Chapter 2

Why Continuous ­Incremental ­Improvement Is Not Sufficient for ­Organizational Success

No problem can ever be solved with the consciousness that ­created it. We must learn to see the world anew.

—Albert Einstein

In this chapter we discuss why continuous improvement is ­insufficient for long-term organizational success in today’s rapidly changing environment. We discuss frameworks which enable organizations to assess ­potential threats and opportunities presented by maturing technologies and the emergence of replacement technologies, products, and services.

Organizations must balance short-term performance concerns while working to understand what it will take to perform well in the long term. Scriabina¹ describes this as balancing the areas of innovation and ­execution. Innovation is about creativity and inventiveness while execution is about efficiency, predictability, and consistency. Short-term performance is often achieved by exploiting an organization’s current capabilities. ­Continuous improvement of these capabilities can assist in maintaining an organization’s competitive position and many organizations have become quite adept at doing this. Long-term performance, however, ­usually derives from activities that explore new, unknown possibilities and many organizations have difficulty searching outside their current paradigms.²

The word “paradigm” may be defined in a variety of ways and at a variety of levels. On the highest scientific level, Newtonian physics would be an example of a paradigm as a model within which observations can be predicted, organized, and explained. On the highest organizational level a paradigm can be described as “a set of rules and regulations that establish boundaries, and tell us what to do to be successful within those boundaries.”³ In this sense a paradigm constitutes a model for thinking.

In another sense a paradigm can be envisioned as defining the fundamental boundaries upon which an organization is based and that permit an organization to function as it does. In this sense a paradigm might be a composite of technical, regulatory, social, and organizational aspects. The prevailing paradigm for U.S. automobile manufacturers today is comprised of internal combustion, gasoline powered (technical) vehicles, subject to government mandated emission, safety, and fuel efficiency standards (regulatory), produced in a unionized, specialized labor environment (social) on assembly lines within bureaucratic organizations (organizational).

Paradigms provide a level of comfort. Once we master the prevailing paradigm we can carve out competitive advantage by continuously improving within the boundaries of that paradigm. The most successful organizations in a particular field will be those who improve the most and improve the fastest.

But what happens when the paradigm shifts—that is when the rules of the game change in the middle of the game? What happens when we do a really good job of continuous incremental improvement within the prevailing paradigm and reach the very top of our industry and then…the paradigm shifts?

Paradigms Are Not Forever

Anthropologists provide examples (speculative, but sound given the limited available evidence) of the effect of paradigm shifts on species survival. Some speculate that what separated the branch of proto-humans that evolved into Homo sapiens from the other branches which died out was tool making. Our tool-making ancestors achieved a technological advantage that allowed them to dominate their environment and their competitors. The Inca developed a flourishing civilization in Peru that covered a land area one-fifth the size of Europe and contained a population of 16 million.⁴ Their ­civilization was based on certain social and technological paradigms which enabled the Inca to dominate other cultures in the region. That civilization was overthrown in the early 1500s by a relative handful of Spanish soldiers and their native allies. The Spanish brought new paradigms to South America which included technologies such as gunpowder, steel, and mounted warfare. The previously dominant paradigms of the Incas were rapidly rendered obsolete by the new paradigms of the Spanish.

Businesses also are impacted by paradigm shifts. The initiators of the shift achieve dominance in their markets while their competitors struggle or fall by the wayside. However the problem for the newly dominant ­competitors is that no paradigm lasts forever. Highly innovative organizations which quickly rise to dominance, but who fail to recognize that their new paradigm will not last forever, are subject to being rendered obsolete by an unanticipated or underestimated new paradigm. As Example 2.1 shows, continuous improvement is not sufficient to protect against obsolescence.

While the discussions in this chapter largely use manufacturing examples, the retail and service industries are equally subject to paradigm shifts that fundamentally change the way they do business. In 1997, ­management guru Peter Drucker famously predicted the demise of bricks and mortar colleges and universities within 30 years. “Thirty years from now the big university campuses will be relics. Universities won’t survive. It’s as large a change as when we first got the printed book.”⁶ According to Drucker, traditional universities will be replaced by distance learning universities. Prior to 1990, the dominant paradigm for distance learning was correspondence courses offered by mail. With the advent of the Internet, web-assisted courses, and fully online courses were created. By 2011 the vast majority of traditional colleges and universities in the United States were offering online courses and degrees in addition to their classroom courses.

The rise of big store booksellers such as Borders and Barnes and Nobel spelled the doom of all but the most robust small bookstores. Now, the beginnings of an apparent shift from bound books to downloadable e-books for Nooks and Kindles, and the success of online booksellers such as Amazon.com has had a huge impact on the big store booksellers pushing them into adapt or die mode. The rise of Netflix and downloadable music on iPods has affected “record stores” and movie rental outlets such as Blockbuster.

Tracey Wilen, in the book Digital Disruption7, highlights current disruptions in a variety of business sectors. Uber is an example of a transportation firm that owns no cars. Airbnb is an example of a hospitality firm that owns no hotels. Amazon is a large retailer that owns hardly any stores. No business sector is immune from the impact of paradigm shifts.

Even nonprofit organizations are subject to paradigm shifts. The March of Dimes and Heart Fund’s traditional fundraising strategy of using teams of stay-at-home moms soliciting door to door in their neighborhoods became obsolete as more families became two-career households. Charitable organizations that receive donated items often sell the best items on eBay rather than in their second-hand stores. No organization is immune to the threats and opportunities arising from paradigm shifts.

Continuous Improvement and the Technology S-curve

The technology S-curve describes the life cycle of a technology in terms of performance over time. The basic technology S-curve shown in Figure 2.1 illustrates how the performance of a technology generally increases over time but at different rates at different times during its life cycle. Very early in the life cycle of a technology, performance increase is relatively slow. However, as the technology gains acceptance, the rate of performance improvement generally increases. As the technology approaches the end of its life cycle the rate of performance improvement decreases. The end stage for a technology can be the result of several possibilities. Among these are:

Figure 2.1. Basic technology S-curve.

• The introduction of a new technology whose performance greatly exceeds that of the current technology. An example would be the replacement of home video tape systems by digital recording systems.
• Constraints imposed by the laws of chemistry or physics. An example would be the packing density of music information on a vinyl record. Increases were obtained as the technology moved from 78 to 33 1/3 rpm. Further increases in recording density became more difficult as the physical limits of the needle-in-groove technology were approached.
• External pressures from customers or regulators. An example would be the nuclear power industry where the rate of technology advancement has been inhibited by public resistance, increasing government regulatory involvement, and negative publicity due to horrendous accidents such as those at Three Mile Island, Chernobyl, and most recently Fukushima Dai-ichi.

The structure of S-curves varies by technology as shown in Figure 2.2. Some technologies evolve slowly (for example bread-making technology) while others evolve very rapidly (for example computer processing power which has doubled every two years over the past 50 years or so).⁸ Some technologies have a very short introduction phase and perhaps reach maturity relatively quickly, while others start more slowly but perhaps have a longer growth phase. Creativity and innovation are relatively more important for fast growth technologies than for slow growth technologies where continuous improvement activities might be relatively more important.

Figure 2.2. Different technology S-curve shapes.

Certainly new technologies may emerge at any time and truncate the technology S-curve for an existing technology. For example, there was still room for improvement in propeller-driven military fighters in the late 1940s; however efforts to further improve performance in this ­technology largely ceased as jet engines were introduced. Moreover, as a technology approaches maturity, it becomes more likely that the existing ­technology will be replaced by a new technology. This renders ­continuous ­improvement of the existing technology relatively less important than development of the new technology. This situation can be modeled using a series of S-curves as shown in Figure 2.3.

Figure 2.3. Replacement technologies and S-curves.

Continuous improvement activities infused with creativity and innovation directed toward breakthrough or radical improvements to extend a technology’s S-curve are important and may occur anywhere during a particular technology’s life cycle. But more than continuous improvement is required to develop or be prepared to react to a replacement technology. The remainder of this book is directed toward the new way of thinking that is required to develop or at least anticipate the replacement of one technology with another. This new way of thinking—let’s call it insight—is necessary to assure the long term success of organizations.

Continuous Improvement and the Product Life Cycle

Like technologies, most products and services go through a product life cycle during their commercially useful life. The major difference is that the technology S-curve tracks the life cycle for a technology in terms of performance over time while the product life cycle tracks the customer demand life cycle for a particular class of product or service in terms of demand over time. The product life cycle consists of five stages as depicted in Figure 2.4. The length of the product life cycle varies by product and service. For high technology products and services, the product life cycle may be quite short. Over time, these short life cycles are becoming even shorter. Life cycles for personal computer (PC) products moved from about one year to about three months from the mid-1980s to the mid-1990s.⁹

Figure 2.4. Basic product life cycle.

As Figure 2.4 shows, each stage of the product life cycle calls for different strategies. The introduction phase is the time when an innovative new product or service is first commercialized and offered for sale. Plasma TVs were in the introduction stage in the U.S. market during the late 1990s. During this stage, efforts must be undertaken to develop a market for the new product or service. Rapid feedback from early adopters is important to identify design flaws and areas where customers desire improvement. As the market develops and the product is improved, demand increases and the product enters the growth phase. Plasma TVs were in this stage during the early to mid-2000s. During this phase continuous improvement activities are important to increase output and decrease cost. As more and more customers who desire the product or service acquire it, demand growth begins to flatten out as the maturity phase is entered. During this phase, creativity and innovation are important to identify new markets and new features and major improvements to increase demand for the product or service. The desktop personal computer (PC) was in this phase in the U.S. market during the early 2000s having been passed by laptops in sales around 2003. PC manufacturers responded with ever increasing memory, speed, and new applications. The laptop PC may be entering the maturity stage in 2011 as sales growth slows due to replacement products such as netbooks and tablet computers which provide Internet access in a smaller package. In the saturation phase the technologies underlying the product or service begin to be replaced by new technologies. Competition in this phase does not come just from competitors offering similar products and services but also from new offerings providing more capability or lower cost. During this phase decisions must be made about how much longer it will be commercially viable to continue to produce the product or service. The desktop PC may now be in the saturation phase in the U.S. market. It has been revitalized again and again as new applications and features have been added each year. However, now laptops and integrated electronic devices such as smart phones that perform many if not all of the functions of a desktop PC are increasingly replacing desktop PCs. As alternative products or services begin to dominate the market, the product or service enters the decline phase and the decision about when to discontinue production must be considered as Sony did with the cassette Walkman when magnetic tape was displaced by solid state electronics in the consumer audio market.

Creativity and innovation are important in each phase of the product life cycle; however they are perhaps most important during product and service research and development (R&D) and during the introduction phase. Continuous improvement (CI) becomes more important as the product enters the growth phase. But continued emphasis on creativity and innovation throughout the introduction and growth phases can often result in major improvements and alternative uses that can forestall the product or service from entering the maturity phase or resurrect it after it has entered the saturation or early decline phases. Continued emphasis on creativity and innovation can lead to improvements which can result in a revitalized product life cycle such as the one in Figure 2.5. However, focusing exclusively on CI activities will not generally create sufficient improvement to dramatically extend the product life cycle by staving off threats from alternative products and services.

Figure 2.5. Revitalized product life cycle.

A product that evolved through several innovative major improvements that extended its life cycle through several revitalizations is the flexible disk. Introduced in the early 1970s an 8-inch “floppy” could store about 80 KB of data. Through continuous improvement, this ­format ­eventually could store about 1 MB of data. The major improvements which revitalized the product were the 5 ¼ and 3 ½ inch floppies that eventually stored up to 1.44 MB of data. The magnetic media for 8-inch and 5 ¼ inch floppies was encased in a flexible envelope. This envelope was subject to damage through folding and a portion of the magnetic media was always exposed. The magnetic media for the 3 ½ inch floppies was contained in a plastic protective case with none of the magnetic media exposed which increased durability. Despite these improvements, floppies eventually lost out to writable CD, DVD, USB flash drive, and external hard disk technologies. And now these storage technologies in turn are increasingly being replaced by cloud storage where no physical device is necessary for the user.

Another product demonstrating a revitalized life cycle is baking soda—simple sodium bicarbonate. Until about WW II, the major home use for baking soda was as a leavening agent for making bread, biscuits, and other baked goods. As the stay-at-home-mom became a rarity in the post war years and the availability of quality baked goods increased in stores, home baking and demand for baking soda declined. The baking soda industry reinvented the product emphasizing its use as a deodorizer for refrigerators, garbage disposals, musty closets, and carpets.

The Necessity for Thinking beyond Continuous ­Improvement

Threats can emerge at any time during the product life cycle. The slide rule was still in the growth phase through most of the 1960s as interest in the space program increased the number of students majoring in science and engineering when it was replaced by small electronic calculators during the early 1970s resulting in the product life cycle depicted in Figure 2.6. As the pocket calculator entered the introduction phase of its product life cycle, the slide rule began a precipitous decline.

Figure 2.6. Slide rule and pocket calculator product life cycles.

During the years leading up to their demise, the slide rule manufacturers continuously improved their product by adding additional scales and increased resolution. Interestingly, none of the slide rule manufacturers became major players in the technology that replaced their products. Slide rule manufacturers such as Pickett, K&E, and Post were replaced by handheld calculator manufacturers such as Texas Instruments and Hewlett Packard in the portable calculating market. In situations such as this, customers will no longer demand the first product because it is no longer the best fit for its intended use. They will rather shift their demand to the first replacement product and then to the second, and so on.

At no phase in the product life cycle is it safe to focus exclusively on continuous improvement activities. Organizations must behave proactively to develop or at least anticipate new paradigms that affect their products and services. They must also be prepared to react quickly and effectively to paradigm shifts which strike without warning. This requires a way of thinking that is quite different from that required for success through continuous improvement. This new way of thinking is increasingly important as life cycles for technology products become increasingly short. Sometimes it seems that a new product or service is hardly off the drawing boards and entering the growth phase when it is suddenly rendered obsolete by a brand new product or service. Consumers are painfully aware of this when they see advertisements for the next generation high technology consumer product that displaces the product they just purchased from the “cutting edge” position in the market. This problem has spawned innovative marketing programs such as the Future-Proof Your Technology with the Buy Back Program at Best Buy¹⁰ which will buy back your last generation product when you are ready to purchase a next generation replacement product at Best Buy. And the Apple Store offers an “iPhone Upgrade Program” to allow customers to always have the latest cell technology at their fingertips.

A recent IBM study indicates even midsize business organizations understand the increasingly dynamic nature of the marketplace.¹¹ ­Midsize firms report that they are looking beyond cost cutting continuous improvement efforts. “About 70% said they have started or intend to start to collaborate with partners to drive innovations, improve ­productivity, and focus more on the customer.” These are their new ­priorities. Just two years prior, 53% of midsized firms surveyed reported their priorities were reducing costs and increasing efficiencies. In the 2011 survey, this number was just 21%. The increased focus on innovation indicates that many midsized firms recognize that simply doing the same things better will not be sufficient to survive and thrive in today’s business environment.

Market Penetration Rates

In addition to the shortening of the technology S-curves and product life cycles, the pace of acceptance of new technologies has also increased. As Figure 2.7 shows, new technologies are penetrating markets at a much more rapid pace than similar technologies that were introduced earlier. This means that organizations that are early to market with new products and technologies have a better chance of reaping the lion’s share of the business compared with organizations which are later to market.

Figure 2.7. Market penetration for new products.

The Opportunities and Threats from Convergent ­Technologies

Increasingly, technological convergence is warranting additional attention. Technological convergence occurs when multiple individual ­technologies come together in a single product or service. Phillip Sharp at MIT argues that, in the biological sciences, “the true multidisciplinary nature of convergence marks a ‘third discipline’ in science that is following in the footsteps of the molecular biology revolution of the 1950s and the genomics revolution that began in the late 1980s.”¹² When PCs first appeared they were designed for traditional computing applications such as data processing, word processing, and the like. With the addition of modems and later the Internet, communication was added to PC capabilities which had implications for more traditional communication technologies. In this case, computing and communications technologies converged. Today, convergence is becoming the norm.

Figure 2.8 provides an example of the technologies that have converged on what we refer to as “cell phones.” However, the term “cell phone” is hardly adequate to describe products such as the iPhone 8 and iPhone X. By the time this book is published, this figure will probably be out of date because the convergence of technologies is happening so rapidly in this area. This convergence of ­technologies has significant ramifications for all those who are producing the individual technologies on a stand-alone basis. For example, with a high resolution camera built in and a GPS application, why would an iPhone 8 owner wish to purchase a basic stand-alone digital camera or GPS? If indeed this is a threat to the stand-alone digital camera and GPS industries, continuous improvement will not be an adequate response.

Figure 2.8. Technological convergence around the cell phone.

So, How Do We Survive In This Increasingly ­Challenging Environment?

That is the subject of the rest of this book. The easy answer is that we need to attain a new way of thinking—thinking sparked and guided by insight. The way of thinking that would have guided the slide rule manufacturers in the 1960s to become aware of the continuing miniaturization of electronics in general and in computing in particular. The way of ­thinking that would have caused them to ask the question “What if someone develops an electronic slide rule? What then for us?” The way of thinking that would go beyond the seemingly logical but decidedly unhelpful conclusion that we are not an electronics company so how can anyone expect us to be aware of what is happening in an industry we don’t know anything about? The way of thinking that would enable management to explore possibilities and develop contingency plans to, for example, explore the market value of their distribution channels and name recognition among the target market for both mechanical slide rules and “electronic slide rules,” and consider the possibility of acquiring or forming a strategic alliance with an emerging electronic technology leader. That is the kind of thinking that the rest of this book is about.

Insightful organizations:

• Recognize that paradigms shift. What are the fundamental boundaries upon which your organization is based and that permit it to function as it does? What is emerging in the technical, regulatory, social, and organizational aspects of your organization’s environment which may indicate a paradigm shift is on the horizon?
• Understand in what stage on the technology S-curve are the fundamental technologies upon which the organization is based. Is your organization prepared for a fundamental shift in technology? Have you identified the technology most likely to succeed the current one? Are you working to develop competency in the new technology?
• Understand where their products are in the product life cycle. Are your organization’s strategies appropriate for its product’s stage in the product life cycle? Are you planning innovative redesigns or reuses to extend your product’s life cycle? Do you have new products in development to replace those currently in the saturation and decline phases of the product life cycle?