Is it sufficient to digitize business operations for higher efficiency? Or does the real – and much larger – business opportunity come with digitizing products, and with creating entirely new value propositions? Read on to find out why we recommend businesses shape their digital transformation by reinventing what they make.
The thing about digital technology is that it’s not only changing how companies make things – it also changes the very things themselves. Today, there can be no more doubt that we’ve already entered a new era of products – and it’s one of smart, connected products; products that come with embedded sensing capabilities, software, connectivity, and even AI.
This era will likely bring extraordinary opportunities for businesses and their customers alike. But, so far, only very few companies are starting to seize these. Most firms stick with their established ways of making, selling and using products – and are missing out on the massive potential that new, emerging digital technologies can offer.
In the – very near – future, hardware devices such as cars, appliances, heavy and industrial equipment, as well as software products, will no longer be differentiated by static product features. Instead, manufacturers will design these devices to offer highly personalized and “fluid” experiences, based on digital and other services that can be customized to a single customer’s needs. In other words: The future will be an era of truly “Living.”
But what does that mean for manufacturers? Which changes should they prepare for? And how could they harness these changes to reinvent their entire business?
Let’s go through all of these step by step.
A major disruption for manufacturers
First: what does the rise of these new products mean for manufacturers? Simply put: a major step change in both digitization – and in the very ways in which businesses think about, design, manufacture, sell and services products.
So far, the focus of industry digitization has been on the improvement of front- and back-office operations, that is: things like marketing and sales or planning, procurement, finance and HR, and IT. But this focus is shifting. That’s because the “Internet of Things,” sensors, edge computing, and the cloud have enabled engineers to embed compute power, connectivity, and software into almost any kind of hardware product. And this, in turn, allows for the emergence of hyper-personalized product-experiences and as-a-service offerings, all drawing on digital technologies.
The key benefit of this: Manufacturers can finally push beyond old ways of doing things and tap into the full value of digital. By combining digitized business operations and industrial workflows with new kinds of products and services, organizations can improve not just their core efficiencies, but also reinvent themselves continuously to seek out new growth opportunities and digitally-enabled revenue-streams. And: the new products and services will likely enable them to revise, simplify, and digitize their operations even further.
Consider the automotive industry, for example, which is being disrupted by some of these changes already: the rise of connected, electrified vehicles and new offerings like “mobility services” – like digitally enabled car-sharing and ride-hailing – is already changing the industry and creating new opportunities, and forcing the OEMs to review, revise and reinvent the very way in which they operate. And more changes are already on the horizon, brought about by Artificial Intelligence solutions which enable things like the personalization of the in-vehicle-experience, and of course self-driving cars.
How making things will change
Other manufacturers will experience something similar very soon. That’s because the shifts that are currently changing the auto industry will come to sectors like Aerospace and Defense, Consumer Goods, Heavy or Industrial Equipment, too. Among these, five are key:
- Products will be embedded with more and more software, including algorithms and AI. Up to 90 percent of the value from a typical product will eventually derive from its software and digital components rather than from its mechanical parts (key examples: the “smart speakers” by Amazon, Google and others)
- Product makers will turn smart connected products into carriers of services, based on the operative fluidity and adaptability of this new device class.
- This means that hardware buyers will no longer settle for products with static feature profiles. Instead, they will expect “smart” and connected products flexible enough to offer highly personalized and fluid experiences that exactly meet their needs.
- Many products will be turned into platforms, serving either as central anchors in wider business ecosystems, or as subordinate components of a platform ecosystem (think about cars again, and how they’re already becoming platforms for digital services like navigation, music streaming, travel, and productivity).
- Shifts one to four will require product companies to put in place new practices for managing innovation, product and service development, product management and service, and marketing and sales. Manufacturer’s entire business will change!
To manage these shifts, product manufacturers will need to leverage agile, iterative methods with data and insights provided by their own products – much like software companies do. This is another big change to make, of course – and a key requirement for success in the highly digitized “Industry X.0” world of tomorrow.
The shift from “selling” to “managing”
But it’s not only the products themselves and the ways in which they are made will change – it’s also the very relationship that manufacturers have with the things they create. As products become smart and connected via a stack of digital tech that has become super-cheap, super-easy to use and therefore super-pervasive, companies can no longer simply sell them and be done with it.
Instead, they will have to maintain remote contact and a permanent exchange of data, services, over-the-air updates and upgrades with the “installed base” of their products in the field (again: just like software companies do) – effectively becoming the “managers” of the experiences around these products.
This change in roles gives rise to a series of related shifts: Manufacturers will have to build the capabilities that are required for this kind of minding work. They will have to think about how they can get compensated for this specific service. And they will have to become smart about how they can use the insights they get from their work for either enhancing their existing products and services or for creating new ones.
All of this will require a lot of work, of course (and manufacturers should prepare to take that on). But it will also enable them to pursue strategies which, until very recently, where open only to software- or consumer-internet operations: Building better customer relationships to drive growth, for example, selling as-a-service-offerings, monetizing their “data exhaust” (i.e.: data they always had, but weren’t using), or building platform businesses – all of which can bring much higher growth rates and profits than selling products can.
How can manufacturers prepare?
So, how should manufacturers tackle these challenges – and make the changes they need to make so that they can seize all these opportunities? How can they, in other words, pivot from the old, making-and-selling-things way of doing business, to the new?
The short answer to this is: There are a series of steps that companies should take; these have been proven to work by businesses which have already started their own, product-led digital transformation (like, for example, Haier – the world’s largest maker of “white goods”, which made their home appliance ranges smart and connected. Or Faurecia, an automotive supplier, which is about to revolutionize the car interior by embedding AI and interactive features).
It starts by shaping a clear vision and product strategy around the value that a company is seeking to create. Once this exists, the organization can focus on digitizing its existing core business operations to drive higher operational efficiency to fund the pivot to the ‘new’, for example where the business shifts from selling products to services.
As the new business grows, executives need to ensure that business is also growing its ecosystem and partnerships – which are almost always a key enabler of digital strategies – and ensure that the partner- and customer-experience match where the organisation is headed. Once these steps have been taken, executives can begin to execute the pivot, that is, prudently shift from the old ways of doing business into the new.
Bringing best practices to bear
All these conceptual steps are, of course, highly specific to a given business; the journey of taking them will vary from company to company. But there are a few best practices which seem to benefit every kind of manufacturing business.
One has to do with focussing on building the key capabilities for product reinvention, like the mastery of data management (which includes things like “digital twins” – digital representations of physical products – and digital threads, i.e. digital representations of said products life cycles), the employment of agile, iterative engineering practices, or the skills required to manage ecosystems and partnerships.
Another has to do with bringing these capabilities into an organization: Many companies are already seeing great results from creating a well-suited digital service factory – a kind of product and experience innovation center that houses all the inter-disciplinary skills required and supplies other lines of the business with new products and services.
All of these best practices can be (and have been) explained in very practical ways which should be easy to follow. Which means that, while there’s certainly no one-size-fits-all strategy for taking a manufacturing business all the way from product to business model reinvention, there should be more than enough pointers to allow a company to begin that journey, and then figure out its own way forward.
Start reinventing products now!
Reinventing products and, eventually, an entire business is no easy task (Harvard Business School Professor Sunil Gupta has compared it to exchanging the engine of an airplane during flight). But it’s also a feat that’s very well worth taking on: Research suggests that fully digitizing our businesses could create 100 Trillion US dollars in value for both society and business, about two-thirds of which will come from further digitizing operations and customer experiences. And what better, more efficient way to start tapping into this extraordinary reserve than by reimagining and reinventing what’s at the core of these two things, that is: products, and the way in which they create value?
We have everything we need to reinvent the very notion of what things to make and how to make them. All that’s left to do is start doing it – and doing it now.
Filed Under: Aerospace + defense, AI • machine learning, Product design