Future markets will be a combination of “dollar” and “non dollar” markets. Industry 4.0 / digitalization will lead to “dollar” markets shrinking but total markets, “dollar” + “non dollar” growing. Basically this is a sum of the last 2 blogs. .The final piece for me in this 3 part story is what happens to industrial companies and how will they thrive and compete – if Industry 4.0 is just going to accelerate the shrinking of “dollar” markets.
The answer for me is that value chains (the collections of customers and suppliers that form partnerships to compete) need to also to blend “dollar” and “non dollar” methods to supply goods and services to meet customer needs, reflecting the new reality of digital markets.
To explore and test this, I will set up a thought experiment to sum up the ideas about how the “dollar” markets will change due to digitalization, and then consider how we can blend “dollar” and “non dollar” in the supply as well as customer side. This thought experiment is ultra simplified to make a point, but could easily be scaled up to a complex model.
Consider a more traditional global setup of some market segment before widespread digitalisation. We will just think of two large regions far apart from each other ( Region 1 and Region 2). In each region, a Value Chain has emerged of linked producers to provide offerings to regional customer needs (Value chain 1 for Region 1 and Value chain 2 for Region 2). Its a global world, so some of the offerings from Value Chain 1 go to Region 2 and visa versa.
Scenario 1:
Global customer demand:
Region 1 | Region 2 | Total
Customer needs: 10 | 10 | 20
Of which are
shared: ° — 5 — ° | 5
of which are
Unique: 5 | 5 | 10
In all 15 unique needs
Global production :
Value chain 1 Value chain 2
Number of offerings: 10 | 10 | 20
From other
value chain: ° — 3 —-° | 3
Of which are
unique 7 | 7 | 14
In all 17 unique offerings
Scenario 2: Along comes digitalization:
Number of customer
needs fulfilled
Region 1 | Region 2
Unique needs
fulfilled: 4 (of 5) | 3 (of 5)
Shared needs
fulfilled: ° — 5 — °
Platform offerings |—-12.—–I
Value chain 1 | Value chain 2
Value chain
offerings: 6 | 6
Custom made
offerings; 1
Needs not met: 1 | 1 (2 needs not met)
So what has happened ?
First – and this is a key part of any digitalization of a market – global “accessible” choice has increased . In the first scenario, there were 10 offerings on the market in each region . In the second there are 12. The platform dynamic of digitalization kicks in.
Next- the hidden downside outlined in the first blog – customers cannot fulfil all their needs as global “total” choice reduces. 3 needs cannot be met by the platform offerings. One is custom made (value justifies the increase in cost ) but 2 are withdrawn from the market. This is the effect mentioned in the first blog where companies can no longer cross subsidize offerings, so they take offering off the market – as cross-subsidized offerings option is stripped away due to the ability of digitalization to ensure customers just pay for that part they want.
As a result – finally – the dollar market offerings (and hence the “dollar” market itself) have shrunk as need and production become transparent. Each value chain has gone from 10 offerings each to 6 offerings each. Almost certainly due to higher competition and emerging transparency eliminating any offerings that are subsidized by other offerings.
Now nature (and markets) abhor a vacuum so something has to happen to meet the needs of customers – in reality they will not go unmet as illustrated in the model. The model is incomplete and something else must happen to allow needs to be met, even if value chains cannot afford to.
First a recap : Industy 4.0 will just make things worse – it is the enabler to shrinking “dollar” markets. Value chains will start by digital-enabled accelerated optimization of production and development – agile product development with increased software and simulation, additive manufacturing and other fast prototyping, fast Development and flexible manufacturing Technologies – leaner supply chains emerge to deliver only whats wanted – “pay as you use” efficient cloud based IT infrastructure will be even more widespread as flexibility at “efficient cost” spreads and companies need to transfer the “pay only for what I want” customer demand through the supply chain so we have “scale cost one to one to what is payed for” – automation of white collar and blue collar work accelerates with cheaper hyper flexible automation among others – “digital factories” emerge in all their possible forms – so factories are more & more decoupled from any particular design needing to be produced , and so on with all the drivers and buzz words around Industry 4.0. All these initiatives just accelerate the digitalization of the total market and shrink market size (for “dollar” part of markets).
All this implies a downward spiral on the value chains that in turn deprive customers at a total market level of fufilling needs whilst they are being drowned in choice driven by global platforms.
However, previously, we suggested we will move to a situation where the total market would be a “dollar market” + a “non dollar” market. Customers will access value by combining both markets, so the “dollar market” could shrink but total (dollar + non dollar) market could still grow. Customers will not be limited to paying the value chain – they can access sharing economy solutions – maybe also carve out and access only part of the value chain and do the rest themselves – or other options opened up via full digitalization.
This same dynamic, however, is also available to industrial companies (after all one persons supplier is another persons customer and value chains are just collections of customers and suppliers that form partnerships to compete with other value chains )
This leads to an obvious answer in how will we compete when Industry 4.0 hits: value chains need to also be made up of dollar and non dollar means of production as they transition via Industry 4.0 to a digital world.
So how does dollar & non dollar blended means of production work?
Today we are already seeing some elements emerging, building on business models that have been part of the Internet subculture (like the open source movement) since its birth.
We have seen the fruits of this social / sharing economy subculture moving into industry, with for example, open source being a part of the corporate infrastructure (eg think apache servers). We also have “old” stories from corporate business of how sharing economies could work for large investments / capital expenditure (as opposed to end user sharing of their personal investments like cars or houses), such as corporate jets being shared between Customers (Netjet).
From this we start to see new patterns. Cloud platform houses that serve large companies are building open source into their offerings, releasing more code to open source and developing and changing their offerings by combining own development with shared and open source development – building customers into the development requests and outputs, much like open source. An example of this is microsoft Azure platform with 1000’s (ok maybe 100’s) of tools accessible – many being open source and much of the code also released – and the development also run in an agile and ”open source” like way with customers. Not sure if it will be successful but its a serious attempt to blend dollar & non-dollar markets and if they reflect this blend in price & value of offering, it could work. It certainly is a very fast dynamic platform – at odds perhaps with Microsoft traditional corporate image.
Another example is emergence of ventures trying to offer capacity on 3D printers to others and I’m sure many other types of industrial asset sharing ventures will follow (another prediction – don’t forget to allocate a fractional value of your company shares to me if this idea is new to you and you start up a venture from it) – so a company can share the cost of invested capital by sharing capacity.
As we move to “digital” products (discussed before) and Industry 4.0 technologies , this type of industrial sharing will become easier and be more and more frequent. We can see with the emergence of shared 3D printing capacity ideas (additive manufacturing) , the key is to solve guarantees of data security – but this is already happening. Then companies can offer, for example, “shared” spare capacity in the same way we share car capacity in say “Go More” or houses in “Airbnb”. This capability to share will be accelerated by Industry 4.0 trends that have a tendency to move the value to the digital part of production and design.
This sharing can easily be extended. As manufacturing designs become digital, it is easy to see that some design templates will become public, others may be available in some kind of libraries at significantly lower prices. Companies wanting to meet customer needs, but needing to keep profit and margins, could start blending offerings – combining their own designs and using their manufacturing capacity and supply chains to also make “free” or shared designs to enable wider offerings – or using their assets to make products for other value chains. We see the release of IP from Tesla playing directly into this arena. We also see libraries appearing on the internet for devices that can be created for 3D printing – its not hard to imagine these designs also encompassing more industrial areas rather than fun things for the home – a quick scan of some of the serious enthusiast areas shows this is not a long way from this (browse thingiverse or grabcad if you want)
So what will we compete on in the future?
In the digital future, customers will be able to get their products from multiple supply chains with help of platforms to get best cost. However, some companies and value chains will be a much better “experience” than others – they will claim higher “non dollar” value through ratings, reputation and other social/shared currencies – and these will become key to success – both for their financial credibility in the “dollar” world and success overall. The future will go to those that compete in both “dollar” and “non dollar” economies.
This will require excellence in two arenas. First, those that can blend the two worlds into their value chains to ensure the correct blend of own offerings with own value add, combined with shared/free offerings of the “non dollar” market to ensure the best value to cost possible. Second those that can create experiences to transfer this value to customers and achieve highest social / shared economy Capital.