Photizo & IBM Viewpoint on B2B Transformation

Portions © IBM 2012 and © Photizo Group 2012

Products to Services Transformationin B2B Electronics: Past, Present, and Future

May 2012


Objectives and Caveats for This Presentation

• This presentation provides insight into why it is important to transform your business. It will define the industry and global drivers that make transformation an imperative.

• The presentation cannot provide specific recommendations or diagnostics for the specific transformation your company requires. Each company’s situation is unique, and each transformation path will be different.

• However, we do have the processes, models, and frameworks to build specific transformation plans and would be happy to discuss these with you.

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Authors Contributors

Paul R. Brody

Rob Sethre

[email protected]

@pbrody

pbrody

PartnerGlobal Industry Leader, Electronics

Dib BanerjeeConsultant, Strategy and TransformationGlobal Business Services

Senior Consultant

[email protected]

@rtsethre

robert-sethre

[email protected]

@PhotizoGroup

ed-crowley

CEODoctorate Candidate,

University of Manchester (UK)Doctorate Topic: Japanese Firms

and The Transformation from Product Centric to Service Centric Businesses

Edward Crowley

Vice President, Services and Publishing

Ann Priede

[email protected]

@dibyob

dibyajyoti-banerjee

[email protected]

@ahpriede

ann-priede


Executive Summary

• While consumer electronics markets have sprinted ahead in transforming products into services, the same transformation has been much slower to take shape in the B2B electronics industry.

• Numerous forces have slowed down the transformation of the B2B side of the industry, including longer product life cycles, deep client sales relationships, and the cost and complexity of creating low-volume, high-value B2B technologies.

• New technologies, from procurement systems to standardized components and 3D printing, are eroding those barriers to transformation.

• Though technology is key to enabling transformation, transformation from products to services is most often driven by a compelling business case.

• The market for printers and copiers is a great case example of how transformation can be slow in coming, but once it arrives with a strong value proposition, the result is a swift transformation.

• When transformation does occur, it is often fast, usually taking less than one full product life cycle, and afterward the industry segment is often significantly consolidated in a winner-take-all model that looks very similar to consumer electronics.

• Companies that wish to prepare for and survive this transformation should first and foremost invest in client intimacy to learn the ideal elements of a compelling business from the point of view of the client.

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Table of Contents

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Consumers Lead Transformation, Enterprises Lag

Eroding Obstacles to B2B Transformation

Preparing for the Future


Consumer electronics have shifted radically to connected devices over the last few years

6

Section Start: Background/Consumer Electronics Analogy

CONTENT

APPLICATIONS

CONNECTIVITY

SERVICE

Seamlessly integrated across multiple devices

• Industry leaders have refused to allow their value proposition to be unbundled – there is no iPhone without iTunes, no Kindle without the Amazon bookstore


In the consumer electronics market, it has been winner take all, and the winner takes it all very, very quickly

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Q4 2009 Q4 20105%

10%

15%

20%

25%

30%

Visio

Samsung

Sony

LG

Toshiba

Winners and Losers in the LCD TV Market,Fourth-Quarter 2009 versus Fourth-Quarter 2010

Mar

ket s

har

e

Q2 2010 Q2 2011*5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

Apple

Acer

HP

Winners and Losers in the Notebook Market (Including

Tablets), Second-Quarter 2010 versus Second-Quarter 2011

Mar

ket s

har

eSource: IHS iSuppli February 2011 Source: IDC* Estimated


The consumer electronics market has short cycles and fast transitions

Typical consumer electronics curve:• Short R&D cycles• Rapid and steep growth• Increased competition floods

the market• Peak followed quickly by

steep decline

Rapid and steep growth

Transformation Begins here

Products may be on different parts of the life cycle curve, but trend lines are almost always the same

Short R&D cycles

More competitors and products

SaturationMarket is flooded and vulnerable

Commoditization

Introduction/ R&D

Growth Maturity Decline End of life


Consumer adoption of new technologies historically has been fast and generally accelerating even in periods of recession

1920 20101925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

100%

80%

0%

60%

40%

20%

Per

cen

t of p

op

ula

tion

pen

etra

tion

Technology Adoption (Measured by Population Penetration) in the United States,Radio versus TV versus Internet versus Mobile Internet, 1920–2011*

Source: Radio penetration data from Broadcasting and Cable Yearbook 1996, Internet penetration data from World Bank/ITU, Mobile Internet (smartphone) data from Morgan Stanley Research, and 3G data from Informa. Chart from Mary Meeker’s 2011 Internet Trends Presentation at Web 2.0 conference *Estimated


The global leadership positions in the electronics industry changed dramatically in just 10 years (1 of 2)

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Long before people waited in line for iPads, they waited in line for the new PlayStation 2Sources: Yahoo Finance, Bloomberg, and Thomson Reuters company financials and reports

Enterprise Market Value – November 2001(Market Capitalization, in Billions of U.S. dollars)


We believe the same dramatic transformation is coming to B2B electronics marketsSources: Yahoo Finance, Bloomberg, and Thomson Reuters company financials and reports

The global leadership positions in the electronics industry changed dramatically in just 10 years (2 of 2)

Enterprise Market Value – November 2011(Market Capitalization, in Billions of U.S. dollars)


Enterprise sellers believe change is coming for B2B…but not yet, and not quickly

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• Market is based on slower sales cycles• Longer product life cycles• Different selling process• Greater systems and product complexity• Comfortable, safe, and sustainable

Historical paradigmfor resisting change

• Historically, change has come rapidly• Change is very disruptive• Led by new competitors and technology• Encumbent players are most at risk

Change will come

Ignoring the signs


B2B market llfe cycles are longer than consumer life cycles

Introduction/ R&D Growth Maturity Decline

Longer life cycles create a false sense of security that business models won’t be disrupted

Endof life

Typical B2B Curve:• Extended R&D cycles during

growth phase• Allows for more incremental

product improvements• Slower but consistent growth• Fewer new market entrants in

the early stages• Commoditization begins later

but lasts much longer• Mature stage lasts longer• False sense of security

Slow and steady growth

Transformation Begins here

Longer R&D and product development

cycles

SaturationMarket is mature but change

has not yet occurred

CommoditizationEarly Stages of Market Evolution• Little to no product

differentiation• Products stay in the

market longer• R&D cycles are

compressed significantly

• More new market entrants

• Threats from outside competitors and new technologies

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While the technology exists to support platforms and services, most big enterprises do not want to disrupt their products-centric modelsCase Example: Large Energy and Industrial Automation Company

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Only half of the devices that can be connected are….

…none of the data streamed is used

proactively…

…and technology is still sold as a product, not a

solution.

Percentage of the installed based that can be connected to the Internet and the proportion that actually is being connected

Percentage of the installed base in which analytics are applied to usage and performance data to predict maintenance or other requirements

Revenue from bundled solutions versus discrete product, service sales

30%

40%

30%

OtherConnectableConnected

100%Predictive

Reactive

Source: Data based on interviews with client executives. Numbers under 5 percent mean “unknown and thought to be very small” rather than 0.


Some markets have seen significant transformation in B2B, but it is not yet a general trend

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Office equipment

Network equipment

Medical devices

Industrial automation

Semicon

Accelerants • Cloud• Managed print• Software as a

service• Mobile devices

• Outsourcing deals for public networks

• Consumer health devices

• High CapEx cost on new factories

Brakes • Corporate security fears

• Legacy apps

• Conservative insurance and regulators

• Corporate security fears

• Very limited new investments

Key trends • Cloud services are a better fit for mobile devices

• Shift from private to public networks by enterprises

• Bar is rising fast for new medical technologies

• Initial services will be for maintaining existing equipment

• Initial services will be for maintaining existing equipment

Most Transformed Less Transformed


Table of Contents

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The same forces that powered very rapid changes in consumer markets have been absent from B2B markets, but that is changing

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The network effect

Increasing returns to scale

The social bandwagon effect

• Content producers are attracted to large user base

• Users look for rich set of apps and content

• Shift to apps and content has given “devices” like phones the characteristics of software with increasing returns to scale

• Highly visible device usage

• Visible interaction on public social networks

• “Smart devices” like power meters, printers, and HVAC systems are getting their own apps and analytics

• Value is shifting from the physical device to analytics and services that have increasing returns

• Social networks for enterprise users create product visibility

Consumer effects today…

Enterprise impact tomorrow.


Five big trends are transforming the business of selling and managing electronics in B2B markets

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CategoryTraditional obstacle to rapid change

New enabler of rapid change

Increased sales process transparency

• B2B based on much stronger personal relationships

• Less formal procurement

• Highly mobile sales forces, take the rolodex with them

• Modernized, fact-based procurement processes

Analytics-driven value propositions

• Unable to share data• Security fears over data sharing

• Compelling value propositions around analytics

• Access to benchmarking data

Changing product markets • Long life with static product• Mature markets

• Long life with dynamic product• Emerging markets focus

Simplified and standardized product designs

• Engineered to order• Homogenous supplier ecosystems

• Open standards for inter-operability• Shift to configure to order over

engineer to order

The rise of service-based business models

• Purchase of items and services separately

• Shift in business model to integrated solution

• Visibility to benefits of new model


Technology is making the sales process more competitive and less driven purely by relationships

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Diminished B2B

relationships

Spend analytic

s

Online marketp

laces

Procurement

systems

• Spend analytics provides new insights into how to reduce costs

• Online marketplaces are standardizing terms and making pricing transparent

• Procurement systems make rogue spending difficult

• B2B relationship selling is more difficult now

• Business cases that depend on capturing benefits are easier to execute

• Pricing and performance differences across solutions are more easily compared


Analytics provide more than a view of device usage, they provide a real-time, bottom-up view of operations

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Operations:• Copies printed• Toner required• Paper jams

Operations:• Copies printed• Toner required• Paper jams

Business activity:• New documents processed

(account openings, deals closed)

• Peak and off-peak work times

Operational excellence:• Identify heavy and light users• User and office cost

comparisons• Identification and transfer of

best practices• Competitive benchmarking

Stand-alone devices execute functions

Connected devices provide real-time insights that can be used to optimize operations


Product markets also are changing as devices become dynamic and the focus shifts to emerging markets

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• Simple functionality

• Intended to be in place for decades

• Not upgradeable

• Multifunction

• Continuously upgraded

• By 2025, China is likely to be the biggest market in the world for several key industries

• Emerging markets buyers are focused on new growth, mature market buyers are more focused on maintenance of existing systems

Manufacturing

Utilities

Chemicals

Petroleum

Electronics

The products are changing: As are the buyers:


Barriers are crumbling, with standard technologies making it possible to assemble complex, integrated systems more easily

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Embedded Systems• Shift from

proprietary solutions to open architecture

• Java• Web services

Always On• Interconnected,

ubiquitous networks • Wi-Fi • High-speed cellular• 4G and beyond

Integrated Workflow• Standardized device

management tools• Cloud-based solutions

for document management

• Open APIs for third-party solutions

Applications• Office document

applications supported across all devices: Mac, PC, tablets, smartphones

• PDF• E-mail


Shifting to a services model can simplify and accelerate buying decisions by reducing complexity and up-front expense

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Product Business Model

Services Business Model

Simpler Decisions

Lower capital expenditure

Faster buying decisions

Less operational complexity

Services are expensed and usually have lower commitment requirements

Sales cycles speed up even with complex enterprise solutions

A third party assumes management of the solution

Functionality in hardware

Blend of device and cloud

Fixed functions, no upgrades

Continuous updates

Revenue is unit-based up front

Annuity relationship


Case Study: Printing and copying have been the first and most thoroughly transformed B2B segments of the electronics industry

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Product• Printer• Toner• Service

• Printer is designed for low up-front cost

• Toner generates profit• Focus on preventing

consumer from using third-party toner

• Product is not designed for long service life

Service• Price per page• Everything included• Apps and analytics

delivered in cloud

• Device is networked to enable management

• Designed for high reliability, long durability

• Total cost per page to be minimized

• Downtime = lost revenue


The value proposition for the transition from a product model to a service offering was compelling to clients and drove transformation

Dow Chemical Boeing Nationwide LCBO Other 105 companies0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Total Ownership Cost Savingsfrom Implementing Service Business Model

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Source: Photizo Group, MPS Advisory Service, MarketWatch™


• Virtuous Cycle: Inflection point to rapid change: at 15 percent of the market, a sudden takeoff in the proportion of spending is shifting to managed print services

• Huge Value Proposition: Compelling 30+ percent cost reductions for customers, higher margins for winning vendors

• Service Extension: Branching beyond copying into printers, processes, and other IT infrastructure services

• Winner Takes All: Transformation driving consolidation toward larger vendors

The result is that the shift to managed print services occurred in just three years, from 2008 to 2011


Huge Growth for Managed Print Services, Represented by the Number of MPS Programs Announced

75%

50%

25%

0%

= Number of new MPS programs

= MPS program growth

1 1 1 1

10

31

112

1% 2% 3% 4%

14%

45%

56%58%

2004 2005 2006 2007 2008 2009 2010 2011


The transition to managed print services has been accompanied by the creation of a whole software and services ecosystem

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Keys to growth1. Building out the infrastructure

so dealers/resellers do not have to build their own

2. Utilizing multipliers

• Cost reduction

• Sustainability

• Improved tools

3. Market awareness

• Companies realized they had to act

• Difficult to build own MPS program

• Required specialists to improve ability to ease into MPS

• Example – FMAudit’s Deployer® solution Source: Photizo Group, MPS Advisory Service, MarketWatch™

2006 2009 2012

Ecosystem Growth and Technology Adoption, 2006, 2009, and 2012

Professional services

Resellers

Infrastructure providers

OEMs

Software


Traditional hardware vendors have consolidated from 36 down to 15

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As in many B2C markets, fewer survivors in B2B printing and copying are taking a much bigger share of the profits

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In the consumer space, winners dominate profits. Will it be the same in the enterprise?

Profit shares of eight mobile phone companies100%

0%

25%

50%

75%

Q2/2007 Q4/2007 Q2/2008 Q4/2008 Q2/2009 Q4/2009 Q2/2010 Q4/2010 Q2/2011 Q4/2011

Nokia

Sam

RIM

SE

LG

Apple

HTC

© Asymco


Table of Contents

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Key Conclusions: Electronics markets that are undergoing B2B transformation exhibit three key characteristics

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Transformation is business-case driven

Once started, transformation is swift

Connected-device markets are “winner-take-all”

• 20-40 percent annual savings and elimination of CapEx have had biggest impact

• Analytics, platforms, and new services come after transformation

• Change can happen in between 0.5 and 1.0 product life cycles

• Three years in managed print services• Five years in network equipment

• Transformed markets show rapid consolidation of industry players

• Profitability consolidation even stronger than market share

1

2

3


We believe there are three strategies that electronics companies should embrace to prepare for transformation

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Invest in client relationships

Go first

Drive transformation from the outside in


Without client intimacy, the chance of building a compelling value proposition is limited

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The same piece of equipment…

…can be viewed from multiple value propositions:

A commodity that’s costly to own and operate.

A key differentiator in the overall solution

A failure-prone “weak link” that causes down time

One part of a larger set of business issues

…with different transformation options:

Reduce cost of ownership, eliminate capital expense

Guarantee capacity, build deep design partnership

Sell uptime and results instead of the device

Expand to other markets to sell total solution

CNC image, Flickr Creative Commons


Disruptive competitors have a history of re-framing the product and objective, leading to an entirely different sales cycle and value

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Free.fr• Competition thought it was selling

cable TV• Free is building a national fixed

and mobile network

Square• Competition thought it was selling

transactions processing• Square is selling customer

intimacy and analytics

Amazon Cloud• Competition thought of Amazon

as a retailer that was out of its depth

• Amazon sees itself as a technology company

Data Center image, Flickr Creative Commons


In a winner-take-all model with very rapid market transitions, fast followers are at high risk of failure

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99%

74%

52%

Infrastructure share of top three mobile systems vendors in 2010: Huawei, Ericsson and NSN

Share of mobile device industry profits going to Apple and Samsung in 2011

Proportion of the managed print services business contracts taken by Xerox, HP, and Ricoh, the top three in 2010

96%Web-site hosting share of the top three cloud infrastructure providers in 2011: Amazon, Rackspace, and Linode

Source: Asymco, Gartner, MobileNews, DailyWireless, Jack of All Clouds, and IBM ResearchSource: Photizo Group, 2011 MarketMetrics™

While not always as stark as in B2C, the winner-take-all nature of products-to-services transformations leaves the market transformed in relatively short order


When market transformation accelerates, organizations should drive transformation outside in, starting with client-facing work

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Sales

Service

SCM

R&D

Finance

In B2B, leaders have often started with the client-focused value proposition and then aligned their organizations to support it

• Started with the cost-per-page value proposition

• Still completing the transformation to a solutions and services organization

• Created the Integrated Systems Solution Company in 1991, the predecessor to Global Services

• ISSC became the world’s second- largest IT services firm in it’s first four years of operations

• Alignment and integration of Global Services followed


Case Example: In managed print services, Xerox started with a per-page business model and then optimized operations to support it

• Xerox already had a strong field service organization

• First, it made the offer to clients• With no real capability other than manual “meter reading”

• Transformation followed:• First sales

• Then marketing

• And finally (much later) supply chain and product development

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UPD

Multiple high-cap drawers

Very high-yield ship with supplies

GPS for assessment and MACD

Open MIB to support third-party software

Powerful controller

Support for broad area analytics

Secure de-install

Remotely downloadable configs and upgrades

Prevention diagnostics

Intelligent remote install based on company print policies

Cloud-based monitoring

Biometric security

Mobile print supportAI-based supplies replenishment

Transformation management cannot end with client-facing work, however; transformation needs to go all the way to every aspect of product design



We cannot predict the future. We can only prepare for it.

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Product-to-service transformation has been slower in B2B electronics than in consumer

The traditional impediments to this transformation are now eroding quickly

When transition does happen, it’s driven by a compelling business case, not just technology

Products-to-services transitions, when they happen, are swift and “winner-take-all”

The enterprises most likely to lead and survive this transition will make three key investments in:

Client intimacy

Leadership in new offerings

Outside-in transformation


• A leading consulting and marketing information firm for the technology industry that assists clients in transforming their business model from product-led to services-led through

• Innovative and practical market intelligence and research• Consulting to address specific business transformation opportunities

• Transformation centric educational events and training

• We are a trusted consulting and advisory partner to Fortune 500 companies that offers visionary guidance to help make strategic business decisions


Resources

http://www.photizogroup.com/

Documents

Photizo & IBM Viewpoint on B2B Transformation