Digital Transformation in the High-Tech Industry

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1 Digital Transformation in the High-Tech Industry TECHNOLOGY IS ACCELERATING business change in nearly every industry, but it s especially daunting to high tech. A recent poll by PricewaterhouseCoopers (PwC) found that 60 percent of CEOs in high tech are either extremely or somewhat concerned that the speed of technological change will hurt their organizations growth prospects, compared with only 41 percent similarly concerned among CEOs in all industries. figure 1 That might seem paradoxical, given that these same CEOs are leading the very device manufacturers, component suppliers, and software vendors largely responsible for accelerating technology s pace. But the changes are also profoundly altering high-tech companies own internal operations, creating the need for a digital transformation. These transformations involve using technology to create differentiation by changing a process or business model. High tech is undergoing a tectonic shift, explains Tom Archer, U.S. technology industry leader at PwC. It starts with how and why the industry s customers want to purchase technology. Customers of high-tech suppliers are undergoing a digital transformation of their own. No longer satisfied with buying a discrete product or piece of software, these customers instead want solutions to specific business problems. They re especially interested in integrated platforms that combine hardware, software, and services that both create unique digital experiences for their customers and help their employees get work done. In response, the most progressive high-tech suppliers are transforming themselves to provide such solutions. HIGHLIGHTS n 60% of CEOs in high-tech companies are concerned that the speed of technological change will hurt their organizations growth prospects. n 38% of high-tech companies use mobile technology to interact, get feedback, and solve problems. n 13.7 billion devices with Internet connections are forecasted to ship worldwide in Consider Royal Philips, a diversified technology supplier based in the Netherlands. The company, which produces complex products for health care, consumer lifestyle, and lighting, has grown concerned over competition from lower-cost providers, according to recent reports. To fight back in the health care sector, Philips plans to offer medical CT scanners as part of a solution that combines consulting services and integration with its other products for end-to-end solutions. Integrated solutions should appeal to hospitals, says Martin Mocker, a research scientist at the MIT Sloan Center for Information Systems Research. They really do work together to address their business problems. Similarly, Lexmark International, well known as a manufacturer of computer printers, is now transforming itself into a provider of integrated digital solutions. Now this hardware is sold as a component of larger printing solutions that help customers manage such unstructured information as invoices, sales orders, images, and video. Copyright 2014 Harvard Business Publishing. All rights reserved.

2 Figure 1 What Keeps CEOs Up at Night? When asked How concerned are you about the threat of speed of technological change to your growth prospects? high-tech leaders indicate considerably more angst than other industry leaders. ALL CEOs 12% 22% TECH CEOs Extremely concerned 29% 38% Somewhat concerned 40% 26% Not very concerned 17% 13% Not concerned at all 2% 1% Don t know SOURCE 17TH ANNUAL GLOBAL CEO SURVEY, PRICEWATERHOUSECOOPERS, 2014 As part of this transformation, Lexmark has acquired 10 software companies, developed expertise in key vertical markets, streamlined its IT environment, and deployed analytics to improve the efficiency of its operations and services. Lexmark also offers access to its solutions from mobile devices. Keith Moody, the company s CIO, says Lexmark had no choice: Due to the consumerization of technology, customers now expect the same pervasive access to view, process, and print information that they get from personal apps such as search and . Customers don t want to buy just printers; they re trying to efficiently create the output they need, where and when they need it, Moody says. They re also trying to deal with all the content they have. Our value is less about the device and more about working with customers to devise a high-value solution to their unstructured information problems. 2 HARVARD BUSINESS REVIEW ANALYTIC SERVICES N = All CEOs 1,344; Tech CEOs 117 A Shattered Economic Model These changes from product sales to more iterative solutions, connected experiences, and service-based business models have shattered the high-tech industry s traditional economic model. Consider, for example, product cycles. In the past, cycles for enterprise software and mainframe-class servers would run over several years. The customer would make a major investment in the first year, then pay another 10 to 20 percent a year for a service contract until the product s next major release. In essence, customers were locked in, and the supplier s revenue was uncoupled from a product s effectiveness. As a result, suppliers had little incentive to improve the product, and the economic model was built on winning the big contract. Today, however, customers want to quickly co-create business solutions with their suppliers. This requires vendors to get closer to their customers and continually improve their products. What s more, customers no longer want to make a single large capital investment up front. Instead, they may prefer the pay-as-you-go and subscription-based pricing of cloud-based computing, applications, and storage services. Making these kinds of changes also requires high-tech suppliers to adopt new operating models on the financial side and new levels of speed and agility in every aspect of operations. Creating a 3-D Value Chain What does a transformed high-tech firm look like? A useful perspective comes from research firm IDC, which prescribes a 3-D value chain: Demand-oriented, Data-driven, and Digitally executed. Demand-orientated means getting closer to the customer to better meet market demand, calibrating the business to the external cadence of the market and customers rather than to the internal cadence of product development. Data-driven means managing based on data captured for analysis as it is produced; this makes management more accurate, agile, and productive. Digital execution means that the more instrumented and connected the enterprise, the less it will need to rely on slow and imprecise human intervention. An organization executing digitally will be fast, effective, close to the customer, and in possession of highly accurate data. Bob Parker, group VP and general manager at IDC Retail, Energy, and Manufacturing Insights, says the 3-D value chain is both cumulative and interconnected. To explain, he offers the example of A-B testing, commonly used by big retail sites such as Amazon and Apple itunes to test how customers react to one variable in a binary choice scenario. If Jane comes to the website and I show her A, and Joe comes to the website and I show him B, and I have more success with B, then there s live in-line experimentation that combines being demand-oriented

3 with data-driven, he says. Then, as I analyze the data and act on it, there s digital execution. In effect, demand orientation is a precursor to being data-driven. And being data-driven is a precursor to digital execution. Another example of the 3-D chain comes from Adobe Systems, a provider of software for creative professionals and consumers that recently has gone through a business transformation. In the past, Adobe sold boxed software; today it generates most of its revenue from cloud-based software services. Now, according to a recent case study, Adobe monitors customers cloud-based subscriptions to learn how actively a product is used and when a change is needed. The resulting change has been dramatic. Adobe used to release new versions every 18 months. But now, upgrades are made continually, based on managers observations of customer behavior. Similarly, Adobe has changed the way it interacts with customers. In the past, the company had only periodic customer interactions, mainly through its resellers and partners. Today, Adobe interacts with customers continually across multiple channels, including social media, display ads, , the call center, direct sales, and the company s website. This change in turn has required Adobe to adopt new technology itself. The company now uses fast in memory computing systems a high-performance, integrated platform that powers transactional systems as well as analytics at real-time speed to analyze data from these interactions on the fly. These systems help Adobe understand its customers better, respond quickly to their needs in a personalized way, and even predict their future requirements. In essence, Adobe has implemented a 3-D value chain to operate with speed and agility and in a way that s more aligned with its customers needs. High Tech Drives the Transformation Adobe aptly illustrates the key role played by advances in technology to drive transformation at high-tech firms. Whereas in the past the business model was driven by engineers coming up with ideas for new products and companies taking them to market, today technology is driving the change, Archer says. Which technologies are most essential? The industry has coined another acronym, SMAC, short for social media, mobile, analytics, and cloud. As the acronym implies, these technologies are interrelated; when combined, the whole is greater than the sum of its parts; some call this combination the SMAC stack. Add to SMAC the Internet of Things, big data, and fast IT platforms such as in-memory computing, and you have key building blocks for digital transformation. Social media is transforming the way high-tech companies interact with customers, helping illuminate what the market wants and how customers view current features and products. Social is also an ideal channel for personalized communications and the connected experience. Social business apps have a place inside the enterprise as well. Social enables employees to connect outside the company hierarchy, says Mocker of MIT. It can improve process speed and encourage the cooperation and collaboration necessary to help create integrated products. Mobile technology not just smartphones and tablets, but also software that connects them securely with enterprise systems provides high-tech suppliers with anywhere-anytime access to customers. Already, more than 60 percent of high-tech firms use mobile to connect with customers in some way, such as mobile advertising, according to PwC s Digital IQ Survey, taken earlier this year. figure 2 Similarly, nearly 40 percent actively interact with customers, receive feedback, and problem solve, enabling them to capture data for analysis from those interactions. Nearly 20 percent have given customers mobile transaction capabilities. Yet only 11 percent use mobile for such co-creation as the kind of A-B testing mentioned earlier; clearly, there s room for improvement. Taking advantage of data from social, mobile, transactions, and other sources is the province of analytics. The technology is important, but in the end it s all about information, says Moody of Lexmark, an extensive user of analytics. The imperative starts with getting good data through master data management, but analytics enables us to take all the data, which might seem unwieldy and unmanageable, and gain insights from it. Figure 2 How High-Tech Companies Use Mobile Technology N = 1,494 38% Interact, get feedback, problem solve 26% Inform and educate 19% Quote and sell products/services 11% Gather, co-create new products/services, ideas 5% Don t know 1% Other SOURCE 6TH ANNUAL DIGITAL IQ SURVEY, PRICEWATERHOUSECOOPERS, HARVARD BUSINESS REVIEW ANALYTIC SERVICES

4 Analytics at Lexmark rises to the massive volumes considered big data, in part because of the phenomenon known as the Internet of Things, in which sensors in instrumented devices broadcast status reports, error messages, customer usage habits, and other data. figure 3 Although today s high-tech firms could easily instrument and connect many of their products, managing the voluminous data, analyzing it, and gleaning insights present both challenges and opportunities. For Lexmark s managedservice customers, sensors in the printers broadcast data in real time that is analyzed for consumption-based billing and to predict when a device needs toner or is ready for service. Similarly, Philips could capture and analyze anonymous data from its Hue lighting solution to gain insights into how customers use the product. To make this work, high-tech companies must have an IT platform powerful enough to manage the data and deliver timely insights. A lot of organizations are struggling to address that issue, Moody says. Those that do will gain a unique advantage. Bill Veghte, chief operating officer at Hewlett-Packard, puts it this way in a recent statement: To succeed, organizations need to make fast, informed decisions by extracting large amounts of raw data from their systems and turn it into information that is meaningful. This challenge has led Adobe, HP, Lexmark, and other high-tech firms to in-memory computing. Parker of IDC also notes that in-memory can scale to handle the massive transaction volumes of B2C firms such as phone manufacturers and music download sites. The high-tech industry will be the head of the spear for in-memory computing, he says. It all comes down to speed, and high tech is looking at the clock while others are looking at the calendar. At Lexmark, in-memory computing helps managers speed analytics as well as operational systems such as global inventory management and order fulfillment. At first we focused on improving our operational reporting, CIO Moody recounts, but now we see opportunities to combine data sources such as the printer-usage information and service histories we get from our customers. This will help us discover patterns so we can offer more proactive services. Creative use of SMAC and other technologies is helping hightech companies provide solutions closely attuned to customer demand, managed by decisions grounded on real-time data and executed through a fast and agile IT environment. They re the building blocks of digital transformation and the foundation of future success. Figure 3 The Rise of the Internet of Things Forecast for worldwide shipments. Total taken from eight major industries: automotive, communications (fixed), communications (mobile), computers, consumer, medical, industrial, military, and aerospace. BILLIONS OF DEVICES TOTAL INSTALLED BASE NEW SHIPMENTS SOURCE INTERNET-CONNECTED DEVICES: EVOLVING FROM THE INTERNET OF THINGS TO THE INTERNET OF EVERYTHING, IHS TECHNOLOGY, HARVARD BUSINESS REVIEW ANALYTIC SERVICES

5 Sponsor s Perspective Unleashing the Business Innovation Potential of High-Tech Companies High-tech companies across the globe face many challenges as new competitors emerge and customers expectations rise. Rapid changes in technology and market dynamics make it difficult for these companies to stay ahead of the curve and grow. The mandate today is to innovate quickly, operate in real time, and bring relevant innovations to the market faster than any time in the past. Jeff Howell, vice president of the high tech industry business unit at SAP, and Dirk Wenzel, head of global high-tech marketing at SAP, discuss the transformation that high-tech companies must make to respond to these critical changes. What is the most important challenge for SAP s hightech customers today? There s huge pressure on high-tech companies to bring more innovations to the market faster and meet the everchanging customer demands and this is across the board from chip designers to high-tech manufacturers to software companies. This adds a tremendous amount of complexity to their business. This in turn means that they need to stay much closer to their customers and make sure they deliver the right innovations at the right time. At the same time, they need to have full visibility and control across their business functions in real time. In short, they have to transform into lean and effective innovation machines. Which emerging technologies can play a role in this transformation? High-tech companies need a modern and agile business platform that supports rapid innovation and provides a new set of capabilities so that they can implement new business models along with new product introductions. For instance, we see a strong trend in high tech to go from selling widgets to selling end-to-end solutions and, in some cases, to deliver these on a subscription-based model or through the cloud. This might sound easy at first glance, but many business applications make this a very complex or even impossible task. We believe that SAP HANA platform is the perfect foundation for high-tech companies. It enables them to immediately modernize their SAP business suite while also taking advantage of some of the most innovative applications that SAP has purpose-built for high-tech companies. Further, with the power of in-memory computing and the SAP HANA platform, they can get real-time insight into their business and truly unlock the value of their big data. Why is this technology critical for success? Today we are digitally connected, socially networked, and better informed. Customers live their lives in the moment, updating their relationship status, interacting with their friends, and sharing their likes, dislikes, and opinions in real time through the power of their mobile devices. They re changing the rules of engagement and becoming more empowered. It s easy to think about this in the context of business to consumer (B2C), but this empowerment and these experiences set expectations for how business to business (B2B) commerce works as well. When we add the aspect of machine-to-machine communication to the mix, the result is an enormous amount of information. The value contained in this information is huge, too. When we re able to unlock this as seen in the examples provided in this report we can truly change business. TO LEARN MORE, VISIT saphana.com/welcome hbr.org