Excellence in Electronics

Innovation no longer ensures success in the maturing computer market; continuous productivity improvement is what it takes to win PATTERNS OF COMPETITION in the computer industry are changing as the market matures. Players are responding to the new conditions in a variety of ways. During the past five years, one computer manufacturer focused on innovation in the effort to differentiate its products and achieve higher margins and sales. The company applied this strategy both to its traditional proprietary systems and to a new product line based on the open Unix operating system. Meanwhile, another also committed itself to innovation, but followed a different path, continually reducing product cost and improving manufacturing operations. Its ambitious productivity initiatives reached through the entire organization -- and beyond to distribution channels and suppliers. As the rate of growth in industry sales declined, the first manufacturer redoubled its efforts to develop a new star product, zeroing in on the market niche of high-end network servers. Unfortunately, it was joined by all sorts of competitors -- makers of PCs and workstations as well as minicomputers. As price wars broke out, it repeatedly cut its head count. But these reactive measures were not enough to keep pace with competitors or to maintain profits. Both companies used techniques such as TQM, just-in-time manufacturing, employee empowerment, and design for manufacturability, but with differing levels of commitment and aggressiveness. As a result, they experienced very different results. The second developed a level of productivity four times that of the first (and twice that of its closest competitors), along with a rate of productivity improvement twice as high. At the same time, it employed fewer engineers relative to the level of sales, but developed more products per person in less time. It also maintained solid margins and sales growth, although at a lower rate than in past years. The experiences of these two organizations illustrate a key development in the electronics industry. The traditional emphasis on innovation is no longer enough to succeed in an environment of increasingly intense competition. Growth is slowing, and the shift from high-margin proprietary technologies to more commodity-like products based on common technical standards is accelerating. As a result, productivity throughout the business -- not just in manufacturing -- has become a critical determinant of financial success. This dynamic, which has already led to a restructuring of the consumer electronics segment, is now shaking up the computer business, becoming important even in those segments, such as industrial electronics and medical systems, that still rely on proprietary technologies. A recent study of both more and less successful competitors in all these segments shows that, on average, successful companies have become almost twice as productive as less successful ones, and are improving their productivity about twice as quickly: by 7 percent a year, compared to 3 percent. (Within the successful group, some companies show even higher productivity levels and rates of improvement.) This productivity gap means that the poorer performers would have to improve at the formidable rate of 31 percent a year to catch up by 1994. The successful companies have not had to make tradeoffs between innovation and productivity. In fact, they have generated higher productivity and greater levels of innovation precisely because many of the same principles drive improvements along both dimensions. A simple product line and an empowered, high-caliber workforce, for example, support both product innovation and growth in productivity. Huge and widening gaps Equally important, the study revealed large financial and sales performance gaps which are steadily growing.(*) This ever-widening gulf exists against a background of increasing competitiveness in each segment: return on sales, revenue growth, and product life cycles have all been declining at double-digit rates. …