Businesses must walk a fine balance between innovation and standardization.
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I don’t usually mention this, but I initially studied to be an engineer before circumstances sent me off on a different path. Maybe that training causes me to notice things or maybe seeing patterns is just a part of me.
Quite a few years ago, I observed something about Calgary road designs. It seems like every major intersection project was an opportunity to try something different.
A prime example is the Deerfoot Trail. Sometimes when exiting, you do so before the overpass and sometimes after. Sometimes, it depends on whether you are heading East or West. Sometimes, you have to follow a convoluted route when traveling in certain directions only. The same variances apply when entering the Deerfoot from an intersecting artery.
The differences don’t just impact the cost of the construction project and ongoing maintenance. It works out fine if you know the area but can be quite confusing for drivers not familiar with the route. I am not aware of any statistics on accidents caused by the confusion factor, but I am sure there must have been a few over the years. To understand, you just have to be a passenger giving directions to someone not familiar with the roads.
The oil and gas industry has similarities.
Knowing When To Innovate
Businesses are usually striving to create a competitive advantage or become more efficient to increase profit. The exception to this is when the demand is so high there is no real incentive to become overly profitable as a percentage. Instead, companies focus on increasing revenue to increase total profit as a dollar amount.
In any industry, there is a balance between innovation, customization, and the tendency towards cost and standardization. The rule of thumb should be when the benefits from innovation and customization exceed the costs of standardization, go with innovation.
Three factors tilt the balance towards customization even when it breaks that rule of thumb.
Lack of Industry Agreement
To get more standardization, lots of groups of people need to come together and agree what the standards are. This requires a champion, consensus, and an incentive to make it happen. The bigger companies might be able to enforce standards within their sphere of influence, but that still requires changes in the way things get done.
The Way Things Are Done Here
Each organization has its way of doing business. People move between organizations typically within a region. So, the way things are done here becomes the way things are done there as well.
Momentum
The above two factors combine over time to create momentum that is very hard to shift. It might not even be in everyone’s best interest to change, which further creates resistance.
The Impact On The Industry
You have a resource like oil. You have an end product like gasoline, which is a commodity. The more efficiently you can get oil into the product form the more profit you can make even in down markets.
But, due to the momentum of customization and innovation in the past, the supporting industries would have to shift as well. Engineering firms, on-demand manufacturers, and the supporting trades would have to move from a model of customization to one of standardization. This step tends to drive the value chain towards cost and efficiencies. Standards and efficiencies benefit from scale. So, that would lead to a shift in the players and industry consolidation.
But, standardization also has another price.
When things are overly standardized, you lose the ability to innovate quickly. The momentum is hard to shift as agreement is then required to make a change. Some innovators will disrupt the standards anyway. Then, all bets are off.
Innovating In How You Market And Sell
Momentum and the way things are done here mean most service companies continues to sell the way they have done so for decades by using relationships and who they know.
Hires are often made by the size and perceived usefulness of the personal database the person brings with them. The problem is relationships also leave with the loss of the key employee.
As the industry goes through a generational shift now and over the next 10-15 years, we are starting to see more people willing to try something new. The impact of globalization will also continue to disrupt local businesses as downward prices come into play. Relationships are still important, but how they work will shift.
The companies that will thrive in the future will understand they need to look at innovation and competitive advantage. Your edge doesn’t do you much good if no one knows about it.
Communicating your message is where strong brand and marketing strategies come into play. You get clear on who your best clients are and why they buy from you. When you are bidding on a project or a custom product, they consciously or subconsciously want you to win, because that trust is there. Existing customers buy more from you. And, when that competitor of yours messes up or goes under, you are the preferred alternative.
It is far better to compete on value than price. That means innovating across your entire business. It means standing out from the herd.
It might even mean going in a different direction than everyone else.
Originally published in the April edition of the Oilfield Pulse.
