New business model
A new business model conversation is urgent
The race for survival will spark innovation
The shock brought by the pandemic is liberating firms to make numerous experiments. Some will fail, while others will succeed. This creates a tipping point for a long overdue conversation about new business models in advanced manufacturing. In the past decade many firms have made significant efforts to digitize their factories and optimize their supply chains but, for the most part, these firms have yet to fully embrace different ways to monetize and capture value from their operations.
The pandemic has thrown some of these firms into chaos by shutting them down or overwhelming them with demand they cannot meet, while disrupting their supply chains, forcing change that was once deemed unimaginable. On the one hand, some firms are adapting to the COVID-19 crisis with tactical measures such as cutting costs, reshoring parts of production and diversifying suppliers. On the other hand, we have also witnessed leaders bringing rapid and dramatic change without making additional investments through strategic measures such as innovating their business and operating models, reconfiguring existing technology to remotely manage their infrastructure and enabling digital collaboration end-to-end.
As organizations settle into either a new normal or plan their return to pre-pandemic operations, the question rises as to whether firms will “snap back” to normal or settle on some new equilibrium. We may be on the precipice of “Operational Darwinism”, wherein mere reductions in costs may not be enough to compete against leaders who make manufacturing a rapid and key part of their digital innovation edge. In this white paper series, we explore what new business models might look like and how they are likely to interact with both existing operating and business models in the context of the new normal brought about by the pandemic. Our findings and conclusions are the result of consultation and collaboration with senior executives from discrete assembly manufacturing companies, process manufacturing industries, financial services and the software sector.
Digitization is setting the stage for change
The COVID-19 pandemic has only accelerated what we have observed to be a megatrend in the global economy. Major digital technology firms such as Alibaba, Amazon, Google, Tencent and many more have grown far faster than the financial services and energy firms that once dominated global equity markets. Such a rapid growth has been driven by improvements in information and communications technology (ICT) and a dramatic increase in the ability to capture, process and transmit information. However, the ability to capture and process information is only a necessary but not sufficient condition for new firms and industries to arise.
In fact, the fastest-growing firms are those that not only harness information but also possess an ability to transform it into valuable products and services. Information has the characteristic that, once created, can be distributed at very low cost, which changes the cost structure of firms on the supply side.
This disruption can be compared to the transformation of the industrial economy that allowed for the giant steel, transportation and energy firms to grow at scale in the 1900s. What is different at this point in history is that many of the largest firms also harness network effects whereby incremental value is created as a function of additional users who create value for one another. This creates what is called a “demand-side economy of scale” that tends to create a positive feedback loop such that the leading firms grow even more quickly.
Manufacturing companies are trying to adapt
Manufacturing companies have noticed megatrends – from digitization to the imperative of environmental sustainability and globalization – and have begun investing in projects that exploit data. Some have seen early success. For example, many of the fastest-growing parts of industrial firms such as Siemens and John Deere are their software and information services arms. John Deere created a digital services layer to help farmers better utilize seeds and fertilizers as well as to capture data that reduces equipment operating and maintenance expenses. Going beyond the relatively straightforward cost-focused approach to using data are firms that add digital services layers to extend system functionality. For example, Siemens has added AI-driven diagnostics to its medical equipment that can be provided by either the firm itself or by partners through its Healthineers Digital Ecosystem Platform. Numerous firms have launched initiatives to explore new business models as part of their digitization initiatives. However, many firms find themselves stuck in “pilot purgatory” as they work to transition these initiatives to self-sustaining businesses. This is predictable because digitization efforts often change business models, and create new sales channels, both of which disrupt existing parts of organizations.
Less innovative firms will be left behind
The urgency of the business model conversation is accelerated by the extreme disruption caused by the pandemic. The current situation has created an avalanche of change where the pace has been more glacial. In fact, existing supply chains have collapsed at the same time that firms are experiencing demand disappearing or expanding dramatically. This unprecedented scenario has created the need for rapid and radical actions. Most manufacturing firms continue to realize their revenues through traditional channels (e.g., the sale of their primary products, services and after-market sales of services and supplies).
By contrast, Amazon’s Marketplace is able to more fluidly connect supply and demand. Other firms struggle because, although manufacturing firms participate in markets, they are less likely to have the managerial capabilities to manage markets that match supply and demand and, as a result, are less able to do so on short notice.
This crisis, which has depleted cash reserves and the ability to invest at most firms, is creating the perfect space for new entrants that utilize different business models, especially market orchestration, to emerge and is allowing for companies that leverage ICT to rise even faster.
The firms best-positioned to adapt quickly to disruption are those that can digitally link their design and operations all the way to the manufacturing floor to create seamless customers experience.
Those manufacturing companies that do not innovate at speed reconfiguring their supply chain in the face of change face the prospect of being left behind.