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The Spectacular Failure
of Software Growth Strategies

The question you should be asking is more complicated than “build, buy or partner?”

Build, buy or partner? It’s the perennial question for OEMs, but is it the right one to ask? Perhaps a better question is, “What role should software play in our business and what combination of build, buy and partner should we strive for?”

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 observe many OEMs awakening to the growing presence and scale of software in their businesses, it’s still too early in the game to predict how successful OEMs will be with software.

The scale, scope, and sophistication of the B2B and mission critical software opportunity for both OEMs and new software startups has not progressed very fast or evolved very far. Smart Systems, the IoT, and new software innovations 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.

As Software Becomes Pervasive, Will OEMs Win?

Software becomes pervasive

source: Harbor Research

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. They should be selling software like crazy, but that hasn’t always been the result.  What we have been seeing more often than not is large B2B OEM’s software strategies stuck in “low gear” and trapped selling their software solutions to their largest installed base customers – essentially selling their software to their own captive hostages.

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?

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 asking the classic question, “Should we build, partner or buy?”  It’s no wonder that so many OEMs have defaulted to acquisitions and just “bolting on” these new software businesses.

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.

Crossing Someone’s Chasm

Everyone we talk to in the OEM space is telling us the same thing: software is very challenging. Hardware players have never been good software players. They’ve never understood software culture, never learned to not confuse software with their own core equipment business and value propositions. And they have continued to think that they can acquire any business, and everyone will have to keep playing by their rules.

But that story is over. Software is now in everything. It’s indisputably eating the traditional profits and revenue models across many industries.  Machine, equipment and hardware OEMs literally have no choice but to embrace the creation of code. The questions are: How, where, and to what ends?

Manufacturing companies have actually dealt with software for a long time. But their expertise has always been in hard-coded, purpose-built software embedded in their machines. You needed it to make the hardware work, so OEMs bundled the embedded software with their physical product and didn’t even charge money for it. They’d grown up in an environment that was all about physical control, and they remained challenged by software, code development, data acquisition, value and analytics.

Orchestrating Software Innovations

Machine and equipment businesses have been deconstructing for decades. OEMs used to develop the 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. Companies are 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.

Need to Organize Cloud, Data, Workflow and App Development Tools

Need to organize cloud, data, workflow and app development tools

source: Harbor Research

OEM management teams often live in two separate and competing worlds – running their core business as efficiently as possible while also needing to identify new and novel product and systems innovations.  This strategic contention causes many OEMs to act like a deer in the headlights between vastly different business models.

OEMs are struggling today to turn the operational data generated by their machines, equipment and fleets into tangible business value for their customers as well as for themselves. Extracting value from new connected equipment systems has proven to be much harder than anyone thought it would be.

These forces are driving many OEMs towards acquisitions and others to work with broader networks of external software developers and organizations including systems integrators (SIs), independent software vendors (ISVs), independent hardware vendors (IHVs) and more. However, sorting among the many diverse categories of software developers and players for the right collaboration partners has been challenging for OEMs.

To make matters worse, the software tools many third party players are developing or working with today were not designed to handle the diversity of data types, the scope of interactions and the massive volume of data points generated; each new application requires too much customization and development resources just to perform many of the same basic tasks efficiently and effectively.

Existing web development platforms and so-called low-code frameworks offer a graphical UI to simplify the process of structuring a program, and then behind-the-scenes the system assembles the actual code that gives machines their instructions. Today’s typical web development platforms and low-code frameworks all manipulate the same programming problems, but their different solutions are locked away in a more tightly coupled data structure that their simplified UI hides from the user.

For OEMs, working with the wrong partner, platform or software tools can limit their solution impact and constrain customer opportunities. New networked and software innovations are not just a new line of business OEMs can attach to their existing organizations.

Open-source software tools, cloud computing and distributed/edge architectures are hardly new, but as the diversity, scale and nature of data interactions grows, the systems or “technology architecture” will need to become more closely coupled to the application logic or “business architecture” to inform and enable a new generation of data applications and services. These two “architectures” must be tightly interwoven and mutually supportive without inhibiting one or the other.

Software development and realization is undergoing significant changes. Radically new development models and approaches are emerging where open-source software development tools and libraries are modular and interchangeable and where automation of software development and re-use of software components can be realized across an ever-broader spectrum of development partners, communities and domains.

Aligning and leveraging the respective roles of technology architecture and business architecture often creates contention, but we are entering an era where success in either architecture dimension will increasingly go to the OEMs that effectively utilize their combined potential.

Data applications are at the heart of this convergence trend, enabling a whole new generation of digital solutions. OEM engineering and development organizations are reaching a critical juncture where they will need to carefully consider whether acquiring a software business or collaborating with players is the best path forward.

For OEMs, working with the wrong partner, platform or software tools can limit their solution impact and constrain customer opportunities. New networked and software innovations are not just a new line of business OEMs can attach to their existing organizations.

New Market and Software Roles for OEMs

If software continues to become pervasive across any machine, equipment or hardware business then what are the new and unique strategic roles and differentiated business models that OEMs can embrace to drive new software opportunities and catalyze growth?

Existing Software Incumbents Are Diverse and Fragmented

Existing Software Incumbents Are Diverse and Fragmented

source: Harbor Research

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 opportunities for OEMs that have the potential to drive much greater value for the customer. Understanding the business-model design trade-offs, organizational and 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. Hence, the question shifts from should I build, partner or buy to a combination of all three. This new generation of collaborative application services, and the significant increase in interaction value they inform, inevitably requires open information flows and shared data across the ecosystem and its participants. Orchestrating data and information value based on the integration of relationships across new ecosystems will become the “order of the day” for new Smart System solutions. ◆


This essay is supported by our Market Insight, “OEM Software Growth Opportunities.”

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