Manufacturing industry in digital transformation

Data is power and capital in the digital world. Data can provide the basis for new services, can be used for the development of existing products or the creation of new ones, and can enable us to learn more about our customers, enhance existing customer relationships or discover new markets. Manufacturing industry has traditionally been about selling machines and devices, while life cycle services tend to cover after-sales service and the sale of spare parts. The digital revolution is transforming old practices and turning the business environment and work at the customer interface upside down.

Data is easy to collect and store, but little is being done to exploit it in the development of business activities or of products, services and processes. This is due to the fragmented nature and uneven quality of the data collected and a lack of the required analytical skills. Companies are often still unclear about what, or what kind of, data they hold. Sensibly combining data of various quantities and from various sources is difficult. Companies may also be unclear about the quality or value of the data they hold.

Using digital technology to transform services into service businesses has become topical among SMEs in the manufacturing sector. A huge challenge lies in transforming into a digital business on the one hand, and making the leap from being a product manufacturer to a service business on the other. Thought must be given to the ramifications of such a change for the firm’s management, operations, tasks, skill requirements and cooperation, whether internally or at company-network level. Issues to be considered include how structural and functional changes and the adoption of new skills can be planned and implemented in a managed way that keeps employees on board with the transformation. However, digitalisation is not an end in itself – solutions must also be considered from the perspective of added value for the customer and business.

Digitalisation also offers new solutions and business models for firms engaged in developing their productivity and turnaround times. Maximal use of 3D models and digital information throughout the supply chain should be explored at the design-production interface. Interfaces between companies and systems are challenging; digital communications often fail to cross such interfaces, while the same data is fed several times into multiple systems within silos. By analysing the flow of information within the order-delivery process, an overall picture can be obtained of the consistency of data flows, and of the cost effects of information blockages on general productivity.

The Smart Machines and Manufacturing Centre (SMACC) of VTT Technical Research Centre of Finland Ltd and Tampere University of Technology focuses on the challenges posed for manufacturers, particularly SMEs, by the digital transformation. Experts from SMACC have developed tools and methods using which companies can quickly build an overall picture of the potential offered by digitalisation from both the business and technology perspective, as well as a clear roadmap for taking the digital leap and for the practical implementation of what follows.

Jyrki_Poikkimaki_2Jyrki Poikkimäki

Key Account Manager

Digitisation transforms business models – what can we learn from history?

IoT and Big Data are coming – are you ready? I have heard IT consultants rave about the ongoing digital transition with an almost religious fervour, how it will change the world, how we have so far only seen a small glimpse of what is about to happen, and how every company willing to succeed in the future should be ready to adopt this new technology. I am not going to contradict this. I just want to remind us of what we can learn from history.

Only on very rare occasions has new technology as such generated business success. Usually, new technology must have been accompanied by a radical change, an innovation, related to the company’s business model in order to turn implementation of this technology into successful business operations. In the success story of Ford Model T, the car itself was only part of the truth. With a view to company success, a more important element was the change in the business model, as Ford made a shift from the manufacture of individual items to efficient assembly line production. The rise of MP3 players can be considered a more recent classic example of this. MP3 players made their actual breakthrough only when Apple came up with the idea of integrating the player, its control software and its online music shop into one entity, i-Tunes, in a totally new consumer-oriented way.

Over the past few years, we have almost daily been hearing or reading about the difficulties Finnish retail sector is facing when trying to manage the radical change within the sector. The reasons behind the radical change are digitisation and the changed consumer behaviour, including online shopping. For a long time, the traditional Finnish trade applied IT technology only to its background processes (e.g. delivery chain management, etc.), almost forgetting the consumers. Verkkokauppa.com and other new actors, who successfully sensed the business opportunities the change offered, have been taking a different course. They are successfully utilising the new IT technologies also in the customer interface (in addition to the background processes) by making the product, price, and other information available to the customer in a user-friendly manner. In their business model, serving customers by providing ‘omnichannel information’ plays an important role (in the omnichannel model of retail, products, information and money move smoothly and in a customer-oriented way between the brick-and-mortar store, online shop and mobile services). The traditional retail sector is only beginning to realise the existence of such a omnichannel approach, and it is paying a high price for this “dozing-off”.

The reason why I addressed the radical change in the retail sector in this piece targeted on technology industry operators in particular is that digital native consumers and other people who have otherwise adopted digital era habits (the ones who brought on the radical change in the retail sector) are increasingly entering customer roles in business-to-business markets as well. They are used to the new business models springing up out of digitisation. For them, i-Tunes or service by information do not represent a new mode of operation, but they are something that “has always been there”. At work, they expect the technology industry to offer similar customer-oriented solutions that make everyday life easier. The may find the traditional industrial operating models quite strange.

What, then, does the term ‘business model’ refer to? To put it simply, it is a description of how the company’s business operations are run. It describes at an architectural level how the company implements its strategy. The business model tells us what the company offers and to whom, how it does that, and what the company’s earnings logic is. These descriptions are provided at an appropriate accuracy, without going too deeply into the processes and routines used for implementation of the business model. A single company may be implementing several business models at the same time. The business model may be product portfolio-specific.

For a company, the business model may be a way of distinguishing itself from its competitors and gaining competitive advantage. Verkkokauppa.com is a good example of this. They did not set out to bring new technology to the traditional business models of the retail sector, but they took advantage of digitisation in the new omnichannel model and implemented that in such a way that gave them a substantial competitive advantage. Verkkokauppa.com is an example of a company whose success is based on, besides price competitiveness, also many other factors, which have been implemented in a correct manner that serves the customers and gets them hooked.

What, then, are the successful future business models for the manufacturing industry? Digitisation is coming (or, actually, it is already here). How does it affect the business models of the manufacturing industry? These are essential questions for all of us to consider. Someone may find success through a service with provision of information, but the service market alone cannot offer a big enough cake for everyone to share. Someone else may find success by integrating and packaging different matters into new kinds of entities that make the customer’s everyday life easier. Additive Manufacturing (3D printing etc.) is also a good example of how new technology could enable many new operating models with a potential to revolutionise the markets. So far, they have not done so, but as the technologies develop further, this is likely to happen. What other opportunities does the future offer to the manufacturing industry?

Often, new technologies and the business models utilising them require that companies have the kind of competencies they do not yet have. It is good to identify such gaps in competence already when planning new business operations. If the idea is strong, the company’s existing competence seldom becomes an obstacle to realising a good plan. It is often possible to purchase or develop the missing competence using external assistance. In many cases, it is advisable to use external experts at the very early stages of planning, maybe even when developing ideas for new business operations. A technology expert may bring valuable input to the process on the technological opportunities available, and a business expert on how new technology can be used to generate profitable business – by applying a new business model.

Jaakko PaasiJaakko Paasi

Principal scientist

Leader of the Business Models module in the For Industry programme