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New Wave of Manufacturers Will Choose Scope Over Scale

By the MIT Sloan Management Review - The End of Focus: A New Wave of Manufacturers Will Choose Scope Over Scale - 29 March 2017

The full article by Richard A. D’Aveni is subscription based - The End of Focus: A New Wave of Manufacturers Will Choose Scope Over Scale - March 29, 2017

Two sections of the much longer article:

Since the 1980s, Western business strategists have preached focus. To capture economies of scale, move quickly down the learning curve, develop core competencies, and deeply understand customers, it’s best to operate in only one industry, or perhaps a few adjacent industries. Diversifying into unrelated industries is dangerous, the thinking goes, because it leads to complexity and unmanageable size without yielding economies of scope and other operational synergies. Indeed, Wall Street has frequently penalized multi-industry companies with a “conglomerate discount.” Focused companies also tend to be quicker to exploit new technologies than their more diversified, bureaucratic rivals.1

Those dynamics, however, will soon go into reverse. New digital technologies are changing the rules of competition by expanding the boundaries of what a company can handle and introducing new sources of advantage. Big data analytics, cloud-based mobility, 3-D printing, and machine learning are combining to make complexity manageable and generate economies of scope. Entering multiple industries will no longer be a drag on operations — it will bring competitive advantage. Digital technology has already upended the media and information sectors. It’s about to do the same to the manufacturing economy, and pave the way for what can be called the “pan-industrial” strategy.


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Achieving Production Synergies Across Industries

General Electric, having invested heavily in a digital platform and 3-D printing, is also moving along the pan-industrial path. Whereas Jabil’s platform started with a supply chain and logistics, GE’s began in the factory. Predix, its “brilliant” manufacturing software platform, continually monitors plant equipment and production flows, crunches the data with artificial intelligence, and recommends improvements. Every aspect of the process is expressed digitally, measured with the internet of things, and then optimized with analytics.5

While General Electric sells a wide variety of products across its 11 divisions — from jet engines to electric generators to MRI scanners — it is not yet a true pan-industrial. That’s because Predix still operates mainly within each division, so it doesn’t achieve the economies of scope that Jabil’s Control Tower does by integrating supply chains and production across multiple industries. But GE is much further along than Jabil in another key element of pan-industrialism, 3-D printing. The company has already invested $1.5 billion in additive manufacturing for its aviation and medical device businesses. In 2016, it put up an additional $1.3 billion to buy two European metal 3-D printing companies: Arcam AB and Concept Laser GmbH, whose technologies will boost the quality and speed of GE’s existing processes. It also built a $40 million 3-D printing research and training center in Pittsburgh. Because 3-D printers work purely from digital files, they mesh perfectly with digital platforms to turn information into physical goods in a pan-industrial structure.6

Most important for the pan-industrial story is GE’s $200 million factory in Pune, India, which opened in 2015. Unlike other GE factories, which focus on just one of the company’s divisions, Pune serves multiple divisions. It takes advantage of 3-D printing’s flexibility to make parts for airplanes, locomotives, and gas turbines. If jet orders are falling but railroads are booming, it can switch over the production lines and keep the factory running at a high level. Pune has conventional injection-molding equipment as well as 3-D printers, but it has enough of the latter to gain significant flexibility. So far those switchovers are still slow and difficult, but as GE moves down the learning curve with 3-D printing, and expands Predix to handle the complexity of possible options, the switchovers will get easier and cheaper.7

A higher utilization rate isn’t the only advantage of plants like Pune. GE’s divisions generally rely on a few big specialist factories, with their economies of scale, to supply the entire world. Because of its wider scope, producing for several industries, Pune can achieve volume from only a regional customer base. Besides putting the plant closer to its customers, a regional approach also offers a timely political boost. As GE’s CEO Jeffrey Immelt recently pointed out, rising protectionism around the world is pushing manufacturers to localize.

Once it integrates the divisions with the software platform and 3-D printers, GE stops being a conglomerate and becomes something much more integrated and cohesive, a pan-industrial company. The old GE captured synergies only in financing and in management development. The emerging GE, with an integrated manufacturing platform and 3-D printing, will have synergies in supply chains, production, and distribution. The divisions will gradually lose their autonomy and separate P&Ls, and start to share many resources. GE’s old adage of “being #1 or #2 in your industry” will likely become ancient history. Industry boundaries collapse when separate divisional activities become one activity.

Indeed, like Jabil, GE could eventually find the platform so powerful that it focuses its attention there, not so much on manufacturing itself. Immelt announced in 2015 that GE hopes to become one of the 10 largest software houses in the world by 2020.8 Already the company is licensing the software externally. As Predix gets ever more capable, GE may extend it well beyond its existing operations.