Economic Disruption for Equipment Manufacturers: Lessons Learned and What Lies Ahead

Since its inception, the internet has had a monumental impact on the world we live in, from gross domestic product (GDP), gross global value creation and destruction, profit performance, social networks, commerce and cyber security, emergency management, and advertising, just to name a few. 

As a result, equipment manufacturers are facing many new challenges as connected devices are changing the world and old business models are shattering. But, they can possibly learn from other past miscalculations, particularly brick and mortar retailers that have a physical asset to sell while dealing with the commercialization of products and increasing focus on services and the customer experience.

When Did We Start to See the Internet's Impact on Traditional Businesses?

Reminiscing back to the early days of the internet, circa 1995, I was working as a national sales manager for a small internet startup that was brokering internet services to schools, so that in turn, they could resell those services in their local community instead of magazines or baked goods as part of their fundraising efforts. We had a network of our own ISPs (internet service providers), but as the internet took off and the services became more widely available, the startup simply evaporated. 

At that time, what was most interesting was speaking with the brick-and-mortar retailers, as many of which didn’t understand the internet, didn’t have a web presence, or couldn’t comprehend e-commerce. While the infrastructure was there, the speed, user-friendliness and security was less than desired. As mentioned in an infamous video by The Computer Chroniclesin 1995[i], "Successful home pages could be seen by twenty or thirty thousand people a week.” And “The complexity of programming 'links' can be overwhelming." Also, "I wouldn't put my credit card up until there's security software that will protect the credit card." I recall having conversations with senior leaders of these companies – some of which thought it was a fad, paralyzed or in denial – but doing nothing proved to be fatal to their business. However, the firms that strategically but carefully pressed forward and changed their business models have since become the darlings of Wall Street today.

Online vs. In-Store Sales

One shining example of these success stories is Costco. I was one of the early members of Costco, as I grew up and lived in Kirkland, WA just minutes from their headquarters. At that time, they just started their Kirkland Signature brand and opened their 200th retail store. In 1998, e-commerce at Costco.com would bring Costco prices and services to the internet. Today, Costco has just short of $5B in web sales and grew its e-commerce business 20 times faster than same-store sales, for about 22% of growth in net sales.[ii] But make no mistake, Costco makes their money through membership, and that is also a path to driving internet sales.

To share a personal story about a different retailer who unfortunately doesn't pay the same attention to changing customer demands and expectations as Costco, I just recently shopped for a new home computer monitor both online and in-store at a major electronics chain store. While in-store, the retail salesperson mentioned that the company was struggling financially due to competing internet sales. He mentioned that as a result, there is rumor they might bring in furniture and the like to diversify. They could have easily sold me online (they had the best selection) with an in-store pick up, because I wanted and needed the product today (like many of us). However, instead of focusing on their online experience, digital strategy and supply chain (he admitted they had serious supply chain issues), they are moving away from their core value offerings that the company was built on, and into new uncharted and vastly different markets. Not the best idea. 

What Equipment Manufacturers Need to Do to Adapt to the Changing Market

As we saw in the past with retailers, equipment manufactures that do nothing to adapt will be in a perilous position in the coming years. You cannot ignore the quickly changing market, the digital economy, and how product-attached software and services will fundamentally change how businesses and consumers interact with and buy assets. The trends are clear:

• 90% of the companies within TSIA's Services 50 Hardware and Industrial Equipment 30 experienced flat or declining product revenues.
• 44% of the Services 50 and Industrial Equipment 30 companies experienced growth in services revenues.[iii]

The path to redemption in commercialization is to think through not only the customer journey map, but also the internal build, market, and sell supply chain. Product manufactures have a unique opportunity to leverage this transformation with frameworks like the TSIA Remote Service Continuum and Digital Value Chain.[iv]

Keep in mind that this is not merely a departmental shift or change, but an entire organizational transformation that must include all levels of the executive team. The complexity of this change can have huge implications to profit, market share, and growth.

For instance, the sales leader can’t continue with a heads-down approach to selling product and focusing on only the product win and “owning the customer." In speaking with many organizations that are hemorrhaging in products sales growth, they feel the right answer is to invest in more sales and marketing, but this couldn't be further from the truth. The roles of marketing, customer success, global services, and product management are key to the entire customer journey and ultimately sales success – that is to say Land activities, Adoption motions,  Expansion programs and eventually the successful “natural” Renewal (the TSIA LAER model) of these ongoing services. The sales leader must understand how to transform the sales organization into what it needs to be in order to succeed, and that alone can be difficult to get your head around. It may include inside sales, analytic frameworks, fundamentally different compensation structures, handing off revenue responsibility for expansion offers to other parts of the organization, upgrading talent that understands subscription based selling, and the effective presentation of product attached services from a strategic perspective to drive the appropriate customer outcomes. 

Likewise, product management can’t operate in a vacuum focused on features and functions. They must build capabilities into the product ahead of launch that anticipates the potential for new product-attached offers, analytic frameworks, service capabilities, and consumption models. For instance, this might include self-diagnostics, predictive service requirements, intelligent and data driven upsell and cross sell motions, product optimization recommendations, and the like.

How Data Analytics and the Internet of Things (IoT) is Impacting Equipment Manufacturers

Data analytics is just one, albeit a very important key ingredient to success. In my prior experience before joining TSIA, I spent over 10 years working for business intelligence and data analytic companies. The first BI company that I worked for just after the startup that I mentioned earlier in this post was Brio Software (later acquired by Oracle). Back then, we were touting the benefits of data warehouses, operational data stores, and OLAP (online analytic processing) that would drive vast improvements in your “understanding of the business." It gave companies a better “internal view” of a vast number of metrics. Today, companies are leveraging data analytics for an “external view” of the connected information products can provide that include things such as consumption, uptime and capacity utilization, root-cause analysis, supply chain inventory impact, etc. 

In a fascinating webinar from The MIT Sloan Management Review[v] titled, "Internet of Things in Motion: Analytics & Transportation," Gerhard Kress, the director of mobility data services at Siemens, shared how digitization is central to their corporate strategy. He defined digitization as connecting real-world assets to a digital network, creating a digital representation of real-world objects, supporting real-world processes through digital workflows, and providing appropriate feedback. The result is staggering and certainly wasn’t achieved without executive support across multiple areas. He went on to say, “Vast amounts of data are being analyzed to literally help trains run on time. With digitization capturing data on everything from the weight of connected rail cars to the quality of tracks to the terrain trains are traveling through, railway companies are now able to predict when breakdowns might occur and fix those trains proactively. The results are breathtaking: nearly 100% availability of operational trains.”

The Siemens executive team has been very aligned along this strategy continuum. In their most recent annual report[vi] they go on to say, “Along these value chains, we have identified several growth fields in which we see our greatest long-term potential. We are orienting our resource allocation toward these growth fields and have announced concrete measures in this direction. For example, we see an opportunity to leverage business analytics across verticals and introduce cloud-enabled software and IT services (e.g. predictive maintenance) resulting in additional business volume, market share and customer retention. We intend to fully exploit the potential of increasing digitalization not just in manufacturing. Utilizing software and simulations, the Digital Factory Division makes product development considerably faster and more efficient. Data-driven services, software and IT solutions are of decisive importance as they have a substantial influence on all of our future growth fields.”

Preparing for the Future

As you can see, the executive leadership team must be operating from the same playbook – and thankfully we have one these days that the brick and mortar retailers of yesteryear didn’t. As most astute business people recognize, producing the right product and offering requires corporate collaboration for outcome engineering effectiveness. We think of outcome engineering as the ability to consistently help customers achieve targeted business outcomes. It's fundamental to understand that services are vastly different than product, and while this can have some daunting notions, we can get the leadership team to begin these discussions. In TSIA’s recent book, Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business, by TSIA executives Thomas Lah and J.B. Wood, we introduce The Iron Triangle for Offer Definition. 

One area to focus on is the customer engagement model and consider the following questions:

• What does the future customer look like?
• How will they buy my product?
• How will they buy a competitive product?
• What services are necessary to ensure stickiness?
• How do I differentiate with services?
• What combination of hardware, software, and services will be necessary going forward?

Many firms of the future will be blindsided by the continued impact of the internet, and while we can’t predict the nuances of these changes, we can effectively prepare and take action based on unbiased research and understanding market trends that were not available two decades ago. There is a new road to consumer and business consumption, and I will leave you with this thought: our society is moving toward an ownership-free economy. What is your company's next move?

Learn More at an Upcoming Workshop Hosted by The MIT Startup Exchange

On Tuesday, June 28, 2016, I will be participating in a panel discussion related to this topic at the 2016 MIT Startup Showcase in San Diego, hosted by Qualcomm. The event is free, and all are welcome to join, as there will be a lot to learn about robotics, automation, and analytics. Our session, "The Future of Robots and Automation in Industry and in the Home," we'll be discussing how to best act on emerging industry trends and the new challenges and opportunities they bring, such as:

• What are some of the most exciting experiments, startups, or large-scale infrastructure projects?
• Where are opportunities for collaboration among industry, universities, governments, and startups, and what are the challenges that these potential collaborations face?
• How can both established and emerging companies overcome barriers to new technology adoption?
• What are the most promising paths to commercialization?

I hope to see you there!

End Notes

[i] [Video] The Computer Chronicles – Internet 1995

[ii]Internet Retailer, October 2, 2015 – Costco closes in on $5B in annual web sales by Mark Brohan, Research Director

[iii] TSIA: TS50 index 2016-Q1, IE 30 index 2016-Q1

[iv] TSIA “Smart Companies need Smart Services – Impact of IOT and Product-as-a-Service on Hardware Companies” TSW 5.2.16 Vele Galovski, Professor Harold Kopp

[v] The MIT Sloan Management Review

[vi] Siemens annual Report 2015, page 32