"The Efficient Frontier," Feature Article, March 2008

the efficient frontier

Pushing the boundaries of what's possible as an engineer.

by Steven Kerno

"Houston, we have a problem."

This short, declarative statement, uttered by astronaut Jim Lovell aboard the Saturn V rocket during the Apollo XIII mission to the moon, was a level-headed call for help. The Saturn V was venting breathable oxygen, and losing power, as well.

The events that followed, chronicled in the book Lost Moon: The Perilous Voyage of Apollo 13 and dramatized in the motion picture Apollo 13, are a testament to the ingenuity, creativity, and efficiency that engineers are capable of, even when confronted with a seemingly impossible situation. The actions allowing Lovell and fellow astronauts Fred Haise and Jack Swigart to return to Earth safely are aptly summed up in a line spoken by actor Ed Harris, playing the role of Gene Kranz, lead flight director, in the film: "With all due respect, sir, I believe that this will be our finest hour."

It most certainly was. The support provided by engineers at mission control during Apollo XIII is frequently cited as an example of teamwork and leadership at its finest.

Apollo XIII required a new definition of efficiency with available resources, and engineers delivered, pushing the boundaries of what was previously thought possible. Given the technology available at the time (April 1970), the astronauts, mission control personnel, and a veritable army of supporting engineers, within a matter of hours, had established a new technology frontier, against which other efforts could conceptually (if not practically) be measured.

Engineers in industry do not have the resources required to pull off the "successful failure" that Apollo XIII was. (Even NASA no longer has this privilege.) Engineers must work within the budgets, deadlines, and product or service requirements imposed by the marketplace. They are challenged to be more efficient with available resources to improve their employer's cost structure, and to provide better products or services, which should allow a company to realize a competitive advantage.

Their finest hour: Members of the flight control team confer in NASA's Mission Operations Control Room during the return of Apollo XIII.

Going as far as they can with the resources at their disposal is what engineers do. At optimal efficiency, they are working on what has been called an efficient frontier.

The efficient frontier concept was first articulated in 1996 by Harvard Business School professor Michael Porter in a Harvard Business Review article titled "What Is Strategy?" An efficient frontier is the aggregate of best practices, processes, management techniques, purchased inputs, and technologies available to an organization that allows it to operate at maximum efficiency. The efficient frontier is also a tradeoff made between value, either real or perceived, and cost for a given product or service.

///PRACTICAL LIMITS

The efficient frontier, while initially conceived within the realm of economics and business, is essential to the practice of engineers as they pursue goals and objectives set forth by employers. Why? Because, whether a company realizes it or not, its engineers frequently have the most contact with the practical limits of design. What's more, their knowledge and creativity offer the greatest likelihood of pushing beyond the currently established boundaries. Engineers, through their education and on-the-job experience, have had more exposure than most people to the very concept of efficiency.

Engineering courses, from undergraduate through doctoral studies, have a primary concern with efficiency and how it relates to the physical world. Such an understanding is critical, because wasted motion, momentum, or material frequently has adverse consequences in real-world applications, as either product or service cost targets are more likely to be exceeded or safety is unnecessarily compromised. Think of how many engineering concepts contain the term "conservation." Replace the word with "efficiency," and the meaning is essentially unchanged.

In addition, engineers must be aware that the efficient frontier is constantly moving outward as new technologies and processes are developed and applied, and as new, higher-value, lower-cost inputs become available.

For example, if three companies, competing in the same industry, are to remain competitive over an extended period of time, they may choose to operate at different points on the frontier, but, nonetheless, they must be located on it.

Within this construct, consider three separate companies— Kia, Honda, and Mercedes-Benz—and their relative positioning along the efficient frontier. Each company, and its associated brands, evokes an image of product cost and related value (either real or perceived). Furthermore, these images may be located, with relatively high agreement among customers, along the efficient frontier. None of the three companies occupies an identical (or even a relatively close) position, but each has been successful by consistently delivering to customers a product that very closely matches expectations of cost and value.

///THE CHALLENGE FOR COMPANY C

Now consider a simple diagram representing the positions of three hypothetical companies competing in any industry. Companies A and B are operating on the efficient frontier, but company C is not. A and B will likely remain competitive, but company C will not, as it offers the same value as company A, but at a higher cost, and has the same cost as company B, but with a lower-value result. The cost vs. value decision directly relates to the location a company aspires to occupy on the efficient frontier.

The engineers employed by companies A and B are in position to move their respective companies beyond the currently established efficient frontier. By reducing costs, offering greater non-price value, or by some combination of these two critical variables, the engineers at companies A and B can use their knowledge, skills, abilities, and talents to improve upon the current state of best practice. By doing so, the companies and their respective employees will likely realize a competitive advantage.

The engineers employed by company C should be endeavoring to move the company to the efficient frontier. By doing so, the company will no longer be in a situation where it is at a competitive disadvantage relative to companies A and B, and will likely continue to operate within this industry.

It is frequently the engineering talent within a company that best understands how to harness the organizational capital required either to move toward the current efficient frontier or to exceed it. A few advances from recent history involving consumer products are the replacement of carburetors with fuel injectors and of rear-wheel drive with front-wheel drive in automobiles. The increased safety, responsiveness, and reliability these improvements made possible overwhelmed any price difference very quickly (and, in many cases, they proved actually less expensive, as increased sales decreased the associated per-vehicle R&D costs).

C Trouble: The distance of a firm from the efficient frontier correlates with its chances of eventual bankruptcy. Company C needs to come up to the line. (Adapted from Michael Porter, "What Is Strategy?" Harvard Business Review, November-December 1996.)

And what about the replacement of vacuum tubes with transistors and then with integrated circuits in electronics? The vacuum tube, a mainstay of radios, televisions, and even computers for many years (Remember the tube testers in the hardware stores?) has been leapfrogged by devices so tiny that atomic and molecular distances have become a concern regarding their continued miniaturization.

Furthermore, it should be noted that as companies within a given industry strive to improve their operational effectiveness, any advantage this might provide will usually be short-lived. The ability to codify and document such operational activities inevitably invites diffusion and duplication by competitors, especially if they are relatively generic, applicable to a multitude of settings, and have a high degree of "portability."

Remember when Dell was lauded for removing the barrier between customers and operations with its "computers made to order" business model? This created a cost advantage (lower inventories, no markups for retailers) that existed for many years. However, other manufacturers have since caught up, and Dell has been forced to compete on product attributes other than cost. As such, operational effectiveness (activities focused primarily on the cost axis of the efficient frontier) can lead unintentionally to increased homogeneity among firms, with zero-sum competitive outcomes (and the accompanying pressures on profits) becoming the long-term result.

The critical difference between companies that are forward-thinking, innovative, and creative with their resources and those perpetually on the cost-reduction treadmill will likely be the deployment of their engineers, and how those same engineers can take the lead in creating value. While inherently more risky, since such activities typically require trial and error, and are difficult to quantify (in financial terms or otherwise), companies capable of tapping their creative engineering talent may well be amazed at what it is able to produce.

///WHAT MIGHT HAVE BEEN

Want an example of a company that did so, yet couldn't harvest the bounty? Consider the engineering talent and creativity that was unleashed within Xerox's Palo Alto Research Campus, a "skunk works" that existed in the 1970s. Inventions as important as the computer mouse and the laser printer were developed there, but the company failed to capitalize on them.

In the book Joe Wilson and the Creation of Xerox, Steven Jobs is quoted as saying, "If Xerox had known what it had and had taken advantage of its real opportunities, it could have been as big as IBM plus Microsoft plus Xerox combined—and the largest high-technology company in the world." However, Xerox management was content with a "quarter by quarter" approach (as their products accounted for 96 percent of overall copier revenue in 1970), and executive myopia likely cost the company an unparalleled opportunity. Operations and cost-cutting approaches didn't generate these opportunities—ingenuity and creativity did.

The efficient frontier should not be regarded as merely a conceptual tool, with little applicability to daily work or strategic planning activities. In a paper, "Bankruptcy Risk and Productive Efficiency in Manufacturing Firms," by Leonardo Becchetti and Jaime Sierra in Journal of Banking and Finance in 2003, a direct correlation has been shown between the distance a firm lies from the efficient frontier relative to its industry peers and its probability of eventually declaring bankruptcy.

Against such a backdrop, the challenge confronting company C isn't merely academic, but of primary importance if it expects to survive. Company C should be committing significant organizational resources, including the deployment of its engineering talent, to close the gap between its current position and the efficient frontier.

Engineers who are able to push beyond the current efficient frontier can better position their employers to earn profits, accrue prestige, and when properly communicated, demonstrate the value that engineering talent creates for everyone. Such an effort could result in a patent or a series of patents, the documentation of a difficult-to-replicate process or procedure (such as a trade secret), a significant improvement in design, overcoming a manufacturing barrier, or a combination of these advances. Additionally, by earning increased profits, a firm can invest some of the additional funds in activities intended to further the distance between it and its competitors on the efficient frontier.

///KEEPING THE SPIRIT

While we may never be confronted with the challenge of returning three men safely to Earth aboard a damaged spacecraft, we can retain the legacy of those responsible for this heroic achievement.

Most engineers do not know the people whose lives they affect. Engineers who improve the crashworthiness of vehicles are responsible for saving tens of thousands of lives every year. What about the designer of a better stair tread, or a child's car seat? And then there are engineers not directly involved in life-saving technologies who are pushing the efficient frontier to improve the quality of the lives that others have saved.

The ever-rising standard of living we enjoy owes a sizable debt to engineers, and their resourcefulness, creativity, and, of course, their ability to constantly redefine and extend the efficient frontier. Engineers, without a doubt, are the unsung heroes of our generation, allowing the most modest wage earner access to luxuries unavailable even to royalty not so long ago.

If we have veterans to thank for our freedoms, and firefighters and police officers for our personal safety, then we must thank engineers for our standard of living.

Steven Kerno Jr. is a parts cross-reference analyst at Deere & Co. in Milan, Ill., and a doctoral candidate at St. Ambrose University in Davenport, Iowa. His research interests include the connection of continuous learning and career success, and the effects of organizational culture and hierarchy on the communities of practice approach to learning. He may be contacted at kernostevenj@johndeere.com. Kerno's first article for Mechanical Engineering, "Continual Career Change," was published in July and has been included in a book, Career Development in Bioengineering and Biotechnology, to be published this spring by Springer Press.