The shift from standalone hardware to smart, connected products is pervasive—and it’s here to stay. Forward-thinking hardware companies are taking leadership positions in a new era of product development. Will you be one of them?
The world of engineered products (think: planes, automobiles, medical equipment, and appliances) is changing. Traditional hardware is rapidly converging with technology. Electrification, software, and AI are disrupting the value chain and changing the competitive playing field. Top innovators and new entrants are leading the charge and being rewarded by the capital markets. Even young startups with zero revenue are seeing valuations on par with century-old Fortune 100 companies.
Software and connectivity are playing a much bigger role in differentiating the customer value proposition. Value is moving from the product itself to the broader business ecosystem of software-defined services. This movement, in turn, is completely changing the traditional model of launching new products in fixed cycles. In the new paradigm, we will see more companies launching integrated and scalable hardware, software, and services platforms into the market and continuously releasing upgrades over the product life cycle.
The classic example of this in the automotive sector is Tesla. The Model S was launched in 2012 and the vehicle itself still looks the same today, but the user experience has continued to improve over time. In response to changing technologies and customer demands, Tesla routinely releases new features that make the car safer, more autonomous, and more fun to own—and the upgrades are delivered primarily via software, seemingly in real time. What’s more, Tesla leverages technologies in the vehicle to access the broader ecosystem. For example, using data and connectivity, the vehicle can diagnose and resolve automotive issues, often over the air, replacing traditional dealers and service repair shops. In this way, Tesla has created a business that is scalable, sticky, and capable of accessing new pools of recurring profits.
While making this shift is a strategic imperative, there is also a sizable prize ready for the taking. By transitioning to a scalable, high-touch, high-response business model that generates recurring revenue, companies can double their margin per unit sold (taking into account the lifetime value of these revenue streams) and drive loyalty to 80% or higher. The scalable nature of these businesses also has a direct impact on cost and efficiency. Because software and the broader technology stack eliminate a great deal of complexity, product development cost efficiency can improve by up to 30% and product development timelines can drop by as much as 50%.
This shift from standalone hardware to smart, connected products is pervasive—and it’s here to stay. To compete in this new era, hardware-centric companies must reimagine product development: from hardware to software, from product to ecosystem, and from fixed-cycle launch to continuous release. To support these moves, they will need to invest in new capabilities and ways of working: a technology-centric organization, agile systems engineering practices, digital platforms and tools, and renewed governance.
Reimagining Product Development
To reimagine product development, companies should ask themselves two fundamental questions.
How can embedded technologies create access to new revenue streams and business models? To seize new opportunities in the market, original equipment manufacturers (OEMs) must first examine the end-to-end ownership experience for retail customers and identify where electrification, AI, or software and connectivity provides a right to win or enhances the customer experience. Tesla’s approach to maintenance and repair is a great example of this. The vehicle’s ability to diagnose itself and even preorder parts for repairs creates a highly differentiated experience for the customer.
For commercial customers, companies must examine their products’ full life cycle P&L and identify opportunities to enhance throughput, cost, or productivity. The shift we are seeing to autonomous, robotic “fleets” across a range of applications illustrates how AI and connectivity are enabling a move away from sales of equipment to sales of services that continuously improve over time.
What technology platforms—whether hardware, software, or ecosystem—will best deliver these new opportunities? Until now, embedding electric, AI, and software and connectivity technologies into products has not been a focus of hardware-centric companies. But they will need to develop this expertise because it has become a key competitive differentiator. Here are just some of the strategic challenges that companies will need to address:
It is critical to meet each of these challenges, and strong execution will determine a company’s success on the new competitive playing field. READ MORE
By Andrew Loh, Mikaël Le Mouëllic, Nina Kataeva, Laurent Alt, and Olya Ivakhno
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