31 May 2023
How to make the digital transformation profitable in the manufacturing industry
Digital technology enables traditional manufacturing companies to transform into service providers. In a new thesis in Innovation and entrepreneurship from Luleå University of Technology, this transformation process is analysed in a number of manufacturing companies. Based on the research, the dissertation's author presents a number of proposals on how companies can become more competitive in the ever-changing digital environment.
The ongoing digital transformation in the manufacturing industry is usually referred to as digital servitisation. This could, for example, involve equipping machines with sensors and digital technology that collect data on the machine's use and condition. With the help of this data, it is possible to predict when the machine needs maintenance (predictive maintenance).
Another example of new types of business models made possible by digital technologies is the optimisation of machine fleets (fleet optimisation) or even the optimization of, for example, an entire mine site (site optimisation) by analysing material flows in a certain process. In both cases, data is collected through digital technology built into the product.
“It has become increasingly common for the manufacturer to offer performance or outcome-based business models, or enter into various forms of subscription agreements with the customer, instead of actually selling the product. Ownership remains with the manufacturer, who instead offers various ancillary services linked to the product, explains the thesis's author”, Lina Linde.
How to get returns
A challenge for manufacturing companies undergoing digital servitisation is how to get a return on their investment.
“In my thesis, I present a process that shows how companies can evaluate the business potential of new digital business models before presenting their offer to the customer.”
Linda Linde believes that a challenge with these new digital business models is that they require a high degree of transparency between supplier and customer. Both manufacturer and customer must share data with each other that has traditionally been considered trade secrets. It can be difficult to regulate the sharing of data in a contract. Furthermore, digital business models require more extensive customer customisation. For example, digital platforms need to be adapted to each specific customer's business.
“For the business model to be profitable, it must be based on a relationship-driven rather than contract-driven logic between manufacturer and customer. That relationship should be based on trust and a long-term perspective where manufacturer and customer are co-creators of new values by jointly testing new innovations and business models”, says Lina Linde.
Important with ecosystems
The digital environment is complex. This means that the individual manufacturer rarely has all the expertise and resources required to be able to develop and deliver digital services on their own. They must be part of so-called ecosystems within which several actors work together to create economic value. In the thesis, Lina Linde highlights a number of abilities that a leader of such an ecosystem needs to acquire:
- Being able to identify new opportunities in the form of technologies, customer segments and partners.
- Being able to connect with the suppliers by creating business models that make it attractive to be part of the ecosystem.
- To be able to adapt the ecosystem to the constantly ongoing rapid changes.
“Through my thesis, I want to contribute to making companies competitive over time. Huge investments are being made in digitalisation. New business models are necessary to make digitalisation profitable.”
The results in the thesis are based on 150 interviews and conversations with 21 suppliers, customers and ecosystem partners as well as workshops and the companies' own documentation.
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