Manufacturers in Business Ecosystems: When Iron Meets Software

Manufacturers in Business Ecosystems: When Iron Meets Software

We suggested in our last post that for manufacturers to thrive, they need to command privileged positions in at least some of the business ecosystems in which they participate.

A privileged position means:

  • Being core to or at the center of the ecosystem; or
  • Owning vital elements of the ecosystem (standards, technology, proprietary software, etc.)

We suggested some ways to achieve that, among them:

  • Ensuring that if there’s value in making your product ‘smart’, you play an important role in doing that — controlling or influencing the development of software, APIs, capabilities, standards, etc.
  • If your product has software in it, owning its design and development as much as possible, especially for controls.

But designing and developing software poses distinct challenges for incumbent manufacturers — even if they don’t try to do it themselves.

In particular, incumbents’ existing development processes for many industrial products (such as electro-mechanical devices ranging from valves to combine harvesters) are likely much slower than for software & electronics — and for good reason.  Such products (especially large ones) often comprise multiple integrated systems and components.  Changing one affects others, and can have unpredictable effects on the performance of the entire machine.  Moreover, a design change means changing manufactured parts and/or their fabrication — which, especially if it involves suppliers, can be slow, risky, and costly.  Accordingly, incumbent manufacturers have learned how to update their products carefully and with manageable pacing.

Software development cycles, on the other hand, are much shorter.  Software is easier to edit, test and replicate (even if the consequences are just as unpredictable, if not more so).  But precisely because it is easier to edit, software development processes have come to be dominated by modularity, agile methodology, and rapid development and deployment.

Harmonizing these differing development processes across a set of design projects for a specific product is not easy, even (or especially) if the software development is outsourced.  Except in cases of an entirely new product form, the physical product exists already, and the software project is about adding or upgrading sensors; adding communications in or out (from those sensors, for example); or automating (and/or optimizing) controls.  Hardware engineers do not generally write software, so the first challenge is setting and maintaining execution schedules between hardware and software engineering teams (coordination only between individual engineers is often insufficient).  A technical surprise or a shift in funding priorities can disrupt timelines, leading (in the worst case) to product delays or even incomplete (or buggy) solutions coming to market.  In addition, design changes to the physical product and the software can get out of sync, again requiring time and often-scarce resources to reconcile.  (Your software people may be spread thinner than you realize — especially if they must work with several product families.)

But there’s a deeper issue which may produce or exacerbate execution challenges:  it’s not uncommon for requirements to change (or to be too vague), leading to misalignment between hardware and software teams.  This especially plagues projects where the software component is outsourced or developed by a different unit of the company.   It may even be unclear who owns the user experience, or the entire solution’s architecture and requirements.

In addition to adding cost, time delays are a frequent outcome of these challenges; yet for a large industrial product, missing a competitive product upgrade cycle (or two!) can be fatal to market share and/or profit margin.

So, what can be done?

  1. Start upstream from execution, with a shared vision across hardware and software of the value proposition for what you’re doing. Are you adding software-enabled features because the competition has them, and you must keep up?  Ask yourself what the new capabilities will do for the customer, and whether/how that fits into your value proposition.  If you must catch up, you might as well leapfrog — but only so far as you are meeting a real customer need, and not just trying to “out spec” the competition. (Yet leapfrogging can be a dangerous temptation — you are likely to take on additional technical risk, as well as marketing / channel challenges.  And you had better be confident about profitability.)
  2. Ensure the product requirements are specific, measurable, and deliver the value proposition. Work together and be willing to listen to each other — often, the software team can suggest capabilities the hardware team didn’t realize were feasible.  Most important, when requirements change (as they often will over the course of a project), don’t assume everybody is aware.  Revisit the timeline and collaboratively make any needed adjustments.
  3. Consider developing a realistic, actionable product roadmap, incorporating some high-probability variants (e.g., funding cuts). This can align expectations and enable planning for contingencies. Perhaps most important, it enables you to be proactive — not re  And the roadmap needs to reflect — and reconcile — the differing challenges of hardware and software development (e.g., seasonal product testing).
  4. Establish program governance across all the participating organizations for the set of projects together delivering the product update. This doesn’t have to be extensive or bureaucratic, but it does need to include:
    • A joint repository of the project documents, including staffing, leadership, schedules, and requirements.
    • Who decides what, and how conflicts are managed (“decision rights” — especially over product architecture, standards, and shared systems). And not just in theory — the organization must honor the process and “walk the talk,” especially when it comes to balancing the interests of not only hardware and software, but of design, manufacturing, and sales & marketing.  (For example, who owns the specifications of the CAN bus on a vehicle?  Especially if it is the factory which must carry the cost of a better one?)
    • How communications between software and hardware teams will happen (e.g., when software teams change delivery dates for product features, how they will ensure the hardware teams know about it so they can plan).

Incorporating intelligence and connectivity into industrial products and components can be challenging, but it also opens new opportunities.  Failing to do so can mean eventual relegation to commodity status.  The manufacturing companies that will thrive in the future are likely to be “smart industrials.”

For more about operational governance, please see here.

Manufacturers in Business Ecosystems:  Who Drank My Milkshake?

Manufacturers in Business Ecosystems: Who Drank My Milkshake?

In the 2007 movie There Will Be Blood, a character explains how directional drilling can drain the oil reservoir under someone else’s land.  “I drink your milkshake!” he proclaims, to the dismay of the character whose oil profits have vanished.  With similar dismay, many manufacturers have seen their profits drained away by other companies.

Many of the great American manufacturing companies of the 20th century have fallen on hard times.  GM, US Steel, General Electric and more are now shadows of their former glory.  Those that have thrived in this century (such as Apple, Intel, Honeywell, John Deere, or Rockwell Automation) tend to either lead or play major roles in one or more of the business ecosystems in which they participate. 

Consider Apple, now one of the world’s most valuable companies as measured by market capitalization.  Apple makes the lion’s share of profits earned in the smartphone industry, and they are the most profitable large-scale OEM in the world.  Especially for a manufacturer, Apple is very profitable.

But is Apple really a manufacturer? They outsource nearly all their production and assembly — Apple does not actually build their phones, pods, computers, or much of anything else in their product suite. 

If they are not, how then do they manage to drain the profit pools of most of the manufacturers in the smartphone industry? Why can’t most of the companies who actually build all those chips, iPhones and iPads extract more value from Apple?

Only by holding the commanding heights (privileged positions) in a thriving ecosystem, including a manufacturing ecosystem, is Apple able to collect most of the profits in the smartphone business.   

The famed Apple product and services ecosystem consists of devices (mostly iPhones, iPads, Mac desktops & laptops, and wearables (Apple Watch, AirPods)) and their key components (especially chips); operating systems, standards, & APIs; software applications and services; and a software development community.  The attraction of the ecosystem is the interoperability and ease of use of its elements — “it just works.”

Apple’s manufacturing ecosystem is also extensive.  Apple designs its products, sets standards for and governs much of the supply chain several layers deep, and has other companies in the ecosystem manufacture components and assemble most products.  Key hardware and manufacturing members of the ecosystem include Foxconn, TSMC, ARM, Intel, AMD, Samsung, LG, NVIDIA, Broadcomm, and many more.

Apple governs this ecosystem by occupying the key roles:  As the OEM (and direct seller of many devices), Apple controls access to the customer.  As developer of the operating systems and core applications, Apple sets the standards, defines the APIs, and controls the platforms on which Apple products and services operate.  As designer of the products and the systems-on-chips (SOCs), Apple optimizes both hardware and software to achieve better performance for cost.  As system integrator, at both the device and ecosystem levels, Apple is able to ensure that participation in the Apple ecosystem is always on Apple’s terms.

Because Apple controls both the software and hardware, they are able to sell software embedded in proprietary hardware — and realize the profits on either the hardware or the software (depending on what is tax-advantageous).

Apple did not start off controlling their own smartphone ecosystem.  Indeed, they were late entrants to smartphones, with relatively low volumes — at first.  But Apple crafted its smartphone ecosystem, then over time merged the rest of its offerings into it.  This demonstrates one doesn’t have to be the market leader (at the time, that was Nokia— remember them?) to begin building a viable ecosystem.

Apple’s example has important implications for other manufacturers:  if you want to earn sustainable returns, you too need to figure out how to define and control key roles in viable ecosystems.  This is especially urgent in the age of the Internet of Things (IoT) — as more physical products are imbued with networking capabilities, “dumb” (no computational or networking capabilities) products are likely to be increasingly commoditized.

Manufacturers should consider:

  • Ensuring that if there’s value in making your product ‘smart’, you play an important role in doing that — controlling or influencing the development of software, APIs, capabilities, standards, etc.  (Note this doesn’t mean “make your product ‘smart’” if there’s not a customer segment willing to pay for such capabilities; internet-connected washers come to mind).  But industrial valves, for example, can usefully be enhanced to be both sensors and digital controls. 
  • If your product has software in it, owning its design and development as much as possible, especially for controls.    Any performance-enhancing integration of your product’s controls with others in the ecosystem strengthens your position.
  • Commanding the integration nodes to and around your products.  Proprietary physical interfaces and proprietary APIs can both deliver great leverage, even in an ecosystem not your own.  (They must deliver real value to your customers, though.)
  • Ensuring that it’s your hardware and/or software used at the points in the system that most drive performance.  In an engine, for example, the fuel controls, emissions aftertreatment, and turbocharging are important drivers of an engine’s performance — and there is an entire frontier of optimization opportunities. Finally, to the extent that an important platform is part of the ecosystem (operating software, an order fulfillment system, a particular piece of hardware), try to move up from connection and compliance with it to influence on it.   

These are fundamental issues strategically:  Where to Compete, and How to Win.  “Where” is not only which products, for which customers, in what markets and geographies; it’s also where in the value chain and where in the ecosystem.  “How” includes all the strategic actions described above, but especially regarding ways to be a more important player in the ecosystems in which you participate.  It’s not going to be enough to be “the low cost producer.”  Not for long, anyway.

Don’t Be a Sitting Duck!

Don’t Be a Sitting Duck!

  The industry in which you compete may not emerge from this pandemic the way it entered. Some industries may undergo structural change (e.g., healthcare: telemedicine and long term care, travel, tourism, etc.) while in others the required adaptations will be less dramatic (reworking supply chains will be common). Yet many companies, once the immediate crisis has passed, will revert to the organizational routines and decision-making processes deeply embedded in their culture. Their strategic response will likely be “more of the same, but try harder!” This predictability will increase risks for the complacent and present opportunities for the agile. 

So how do your competitors think they can count on you reacting? Are you vulnerable to them exploiting your predictability? 

Periods of disruption create opportunities when the participants or the “rules of the game” change, or when new or emerging technologies are accelerated into broader use. This pandemic may end up changing the nature of competition in many markets, as well as who participates; it has already accelerated the adoption of distance learning, telecommuting, and virtual business.

Let’s start with market structure: many industries will become more top-heavy as smaller players are driven out of business and acquired by larger firms. This happened after the 2008 financial crisis, and is likely to be even more widespread this time, creating opportunities for more agile incumbents.   

“A key advantage was that everything was cheaper in 2007 and 2008. ‘We were able to acquire smaller companies for very favorable multiples since there was less competition bidding for these businesses. Moreover, their limited access to capital stunted their growth allowing us to gain leverage very quickly once they were part of XL Marketing,’ said David A. Steinberg, CEO of Zeta Interactive” (formerly XL Marketing). [Citation]

If your strategy has relied on selling to smaller firms at better margins — you might find that you will have fewer customers.

Cross-border trade (and reliance on low-cost Chinese suppliers) will face challenges, as the trading environment shifts to become more protectionist — affecting not only medical supplies, pharmaceuticals, and semiconductors, but basic inputs across a range of industries. For companies relying on tightly integrated supply chains originating in China, the costs and time required to diversify those supply chains may open up opportunities for competitors less embedded in China. What was once a strength can become a weakness. Even in the absence of limitations on free trade, changing foreign exchange relationships may make it easier for previously tertiary competitors to become quite troublesome. Can they rely on you to just “ride it out”? 

I recently wrote about how the pandemic requires a rethinking of where businesses choose to complete and how they will win. That article was introspective, looking from the inside out – focusing on what a business should be thinking about amid a shifting and unknown post-COVID landscape – unprecedented in our lifetimes (see article here). Now, let’s look outside-in: how do competitors view your position and strategy? Are you too predictable as your industry adjusts to a post-pandemic world?

Success in the marketplace is determined by the alternatives available to your customers. Those alternatives are generally your competitors’ products and services (with associated pricing and availability). Thus, your strategy is only as good as it affords your organization a benefit (to you or to customers) that competitors cannot match.

So, if the structure or the basis of competition in your industry shifts as a result of the pandemic, what do your competitors think you will do? Can they rely on you resuming “business as usual”? Organizational inertia dictates that this is probably the default position. And if you had an advantage pre-pandemic, maybe maintaining your strategy and organizational routine is appropriate. But, structural changes may prompt competitors to try to break the binds of that inertia (and count on you not to do so). One example might be re-regulation. Certainly the pendulum is swinging back in that direction as more industries and businesses are thrown lifelines (with strings attached). What might this mean to your industry? Is there a way that you can leverage regulatory oversight to your advantage? What if a competitor does so? 

If you suspect that the pandemic may shift the terms of competition in your industry, how should you proceed? We recommend starting by documenting the following:

  • Identify changes that may occur in your industry as a result of the pandemic:  Will trade barriers or tariffs become a factor? How? For whom?  Will reliability of supply become a more important purchase criterion?  Will certain customer segments shrink or grow?  Will competition in the industry increase?  Could aggressive new competitors enter? 
  • Who could benefit from the change(s) — you? Competitors? New entrants? For example, many manufacturers have realized that they can produce PPE and ventilators – are some of them new competitors (or suppliers) for medical supply companies? What current competitors will most likely not survive or need to alter their product/service offerings?
  • What organizational habits of mind could prevent your firm from adjusting to these changed circumstances? What about your competitors? 
  • Finally, think about talent – with employment in turmoil and many workers furloughed, is this an opportunity to acquire skill-sets that will advantage you in the future? Better than having a competitor do so!

Assess where your relative strengths might enable you to pursue certain opportunities better than competitors. Then, formulate a hypothesis around each potential and commit to testing each (a few is probably sufficient). Write down “what would I have to believe” in order to move forward with each hypothesis.

This exercise may provide tremendous insight – in fact, the very process of thinking it through and committing it to paper will be valuable in itself. It is also very likely that you will discover opportunities that your competitors will not (or cannot) act upon – relegating them to status of the sitting duck.

Hitting RESTART After the Pandemic

Hitting RESTART After the Pandemic

While companies around the globe are thinking about how to restart normal operations, the initial focus will undoubtedly be tactical. Forward-looking leadership teams will realize that now is the time to re-think their company’s business strategy to maximize chances for success over the intermediate to longer term. 

It is likely that strategic plans established during the record global economic expansion will no longer apply in a post-pandemic environment. At the very least, financial projections outlined in those plans are no longer realistic. But the challenge is not limited to making better forecasts — the ground has shifted fundamentally for many businesses. Some customers and suppliers will recover slowly, others not at all. Industrial ecosystems have been disrupted across the globe. Business strategies will need to adjust — and quickly.

So where to start? Simply stated, strategy is about choices: what is the company all about and why do you exist? Where do you choose to offer your products and services, and to whom? Why? What are those products and services, and what business models do you employ? Think of these questions as links in a chain, and let’s consider each in turn. 

What are your goals and aspirations?

Is your fundamental mission still intact? Has your definition of success changed? Perhaps not, but there is a chance that you will need to re-scope these for the new environment. After assessing where you choose to compete and how you will win in target markets (see below), you might well determine that an adjustment is necessary. You may need to raise your sights, or narrow them. If you have not had clear company aspirations, mission or vision, now is the time to develop that clarity.

Where to compete?

“Where” is not only about geography, but also about customer segments and sales channels. This is an arena where many companies will want to make modifications. Are some types of customers that you currently serve across markets globally going to be different in the future? Will the market demand be different from historical trends? Will there be dramatic swings necessitating focus on certain markets and/or customers and not others? Will the jobs change that customers perform with your products and services? Will new market opportunities present themselves that were not apparent before? Is there an opportunity to build market share by countering competitors’ moves and filling voids in markets where they choose not to focus? Very likely, the answer to some of these questions is a resounding, “yes”.

By clearly articulating the specific markets and their respective customers and then prioritizing their relative attractiveness and the capability of the company to serve these markets, the result is a very targeted understanding of where the company should (and should not) compete. For example, your products or services may remain the same, but prioritized geographies may need to change, or your channels may need to evolve to accommodate more business-at-a-distance.

How to win?

Once you understand where to compete, the next step is to determine how to do so in each selected market. Will you need to rethink the appropriateness of the products and services that you provide for those markets as determined above? Will different products and/or services be required? Could business models need to change? Do value propositions need redefinition? Will the company’s production assets (supply chains, factories, etc.) need to be reconfigured? How might the organization structure or operating model need to evolve?

These strategy elements are interdependent — when one changes, others may become misaligned or inconsistent. By answering these questions for each defined market, you provide strategic clarity. Most likely, some of these elements have changed. This necessitates a thoughtful review of your business strategy.

At this crucial moment — how strong is your strategic plan? Returning to the metaphor above, a chain is only as strong as its weakest link. This pandemic is a unique and unprecedented disruption that has left no individual or company unaffected. Your future success will depend upon how you respond. Companies that realize this, take the time to fortify these links, and make appropriate modifications to their strategic plans will be the ones that win in tomorrow’s marketplace.  

Manufacturing Strategy in Today’s Volatile Trade Environment

Manufacturing Strategy in Today’s Volatile Trade Environment

Brexit, TPP, NAFTA’s evolution, China’s Belt & Road initiative (and others) are disrupting traditional WTO-based trading and offer opportunities. Both manufacturers and companies that rely on them (e.g. Apple) need to adjust to an emerging environment of volatile tariffs and non-tariff trade barriers. Along with the disruption of existing arrangements, there will be new market opportunities and supply networks to tap into, with room to build new relationships.

Manufacturing strategy is about more than cost!

Manufacturing Strategy is about what you build (versus buy), and where and how you build. In making these choices, companies must balance cost; quality; delivery speed and accuracy; and flexibility. By “flexibility” , we mean the ability to withstand exchange rate fluctuations, changes in shipping rates,operations disruptions, and changing tariffs/ non-tariff trade barriers.

Where you build can have huge implications for flexibilitychoices about your manufacturing footprint (such as scale, number, location, concentration of factories) affect your ability to withstand changes in the trading environment.  In particular, manufacturers with global markets may find it worthwhile to maintain production capability within multiple trading blocs, to offset the risk of higher costs or trade disruptions between blocs.  Greater complexity in a set of manufacturing plants, however, can increase costs as well as reduce delivery speed & accuracy.  A coherent manufacturing strategy balances these competing goals and empowers the business strategy.

In addition to focusing on independently minimizing costs at each factory, manufacturers need to start managing their manufacturing plants as a network, accepting higher costs at some in order to achieve lower production cost for the entire network, over a range of potential trade and demand scenarios.  This is key to achieving manufacturing flexibility in a world of volatile trading relations.

As we’ve discussed in prior posts ( ) , global trade relations are in flux.  Long-established trade flows are being disrupted, and more disruptions threaten (e.g., BREXIT).  A coherent manufacturing strategy will be critical to navigating these troubled waters.

Regional blocs, or proprietary trading blocs?

Regional blocs, or proprietary trading blocs?

Image source:

The EU is leading a broad expansion and modernization of its already extensive PTA network with recent agreements with Vietnam, Canada, Japan and maybe soon, Argentina, Brazil, Paraguay and Uruguay (Mercosur), among the most prominent. The EU appears to be trying to build a “proprietary trading bloc” to advantage members and disadvantage outsiders. In such a trading arrangement, the bloc is dominated by a leading member, and can be used in mercantilist contests against other major economies.

Similarly, Japan has played an influential role in the revival of TPP after the U.S. withdrawal. With just the suspension of a few provisions, the TPP, presently renamed the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), will be marked this month by every one of the original 12 countries excluding the U.S. It will deliver de facto 18 new PTAs between CPTPP members — but will be dominated by the Japanese economy.

In addition to these moves by the EU and Japan, China has launched the Belt and Road Initiative (BRI), an ambitious project to improve Chinese-led regional economic integration and connectivity on a transcontinental scale. It is above and beyond typical PTAs. It includes “hard” infrastructure along six overland corridors, and the 21st Century Maritime Silk Road; “soft” infrastructure, such as the financial system, to enhance efficiency and facilitate economic flows; and policy reforms and institution-building to promote trade and foreign direct investment among the BRI countries.

Racing to keep up, other regions are also actively engaged. African countries will be signing the Continental Free Trade Agreement (CFTA) next March, expanding on the regional economic communities to liberalise trade. And in Latin America, there is an extraordinary fervor around the potential Mercosur-EU agreement and the continued strengthening of the Pacific Alliance, encompassing Colombia, Chile, Mexico and Peru, who are now negotiating “associate membership” with Australia, Canada, New Zealand and Singapore.

On a global basis, the resulting overlapping layers of trading arrangements greatly increase the complexity of production planning (among other operations) for companies operating across multiple trading blocs. And while trade within each bloc may grow, trade across proprietary trading blocs may suffer — especially if it threatens the interests of the dominant member.

For companies whose supply chains and/or production networks span trading blocs, now may be a good time to revisit your strategy (especially production strategy) as the right level of flexibility may be the key to profitability (and competitive advantage).