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Can You Tell a Model T From a Toyota Prius?
This week’s eSourcing Wiki-Wednesday topic is discontinuous innovation, and it is included as one of twenty-one Next Generation Sourcing Strategies that can help revolutionize the role of procurement in the organization.
The first distinction to make is the difference between discontinuous and disruptive innovation. Although discontinuous innovation creates significant competitive advantage for the innovator and may change an industry or market, it is still considered a ‘sustaining’ type of innovation. Sustaining innovation may be revolutionary but is contained within an existing market.
Disruptive innovation creates an entirely new market or value system - for example, the mass-produced, affordable modern automobile. While the first automobiles were produced long in advance of the mass-produced Model T, which was first available in 1908, they were high priced luxuries accessible only by the extremely rich. This limited consumer base prevented automobiles from creating a new market, and did not steal market share from horse-drawn vehicles.
Discontinuous innovation occurs when an existing player in a market manages to offer significantly improved value in comparison to their competition. This innovation is revolutionary rather than evolutionary – meaning that a creative spark or unique insight is required to bring it to pass. Evolutionary innovation is the result of natural product development and is likely to be seen across all players in a market within a relatively narrow timeframe.
If you are fortunate enough to work for a company that achieves discontinuous innovation, the benefits of that competitive advantage are higher margins and possibly lucrative consulting deals. The alternative is commoditization, which leads to low margins and favors large market players who can subsidize their losses through volume and revenue from other sectors.
Like the introduction of the Model T one hundred years earlier, the Toyota Prius represented a significant change in the mass produced automotive market. Although this hybrid vehicle uses electricity to reduce fuel consumption, and Toyota’s competitors have introduced competing models, it has not created a completely new market; in 2011, all hybrid vehicle sales accounted for only 2.2% of the US. Automotive market (Source: IntegrityMarkets.com). The Prius still has to compete against compact cars that are fuel-efficient without being hybrids.
From a procurement perspective, we get to look for opportunities to be discontinuous both internally and externally. We may have ideas for improving our own company’s manufacturing or delivery models that become the source of innovation. Procurement should also be on the lookout for suppliers and alternate markets that have achieved discontinuous innovation when we are beginning a sourcing effort. Many times this requires looking at much smaller companies, because of the previously stated advantage large market players have in more commoditized markets.
The advantage of either approach is the same – procurement gains the opportunity to position itself as a value creation group rather than managers of commodities and pricing. Being a source of discontinuous innovation ourselves proves that we are players deserving of a voice at the executive table and the likely source of valuable input to the overall business strategy. Looking for and calling out both Model T’s and Prii (the official plural of Prius) is a job that procurement is uniquely positioned to take on.