Manufacturing Quality—The New Commodity

BodyMedia’s success comes from a pragmatic approach to innova­tion. Any company producing a product or service that wants to dif­ferentiate, that wants to avoid being a commodity, must innovate. Innovation is the key to the competitive edge. That edge used to be found downstream in quality programs. Today, innovation is the theme that has replaced quality improvement in companies around the world. Not in the sense that quality programs are lessening in importance, but quality programs no longer offer a competitive advantage. Quality programs, such as Six Sigma, focus on producing zero-defect manufactured goods, where the goal is to improve the short-term and long-term hard-quality aspects of a product or deliv­ery of a service. These methods have led to successful production of high-quality products, yielding goods that meet tolerance and other functional expectations, products that maintain that effectiveness throughout the life of the product. These quality methods have set a new standard; they have improved company processes and products so well that practically all companies now implement some kind of quality initiative. In fact, they must, because to be competitive every­one now must have high-quality manufacturing standards.

But now that quality manufacturing is simply the cost of doing business, corporate leaders have recognized their mandate to find other avenues for increasing bottom-line profits. Much recent effort has been directed at cost cutting. Wal-Mart’s success has led many companies to see lower costs as an avenue for higher profits. Although Wal-Mart’s no-nonsense price negotiations with suppliers are well known to the public, business leaders have been enticed more by Wal-Marts cost-cutting improvements to the supply chain itself. Wal-Mart was a leader in implementing continuous replenish­ment programs and vendor-managed inventories, systems that have been critical to Wal-Mart’s ability to keep costs down. Like quality programs, these business process enhancements are quickly becom­ing necessary standard operating procedures for every industry. But efficiency gains from these systems are showing up less and less in bottom-line profits and more and more in lower prices for con­sumers, which results in lower top-line revenues.

Attention is back on innovation as a way for top-line growth, now that companies are efficiently producing and supplying high-quality products and services. Quality programs had a guaranteed impact on the bottom line for those companies that were the first to adopt them. But after all competitors implement quality initiatives, quality pro­grams no longer provide a competitive advantage. If they are not a competitive advantage, they are like a commodity, something every­one has. Microeconomics teaches that marginal profits are zero for commodities, that revenues simply cover the costs of wages, depreci­ation of equipment, and so on. Only those companies that are on the efficient cost frontier can continue to stay in business—anyone whose costs are too high must sell at a loss. Previously, when some compa­nies had higher quality to offer, they could sell at higher prices and afford higher costs. Now that quality manufacturing is accessible to all, quality differentials have shrunk, and higher costs are unafford­able. Offshoring is a result of firms’ need to stay on the efficient fron­tier, the need to keep costs down and profits up. But it is a short-term solution for profits, even though the moves offshore may be perma­nent. innovation cannot be commoditized, for innovation leads to dif­ferentiation because innovative products offer unique value benefits. A process of innovation is a fountain of youth, a source of a profit stream that cannot be quenched from competitive replication. Each innovative solution yields its own differentiated market and unique source of revenues.