Manufacturing and Value Chains

How businesses can win at leapfrog

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A key business strategy for the Fourth Industrial Revolution Image: REUTERS/Tm Wimborne

Otto Schulz
Digital Member, Kearney
Mauricio Zuazua
Partner, Kearney
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Rapidly emerging technologies — such as the Internet of Things, artificial intelligence, wearables, robotics and additive manufacturing — are spurring the development of new production techniques and business models that will profoundly disrupt most manufacturing and global supply chains. For example, some low-cost manufacturing export economies may be at risk, as technology may soon make it possible to manufacture many products much closer to the markets where they will be sold at a competitive cost.

Yet that is just one aspect of a vastly shifting landscape. It is imperative that government and business leaders take a fresh look at how their countries and corporations will contribute to the world’s fast-changing value chains.

A strategy that has worked for some is to leapfrog into global leadership in targeted areas, as South Korea did with high-definition television (HDTV) and China is now endeavouring to do with electric vehicles. Rapid technological advances open windows of opportunity for trailing or nascent economies to quickly take leading positions in prosperity-sustaining value chains without having to replicate the paths taken by more established competitors. The Fourth Industrial Revolution will definitely create fresh opportunities to leapfrog.

It is important to understand, however, that leapfrogging is not for everyone. In fact, the findings of the Readiness for the Future of Production Assessment 2018 report, conducted by the World Economic Forum in collaboration with A.T. Kearney, suggest that only a handful of countries may be poised to make such leaps.

Figure 1. Readiness Archetypes

High potential countries, such as Australia and the UAE, and nascent countries closest to the archetype border, such as the Kingdom of Saudi Arabia, are likely in the best position to leapfrog in the emerging production paradigm. These countries have a relatively small current production base, but have the resources and potentially the right combination of other capabilities to capitalize on leapfrogging opportunities. Other countries have the potential to leapfrog, but with still greater effort, by focusing on a few opportunities, then focusing their energies and investments to develop correspondingly crucial capabilities.

Assessing essential capabilities

The data-driven Readiness for the Future of Production Assessment 2018 report analyses how well-positioned economies are today to shape and benefit from the changing nature of production. Readiness is generally regarded as the ability to capitalize on future production opportunities, mitigate risks and challenges and be resilient and agile in responding to unknown future shocks. The assessment is made up of two main components: structure of production, or an economy’s current baseline of production; and drivers of production, the essential enablers that put an economy in a position to capitalize on the Fourth Industrial Revolution.

Figure 2. Capabilities for Future of Production
Figure 2. Capabilities for Future of Production

Some of these capabilities are particularly vital to leapfrogging and so must be carefully addressed before choosing a leapfrog strategy. Three areas that particularly merit the early attention of leapfrogging leaders are technology and innovation, human capital and institutional framework.

Most leapfrogging efforts begin with a differentiated (and typically specialized) competitive edge in technology and innovation. Leaders preparing to leapfrog must clearly foresee and define how they will nurture focused and continuous technology development and diffusion.

Human capital is obviously fundamental. Leaders charting a leapfrog strategy must be realistic in assessing what will be required of their country and industry talent pools and meticulously implement corresponding strategies to rapidly develop the human strengths required. In the Fourth Industrial Revolution, these comprise not only technical prowess but also the ability to continuously learn, creativity, emotional intelligence and other soft skills.

A country’s institutional framework encompasses how well government institutions, rules and regulations shepherd technological development, novel businesses and advanced manufacturing. To nurture leapfrogging, leaders must cultivate an environment where rule of law is strong enough to protect intellectual property and ensure social stability, liberal enough to encourage rapid innovation and attract unconventional thinkers, and business-friendly enough to entice entrepreneurial activity.

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The age of economic ecosystems

Many countries will find it difficult, if not impossible, to cultivate all the capabilities required to leapfrog via traditional industrial policy. In this rapidly changing environment, choosing individual value chains and combining them with selected technological solutions will not work, as it would require that leaders guess right nearly all the time about where the best opportunities to become and remain competitive might be found, and how best to pursue those opportunities.

A practical alternative to traditional industrial policy is to actively participate in new economic systems, comparable to those found in nature. Coral reefs, for example, blend the abilities of a diverse array of organisms, big and small, for the survival and sustenance of all. Economic entities frequently mimic nature by choosing to engage in symbiotic relations. The technology giants and start-ups of Silicon Valley, for example, are highly dependent on the region’s universities, which in turn benefit from having elite employers nearby, anxious to hire their graduates and fund their research. Throughout the world, in fact, the high-tech industry and higher education institutions tend to recognize their interdependence and form strong communities of self-interest which are, in essence, systems that foster the healthy competition of ideas and solutions.

Systems are much more resilient than any individual solution and have a far greater capacity to adapt to the unexpected. Countries and companies looking to leapfrog must therefore be visionary to see where they may share interests with partners they do not yet know, and creative in forming new bonds of mutual dependence. In fact, building and engaging in economic systems may prove the most crucial capability of all in the Fourth Industrial Revolution. Leaders can now begin to cultivate that capability by actively engaging industry, academia, unions and other crucial stakeholders in the process of exploring, targeting and pursuing leapfrog opportunities.

For more information, see the World Economic Forum’s System Initiative on the Future of Production.

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Related topics:
Manufacturing and Value ChainsLeadershipFourth Industrial RevolutionEconomic Growth
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