More Than Just Machines – Part I

More Than Just Machines – Part I

Part I: The Hardware Paradox

Appropriately monetizing the transformation of machines beyond machinery is going to be key this coming decade

With companies further up the transformation ladder delivering higher shareholder value over the past three years, the next decade’s industry winners are all set to “experiment aggressively in the ecosystem outside of their machinery.”

In their Global Machinery & Equipment Report 2022, consulting giants Bain & Co. make a compelling case for the ‘accelerating threat of hardware commoditization’, which have, in turn, been pushing machinery companies to turn to new business models and invest in sector-specific solutions and new business models. The argument is solid and clearly underlines how companies moving quickly have fared better than their counterparts.

Top machinery companies that have started early in their transformation process seem to have been performing better, “with a more mature portfolio of solutions combining hardware, software, and services significantly outperforming their competitors. The average annualized total shareholder return (TSR) among the leaders from 2019 through 2021 was 32%, compared with 4% among the laggards,” reports Bain & Co.

Source: Bain & Company

Most leading manufacturers of industrial machinery and equipment are now set to face – over the next decade – what is set to be one of the biggest challenges they have faced: the potential commoditization of machines and equipment. Whilst this does pose a major threat, proactive steps could ensure this works out to be one of the biggest drivers of growth.

“Growing competition and slowing device-centric innovation have made it more challenging to maintain profitable growth and to differentiate the business based on machine performance alone,” according to Bain & Co. Competitive advantage now lies with those focused on software and automation capabilities allowing machine interoperability with other equipment, and the way businesses adapt to monetize other business solutions, based on the provider’s application and the process expertise, developed around the machine.

Shifting direction of growth engine

As a result, the share of just hardware capabilities in firms’ value creation engines have shifted. In industrial automation – a sector that has already seen much transformation owing to the increased need for flexibility – the share of company profit coming from hardware is set to go down from approximately 31% today to about 23% by the end of the decade. The gap in percentage points is set to be filled by services, software, and mainly, the solution-based offering which bundle the two.

Already on an accelerating trajectory, said trends are only set to continue, with an increasing number of machinery and hardware companies now taking strides to pay more attention to safety, sustainability, and traceability in supply chain operations, among other major paradigm shifts. Digital tools and a solution-focused business model lie at the center of this shift.

Nevertheless, as the report successfully points out, moving from an equipment business to a solutions-based business may turn out to be rather tricky, carrying financial as well as execution risks. The huge upsides also need to be recognized, however, especially with the potential to tap into a faster-growing profit pool, increasing sales and revenue as well as capturing higher margins.

Partners at Bain write: ‘the emerging winners of this transformation are already thinking beyond their machines. They’re developing a deeper understanding of how their products fit into customers’ processes, and they’re finding new and creative ways to deliver value as part of a larger ecosystem. To take full advantage of this opportunity, these machinery leaders are evolving their businesses on three fronts.’

These three fronts: software and automation, verticalization, and new business models, shall be discussed in detail in the follow-up to this article.

(To be continued)

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