Part III: Verticalization – Birth of the new machine model
Powered by software and automation, newer business models and verticalization are set to be key themes in the transformation of the machinery industry.
Beyond the digital transformation of the industry, some of the major aspects to be considered for the future of machinery is the emergence of newer business models and greater stress on verticalization.
What software and automation do at the base level is to enable machinery companies to meet consumer demand for extremely specialized solutions to serve large (and rather diverse) machinery operating conditions and requirements across multiple industry industries. This is what is giving birth to the need for ‘verticalization’, i.e. industries developing sector-specific or vertical-specific solutions for customers.
This is a rather historic paradigm shift in the machinery industry. Earlier, Bain & Co, writes, “machinery makers have either sold direct or partnered with distributors and system integrators to bring their products to market, in many cases with minimal variation across customer segments. A chiller was a chiller; you made it, packed it, and shipped it. If a company shifts to providing cooling solutions, those will necessarily have to be different in supermarkets vs. semiconductor clean rooms, for example.”
Whilst most firms usually gravitate towards a product-led approach, machines existing in product catalogs do not usually fix sector-specific problems. Leading firms which recognize the most effective approaches to verticalization start by first identifying customers’ needs and then creating custom solutions in order to serve their needs. “This tends to strengthen relationships and customer loyalty, and it often helps the machinery company identify new selling opportunities. Those that don’t pursue verticalization put their products at greater risk of becoming commodities.”
German technology giant Siemens is a prime example. Their contribution to the pharmaceutical industry is evident in their building of a leading plant automation and equipment business that systematically expanded beyond its current SIMATIC controllers through the acquisition of pharma-focused software and tech companies such as Elan Software Systems in 2009 and Camstar Systems in 2014. This, added with hiring well-trained pharma engineers and leaders, has helped Siemens’ Digital Industries business grow to almost $20 billion in annual revenue last year, with profit margins up to almost 20%.
Making verticalization work effectively, however, will imply a significant shift in machinery company’s models becoming more local, agile, and cross-functioning. With strengthening local system integration capabilities and becoming customer-centric as the two main goals, finding talent in a heavily fragmented and underdeveloped pool of system integrators and taking a backward approach from consumer needs will be crucial.
Traditional means of industries selling equipment/services are now all set to give way to “X-as-a-Service” platforms (where “X” can be equipment or machinery), bundled with other advanced service agreements, “including ones that pay machinery companies based on customer usage or on outcomes, where payment is conditional upon the machinery or solution meeting certain performance metrics.”
Despite some notable exceptions, a few machinery-manufacturing companies have already successfully established advanced service models, boosted by improved connectivity, analytics, and integration in machinery and equipment at a higher level of automation making opportunities more real and relevant for customers.
Bain & Co. writes: “the speed and adoption of advanced service models will vary by industry and type of machinery. A good starting point for machinery executives is to consider which of their customers’ suppliers are best positioned to help the machinery company increase customers’ productivity and would make ideal partners. This assessment will point toward the most attractive market segments and value creation levers for machinery executives to focus their business model transformation.
Effective companies will identify the most promising solutions first and develop the technology next.”
Know more about our Top Ranked PGDM in Management, among the Best Management Diploma in Kolkata and West Bengal, with Digital-Ready PGDM with Super-specialization in Business Analytics, PGDM with Super-specialization in Banking and Finance, and PGDM with Super-specialization in Marketing.