The world of software, data and models is displacing physical hardware and replacing labor-intensive services in nearly every market and niche application imaginable, and it shows no signs of slowing down. In one form or another, every company is becoming a software company. But not always because they wanted to, and not always with brilliant success.
Everyone we talk to in the OEM space these days tells us the same thing: it’s getting harder and harder to understand what business we are in because the customer’s perception of the value that machine builders and equipment manufacturers create is rapidly shifting from the physical system to software.
And yet today, OEMs are developing, embedding or integrating software to monitor, operate, diagnose and analyze the performance of their machines and equipment. Many OEMs have entered the software business outright, while others have created new-fangled software ventures.
On its face it might not seem so outlandish that a hardware OEM, realizing that much of its market is being overtaken by software, would decide to go into the software business itself. Unfortunately, in many cases it has produced disastrous results.
That’s because the economics, design and development protocols, financial treatment, and scorekeeping of software creation are all diametrically opposed to those of hardware manufacturing. Hardware players have never been good software businesspeople. They’ve never understood software culture, never learned not to confuse software with their own core equipment business and value propositions.
Re-Thinking How to Organize and Stage New Innovation and Growth Ventures
While we strongly believe Smart Systems and IoT technologies will play a central role in OEM’s strategies going forward, we have also observed how difficult it’s been for many OEMs to integrate new digital and IoT technology into their core business. As the pace of Smart Systems and IoT technology adoption increases, many managers will be challenged by the trade-off decisions they will face. Should we invest more in the core equipment business or invest more in new innovations and new growth ventures?
When traditional business practices, company culture and operating models inhibit the required creativity and speed to effectively drive new customer innovation and value creation or when traditional operating models constrain the organization’s ability to develop new technical skills or organizational capabilities, an OEM needs to seriously consider alternative innovation modes and non-traditional growth ventures.
Today, the subject of corporate ventures and related maneuvers does not inspire many executives, especially in the conservative cultures that often exist within machine builders and equipment manufacturers. We believe that 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 1990s. However, because the many challenges associated with embracing digital and Smart Systems technologies are now clearer and better understood, we believe the pendulum is likely swinging back. If OEM management teams will need to live in two distinct contexts – running their core business as efficiently as possible while also being able to identify new and novel product and systems innovations, then it is very likely we have entered a chapter in the marketplace where non-traditional growth ventures and vehicles will become more common.
Many Companies Would Rather Just Buy More Businesses Than Think Creatively About Growth Ventures
Developing autonomous growth ventures in parallel with the core 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? All these questions lead to a very basic question, is it better to create new growth 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?
Multi-Modal Corporate Growth Ventures
To stay competitive, OEMs will need to sustain momentum in their core business while developing new digital and IoT capabilities, offerings and business models. The assumption that the primary role of an equipment manufacturer is only about sustaining their core product business no longer works.
We believe OEMs need to think seriously about new, more autonomous ventures and growth vehicles for Smart Systems innovation. OEMs need to think about new growth businesses in a manner that transcends their core products or services. OEM business strategists need to creatively imagine fully developed application solutions, ecosystems and whole marketplaces.
In our experience with clients, most OEMs are significantly challenged in their development of new growth ventures. Today, OEMs willing to act tend to select only one, or possibly two, of many potential sources for their new ventures:
- Internally via spin-off of sound new business ideas that surface in existing core businesses, but where the culture and operating mode in the core do not permit them to survive beyond early R&D and development
- Internally via incubators, accelerators and other similar innovation schemas
- Autonomous [standalone] ventures often developed via a corporate venture function or similar for new high potential innovation and business concepts, such as IoT platforms
- Externally via acquisitions and minority equity investments
- Externally via joint ventures and other similar vehicles for collaboration with customers or partners
- Externally through collaborative ecosystems and creative combinations of start-ups and larger organizations
Developing A More Holistic Understanding of New Business Creation Vehicles
Accordingly, the strategies and organizational approaches adopted by many OEMs today reflect their focus on too few sources of new business. In contrast to these more limited approaches, we believe OEMs need to move beyond their “comfort zone” and focus on synergistic market opportunities that expand an OEMs footprint beyond their core. OEMs should look for new growth venture development strategies that leverage a more flexible mix of these approaches – determining the best mix and the most viable “vehicle/s” for developing new customer solution opportunities.
OEMs need to take a more holistic view of new non-traditional growth opportunities that can include ventures that address innovations in the core business as well as collaboration with customers and partners. When multiple parallel modes of new innovation and venture development are correctly applied, OEMs can create new internal growth ventures and engage with external organizations at differing stages of development in a structured manner.
Recent maneuvers by larger OEMs, as mentioned earlier, have hit a number of “speed bumps” in their development, but we believe the more important measure of progress has been management’s willingness to take the risk of creating new venture businesses, developing new capabilities and forging new non-traditional relationships to create new customer solutions.
Understanding Which Growth Venture Alternatives and Options Align With The Business
Beyond those we have 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.
What Business Am I Really In?
Since most OEMs don’t know how to develop software on their own, or how to be in the software business, many of them have responded by acquiring software businesses. However, when OEMs buy software companies, they face the challenge of keeping them close enough to get synergy, but not so close that they strangle a strange business that is fundamentally alien to them.
Unfortunately, expecting OEMs to keep their hands-off businesses that they don’t grasp culturally has been too much to expect. And now today many OEMs are realizing that they poisoned the water by not understanding the companies they bought, or the software business in general.
We dive deeper into how OEMs should think about venture growth in our latest episode of Future Perfect Tech with the founder and managing director of Spinnaker Venture Partners, Mark Roth. Listen to the episode here. ◆
This essay is supported by our Market Insight, “OEM Growth Venture Strategies.”
Fill out the form below to download it for free.