Originally published in Industry Today as Services, Not Products, Are the Future of Manufacturing by Michael Mansard, Principal, Business Transformation & Innovation at Zuora.
As customers search for solutions—not just products—what business models do manufacturers need to implement to avoid disruption?
Industry 4.0—especially the internet of things (IoT)—is transforming manufacturing. This digital transformation integrates disruptive technologies like automation, cloud computing, and data collection into traditional manufacturing processes. The resulting new range of products and services creates a win-win situation, spawning monetization opportunities for manufacturers while improving the customer experience.
The success of Industry 4.0 thus far has clearly sparked a trend, with IoT growing 22% in 2018, surpassing the growth of traditional subscription-based businesses like media and software, according to the latest Subscription Economy Index (SEI). And usage of the core technologies fueling Industry 4.0 are expected to grow from 20%-80% by 2023. For example:
While the trend toward Industry 4.0 is clear, only 14% of manufacturers say they have created go-to-market IoT strategies. The challenge that many manufacturers face is that, in order to successfully implement digital transformation, new business models are required. Companies that embrace these new models and expand their range of products and services are poised to seize a competitive advantage.
Traditionally, manufacturers focused on identifying a need in the marketplace and meeting that need with a product. The key challenge was to make the best product as efficiently as possible, pursuing economies of scale. Ultimately, this model was about getting products to market and selling the maximum number of units. Manufacturers pushed products into as many sales and distribution channels as possible. Everything cascaded from the product itself.
In Industry 4.0, products are no longer the end goal. Instead, they are a vehicle to deliver dynamic solutions for customers. Using the disruptive technologies of Industry 4.0, manufacturers provide not only the product, but also services that build off of data about how the product is used and what outcomes it is achieving.
This exchange of information translates into a range of valuable services that can be delivered by the manufacturer. The ongoing nature of these services forms a closer relationship between the customer and manufacturer that is no longer based on single transactions for products.
The customer is now a subscriber. And this subscription-based model becomes a reliable recurring revenue stream for the manufacturer.
Leading edge manufacturers are already implementing this strategy to drive impressive growth. Caterpillar (CAT), the world’s largest equipment manufacturer, is a case in point. The company now produces connected machines (and retrofits older models) with integrated sensors that gather data about usage. This data helps customers optimize the use of their fleets and reduce the overall cost of ownership. As a result, CAT has new recurring revenue streams, closer relationships with their customers, and the largest connected fleet in the world, with more than 500,000 connected assets in the field.
Another example is Siemens, which has launched a range of technology-driven, subscription-based solutions for the healthcare industry. One offering, Teamplay, is a cloud-based collaboration app that allows healthcare professionals to exchange data among themselves to facilitate better-informed medical decisions. Siemens has also deployed AI to help automate and standardize complex diagnostics. These investments have paid off for Siemens, with revenues in fiscal 2017 of $15.4 billion, more than 55% of which was recurring.
Shifting to a subscription-based business model means adding new products and services outside the wheelhouse of a traditional manufacturing company. To navigate this expansion, we’ve identified three main plays: New Connected Services; Repackage to Recurring; and Product-as-a-Service. (Note that there is no one “best” play as the strategy is dependent on a given manufacturer’s portfolio, and that all three plays often coexist in parallel within the same company.)
Industry 4.0 presents tremendous growth opportunities for manufacturers who deploy disruptive technologies, but technology alone does not guarantee success. Only by implementing new business models that monetize Industry 4.0 will manufacturers reap the rewards.
This sort of business model transformation is a long journey that deserves ambitious targets: we believe that every company should aim to reach 20% penetration of new equipment and services sales with recurring (“as a service”) solutions within a five-year period.