Digitalization is a phenomenon that has been transforming business and consumer markets for years and is now starting to have a noticeable impact on industry. Termed the “fourth industrial revolution”, digitalization in industry is about the impact that intelligent, networked cyber-physical systems will have on products and how they are manufactured. Digitalization in business and consumer markets has been exceedingly disruptive to established players and there is no reason to think that will be different for industrial companies.

Digitalization changes the nature of the markets that it affects. Traditionally, market competition is often about reducing costs and increasing volume, with many European industries losing out to their Chinese competitors. However, digitalization is less about cost than it is a race to own the interface to the customer. By owning the interface to the customer suppliers are able to build customer intimacy, rapidly adapt to changing needs and consequently design business models based on maximising value rather than on reducing cost.

The most successful digital companies are those that started business with a software centric strategy, for example Uber, Airbnb, Alibaba, etc. There are fewer examples of established companies that have made a successful transformation to the digital world. In a 2018 study, Mckinsey concluded that only 16% of established companies succeeded at sustained digital transformation. They also observed that having digital-savvy leaders in their management team was a key differentiating factor for the companies that were successful.

For the last 30 years, innovation in High-Tech industry has been largely driven by advances in physical technologies, such as electronics, mechatronics and nano-technologies, etc. Today, many of the engineers who architected the hardware revolution occupy senior management positions in industry. These leaders may have a profound understanding of physical systems, but often they understand far less about software. For them software has always been just another discipline, the ‘glue’ that makes hardware work. This point of view is incompatible with a successful digitalisation strategy.

Digitalization is fundamentally about exploiting new software technologies. Software is what makes a product intelligent and enables it to communicate. Any product category utilizing an adjective such as “smart” or “autonomous” is about exploiting embedded intelligence and connectivity, is software. For example, Smart Industry is about integrating machines into manufacturing systems and manufacturing systems into systems-of-systems with machine learning and artificial intelligence delivering end-to-end flexibility, higher throughput and lower costs. In this context, the role of hardware is set to become progressively commoditized while software will be the generator of increasing value.

Understanding the ability of software to generate value is utterly key to successful digitalisation and not a core competence widely present amongst the leaders of High-Tech industry. To borrow from Michel van Genuchten:

“Only when the CEO of a company knows how much of his company’s revenue is generated through software has that company truly embraced digitalisation.”

Author: Robert Howe, Lakana, member of the High Tech Software Cluster.