Developing competitive advantage through process/product innovation and experience curve.

ABSTRACT

The sophisticated consumers of today know what they want and they want # immediately [1]. They expect the best products on time because companies are providing them the best products on time. A company must be competitive in the market place to gain and defend their market share. Companies must have some sort of advantage over their competitors to sustain this market share and provide consumers with what they want at the prices they are willing to pay. There are numerous ways to gain a competitive advantage. Two effective methods are process/product innovation and the utilization of the experience curve. The ability to use these two methods concurrently can produce a synergistic effect in gaining and maintaining a competitive advantage. Competitive advantage, process/product innovation, the experience curve, and the S-Curve as used to explain/earning rate and process/product development are explained. We discuss how and when it is possible to create synergism using process/product innovation and the experience curve concurrently to create a competitive advantage. Lastly a case is presented that is an exemplary example of process/product innovation and the experience curve used concurrently to gain competitive advantage.

INTRODUCTION

A company has competitive advantage whenever it is more successful then rivals in attracting customers and defending against competitive forces [2], [3]. There are many sources of competitive advantage: having the best-made product on the market, delivering superior customer service, accelerating down the experience curve and achieving lower costs faster than your rivals, being in a more convenient geographic location, proprietary technology, features and styling with more buyer appeal, an organizational structure that fosters the ability to steepen the S-curve (learning rate and process/product development), process innovation that dramatically increases the effectiveness and efficiencies of a process, product innovation that full fills the wants and needs of the customer at a higher level than the old product, a well-known brand name and reputation, and providing buyers more value for their money (a combination of good quality, good service, and acceptable price) are but a few. To succeed in building a competitive advantage a company must provide buyers with what they perceive as superior value. This means a good product at a lower price or a better product that is worth a higher price [4, 5, and 3].

Companies should always seek and make the best use of the age old and intrinsically valuable assets e.g., access to natural resources, control over powerful distribution channels, strong brand names, and patents and other government licenses. However, the advances in communications and transportation have reduced the advantages that these assets once held. In today's world economy, business people agree that most industries have entered an era in which competitive advantages will be gained with less obvious ways and will favor those who develop the core skills and core competencies that allow them to win a battle that now depends more on movement than position. Indeed, company organization, innovation, customer driven service, total quality, and continuous improvement are examples of the capabilities companies now need for competitive advantage [6, 7]. These advantages are short lived as they can be copied. The company that has the ability to maintain the organization that fosters continuous movement will be the company that maintains the competitive advantage [7].

True competitiveness is derived from an ability to build or serve at lower costs and move faster into the market place than competitors. The real sources of competitive advantage are to be found in management's ability to consolidate corporation wide technologies and production skills into competencies that empower individual businesses to adapt to changing opportunities [6]. If a company has the competencies and the corporate organization to create process/product innovation and the ability to move down the experience curve quickly, the chances of adapting to changing opportunities will be more insured.

S-CURVE

The S-Curve is a graph (Exhibit 1) showing a line that has the best fit to a set of points. In this paper, these points represent the relationship between knowledge acquisition and time (Learning Rate S-Curve) and the relationship between the amount of increased production, market share, or/and customer satisfaction to the amount of effort (measured by time or/and money) spent on process/product innovation (Developmental S-Curve). The equation that generates the graph in Exhibit 1 is:

[GRAPHICS OMITTED]

M is a constant of the limit of Knowledge of a subject or the limit of a particular Technology of a Process/Product.

q(t) is the amount of Knowledge of a subject or the amount of understanding of the technology of a Process/Product at period t.

q(t)=M/1+[e.sup.-[alpha](t-[t.sub.o]] 0 [alpha] 0is a constant characterizing the rate of learning or the rate of technology development.

t is time or period taken to reach q(t)/M.

[t.sub.0] 0 Is an iteration constant localizing the process in time [8].

By manipulating [alpha] 0 and [t.sub.0] 0 in the S-Curve equation, we can change the slopes of different portions of the S. The most desirable S-Curve would not even be a S-Curve, but a line that would be nearly vertical, intersecting a horizontal line at the top. The left hand S-Curve in Exhibit 1 is an example of a nearly vertical line. Such a graph, when representing learning rate, would represent a complete and instant grasp of any skill, task, or concept by an individual. In the case of process/product innovation, the nearly vertical line would mean that for any effort made in improving a process or developing a product there would be instant and profitable returns until the physical limitation of the process/product was reached (represented by the horizontal line)[7].

EXPERIENCE CURVE

The experience curve is a reflection of the learning ability of a firm and the people within the firm. When a process/product is first instituted it will take time for the people involved to discover and learn all the steps necessary to make the process/product as efficient and effective as possible. This curve is an expediential curve that can be illustrated graphically. In the graphical representation, the X axis represents the cumulative number of units produced and the Y axis represents the time or the cost to produce the nth unit [9]. Exhibit 2 shows a typical 80% experience curve and an experience curve that starts at Standard Time. An 80% experience curve shows that with each doubling of the cumulative number of units produced there is a 20% reduction in the cost or time of production for that specific unit. The distance from the X axis to where the curved line starts to become fiat in relationship to the X axis, is referred to as Standard Time. Standard Time is the point where the doubling of experience (doubling of cumulative number of units) has very little effect on the numbers of units produced or cost per unit. The upper limits of efficiency and effectiveness of processes and peoples abilities have been reached at Standard Time.

The experience curve can take on various shapes depending on the firm and the industry. Variations occur for many reasons: cost reductions are never automatic, companies must work to lower costs, and some products and processes have greater potential for improvement over time than others. Manufacturing processes have steeper experience curves than purchasing, marketing, or distribution functions. Manufacturing costs decline particularly fast in industries with shared inputs or processes. In many industries, the platform or base experience includes more than one product. Many companies use the same components, production facilities, or delivery systems for their products, This multiple use of a broad experience base enables these companies to make the Learning Rate and Development S-Curves more vertical and decrease the time it takes to reach Standard Time when a new process/product is introduced.

Technological change is the foundation for the experience curve. Without the introduction of a new product or process, there can be no experience curve effect, The use of an experience curve strategy works best early in a product's life cycle because cumulated output doubles rapidly at this stage. Experience curve strategies can only work well in a mature or declining stage of a products life cycle if an innovative process is applied to production that dramatically reduces costs or/and improves quality. Cost leaders in mature or declining industries such as the steel industry frequently have smaller, focused, more modern facilities than their competitors. They have refined their process through process innovation.

First-order and second-order learning are two types of learning that effect the experience curve. First-order learning is learning-by-doing, the essence of the traditional experience curve model. Second-order learning is induced learning (learning via engineering design changes or training programs). The relative roles of explicitly managed second-order learning and tacit first-order learning can vary substantially across functional processes. If second-order learning is not used correctly it can disrupt first-order learning instead of facilitating it as planned [10].

PROCESS/PRODUCT INNOVATION

A process can be defined as "a structured, measured set of activities designed to produce a specified output for a particular customer or market" [11]. A process focus is concerned with how work is done within an organization. A product focus is concerned with what work is done. Innovation is the act of introducing something new. Product innovation is the introduction of a new good or service. Process innovation is the act of introducing a new, structured, measured set of activities designed to produce a specified output for a particular customer or market [12]. It may be easier to think in terms of production when considering process/product innovation; however, process/product innovation applies to all businesses and all functional areas. All company processes must be looked at for process innovation, not just production.

The production costs of a normal manufacturing company will only average 10% of a products cost and more customers are lost through poor service than bad products [13, 1]. Process innovation can and should cross functional boundaries [11].

Innovation is an old concept that has always been significant (clay tablets were replaced by the innovation of paper), but the significance of innovation has intensified due to the rapid change in technology today [14]. Even though innovation is a source of competitive advantage [15], the competitive advantage gained through innovation can and usually are fragile and difficult to sustain. Most successful innovations can be reproduced by other companies. If a company can hold on to the competitive advantage gained by process/product innovation and focus on reputation and not short term profits, the returns can be large. Globe Metallurgical claimed returns of 40 % from a process innovation they instituted.

Effective and efficient business and manufacturing processes is the key to error free performance. If there is not error free performance, process/product innovation is necessary. Innovation is not synonymous with automation. What good is it to automate an error prone process? If you do automate such a process, there is now a fast process that ensures a bad job every time with less effort [1]. Tools of process innovation that will steepen the S-Curve are:

Simplification of Process Simplification of Design

Change Activity Sequence

Upgrading Technology

Standardization 

Supplier Partnerships

Feedback

Automation

Parallel Process

Error Proofing

Effective Communication

Automation

Standard

Of all of these tools the most important and possibly the least emphasized is education/training [16]. At the organizational level, most innovations result from borrowing rather than invention. The ability to assimilate and use external knowledge is thus a critical component of innovation. It takes a diverse and ever expanding educational work force pool in the organization to do this.

Process/product innovation is not something that happens overnight. First there has to be a clear understanding of what is trying to be accomplished. When it is determined what the output is to be, the process/product must be developed. It is important to get input from all people who will be affected by any change in a process/product. An incomplete picture of the process/product will appear if this input is not sought. Being included in the innovation design helps to foster feelings of ownership and pride among those affected by the innovation. Most innovations that fail, fail because not enough time was taken to fully develop the innovation before implementation. Those affected by the innovation were not consulted. Good process/product innovation projects will favorable affect [alpha] 0and [t.sub.o] 0 of the S-Curve and will have the following components:

Process/Product Owner: someone who will be held accountable for the success of the project

Process/Product Scope: well defined boundaries

Well Defined Interfaces and Responsibilities With Cross Functionality (Exhibit 4).

Documented Procedures: work tasks and training requirements

Measurement and Feedback Controls Close to the Point at Which Activities are Performed

Customer Related Measurements and Targets

Known Cycle Times

Formulated Change Procedures

Know How Good the Process/Product Can Be [1]

EXPERIENCE CURVE AND PROCESS/PRODUCT INNOVATION

Manufacturing firms have an increasing tendency to introduce new products and new processes simultaneously [12]. When the product or process that is being launched is from a common experience platform, it is related to previously introduced products and processes. The cumulative knowledge and experience provided by this relationship makes it easier to develop an innovative process and also makes it easier to accelerate down the experience curve or to start at Standard Time (the Learning Rate and Developmental S-Curves would be close to vertical).

In a ridged hierarchical company, introducing a new product or/and process without a relationship to previously introduced products and processes would not lend itself to a combined process/product innovation and experience curve strategy. A hierarchical company is usually not the type of firm that can make the Learning Rate or Developmental S-Curves vertical. The development of the skills and knowledge necessary to move down the experience curve fast enough to capture a competitive advantage over rivals is difficult when the Learning Rate and Developmental S-Curves are flat (Exhibit 4, right line). Firms that foster steeper S-Curves are usually cross-functional and have training and educational programs to encourage and implement innovation. With vertical Learning Rate and Developmental S-Curves, a firm can take a new process/product and start production close enough to Standard Time to capture a significant competitive advantage over rivals.

The need for steep S-Curves drives the need for Education/Training and teams. It has been shown that prior knowledge facilitates the learning of new related knowledge. This is extended to include the case in which the knowledge in question is itself a set of learning skills. There is even a transfer of learning skills across bodies of knowledge that are organized and expressed in similar ways. As a consequence, experience or performance on one learning task may positively influence and improve performance on some subsequent learning task.

Not only does education/training help with the assimilation of outside innovation, but it helps with the invention of innovative practices and products. The theory of learning discussed above translates to acquiring problem-solving skills. Problem solving (creativity) and learning capabilities are so similar that there is little reason to differentiate their modes of development. Continual education with a broad field of study for individuals and then putting these individuals on teams is perhaps the most powerful tool to generate process/product innovation.

Learning is cumulative and learning performance is greatest when the object of learning is related to what is already known. This is why a broad field of study is important. Where there is uncertainty about the knowledge domains from which potentially useful information may emerge, a diverse background will provide a more solid base for learning. A solid base of skills and knowledge will increase the prospect that incoming information will relate to what is already known. In addition to strengthening assimilative powers, knowledge diversity also facilitates the innovative process by enabling individuals and teams to make novel associations and linkages [17].

Cross functional teams made of broadly trained and educated individuals will provide the diversity of knowledge needed to make S-Curves steeper (alpha close to one and a small integration constant (Exhibit 4 left line)). The firms that take advantage of steep S Curves will be those who introduce innovative processes/products with production starting at Standard Time.

APPLICATION

A firm that has been successful in utilizing process/product innovation and the experience curve concurrently is Eastman Kodak. In the late 1980's Kodak wanted to expand its product line by introducing their FunSaver camera, a disposable (recyclable) camera. Kodak's camera division took a new approach to streamline decision making: rapidly and efficiently design the camera, and ensure that the cameras design would make it easy to manufacture and sell. The division placed design and manufacturing under one project leader and formed a small dedicated team of engineering, manufacturing and marketing people to develop, manufacture and sell the new camera. The team had three explicit goals: to produce the camera quickly; to create new methods for functional integration; and to develop new CAD/CAM technology that would enable Kodak to develop high quality, easy-to-manufacture products faster and more efficiently. This team was put into one work space and linked by the new CAD/CAM computer design system. This computer system made it possible for each team member's component part of design to be integrated into the whole camera design. The team was able to generate simulations of prototypes of the product and of the manufacturing processes which enabled them to work out kinks that would have shown up in the actual manufacturing system. As a result the Learning Rate and Development S-Curves were close to vertical and when production started it started near Standard Time.

Fuji had developed and introduced a similar camera in Japan before Kodak had started their developmental stage. Due to the design, production, and marketing approach that Kodak took, they were able to release their camera into the United States market the same time as Fuji did. Kodak gained a larger share of the market then Fuji, and they have kept it by introducing new models using the same developmental techniques as they used in developing the FunSaver [17].

Eastman Kodak experienced a synergistic effect in gaining competitive advantage through process innovation of the design, manufacturing, and marketing process of new products, and the ability to start at Standard Time on the experience curve.

CONCLUSION

Maintaining a competitive advantage is a dynamic process, but with to days quickly changing business environment there is no such thing as a sustainable competitive advantage [17]. It is necessary to start as close as possible to Standard Time with new processes and products. A process approach that marries radical innovation and the discipline of continuous improvement and the willingness to abandon old products and processes as they reach their limits is needed. Education/training coupled with cross functional teams will play an important role in integrating process/product innovation and experience curve strategies. Human resource understanding and development through continual diverse education coupled with information technology are the enabling functions that will allow organizations to develop and implement strategies through combinations of concepts such as process/product innovation and the experience curve.

Businesses are complex systems interacting with the larger complex system of the external environment. Change is a fact of business life. The organization that is most flexible in adapting to the changing environment will be the one with a competitive advantage. While every organization must conduct an industry specific analysis, all industries are changing rapidly. Information technology and human resource development both fuel the change and help organizations to adapt to the change. In general, product life cycles are becoming increasingly shorter driving firms to develop and implement an organization that can and will employee both the experience curve and process/product innovation strategies concurrently to gain a synergistic effect in obtaining a competitive advantage over rival companies.

BIBLIOGRAPHY 

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Alan S. Khade, California State University-Stanislaus, Turlock, California, USA

Scott K. Metlen, University of Idaho, Moscow, Idaho, USA

Author Profiles:

Dr. Alan S. Khade is a professor at the College of Business Administration, California State University-Stanislaus, Turlock, California since 1989. He was Director of the MBA Program from 1992 through 1995. He earned his both M.B.A. (1986) and Ph.D. (1990) at the University of Houston, Houston, Texas. He has four years of industry experience prior to entering the graduate study. Dr Khade was Program Chair and Vice President of the Decision Sciences Institute, Western Region, 1993-94.

Dr. Scott K. Metlen is an assistant professor at the University of Idaho, Moscow, Idaho. He earned his M.B.A. in 1996 at the California State University-Stanislaus and Ph.D. in 2002 at the University of Utah, Salt Lake City, Utah. He has about 20 years of industry experience prior to entering the graduate study.