If 2015 was the year that IoT & Analytics became mainstream business terminology, then perhaps in 2016 leaders will focus more on how to use these capabilities to gain competitive advantage and growth. Although some serious use cases are now emerging from industrial companies, most CEO’s and directors I meet are still asking the question, ‘How do we develop the opportunity’?
Perhaps one reason that most companies are struggling with this question is that despite what business leaders say about being ‘customer focused’, the sad fact is that often they only concentrate on ‘customer needs’. This is generally what the customer tells them about their requirements at the interface between the product and the customer; in other words quite superficial. Customer insight goes much deeper and explores how customers and potentially their customer make money. By applying Service Thinking, companies can understand where the profit pools and opportunities lie within the ecosystem of stakeholders that make up the Industry Supply Chain. With this insight, they can develop product, services and technologies that can drive growth. So as you ponder how to move forward in what are unsettling times, you might consider these six strategies to maximise the value of your businesses knowhow:
1. Understand the Value Iceberg
If you look at the total cost of offering an industrial solution, you will find that the product element only directly makes up between 5% and 30%. It is a bit like an iceberg. Above the waterline it is possible to clearly identify the costs that are directly associated with the product itself. Below the waterline there will be hidden costs associated with the solution. Some can be allocated to the production process such as maintenance, people raw material, energy, assembly, down time, warranty etc . Moving deeper into the iceberg there are costs that can be allocated as ‘production overhead’ such as purchasing, logistics, engineering, quality, implementation support, legal compliance and management overhead. Here are also found costs that are associated with the lifecycle of the solution such as field & technical service, parts, account management and financing. Then in the depths there are far more intangible costs of risk & uncertainty that significantly influence the decision making process of managers.
This Value Iceberg concept applies to nearly all product and technology based businesses, but its composition is very specific to the industry and customer context. Understanding it can help answer the question;
‘Where do my customers capture value and how can we use our know-how to help them grow revenue and profit?’
The most profitable companies in the world know what is below the waterline and target these areas of value for their products and services.
2. Where and what influence does a business have on the industry value chain
Understanding where value is created in the industry supply chain can help companies capture profitable growth. This can be illustrated through two examples:
- Selling further up the value chain: There are many companies who appear to be a supplier of a commodity product, but realise that if they sell further up the industry value chain to the OEM or even the end customer, that they can design themselves into the product such that even though they are on the end of the supply chain, they are specified as the supplier and avoid price erosion. Frequently component suppliers will offer Application Engineering Services that engage with the OEM design engineers in order to be specified on the production drawing.
- Consolidating elements of the supply chain into a service: Frequently one sees suppliers of commodity products changing their position in the industry chain by offering services that consolidate and replace some key elements. A good example would be providing logistics services. Some companies will provide their products on a just-in-time basis to line-side, taking cost off the balance sheet and simplifying their customers internal logistics processes. Others will not only support their own products, but supply spare parts or even maintenance services for their competitors. Both services affect the profit pools within the industry chain.
3. Access value through the product
Having understood the ‘Value Iceberg’ and the industry chain, companies can design their product to target specific elements of hidden value under the waterline. For example niche fastener manufacturers who can generate an EBITDA over 30% by focusing on saving assembly costs with their ‘simple’ fastening solutions. Or the tyre manufacturer who understands that 50% of the haulage industry costs is fuel, and that they can design products that can significantly impact their customers profitability.
4. Access value through services and solutions
There is a growing awareness that adding services to products can help access even more of the value that lies below the water line. This has led to companies offering asset management type solutions that include remote, preventive and predictive maintenance as well as guaranteeing equipment availability in order to maximise raw material throughput.
But this is just the tip of the iceberg so to speak. Some industry leaders see so much hidden value under the waterline, they are creating new service based business models to tap into this growth opportunity. For example in the fleet transportation market, Michelin no longer just focus on the tyre technology. They have developed a service business where tyres are charged by the kilometre, which given the importance of fuel economy and the tight margins have had a significant impact on reducing costs and making them more predictable. These new ‘Servitization’ or outcome based business models require a much deeper understanding of the available profit pools that can be accessed by companies, if they are to be successful.
Many of these services rely on data and analytics. By understanding where a company can make a real difference to their customer’s profitability, prioritisation of new technologies such as the IoT, big data analytics and mobility, becomes far more targeted than it is today.
4. Find the Product Design Cost v Future Service Value Trade-off
As outcome based services become more popular, it forces alignment between the customers and suppliers objectives. If a tyre is sold by the kilometre, then the design and service must deliver the lowest overall cost of performance over the life of the product.
Even in more traditional business models, there is a realisation that the installed base represents a significant revenue opportunity versus new build. There are many businesses who for every new machine sold, might have anywhere between 10 and 100 pieces of equipment already in the field. The installed base represents a large revenue opportunity!
In both these cases the trade-off in the product design between product cost and service value could have significant financial consequences. For example with the manufacture selling tyres by the kilometre, a saving in the tyre cost which creates higher service costs will impact the profitability. Designing services into the product such as remote connectivity, could enable a growth in service revenues that is far larger than the increase in the product cost.
This more holistic approach to value over the products life is a change in mind-set for most product-orientated companies. This has significant implication on culture, KPI’s and organisational design if a company is to maximise it profit over the assets life.
6. Managing Risk & Uncertainty
As companies take on more responsibility in their customers’ business processes, so their perspective on business risk must adjust. While they have the opportunity to earn more margin, they also have to become better at managing risk and safeguard the value they have won. Indeed many companies will often unnecessarily shy away from profitable opportunities because of this lack of understanding.
It is a complex trade-off, but it is important to first be clear about the difference between uncertainty and risk. Uncertainty is when there is variability in the outcome of an event caused by the environment, human error or lack of knowledge. Uncertainty is a fact of life and so we must develop solutions/processes to dynamically manage these unknowns. For large contracts this is a highly complex challenge, but there are three good pointers that can help all businesses:
- Identify areas of uncertainty
- Develop processes that actively manage uncertainty in the product service delivery
- Ensure transparency of data through the life cycle requirements to aid fast decision making
Risk is a special uncertainty where negative consequences affect the overall performance. This means ensuring your business can cover a worst case scenario, however unpleasant. Managing uncertainty well, decreases but does not eliminate risk.
These six strategies can help all businesses create and safeguard value. If incorporated into a companies thinking, they can help companies manage the value they already deliver more effectively. More importantly it can help them to clearly identify the opportunities where they can grow their business through products service solutions.
This article was first published in Field Service News in January 2016
Nick Frank is Managing Partner at Si2 Partners, a consultancy helping clients leverage services to win in industrial markets
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