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The Trillion-Dollar Risk

Creating Versus Destroying Value

(the first of a three-part series)

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If you’re trying to figure out how big the impact of Smart Systems and the Internet of Things could be, just start adding up the annual product revenues of the largest manufacturers on earth. By the time you sum the top dozen diversified companies, you’re over a trillion dollars. That’s the level of exposure we’re talking about.

A Child’s History Lesson

Once, all machines were purely mechanical. Then many of them became electro-mechanical, and ultimately digital-electro-mechanical. Paralleling that progression, there was a time when machines weren’t intelligent at all. Now they’re all potentially intelligent. Today, manufacturers have software embedded in most of the things they make, and beyond that to the services they offer, not to mention the huge value of data-analysis to their businesses.

Suddenly, software is as germane to physical manufacturing as a bearing is to a mechanical assembly. Further, the definition of an intelligent machine is a moving target. At the end of the day, any product that can be networked and made more intelligent will be, and as that evolves from simple sensing and monitoring to AI, machine learning, and autonomy, the world of the OEMs will change radically. Machine, equipment, and component manufacturers need a clearer framework for understanding what role software will play in their business, operating models, and strategic decisions. But such a framework is hard to come by.

Manufacturing companies, particularly the large diversified ones, have been playing with their strategies and portfolios for a long time. They’ve made all the obvious acquisitions. They’ve trimmed everything down as lean as it can get. They’re all chasing after new digital opportunities in their operations. But, as the impacts of software grow, there’s a great deal of confusion about how to manage all this.

Fundamental questions about how to embrace the expanding embedded intelligence and software surrounding their businesses remain partially or completely unanswered. Where should manufacturers get in, and how far should they go? Should they confine themselves to making software that controls their own world, or should they be in the business of selling software to others? The “obvious” next step is still remarkably fuzzy and elusive.

But one thing is clear: Not doing anything exposes them to a huge risk over time.

A Sea-Change Toward the Horizontal

As networks have invaded the “physical” world, designers have seen the growing value that comes from communications within and between sensors and machines. Traditionally unique components with their many SKU numbers have been subsumed by programmable replacements that can perform any of the functions of their predecessors. Interfaces between and among electronic systems, as well as mechanical and other related sub-systems, are becoming more and more standardized. Beyond efficient support of products and equipment, the convergence of collaborative systems and machine communications will enable entirely new modes of services delivery and customer interactions. This implies a total paradigm-shift, and the depth of this shift has begun to suggest itself. But it is by no means accomplished.

The implications of these trends are enormous. No product development organization or its suppliers of componentry and sub-systems will be able to ignore these forces. Product and service design will increasingly be influenced by common components and sub-systems. Vertically defined, stand-alone products and application markets will increasingly become a part of a larger “horizontal” set of standards for hardware, software and communications.

As it becomes easier and easier to design and develop smart systems, competitive differentiation will shift away from unique, vertically focused product features toward how the product is actually used, and how it fosters interactions between and among users in a networked context.

How have manufacturers been able to continue to grow and create value in the equity markets? So far, it’s been by global expansion, re-engineering, lean practices, and mergers and acquisitions—all reasonable strategies. But in a marketplace of rapidly consolidating businesses, what worked in the past is less likely to work now or in the future. Indeed, these strategies have already reached the point of diminishing returns. At many companies, for example, there aren’t enough acquisition candidates left to “move the value needle.”

Most knowledge comes from human experience and expertise. But today that knowledge largely resides in functional silos and systems dispersed across organizations. Acting as single entities, functional organizations are constrained by the resources under their control. Legacy processes and habits inhibit any natural ability to communicate and work together to solve big problems or create new solutions. In many companies, lean practices have been applied so aggressively that people are simply consumed by “running the business.” This restricts their ability to harness the collective intelligence available throughout a company and its networks to inform creative products, systems, and solutions.

How well-prepared are manufacturers for the advent of software and smart systems? Not very, in our opinion. The people, functions, and processes of most companies are too disconnected to create new smart systems opportunities. Large organizations have many rules and policies that often seem completely at odds with each other. Our business culture has created language and systems that seem to be a triumph of technique over value.

In fact, we believe that existing schemas, institutions, and approaches for new growth development are, for the most part, broken. The complexity, interdependent relationships, and related timing required for new growth ventures in the IoT arena only compound the challenges. In this environment, growth depends upon interacting in new and creative ways. Breaking down the barriers to communication, and linking functions together, is a good preamble, but it can’t stop there. The key next step is building truly innovative software ventures and businesses.

(Next week, part 2: “Taking the Plunge”)

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