CHAPTER 9

HANDS: THE CRAFT OF MAKING THINGS

Analog is sometimes better than digital. Great craftsmanship happens in analog. In music we hear better sound when it is analog, and we see it in the engineering and design philosophies within a company. We need to have appreciation for analog and what it brings to the world.

—Young Sohn, President of Samsung Electronics

Hands are my metaphor for the craft of making physical products, whether as simple as a paper clip or as sophisticated as a Steinway grand piano. This competency includes understanding the trade-offs in your specific industry involving quality, cost, scale, and speed. It requires being smart about how you prioritize those variables, while treating manufacturing as just one aspect of your overall business strategy.

This represents a mindset shift from the industrial revolution, when the best hands were those that could make the most stuff at the lowest costs. The original titans of early twentieth-century production, such as Henry Ford, focused on never-ending improvements in efficiency and economies of scale. Throughout the post–World War II boom years, the companies that sold the most washing machines and televisions were generally those that could produce them quickly enough. The bigger your manufacturing capacity, the lower your unit costs, and the more revenue you could pour into advertising to drive demand for your products.

That classic model began to change in the 1970s, when globalization brought more foreign goods to the United States—many of them appealing to consumers with higher quality, lower prices, or both. This new competition drove many US manufacturers to relocate their factories to lower-cost parts of the world, especially Southeast Asia and Mexico. If your biggest expense was labor, why pay $20 per hour for a unionized worker in Ohio if you could pay $2 per day to someone in Bangladesh or China? Tragically for millions of Americans, job migration toward the cheapest available labor devastated various industries over the past half century. Improvements in global shipping made it easy and cost-effective to build just about anything on the other side of the world.

There are still plenty of companies that make things this way, producing commodities or near commodities very cheaply by maximizing their economies of scale. For instance, while you can buy fancy pens for $5 or more each, Bic still sells basic ballpoint pens in multipacks for a unit price of about $0.20. Bic can afford to sell pens for pennies because it produces them at massive scale. In turn, the super-cheap price boosts demand among cost-conscious pen shoppers. A low-cost/high-volume commodity business model can still work—but it’s no longer the only path to manufacturing excellence.

More and more companies over the past decade, both start-ups and incumbents, have been bringing dramatic innovation to their manufacturing processes and business models, working toward high-quality products at prices perceived to be fair. Perhaps the most significant new manufacturing technology is additive manufacturing (AM), which can be defined as “technologies that build 3D objects by adding layer-upon-layer of material, whether the material is plastic, metal, [or] concrete. . . . Once a [computer aided design] sketch is produced, the AM equipment reads in data from the CAD file and lays downs or adds successive layers of liquid, powder, sheet material or other, in a layer-upon-layer fashion to fabricate a 3D object.”¹

Additive manufacturing seems poised to explode in the decade ahead, making it possible to design and to build things cost-effectively in a higher-wage country like the United States. Companies with great hands can now afford to hire and train skilled workers locally, because factories with advanced robotics need far fewer workers. Yet those workers now have much more responsibility for using and maintaining sophisticated machines. When you combine local hiring with local sourcing of advanced materials, this new model of manufacturing can be both high-quality and high-volume, yet still affordable relative to global competition.

A good way to understand this trend is via a type of production possibilities curve designed by my Stanford colleague Robert Burgelman, which plots “delivered cost” (DC) against “perceived value” (PV).² (See Figure 9.1.)

FIGURE 9.1 The Perceived Value/Delivered Cost Curve

On the lower right end of the possibilities frontier, you can profit by selling a product with low PV for a low DC, like Bic’s cheapest disposable pens. You can also profit on the upper left end of the frontier, by selling a product with high PV for a high DC, such as gel pens that cost 20 times more. But the best option of all is to leverage new technology to shift the frontier curve outward, enabling higher perceived value for the same or even lower delivered costs. (See Figure 9.2.)

FIGURE 9.2 When An Innovation Moves Out the Possibilities Frontier

This chapter focuses on companies that are figuring out how to change the game in their respective industries by shifting their PV/DC curves outward. They’re increasing quality by making products with fewer defects and less need for maintenance, repairs, or replacements. They’re also driving down costs to their customers—often not just monetary costs but also by saving production time from previous types of manufacturing. (Time is money!)

First we’ll briefly revisit two companies from earlier in the book: smart Align and strong Daimler. Then we’ll see how Samsung, a massive global conglomerate, is applying its expertise in manufacturing electronics toward new markets like cars and pharmaceuticals. Then we’ll do a deeper dive into Desktop Metal, a start-up that’s riding the trend of additive manufacturing, aiming to upend the world of industrial production with its cutting-edge, high-quality, yet affordable 3D printing solutions.

Align: Never Stop Improving Production Processes

As we saw in Chapter 4, Align Technology has been a tech innovator since it launched in 1997. Its Invisalign dental aligners had to be high quality with extremely limited defects if they were going to compete with traditional wire-and-bracket braces. That became even more true later, with the rise of cheap competitors like the SmileDirectClub. Invisalign’s brand message stresses its top-quality performance, moving your teeth exactly where your orthodontist or dentist wants them to go, with none of the hassles of traditional braces. In Figure 9.3, this puts Align on the upper left, delivering high value for higher cost than cheap competitors like SmileDirectClub, which is on the lower right of the frontier. Meanwhile, traditional wire-and-bracket braces are in the danger zone inside the frontier, delivering significantly lower perceived value than Invisaligns at about the same cost to customers.

FIGURE 9.3 The competitive space for orthodontia solutions

Align is constantly looking for ways to improve its production process, by studying the big data generated by the 9 million Invisalign patients to date. For instance, in October 2020 the company announced “SmartForce Aligner Activation,” an innovation in how it would produce aligners. Select areas of the aligner’s surface would now be “specifically contoured to apply optimal forces to the tooth surfaces to control the location, direction and intensity of the force to produce the desired outcome and minimize unwanted movement.” According to Mitra Derakhshan, Align’s vice president of Global Clinical, “The additional activation is now automatically determined by the software and fabricated into the aligner as SmartForce Aligner Activation, thereby reducing doctors’ inclination to overcorrect certain movements in their treatment plans.”³

Even companies like Align that essentially invented a completely new production process can never stop improving that process, if they want to stay on their industry’s evolving value/cost frontier. And every Align innovation pushes the frontier a little further outward, making it harder for competitors to keep up.

Daimler: Smart Factories with a Human Touch

Another company we previously looked at, Daimler, has been a manufacturing pioneer since the nineteenth century. Mercedes cars set the global benchmark for high-quality craftsmanship, with a workforce of 300,000 committed to maintaining those high standards as a moat against competitors. Like Align, Daimler has consistently reevaluated and refined its manufacturing processes to take advantage of the latest innovations in its industry. It also built up a network of global manufacturing facilities far beyond its home in Germany, which required considerable political maneuvering in countries as diverse as Brazil, France, Hungary, India, Indonesia, Malaysia, South Africa, Thailand, the United States, and Vietnam.⁴ A competitor with unlimited capital might be able to design better cars than Daimler, but it would need years if not decades to build up similar manufacturing capacity on four continents.

Yet despite all those advantages, no brand is guaranteed to last forever. Daimler’s vehicles are currently losing prestige relative to Tesla, which (as we saw in Chapter 2) has been the source of Daimler’s biggest recent headaches. The company’s obsession with excellence and quality control, which helped it lead the car industry for more than a century, now risks slowing or stalling its reinvention.

But Daimler is hardly giving up; instead it’s constantly getting smarter, rethinking its manufacturing processes for an increasingly digital world. It was the first major automaker to integrate lightweight robots into vehicle production. Now it’s embracing what it calls “Industrie 4.0”—the digitalization of the entire value chain, from design and development to production. This includes building “smart factories” that make it easier to mix and match elements for various car models, such as gasoline, diesel, hybrid, and fully electric engines. Daimler predicts that “automobile production will change from large-scale to one-off production, where every car is built to individual customer requirements.”⁵

In a smart factory, the products, machines, and entire environment are networked with each other and with the rest of the global enterprise. As one Mercedes executive noted, “Digitalization enables us to make our products more individual, and production more efficient and flexible. The challenge is to plan for the long term while remaining able to respond rapidly to customer wishes and market fluctuations.”⁶ New processes that are already or will soon be in use include:

3D printing/additive manufacturing: for rapid prototyping of parts and tools.

Human augmentation: new ways of controlling robots inside vehicles, with workers instructing the robots via Wi-Fi.

Machine learning: lightweight robots can improve their movements by observing and copying human workers.

The production data cloud: all production data worldwide is being made available to every plant in the network, enabling faster sharing of useful information.

Does this mean that robots are taking over? Not according to Daimler: “The direct cooperation between people and robots means the cognitive superiority of people is ideally combined with the power, endurance and reliability of robots. . . . It is not aimed at the maximum mechanization or full automation of activities.”⁷

I was somewhat critical of Daimler’s efforts to improve its innovation and other brainy competencies, so it’s worth stressing that its hands are still world-class, the envy of any company that makes physical products. Daimler lives on the top left of the frontier curve, reliably delivering high-value vehicles for a relatively high cost. But its archrival, Tesla, is aggressively pushing the industry’s curve outward, while Daimler struggles to keep up. A decade ago, Americans who could afford to spend $50,000 on a car might be torn between Mercedes, BMW, or Porsche. Today, a rapidly growing share are choosing Tesla.

Samsung: Applying a Mastery of Manufacturing to New Markets

Samsung Electronics is the most prominent division within Samsung, a global conglomerate based in South Korea. In addition to making a wide array of computers, televisions, household appliances, and telecommunications equipment, Samsung Electronics is the world’s largest producer of mobile phones and the second largest producer of semiconductors. In short, this company excels at manufacturing. And as former President and Chief Strategy Officer Young Sohn told my classes in April 2019 and January 2020, Samsung never stops innovating to improve its competitive advantages in manufacturing and apply its expertise to new fields, such as automotive and pharmaceutical production.

During his eight years with Samsung, Sohn was instrumental in helping expand a company that already enjoyed incredible size and scale. He guided its corporate venture business and led its $8 billion acquisition of auto parts supplier Harman International in 2016. As the Wall Street Journal reported, “The transaction, the largest in Samsung’s history, comes as the smartphone market is maturing. It is a bet that automobiles, which have looked roughly similar for decades, will be the next place to fit in more chips and screens. Around 65% of Harman’s revenue came from supplying chips, audio systems or other parts to vehicles.”⁸

Sohn, who became chairman of Harman as a wholly owned subsidiary, spoke about how Samsung sees automobiles becoming more like “smartphones on wheels.” With increased computing power, communication capabilities, and entertainment systems, vehicles will soon not merely connect directly with people’s smartphones; they will act like actual smartphones themselves. Samsung’s expertise at making all those sophisticated components is boosting Harman’s existing advantages.

The company also realized that making pharmaceuticals at scale depends on having disciplined process manufacturing, another of its core strengths. After launching a drug manufacturing division in 2011, Samsung partnered with some of the world’s biggest pharmaceutical companies, including Bristol-Myers-Squibb and Roche, which needed additional high-quality production capacity. Samsung Biologics turned a profit in 2015 and is already one of the world’s largest contract-drug makers. With demand for increasingly complex medicines skyrocketing, Samsung began building a fourth facility in South Korea that will become the largest biologic drug production site in the world in 2022, with nearly 2.5 million square feet of floor space (slightly more than the Louvre).⁹

Samsung has a reputation as a digital leader, but Sohn urged my students not to downplay the ongoing importance of analog. “Analog is sometimes better than digital. Great craftsmanship happens in analog. In music we hear better sound when it is analog, and we see it in the engineering and design philosophies within a company. We need to have appreciation for analog and what it brings to the world.”¹⁰

A big share of Samsung’s revenue comes from supplying semiconductor and display components to other companies that compete directly with its own consumer products, especially smartphones. Sohn explained that Samsung’s ability to do this stems from its reputation for best-in-class quality and reliability at the component level, to such a degree that some of Samsung’s customers have no real choice but to incorporate Samsung parts.

How did the company get so good at manufacturing? By forcing the component-making units of Samsung Electronics to compete for inclusion in the company’s own smartphones and other products. The teams that make displays and semiconductors are driven to outperform non-Samsung suppliers. This high bar for quality within the company creates a virtuous circle; the component groups have to outperform their competition just to stay in use at Samsung, and the process of becoming best-in-class leads to component sales far beyond Samsung.

From Sohn’s perspective, Samsung’s size and reach don’t guarantee future success, but they offer a great opportunity to keep improving its production capabilities and spreading them into new geographic markets and new product markets.¹¹ The company’s hands are likely to become even stronger in the years ahead.

Now let’s turn to one of today’s most interesting innovators in additive manufacturing.

Desktop Metal: The Start-up Leading a 3D Revolution

Desktop Metal (DM) was founded in 2015 by a team of pioneers in advanced metallurgy and robotics, with the goal of revolutionizing 3D printing as a faster, cheaper, higher quality, higher volume option for additive manufacturing. As the company’s vision statement puts it: “Desktop Metal exists to make 3D printing accessible to all engineers, designers, and manufacturers. We are reinventing the way engineering and manufacturing teams produce parts—from prototyping through mass production.”¹²

Prior to launching Desktop Metal in Massachusetts, Argentine-born Ric Fulop had been an entrepreneur for 15 years with six previous start-ups. He then spent five years as a partner with North Bridge Venture Partners, leading successful investments in companies like Dyn, a web application security company; Onshape, a CAD company; and Markforged, a carbon 3D printing company.¹³ He could have stayed in venture capital, but by 2013 he was itching to get back to running a company. As he later told Forbes, “Investing is very slow. It’s molasses. It’s not very operational, and I’m an operator. It’s kind of boring, honestly. This is more fun.”¹⁴

Fulop explained his decision to go all in on 3D printing when he spoke to my Stanford class in April 2019. Although the core idea of additive manufacturing had been around for decades, he saw that recent technological improvements were creating opportunities to make the entire field vastly bigger. Some kinds of parts would become easier and cheaper to produce via additive manufacturing; others would become possible to produce for the first time. Fulop saw an opportunity to compete against large incumbents such as HP, by developing new capabilities that older manufacturers would be unable to match. With the right blend of technology and capital, a disruptive start-up in additive manufacturing could zoom to major player status in just a few years.

He told us that 3D printing in 2019 was roughly where the semiconductor industry had been in 1979: the basic technology had been around for a while, but people were just barely beginning to tap into its potential. Fulop predicted that the total market for additive manufacturing would grow at least 10 times over the next decade, as the process expanded from a narrow range of niche customers to a mass market with a wide range of applications. He made a persuasive case that everyone from small machine shops to high-volume producers would soon be ready to invest in high-quality, reliable, cost-effective 3D printing machines that could handle new alloys and materials.

The Technology

Videos of Desktop Metal machines in action look almost like science fiction. Layer after thin layer, a 3D printer can build almost anything made out of metal, from airplane parts to industrial equipment to medical products to toys. Imagine a future when your car repair shop never has to wait a few days to get the specific part you need, because a mechanic can simply print one in less than an hour. The opportunities for flexible, customizable manufacturing seem limitless.¹⁵

Desktop Metal’s first 3D metal printing system, the Studio System, was pitched as compact and office-friendly, not requiring the personal protective equipment or separate facilities that other 3D printers required. Debuting in December 2017 for $120,000, it eliminated the previously typical dangerous powders and high costs per use. The Studio System could do high-quality prototyping, tooling, and production, giving customers an accessible way to print parts on the fly at low volumes. As of August 2020, it was DM’s biggest seller and the source of a majority of its revenue.¹⁶

In March 2019, DM introduced a second, industrial-sized product called the Production System. This one was driven by a new printing process called single pass jetting (SPJ), a faster version of the typical binder jetting process found in powder-based ceramic and metal printers. SPJ uses more than 32,000 jets in conjunction with powder spreaders to jet millions of droplets per second. Desktop Metal claimed that SPJ and other innovations made the Production System up to 100 times faster than the most common method for metal 3D printing, and up to 20 times cheaper.¹⁷

That October, DM also introduced a machine called Fiber for customers who wanted to print high-resolution parts using a composite like fiberglass rather than metal. Fulop’s pitch was that Fiber would “deliver very high-resolution parts . . . using materials stronger than steel yet lighter than aluminum—all starting at a subscription price just under $3,500 per year.”¹⁸ It would be especially useful for consumer electronics.

For its fourth major product, DM launched the Shop System in November 2019, calling it the world’s first metal binder jetting system designed specifically for machine shops and metal job shops. It was a midsized offering for customers who needed something bigger than the Studio System but not as massive as the Production System.¹⁹ It would be ideal for industrial companies like Caterpillar, which might need to print replacement parts for large equipment in remote locations.

All of these sophisticated printers showed the power of DM’s research and development team. The company had more than 120 patents issued or pending by August 2020.²⁰

The Business Strategy

Desktop Metal’s business model depends on close, long-term relationships with demanding B2B customers, many of whom need customized solutions. Buying one or more of these printers and adapting your production system to it requires a leap of faith, beyond the capital investment. Customers need to feel comfortable trusting Desktop Metal as a long-term partner. The purchase decision isn’t about saving some money on the margins; it’s about whether DM can be a reliable partner, even at premium prices.

Different market segments have very different needs, which requires DM to stay flexible. Some of its prototyping customers want a complete wing-to-wing solution: machines, ink, metal powders, and support on demand. Others, like Lockheed-Martin or Owens Corning, are large enough to have their own relationships with metal suppliers, so they need fewer products and services from Desktop Metal.

Consider a start-up like Lumenium, one of DM’s early customers, which needed 3D printing at volume to produce a new type of internal combustion engine with a complex design. When Lumenium CEO Bill Anderson saw Desktop Metal’s machines at a Pittsburgh trade show in 2017, he was blown away. “We were pretty stunned by the booth,” he told Forbes in 2018. “We never thought those parts could be produced in quantity at low cost.” Working closely with DM, Lumenium found that 3D printing could cut both time and cost. One tricky engine component that had previously taken a week to produce at a cost of $980 could now be done in four days for just $148.²¹

Fulop stressed to my class that while a long sales lifecycle can be frustrating and challenging for DM employees, once validation is achieved the company can become embedded into its customers’ manufacturing processes. When Fulop and his team win the confidence of a customer—whether as big as Caterpillar or as small as Lumenium—they earn the right to sell into that company for years to come. Strengthening the customer’s hands is where DM’s real potential lies for outsized profits over time.

(This trade-off has a lot in common with Instacart’s, as we saw in Chapter 7. The more time and effort Instacart invested in nurturing its partnerships with the supermarket chains, the greater the long-term payoff. Convincing supermarkets of the value Instacart could provide might be hard, but once it became clear that trusting Instacart for home delivery paid off, those partners would have little incentive to break away.)

Desktop Metal had to develop deep domain knowledge for customers in a wide range of industries, including robotics, industrial parts, the military, aviation, green energy, and perhaps most important, automotive. By 2020 it was partnering with some of the world’s leading automakers, including Ford, BMW, Renault, Toyota, Volkswagen, GM, and Nissan. DM also received strategic investments from Ford and BMW.²²

As Fulop told Forbes in 2018, “This is the reason that Ford and others have supported us. In the time it takes the [traditional] process to produce 12 propellers, Desktop Metal would produce over 560.”²³ The magazine noted that his office desk displayed dozens of small metal parts that DM had 3D printed. One was a miniaturized steel prototype of a water pump for a BMW car; it cost $80 to make previously, but barely $5 via 3D printing.²⁴

These improvements would mean big cost savings in material as well as fuel costs. Desktop Metal was moving the frontier of additive manufacturing’s PV/DC curve, offering its customers the same or in some cases better perceived value at lower delivered costs, including the cost of time.

The Financial Gamble

Desktop Metal drew considerable interest from venture capitalists early on, thanks to its disruptive technology and potentially massive future market. By 2018, it was valued at more than $1 billion, with $277 million in funding from firms like New Enterprise Associates and Kleiner Perkins.²⁵ Ford, already a blue-chip customer, kicked in a $65 million strategic investment and put its chief technology officer on DM’s board. Not bad for a three-year-old company with 225 employees.

Rather than gradually move toward an IPO, Desktop Metal suddenly went public in August 2020 via a merger with Trine Acquisition Corp. Trine CEO Leo Hindery Jr. gushed during an investor conference call that “Desktop Metal will be the only pure-play opportunity available to public market investors in the additive manufacturing 2.0 space, and we believe the Company is in the process of revolutionizing the industry. Desktop Metal’s technology will be a significant first step in replacing a mass manufacturing base which has become antiquated.”²⁶

After analyzing hundreds of potential acquisitions, Hindery said, Trine chose Desktop Metal as its most compelling investment opportunity, because it combined:

An exceptionally robust portfolio of products and intellectual property.

A business model capable of generating high margins and powerful, recurring revenue streams. He praised DM’s “proprietary distribution network of over 80 partners across more than 60 countries.”

A booming market. “Industry experts forecast that the additive manufacturing industry will realize explosive growth over the next decade, reaching over 10X the 2019 market size. We believe Desktop Metal’s go-forward plan is eminently reasonable and achievable viewed alongside these strong, secular tailwinds.” ²⁷

During the same investor call, Fulop projected that the overall industry would grow from $12 billion to $146 billion by 2030. He expected DM’s revenue to triple from $26.4 million in 2019 to $77.5 million in 2021, and then to grow even faster, approaching $1 billion in 2025.²⁸ “We believe Desktop Metal is uniquely situated to lead the industry into this new era. Whereas prior additive technologies have been primarily focused on prototyping, our portfolio is . . . capturing value at every stage from R&D to high-volume mass production.”²⁹ Fulop added that Desktop Metal would ramp up shipping its four products by the end of 2021, and that it would also generate revenue from “recurring consumables” (the “razor & blades” business model) and providing services to its growing customer base.

Not surprisingly, many investors were eager to buy shares, with one calling DM “the next $10+ billion company” despite its post-merger valuation of $2.5 billion.³⁰ It now had plenty of capital, including $300 million from Trine and $275 million from other pre-merger investors. It had an experienced management team and R&D team. It had disruptive technology, protected by those 120+ patents. And it had first mover advantage in an industry projected to grow by 10 times in a decade. What could go wrong?

As always when we try to predict the future, anything could go wrong. Desktop Metal is already smart and getting stronger by the day. In five years, it might dominate the market for additive manufacturing. Or it might still be a niche player, quietly earning profits in a low-volume industry that never explodes to the extent that observers are projecting. Or it might be out of business, replaced by some other upstart not on anyone’s radar yet. Nothing is certain, except the principle that being both smart and strong is the best possible protection in an unpredictable world.

Whatever its future, Desktop Metal has already developed amazingly strong hands in just its first five years. It proved that manufacturing is far from a boring or trivial competency. Being great at making things still matters—and making things in innovative ways that move the curve of an entire industry can matter even more.

Getting Manufacturing Right

Even though economic value is increasingly shifting to digital companies that don’t make anything tangible, organizations that can master advanced manufacturing capabilities can also thrive. While the late twentieth century saw manufacturing scale up through low-cost labor and high-volume production, today it’s all about the smart application of technology and data. Virtually any company that makes anything needs to commit serious resources to automation, robotics, mass customization, and (when appropriate) additive manufacturing.

In addition, as products become increasingly connected via the internet of things (IoT), manufacturers have to do more to understand at a deep level how their customers’ customers use their products. Like Align, they can apply new manufacturing capabilities to deliver mass customization in ways that were previously impossible. Like Samsung and Desktop Metal, they can develop intimate relationships with their customers that deliver unique solutions through the combined power of technology, big data, and a commitment to service.

The next wave of manufacturing leaders won’t be those who merely slash costs via cheap labor. They will be companies that can simultaneously deliver high value, high volumes, and high touch service at the same time.

THE SYSTEMS LEADER’S NOTEBOOK