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Clash of the
Industrial Titans

Observations from Hannover Fair
on New Software Opportunities

New software innovations and technologies are called “disruptive” for a good reason. But some of the chaos surrounding the growing complexity of industrial software is unnecessary and impedes progress.

WINGS OF PURE HYPE AND ONE-UPMANSHIP

When it comes to industrial trade shows, there simply is nothing that compares to Hannover Messe, likely the largest trade fair in the world. The annual springtime event in Germany showcases—even if only remotely this year—new innovations and solutions for the factories and energy systems of the future.

Emerging technologies usually come from some inspired new union of science and design. So it’s ironic that many new industrial software innovations enter the world in the most unscientific and undesigned manner imaginable—flying in on wings of pure hype and competitive one-upmanship during events like Hannover.

As software continues its invasion into the physical world of machines, equipment and automation, everyone we talk to in the industrial space tells us the same thing: software is very challenging.

Machine and equipment players, particularly the largest ones like Siemens, ABB, Schneider Electric, Emerson, Bosch and more, continue to grapple with how to participate in the software business, trying very hard not to confuse software with their own core equipment business and value propositions. And they continue to think that they can do anything, and everyone will have to keep playing by their rules.

But that story is over. Substantial value has already shifted from the physical system to software, and the question on everyone’s mind is, “Who is going to be the Google or SAP of the future industrial OEM software business?”

Industrial and Manufacturing Software – Diverse Players and Fragmented Landscape

Clash of Titans player landscape

AN OLD GAME ON A NEW PLAYING FIELD

New software innovations and technologies are called “disruptive” for a good reason. But some of the chaos surrounding the growing complexity of industrial software is unnecessary and impedes progress. It comes from trying to play an old game on a new playing field. The incoherence and hype stems from the intense, high-stakes competition that software is now driving in the industrial markets. But the historical basis of that competition lies in an old, non-connected world where the necessity of interoperability ended with the AC wall plug.

In the conservative culture of most OEM businesses, competitive advantage is usually perceived, to one degree or another, to lie in command and control ownership, closed systems, little to no data sharing and sometimes adversarial relationships with partners. It goes without saying that such a culture does not blend well with the notions of transparency, open collaboration and trust. In a connected world, where the value of solutions has shifted dramatically from the equipment and hardware to software-defined solutions, open data sharing architectures and cooperative ecosystems, OEMs will need to think about competition, cooperation, and innovation quite differently.

MEET THE NEW RULES OF THE INDUSTRIAL SOFTWARE ARENA

Multiple forces in the industrial marketplace are driving diverse opportunities for software innovation. As users and customers become more familiar with Smart Systems and IIoT capabilities, they are realizing that these technologies will push the boundaries of how products, systems and equipment are managed today which will, in turn, increase pressure on OEMs to embrace these capabilities.

Industrial Software: Many Dimensions, Much Complexity

However, traditional business practices, company cultures and operating models inhibit the required creativity and speed to effectively drive new customer innovation and value creation in many OEMs today. Leadership teams in most OEMs live in two distinct worlds—running their core equipment business as efficiently as possible while also trying to identify new and novel software and system innovations. The two thrusts—operating the business and enabling new innovations—often creates conflicts.

Think of the classic OEMs that build machines, equipment, and devices like robots, power plant turbines, offshore drilling rigs, mechanical power transmission systems, and low-voltage power devices. They work with a unique set of engineering skills, manufacturing expertise, long established channel partners, and strict financial controls. The traditional core operating models of these companies make developing software beyond what’s embedded in their equipment very different, if not very challenging.

OEMS 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-fangled 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.

Large Industrial OEMs Are Making Multiple Parallel Maneuvers

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 IIoT 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 behemoths think about this?

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 business models, and the “role” that integration architecture and development platforms will play in enabling new solutions.

Our evolving “thesis” goes something like this: As the complexity of these systems increases, the number and diversity of stakeholders—users, sellers, supporters, benefactors, etc.—expands and the volume and nature of their interactions grows. The systems or “technology architecture” will become more and more tightly coupled to the “business architecture” and will, in turn, inform a radically new view of data and information-driven services that must be aligned with the corresponding business and revenue models. These two “architectures” must be viewed in close proximity. The two thrusts need to be mutually supportive without inhibiting one or the other.

However, trying to coordinate and leverage the respective roles of technology architecture and business architecture often creates contention. Many OEMs in this emerging arena that we speak with are coming to see the continuously evolving relationship between these two dimensions as fertile ground for innovation. They need to be interwoven and mutually supportive. In fact, from our own direct consulting experiences, we believe success in either arena increasingly goes to the company that effectively utilizes the combined potential of both.

Many people inside these companies get this, but many more have yet to assimilate the entire picture. These companies are large bureaucracies founded on hardware and products addressing focused markets. The era of Smart Systems will cut across traditional product P&L and market boundaries like a machete. If the major diversified, industrial behemoths don’t see the implications of this soon, a new category of player may emerge to fill the crucial role.


This essay is supported by our Smart Systems Market Insight “Industrial Smart Systems & IIoT Market Opportunities.”

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