As an embedded electronics design partner we have worked with several manufacturing companies, helping them cope with their process challenges through electronics design.
That is precisely why we find it worthwhile to discuss the toughest challenge manufacturing companies are faced with these days: digital transformation.
Digital transformation is very hot topic in every industry's agenda, yet only a few of us are actually possessive of the actual implications of these two words.
Vijay Govindarajan and Jeffrey R. Immelt investigated in their visionary article on MIT Sloan Management Review what digital transformation actually implies and why they think digital transformation, if successfully pulled off, is "the only way" manufacturers can survive.
Before going into the key takeaways of the article, let us first have a look at what digital transformation is NOT.
Digital transformation is NOT the digitalization of an existing business. And it certainly does not involve creating websites, mobile apps, social media campaigns, and online sales channels.
So what is digital transformation exactly?
A digital transformation should alter your strategy.
A well-thought digital transformation process involves rethinking your products and services as well as reinventing your business model. For the particular case of a manufacturing company, creating new and improved value from the combination of current physical products AND novel usage of data is the key.
So what does this exactly mean?
Traditional business models of manufacturing companies has been selling hardware that comes with a free software and providing maintenance services for a fee (when needed).
New and digitally transformed business models involve selling customized and software-enabled solutions that come with a hardware (i.e. industrial IoT), delivering direct value-add and claiming an indisputable share in the additional profit made available to the customer.
"By embedding sensors and instrumentation in machines and processes, companies can now collect and analyze user data continuously rather than periodically. For instance, companies like GE can sell power by the hour instead of selling engines."1
It is no secret that digital technologies disrupt businesses. Manufacturing companies are no exception.
At Grus both industrial control & instrumentalization and connected devices (including IoT solutions) are among our expertise areas.
We build modules that measure, control and supervise industrial applications. We also design and build decentralized, interconnected sensors, control units that can be remotely managed.
If a purely digital company can one day achieve to find a way to perform your machines better than you as their producer, you will get to be disrupted.
First, you will lose very profitable service revenues to that digital company. And second, you will be stuck as nothing but a commodity producer.
In the mean time that digital company will be instrumentalizing your machines with IoT sensors. They will be collecting meaningful data and feeding your customer with valuable services, improving their processes, systems and efficiency.
So companies that overlook digital transformation distracted by the current performance metrics and revenues coming from their traditional business models will eventually be left out by new-comers who offer novel and data-based services.
But tackling digital transformation is not an easy job. It stands as the most complex yet crucial challenge facing manufacturing companies today. And not a single manufacturer has already entirely pulled this off yet.
Barriers to digital transformation is both structural and behavioral. Here are the 3 barriers that stand against digital transformation:
1) Existing business models are too lucrative to leave
There is a reason why companies are lagging behind when it comes to digital transformation: because their current business models do work.
Being in the possession of a well-oiled machine that generates profits today conceals the danger coming from new and disruptive business models.
Digital transformation is a long-term investment. It is far more than investing in innovation and R&D projects, which produce results in a relatively foreseeable future. Fruits of digital transformation, on the other hand, ripen in a much longer run.
Therefore, it is a challenge to convince your profitable divisions for investing in a digital transformation.
2) Inviting and integrating talent is hard
Carrying out a digital transformation requires distinctive skills.
For a manufacturing company employing mechanical, electrical and other "physical" skills, digital talent is a whole new skill set that should be hired.
The digital talent hired for digital transformation should be integrated with their traditional engineering teams. This is a challenge because virtual sciences and physical sciences are very different in the way they learn and think.
Plus, it is not very easy, for a manufacturing company, to attract the very best talent out there competing against digital talent magnets such as Apple and Google other software giants.
3) Manufacturing and digital companies support entirely opposite cultures
Manufacturing culture supports long-term improvement, long product development and long sales cycles. Large investments are poured on developing proprietary technologies.
On the other hand, software culture supports short development cycles and short sales cycles. Software companies are more open to partnership with other companies and most of the time monetize their software as a service.
Melting these two cultures in a pot and having them function in a co-productive way is an outstanding challenge.
How to overcome barriers to digital transformation
It is no surprise that leaders in the manufacturing industry are having a hard time with digital transformation.
The article presents some suggestions for overcoming the mentioned barriers.
1) Create fresh value and/or capture new value
Changing the traditional business model is the key to a digital transformation. Manufacturers can either create fresh value or capture new value, or do both.
Creating fresh value through using industrial IoT is possible in multiple ways. By analyzing the data on how your customers use and maintain your machines, you can build better-performing machines. In addition, through software applications, you can turn this data into meaningful insights for your customers.
Capturing new value refers to creating new revenue streams from your new software services, such as SaaS subscriptions and licenses that you sell alongside your physical products. These provide meaningful insight to you and to your customer as well as additional profits to you. Alternatively, you can sell "success as a service," which means guaranteed customer outcomes such as speed and safety. "Instead of selling jet engines, [you] can sell flying times." Software incumbents such as SAP and Salesforce have already gone "beyond selling software to selling services and success."
2) Keep digital operations distinct but linked to traditional operations
Creating an independent digital operation is crucial in tackling digital transformation.
Some tension should be expected while linking digital operations to the industrial divisions, who objectively make all the revenues and understand how their machines work, which brings us to the third suggestion.
3) CEOs should never apologize for investing in digital transformation
A digital transformation requires confronting the status quo for the sake of creating the business models of the future. Therefore, it is up to the CEOs to take the lead, fight against ignorance and resolve conflicts that will arise along the way.
It is extremely difficult to lead a change, especially when it is not clear to everybody where the organization will end up as a result of this change.
Digital transformation alters everything from people's mindset to the organization's culture, its operations, revenue streams and future prospects. But the future is only attainable by taking action now, by overcoming these structural and behavioral barriers one step at a time. That is precisely why manufacturing companies should start investing in digital transformation today.
Source: "The Only Way Manufacturers Can Survive"