Why product innovation and engineering needs to be transformed

Servitization is becoming increasingly popular with manufacturers, but are they ready? What do they need to make the transition?
22 June 2018

Is your business still following traditional business processes and models? Source: Shutterstock

Digital technologies are transforming how manufacturers look at their business.

Increasingly, in a bid to get closer to their customers, manufacturers are thinking about ways to move from product-based business models to service-based ones. The transformation, known as servitization, is something that really changes the game for businesses.

“In recent years, more and more manufacturers are competing through a portfolio of integrated products and services. This is a conscious and explicit strategy for manufacturers, with the provision of product-centric services providing a main differentiating factor in the marketplace. And it’s this which has become known as the servitization of manufacturing,” said Dr. Howard Lightfoot, manager of Operations Excellence Institute at Cranfield University.

New skills are needed in a world of smart products, and innovation success depends on the effectiveness of a company’s open ecosystem.

Businesses are constantly struggling to balance how they use digital to get legacy products to market quicker while investing in new smart products to capitalize on the servitization opportunities.

In fact, if the results of a study by GE Digital are to be believed, Generation Z, those born from the mid-1990s onwards, will be the last generation to remember a product-based economy.

GE Digital found that 95 percent of companies that don’t currently operate a fully servitized business model say they are already working towards it or are planning to in the future, and 98 percent believe servitization will enhance the way their industry operates.

According to a study by the Capgemini Digital Transformation Institute, businesses grappling with the servitization challenge need to re-think their products and processes with an emphasis on supplementing their non-physical skills.

The institute’s survey found that the size of the smart, connected products prize globally will be between US$519 billion and US$685 billion by 2020.

Manufacturers estimate that close to 50 percent of their products will be smart and connected by 2020, a 35 percent increase from 2014.

In fact, 18 percent say that they plan to stop manufacturing products altogether and move to a pure service-based business model.

To capitalize on new service-driven opportunities, manufacturers will need to improve their digital capabilities.

Companies will need to add non-physical skills – such as data, IT and software competencies to their traditional physical skills base: non-physical capabilities are expected to grow up to about 50 percent by 2020.

Outside hires will not fill the digital talent gap completely, which means that organizations will need to invest in digital training, tools and new collaborative ways of working for their existing employees.

According to the survey, an extended digital ecosystem will also be critical to design and provide new end-to-end services.

Capgemini’s research shows that 54 percent of organizations have instituted programs to foster collaboration with start-ups, third parties, and suppliers. However, less than a third have leveraged such programs to co-develop products and services.

A need for transformation

Simultaneously, manufacturers need to reboot current approaches to legacy product innovation and development using a consistent source of information running across the product lifecycle – from engineering to manufacturing to services.

Around 60 percent of manufacturers are struggling to ensure “digital continuity” throughout the whole lifecycle.

Similarly, despite being responsible for 58 percent of global research and development spends in 2017, 19 percent of discrete manufacturers featured in the Forbes’ list of the most innovative companies 2018, highlighting the ‘anchor’ effect of legacy products and the need to rethink current approaches to product and services innovation and engineering.

Manufacturers, according to the Institute’s study, have responded enthusiastically to new technologies and are already rebalancing their IT investments accordingly.

Around 50 percent of manufacturers aim to spend more than EUR 100 million (US$116.49 million) in Product Lifecycle Management (PLM) platforms and digital solutions in the next three years, while the proportion of IT budget earmarked for maintaining legacy systems has dropped significantly, declining from 76 percent in 2014 to 55 percent in 2017.

However, the institute concludes that only a few companies have been making significant progress in transforming their approach to innovation and engineering.

“In a servitized world, the asset is king, and everything revolves around it, such as uptime, availability, mitigating downtime, asset estate insight, performance metrics, and supply chain. With digitization, service data is a subset of the asset data, and both hold untapped insights for almost every line of business. The rise of this ‘asset and service data gravity’ is changing the way businesses view and monetize their service operation,” said Mark Homer, Vice President Global Customer Transformation for ServiceMax, a GE Digital company.