Those companies that are successful in implementing a digital-led growth strategy don’t bother with the jargon of the moment!
The leaders in this field start with the basics – a deep understanding of their customer’s problems and then work backwards to offer solutions that create value or reduce risk. As part of the journey, they look hard at their own DNA and take action to fill their capability shortfalls. They identify the actual data they need and then automate the data collection/analytics process to deliver scalable solutions.
Businesses starting this shift to service led growth would do well to note that successful companies do not focus on the rhetoric, but rather have an intense obsession with how to make their customers more successful. The lesson to be learned is using the latest jargon does not put you ahead of the game. Believe this and you might not realise that you are leaving your business ‘naked’ to competitive actions, just like the emperor in the children’s story.
In the last year, I have heard this same story time and time again. At the recent After Market conference in Hamburg, we heard speakers from SKF, Outotec, Caterpillar and Serco tools all starting with the customer problem, defining the customer pain map in terms of real money.
Talk to experts in machine learning or knowledge management and one hear’s exactly the same story. Start with the business problem or the KPI and then work back to the data solution. For some, this means adding services such as analytics or remote access to products to create customer value. Others go further and no longer sell a product but an outcome such as leasing a tractor unit of a truck by the mile.
In all the success stories there is a common theme. Each company is able to articulate in terms of money, why their customers should buy their solutions.
They almost all do this following what I call the Value Iceberg principal.
The cost of the product or service you provide can be clearly seen above the waterline.
However, from the customers perspective, there are many other costs within their business below the ‘waterline’. Some are easy to define such as labour, material throughput and energy. Others are much harder such as overheads or obsolescence. And then there is RISK and UNCERTAINTY that are extremely intangible and frightening when quantified, but which have a strong emotional impact on companies buying decisions.
The most profitable manufacturing companies understand the iceberg very well. By adding services to their products and creating integrated solutions, there exists a huge opportunity to capture more value that is hidden deep within the customers’ business processes. Take the truck example. The tractor unit represents maybe only 8% of the annual running costs. Below the waterline 50% of the operating costs is the fuel used, 25% the driver and profit accounts for perhaps 2-3%.
Over 20 years ago, MAN truck’s UK distributor identified this value and added maintenance services to their portfolio that were designed to reduce fuel consumption by 10% and so double the profitability of a tractor unit over the year.
Using telematics technology in the cab, they were able to manage the running costs so well, they could shift their business model to effectively lease trucks by the mile. The resulting value argument was so compelling, that over a 20-year period their business grew from £50M to 550M. The other OEM’s are now following!
For leaders of change, this deep, almost obsessive understanding of customer value, gives them the confidence to know in what businesses and technologies to invest. It allows them to understand whether customers can afford more outcome-based services and how far their business should move along the Product to Service continuum.
This value-based phenomenon is also very real when we start to look at the UK macroeconomic viewpoint. When we redefine manufacturing as a product plus associated services, a 2016 study by Cranfield University estimated this to make up 16.8% of the UK Gross Value Added(GVA) versus the traditional definition of manufacturing at 10% GVA
Perhaps this realization that our view of manufacturing is fundamentally changing, is the reason why many people focus on the digital or IR4 technologies, forgetting that these are only enablers of change. In most part, it is through services that the technologies add new value and not the other way around. But sadly many companies have yet to grasp this notion. The reality is that unless they do, many players will be left wondering why digitization and IR4 have never quite delivered on the promise!
If you would like to know more about your Value Iceberg to drive your investment priorities, then you can contact Nick at nick.frank@si2partners.com
