Serial chairman transatlantic engineer Sir George Buckley talks to Inflexion about the importance of innovation for industrial businesses to succeed.
Better known for high margins than their growth, few would hail industrial businesses as bastions of innovation. But to ignore this important facet of development is to risk being left in the dark, according to Sir George Buckley. He is well placed to speak on the matter: From humble beginnings in Yorkshire to one of the most celebrated businessmen on both sides of the Atlantic, he now serves as Chairman of engineering conglomerate Smiths Group plc, which claims to be ‘finding solutions to the world’s challenges’, ‘creating the future’ and ‘focusing on innovation’. To this end, the business has created a ‘digital forge’ in San Francisco which is advancing innovation and digital transformation at Smiths.
Sir George convincingly argues that industrial businesses can’t grow earnings through cost-cutting alone. “It’s not just about squeezing the lemon. If you are trying to compete with a great competitor, it’s not through small incremental changes.” Innovation, he stresses, is sometimes about breakout and it’s the key to sustainable organic growth. He makes the point that, while innovation may be seen as risky and uncertain by some executives, not doing so is a far worse alternative. A company needs to ask itself “what happens if we don’t?”
“Growth is the greatest value creator in businesses. Albert Einstein famously said the greatest force in nature is compound interest. I say that the greatest value creator in corporations is compound growth. In industrial businesses, which tend to be trapped in high-margin and low growth ruts, new value creation is best done through driving improved sales growth.” He outlines five methods for new value creation: “Firstly, proper segmentation analysis of the core market to find the existing pockets of faster growth within. If you can’t find those pockets, you must invent them by innovating. The best thing is to do both. Secondly, geographic expansion and line extension. Line extension also requires innovation. Next, focus on gaining market share. If you want to gain share from a competitor, you must offer their customers new USPs, possibly lower price and certainly better service – and this too almost always requires innovation. Fourth, have the courage to move your resources from 2% growth markets to 8% growth markets. Finally, invent completely new markets through innovation. This is the only calculus for growth that works. This has historically been the 3M way. Three or four of these growth elements require innovation.”
And he reels off the tools you use to do this: (i) Cost (ii) technology (including digitisation) (iii) brands and marketing (iv) distribution (v) people (vi) customer service and (vii) good industrial design. “These are the weapons companies go to war with against the competition.”
Rinsing the competition clean
Sometimes innovation means wholesale change rather than incremental tinkering with design. “In 1997, Chuck Knight (Charles Knight, then-CEO of Emerson Electric) called me to his office and said, ‘George, I have a new mission for you. I want you to re-invent American laundry’. In cases like these, you are never dumb enough to ask the CEO ‘what you mean by that Chuck?’ It was his job to ask, and my job to figure it out and do.” At the time, vertical axis agitator machines were de rigueur in American laundry rooms. I worked with one other amazing colleague, Bill Snyder, to create a horizontal axis washing machine whose system washed 3x as efficiently as the old agitator one. We tried to sell it to Whirlpool, but they said such an advanced machine would never take off and was, anyway, too costly. So, we sold it to their competition: Maytag. At the time, Emerson Electric supplied 100% of the electrical equipment to Whirlpool, Maytag, Speed Queen and 50% to Frigidaire. The Maytag Neptune washing machine was the result and it was launched in 1997. One year later we hit $1bn of retail sales and took nine percentage points of market share from Whirlpool. That innovation completely changed the market. Today virtually all American washing machines are made this way”
His fairy dust is clearly working its magic at Smiths. Last year’s company report stated: “The group delivered underlying growth for the first time in five years…” while this year’s reported “a 300 basis points of growth improvement since 2016.” In the first fiscal quarter of this year, the company reported organic sales up 11%.
He says “It’s all been down innovation, with some improvement in operations excellence. The company has created many new products right across its portfolio, with a lot more to come. “When a company has a thousand small products, you have no choice but to innovate in a thousand different areas.”
Sometimes innovation means wholesale change rather than incremental tinkering with design.
Outthink the competition
Sir George was once in conversation with the then Chairman and CEO at PepsiCo, Indra Nooyi. She asked George for his thoughts on innovation. At the time, the company was spending less than 1% of sales on innovation and Indra wondered whether more money could effectively be spent in this space. Sir George recalls confirming it by saying: ‘Indra, please think about Coca Cola as a proxy for the competition. Then let’s go down the income statement line by line and ask ourselves a few questions. On the Procurement line – can we buy goods and services more effectively than Coke? Probably not. In Operations, look at the COGs line – can we out-operate Coke? Deploy our capital more effectively, get better yield, quality or throughput? Probably not. Now go to the SG&A line – can we outsell and out-brand them? Probably not, after all they have the highest unaided brand recognition of any brand in the world. So, if we can’t beat them on any of these factors, what we do to be better and more competitive? The answer is that we need to out-think them. And that means we need to innovate. And this conclusion, applies to any pair or group of well-run companies right across the world.’