The Failure of Digital Transformation
OEM GROWTH CHALLENGES
The industrial device, equipment and machinery universe encompasses a wide range of companies that develop and supply the equipment that other companies need to run their operations. The impact of original equipment manufacturers (OEMs) on the global economy cannot be understated. The breadth of equipment and products spans from components such as semiconductors and sensors to robotics and industrial machinery as well as complex test and
This paper identifies new forces acting on players and markets and seven key growth themes that tie closely to future OEM competitiveness which, in turn, are tied to several technology trends we believe will enable new customer solutions and new non-traditional growth opportunities. Digitization and the continued evolution of Smart Systems technologies will impact virtually every dimension of any OEM’s growth strategy and operating model and will likely make the business look and feel very different in the coming years.
MACHINE and EQUIPMENT MANUFACTURERS
FACE DRAMATIC CHANGES
While it is difficult to generalize, most OEM segments are undergoing dramatic change due to broader forces at work in the marketplace but also because of the impacts driven by digital and Internet of Things technologies. The advent of connectivity for intelligent equipment and machines is enabling asset monitoring and tracking to ensure uptime, performance, availability, software version control, and location analysis for a wide range of applications. As networks continue to invade the physical world of sensors and machines, many OEM’s have come to understand the significant value created from extracting and leveraging the machine data and
usage information from their equipment.
As the Industrial OEM arena evolves past the last several turbulent years, multiple forces [such as global economic expansion] are likely to contribute to positive growth in the short to moderate term. The overall health of the global economy and global gross domestic product (GDP) growth historically tie closely to the growth of machines and capital equipment. For leadership teams in OEMs, identifying and understanding key forces and trends and their potential impacts on their specific product, machine or systems segment, will be critical for sustaining growth and performance in the long run. Management in equipment manufacturers and machine builders will face tough trade-off decisions related to new technology and innovation investments as well as rapidly evolving business and operating models.
Technologies, markets, customer needs and competitors are all changing rapidly. Consider just a selection of the many forces at work in the marketplace today:
» As the economy has evolved to a more service-oriented and increasingly digital state, the importance of speed and agility as well as building new skills has increased dramatically.
» Capital is increasingly available and abundant. The scale of financial assets is now roughly 8-10 times global GDP, making unique skills and new innovation concepts far more important than capital formation and also, are the true constraint on an OEM’s ability to drive new growth.
» Industries are consolidating into a “winner-takes-all” mode. Virtually any product or services segment likely had twenty or more significant competitors thirty years ago. Today that number is typically 3-5 globally dominant leaders in each segment collectively earning as much as 75% or more of the profit pool.
» Wall Street demands and rewards quarterly profits and short-term performance in the name of driving shareholder value. Shorter management horizons and increased pressures from investors are what drives businesses today with less emphasis on longer term investments in new growth.
We would describe all of the above trends as “classic.” What we mean is the relationship of these trends to an OEM’s core product business is predictable. For OEMs to succeed in their core product businesses they will need to continue to carefully set priorities and investments to address prevailing trends in the marketplace. Innovation for the core business is, for the most part, sustaining, incremental and continuous. Performance measurement, repeatability, risk management, continuous improvement and financial discipline are the minimum requirements to help drive a continuing cycle of improved costs and higher levels of customer support.
However, we believe new digital and Smart Systems technologies will have an out sized impact on OEM’s strategy and begin to turn long held beliefs upside down. For example, many managers believe that you can be big and low cost, or you can be focused and differentiated— but not both. Today’s Smart Systems and IoT technologies are enabling new modes of services delivery and creating new opportunities with data and analytics capabilities that either significantly reduce, if not eliminate, this classic strategic trade-off. This, we believe, is but one example of the extraordinary effects new systems technology will have on OEMs.