As digital technologies continue to spread across the B2B and industrial arenas, designers have seen the growing value that comes from communications between sensors, devices and machines and the software that leverages the data flowing from connected systems. However, the impacts these innovations will have on existing business models does not stop with just software.  As communications and software become deeply integrated into hardware components and systems, even the more manufacturing elements of OEMs will be subject to many discontinuities.
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 that is already underway.
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 and data-driven context.

OEMS AND HARDWARE BUSINESSES ENTER A NEW CHAPTER

And yet today, OEMs are developing, embedding or integrating software to monitor, operate, diagnose and analyze the performance of their machines and equipment. Many of them have entered the software business outright, while others have created new software ventures. To the casual observer, it would appear that many OEMs made these decisions without understanding or consciously thinking through what role software might or should play in their businesses.

The business environment for OEMs has entered a new chapter with new challenges and unfamiliar technologies. Even though the journey forward will differ from company to company, we believe leadership teams in OEMs are facing several common forces in the marketplace, including:

• Smart Systems, software and IIoT technologies are enabling radically new user and customer experiences and informing equally disruptive business models. The ways that OEMs compete is shifting away from traditional product features, low-cost manufacturing position, channel/support capabilities or similar, toward the ways that intelligent systems are experienced, and how networked products foster interactions between and among OEMs, users, technology alliances, developers and channel partners in a networked context.

• Leveraging new digital data values inherent in connected products and systems will require new partners for infrastructure and enabling technologies that will, in turn, inform the formation of new and different market relationships and alliance networks.

• As the complexity of these systems continues to increase, the number and diversity of stakeholders, users, sellers, supporters, etc. involved and interacting with these systems will also rise in a way that creates a “social system” comprised of diverse relationships. We believe that within this social system (or ecosystem), new value creation roles will emerge—some more dominant and some more subordinate.

• As new value networks and ecosystems of complementary machine and equipment suppliers evolve, OEMs will be forced to make choices about partnering with many new and unfamiliar players such as third-party app developers, service professionals and technical specialists (what we like to call “strange bedfellows”).

• The technical innovation driven by software, Smart Systems and IoT technologies, coupled with the rapidly changing relationships among players, will drive changes in market structure, business models and the sources of profit and value creation.

New business models are already enabling everything as a service forcing OEMs to turn their equipment engineering, services and financing competencies into “actuarial science.” So, what does this mean and how should the large industrial machine and equipment players think about this?

In the automation and control sector, where this shift has been underway for several years, we expect hardware to decrease from approximately one third of an automation company’s profit today, on average, to as low as 20% by 2030 with the remaining sources of profit coming from software, services, and integrated equipment solutions.

SOFTWARE BRINGS CREATIVE DESTRUCTION

While software is not the sole agent of disruption, it is quickly becoming a dominant force and a disruptor for the largest diversified industrial equipment manufacturers. In many ways, the large OEMs have been deconstructing for decades. Companies used to develop all of the engineering, logistics, tools and processes they needed right inside their four walls.

Today, no one thinks of a company as bound by the four walls of a building. Whether they know it or not, OEMs are becoming ecosystems now, value-delivery networks consisting of a disassembled set of business functions and entities—some owned directly, many sub-contracted, but all requiring orchestrated data and information. Just witness the growing number of re-structuring maneuvers and spin-outs companies like GE, Siemens, ABB, United Technologies, Danaher and more have initiated.

In the midst of these changes, many OEMs cannot see that the industrial software opportunity is far more significant than just capturing installed equipment services, or protecting aftermarket parts revenues, or “bolting on” new sources of revenue. The industrial software opportunity is moving well beyond the “servitization” trend many OEMs still find themselves challenged by. Incalculable value will flow from integrating assets into intelligent, adaptive systems. The architects of the next generation of software-defined solutions will drive that value and command it.

Perhaps the most important shift we see occurring is the relationship between software technology and OEM business models, and the need for open systems and collaboration based on a platform and integration architecture that enables the cooperative development of solutions with numerous partners.

Our evolving “thesis” goes something like this: As the complexity of these systems increases, the number and diversity of stakeholders—users, sellers, developers, supporters, benefactors, etc.—expands and the volume and nature of their interactions grows. The systems technology and architecture will, by necessity, need to become more and more open to foster collaboration. This openness will, in turn, inform radically new modes of collaboration including reuse of software components and increased sharing of data.  These two forces must be aligned with the corresponding business and revenue models of the players that comprise the ecosystem. The two thrusts need to be mutually supportive without inhibiting one or the other.

However, trying to coordinate and leverage the need for open systems and collaboration creates contention. OEMs today have largely organized their software businesses as a branding mechanism – a collection of aging monolithic software applications shuffled under a new market identity and technical “veneer” — think GE PREDIX, Siemens Mindsphere, Honeywell Forge or any of the other flavors in the market. These maneuvers are all symptoms of an aging OEM strategy mindset that is based on the belief that these businesses can continue to exist as “solo” portfolio and solution providers.

Of course, most businesses insist that they’re not flying solo. They remind us they depend upon many relationships and they’re part of complex value chains with diverse channel partners. Yes, but those excuses miss the point. Their relationships aren’t organic ecosystems. They’re command-and-control, hub-and-spoke arrangements; and the business in question is always the hub.

“You want us to collaborate and share our software and data,” we often hear from the C-suite. “But our data’s the new path to profitability and higher multiples.” Systems suppliers that have come from a legacy of “solo” solution delivery resist fundamental change. But change they must.

All of this has left the B2B and Industrial OEMs open to disruption from multiple directions. On one side, the big cloud and infrastructure players like Microsoft, AWS and Google are quietly “hollowing out” their OEM partners’ solutions (don’t think of Satya Nardella as an OEM’s best friend; think about these infrastructure and software providers as being more like “Typhoid Mary”). ‘

On the other side, customers who work with these B2B OEMs are also seeing the value of open innovation, collaboration and data sharing and are now saying, “We aren’t sure how to work with you. Is your new software platform and solution enabling collaboration or is it really more about account control?”