Sunday, March 16, 2014

Disruptive Innovation in Manufacturing, Aerospace and Space

          by Chuck Black

Clayton Christensen. Photo c/o Wikipedia.
On the heels of the 7th Canadian Space Commerce Association (CSCA) National Conference, which was held in Toronto, Ontario on March 13th and focused on the highly disruptive topic of "New Technologies for New Space," its worth noting that some of the finest business and academic minds are currently studying how new technologies overwhelm the traditional market leaders.

Take, for example, the three excellent lectures presented below by Clayton Christensen, the Kim B. Clark Professor of Business Administration at the Harvard Business School on the topic of "disruptive innovation."

In his first presentation, Christensen discusses the path of innovations in the steel and automobile industries as low cost mini-mill produced steel from regional suppliers overwhelmed the better quality integrated steel producers in the 1970's and 1980's and low end Asian automobile manufacturers such as Toyota did much the same to Detroit automakers.

In both cases, the existing market leaders focused on the "deployment of capital" and calculations based on a variety of cash flow ratios designed to "maximize profitability," which led them down a path of ceding the less profitable market segments to the newcomers over and over again in favor of upmarket entrenchments in smaller and smaller markets (but with higher and higher profits margins) until they eventually ran out of markets.

Christensen went on to discuss US based Dell Computers and its relationship with Taiwanese subcontractor Asustek Computers (ASUS), which grew into the world's fifth largest computer maker by unit sales, simply by taking over the Dell supply chain.

Like the unnamed boss in the Dilbert comic strip, the unknown managers at Dell simply knew that their ratio of profits to assets would increase once they had no factories or assets, even if total profits dropped.

The second and third hours of the Christensen presentation expand and illustrate this train of thought plus provide insight into why managers act the way they do and the difficulties in developing a cogent theory to explain these actions.

How does this relate to aerospace and NewSpace business models? 

Only time will flesh out the details but it's worth noting the March 16th, 2014 Space Travel article, "Lockheed Martin Commercial Launch Services Announces Industry-Unique "Refund Or Reflight" Program." The article reported on the announcement of the industry's first (and so far only) 100 percent space launch vehicle "refund or re-flight" program, which is intended to protect customers from the up front costs of a launch vehicle malfunction. 

The program, offered by Lockheed Martin (LM) Commercial Launch Services, will also provide partial refunds for "partial malfunctions" and apply to all future non-US government contracts. It's certainly a first for the industry and will likely serve to differentiate LM launchers from their less costly counterparts.

But it's also a good indication that the venerable launch provider has decided it needs to move into guaranteed services, a new area with bigger profit margins, in order to avoid short term competition from NewSpace competitors like Space Exploration Technologies (SpaceX) and others. SpaceX has already achieved much success competing against LM in the commercial market and looks poised to break into the lucrative US government launch market over the next few years.

In essence, the incumbent rocket firm, in this case LM, is already moving upmarket. The rest of the aerospace and space industry will soon follow. 

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