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ML Journal

ML Journal

M2030: Making Business Model Innovation a Priority

Overlooking the potential of new business models for the future could create opportunities for your competitors in the years ahead to 2030.  

It’s time for manufacturers to step up their game in the race to be ready for 2030.

That may sound harsh, given all that the manufacturing industry has done in recent years to prepare for the future. Digitization is everywhere as companies embrace the power of technology to meet the ever-evolving demands of the market. The idea that this isn’t the manufacturing industry of earlier generations has never been more true. Manufacturers have learned to connect everything and collaborate with everyone, to reduce complexity, empower the workforce, prioritize innovation and agility at scale, and build a broad, rapidly responsive, inclusive, and unified ecosystem.

And yet, it’s not enough.

The EY CEO Imperative Survey finds 70% of manufacturing sector respondents see technology and digital innovation as a transformation driver for their companies, while only 30% said the same of new business models. Contrast this with the technology sector, which is leading the way with almost twice the focus on business model innovation — and receiving significant investor credit for it. Overlooking the potential for new business models can create opportunities for competitors from adjacent sectors.

Manufacturers are in a powerful position to become leaders in their value chains1. Connected products are generating data rich with potential insights that can drive new services and new business models. Every day, competitors from inside and outside the manufacturing sector are forming ecosystems to manage, and profit from, new ways to deliver customer value. To take their seat at the table, manufacturers must be ready to reinvent their business models, or watch from the sidelines as others take control of their value chains.

Four Ways to Innovate

Manufacturers can thrive in a challenging growth environment by following some key principles to build, launch, and grow innovative business models. If companies want to shift from surviving to thriving, they need to turn their business model innovation intention into action, today. They can do so by building a foundation of innovation on four principles:

1. Strengthen relationships throughout the value chain
Business model innovation begins with bringing a growth mindset to identifying, understanding, and pursuing customers. While most manufacturers are naturally accustomed to considering both direct customers and consumers as key constituencies, leaders should assess all the links in their value chains to establish a comprehensive understanding of who in the chain is creating the most value and how. Doing so helps leaders align strategic decisions and resources to the needs of constituencies that will ultimately drive revenue growth. This also helps leaders broaden their thinking beyond the immediate next link in the value chain to include a wider range of value creation opportunities.

Manufacturing leaders need to transition from a product-delivery mindset to a value-generation mindset. Implementing these shifts within a company may require both structural and cultural adaptations to best generate value. Leaders must bring a fully open mind to the process of understanding their customers better — and be prepared to disrupt their own teams and structures to expand value creation. Reorganization without full knowledge of customer needs, on the other hand, can take a company backwards in the value creation process.

“Connected products are generating data rich with potential insights that can drive new services and new business models.”

 

2. Establish a presence in the value chain with the strongest market position
As threats from nontraditional competitors rise, manufacturing leaders need to focus their organizations on pursuing and owning value chain positions that offer the greatest opportunities for value creation over time — and embracing the business model innovations required to achieve these goals.

Leaders must assess how their organization’s capabilities and offerings align with the value being generated across the value chain. Reviewing one’s activities through this lens can help identify whether the value being captured by the organization is properly aligned with the value created for consumers or if there are untapped opportunities to create new value — and be recognized for it.

Many manufacturers have succeeded at business model innovation by evolving from a product-based model to a new service- or subscription-based model. These new models frequently draw on existing capabilities (e.g., aftermarket repairs and related ancillary services) while deepening or creating new customer or consumer relationships and providing unparalleled ongoing insights into how these constituencies define value.

3. Shift revenue models from delivery of goods to delivery of value
The first two principles underscore how business model innovation can help firms rethink what value they are delivering and to whom – so focusing on the value case and not the technology. It is also critical for manufacturers to explore changes to the “how” — namely, revenue model shifts and tactics that enable manufacturers to capture their fair share of the additional value delivered to customers.

For companies to succeed at measuring and pricing value, they need access to data, supported by the right technology to capture, analyze and act on it. Connected products provide manufacturers with a prime opportunity to understand customer usage patterns and to build new offerings — and new business models — based on insights from this data. Digital transformation efforts undertaken by many manufacturers may create a foundation, but the insights that may foster real business model innovation require more than just the right toolkit. Leaders must be ready to reimagine all aspects of their business through the lens of what they know, via their own data, that the rest of the market doesn’t.

“If companies want to shift from surviving to thriving, they need to turn their business model innovation intention into action.”

When working with customer data, trust is essential. If manufacturers are to be paid based on value delivered vs. units sold, customers must be willing to trust that data gathered via connected products and services will be used to their benefit as much, if not more so, than that of the manufacturer. Customers should be able to see an accounting of value generated and its alignment with prices or fees, ideally creating a virtuous cycle of openness with the manufacturer. Ongoing transparency makes it easier to identify opportunities that may be addressed by new business models.

4. Build a partner ecosystem to innovate at scale beyond sector boundaries
Business model innovation requires companies to re-examine, and often challenge, their own core competencies. Sometimes a value creation opportunity demands capabilities outside the company’s experience or beyond its sector. In these cases, manufacturing leaders should focus on building or joining an ecosystem2.

To build a high-performing ecosystem, manufacturing leaders need to define where partnerships would best support value creation and delivery by extending capabilities, market presence and innovation more effectively than through organic investment or acquisitions. While ecosystems generally provide value creation opportunities for all participants, leaders seeking to build one should look for ways for their organizations to own it for greater control over how the additional value is allocated.

Through these partnerships, manufacturers should also follow leading practices in sourcing, building and managing ecosystems. Ecosystems work best when regular C-suite reviews, KPIs, dedicated budgets and clear organizational ownership are transparently articulated and followed consistently.

Key Questions

As manufacturing companies seek sustainable, profitable growth, the incentives for laying the internal and external groundwork for business model innovation are clear. It’s not surprising that sector CEOs are prioritizing more tangible and predictable actions (e.g., investments in data and technology) over significant changes in their offerings. But there is risk in delaying more substantive changes that position their companies for manufacturing in 2030 and beyond.

Leaders need to think carefully about the current and future state of their business model and its relationship to the value chain. The answers to the following questions may reveal critical knowledge gaps or risk areas that should be addressed, regardless of the specific solution, before beginning the process:

  • Value of offering: Where and how is value created by your company’s products and services?
    Value to customers: Where would your customers say your products and services deliver value? How do you know this?
  • Pricing of value: How does your company set prices? What is the relationship between your prices and the value delivered to customers?
  • Forms of value: What forms of value exchange could you be taking advantage of beyond just fees for products? Would you be better off charging less and receiving additional data, IP rights or access to new types of customers?
  • Value from competitors: Where are your competitors creating and delivering value?
  • Ecosystem partners: How are partnerships adding to the value of your products and services?
    Products, processes, and people: Do you have the right products, processes and people within your organization to maximize value? If not, where is the greatest need for change?

Looking Forward

In summary, manufacturers can and should become leaders in their value chains. New business models based on value creation are at the center of successful growth strategies. And when value creation opportunities demand capabilities outside core competencies, manufacturers should consider building or joining an ecosystem.

By adopting this enlightened approach to business model innovation, and understanding both the opportunities and challenges involved, manufacturing companies will be far better prepared to thrive and grow by 2030 and beyond.  M

Article Definitions

Value Chains: The full range of activities undertaken by companies or individuals to bring a product or service from the concept phase through delivery to the user and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer.
Ecosystem: An evolution of traditional forms of partnering, ecosystems combine a broad range of skills, technologies, products, services, experiences and data from multiple value chain participants. They allow organizations to innovate at scale, transform their operations, challenge sector boundaries and serve end customers better. Unlike typical supplier relationships, ecosystem partners will frequently go to market together, maintaining individual brand visibility. 

About the Authors:

 

Claudio Knizek is EY-Parthenon Global Advanced Manufacturing and Mobility Leader.

 

 

Jerry Gootee is EY Global Advanced Manufacturing Sector Leader.

 

 

Greg Sarafin is EY Global Alliance and Ecosystem Leader.

 

Also contributing to this article was
Julie Buresh, EY Global Advanced Manufacturing Senior Analyst.

 

 

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

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