Changes loom for OEMs

At the risk of simplifying things (and preaching to the choir), most OEM segments are being affected by digital and IoT technologies. The advent of connectivity for intelligent equipment and machines is enabling asset-monitoring/tracking to ensure uptime, performance, availability, software-version control and location-analysis for a wide range of applications.

And as networks creep into the physical world of sensors and machines, many OEMs are appreciating the significant value in extracting and leveraging machine data and the usage information from their equipment.and IoT technologies. The advent of connectivity for intelligent equipment and machines is enabling asset-monitoring/tracking to ensure uptime, performance, availability, software-version control and location-analysis for a wide range of applications.

As the Industrial OEM arena moves past the last several turbulent years, multiple forces (such as global economic expansion) are likely to contribute to positive growth in the short to moderate term. The overall health of the global economy and global gross domestic product (GDP) growth historically tie closely to the growth of machines and capital equipment.

Glen

Harbor Research's Glen Allmendinger

For OEM leadership teams, understanding key forces/trends and their potential affect on their specific product/machine/systems segment will be critical for sustaining growth and performance in the long run. Leadership in equipment manufacturers and machine builders will face tough decisions related to new technology and innovation investments as well as rapidly evolving business and operating models.

Technologies, markets, customer needs and competitors are all changing rapidly. We know this. Consider just a few of the many forces at work in the marketplace today:

  • As the economy has become more service-oriented and digital, the importance of speed and agility as well as building new skills has increased dramatically.
  • Capital is abundant. The scale of financial assets is now roughly 8-10 times global GDP, making skills and innovation concepts far more important than capital formation (and true constraints on an OEM’s ability to drive new growth).
  • Industries are consolidating into a “winner-takes-all” mode. Virtually any product or services segment likely had tens if not many tens of competitors thirty years ago. Today that number is typically 3-5 globally dominant leaders in each segment collectively earning as much as 75% or more of the profit pool.
  • Wall Street demands and rewards quarterly profits and short-term performance in the name of driving shareholder value. Shorter management horizons and increased pressures from investors drive modern  businesses, which place less emphasis on longer-term investments in growth.

We would describe all of the above trends as “classic.” What we mean is that the relationship of these trends to an OEM’s core product business is predictable. For OEMs to succeed in their core product businesses they need to carefully set priorities and investments to address prevailing marketplace trends. Innovation for the core business is, for the most part, sustaining, incremental and continuous. Performance measurement, repeatability, risk management, continuous improvement and financial discipline are minimum requirements to help drive a continuing cycle of improved costs and higher levels of customer support.

However, we believe new digital and smart-systems technologies will have an outsized impact on OEMs' strategy. They will turn long-held beliefs upside down. For example, there’s been a long-held belief that you can be big and low cost, or you can be focused and differentiated—but not both. Today’s smart systems and IoT technologies are enabling new modes of services delivery and creating new opportunities with data and analytics capabilities that significantly reduce or eliminate this classic strategic trade-off. This, we believe, is but one example of the extraordinary effects new systems technology will have on OEMs.

The business environment for OEMs has entered a new chapter with new challenges, new business models, and unfamiliar technologies affecting virtually all players and all segments across the OEM arena. Trying to coordinate and leverage the respective roles of new digital and smart-systems technologies and new business models creates contention.

Many of the OEMs we work with are coming to see the continuously evolving relationship between these two dimensions as fertile ground for innovation. They must be interwoven and mutually supportive.  In fact, from our own direct consulting experiences, we believe success in either technological innovation or the larger business model increasingly goes to the company that effectively utilizes the combined potential of both.

Harbor Research completed a study where we examined 55 OEMs across 10 different equipment segments to identify key growth themes that product manufacturers must consider. Across the diverse vertical industry segments we looked at, OEMs are becoming the “interpreters” and vertically skilled “translators” of digital and Internet of Things technologies in customer operations. As a result, companies are being forced to redesign sales organizations, develop new skills and enable customers in ways we have not seen before.

Glen Allmendinger is president of Harbor Research.

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