How can manufacturing CEOs innovate like their future depends on it?

While it remains true that innovation is the job of everyone in an organization, as the leader, the CEO must determine the path forward and set priorities, as well as compel action when institutional inertia threatens to drag down needed change. Traditionally, CEOs have considered their roles as the champions of innovation. The typical champion is someone who encourages and supports the team but does not directly drive the innovation charge, while the driver is like a general leading the troops from the front.

One can think of the innovation process like a vehicle that will stall if it loses momentum. It is critical that the CEO keeps the innovation moving forward, provides direction, anticipates challenges, motivates the team and performs just-in-time course corrections so that momentum is maintained. The more disruptive the innovation, the more it needs a CEO leading the cavalry from the front. Having the CEO as the driver means that disruption is not watered down along the chain of command into incrementalism (such as in a game of telephone, combined with risk aversion from the organization).

In an EY poll (via EY.com US), 63% of C-suite executives in the manufacturing space believe that the biggest competitive threat in the next three years will come from a company outside their current sector.

In this complex landscape of new challenges and opportunities, CEOs have constrained timeframes in which to set and pursue their leadership visions: their average tenure in the sector has fallen to 6.5 years in 2023, compared with 7.2 years a decade ago. And they have fewer people on their teams to consult: in a separate EY survey, 56% agreed that “few members of our senior leadership team have experience in managing a business through a downturn of this uncertainty and volatility.”

Traditional wisdom suggests prioritizing the biggest customers, and traditional wisdom isn’t wrong. However, manufacturers are generally one or multiple steps removed from the ultimate customer, and both the end customer and intermediary customer are equally important. Additionally, disruptors often target unserved and underserved customers, which are often the most important vehicle to harness disruption and avoid being thwarted by disruption.

However, with new technologies has come increased awareness. Data from customers/consumers is the fuel for new products, new business models and new markets, and this fuel will increasingly separate winners from losers.

The EY CEO Imperative Study showcases this trend: customer-sourced innovation is a top priority for manufacturing CEOs overall. Moreover, high performers are already considering customer perspectives and will continue to leverage those perspectives while also developing external innovation ecosystems to capture scale and take greater risks. When manufacturers understand the needs of their customers better, they’re positioned to not only grow but also to transform their business models and value chains.

Among the 33% of manufacturing CEOs who chose “innovation processes” as one of their top three areas for implementation of change in the next three years, there are multiple ways in which they plan to get there. But customer-focused innovation is the clear top choice at 67%.  

While this is an emerging trend and not yet the norm, if you look only at CEOs of thriving manufacturing companies, they’ve increasingly embraced customer perspectives and are now focusing on implementation.

When your competitive chessboard is changing rapidly, how do you predict future performance? One of the hardest times for companies to think disruptively is when they have a highly successful product or technology. It can be tempting to ride that wave of success for as long as it lasts and make incremental improvements requiring smaller investments, especially since disruptive innovation requires investment of significant time, resources and cultural commitments. But the past is not a prologue for the future, and failure to embrace disruptive innovation can lead to stagnation at best and irrelevance at worst.

A CEO who is wary of risk is likely also wary of innovation. To make a giant leap, sometimes you may fall flat on your face. To be successful, keep making strides while looking for opportunities to leap ahead.

Manufacturing leaders should look to venture capitalists for the formula to minimize potential downside while taking informed risks.

• Approach innovations as part of a portfolio. Balance the portfolio with a mixture of sure bets (with a high likelihood of commercial success) and big bets. The former can cover costs of the full portfolio, while the latter can reap much higher ROI.
• Set clear targets and manage against them. This means more than forming a steering committee that meets every quarter. What is the size of the disruption you’re aiming for, and do you have the enabling capabilities?
• Fail fast and move forward. Treat innovation as a series of sprints within a marathon. Rather than strive for a perfect product, aim to deliver a good product quickly that can later be improved. Define a problem, solve it quickly and use what you’ve learned to inform the next iteration. Keep the feedback cycles short.
• Don’t feel like you must start from scratch. Invest in early-stage businesses to acquire new talent and business platforms. CEOs can evaluate an effort from the outside before committing a company’s resources toward it.

Manufacturing talent grows scarcer by the day. As a CEO, it’s vital to create a narrative around your organization’s purpose that appeals to the market and clearly rewards innovation. This narrative should attract two kinds of talent: those with specialized skills who can focus on the core and those who bring in diverse ways of thinking to help the organization transition during this challenging phase of industry convergence. While organizations pursue and reward specialists (in particular, there is a rise of skills-based hiring in recent years), innovation sometimes needs lateral thinkers with nontraditional backgrounds and multidisciplinary generalists.

Organizations need to look beyond their own boundaries to hire talent, and avoid getting stuck in the trap of traditional ways of thinking, in order to accelerate their innovation efforts. When multiple perspectives and approaches within an organization are engaged in problem-solving, the resultant solutions are more robust. Additionally, hiring or collaborating with an external organization can further enhance solutions, as outside perspectives offer an external lens unaffected by the company’s internal culture, incentives and political dynamics. One can look at the power of open-source ecosystems, such as the Android operating system for mobile phone or Tesla patents for electric cars, to fully understand the power of leveraging collaborators inside and outside of a company.

Whether an idea becomes reality depends on its leadership — and, crucially, whether leadership rewards and encourages experimentation and tolerates the associated risk of failure. A pioneering EY and the University of Oxford's Humans@Center study scrutinized leadership behaviors and decisions through the eyes of employees to see what separated high-performing manufacturers from low performers as they went through transformations. (High performers surpassed their key performance indicators.)

Summary

In shifting tides, trying to stay in one place will only get you further out of sync. Nontraditional upstarts are achieving what many manufacturers have not over decades of being in business by taking different approaches to hiring, partnering, connecting, building and more. As those who are best positioned to keep innovation on track and relationships strong, manufacturing CEOs must shed yesterday’s competitive mindset and accelerate their organizations into tomorrow. Steps to achieving this include hiring new talent with diverse perspectives, building more robust ecosystems of partnerships, getting closer to customers and taking calculated risks.