There's a tendency to think that digital transformation is a new phenomenon affecting our businesses. However, the fact of the matter, it has been around for over 50 years. Early disruption examples exist in the watchmaker and film production industries, mainly in business-to-consumer (B2C) markets, with the development of digital watches and cameras. This new wave, which sometimes also called the Fourth Industrial Revolution, is also reaching applications in business-to-business (B2B) markets. The rise of big data, the Internet of things (IoT), predictive analytics, machine learning, and artificial intelligence play an important role in accelerating this transition.
For instance, IoT-ready devices enable the generation of rich machine-generated data (MGD) to bring industrial applications into a modern environment, whereby both the physical and the digital world can seamlessly interact with one another. This allows actors in the supply chain to share necessary information, opening up opportunities for efficiency in operations. But the change of existing business models, is certainly what markets find even more disruptive. Our organizations face the challenge to deliver more value from industrial machinery and services by using “data”. Therefore, nowadays the commercial feasibility of these new business models is becoming more relevant than the actual implementation of this technology itself. Companies are asking themselves the questions: Are we really creating value for our customers with digital transformation? Are we really monetizing all services and technology? Are we really making money out of this stuff?
This post aims to outline some of the major challenges to overcome, in order to develop new digital business models for industrial applications.
1. Investing in Digital Technology
Technology moves extremely quickly, regardless of the industry you are in. Thus, it becomes the necessary evil for some whilst, for others, it is the key to success in enabling solutions in this environment. Some people will argue about the scalability and interoperability of networks, protocols, and applications as mandatory. Although we think this statement is plausible, we are very much in favor to involve start-ups, small and medium enterprises SMEs, regardless of the type of platform used in the market. Technologies will evolve, and their providers will adapt or die, but our argument here is to pay attention to the ideas and people who really add value. Sure, we can invest tons of cash in digitalization, but legacy organizations must reinvent themselves and create a more cohesive environment between product management, commercial, and engineering teams. That is the real value! If what we want is to create more value from our products and services, then organizations have to invest in soft skills, new role definitions, new processes, and change management to balance acquired technical competencies.
2. Making the shift to services
The provision of services has now turned into a conscious and explicit strategy for differentiation. Today, value propositions usually include services and reduce the physical product to only a small part of the offering. Original equipment manufacturers (OEM) are gradually becoming digital service providers and in turn, customers become users of these services. Thus, this trend leads us to the development of new business models in which “the product” is absorbed into solution ecosystems. Therefore, OEMs have to utilize their ability to understand complex industrial processes and segment these challenges into use-cases. They are just a few actors today acting in this space, while others are lagging behind; this means to embark upon both service and digital transformation all at once. What a challenge! The journey has just begun for many of us, and the question is whether we are prepared or not for this voyage to the next frontier.
3. The transition towards outcome-based pricing
Companies still find it extremely difficult to successfully exploit the financial potential from their new business models. This is because revenue models have to be transformed from the traditional ownership-transfer (e.g. direct sales) towards the adoption of guaranteed-access models (e.g. rental, lease, and subscription) and outcomes-based models (e.g. quality, uptime, and production). This trend often requires companies to operate outside their comfort zone and consider strategies that are not necessarily easy to understand. Certainly, this move requires changes to the traditional organization structure as discussed, but it also implies rethinking revenue models and changing the way services are priced. Outcome-based pricing is not simply a financial calculation – it requires a more holistic approach.
4. Relational contract management
We at Avrogan are advocates of “collaborative business relationships,” in which parties agree on an operational model as well as a genuine sharing of risk and reward. However, our organizations have the tendency to safeguard their own interests to the detriment of another party. If we want to engage in different dialogues, including those on mutual efficiency, cost-saving, new revenue streams, less working capital, better profitability, and less risk, etc., then we should discuss our interaction and collaboration approaches. These new digital business models require a considerable amount of strategic planning and communication within the supply chain. Therefore, this should be done in a controlled and respectful manner in order to benefit the relationship. Our leaders should focus more on the relationship and not the deal. Because the foundation of success in digital business should be trust, transparency, and compatibility between parties to overcome the challenges resulting from the rapid development of technology, economic fluctuations, shortage of resources, nd lack of trained human capital.
References:
Vitasek, Kate et al. (2012), Vested: How P&G, McDonald's, and Microsoft Are Redefining Winning in Business Relationships (1st ed.), Palgrave Macmillan, New York, ISBN 978-0230341708
“Unpacking Relational Contracts: The Practitioner's Go-To Guide for Understanding Relational Contracts” 2016, Vested Way (accessed 26 October 2016)
I.R. Macneil, “Reflections on Relational Contract Theory After a Neoclassical Seminar” in H. Collins, D. Campbell and J. Wightman (Eds), The Implicit Dimensions of Contract, Hart, Oxford, 2003
Porter, M.E., Heppelmann, J.E., 2014, How smart, connected products are transforming competition. Harv. Bus. Rev.
Porter, M.E., Heppelmann, J.E., 2015, How Smart, connected products are transforming companies. Harv. Bus. Rev.