AGAAS Strat Article

Strategy: Predicting The Future

Apple's original iPod®, iPad® and iPhone®, or Toyota's popular Prius® hybrid electric car, are all examples of products from companies in highly competitive industries where, had you asked business leaders and analysts of the time if they really understood their industry, they would have answered with a resounding "yes". Yet in the "aughts" (early) of the 2000's, there were few flash-media music players or hybrid-electric cars on the roads, and those that did exist were hardly considered mainstream.

The story is somewhat more remarkable when one considers the research & development (R&D) needed to create such products. During the time, several adverse financial events had occurred, including the 1997 Asian Currency Crisis, the year 2000 NASDAQ bubble, and the soon-to-follow sub-prime lending crisis that helped induce the Great Financial Crisis of 2008. Such recessionary events almost always lead to lower overall R&D spending. One would not necessarily expect the invention of a totally new type of car, even from a company like Toyota, due to the enormous investment and risk-taking required by a "first goer". And while hard to envision now, Apple's overall computer business was seeing waning market share, with none of its current signature products yet invented in the early 2000s.

It would have been completely understandable, and perhaps even advisable, for such companies to have taken a defensive stance and focus primarily on their existing products, making them as well as they could, and not directing any further resources outside that path. After all, focusing on existing, high-quality products is never a bad idea.

However, each of these companies did something different. They looked ahead at the near future. Everyone knew an electric car for the masses was coming one day, but no manufacturer wanted to be the first to learn the hard lessons. And much talk had been made about computer tablets and MP3 music players, with a few hundred megabytes of memory and a battery that lasted a couple of hours. A few products already existed, but the quality wasn't particularly high, and the user experience was just "OK". Many theorized about converging the technologies into one small package, but that was an idea for the future. It would be expensive, there were no standards for such devices to follow, and besides, we already had portable CD-players (remember those?).

But each of these companies pushed through challenges, some internal and some external, realizing these products could otherwise be made soon. Once key blocking issues were resolved, they could provide their customers with truly unique products that would be in-demand. In doing so, they not only became leaders in these new businesses, but they also grew their overall business much larger than could ever have been predicted.

How did they do it?

Case 1: Apple iPod®

Flash-memory based solid-state hard-drives were too expensive several years ago, where standard "spinning" hard drives were well-understood and reliable. Most consumer electronic manufacturers recognized that solid-state drives would one day have a place, but were waiting for their prices to decline before incorporating them into products, despite their obvious advantages. But Apple understood the impact of continual miniaturization, even at a price, realizing that they could start design on a new device with a small spinning hard drive as early as the year 2000, so that when flash-memory technology caught-up by 2002, it could quickly be incorporated. This allowed the launch of a product with a significant first-to-market advantage, as well as a technological advantage over competitors (here, "first-to-market" means a high-quality, music storage device — existing hybrid devices already existed, but did not have the music-player sole focus of the iPod® which was intended to hold the user's entire music library on one device).

While still a respected and major player in the computer world, Apple did not at that time have the enormous R&D budget it has today. But, Apple stuck to their view that a small flash-media player with mass storage would be a hit, and perhaps more interestingly, that the player should also be made of high-quality materials which would cost more to manufacture and sell, but also allow for better sales margins as a premium product, which would further help the company's reputation for building higher-quality products.

iPod® is a registered trademark of Apple Inc. iPod Classic photo courtesy of Apple Inc.

Case 2: Toyota Prius

Toyota was early to recognize the worldwide demand for low-emissions vehicles. To go ahead with development was not an easy decision to make in the then-recent, post-1997 environment after a jarring currency crisis in the region, and when a barrel of oil was selling for around $18 USD, and a gallon of gas cost $0.87USD/gallon. Further, there was strong demand for larger vehicles in the United States and other countries, which would not be easily adaptable to either full-electric or hybrid designs. If that weren't enough, the perceived need that a network of "filling stations" with electrical hookups would first have to be built, prior to any sales of electric vehicles, seemed to doom the development of a consumer-ready, hybrid electric car.

But Toyota persevered, believing that even if the Prius® did not initially sell well, their investment in mass production of hybrid-vehicles would gain them valuable knowledge. It was really just a matter of time, and as it turned out, they did not have long to wait. In just about 5 year's time, the world demand for efficient, fuel-saving vehicles was growing by double-digits every year, leading to waiting lists for new Prius® vehicle deliveries, even as much as 10 years after initial introduction. Many automobile manufacturers scrambled to catch-up and offer some kind of a hybrid vehicle, realizing the race was now on, yet Toyota was already well ahead of others. Lessons learned, and in some cases, even the capex spent twenty years ago, are all still paying dividends today.

Over the years, the hybrid and full-electric offerings from many existing and new manufacturers have done well. Still, the Toyota Prius® hybrid is amongst one of the most recognized cars ever produced, and for years outsold all of its competitors, combined.

Prius® is a registered trademark of Toyota Motor Corporation. Prius photo courtesy of Toyota.

Case 3: Boeing 787 Dreamliner®

There are many fascinating examples of letting the future be your guide, such as the parallel-development of technology where several pieces used in a larger product are all developed in tandem, yet at different worksites. The idea is to leverage better material costs and know-how in regions where they are optimized, and bring such parts together into one final product where everything then fits together perfectly.

Boeing's multi-manufacturer 787 Dreamliner® would use parts made from around the world. Many parts had never existed before, except in crude, non-production prototype form, so a great deal of testing and trials would be needed to ensure quality. The program to build the Dreamliner started in April 26, 2004, with great optimism in making the most fuel-efficient large commercial aircraft (at least to that point), and yet also improving passenger comfort to new levels, all the while reducing maintenance and operating costs for airlines.

But missteps always occur, particularly with this type of "skunkworks" development, where new ideas and techniques have to be tried. Indeed, some early problems with fit and quality did occur, and in some cases were quite significant. New processes and inventions almost always have unexpected challenges, and yet may be pointed to as "proof" that the new system isn't working. However, after a relatively short period of re-tooling, the first Boeing 787 Dreamliner® aircraft rolled off the assembly line, and on September 26, 2011, the first delivery to a commercial airline customer was made, just 7 1/2 years after the entire program was started. Today, the Dreamliner® ranks among the very best commercial transport aircraft ever made, delivering on all its promises as a much more efficient and comfortable airplane (on the point of comfort, we know first hand).

All the manufacturing parties involved knew they had to look at what would be normal in the future, and make that their target. Critics pointed-out significant problems (sometimes rightfully). But the problems were fixed, leading to an even better understanding of what can work, what doesn't, and how to avoid problems in the future. That, by definition, is what makes them innovators.

787® and Dreamliner® are registered trademarks of Boeing. 787 photo courtesy of Boeing.

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