Industry Insights

The Digital Revolution in Manufacturing, Part One: Building New Business Models

By James MacTavish / March 13, 2018

Steam-powered engines, electric mass production, computers and robots on the factory floor—the manufacturing industry has seen tremendous change over the past 200 years. Now, with the dawn of the fourth Industrial Revolution, things are about to get even more interesting.

Today’s new era in manufacturing goes by many names: Industry 4.0, digital factory, the Industrial Internet of Things (IIoT). Whatever term you use, this digital revolution is changing the manufacturing industry at lightning speed. Now, every manufacturer is thinking about (or should be thinking about) their products and services beyond the hardware they produce. Moving forward, successful manufacturers will need to create new business models—and unlock new revenue—driven by digitization, improving the customer experience, and boosting competitive value.

But how? This is part one in a three part blog series that will explore the challenges facing manufacturers in the age of Industry 4.0, and how to overcome them. While every manufacturer is different, understanding the emerging landscape is a critical first step that can help companies not only adjust to the new reality, but succeed and thrive in it.

Traditional Manufacturing Business Models—and Why They Don’t Work in Industry 4.0

Typically, manufacturers have focused on one type of business: Selling hard goods through some type of distributor, such as OEMs, systems integrators (SIs), and consultants. In these traditional models, distributors will buy goods from manufacturers, stock the products, and manage the inventory. Here, manufacturers will rarely, if ever, sell directly to end customers.

Traditional distribution models provide almost no insight into who the customer is.

In a traditional scenario, the manufacturer is disconnected from end customers and all of the touch points that it takes to reach them. It should come as no surprise that these models create blind spots and challenges for manufacturers. Traditional distribution models provide almost no insight into who the customer is and no opportunity to cross sell or upsell those customers on complementary products or services. Moreover, manufacturers lose valuable information into how the various players in the value chain (OEMs, SIs, etc.) are actually selling their hard goods. These factors add up into limited potential for scalable revenue growth.

New Business Models for Industry 4.0

What many manufacturers don’t realize is that they have a treasure trove of digital assets that can provide just as much value as their hard goods. However, many companies give these assets away for free or sell them through CPQ systems, RFQ responses, and as incentives for consultants to sell alongside hard goods.

Many manufacturers don’t realize they have a treasure trove of digital assets.

Ultimately, these traditional models aren’t a good fit for digital assets, either; manufacturers are still too far removed from the end customer. What they really need is a is a direct line to their customers—and vice versa. The solution? A customer-facing digital marketplace.

A marketplace for digital products brings with it a wealth of new customer engagement models and revenue opportunities. To take full advantage, manufacturers need to do three things in this new digital world:

Create cloud services: Manufacturers need to offer cloud-based digital services to add value to their hard goods. Soon, the vast majority of manufacturers will offer cloud-based digital services, which means competitive pressure is increasing. Moreover, creating cloud services can expand market opportunity by lowering the barrier to entry for hard goods and making compute-intense products more affordable, both internally and externally.
Create an ecosystem of partners: Manufacturers need to create cloud services, but that doesn’t mean they need to take all of the development burden on themselves to do so. Creating an ecosystem of partners that develop digital products for your goods not only enhances the value of your hardware, but also drives revenue for both you and your partners.
Expand your market opportunity: Digital assets can open the door to entirely new business models for manufacturers. For example, hardware and products can be sold “as a service.” In fact, “Hardware-as-a-Service” (HaaS) is becoming an increasing popular approach in the industry. In this approach, manufacturers can generate recurring revenue from HaaS—and the complementary digital services that are sold with it—instead of relying on the final sale of a hard good.

Of course, all of these elements are easier said than done, particularly if you decide to build capabilities in house. You can take a deeper dive into the various aspects of building a solution or partnering to launch a platform here.

The bottom line: For manufacturers, the old way of doing business—without insight into who the customers are or how a product gets into their hands—isn’t going to cut it anymore. Marketplaces where customers can buy digital assets directly will be the only way to realize the full potential of Industry 4.0.

Be sure to check the AppDirect blog next week for part two in this series, a post on how to drive customer retention.

James MacTavish is the Marketing Manager for manufacturing at AppDirect.