Reshaping business models for digital era in manufacturing industries

Digitalization and Internet of Things (IoT) are shaping nowadays the industrial economy and it is said to be a driving force for a fourth industrial revolution. The traditional business functions should be restructured. A successful organization needs diversity amount employees and innovative resource combinations should be created from individual competencies. This study indicates that manufacturers’ entire business model should be redefined for being successful and competitive in the future.

Digitalization is forcing companies to redefine and rethink nearly everything they do. The traditional business functions, such as product development, IT, manufacturing, logistics, marketing, sales, and after-sales service, are being redefined. Starting from product development, the increasing of embedded intelligence in product requires competencies and integration of several disciplines: mechanical, electronic and software. In addition to being multi-disciplinary, the development of complex systems is usually multi-life cycle, multi-site and multi-organization at the same time. Marketing and sales will have completely new ways for operations as digitalization, virtual reality and other new tools can support the operations. After-sales is moving already more and more towards automated sensor data based analytics, which makes possible entire new predictive service models.

Observations from the practice indicate, that today the competencies might not fit in the future requirements and for searching solutions for digitalization opportunities and creating new value for customers. Diversity among employees can create better performance results with creative tasks such as innovations, product development or targeting new markets. Manufacturers will have to hire experts in applications engineering, user interface development, and systems integration, and, most notably, data scientists capable of building and running the automated analytics that help translate data into action. New competencies will be the base for the new kind of organizational structures. Because of the growing volume, complexity, and strategic importance of data, it is no longer desirable or even feasible for each business function to manage data by itself, build its own data analytics capability, or handle its own data security. To get the most out of the new data resources, many companies are creating dedicated data groups that consolidate data collection, aggregation, and analytics, and are responsible for making data and insights available across functions and business units. This new organization unit could be called Unified Data Organization. The second new unit will be Dev-Ops (a clipped compound of “development” and “operations”), which emphasizes the collaboration and communication of both developers and operations personnel. The third new organization unit will be Customer Success Management, which is responsible for managing the customer experience and ensuring that customers get the most from the product. This new unit is extremely important, when moving towards service business and product as a service operation models.

At the end, manufacturers’ entire business model should be redefined for being successful and competitive in the future. Value proposition in the future will be based on the Digital or Smart connected products and digital life-cycle services. Basic product will be supported by Tailored performance service offerings and Right timed product-service deliveries. Customer Success Management (CSM) unit will define analytics based customer segments locally and globally. On the supply side, selected performance and value creation partners will be defined, as well sustainable production partners. For the logistics and supply chain the agile demand-driven supply chain partners are needed. Physical transport is not sustainable and cost efficient, so in global business, still the utilization of local resources will be important. Key activities are Streamlined customer processes through innovation, production, problem solving and networking, as well the Business data management. Key resources are organized in new ways with taking care of entire new organizational units, as mentioned in earlier chapters. In revenue side, new performance and value based revenue models will be formed. On the cost side, efficiency and sustainability are the key targets. As a conclusion of literature and case studies findings, the elements of future business model are listed on following Figure.

Jukka Hemilä

Manufacturing Industries Business Model for digital era.

Digitalization is a major opportunity and strategic investment that often requires renewal of the business strategy. The digitalization itself should not be the driver, but the opportunities created by digitalization. Practitioners should analyze the future customer value, what is valued by customer in the future, which kind of technologies, products and services create added value for the individual customers. New kind of competencies are needed in successful organizations and HR will have to rethink many aspects of organizational structure, policies, and norms. In modern industrial ecosystem, companies should still focus on core business and non-core areas should be outsourced. It is time to redefine business model according the future customer value and needs.

This blog post is based on the published conference article:

Hemilä, Jukka (2016): “Reshaping Business Models for Digital Era in Manufacturing Industries Supply Chains”, The Proceedings of 7th International Conference on Operations and Supply Chain Management (OSCM), Phuket, Thailand, 18 – 21 December 2016.

Jukka Hemilä, Senior Scientist, VTT Technical Research Center of Finland

New business from BIG DATA

Digitalisation has radically changed the old idea that the services cannot be stored or transported, they are instantly perishable, and they come into existence at the time they are bought and consumed. More and more services can be exported to global markets, just like physical products. The Industrial Internet will radically change the success factors of industrial firms, giving birth to companies that revolutionise the terms of competition – just as the Internet made Google and Amazon possible. In January 2015, the Economist stated “Manufacturers must learn to behave more like tech firms.”

Where can success factors be found in a changing business environment? How should machine and equipment manufacturers adjust their operations in order to act like technology companies? Based on cooperation between research institutes and companies, the opportunities, enabling factors and barriers to digitalisation were considered via the SmartAdvantage project. Five companies – Pesmel Oy, Chiller Oy, Huurre Oy, SW Development Oy and Delete Finland Oy – were involved; they represent different sectors and share a desire to develop new business based on digital solutions. The diverse effects of digitalisation were reviewed from three perspectives – data, technology and business. The key challenges lie in identifying customer needs and the value of services, as well as in the earnings logic and traditional and slowly changing roles within business networks.

In many cases, either an equipment supplier lacks information on delivered equipment, or is unable to benefit comprehensively from the information it gathers. This means that the development and implementation of knowledge-based services also requires the renewal and expansion of expertise, either in one’s own organisation or by networking. Because companies specialising in data analysis rarely have special sectoral expertise, long-term partnerships need to be built. Examples of cooperation that have hit the headlines include the partnership between Kone and IBM, and that between ABB and Microsoft in Industrial Internet solutions. For many companies providing expert services and software, analysing data on customer processes provides major opportunities to learn how to operate and optimise processes in a new way.

Technology has a key role as an enabler of digital business. It is also a challenge for traditional machinery manufacturers and suppliers, since digital service technologies require a vision of how the sector is developing and broad expertise in various sub-areas – such as IT and automation systems. Industrial machinery and equipment usually has a long lifecycle lasting up to decades. Careful selections of technology and platforms and a flexible approach are therefore required, when combining the diverging lifecycles of physical product and the related service solutions. Flexibility could mean building solutions in small steps, testing them together with the customer, and learning from the customer’s activities.

Change will multiply the number of opportunities available, even if challenges and obstacles emerge on the path to digitalisation. The companies involved in the SmartAdvantage project also saw opportunities in internationalisation, and new partnerships and business models. The first applications deal with the after-sales market and the development of maintenance services. This means using data gathered from machinery to reduce maintenance and downtime, identify process bottlenecks and optimise processes. Probable future trends include the development of predictive maintenance supported by various remote services and data-analytics, the utilisation of data produced by other actors, and the delivery of data for use by third parties.

This will bring change to many services and service activities. Machinery manufacturers and suppliers could learn from how tech companies use extensive data masses when creating services to their customers.. Product-service solutions could provide a substantial competitive advantage. According to a recent review by the Ministry of Economic Affairs and Employment, we have only caught a glimpse of the ways in which digitalisation will transform the world.

Helena Kortelainen, VTT and Kari Koskinen, Tampere University of Technology

See also:

SmartAdvantage project: http://www.vtt.fi/sites/smartadvantage and https://twitter.com/smartadvant

Business Review published by the Ministry of Economic Affairs and Employment (in Finnish only). Services as a source of growth. No. 2 /2016. http://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/79153/TEM_oppaat_15_2016_Yrityskatsaus_joulukuu2016_WEB.pdf?sequence=2