What happens when capital equipment sales become subscriptions?

Ed Marsh | Jun 14, 2017
industry 4.0 creates opportunities for capital equipment manufacturers to create new business models.jpg
"Change is the law of life. And those who look only to the past or present are certain to miss the future." JFK
The good old days weren’t all that good and tomorrow ain’t as bad as it seems” Billy Joel
"In preparing for battle I have always found that plans are useless, but planning is indispensable." Eisenhower
"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction." Bill Gates

Traditional industries can be disrupted too

They often just don't see it coming.

For a machine builder it's easy to rationalize the disruption of the taxi industry. It was an inefficient system with arbitrarily inflated prices and protections that led to diminished service quality.

It's a bit tougher for a business owner who's invested hundreds of thousands in shrunk wrapped software, shared network drives and local databases to visualize how the cloud will change their business. 

And for all businesses it's even harder to extrapolate how such changes will disrupt the status quo as a result of the original impact on suppliers, customers, and customers' customers.

So we can all agree that retailers should have anticipated the impact of disintermediation via the internet, and hotels should have envisioned the room sharing model which is gaining widespread adoption. Yet Credit Suisse predicts that 20-25% of shopping malls will close in the next five years1...while many REITs, retailers, restaurants and private equity investors continue to build their strategies around mall locations. (And Sears' final asset, its real estate, may dwindle further.)

Is it surprising therefore that many manufacturers confidently dismiss 3D printing (additive manufacturing) as a prototyping technology and the sharing economy as only a consumer trend?

That's naive. Those trends, and more, will shape the capital equipment sales world in coming years.

That's a threat for many who will persist in dismissing them - it's an enormous opportunity for others.

Recognizing the threat

No doubt there are many legitimate reasons why none of this will happen.

Except, it is....already.

2017 is predicted to be the year you'll buy your first pair of custom produced 3D printed shoes as technology truly enables batches of one.

A new study predicts that in 12.5 years America's most iconic industry, autos, will fade from being a declaration of personality in the 2nd largest purchase most make, to being a "vendor" in a "transportation as a service" (TaaS) world.

And two major steamship lines are now extending into the business or supply chain security. Want to know that your organic flax seed oil really is...organic...and flax seed? DNA tag it at the source and then use blockchain to manage the entire distribution & delivery cycle. The John Deere tractors (already an amazing IoT success in as traditional an industry as there can be), the trucks, the containers and cargo ships all become enablers and the data is where the value lies.

I won't try to berate you into acknowledging the potential impact on your capital equipment sales model. Experience tells me that either you "get it" and have started to think about it, or I'll simply sound unconvincing. 

But if you agree that disruption could (indeed already has started to) come to your world, then it may be worth looking for ways to begin to dabble around the periphery to build alternative revenue model muscle. As Gates highlights, it's not going to happen in two years, but in ten the market will be very different.

Broadening the business model

Nobody says you need to deep six the current model of bending steel, integrating controls, adding a healthy dose of expertise and selling and shipping a complete machine for an end user to commission in their facility.

But for goodness sake, please start to do some serious brainstorming and contingency planning.

Start by looking for data. (That's really what Manufacturing 4.0 is about.) What operational metrics and data do your customers ask you to provide through your PLC/industrial controller? And what data do you know they collect internally? Even more importantly, what value in aggregate would the data have that each of your customers collect? In other words, even if it were anonymized, what best practices could be developed from watching hundreds or thousands of users?

And then....

With that data what new business models could you create or opportunities to monetize it could you uncover?

What if, for instance, you gradually shifted traditional capital equipment sales to a package model that incorporated use of the machine, perhaps consumables if applicable, predictive maintenance and remote troubleshooting and operations insights and reporting?

You may say "They already do that." In many cases you're right. But we all also know that maintenance and engineering teams are being reduced while demands rise. Also, they only have access to their own data - you potentially can aggregate information from many locations and tease from that, recommendations for improving OEE and profitability.

So a piece of capital equipment goes from being an asset...to being a collection of sensors which collect data - the new asset. And you go from being a machine builder with peaks and valleys of revenue due to capital equipment sales cycles....to a business consultant, with renewable revenue billing models, stickiness in your relationship and the opportunity to create a data asset on your balance sheet.

Speaking of that, what if that data could be mined to provide other insights that you might monetize. For instance:

  • insights into how, when & why buyers of products like yours actually buy - imagine the power of very reliable behavioral indicators, and the value to you in either a parallel publishing business or as a key asset for strategic acquirers
  • predictive operational insights - what if you could create a foundation of data that allows you to produce propriety research on best practices and trends in the industries to which you sell, and even create proprietary predictive alerts as conditions indicate likely operational disruption. Think of the value of precluding unplanned downtime in real time!
  • actual utilization of capacity - in a "sharing economy" could fractional ownership or leasing models become practical if manufacturing capacity could be fluid and brokered as a perishable commodity? Your data could put you in the brokerage business with your machines simply an asset. 

These are simply examples. There are countless more that we can envision, and many times that number that we probably can't even yet imagine.

And there are privacy and philosophical issues to reconcile here for sure. But those are complications, not barriers.

Working on vs. working in the biz

While broad technology familiarity and exposure to a wide range of industries, thought leaders and disciplines is important to weave integrated long-term strategy, in many cases the classic quandary of juggling urgent priorities vs. future unknowns may be the single biggest predictor of a company's ability to navigate these disruptions - and seize opportunities rather than simply endure the change.

That's an important role of boards. Yet many private SMBs don't have boards, and those that do often select from "clones" - people from their neighborhoods, advisors & non-profit boards - and even families - that look like them, think like them, have businesses like theirs and generally marinate in the same thought circles. Talk about confirmation bias.....

So what's the fix? It's not an easy problem, but family or private investor owned businesses have a huge advantage of long-term flexibility without relentless quarterly market pressures. At the same time, in family held businesses ownership isn't responsible to anyone else and private equity often narrows the traditional board role to simply CEO selection to avoid providing easy excuses for lack of performance.

But companies MUST formalize their contingency planning for disruption. This needs to span from raw material inputs, through suppliers, the core business, to customers and importantly their customers' customers.

That can be done through consultants, an internal (empowered, not check the box) skunk works or a legitimate board. And it needs to acknowledge up front the point that Eisenhower made clear - the plans will be wrong in many ways, but the fact that planning occurs will provide an enormous advantage.

Companies will be on the balls of their feet rather than their heels - they'll be positioned to seize emerging opportunities and mitigate risks of growing challenges.

This is a mindset; an ongoing process. Intellectual curiosity and broad business experience are important inputs - but simple conversation is perhaps most important. Away from the pressure of 15 minute increment schedules.

This free downloadable strategy roadmap and question/discussion guide provides a framework for these discussions that will provide leaders the rare opportunity to actually work on their business. 

strategy guide for manufacturers

1 - Changing retail