Gods, Guns and Software: Future OEM Software Business Models

THE NEXT CYCLE OF TECHNOLOGY DEVELOPMENT

The relationship between religion and science has been a subject of study since antiquity, addressed by philosophers, theologians, scientists, and others. Most scientific and technical innovations prior to the scientific revolution were achieved by religious scholars. Elements of the scientific method were pioneered by ancient pagan, Islamic, and Christian scholars.

However, with the advent of the industrial age, religion and science shifted to a state of seemingly continuous conflict. And when societies and states changed from an agrarian base to an industrial base, the way they made war also changed and became vastly more mechanized. Industrial nations furnished their armies with tools very different from those produced by agrarian nations. As a result, the machine gun, steam and petroleum powered engines, the railroad, telegraph, radios, aircraft, and much more formed the basis not only of the modern military but also of modern society as whole, including business.

Many observers have said that the impacts of the information revolution on society will be far greater than the impact science had during the transition from an agricultural society to an industrial society. We already know that the scale of social, technological and economic change are not easy things to predict. And so the information future itself is, of course, not entirely clear.

The next cycle of technology and systems development in the smart connected systems arena is supposed to be setting the stage for a multi-year wave of growth based on the convergence of software and real world systems. But is it?

If, as we have often said, the original equipment manufacturers (OEMs) that are embedding software into their products—and now are building more and more software into their systems and solutions businesses—are the dominant “translators” of how these technologies will be integrated into our economy and society, then we may have a bumpy road ahead as OEMs sort through the complexity and challenges of new software-driven business models.

OEMS NEED A NEW FRAME OF REFERENCE FOR SMART SYSTEMS & IOT SOFTWARE BUSINESS MODELS

VALUE MOVES TO A HIGHER LEVEL

OEMs are vigorously debating the evolving nature of business and profit models driven by these progressively more open and interconnected technologies. More and more people agree that after the shift from closed and proprietary to open and connected, competitive advantage and profitability will lie in creative use of shared, non-owned assets and the real-time customer contact, data, and services they make possible. Differentiation, value addition, and brand-identity will now occur at a higher level, not at the core. Obviously, companies will continue to prosper in open, connected landscapes, but they will do so in different ways—some of them variations on old models, some entirely new.

Rather than owning declining-profit commodities, companies will own their innovations, whether in technology or services, and they will also own the stream of data coming in from their connected devices and machines in the field. Most importantly, thanks to machine-generated data, companies will “own” their relationships to customers in ways never imagined.

What happens after that point depends upon the strategy adopted. A company could, for example, “lease” part of its stream of customer-information—and thus part of the customer relationship—to another company wishing to provide value that is not part of the first company’s business. Other relationship owners could lease relevant parts of their own customer information back, or share information in a joint venture or some other contractual arrangement.

Most companies looking to connect their tangible and intangible assets still view themselves largely as “product-centric” businesses. This puts many organizations in a very precarious position, with one foot in the new world and one in the old. Making the move from product-centric to a smart services-centric business model will not happen automatically, even with rich streams of device and machine generated data. It’s a major transition that will demand different strategy and culture than most product businesses have known before.

OEM ADOPTION CHALLENGES

Artificial intelligence, machine learning, distributed peer-to-peer data and information architectures, and the Internet of Things are all in some way trying to break from today’s computing paradigms. Their destiny is to enable real-world physical systems (particularly as they become more and more intelligent) to be fully integrated onto networks, and the data they contain to become an integral part of all information systems.

To date, connected sensors, devices and systems have largely been focused on simple functions such as diagnostics, alerts and alarms and simple tracking and location services. This has stemmed, in large part, from the technical complexities of integrating advanced technologies and business model challenges for OEMs. Existing technology has proven cumbersome and costly to apply, with many conflicting protocols and incomplete component-based solutions. The challenges of developing applications and integrating diverse devices onto networks in an open interoperable manner have been big adoption hurdles.

Not surprisingly, OEMs’ concerns are more complex than the challenges of applying new technologies. In the existing business culture of most enterprises, competitive advantage is usually perceived—to one degree or another—to lie in ownership, secrecy, and command and control relationships with suppliers. It goes without saying that such a culture does not blend well with the notion of “openness.”

So how should businesses become more open and connected, change their underlying concepts of “ownership,” and yet remain distinct and profitable entities?

OEMS NEED A NEW FRAME OF REFERENCE

Thinking about the business opportunity associated with a connected product is a highly creative process. Often there are no cut-and-dried markets to identify and size. Rather, there are whole new markets that might develop as networked products and systems are brought to market.

We believe business model design needs to transcend discrete product or service innovation. Assuming the role of business design is only about making existing products or services more attractive no longer works. Business developers need to creatively imagine fully developed systems and whole marketplaces. Companies need to envision the design role as one that can address product, service, user experience and cumulative system value.

Today, with the emergence of connected products and information-based services, even more complexity has arisen in the design of the systems and the services, as well as in the core of the products and elements within the core system. Additionally, from our viewpoint, because networks add yet more complexity to the process, and because just about everything will get connected, we strongly believe business developers need to address multiple interrelated dimensions in order to fully address the nature and scope of the resulting business opportunities. The elements that need to be addressed include:

• Experience: Developing solutions based on user-centered experience for systems operators, stakeholders, users, customers and partners;
• Behaviors: Understanding the many and diverse buying and usage behaviors and modes of collaboration across ecosystems and markets;
• Relationships: Potential to engage and leverage extended communities of users, companies, OEMs and suppliers with real-time interactions and information value;
• Technology: Emerging technologies, if properly nurtured and applied, can foster many opportunities to disrupt current competitive structures;
• Skills: Leveraging human capital and skills in this connected world to re-design and automate business processes will create entirely new solution values; and,
• Data and Content: Organizing the rapidly growing amounts of data from open systems for wider use, awareness, collaboration and collective intelligence.

The intersection of these six dimensions is where discovery of new business models and new business designs begins. Still, many companies will be hampered in their thinking by a tendency to assume that the company after networking and smart systems will be the same company and in the same business as before networking. This is a safe assumption in almost no case.

The first fact about a networked product is that it will capture and convey valuable data. The second fact, not quite so obvious, is that these new data become a core asset. The third fact, an obscure leap for many managers, is that information as an asset makes for fundamental changes in a company’s business. The fourth fact, which makes things simple but by no means easy, is that most changes brought about when information becomes central have the effect of moving a company toward an entirely new smart services business model.

THE “SHIFT TO SMART SERVICES” SOUNDS TAME. IT ISN’T.

We say this is simple but not easy because while the fact that service moves to the fore is not hard to grasp, in practice “service” is a paradigm so foreign to manufacturers that they cannot understand, let alone implement, the changes necessary to make the shift successfully.

Many companies have already seen some of the challenges inherent in shifting to a data and services-driven business. In fact, the phrase “shift to smart services-driven business,” though accurate, can be dangerously misleading because it makes the required corporate culture and business model changes sound almost tame. They aren’t. The era of near perfect, real-time information about physical assets and customer behaviors is looming like a tanker coming out of the fog. Any degree of complacency—even from those who consider themselves “advanced”—will be deadly.

Technology advancements need to engender new system elements and new services. Correctly balanced, technology and new service delivery modes can help customers reach their goals of increased operating efficiency, reduced costs, automated system upgrades, and more efficient operations. Achieving this critical balance is the challenge that most OEMs must focus on solving. What’s needed is a much broader, all-encompassing view of how software will inform this future generation of digital solutions and how radically software will alter how new applications are realized and how customers are supported.

Most executives in manufacturing-based businesses agree that our ability to predict the future is poorly developed. Faced with this seemingly impossible task, most managers are content to simply validate pre-established notions. In business, as in religion or science, a transformation of the superstructure takes place much more slowly than that of the substructure, making it easy to believe past truths despite emergent evidence of change. We believe this is the case when it comes to the impact of software on OEMs.

Download Harbor’s Growth Strategy Insight, “OEM Software Growth Oppportunities,” for free here.