Maximizing Return on Innovation Investment: 6 Ingredients for Success

One of the leading imperatives to emerge over the last few years of economic downturn among manufacturing CEOs is innovation. However, only about 12% of manufacturers have been able to carry out innovation at scale. Now, amid today’s accelerated digital landscape, manufacturers must determine how to “afford” the future they desire, including funds to not only get started but to turn invention into innovation, scale beyond compartmentalized proofs of concept, and accelerate speed-to-value. This will ultimately lead to the goal of a maximized return on innovation investment – ROI2 .

So, what is required above and beyond financial resources to achieve successful ROI2 ?

1) Optimize balance sheets and finance operations to liberate cash

According to a recent EY CEO Survey, nearly half (49%) of manufacturing CEOs plan to invest in innovation and portfolio transformation. These CEOs also indicated that the main source of financing for these investments will come from performance improvements (56%). However, industrial companies struggle with high working capital and cash tied up in physical and digital assets.

To optimize balance sheets, leaders should take a multistep approach that includes reducing cash trapped in working capital, purging “ghost assets,” rationalizing software applications, optimizing real estate, balancing debt vs. equity, and reducing days inventory and sales outstanding.

By taking a coordinated approach, supported by artificial intelligence and machine learning, enhanced analytics, monitoring, and a cash-culture focus, manufacturers can improve return on invested capital (ROIC) and make more operating cash available to finance innovation endeavors.

2) Invest in fit-for-purpose technology and avoid FOMO

Manufacturing throughput and the ability to anticipate and manage production demand and supply is fundamental to every manufacturing company, but equipment downtime, workforce shortages and supply chain challenges are major disruptors. Accordingly, manufacturers are investing in digital manufacturing solutions to mitigate these risks, but often overbuild or underbuild digital manufacturing solutions enabled by Industrial IoT, cloud or edge computing, and associated software platforms, resulting in inefficient spending.

To identify fit-for-purpose solutions, manufacturers should:

• Prioritize business objectives and KPIs to avoid hype-driven technology investments
• Make data-driven investments in technological innovations that offer near-term performance improvements while creating a foundation for enduring enterprise value
• Identify and rationalize legacy IT and OT software systems for cost savings, reduced complexity, and improved master data management and cybersecurity
• Define a robust technical and data reference architecture for investment and implementation, avoiding piecemeal solutions to achieve scalability, lower total cost of ownership, and the expected ROI2
• Use digital twins, digital threads and model-based engineering to test assumptions and probable outcomes, de-risk implementation, and enable continuous improvements

3) Maximize the value from data (VfD) to compete on analytics

A data-driven manufacturing approach is essential to enable the agility required to succeed in today’s market. The manufacturing industry generates almost two petabytes of data every year, and more than one-third of manufacturers say the amount of data has at least doubled in the past two years.

Maximizing the value from data is essential for optimizing technology investments.

Of manufacturing leaders, 22.6% now say that they measure the value from data in monetary terms, compared to 4% in 2021. Additionally, 12.1% say that they measure data’s value by revenues of data-driven services, compared to 3% in 2021, as reported by the Manufacturing Leadership Council.

According to Forbes, the advanced manufacturing industry is one of three industries that place the highest priority on data integration. The leading challenges that manufacturers face in getting more value from data are extracting data from legacy systems, a lack of data analytics skills, and integration of data from different sources. A recent study by the University of Texas indicates that if the median Fortune 1000 business increased the usability of its data by just 10%, it would translate to an increase in US$2.01 billion in total revenue every year.

Companies should start by (a) defining clear business requirements and priorities, (b) identifying actionable insights that can improve overall business competencies, (c) examining existing data sources and data flows linking them to business requirements, (d) defining a master data management and data governance process, and (e) creating a functional data fabric (architecture) to avoid turning data lakes into “data swamps.”

4) Harness the power of people to double transformation success

The World Economic Forum’s Future of Jobs Report states that, due to the growing uptake of technology and automation, half of all employees will need reskilling by 2025. This remains particularly relevant within manufacturing. Cultivating trust, creating a continuous learning culture, and having a people-centric leadership model are linked to significantly better organizational performance outcomes. However, according to the EY 2023 Work Reimagined Survey, just 17% of employees and 22% of employers name training in GenAI skills as one of their top priorities. There is clear value in investing in people:

• According to Gallup, companies that invest in employee development increase profitability by 11%.
• Organizational change management initiatives must address both the rational (processes, organizational design and technology) and the emotional/experiential (leadership, culture and capabilities) aspects in a balanced and integrated way.
• Manufacturers that focus on, and invest in, their people are 2.6 times more likely to succeed in their transformation efforts.

5) Build innovative business models to create competitive advantage

The competitive field of manufacturing is changing at an accelerating pace. Manufacturers are facing nontraditional competitors that bring a new mindset, especially when it comes to cultivating customer experiences and relationships. It’s no longer about delivering a quality product reliably; it’s about creating a value-centered offering.

For a growing number of industrial products, the software and digital aspects offer greater value than the hardware and electromechanical components, enabling the opportunity for new business models and revenue streams beyond the point-of-sale.

Pillars for innovative business models include providing omnichannel experiences and capitalizing on consumer usage to strengthen customer relationships; establishing a presence in the value chain with a strong market position; reframing traditional revenue models to outcome-based, value-driven relationships; and building partner ecosystems to innovate at scale.

6) Leverage ecosystem partnerships to amplify growth  

To create advantages and mitigate potential disruption, manufacturers can embrace mutually beneficial ecosystem partnerships that offer increased value to customers beyond what each company can bring alone — while also accelerating speed-to-value. Ecosystems offer benefits of speed, flexibility and lower capital commitments.

Our study of more than 800 business leaders leveraging at least one ecosystem business model has revealed that ecosystems make up on average 13.7% of their total annual revenues, drive 12.9% in cost reduction and generate 13.3% in incremental earnings. Yet, only 31% of CEOs in an EY CEO Outlook survey use ecosystems, largely due to the need to protect IP and complexities in defining cooperative financial and operating models. These challenges can be overcome by implementing a clear governance structure, defining distinct roles and responsibilities, maintaining open lines of communication, and getting sponsorship from the top. Seventy-one percent of manufacturing CEOs who have high-performing ecosystems affirm that ecosystems are providing greater growth opportunities than traditional M&A.

Maximizing return on innovation investment holds even more importance in today’s rapidly changing manufacturing landscape.

These six ingredients for delivering innovation from invention serve as a compass for organizations navigating this dynamic market and striving to maximize ROI2

The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

SC
MR