The current frontier in industrial manufacturing: bringing software systems to market
European industrial manufacturers have opened a new battleground. While they traditionally competed by selling machines along with machine operation software, they increasingly try to bring software systems to market that provide information and process automation to help customers optimize their value chain. Consider the following three examples:
- EcoStruxure Machine Expert?by Schneider Electric (France) is a software system for developing, configuring, and commissioning machines, including logic, motion control, robotics/mechatronics, simulation, diagnostics, intelligent motor and load management, among other functions.1
- Fleetboard?by Daimler Trucks (Germany) collects and analyzes data from trucks, such as location, driving style, and maintenance requirement. Customers such as logistics companies can use the software to monitor their truck fleet, save on fuel consumption, and ensure the fleet’s uptime.2
- ON!Track?by Hilti (Liechtenstein) is an asset management system. Customers such as construction companies can use the software to keep track of their tools.3
Over the last nine years, we have discussed manufacturers’ move toward such software systems with hundreds of managers. Interestingly, most of them are far from satisfied with their sales performance. This observation intrigued us, as managers of industrial manufacturers are typically very proud of and satisfied with the performance of their?hardware?offerings.
For this reason, we have scientifically examined potential challenges and success factors of industrial manufacturers’ software businesses through focus groups, interviews, and surveys with about 150 experienced managers from global B2B companies. Our analyses revealed that to improve the success of their business with software systems, manufacturers need to answer three key questions:
- Why?bring software systems to market?
- What?kinds of software systems should you?bring to market?
- How?should you bring software systems to market?
Why?bring software systems to market
Many managers complained that their employer’s business rationale for moving toward software systems is not clear, but targets are high. Their companies just seem to follow today’s?zeitgeist?of “digital transformation” and hype up their own revenue and profit expectations. This is dangerous, as exaggerated objectives can lead to dissatisfaction as well as errors in the implementation phase.
To approach the right business rationale, it is useful to first ask: “What happens if we do not expand our product range to include software systems?” Many established manufacturers are nowadays attacked by competitors from emerging markets. These often copy some parts of existing products but have lower costs, thus increasing price and competitive pressure.4
Established companies can counteract this by offering software systems to optimize the customer’s value chain. After all, the know-how required for the successful implementation of such offerings requires extensive process expertise and a trustful relationship with customers. It is difficult for new competitors to copy both. Consequently, markets for software systems exhibit entry barriers that – for the time being – can keep out exactly those competitors that are stirring up hardware markets.
In addition, software systems allow established manufacturers to expand their knowledge of customers and intensify customer relationships. To illustrate, imagine an industrial manufacturer that has implemented a complex manufacturing execution system (MES) for a customer, which steers all production-related processes. By tracking the customer’s capacity utilization, the manufacturer will know well in advance when the customer needs to purchase a new machine. In addition, the manufacturer’s machines may be easier to integrate in the MES than machines bought from their competitors. Both the manufacturer’s advance in knowledge and technical advantage may eventually increase hardware sales.
Against this backdrop, successful manufacturers use software systems to defend and sustain their bread-and-butter?hardware?business against growing global competition in increasingly commoditized markets. They have realized that the true value of their business with software systems does not lie in making a fast buck. Only as a second priority, they look at additional profits through software systems. Notably, these can develop very positively, because after high fixed costs at the beginning, software systems are associated with relatively low variable costs.
Gaining clarity on the strategic rationale for building up software businesses is crucial because it determines how to make implementation decisions. For example, how should success be measured? What budgets should be allocated to software businesses??How many human resources with which capabilities should be allocated? How should software systems be priced? To find answers to questions like?these, manufacturers need to clarify their rationale and priorities for bringing software systems to market – and make this clear to their staff.
What?kinds of software systems should you?bring to market
Many managers are not at all convinced by the software systems they intend to market. One of the key reasons is that manufacturers too often neglect customer needs in their software development. As one manager in our study put it: “What is the acceptance rate of the customer? Less than 1%. Why? Because it has been built by engineers that have never, ever spoken to any customer.”
Successful manufacturers have realized that their software is a means to an end, helping customers solve an important problem. Thus, they start by deeply understanding which problems their target customers have, for example by intensely working with pilot customers. Only then can they develop software systems that customers can use to solve these problems.5??Take the construction industry as an example. Some construction companies easily lose track of their tools or miss to maintain them properly, which leads to costly replacements. As described previously, industrial manufacturer Hilti helps solve this problem with its cloud-based ON!Track software system, which allows customers to catalog where tools are and when maintenance is required.
To make sure software systems and markets are aligned in this way, manufacturers need to employ the right?people?and the right?methods?in their business with software systems. First, some manufacturers have hired their core team from their own customers, hereby making sure that customers’ view is at the center of all actions.6?Second, successful manufacturers in our study have stressed the importance of customer-centric methods, such as co-creation, design thinking, or other agile methods of innovation to develop software systems.
Developing a software system that effectively solves customers’ challenges is a necessary condition for success.
Developing a software system that effectively solves customers’ challenges is a necessary condition for success. However, it may not suffice. Even target customers who share a particular problem can have a variety of more specific needs. For example, some customer segments may put particular emphasis on ease of use, design of the user interface, or particular license agreements. Thus, establishing a new customer segmentation might be a smart step, as hardware-related segments may not sufficiently differentiate between software-related needs.7?If manufacturers aim for extensive market coverage, they should even consider differentiating their software systems by customer segment.
How?should you bring software systems to market
Even when the business rationale is clear and their offerings are aligned with customers’ needs, the actual selling of software systems is no sure-fire success. Many industrial manufacturers have tried to sell software systems through their existing hardware sales representatives. However, many hardware sales representatives do not seem to be capable and motivated enough.
First, as to capability, sales representatives require in-depth IT understanding to consult customers on software systems. What functionalities does the software system have? To what extent can it be customized? How is data protected? How can it be integrated into existing IT architectures, such as ERP systems? Enabling hardware sales staff to answer such questions on eye-level with a customer’s IT or legal department may be a stretch. As one manager we spoke to posited: “You can’t teach a hardware guy to sell software. Forget it.”
Adopting a “software mindset” requires employees to change, which has been shown to be a key obstacle to digital transformation.
Second, even if hardware sales representatives were able to consult customers on software systems, many do not seem to be sufficiently motivated. Selling software systems requires substantial consulting to large buying centers, resulting in relatively long sales cycles. Selling hardware is easier and quicker – and often generates higher revenue. Seeing that sales representatives are typically incentivized on short-term sales revenue, they focus on the low-hanging fruit of speaking to customers about hardware.8?Another, more subtle issue is the culture among industrial manufacturers. Managers frequently describe their employees as exhibiting a “machine mindset”, learned through years or decades of selling high-quality equipment. Adopting a “software mindset” requires employees to change, which has been shown to be a key obstacle to digital transformation.9
Against this backdrop, managers increasingly build up separate sales forces that exclusively focus on selling software systems. Some manufacturers operate these sales forces as separate sales channels that sell in parallel to hardware salespeople. This gives software sales representatives flexibility, but evokes conflicts if they visit customers who are “owned” by hardware sales representatives.
For this reason, more successful manufacturers in our study team up hardware and software sales representatives. Specifically, once hardware sales representatives see an opportunity for selling software systems, they take their software colleagues along while formally staying in the driver’s seat. Such a team approach can reduce conflicts between channels and is also preferred by many customers, as they retain a single point of contact with the manufacturer. However, the approach requires that hardware sales representatives are capable and motivated to generate software opportunities. Achieving this can be difficult, no question. But we have seen manufacturers succeed through dedicated training, targeted change management, and the alignment of incentives.
4. Ploetner, Olaf (2012),?Counter Strategies in Global Markets. London: Palgrave Macmillan.
5. For further information on this approach, see Christensen, Clayton M., Taddy Hall, Karen Dillon, and David S. Duncanc (2016), “Know your customers’ jobs to be done,”?Harvard Business Review, 94 (9), 54-62.
6. For an overview of research on customer centricity, see Habel, Johannes, Roland Kassemeier, Sascha Alavi, Philipp Haaf, Christian Schmitz, and Jan Wieseke (2019), “When do customers perceive customer centricity? The role of a firm’s and salespeople’s customer orientation,”?Journal of Personal Selling & Sales Management, forthcoming.
7. In our study, some managers also emphasized that manufacturers should take different regions into account when segmenting their customers. For example, Asian customers preferred lean products at low prices including perpetual licenses, whereas US customers put a stronger focus on a modern appeal and floating licenses.
8. For an overview of incentive systems required for selling solutions see Habel, Johannes and Olaf Ploetner (2017): “From products to solution – mastering sales force incentives,”?The European Business Review, September-October, 33-35.
9. Freimark, Alexander Jake, Johannes Habel, Simon Huelsboemer, Bianca Schmitz, and Matthias Teichmann (2018),?Hidden Champions- Champions der digitalen Transformation??München: IDG.
This article was originally published by The European Business Review.?