It’s a paradox of production. Information technology automates manufacturing processes that commoditize some products, while helping manufacturers secure entirely new market opportunities elsewhere. Efficiency plus technology equals extra capacities which create opportunities for new business models. As the role of information technology shifts from driving efficiencies to driving entirely new revenue streams, however, it demands a new role for CIOs in manufacturing companies and requires CEOs to set business strategies that are led and fully charged by technology.
In an economy which saw GDP contract by almost 3% in the first quarter, securing sustainable growth is critical to manufacturers. Many now recognize that the industrial internet offers the greatest chance of success. Take Michelin, the French tire manufacturer. It is not just using technology to strengthen traditional operations or improve shop floor productivity; it has disrupted the tire market by offering entirely new services via the recently-established Michelin Solutions.
The new business uses networked smart devices, the Accenture Cloud Platform for hosting and monitoring and analytics technologies, to develop insights from data created by its fleet clients’ vehicles. Putting this data at the heart of its business enables Michelin to offer new services that improve the safety and fuel efficiency of those fleets. Michelin’s services extend to training drivers to further improve fuel efficiency. Offering customer value well beyond the production of tires, Michelin Solutions has allowed the tire maker to move from manufacturer to service provider. Its move has not only mitigated any future commoditization of its tire business, it has produced a service that is difficult for others to replicate and deepened its client relationships. It has created an entirely new market.
Such innovative business models are also seen elsewhere. A drilling manufacturer sells the ability to create ‘holes,’ not drills, while mining equipment manufacturers have switched from selling excavation equipment to monetizing the volume of materials extracted. Taleris, a joint venture between Accenture and GE, finds new value in engine aircraft data transmitted by sensors to reduce delays and maintenance costs and improve aircraft availability.
What these developments show is that disruptive technology, far from being an overwhelming threat to incumbent manufacturers, can become their route to continued leadership. The last decade seemingly saw digital start-ups do all the running: music retail, satellite navigation systems, taxi services and financial payments. But increasingly, large traditional industry leaders are embracing these technologies and coupling them with their existing market presence, customer relationships and sheer scale.
The question for CEOs, irrespective of their sector, is how to take advantage of new technologies to drive new business models, not just to improve efficiencies. Recent Accenture research found that, although the vast majority of U.S. CEOs recognize the importance of digital, an alarming 26% said their company is focusing its digital investments primarily on new growth opportunities versus the 68% who said such investments were focused primarily on driving efficiencies and cost reductions. If manufacturers are to follow the examples of GE or Michelin, they will have to reverse this ratio or risk going the way of any number of venerable companies that were disrupted to their own demise.
Elevating the Role of Technology
To succeed, CEOs will have to elevate the role of technology in decision making. Technology is no longer just an enabler. It is the driver of the very market changes that are challenging businesses. Gone are the days when business goals were set by a group of C-suite leaders and passed to the various functions to execute, with the CIO left to enable their execution. Today, technology must sit at the highest table of strategic decision-making, factored into what markets to take and what strategies to execute. Then, manufacturers can consider how technology can create new value from data. That could result in a new business offering, like Michelin Solutions, or in the creation of a platform that allows third parties to build applications. It might lead to strategic alliances or an entry into forms of customer service that, until now, have been alien to the company. The point is that the opportunity of technology is now driving critical strategic decisions.
Efficiency plus technology equals new capacities that create opportunities for new business models.
The elevation of technology in the creation of new business models does not supersede the role of technology in achieving efficiencies and enhancing operational agility, of course. Entering new markets needs to take place at speed. The new Accenture Manufacturing Flexibility Index, based on analysis of 250 global executives’ survey responses, found that the combination of digital, talent and the ways in which companies manage their physical assets plays a dominant role in enabling them to respond swiftly to changing market requirements. Manufacturers must be able to sense the need for change, innovate and rapidly respond by scaling production up or down, modifying supply routes, finding new sources of materials, or streamlining the research & development process to accelerate time to market.
The significance of digital technology cannot be overstated, but it is often misunderstood. It is as relevant to large players as to disruptive start-ups; it is of consequence to supply chains and operations just as it is to the highly visible consumer channels. And it goes beyond productivity to the heart of what companies do, their competitive essence, who they serve, the markets they target, and how they retain and nurture talent. That brings me back to my earlier premise: Efficiency plus technology equals new capacities that create opportunities for new business models. A company’s commitment to digital technology is no longer expedient. It’s existential. Like the air we breathe, digital technology is a necessity that requires CIOs and CEOs to align more closely if manufacturers are to remain competitive.