Winning in the Digital Age. Strategic Architecture for Technology Industry. - a White Paper

Winning in the Digital Age Strategic Architecture for Technology Industry - a White Paper

Winning in the Digital Age: Strategic Architecture for Technology Industry a White Paper Fimecc Oy, Tampere and Tieto- ja viestintäteollisuuden tutkimus TIVIT Oy, Espoo June 2012 Author: Timo Argillander, Digital Media Finland Oy

Strategic Architecture White Paper 3 (14) TABLE OF CONTENTS 1. Executive Summary...4 2. Key Trends and Disruptions in Technology Industry Business Environment...4 2.1. Digitalization and the Internet Redefine Business Environment...5 2.1.1. Internet is the Key for Transformation...5 2.1.2. Data is the New Oil...6 2.1.3. Internet of Things Brings New Opportunities...7 2.1.4. Consumer Market Innovations Have an Impact on Industry...7 2.1.5. Towards Cloud Based Systems and Lean ICT Development...7 2.2. Transformation of Value Chains...8 2.2.1. Services Become Essential and Complement Product Offering...8 2.2.2. Developing Service Ecosystems...9 2.2.3. Prepare for Disruptions...9 2.3. Other Trends Affecting the Business Environment... 10 2.3.1. The Pace and Complexity of Change Grow... 10 2.3.2. Developing Countries Develop into Lucrative Markets... 10 2.3.3. Environmental Challenges Shape the Market... 10 3. Why Strategic Architecture Toolbox?... 10 3.1. Vision: Technology Company 2020... 10 3.2. Structure of the Toolbox... 11 3.2.1. Requirements... 11 3.2.2. Checklist on Actions for Successful Change... 12 4. Strategic Architecture Toolbox... 12 4.1. 12-Part Model... 12 4.2. Three Main Phases... 12 4.2.1. Analysis Phase... 13 4.2.2. Design Phase... 13 4.2.3. Operations Phase... 13 5. Strategic Architecture Developers... 13 5.1. SHOKs, Fimecc and Tivit... 13 5.2. Industry Team... 14 5.3. Authors... 14

Strategic Architecture White Paper 4 (14) 1. Executive Summary FIMECC and TIVIT have produced this White Paper and accompanying Strategic Architecture Toolbox in order to support technology industry companies on their path towards future business, where ICTenabled services play an elementary role. Digitalization and transition of value chains are two megatrends that affect all industries. Digitalization and the Internet have changed the ways how companies and individuals connect, communicate and transact on a global scale. This has enabled the emergence of global, highly competed value networks. For technology industry these megatrends mean growing global competition in manufacturing and the need to find new sources of competitive advantage in order to prosper. A key source of competitiveness for technology industry companies lies in digital processes, which enable e.g. customized production and expansion into service offering. Shift into service business and to digital services requires a major change in technology industry mindsets. When compared with traditional manufacturing-centered business, in services there are groundbreaking differences in strategic planning, business models, operative processes and competence requirements. However, addressing these differences and creating new ways of working are elementary in order to achieve success in today s business environment. In a nutshell, a successful technology industry company of the future will - have positioned itself favorably in its ecosystem and is taking the benefit of and developing the ecosystem as a whole; - utilize an ICT architecture, which is based on core competencies and business requirements; - provide its customers a first class user experience and value added; - speedily and flexibly implement plans and processes utilizing relevant technical and other developments; and - have competent and motivated employees. To reach this vision, a structured Strategic Architecture Toolbox for addressing relevant development needs has been created. The Toolbox provides tools for four dimensions: strategy, operational processes, ICT architecture and ecosystem development. The Toolbox provides a holistic set of tools for technology companies transition into new business paradigm, where ICT-enabled services are the key source of competitiveness. The Toolbox is a concrete development framework for strategic planning, process development and ICT architecture creation. 2. Key Trends and Disruptions in Technology Industry Business Environment Technology industry is the leading industry branch and employer in Finland as well as in other industrialized countries. Technology industry companies produce a wide variety of technology and engineering products such as marine equipment, elevators, cranes, metal process equipment, construction machines, mobile work machines, and services in operating fleets of these. Technology industry has undergone structural changes, as many companies have moved their manufacturing to lower-cost emerging countries. In the current era of growing global competition it becomes critical for technology companies to develop and utilize new competencies and strategies in order to succeed in the future as well.

Strategic Architecture White Paper 5 (14) We can identify two key megatrends that characterize the changing business environment of today s technology and engineering companies. First, digitalization, growth of data and the emergence of global interconnected network the Internet have changed the ways how companies and individuals connect, communicate and transact on a global scale. While digitalization is originally a technical development, it has significant and large-scale business implications. Actually the overall impact on society and in every business will be as radical as the impact of industrialization has been. However, this time the development will be faster due to the exponential growth factors in digitalization. Secondly, the industrial value chains are in transition. Developing economies such as China and India have developed into the world s most cost-efficient places for manufacturing thanks to their supply of workforce and low employee remuneration levels. On the other hand, Western economies still show competitive advantage in the both ends of value chains: in product development and in services. These megatrends that are taking place simultaneously have brought us to a global marketplace, where competition is efficient and where agility and speed are essential in succeeding in business. At the same time customers have become aware of the new opportunities and their requirements constantly elevate to new levels that the vendors need to match. It is no more enough to polish the existing well-served products and make incremental improvements. To win the competition technology companies need to proactively develop novel solutions and business models that put them in the pole position. These trends and their implications for technology and ICT industries are further elaborated in this chapter. 2.1. Digitalization and the Internet Redefine Business Environment 2.1.1. Internet is the Key for Transformation Digitalization and ICT have had an impact on industry s productivity since the 1970s when computer systems started to emerge in enterprises. ICT provided efficiencies in single functions, such as accounting or computer-aided design and manufacturing (CAD/CAM). Technology has developed ever since, but a major structural transformation and shift of productivity started to take place when the Internet became a global standard for exchanging information and interconnecting separate computer systems with each other. The Internet provides interconnectivity both internally within companies and externally between companies or within ecosystems 1. Companies ICT architecture is transitioning from a collection of single-function ICT systems to an approach where all processes form a uniform digital value chain (see fig. 1 below). Transition to company-level cross-functional ICT systems will bring increased flexibility, better production flow and faster time-to-market. All these are necessities in today s fast-moving markets. 1 An ecosystem is a loosely definable group of companies that share common interests in an industry. See also chapter 2.2.2.

Strategic Architecture White Paper 6 (14) Fig. 1. Paradigm shift: ICT transformation from single-function solutions to a unified approach over the value chain Externally the utilization of interconnected ICT systems will enable companies to take the benefit of networks and ecosystems. Standardized ways in procurement, logistics and sales will create efficient markets and competitive advantage for companies that are able to take the benefit of the new Internet economy 2. 2.1.2. Data is the New Oil In a digital world, every single operation and transaction leaves a digital trace. Vast amount of cumulated data allows companies to analyze their internal and external activities in a way, which has not been possible before. This approach, referred to as big data, will help companies to better develop and organize the way they are working. Big data can benefit all company functions from product development to service process operation. Utilizing data is becoming a part of corporate strategies. The vision statement of Konecranes Plc illustrates this: We know in real time how millions of lifting devices and machine tools perform. We use this knowledge around the clock to make our customers operations safer and more productive. For Eniram Ltd. collecting and analyzing data is the core of its business. The company collects data on marine vessel performance and operating conditions. By analyzing the huge database consisting information on several vessels the company can provide its clients information that helps to drive the ship in the optimal position, or trim. Optimizing the trim leads to a remarkable fuel saving. It needs to be noticed that big data is not about collecting personal information on individuals but rather anonymous data that helps to understand processes and customer behavior patterns better. In an interconnected world some companies might decide to disclose some of their data. Then third parties could analyze that data and develop it into new services, which would bring indirect benefit for the company from where the data is originated. This approach is called open data. An example of open data approach is Helsinki region traffic council that provides public data on their real-time tram locations. A third-party company has then developed a consumer service showing tram movements on a map. An industrial company could open up e.g. its environmental measurement data. Third-party developers could then develop information services based on data collected from various factories. Such approach would also serve company s reputation as a responsible actor. 2 Internet economy refers to a business environment that is characterized by the utilization of the Internet and Internet-enabled new business models

Strategic Architecture White Paper 7 (14) 2.1.3. Internet of Things Brings New Opportunities Gradually all machines and devices can be allocated an IP address 3 and they can communicate with other devices. Internet of people is expanding to Internet of things, where machines will be transmitting monitoring and status data, and other machines and systems can take appropriate actions without human intervention. Today this kind of machine-to-machine (M2M) communications are utilized especially in service and maintenance operations. Self-diagnostics of machines will develop into an essential part of technology industry s service offering. Simultaneously this also strengthens relationships with customers and minimizes customer churn. In Sandvik AB s AutoMine concept driverless trucks operate in a mine controlled by traffic management software system. In case of machine break-downs the system can reroute underground traffic. The system increases efficiency and improves working conditions and safety. 4 2.1.4. Consumer Market Innovations Have an Impact on Industry Key innovators in the digital industry are B2C companies such as Apple, Amazon and Google. Digital consumer devices and services often boast the latest technologies and additionally physical and usability design that make people find those devices superior and desirable. For example leading consumer mobile devices are significantly more attractive than their enterprise counterparts. At the same time, people s behavior develops towards a shorter span of attention, always on-line social networking, gaming and entertainment culture. This will bring challenges in motivating people to work with cumbersome or dull devices and systems at their workplace. These developments lead to consumerization, where employees bring their own devices to their workplaces rather than using corporate standards. While this is clearly an issue for corporate IT, the development can bring also positive consequences for companies. Consumer product innovation can be utilized in B2B operations as well, where consumer devices and services can act as a source for product and service innovations. Huge consumer product volumes bring down the cost and define the ways, how we are using technology also in business applications. 2.1.5. Towards Cloud Based Systems and Lean ICT Development Key revolutions in ICT development are transitions to cloud based paradigm and lean or agile software development. Cloud based systems offer flexibility and scalability that are required in the changing business environment. Utilizing cloud services also shifts cost structure from investments to variable costs, which allows easier entry into new businesses and fast piloting of new innovations. Lean and agile software development is taking over traditional monolithic system development approach. Lean software development 56 applies lean manufacturing approach in software business. In the agile model development is based on short iterative development cycles (called sprints ) and fast prototyping. Lean and agile paradigms address software development processes with largely similar approaches. The clear benefit with lean and agile models is that project stakeholders including end-users can provide feedback and clarify their needs during the development process. 3 IP address (Internet Protocol address) is a unique and mandatory numerical identification for computers and other machines that connect to the Internet 4 For more information see http://www.automation.com/resources-tools/applicationstories/machine-monitoring-control/sandvik-automates-mining-operations-with-automine-system 5 http://en.wikipedia.org/wiki/lean_software_development 6 Mary Poppendieck, Tom Poppendieck (2003), "Lean Software Development: An Agile Toolkit", Addison-Wesley Professional, ISBN 0321150783

Strategic Architecture White Paper 8 (14) 2.2. Transformation of Value Chains 2.2.1. Services Become Essential and Complement Product Offering Mass manufacturing has largely been moved to China and other developing countries. This is due to the lower cost level and also the growing product demand on the Asian markets. The cost savings for many industries have been big enough to cover the growing costs in logistics. Digitalization and the development of the Internet have also contributed to this development. While big-scale mass manufacturing has lost its competitiveness in developed countries, the West still has significant advantages in the both ends of the value chain: in product development and in services. Figure 2 below illustrates this by showing the value added per labor hour during different phases of the value chain. These functions with highest value added also enjoy best profit margins. Fig. 2. Value added per work hour in value chain 7 The challenge with the phenomenon illustrated in Fig. 2 is that if mass production - or any kind of production - is moved totally away from the neighborhood of other value chain phases, there may be problems both in production and in getting ideas and feedback from production to other phases. This has lead to re-shoring, transferring production back to home countries despite of higher personnel costs in order to exploit co-location benefits maximally. Signs of this development can be seen e.g. in Germany and in the US. In technology industry the business is most often about delivering B2B products or solutions that best suit the customers business needs. From this follows the need to tailor the products and solutions for each customer. The ability to customize the offering is another source for competitive advantage for Western technology companies. Revenues of service operations are growing and have a potential for a further growth. The same applies to other intangible parts of the solutions offered such as software. A growing amount of services are delivered digitally over the Internet. Digital services allow efficient and scalable business models and provide a major, if not primary source of competitive advantage in the future. The emphasis shift from manufacturing to service and software provision has a groundbreaking impact on the business and operational models of industrial companies. Future products need to be 7 Pajarinen, Rouvinen & Ylä-Anttila (2010): Missä arvo syntyy? Suomi globaalissa kilpailussa. Etla. (In Finnish)

Strategic Architecture White Paper 9 (14) developed in conjunction with service and digital solution offering. Services and digital solutions will become a key component of the technology industry business. The new service-based business models may lead to growing income and healthy margins but simultaneously require fundamental changes in the ways companies operate. For a product-only company this requires the big effort of transforming the company culture and acquiring new competencies. Even though Western companies still have an advantage in product development and service creation, countries like China and India are developing such competencies as well. From the growth of emerging markets also follows that manufacturing and services need to be present on those markets as well. 2.2.2. Developing Service Ecosystems The new service ecosystems call technology companies to radically transform their ways of thinking. Traditional machine building business has been about optimizing and planning the production and calculating product margins. Services and software based business is about understanding added value and creating pricing models that are based on the value added. The fundamental shift requires new mindsets and the ability to change operating models that have been in place for decades. An ecosystem is a loosely definable group of companies that share common interests in an industry. The companies within an ecosystem may be competitors or co-operation partners, but they all are at least to some extent depending on the success of the ecosystem as a whole. One company can be part of several ecosystems with different roles and strategies. The ecosystem and its all stakeholders have also a major impact on the end user experience. If a company desires to guarantee the end user acceptance of its products and services, it has to be aware of the ecosystem where it is operating. To succeed within an ecosystem a company has e.g. the following strategic options: 8 The first is to build dominance in the ecosystem. An example is Wal-Mart, which has built an ecosystem around the company and where it delivers detailed data for vendor companies so that the vendors can fine-tune and develop their offering. The second option is to develop a key actor position. A frequently used example is the role of Microsoft in PC business. Its operating system is essential for the most of the PC vendors. The third possible choice is to create a niche position, where the company offers some key service or product component that is valuable for the whole ecosystem. Entering service ecosystems require new thinking in two dimensions: understanding the logic of the ecosystem businesses and acquiring new service and digital competencies. 2.2.3. Prepare for Disruptions Changes in value chains and value networks fueled by digitalization development will lead to emergence of new disruptions. As barriers to market entry lower, and the Internet shortens the distances, new actors will come to market with often radically different business models. Disruptions can challenge e.g. business models, pricing schemes or distribution and reseller channels. As always, this development brings both threats and opportunities. For technology industry companies service based business is a potential source for disruptive opportunities. Kodak is a well-known case of how business environment disruption can ruin a world-leading company. Actually Kodak s flaw was not that it would have missed digitalization of photography. Instead, Kodak was actively developing digital offerings and it even managed to become the #1 digital camera vendor in the US. What happened simultaneously was that photography and camera business transitioned into consumer electronics business. Kodak s competence and DNA was in developing high-quality technical solutions while market required easy functionality, short product cycles and low-cost mass manufacturing. Kodak couldn t answer the new market needs and lost their market position. 8 Marco Iansiti and Roy Levien (2004): Strategy as Ecology. Harvard Business Review, March 2004

Strategic Architecture White Paper 10 (14) 2.3. Other Trends Affecting the Business Environment 2.3.1. The Pace and Complexity of Change Grow In an interconnected world where technology continues its ever-faster development, companies need to be able to operate in an environment where the pace of change and the complexity continuously grows. Companies need the capabilities to transform their ways of working and utilize agile development methods. Further it is essential to understand the transformations that are taking place and to adopt tools and enter partnerships that are available in their ecosystems. The fast pace puts lots of pressure on the employees. New requirements continue to emerge and people need to re-educate themselves constantly. A wise company will support people to develop their skills in order to keep their competencies up-to-date and creates a culture where the constant change is a commonly accepted fact. 2.3.2. Developing Countries Develop into Lucrative Markets The rapid development of BRIC 9 and other developing markets lead not only to competition in manufacturing costs but these countries also become important buyers of industrial products and services. New markets have different needs and requirements, so need for customization of product and services offering becomes even more important. 2.3.3. Environmental Challenges Shape the Market Environmental challenges and the requirement for sustainability will affect all industries. For individual companies this means taking environment and sustainability in account in their strategy and product development. Further, a new prerequisite is being able to openly provide information on company s and its products impact on the environment. 3. Why Strategic Architecture Toolbox? In this transforming landscape technology and engineering companies need to reincarnate themselves into active and agile actors that develop and provide their products and services within flourishing ecosystems. A group of Finnish technology and ICT companies have developed a Strategic Architecture approach, which will help technology companies in their intentions to rapidly pilot and implement new service business models. The Strategic Architecture Toolbox is a practical tool for implementing ICT solutions based on business requirements. 3.1. Vision: Technology Company 2020 To illustrate the big picture, the Strategic Architecture development team has defined a generic vision for technology companies. In order to win the competition and to achieve healthy growth, technology companies vision should include the following goals: 1. The company is an active actor within its ecosystem. Its strategy is defined on the basis of its core competencies and it has positioned itself in a favorable role within its ecosystem. It 9 Brazil, Russia, India and China

Strategic Architecture White Paper 11 (14) is also actively taking benefit of and transforming its ecosystem. By operating within an ecosystem the company is more competitive than with closed vertical business model. 2. The company utilizes an ICT architecture, which is based on core competencies and business requirements. The company s operations are built on holistic digital processes that ensure efficiency and sustainability. 3. The company is providing a first class user experience and value added for its customers. The company has an established process for ensuring that their products and services meet the customer needs. This process is intertwined with the product/service development processes. 4. The company speedily and flexibly implements plans and processes utilizing relevant technical and other developments. Its digital and physical processes are ubiquitously interconnected. 5. The company s employees are competent and motivated and they continuously develop their competencies and work processes. 3.2. Structure of the Toolbox The Toolbox builds on the vision described above. On the basis of the vision, key requirements have been identified. These requirements are then complemented with a checklist of actions for implementing successful changes. These findings have then been developed into three-phase portfolio of concrete methods. Requirements, checklist and three-phase methodology model together constitute the Strategic Architecture Toolbox (see fig. below). Fig. 3. Toolbox structure and contents 3.2.1. Requirements Requirements are elaborated on the basis of all five parts of the Vision 2020. These requirements are presented in detail in the Toolbox document.

Strategic Architecture White Paper 12 (14) 3.2.2. Checklist on Actions for Successful Change The key activities required to implement successful change on Strategic Architecture are listed in the form of a checklist: Model current and future architecture Ensure scalability and modularity in the future architecture Build scenarios on key architecture decisions and make risk-levels visible for decision-making Create the new initiative so that it can plug-and-play with current processes and organization structure Define ownership for the initiative Drive focus Define pilot that attracts top management interest Implement goal-oriented management 4. Strategic Architecture Toolbox 4.1. 12-Part Model The Toolbox builds on a three-phase model, where each phase consists of four parts. This leads to a 12-part model illustrated in the figure below. Fig. 4. Key Toolbox components. The highest priority is set on parts with green background color. Each of the 12 parts of the Toolbox consist of the following: - introduction - links to models and methods - summary of key activities When utilizing the Toolbox, one can use the whole 12-part model or pick just those parts that require specific attention. However it should be noticed that different parts of the Toolbox are dependent of other parts so these interdependencies need to be taken in account when utilizing only parts of the Toolbox. 4.2. Three Main Phases The Toolbox builds on three main phases: analysis, design and operation. Each phase consists of four levels, which are strategic, operative, architecture and ecosystem levels.

Strategic Architecture White Paper 13 (14) 4.2.1. Analysis Phase The analysis phase is a preliminary phase prior to architecture design. In this phase information is collected on the following key components: Business strategy, operative strategy, current architecture and the industry ecosystem relevant for the company. There are various methodologies and tools available to perform current state analysis on any of the four key components of the analysis phase. 4.2.2. Design Phase The design phase represents the architecture design. In this phase there are multiple key components requiring iterative and concurrent design: Core and context analysis and definitions, process and tools definition, target architecture definition and value network definition. The design phase combines together relationship between business, strategy and technology. As noted above, it is unlikely that any of the key component designs can be finished independently due to their dependency on each other. One or more iteration rounds will be needed to reconcile assumptions done regarding dependencies between the key components. 4.2.3. Operations Phase The operations phase follows the architecture design phase. In this phase the following key components need to be put into operation: Action plan to drive change, change project(s), architecture evolution and ecosystem transformation. 5. Strategic Architecture Developers 5.1. SHOKs, Fimecc and Tivit The creation of Strategic Architecture Toolbox and the accompanying white paper have been initiated and financed by FIMECC and TIVIT, two strategic centers for science, technology and innovation within the Finnish innovation system. The Strategic Centers for Science, Technology and Innovation (SHOKs) are a unique Finnish cooperation platform for innovative companies and spearheading research. The SHOKs are networks of a new type that engage in intensive and long-term work to achieve shared goals. The results are breakthrough innovations of global importance, which can be agilely transformed into growth in business life and wellbeing in society. The SHOKs will be influential in key areas of business life and society in Finland: Energy and the environment CLEEN Ltd Metal products and mechanical engineering FIMECC Ltd Forestcluster Ltd Built environment innovations RYM Ltd Health and wellbeing SalWe Ltd Information and communication industry and services TIVIT For each SHOK a not-for-profit limited company has been established to run the SHOK operations. Their partners include key companies, universities and research institutes in a topic area. The SHOK s research strategy is drawn up and decisions on its implementation are made by the partners. Non-partner actors may also take part in research programmes and projects. The SHOKs carry out research in a virtual research organisation, which may consist of geographically dispersed units.

Strategic Architecture White Paper 14 (14) Research carried out by the SHOKs is strategic, pre-commercial, and as a rule not associated with short-term market goals. As the time span of research usually is 5-10 years at minimum, competitors may take part in the same programmes. For further information, please visit: www.shok.fi/en/ www.fimecc.com/ www.tivit.fi/en/ 5.2. Industry Team The Strategic Architecture Toolbox has been developed in a series of workshops where three technology industry companies and three ICT companies built brought valuable contribution. The technology industry companies that participated in the project were Kone, Konecranes and Outotec. The ICT companies that participated in the project were Ixonos, Logica and Tieto. 5.3. Authors This White Paper was composed by Timo Argillander of Digital Media Finland. The Strategic Architecture Toolbox was created by Petri Nykänen of Tredea.