How do we get there from here?
The new generation of software will require open information flows and shared data. Creating an unbroken circle of data and information value based on the integration of people, processes, and relationships across new ecosystems will become the “holy grail” of smart systems.
WHY HAVE THERE BEEN SO MANY FAILURES?
In our view, most OEMs behave like a herd when it comes to analyzing trends. They conduct similar analysis that leads to similar conclusions and ultimately to many of the same strategic decisions. Trends like global expansion, re-engineering, lean practices, and mergers and acquisitions become fads more than real forces in the marketplace. Many of the OEMs that have embraced these trends are reaching the conclusion they have matured to the point of diminishing returns.
As networks continue to integrate the physical and virtual worlds, and as software becomes pervasive to all businesses and industries, what worked in the past to drive new growth and value for OEMs is less likely to work now or in the future. While we might argue that the “herd” has now awakened to the growing presence and scale of software in their businesses, it’s still too early in the game to predict how specific OEMs will respond to this force.
The scale, scope, and sophistication of the IoT software opportunity for both OEMs and new software startups has not progressed very fast or evolved very far. Smart Systems, the IoT, and software have added considerable complexities to the worlds of OEMs and new software startups alike. Both groups are challenged for different reasons. For OEMs, it’s because software in general—beyond the code embedded in their equipment—is so foreign to their business models. For startups, it’s largely due to their lack of industry and domain experience.
If the upstream IT and telco “arms merchants” are addicted to horizontal technologies, then the true interpreters and vertically skilled translators of these horizontal technologies ought to be the domain-fluent OEMs. But rather than asking the tougher questions that address new software business models and solution-delivery modes, what we are seeing is far too many OEMs defaulting to the classic question, “Should we build or buy?”
It’s no wonder that there have been so many acquisitions.
Even if we could oversimplify the Smart Systems and IoT opportunity as something that a company can seize alone, enable with focused partners, or pursue as an open collaborative opportunity, the path a company chooses to take to embrace new software opportunities will largely determine the business model it should adopt. If it’s all so straightforward, why aren’t we seeing more hockey-stick growth, and why have there been so many failures?
While many will point to a specific OEM’s software strategy, lack of marketing investment, or potential technical missteps as the cause of such failures, Harbor believes that many of them can be traced to a broader confusion about roles. Sometimes companies need to ask themselves, “Who are we, and what part should software play in our business and for our customers in the market?” Spectacular failures can occur when players either fail to ask the question or answer it wrong.
Maybe it’s time for us all to stand back and contemplate the challenges that players like GE, Bosch, Hitachi and others have confronted.
WALKING & CHEWING GUM
Think of the classic OEMs that build machines, equipment, and devices like MRI scanners, power plant turbines, offshore drilling rigs, mechanical power transmission systems, precision bearings, and low-voltage power devices. They work with a unique blend of complex engineering skills, manufacturing expertise, long established channel partners, and strict financial controls. The traditional core operating models of these companies make adding software to their portfolio mix very challenging.
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.
The results have been, to say the least, uneven.
Traditional management practices in OEMs tend to assume that, whatever the OEM’s particular focus, their business and their peer OEMs share similar characteristics, organization structures, product development protocols, and sales and marketing practices. Management attention in OEM businesses has traditionally focused on the known, the visible, the predictable, and the quantifiable. Anything too difficult to measure is often treated as if it were unreal.
Even more misleading is the assumption that by adding software to the mix, “business as usual” will prevail over a given planning period. Such assumptions leave little room for dynamic management (or creation) of change, the early identification of technology discontinuities, or the increased presence of unfamiliar competitors.
OEMs have developed long planning horizons with a built-in bias that reflects their established operating models. The significant differences in the strategies, business characteristics, and operating models of these two worlds—hardware manufacturing and software development—cannot be overstated. Simply put, software lives in another world. Without question, many OEMs have failed to prepare for the significant changes that are coming from their decision to acquire a software business or create new software ventures.
While we strongly believe that Smart Systems technologies, particularly software, will play a central role in OEM growth strategies going forward, we have also observed how difficult it’s been for many OEMs to integrate new digital technologies and software into their core business.
RE-THINKING HOW TO ORGANIZE & STAGE NEW SOFTWARE INNOVATION & GROWTH VENTURES
Developing autonomous software ventures in parallel with a core hardware business raises challenging operating model questions. To what extent should a new growth venture re-define elements in the core business? How, when, and in what manner should the new business be integrated into the core? How will leadership make critical allocation decisions around skills, people, talent, and investments? Is it better to create new software ventures, or does it make more sense to keep an eye on similar external developments and players in the market, and then either invest or acquire the new growth business?
Like a pendulum swinging, corporate ventures suffered a bad reputation starting as far back as the run up to the Internet bubble-burst in the late 1990s. Today, such ventures don’t inspire many executives, especially in the conservative cultures that often exist within machine builders and equipment manufacturers. But when traditional business practices, company cultures, and restrictive operating models inhibit creativity and new customer-driven innovation, that is when OEMS need to seriously consider non-traditional growth strategies. OEMs need to swing the pendulum back to drive new creative thinking for software development and ventures.
To stay competitive in this period of disruption and change, OEMs will need to sustain momentum in their core business while developing new digital and IoT capabilities, offerings, and business models. They will need to take a more holistic view of new non-traditional software growth opportunities that can include ventures that address innovations in the core business as well as collaboration with customers and partners.
Software comes in many forms that drive diverse values, each tending to require a different approach. Consider the distinct differences between developing new embedded machine-learning software capabilities versus building software to run a customer’s operations, such as a supply chain or a port facility where many OEMs’ machines and equipment load and unload containers from commercial cargo ships. The characteristics of these two business opportunities are drastically different. Yet a single OEM may have two or more distinct software opportunities that it needs to consider.
OEMs need a new approach that addresses the differing types of software opportunities and the different time frames required to nurture them, including autonomous ventures, joint ventures, acquisitions, cooperative development with customers, and minority investments. Beyond those that we’ve highlighted, new emerging investment and venturing approaches are being organized in a variety of industries, including investment vehicles that tie investors to specific ventures within a larger organization—investments that are suited to their risk profiles and that do not involve owning a share of the whole company.
The strategies and organizational approaches adopted by many OEMs today typically focus on only one source of software opportunity, such as the creation of a corporate venture group. We believe that OEMs need to move beyond their “comfort zone” and leverage a more flexible mix of these approaches—determining the best mix and the most viable growth vehicles for new software and solution opportunities.
WHY SOFTWARE IS EATING THE WORLD
In his seminal article, “Why Software Is Eating the World,” originally published in the Wall Street Journal in 2011, Marc Andreessen pointed out that “all of the technology required to transform industries through software finally works and can be widely delivered at global scale.” While most of his observations highlighted consumer and commercial industries and applications, he did go on to say that “in heavy industries such as oil and gas, energy and similar, the software revolution will be primarily an opportunity for incumbents.”
If this is true, and we believe it is, what are the new and unique strategic roles and differentiated business models that OEMs can embrace to drive new software opportunities and catalyze growth? As technologies mature and open standards become the norm, applications based on deeper, peer-to-peer interactions between devices, data, systems, and people will drive new dynamic value streams. This opens new collaborative business model design opportunities for OEMs and their partners that have the potential to drive much greater value for the customer. Understanding the business-model design elements, the relationship structures, and the key interactions and combinations of them will be critical to success.
We believe that successful market development will require established OEMs to develop new relationships with specialized innovators and software developers to enable larger ecosystems and the positive synergies and values that flow from them. These new roles are progressive in the sense that the value increases with the integration of each additional player’s equipment, systems, data, and, most importantly, the increased value resulting from new and diverse interactions.
This new generation of collaborative application services, and the significant increase in interaction value they inform, inevitably require open information flows and shared data across the ecosystem and its participants. Creating an unbroken circle of data and information value based on the integration of people, processes, and relationships across new ecosystems will become the “holy grail” of smart systems. ◆
To download our Technology Insight “How Do We Get There from Here?” please fill out the form below.