It doesn’t stop at manufacturing
The networking of production facilities is progressing at a slow but steady pace. But what’s next? What happens when production has been optimized down to the last detail? Up to what point is the customer willing to pay for it? The progress in production optimization has a point of diminishing returns for the end customers. Above a certain level, it does not create any added value for them if the focus is exclusively on optimizing production, for this part of the value chain has only few—if at all—points of contact with the end customer.
The question that CDOs, Product and Marketing managers have to ask themselves is: which advances in digitalization offer benefits to the customers? Ultimately, the goal is to achieve strong customer loyalty and to create added value in an ecosystem in order to harness the potential of digitalization. The question here is which one of these potentials offer actual added value to the end customer. The optimization of manufacturing already uses a large part of the digitalization budget with a comparatively small effect. Especially when the productive capacities—thanks to their successful optimization—are not exhausted, it is worth taking a look at a new dimension of digitalization: the digitalization of the product life cycle. New potentials arise that create sustainable added value. And that should be said: these do not end in the storage facilities.
Value creation throughout the entire product life cycle
The conventional chain of value generation ends with the hardware sale. The client takes over the product at the interface, and with it the responsibility for its adequate use. The contact with the manufacturer will usually be reestablished in cases of warranty and maintenance, but the manufacturer is no longer involved in the product’s life cycle . This is the moment to think ahead: after the manufacturing, the product’s life cycle does not end—and neither does the manufacturer’s potential to generate value.
Then how should the value-generation continue after the product has exited the storage facility? After hardware, there is software. By extension of the generation of value, hardware providers evolve into hard and software providers. This way they offer their clients intelligent solutions along the entire product’s life cycle. This results in potential benefits for both the manufacturer and the customer:
A higher customer orientation results from better management of the interface between customer and manufacturer. At the same time, new business cases arise for the manufacturer.
- The product remains up-to-date and attractive: Updates are carried out directly on the customer’s software.
- Communication is made easier: Errors are reported directly.
- The industry becomes service-oriented: Software complements one-dimensional products; Product service systems create and generate continuous income.
- Customer loyalty grows stronger: The relationship doesn’t end with the product handover—it starts there.
- Value creation becomes more consistent: Manufacturers are compelled to develop more durable hardware and software.
- Innovations are driven forward: A connection to customers via software enables continuous communication. The open interface to the customer with constant improvement potential favors customer-side innovation and an earlier time-to-market.
Why is the threshold behind production so high?
The orientation towards the product’s life cycle, which only reaches its peak after production, sounds promising. New potentials open up, which bring upsides to both customer and manufacturer, and this is exactly the goal on the way to establishing an ecosystem. So why is servitization and a reversal in value creation along the product life cycle still sound far-fetched to many companies? There is no longer a lack of technological possibilities.
Nevertheless, the development of new life-cycle-oriented business models in industry is still in its early stages—only 15% of machine and system builders are already dealing with the topic.¹ Particularly in the mechanical engineering sector, the focus is often on optimizing the manufacturing of the end product rather than on its usage. Industrial companies are still asking themselves whether customers are willing to pay for the servitization of their products. CDOs, Marketing and Product Development are faced with the challenge that the digitalization of the product’s lifecycle requires more investment and the profit’s increase is slow at first but increases persistently later. On the other hand, the optimization of the manufacturing by the production management shows rapid effects, which, however, also flatten quickly. The problem is that both departments have often the same budget, and short-term-minded coordination between both product development and production optimization ultimately results in the value-generating interface to the customer being closed by the time the hardware is handed over: where there would be room for connectivity between automatic feedback and the client via software, communication breaks.
But: value creation can already be thought through today. For this purpose, it is not necessary that the production is optimized down to the last detail. The possibilities for data generation and networking manufacturer -> product -> customer are necessary. Servitization is only successful if manufacturers have access to the product data. This is the basis for support activities, reports and updates. So far, however, only around 27% of companies have been able to continuously collect data, and 9% use IoT applications and generate data in real time.² However, there is no lack of technical requirements. IoT solutions such as digital twins enable data generation and use. In this way, machine builders become platform operators and hardware producers become software providers.
BASF, Bosch and Co show what value-creation means today
It is well known that Amazon is a master at expanding its value creation model and aligning it with the needs of its customers. Amazon knows how to build customer loyalty and not break it off after the sale of a product. Shipping services, cloud storage, dash buttons, and smart home solutions accompany customers in their everyday lives. But what about the industry? What potential does the B2B industry offer for life cycle-oriented value creation?
Crop Protection 4.0 – With HEALTHY FIELDS, BASF creates digital crop protection. With the BASF Agricultural Solutions division, the chemical company is focusing on the agricultural sector in order to make it sustainable. Among other things, they develop and produce plant seeds, crop protection and pest control products—and digital solutions. With xarvio HEALTHY FIELDS, BASF provides a digital service that supports farmers in the sustainable management of their fields. The software-based manager analyzes local data and uses it to make application recommendations.
What does this mean for life cycle-oriented value creation? At BASF, the connection to the customer does not end with the dispatch of the crop protection products. They accompany the customer in using the product throughout its life cycle. The result is optimal use by the customer and a new business model for BASF.
Bosch’s self-declared goal is 100% servitization.³ In the future, every product is to become a product service system. Dr. Asenkerschbaumer, deputy chairman of the board of management at Bosch, sums it up at the 2016 annual press conference: “This makes things more than things, they acquire multiple benefits.” Thanks to the Bosch IoT Cloud, Bosch is changing from a hardware provider to a hardware and cloud provider.
For instance, with the purchase of its machines Bosch offers its customer the possibility of tracking the energy consumption of each machine. The machine is connected to an energy platform and the customer receives the measured data in clear form—a process that allows Bosch’s customers to spare energy up to 25%.⁴ This results in not only a cost advantage but also a more sustainable production.
What does life-cycle-oriented generation of value mean? The group’s goal is not only to generate further income through services—there is much more to product service systems. Every hardware purchase should potentially lead to a software sale.³ Once again we can state at this point: thanks to integrated services, the customer can make optimal use of the product purchased and a new business model is emerging for Bosch.
GE Healthcare doesn’t sell just medical technology: they see themselves a partners.⁵ Technically they are a producer of medical technology and medicines, but on top of that they offer services that allow them to assure an optimal usage of their products. First of all, clinics and hospitals can observe and monitor the usage data, thereby allowing the customer to track technical data not only for maintenance purposes, but also make decisions about their personnel and location structure. Using apps, GE Healthcare’s customers can optimize the use of their medical devices, like for example the proper maintenance for transducers. With the MyGEHealthcare App, it is possible to integrate, monitor and organize service activities.
What does this mean for the life-cycle-oriented added value? Instead of producing medical technology and leaving further value creation to other companies, this avoids a break in the value chain, and it does so with additional benefits for both client and manufacturer: here, again, new revenue sources for the manufacturers and new potential benefits can be observed.
The previous examples show us that there’s indeed potential in the industry for B2B models. Customers—regardless of whether they are business or consumer—are eager to increase their profits and reduce their costs. Providers of each product or service must ask themselves this question: What can I do to offer my customers an added value? Digitalization opens new possibilities in the creation of added value, and with that come new needs—needs that are to be fulfilled whenever the goal is long-term customer loyalty.
What is next, then? First, companies must decide how they want to distribute their investments in the digitalization of the life cycle on one hand, and in the manufacturing’s automatization on the other. Ultimately, they ought to have a clear picture of which parts of the value creation model they want to adapt and develop. What does the life cycle of the product portfolio look like? In which phases can the customer be supported in using or recycling? What follows is the development of a business model.
Equipment-as-a-Service models are a possibility to think about value creation beyond the handing over of hardware from the manufacturers to the customers. Or is there potential for apps that simplify and optimize the use of products? Could a digital twin accompany the product along its entire life cycle? Which interfaces break customer loyalty, and how can one prevent it from happening? It is time for CDOs and those responsible for marketing and products, to take a step forward in the value chain and create added value synergistically for everyone involved.