The Future of your Industry: Shape Supply Chains!

Innovations shape the industry’s supply chains

The development of supply chains often begins with the creation of new technologies or products by a single party. As demand increases, the network expands into a complex structure. Finally, the supply chain is simplified again as products are commoditized, resulting in lower value and limited margins for producers. This life cycle can be understood using the S-curve model of product innovation and market acceptance. For companies, this means thinking about the future of their industry. And about the future of industries that are possible future markets .

Initial phase: The future of the industry begins as an individual creation

New technologies and product innovations are often created by a single company or a small group of closely associated suppliers. There are certainly a number of different providers involved in the exciting topics of the future. However, more as skeptical competitors than as compact value creation networks. For example:

• Intel produces its first microprocessor “Intel 4004” almost entirely in-house in 1971. Production volume around 2,300 units in the first year.
• Tesla develops and completes the early electric vehicle, the Tesla Roadster in 2008. Technology and components came from a limited number of suppliers.
• Siemens produced its first electric motor in 1866, with almost all components being developed in-house, as electrical engineering was still in its infancy at the time.
• Lapp was one of the first industrial companies to manufacture signal cables on an industrial scale. Driven by Oskar Lapp, co-founder of cable manufacturer Lapp, and the still manageable but already growing demand for electrification in industrial companies.
• AVS Römer supplied the first manufacturers of fully automatic coffee machines with feed pumps when the number of fully automatic machines was still low. AVS Römer established itself as a major supplier of automation, valves and systems to today’s vending machine manufacturers in the food & beverage (F&B) industry.
• Aerzener Maschinenfabrik manufactured its first air blower in 1868, mainly using its own resources, before the market and supply chain for such components developed.

Industry growth and supply chain complexity

As production increases to meet rising demand, the supply chain typically becomes more complex. Demand is increasing, company capacities are becoming scarce and the future of the industry is changing. Outsourcing and division of labor come into play to leverage efficiency gains. Specialized suppliers are required to produce various components, resulting in a fragmented and extensive supply chain. Examples of this are

• Apple’siPhone, which involves hundreds of suppliers worldwide for specialized parts such as displays, processors and memory. Including as part of ‘Coopetition’ from direct competitor Samsung.
• Ford’sModel T, which initially used mostly parts made by Ford itself, but expanded to a variety of suppliers providing specialized parts as production scaled.
• Boeing’s737 airliner, which involves thousands of suppliers providing specialized parts such as avionics, engines and landing gear.
• GE Aviation’sjet engines, which incorporate components from a global network of specialized suppliers, including high-precision parts such as turbine blades and control systems. In terms of the business model, it is interesting that the engine is rarely sold. More often, only the miles flown are invoiced.

Simplification of products and supply chains drives industry consolidation

Over time, the supply chain becomes simpler again. Booming demand is stagnating, companies are no longer able to achieve their usual growth rates and are looking for quick solutions to generate additional sales. The first choice is often to bring value creation steps that were previously outsourced back in-house. Examples of this are

• Dell’s“Direct Model” in the late 1990s, in which Dell began standardizing parts and reducing the number of suppliers to streamline operations and cut costs.
• Apple is developing its own chips (such as the M1) in order to bring more production in-house and reduce its dependence on external suppliers.
• Toyota’sapproach to lean manufacturing, which involves consolidating suppliers to improve quality control and reduce costs.
• ABB’ s strategy to integrate more components for its robotics and automation systems internally to streamline the supply chain.

Final phase of the industry: commoditization and decline

As products mature and reach the late stages of the S-curve, they are commoditized. This means that they are no longer considered innovative and are produced by many companies. The whole world can produce products and components of comparable quality. Only the price is still the deciding factor as to which manufacturer wins the race. The result is as follows:

• Reduced complexity: The supply chain becomes simpler as the need for specialized components decreases.
• Lower margins: Increased competition is putting pressure on prices and profit margins.
• Market saturation: Demand stabilizes or declines because the market is saturated.

Cash cows become question marks: The future of the industry? Unclear. But definitely different.

Industrial commodification examples

• Desktop PCs: Once a high-margin product with significant innovation, desktop PCs are now commoditized, with many manufacturers producing similar products. Margins are low and only a few companies remain competitive. IBM recognized early on that the PC hardware business had no long-term, high-margin future and divested the profitable laptop division. It is still on the market today as Lenovo. IBM, on the other hand, has developed into the world’s largest management consultancy and software specialist.
• DVD players: These were once cutting-edge technology, but have now become simple, low-margin products due to the rise of streaming services and are only relevant in specific niches.
• Bearings in industry and automotive: ball bearings, roller bearings, plain bearings. Formerly high-precision, high-margin products, bearings are now largely commoditized, with numerous manufacturers producing standardized parts. Everywhere and barely distinguishable. With the exception of the price. And then there is the electrification of the automotive industry, which is making around 80% of the bearings previously used redundant.
• Plastic injection molding machines: Once an advanced technology, plastic injection molding machines are now produced by many companies, resulting in lower margins and widespread availability. Still a good bread and butter business for many. A real cash cow only rarely.

Industrial niche markets and specialization

While mainstream products are declining, niche markets and specialized solutions often remain. These products may serve specific needs or industries where they continue to provide value. Examples of this are

• High-quality audio equipment: While mainstream audio equipment has been commoditized, high-quality audio equipment remains a niche market with specialized suppliers and high margins.
• Custom PC builds: Enthusiast markets for customized gaming or high-performance PCs continue to flourish, even though the broader desktop PC market has declined.
• Specialized industrial robots: While general robots have been commoditized, there remains a niche market for specialized robots tailored to specific industrial applications.
• Advanced CNC machines: While simple CNC machines have become more common and affordable, there remains a market for high-precision, advanced CNC machines used in specialized manufacturing processes.

Conclusion: The future of the industry is not sealed. Change is inevitable.

The life cycle of products and their supply chains can be understood using the S-curve model. Initially, products are created by a single entity, leading to complex supply chains as they scale. Finally, commoditization simplifies the supply chain again, resulting in lower margins and value. Nevertheless, specialized niche markets often remain and offer opportunities for targeted solutions and innovations.

If everyone thinks you have a good idea, then you’re too late.
[Paul Hawken]

The most important perspectives that industrial companies should keep in mind for their future are therefore:

• No industry is a perennial favorite: some seem like eternal businesses and perennial favorites. But they are all subject to a life cycle and the risk of missing the jump is high. Especially when business is going well. A few customers pay very well and the curse of success and the arrogance that comes with it makes it difficult to rethink.
• Not either/or: strengthening existing business or innovation, new business and new business development must not be alternatives. The temptation to choose one is great. But if you keep going to the well until the jug breaks, you usually don’t have time to develop and expand new sources of income. It simply takes too long. More and detailed information on this can be found in the book “The Innovator’s Dilemma” by Clayton Christensen.
• The next future market must be small: If the market is already fully grown, then the best opportunities have already been squandered and the cake has been shared out. Starting out in a new niche from a bomb business does not look attractive. But it is usually the only real chance for a fresh start. This is one of the main reasons why companies rarely make the leap and often disappear into oblivion after many years of market leadership instead of soaring to new heights.

TOM SPIKE accompanies companies into the future of industry

If product and technology innovation no longer seem promising in your own industry, then business field development and new business development can be a way forward for the industry and the company. TOM SPIKE helps you to identify and pre-select suitable markets and innovation potentials and to actively explore market opportunities. As an innovation consultancy , we believe in a systemic, participative approach and are flexible in determining how much of the development of the business area your company takes on itself and how much you prefer to outsource.