Investors are well aware of the Diversified Industrials trends whereby solutions for customers are increasingly encapsulated in a software offering as part of a full redefinition of what constitutes ‘services’. They are watching carefully, especially as the transition is fraught with challenges.
With sector tech content ineluctably on the rise, the ability to launch successfully new, monetizable services and even business models is becoming an increasingly significant source of competitive advantage. As firms expand their offering from hardware into software, I expect the market’s scrutiny on R&D activities to grow significantly: Is every dollar or dollar equivalent spent in R&D translating or likely to translate into higher growth and/or return on capital—or is the desert being watered with the illusion of building a better future?
Eventually, any failure to capitalize on intensified R&D efforts will become an angle for activists. 2014 paper by the Columbia University Law School discusses at length ‘the apparent hedge fund distaste for long-term investment in research and development’ by citing multiple studies in the R&D-intensive pharmaceutical industry. For the same reasons, the US tech sector has systematically attracted attention from activists too. A 2017 Harvard Business Review case study notes that Tech companies accounted for 20% of the firms targeted by activists in 2014, a greater share than any other non-financial industry.
As Diversified Industrials companies move into a higher tech territory, they expose themselves to the same trends. Many firms have already introduced new innovation techniques to respond to these dynamics and improve their R&D processes. What about ‘a formal method for practical, creative resolution of problems or issues, with the intent of an improved future result,’ for example. Mumbo jumbo? Well, this is one of the definitions of ‘Design Thinking’ (or ‘DT’) which appears to have made some inroads in helping innovate in an efficient and effective manner. The concept is admittedly not new to most industrial companies.
The key idea behind DT is this: Designers are tasked to ‘package’ products as part of a marketing strategy. What if their approach could be relied upon to design solutions and services to clients: including in the industrial space: as part of a problem-solving process?
The key pillars include an uncompromising emphasis on end-user experience through empathy. What has defined the Uber proposition is the fact that there is no physical payment or receipt at the end of the trip. This fundamentally changed the customer experience by making the end of the journey hassle-free and the payment invisible. AirBnB improved its user experience and gained significant traction by focusing on the quality of the pictures on its website, and the way feedback on properties were input in the system.
Prototyping (‘Demo or Die’ as per the M.I.T. Media Lab motto) is an integral part of the DT process, and with it the acceptance of failure as part of carefully crafted process to innovate successfully. The Institute of Design at Stanford has taken a lead in defining design thinking (check here).
The fundamental message from DT appeals to common sense: first, R&D activities benefit from a highly systematized, holistic approach to innovation. Second, whatever new client solution is being designed, it is essential to keep it simple, intuitive … to keep it human by relying on empathy. These ideas appear to be most relevant to our sector as it joyfully jumps into the tech world.
Sources (unless embedded in the text)
Harvard Business Review, ‘Design Thinking Comes of Age’, J Kolko, September 2015
Harvard Business Review, ‘Design Thinking’, T Brown, June 2008
The Atlantic, ‘How Design Thinking became a Buzzword at School’, 4 January 2017