A New Business Model: To Accelerate Growth, Manufacturers Must Innovate Beyond Their Products

To mitigate this risk, manufacturers must put themselves in a better position to respond quickly to … [+] changing market conditions. This means building on their existing business models to consider how every element of their operations can be positioned to drive value for the company. Agility and flexibility — or “optionality” as Nyquist puts it — are the new pillars of success.

getty

Renowned American entrepreneur Steve Blank describes a business model as how your company creates, delivers and captures value. And for decades, the manufacturing industry has defined that value through its ability to create, deliver and innovate products.

This will always be high on the list of any manufacturer’s core competencies — they are, after all, in the business of making things. But how can they accelerate growth? As the world and marketplace evolve, their products must also become just part of the story when it comes to the full value they can bring. In fact, rather than focusing only on features and functions, the firms that adopt a growth focus in the future will be the ones that broaden their view beyond their products to become truly business model centric instead.

Room for improvement

There is work to be done. According to the recent EY CEO Imperative study, only 30% of manufacturing leaders identify business model innovation as a top growth and transformation driver, well behind sectors such as technology (55%) and finance (38%). This, in turn, limits their ability to seize new opportunities in an ever more dynamic marketplace.

As Ernst & Young LLP Principal, Stephen Nyquist, puts it: “Most manufacturing firms’ commercial models were designed primarily to push products to market as efficiently as possible (i.e., drive out cost). But in today’s highly changeable geopolitical and economic landscape, sticking with this product-led approach leads to a rigidity and slowness that actually create a risk to growth.”

To mitigate this risk, manufacturers must put themselves in a better position to respond quickly to changing market conditions. This means building on their existing business models to consider how every element of their operations can be positioned to drive value for the company. Agility and flexibility — or “optionality” as Nyquist puts it — are the new pillars of success.

It starts with customers

Shifting to this more multifaceted approach starts with truly understanding the value their organizations create — but not by putting products or costs at the center of the discussion. Rather, firms must look at value through the eyes of their customers and, in doing so, start to identify buyer segments (and opportunities) beyond just the folks to whom they sell their products.

For example, imagine a parts supplier to an industrial original equipment manufacturer (OEM). That supplier might view the relationship in a very traditional way; in other words, it provides the components the OEM needs to make its own end product. But if it were to take a more customer-centric view, the company will start to see that, in truth, components are not the only way in which it provides value.

Maybe the OEM values the supplier’s ability to distribute its components across multiple plants in multiple geographies, which means that customer relationship is more than just the products themselves. And once the parts supplier has identified that benefit, it changes the discussion around value.

Show me the money

Spotting these additional value creation opportunities is the first step, but the most important element of all is finding ways to monetize them. So, to take the same parts supplier from above, what would it take for the company to actually make money from its distribution competence? Answer: design and implement a business model that allows it to sell this as a service for others in the market.

Naturally, alongside a new operating mindset, this new business model also requires the right people to drive it. As Nyquist says, “You have to put in place a cross-functional team with a decision-making process that balances growth, risk and cost and that lets you create various business model options according to which products and/or services you want to deliver.” In other words, true business model innovation also requires a willingness to reshape an organization’s talent and recruitment strategy.

Evolution not revolution

Of course, shifting away from a traditional, product-centric definition of value represents a considerable change for the vast majority of manufacturers, many of whom will have built their companies on a legacy of efficiency, cost optimization and product usability. Such transformation can sound daunting.

So, perhaps a better way to look at it is as evolution not revolution. This is not about getting rid of current business models. It’s not even about changing them. Instead, it’s about firms adding new business models that create fresh opportunities for revenue and growth — not the incremental growth that tends to be associated with product innovation either, but true step function growth because it takes them into new markets.

To go back to the earlier example, perhaps that same parts supplier develops a competence centered on product traceability through the blockchain. The supplier then goes through the steps outlined above to build a business model that can take this to market as a service. A whole new stream of value is created in addition to (not instead of) its existing products and distribution capability.

In fact, when it comes to the shift toward business-model-centric innovation, this is perhaps the most exciting aspect of all. Amid the undoubted challenges of a dynamic marketplace, opportunities abound and so do the potential ways to seize them. As Blank says, a business model is a way to create, deliver and capture value. If they’re brave enough to innovate beyond their products, today’s manufacturers have a chance to do so multiple times over.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.