Reinventing the Product

How to Transform your Business and Create Value in the Digital Age

Eric Schaeffer, David Sovie

• Publisher: Kogan Page
• Year: 2019
• ISBN:
  9780749484651
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Verwaltung

Create the personalized and compelling experiences that today's customers expect by harnessing AI and digital technologies to create smart connected products, with this cutting-edge guide from senior leaders at Accenture. Digital technology is both friend and foe: highly disruptive, yet it cannot be ignored. As traditional products transform into smart connected products faster than ever before, companies that fail to make use of it now put themselves in the firing line for disintermediation or even eradication. However, digital technology is also the biggest opportunity for product-making businesses to create the next generation of goods in the marketplace. In Reinventing the Product, Eric Schaeffer and David Sovie, both Senior Managing Directors at Accenture, show how this reinvention is made possible, to deliver truly intelligent, and often even autonomous, products. Reinventing the Product makes the case for companies to rethink their product strategy, innovation and engineering processes, including:- How to harness the opportunities of AI and digital technologies, such as IoT sensors, blockchain, advanced analytics, cloud and edge computing
- Practical advice on transforming their entire culture to build the future of successful 'living products'
- Features case studies from global organizations such as Faurecia, Signify, Symmons and Haier and interviews with thought leaders from top companies including Amazon, ABB, Tesla, Samsung and GoogleThis book provides the only advice any product-making company needs as it embarks on, or accelerates, its digitization journey.

PART ONE

Enter the New: smart connected products for the digital age

01

The digital transformation of product making – happening faster than you think!

CHAPTER SUMMARY

This chapter describes the broad transformation process going on in all product- making companies as a result of digitization. It describes how businesses must think, act and eventually become digital along their whole value chain, from the product ideation process to users operating smart connected products in the field. The need is identified for businesses to include all their functions in efficient data loops so as to align them with increasingly connected and intelligent hardware products that work for users ‘as a service’. Six digital imperatives must be executed to create growth and value in a highly digitized world.

The digital disruption and transformation of the business sphere is one of the world’s megatrends, affecting business-to-business companies representing two-thirds of global gross domestic product. Product makers from sectors such as automotive, industrial equipment, A&D, medical devices, high tech and consumer goods are all undergoing waves of technological upheaval. Their digital reconfiguration, which we call ‘Industry X.0’, has profound ramifications for their cost structures, relationships with customers, work process designs, innovation drives, human workforce processes and, crucially, for the very essence of their products and services.

This broad-based digital revolution in business is not just about driving operational efficiencies in enterprises. This is what many businesses are doing already but is only the first step towards a digital end game much further down the line. Real digital transformation casts the net much wider. It entails completely new digital business set-ups and ways of working across all company functions, as well as the creation of holistic new operating models around reinvented intelligent products.

These moves are already palpable in many quarters of the product-making sector. Embedded in the wider trend towards the Internet of Things (IoT), industrial and other businesses have started to digitally orchestrate factory floors, workers, enterprise functions, and processes, with some initial success. The number of multipurpose industrial robots has dramatically increased in recent years. In the future these robots will become intelligent, which means able to adapt, communicate and interact. This will enable further productivity leaps for companies, having a profound effect on cost structures, the skills landscape and production sites.

The efficiency gains and net financial extra value created are huge. Overall, manufacturers leading in the usage of digital technologies have so far reported a 20 to 30 per cent increase in gross margins and a 15 to 20 per cent growth in operating income.1 According to some estimates, industrial businesses can expect a gross increase of their return on capital employed (ROCE) of 25 percentage points by 2035 following the transition to smart manufacturing processes.2

Perhaps the most visible driver of this radical transformation is the smartened-up and data-driven product. In the past, the vast majority of products sold were not connected and were fairly passive. These traditional products were usually sold through a third-party channel and the product maker had only a very limited ongoing relationship with the end user.

All this is about to change. Companies are going to need to create smart connected products, what we also call ‘living products’.

Four traits distinguish these future products. One, they are connected to the cloud and often directly to other devices. Two, they are prepped for smartness with on-board processing capability and various sensors. Three, they are able to learn using artificial intelligence, voice recognition and other cognitive technologies. And four, many will no longer be sold as a product at all, but rather via an outcome-based, ‘as-a-service’ business model.

Successful smart connected products will contain densely knit software and digital technology ‘tissues’ that connect the physical product to the user, the cloud and often a wider community. This software, coupled with increasing intelligence, will be routine in the product-making sector and spawn a distinctive new economic phase. Enterprises will depart from a long-held focus on manufacturing, for broad and anonymous markets, static and passive hardware objects that are at serious risk of becoming low-margin commodities. Instead, businesses will form personalized service relationships with customers, driven by the latter’s demand for connected, software-enabled, responsive and adaptive devices delivering ‘living’ outcomes in real time. This will be true in the ordinary consumer market but also within industry, where such outcomes will become vital to deliver new levels of efficiency and innovation.

The estimated value created by this seminal shift to smart connected products is impressive. According to calculations we made in cooperation with the World Economic Forum, companies and society will unlock US $100 trillion from digital transformation over the coming decades. The digitalization of consumer industries alone could unlock more than $10 trillion for industry and society in just the next 10 years.3

A striking individual example of this shift’s value creation potential is the startling success of Apple. When Steve Jobs returned to the company in 1997, it was worth less than $3 billion and on the brink of bankruptcy. It saved itself – and then some – by leading the shift to a new generation of connected and increasingly intelligent digital devices and services. In August 2018, it became the first company on the planet to achieve a $1 trillion market valuation – a value increase of more than 33,000 per cent.4

Digital eclipses hardware as a value source

Underpinning the requirement to fundamentally reinvent products are the dramatic shifts in the sources of value creation. These shifts began over the last few decades as software started to take an increasing share of product value, but we expect this value migration shift to accelerate in a digital world. Consider the following figures. The sources of value in a typical product currently are: software 40 per cent, electronics 30 per cent, mechanical parts 20 per cent, and digital components 10 per cent. Digital components include artificial intelligence capabilities like machine learning, voice assistant user interfaces, and natural language processing as well as analytics capabilities to capture and process large amounts of data.

In the future, we estimate the value breakdown will be: software 20 per cent, electronics 5 per cent, mechanical parts 5 per cent, and digital 70 per cent. This represents a dramatic shift in value which requires a fundamental reinvention of every product.5

Figure 1.1 Embedded software and digital technologies become the sources of value

An interesting sectoral example: in the automotive industry, roughly 90 per cent of a vehicle’s value was once locked up in hardware components – power trains, the suspension, the body, the interior – while roughly 10 per cent was in software and control modules. As we go forward, we will see that ratio shift dramatically to a balance where 50 per cent of the vehicle’s value will be covered by hardware and the other half will be divided between software and digital experiences.6

The advent of the smartphone changed things in a similar way in the phone market, where value is migrating to the apps and online services rather than the devices themselves.

SMART VOICES A product executive of an internet product and services giant

How would you describe the role of hardware in a smart and connected product strategy?

It is a role that is not identical in all cases. Microsoft, Amazon and Google see hardware – be it made by them or by third parties – more as delivery devices for services rather than as the centre of their profit generation as is the case with Apple. Services are their main source of value, in the form of the delivery of goods, selling software licences or selling ads as in the case of Facebook. The hardware has here a mere functional delivery role rather than a real value-creation role. In those business models it is often sold at a loss to spread it as widely as possible.

Industrial businesses are trying to turn their hardware products into mere containers for software-delivered services or outcome experiences. Are there examples in the industrial sector you would already call a success?

In the industrial sphere so far Tesla comes to my mind. It tries to create an attractive hardware–software combination that is designed to have consumer appeal through the delivery of a superb experience. Others in the car sector try to mimic that, some with external partners from Google or from Microsoft, but without, I feel, any convincing success yet in the market.

The shift for a traditional industrial manufacturer to set up a smart connected product strategy is more challenging than for a software business. Would you agree?

The journey towards a connected product is no doubt difficult to undertake for a traditional hardware manufacturer. You are in this situation where you have the choice. Either you are disrupted or you throw yourself into this new market. If you decide on the latter you will not get it on the cheap. You will not get it by saying, ‘Let’s create that little digital unit there’. This will not scale. It will fail; you will fire the team and eventually say, ‘It is not for me’. And then you will be disrupted.

Following this trend, all sorts of products will in the end be fundamentally re-architected. Hardware will remain important, but in many cases, the hardware will become a simple shell with functionalities while software and digital technologies become the connective tissue and ‘life’ elements for value creation.

A defining feature of this product digitization megatrend will be the blurring of the business-to-business (B2B) and business-to-consumer (B2C) sectors. Business-facing enterprises will suddenly have to think in consumer-facing ways as a form of ‘industrial consumerism’ sets in among business customers. The top criteria of quality for clients will be the final outcome experience and service pervasiveness that helps them drive efficiency in their own operations and growth throughout their businesses. This expectation alone – far more than pure technological hardware features as selling points – will confer success or failure in future digital product markets.

Another defining trend will be companies having to immerse themselves in ecosystems and alliances with partners who today might seem unlikely. Creating smart and connected products on their own will not work; the digital world is too fluid to be handled alone.

This is a radical pivot, a drastic departure from old-style, hardware-focused product making. Managed with care, skill and creativity, it will deliver enormous value. Business leaders will need to think laterally, factoring in a wide and often unconventional variety of possible allies and opportunities. Companies will also need to act with increased speed and agility as the pace of innovation accelerates.

Dual needs: digital transformation and product reinvention

Product-making enterprises must pursue digital transformation on two fronts simultaneously.

On the one hand, they must leverage new digital technologies to bolster internal efficiency throughout business functions. The main aim here is to gain as much flexibility as possible in reacting to the fast-moving markets unleashed by smart connected products. In these markets, identifiable customer groups calling for increasingly tailored products or services will become ever smaller and the data insights they give away more focused. Businesses working with that data must build an internal structure able to react quickly and fluidly to such granularity.

On the other hand, digitization must be applied externally through the invention of new connected products with smart software lifeblood. This will create new markets, enable new business models and drive market value creation...