Articles: Carmageddon 2 – Broken Pipelines

What happens when Innovation Pipelines Break?

This is the second of three Articles shared by Australia’s Toyota-savvy leader, Gary Stewart.  The articles shed light on last year’s complete collapse of the Australian automotive industry – and the resulting destruction of their innovation supply chains – destruction that extends far beyond the car companies.  This article follows “Carmageddon 1” which appeared in last month’s ATJ Blog #9.  It is certain, that with the continuing acceleration of global competitiveness, there will be more challenges like these to come.  Gary shares his insider-experience which you may find of value for future planning.

When an innovation Pipeline is broken – it usually means the process development function is either now missing or very much diminished. In either case the company must divert resources away from current production, which means that the competitiveness-enhancing research is now isolated – and the firm loses the ability to translate new ideas & research into production. In reality, this transforms a manufacturer into a “commoditised manufacturer”;  one that must now compete by modifying/tweaking existing products through expensive tweaks and engineering adjustments to meet urgent customer needs. This reduces competitiveness through an ever-decreasing resources with a price base that must try to meet customer demands.

Exhibit 2. The reality for most Businesses with a Broken Innovation Pipeline
Without strong Development function – a core competency – it’s not possible to create and build an enduring competitive advantage.  This stifles growth, jobs, and blocks a firm’s ability to develop an enduring “Cash Cow” process that you do that is better than anyone else.  While a global issue, the impact is diminished outcomes from Innovation which is particularly severe in Australia when Innovation pipelines are broken.

Australia Ranks Last in Innovation Pipeline Collaboration
“Australia produces great research – but ranks 33rd in the OECD tables for collaboration between researchers and business” – Glyn Davis (Nov 2015).  Without an active Development function within a firm, who in the company will Universities and commercial Researchers talk with?  It will not likely be the ‘Refinement/Innovation function personnel, or, ‘Efficiency Innovation (Lean) people!

A major cause for Australia ranking last for collaboration is because many firms do not have the technical infrastructure; the capability; or the skilled people who can talk and work with Researchers. And that’s simply because ‘Efficiency Innovation’ (Lean) firms, or Adaptive Engineering firms, or firms who ‘Job shop’ their design & development capabilities’ do not need the Research support.  Hence, only firms with ‘end-to-end’ Development capabilities with robust Innovation Pipelines that will have the continuous need to talk with University and independent Researchers.

Only Israel & China are Bucking this Trend
The two fastest growing innovation countries are Israel and China. Both are dramatically increasing their Development capabilities so they can accelerate comprehensive Innovation Pipelines. China is now implementing its CHINA 2025 program – which is designed to move China away from commodity manufacturing and accelerate the Innovation Pipelines needed to enable Chinese firms to grow their own end-to-end Product Development capability which is coupled with fast agility and time-to-market response capabilities.

Both Israel and China are dramatically increasing their development capability to create better and more robust Innovation Pipelines!  While this is happening, most countries are allowing their Development functions to decline.  This will surely weaken their Innovation Pipelines and endanger their abilities to compete and win in the global marketplace. There will be only one winner as these visions play out.

The Innovation Pipeline: A visual explanation
Figure 6a shows the result of using high-level core competencies to translate ideas/research through the Development function to produce consistent production that meets customer expectations with certainty well BEFORE day-to-day production begins.
Figure 6c shows, conversely, that firms that do not have a robust execution core competence in their Development phase, will generate low-level core competencies that deliver ‘High Uncertainty’ consequences in the form of large variability, instability, cost and quality uncertainty  issues.  Or, as some say they must survive with “a burning platform of problems”.  Broken Innovation Pipelines always deliver outcomes closer to Figure 6c. because of the disruption they cause to production and to the customer’s world.  Such consequences are major, as we shall see in Sec 3: The Commodity Society.

2.0  The Dramatic Collapse of Design & Development (D&D) Capability in Australia.

Over the past 20 years, Government & Industry focus has centred on the slow 30-40% decline of manufacturing production. It is in fact, the causes have been mostly unseen. The dramatic collapse of Design and Development (D&D) capabilities is a major problem.  It has taken place inside Australian firms where from 1-in-3 firms in the mid 1990’s, and now, 1-in-20 firms have fully broken the Innovation Pipeline.  Over the past 20 years, this is a stunning 85% reduction in firms that can fully develop a product from end-to-end. A Broken Innovation Pipeline means our manufacturers must now globally compete as, Commoditized Manufacturers.

The Survey Data Results:  Design & Development Capability Within Firms

Because there is no hard data from within firms, I surveyed industry “Old Heads” who have been in industry for at least 30 years. The results confirm a decline of full end-to-end Design & Development (D&D)-capable manufacturing firms. The firms surveyed were from the mid-1990’s to 2017, and are still fully capable to end-to-end Design & Develop a product.  While there was some small variation in the responses – that variation was still consistent in scale.

The most common scale estimates for the 1990’s were as follows: (based on the number of firms at each level of capability)
33% – No Design & Development capability – they are make-to-drawing manufacturers (fully rely on others for design)
33% – Low Design & Development capability – who adapt products to meet customer specs, or Job-shop their designs.
33% – Full Design & Development capable – they can fully design & develop an end-to-end product.

Survey results for the 1990’s ranged from:   33% – 33% – 33% thru to 40% – 35% – 25%
Survey results for 2017 ranged from:              65% – 28%   – 7% thru to 70% – 25%    – 5%
Note: while this is anecdotal evidence – not one person expressed surprise at the numbers – just agreement. Even if the survey result were out by 30% – it still represents an overall 60% collapse in Innovation Pipeline Capability.

What the Data Shows

Three things jump out from this data.
1. There has been a dramatic doubling of the number of firms who have NO internal Design & Development (D&D) capability. These are “make-to-drawing” Manufacturers – i.e. those who totally rely on someone else for designs.

2. There has been a stunning seven-fold collapse in the number of firms who are fully Design & Development capable.

3. There are now far fewer full capability firms to produce designs for the make-to-drawing manufacturer to rely on.

                                            Mid-1990s                2017             Change                  %
No D&D capability               33%                      70%              +37% +      +212% more firms
Low D&D Capability            33%                      25%                 -8%         – 25% less firms
Full D&D Capable                 33%                        5%               -28%         – 85% less firms

An Alternate Perspective:
Mid-1990s                            2017                                          Result
No D&D capability            1 in 3                         1 in 1.4                      Increased to ~ 70 in every 100 firms
Low D&D Capability         1 in 3                         1 in 4                         Reduced to   ~ 25 in every 100 firms
Full D&D Capable              1 in 3 firms             1 in 20 firms          Reduced to      ~ 5 in every 100 firms

Even the most optimistic assessment had full Design & Development capability down by 75% from the mid-1990s. I expect that the impending closure of the car industry will further worsen this situation – with even less firms being fully able to develop end-to-end products by 2020.  I expect that the impending closure of the car industry will further worsen this situation – with even less firms being fully able to develop end-to-end products by 2020.


This data is consistent with everything else we see going on in Industry – from the findings of the Global Innovation Index 2017; the work of Clayton Christensen; the impact of the commodity society; to the numerous Government reports on problems delivering and accelerating Innovation.  There seems to be a consistent level of correlation with these findings.


What is less certain, is whether this dramatic collapse in Design & Development capability is the root-cause of the ongoing decline of Manufacturing Production in this country and the so-called Jobless recovery.  Other factors may include:  The reality that a Commodity Society creates Commodity Manufacturing;  indications (in Section #4) from Clayton Christensen’s view on the Innovation Dilemma; The Buffett Rule of Innovation; and –  the message sent by the following concept:

No Competitive Advantage ⇒ Commoditized Manufacturer ⇒ Race to the bottom ⇒ continuing Loss of firms and Jobs

3.0  The Commodity Society Creates Commodity Manufacturing

“The ‘commodity society’ has a surplus of similar firms, employing similar people, with similar educational backgrounds, coming up with similar ideas, producing similar things, with similar quality, at similar prices.”  –  According to economist Kjell Nordstrom and author Jonas Ridderstrale

We now live in a User Experience Economy in which the User (or Customer) controls the market. This means the User will now only pay a “price premium” for an outstanding product or service Experience. (think Apple, or Dyson).  Any lesser User Experience means the User will only pay an ever reducing “market price” for those types of products.

This “ever reducing market price” then leads directly to a faster decline into Commodity Manufacturing driven by ever Shorter Competitive Lifecycles and a Chase to lowest cost outcomes (the price race to the bottom) which in turn destroys any firms Capability to Innovate, finally turning the firm into a Commoditized Manufacturer.  All domestic Commoditized Manufacturers will then struggle for survival in an increasingly globalized world against more efficient overseas manufacturing. (~90% of Australia’s firms are now Commoditized Manufacturers)

Destroying the Innovation Pipeline Also Creates Commodity Manufacturing

As we have seen previously – anything that destroys the innovation pipeline will cause the firm to become a Commodity Manufacturer simply because under “lowest cost” pressures most firms will reduce their workforce (and therefore their Capability) in Research, or Design & Development functions – which in turn means that they lose the ability to translate ideas into new products – which in turn means they lose the ability to create competitive advantage.  And without any form of competitive advantage, the firm is condemned to compete as a commoditized manufacturer.

Commodity Manufacturing will ultimately result in the death of the firm (and the loss of Jobs) unless they can become a lowest cost producer in their industry. (which is unlikely to happen for a domestic Australian-based firm)

The Top 10% of Firms Have Reinvented Themselves Away From Commodity Manufacturing

However, something quite spectacularly different is happening at the top 10% of the market. Just as we have an inequality in incomes in society – we have exactly the same stark inequality happening in Business.  The Top 10% of businesses are separating away from the rest. This phenomenon, driven by a proper Innovation Pipeline, is happening in both Manufacturing and Services. The top 10% of firms have reinvented themselves away from Commoditized Manufacturing by changing to a “Competitive Advantage” business model.

Competitive Advantage Business Models

A competitive advantage business model wins by relying upon robust Innovations to differentiate the firms’ products or services. Only by creating a vast differentiation via  highly capable Internal R&D, Internal Design, Internal Sales, Internal Services functions can a firm become a top 10% winner.

Commodity Business Models

All Commodity Business Model firms lose by having a substantially undifferentiated product or service – such as Production, Shared Platforms, Shared Services, or Shared Marketplaces, where no-one has any competitive advantage over anyone else with similar internal productive capability, or who is using the same shared platforms or services.

Who is Winning This War?

Globally it is firms like Apple, Dyson, Samsung, Toyota, Tesla, etc. who have responded best to the User Experience economy and have created a more proactive and Innovative business model. Domestically, it is firms like Cochlear, and ANCA who have responded best to this User Experience economy and have separated themselves away from Commoditized Manufacturing and towards a competitive advantage business model via a much
better, and more robust, Innovation Pipeline.

The Bottom 90% of Firms Have Already Become Commoditized Manufacturers

The bottom (40%) group have already lost – they are already fully commoditized manufacturers – always fighting a losing battle in the globally competitive price race to the bottom.  The larger middle (50%) group – are losing fast and rapidly becoming commoditized.  They now face an uncertain future; by  always struggling to compete: by always playing catch-up – always fire-fighting; and by always robbing Peter to pay Paul. This middle group faces a brutally stark choice – either find a way to move to the right and join the winners in the top 10% or they will inevitably be moved to the left by default by the actions of the commodity society.

But the Signs Are Not Good.
Faced with undeniable relevant change in their world most firms do not respond adequately to the challenge.  And by not adapting to the change they condemn themselves to an unacceptable negative future. Few firms will make a decision to “Separate their business from the rest” and set out on a path to join the winners.

Most firms do not put in place a threshold or “trigger” point at which they which they must act when faced with relevant change to their industry or customer base. So change for most firms becomes more like the “boiling Frog” syndrome – with no trigger point when to act (jump) – they simple let the default (loser) position (boil) them to oblivion.

The Commodity Society and the Cost of – Not – Investing

While most firms will conduct even basic financial analysis Return on Investment (ROI) or Return on net assets (RONA)  almost none will conduct Cost of Not Investing (CONI) analysis. Very rarely does the firm ask – what is the cost (both short-term and long-term) of not making an investment.  In my 35 years’ experience the long-term cost of not investing, is always higher than the cost of investing.  Commoditized firms will almost never ask the question – “What will we lose” by choosing Efficiency Innovation over
Development Innovation?

But top 10% firms will always consider the risks involved in not maintaining or increasing their internal capabilities to that demanded by the Customer. [See more on this in the next section – Clayton Christensen and the Innovation Dilemma]

The Current “Modest Short-Term ” Recovery.

Currently, the conversation in Australia is about the modest “recovery” in manufacturing – but what sort of recovery is it if most of it is just slightly increased volumes for commoditized manufacturers in a commodity society…  Rather than real economic growth from competitive advantage type Innovations that lead to long-term Economic and Jobs growth?

The destruction of traditional manufacturing models will only ever accelerate under the threat of the Commodity Society. Only those firms who firstly, recognize the danger, and secondly, act upon the danger by proactively reinventing themselves away from the rest of the pack –  will win a better future under a commodity Society.

Everyone else will lose!

Gary can be reached at