Infor
REPORT: TRENDS
Nine Starting Points for Digital
Transformation in Manufacturing
Digital Trends Signal Manufacturing Renaissance Ahead
R “Ray” Wang
Founder and Principal Analyst
Copy Editor: Maria Shao
Layout Editor: Aubrey Coggins
Produced exclusively for Constellation Research clients
May 10, 2017
© 2017 Constellation Research, Inc. All rights reserved. 2
TABLE OF CONTENTS
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
WESTERN MANUFACTURERS HAVE FACED A NEGATIVE ONSL AUGHT
FOR FOUR DECADES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
JUMP START GROW TH WITH NINE ENTRY POINTS FOR DIGITAL
TR ANSFORMATION IN MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
A MULTI-MODAL APPROACH PAVES THE WAY TO SUCCESSFUL
DIGITAL TR ANSFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
START WITH FIVE KE Y STEPS TO MANUFACTURING TR ANSFORMATION . . . . . . 14
ANALYST BIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ABOUT CONSTELL ATION RESE ARCH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
E X ECU TIV E SU MM ARY
Western economies have faced an onslaught of negative developments in their domestic
manufacturing bases over the past 40 years. With the rise of Industry 4.0, the current trend of
automation and data exchange in manufacturing technologies, manufacturers now have new
opportunities to undergo digital transformation. Constellation finds that digital transformation in
manufacturing will not only jump start growth, but will also create the environment for a manufacturing
renaissance. Through in-depth study of successful digital transformation projects, Constellation
identified nine entry points for manufacturers to begin their digital transformation journeys. Research
also revealed six organizational features present in all successful digital transformations.
Form (i.e. technologies) must follow function (i.e. business models) in order to create success. Leaders
should focus on creating new business models first and then enabling success with supportive
disruptive technologies. Success requires organizations to take a multi-modal approach that enables a
group’s culture and governance to drive concept to commercialization of new products and services.
This report explains the nine entry points for digital transformation in manufacturing and highlights
the six features of organizations that succeed in digital transformation. It concludes with five
recommendations to ensure digital transformation success in manufacturing.
© 2016 Constellation Research, Inc. All rights reserved. 3
Business Themes
Data to Decisions
Next-Generation
Customer Experience
Matrix Commerce
Technology
Optimization
© 2017 Constellation Research, Inc. All rights reserved. 4
W E S TERN M A N U FAC T URERS
H AV E FACED A NEG ATIV E
O N S L AU G HT FOR FOUR
D EC A D E S
Every industry faces a significant
transformation of business models through
disruptive technologies. However, Western
manufacturers have endured the brunt of
the fallout from not only globalization and
the short-term mentality of public equity
markets, but also from over-regulation,
labor unrest, and under-investment. Add an
aging workforce to the list and the overall
manufacturing base in Western economies has
shrunk (see Figure 1). For example, the United
Kingdom manufacturing base has contracted
by two-thirds since 1980. The result in almost
every Western manufacturing economy is
unemployment, trade deficits, social unrest,
and strategic vulnerability.
A closer examination of the five factors
shows that:
1. Globalization benefits may no longer
hold true. The never-ending shift to low-
cost manufacturing sites led to strategic
advantages moving from Western
economies to Eastern economies. That
manufacturing migration started with moves
to Japan, then Taiwan and South Korea, then
Singapore, Malaysia, Mexico, and China.
Today, every country remains vulnerable.
For example, the growing costs of labor and
intellectual property (IP) theft in China has
led to manufacturing base shifts to Vietnam
and Indonesia and, in some cases, a return
back to domestic manufacturing in places
such as the United Kingdom and the United
States. While this global supply chain has
benefited consumers with lower-cost goods,
recent research studies show how the
hidden costs of job loss, wage stagnation,
and health impacts appear to outweigh
Western manufacturers have
endured the brunt of the
fallout for the past 40 years.
© 2017 Constellation Research, Inc. All rights reserved. 5
the benefits. Western economies have
more incentive than ever to move to
domestic production.
2. Over-regulation has stifled the ability to
invest and innovate. The 40-year pendulum
shift to greater environmental and societal
concerns over unregulated capitalism has
run its full cycle. Extreme regulation has
led to increased energy costs, an inability
to reinvest in modernization, and a shift
away from domestic production. Labor
rules have led to inflexible business models,
a shift to automation, and moves to non-
union environments. The overall societal
upheaval from joblessness has led to a
reexamination of industrial policy across
Western democracies.
3. Short-term mentality has led to profits
at the expense of long-term mission.
The never-ending quest for quarterly
profits at the expense of mid- to long-term
growth rewarded many public company
management teams with bonuses to make
bad short-term decisions. With millions of
Figure 1. Five Factors Pressuring Western Manufacturers
Source: Constellation Research
© 2017 Constellation Research, Inc. All rights reserved. 6
dollars in income at stake for management
teams, a plethora of poor decisions resulted
in cost cutting to achieve bonuses. While
there is always fat to cut, a majority of
executive teams cut into the flesh and
muscle, leaving their organizations in peril,
with short-term benefits for shareholders
and a few executives.
4. Under-investment has left manufacturers
less agile. The focus on profit per sale
without a sound long-term investment
strategy led to cost cutting, senseless
mergers, and deferred investment. Private
equity firms, investment bankers, and
corporate raiders flocked to weakened firms
to unlock value by liquidating valuable long-
term assets in equipment, IP, and real estate.
The hollowing out of organizations such as
Sunbeam and ITT resulted in bankruptcies
and other disruptions.
5. The aging workforce heightens the
knowledge gap. The aging workforce
in Western economies and the extent
of unemployment creates a knowledge
transfer catastrophe. Why? The informal
apprenticeship and informal, “tribal”
knowledge passed on to each generation
of workers have been broken. Every year
that a country delays the ability to restart
domestic production is another year when
that knowledge and skill set undergoes a
slow death and the costs grow to rebuild the
skill sets in the work force.
JU MP S TART GROW TH WITH
NINE ENTRY P OINTS FOR
DIGITA L TR A NS FORM ATIO N
IN M A N U FAC T URIN G
Digital transformation calls for organizations
to engage with stakeholders to transform
business models through disruptive
technologies. Manufacturers looking to
jump start growth and overcome strategic
pressures have turned to digital transformation
as an ongoing program to transform their
businesses. In Constellation’s surveys, 61
percent of the Global 2000 manufacturers
surveyed expected to benefit from
digital transformation.
© 2017 Constellation Research, Inc. All rights reserved. 7
Digital transformation begins with design
thinking, a methodology that unlocks solutions
to questions that have not been asked
Digital transformation calls for
organizations to engage with
stakeholders to transform
business models through
disruptive technologies.
before. Using empathy as the starting point,
organizations put themselves in the shoes of
their customers and stakeholders to rethink
their business models. Design thinking can
help manufacturers overhaul how they use
technologies, redesign processes, and interact
with customers and other stakeholders to
create new business models.
Over the past seven years, Constellation has
identified nine entry points for manufacturers
to jump start growth with digital
transformation (see Figure 2):
1. Shift from product margins to services
margins. Manufacturers with low single-
digit profit margins should shift from simply
selling products to selling new offerings
that bundle products and services to drive
scalable growth and healthy margins.
Examples of services that are scalable
and drive growth include installation, field
service, remote monitoring, and warranty
management. Visible case studies, such as
GE’s and Phillip’s transitions from product
companies to services companies, provide
evidence that legacy manufacturers can
make the shift. Technologies used to enable
the transition include artificial intelligence,
augmented reality, Big Data, cloud, mobile,
and Internet of Things (IoT).
2. Develop post-sale business models. As
manufacturers transition to a post-sale
economy, the product serves as the platform
for new business models. As a result of the
most recent CxO surveys, Constellation
expects 78 percent of manufacturers
to focus growth on post-sale business
models by 2020. Organizations are moving
from products to services, services to
experiences, experiences to insights,
insights to brand promises. Take the rise
of Amazon’s Echo and Echo Dot hands-free
© 2017 Constellation Research, Inc. All rights reserved. 8
voice-controlled devices. Amazon sells
the product for a low entry price to enable
mass adoption. While buyers purchase
the product for a “cool” experience tool
that drives conversations as a service, the
long-term goal is for Amazon to capture
insights in order to anticipate and sell more
personalized services through the use of
data. Amazon hopes to use insights to create
new customer experiences that ultimately
spark service offerings around new business
models. The goal is using data and insights
to deliver on Amazon’s brand promise of
one-click convenience. Technologies used
in developing post-sales business models
will include augmented reality, big data,
blockchain, cloud, IoT, and mobile.
3. Invest in direct-to-consumer.
Manufacturers traditionally work
through distribution networks to gain
access to markets. The system works if
the distribution network delivers value-
added capabilities and is responsive to
the customer. But today’s customers
seek more responsiveness from brands
Figure 2. Nine Starting Points for Digital Transformation in Manufacturing
Source: Constellation Research
© 2017 Constellation Research, Inc. All rights reserved. 9
and manufacturers and the battle for
the customer requires manufacturers to
move closer to the customer. In fact, 57
percent of manufacturers have started
direct-to-consumer programs. However,
manufacturers must tread carefully
to provide services such as warranty
registration, over-the-air product updates,
rapid recall, and personalization without
creating channel conflict and network
disruption. In some cases, manufacturers
will own new product design, manufacturing,
and distribution. Technologies employed for
direct-to-consumer services include big data,
blockchain, cloud, IoT, and mobile.
4. Forecast supply and demand more
precisely. Using techniques such as
mean absolute percent error (MAPE),
mean percent error (MPE), root mean
squared error (RMSE), tracking signals,
and forecasting biases, organizations can
improve their accuracy of supply chain and
demand forecasts. Constellation believes
that 60 percent of mission-critical data will
reside outside of existing systems and be
accessed, not owned. Manufacturers must
prepare for a new set of supply and demand
signals that affect forecasting techniques.
Ability to assign lineage to data enables the
aggregation and rollback of demand signals.
Key disruptive technologies for more
precisely forecasting supply and demand
include artificial intelligence, augmented
reality, automation and robotics, big data,
blockchain, cloud, IoT, and mobile.
5. Move back to domestic production. A
Boston Consulting Group study by Hal
Sirkin and Michael Zinser demonstrated
that not all Western manufacturing bases
are non-competitive. According to the
study, the lowest-cost manufacturing
countries are Indonesia, India, Mexico and
Thailand. China ranks fifth, Taiwan comes
in at sixth, with the U.S. at seventh. Rising
Chinese labor costs, decreasing U.S. energy
costs, and improving productivity drive
manufacturers to reconsider the U.S. The
study showed that after complex supply
chain costs, IP piracy, and quality issues,
every dollar required to manufacture in
the U.S. is equivalent to 96 cents in China
– a relatively small difference. Taking
© 2017 Constellation Research, Inc. All rights reserved. 10
the study’s findings into consideration,
Constellation believes the U.S. is ripe for
a manufacturing renaissance. Once the
U.S. proves it is profitable to manufacture
domestically, expect other previously high-
cost countries to follow suit with similar
policies. Consequently if manufacturers in
previously low-cost countries such as Brazil,
China, Czech Republic, Poland, and Russia
must enact policies to offset wage increases,
improve productivity, and compensate for
higher energy costs. Constellation believes
that additive manufacturing (such as 3-D
printing), artificial intelligence, automation
and robotics, big data, blockchain, cloud, IoT,
and mobile play key roles in driving a return
to domestic manufacturing.
6. Maximize equipment value. Organizations
have used a number of techniques to
optimize usage of capital equipment. From
predictive maintenance to remote field
service, organizations can now identify gaps
in uptime. For example, at GE’s transmission
grid operations, the company knows when
a powerline will go down eight to 10 days
before it happens. Using capacity planning,
organizations can also determine threshold
capacity requirements to manage peak and
average demand for equipment. The result
– less spending for greater return on assets
plus more rentals and access of services
and outcomes for peak demand. Expect
disruptive technologies such as artificial
intelligence, augmented reality, automation
and robotics, big data, blockchain, cloud, IoT,
and mobile to be significant in maximizing
equipment value.
7. Streamline order to cash. Finance process
transformation revolves around increasing
cash flows. Start by doing a statistical
analysis of customer segments and non-
standard processes. Analysis often shows
that non-standardized collections, dispute
management, and accounts receivable
Expect disruptive technologies
such as artificial intelligence,
augmented reality, automation
and robotics, big data,
blockchain, cloud, IoT, and
mobile to be significant in
maximizing equipment value.
© 2017 Constellation Research, Inc. All rights reserved. 11
terms can lead to cash being stuck in limbo.
Focus on reducing days sales outstanding
(DSO), improving credit management,
reducing write-offs in dispute management,
and shortening billing cycles to provide
opportunities to increase cash flow. Most
early adopters apply technologies such
as artificial intelligence, automation and
robotics, Big Data, and cloud to achieve
these gains in cash flows.
8. Increase automation and robotics.
Constellation projects that over three
million industrial robots will be in use by
2020. While the current number of robots
per 10,000 manufacturing employees is
highest in South Korea, Japan, and Germany,
the U.S. and even China are catching
up. Expect more collaborative robotics,
improved gripping skills, higher quality
vision, and finer motor skills to improve
robotics and automation. The landmark
Tesla electric car plant shows the promise
of profitability in small-scale and highly
automated manufacturing. Key benefits of
greater automation are higher productivity
and reduced workplace injuries. Recent
Constellation surveys of early adopter
clients show that 46 percent of respondents
expect to use artificial intelligence or
machine learning to drive automation.
Technology drivers of success in robotics
and automation will include artificial
intelligence, augmented reality, big data,
cloud, IoT, and mobile.
9. Improve uptime and optimization. While
not as sexy an entry point as others,
uptime and optimization efforts can be
transformed with new technologies. Data
can improve outcomes in predicting shift
schedule optimization, improving production
planning, optimizing line changes, reducing
equipment failures, streamlining energy
consumption, and maximizing maintenance
schedules. As more data is collected, more
opportunities emerge to align the data by
business process, mine for business insights,
and make suggestions to improve uptime
and optimization. Artificial intelligence, big
data, cloud, IoT, and mobile play key roles in
bolstering uptime and optimization efforts.
© 2017 Constellation Research, Inc. All rights reserved. 12
As organizations master these nine starting
points, expect new investment in networks
that will knit these entry-point projects
together to form a co-innovation and co-
creation platform. These network economies
will build on the products and services and
the technologies to transform the marketplace
for manufacturers.
A M U LTI- M O DA L APPROACH
PAV E S THE WAY TO
SU CCE S S FU L DIGITA L
TR A NS FORM ATIO N
The overhyped, bi-modal, two-speed approach
to IT and digital transformation is a flawed
fallacy perpetuated by ivory tower, non-
pragmatic legacy research firms. Lessons
learned from successful digital transformation
projects emphasize an organizational design
comprised of six key virtual or physical teams
(see Figure 3).
The six teams exist in all successful
transformation efforts:
• Incremental innovation teams improve
existing business models. These teams
have a mandate for creating faster, better,
and cheaper capabilities in existing business
models. Key team traits include domain
expertise, a passion for improvement, an
understanding of existing constraints, and a
spirit of innovation.
• Transformational innovation teams
innovate with new business models. Often
seen as members of the tiger team (i.e.
special operations), these people explore
additional business models for piloting
inside organizations. Key team traits include
a penchant for disruption, disregard for
existing rules, passion for innovation, and
ability to deal with abstract concepts.
• Concept-to-commercialization teams
enable monetization. This team must
figure out how to take a proven concept
from the transformational innovation team
and incorporate a new business model
with existing systems. Often, this team
is a multi-disciplinary group of experts in
© 2017 Constellation Research, Inc. All rights reserved. 13
incremental innovation, transformational
innovation, and sustainability of operations.
Key traits include a high degree of creativity,
disruptive thinking, political savviness, and
understanding of human behavior
and rewards.
• Culture teams infuse harmony among the
teams. This team draws from different
disciplines and sets the cultural norms
among all the teams. This group must
not only highlight the differences among
the teams, but also find bridges between
the differences to inspire innovation.
Constellation defines design thinking as
unlocking solutions to questions that have
not been asked previously. This requires
a diversity of thought across multiple
disciplines. In fact, an artist, architect,
author, and accountant have different points
of view that together can unlock innovation
in problem solving and design.
• Governance teams ensure overall
organizational alignment and success.
This team must provide the ground rules
and framework to ensure successful
coordination among a variety of business
Figure 3. The Six Components of Successful Digital Transformation
Source: Constellation Research
© 2017 Constellation Research, Inc. All rights reserved. 14
objectives. In some cases, this team sets
up the partnership ecosystem for co-
innovation and co-creation. Key traits
include policy-making experience, program
management, compensation design, and
political savviness.
• Sustaining operations teams keep the lights
on. The bulk of an organization focuses
on keeping the lights on. This team’s goal
is to deliver operational efficiency, rock-
solid reliability, and massive economies of
scale. Key team traits include attention to
detail, strong work ethic, and adherence to
standards and rules.
S TART WITH FIV E KE Y
S TEPS TO M A N U FAC T URIN G
TR A NS FORM ATIO N
Constellation offers five distinct
recommendations for manufacturers setting
off on the journey to successful digital
transformation projects (see Figure 4). These
five steps can help manufacturers and other
types of companies to transform
their businesses:
1. Answer why your brand, enterprise or
organization exists. An organization must
start with its mission. What experiences
and outcomes should the organization be
expected to deliver?
2. Invest in digital artisans. Balancing the right
digital DNA inside an organization requires
both right-brain and left-brain approaches.
If an organization has many scientists,
technologists, engineers, or mathematicians,
it should add artists, ethnographers,
anthropologists, design thinking experts,
and story tellers. The goal is to inspire
innovation from across multiple disciplines.
3. Form (technologies, people, processes)
follows function (business models). The
business model should be developed first. In
fact, successful companies sometimes will
deliver on more than one business model.
Start from a core new business model, then
figure out the technologies, people, and
processes to support the business model.
Design multiple layers of business models
that support the end-to-end value chain.
© 2017 Constellation Research, Inc. All rights reserved. 15
4. Move from gut-driven to data-driven
decisions. Data is the foundation of digital
business. Every click, conversation, video,
transaction, and interaction provides insight
into future capabilities. Align the data to
information flows and mine the data for
insight. Take that insight and determine
the next best action. From there, deliver a
data-to-decisions capability for competitive
advantage. Always start by asking what
business problems need to be answered.
5. Focus on co-innovation and co-creation
with partners. The future of an organization
rests heavily on its ability to put a partner
ecosystem in place. This will come from the
orchestration of content (products, services,
experiences, insights, and outcomes),
networks (distribution models, channels,
and suppliers), and technology platforms
with each other. Most of these integrated
capabilities have not been developed yet.
The goal is to find partners who can co-
innovate and co-create these capabilities
with you. In some cases, traditional
competitors may be the best partners in
creating a common core.
Figure 4. Five Major Steps to Succeed in Digital Transformation
Source: Constellation Research
© 2017 Constellation Research, Inc. All rights reserved. 16
ANALYST BIO
R "Ray" Wang
Founder and Principal Analyst
R “Ray” Wang is Founder, Chairman, and Principal Analyst of Constellation Research, Inc. and the author of the
popular enterprise software blog, “A Software Insider’s Point of View.” He previously was a Founding Partner
and Research Analyst for enterprise strategy at Altimeter Group.
A background in emerging business and technology trends, enterprise apps strategy, technology selection, and
contract negotiations enables Wang to provide clients and readers with the bridge between business leadership
and technology adoption. Wang has been recognized by the prestigious Institute of Industry Analyst Relations
(IIAR) as the Analyst of the Year, and in 2009, he was recognized as one of the most important analysts for
Enterprise, SMB, and Software. In 2010, Wang was recognized on the ARInsights Power 100 List of Industry
Analysts and named one of the top Influential Leaders in the CRM Magazine 2010 Market Awards.
Wang graduated from the Johns Hopkins University with a B.A. in natural sciences and public health.
His graduate training includes a master’s degree from the Johns Hopkins University in health policy and
management and health finance and management.
@RWang0 | www.constellationr.com/users/r-ray-wang
www.linkedin.com/in/rwang0
© 2017 Constellation Research, Inc. All rights reserved. 17
A BOU T CO NS TELL ATIO N RE S E ARCH
Constellation Research is an award-winning, Silicon Valley-based research and advisory firm that helps organizations
navigate the challenges of digital disruption through business models transformation and the judicious application of
disruptive technologies. Unlike the legacy analyst firms, Constellation Research is disrupting how research is accessed, what
topics are covered and how clients can partner with a research firm to achieve success. Over 350 clients have joined from an
ecosystem of buyers, partners, solution providers, C-suite, boards of directors and vendor clients. Our mission is to identify,
validate and share insights with our clients.
Organizational Highlights
· Named Institute of Industry Analyst Relations (IIAR) New Analyst Firm of the Year in 2011 and #1 Independent Analyst Firm for 2014 and 2015.
· Experienced research team with an average of 25 years of practitioner, management and industry experience.
· Organizers of the Constellation Connected Enterprise – an innovation summit and best practices knowledge-sharing retreat for business leaders.
· Founders of Constellation Executive Network, a membership organization for digital leaders seeking to learn from market leaders and fast followers.
www.ConstellationR.com @ConstellationR
[email protected] [email protected]
Unauthorized reproduction or distribution in whole or in part in any form, including photocopying, faxing, image scanning, e-mailing, digitization, or making available for electronic
downloading is prohibited without written permission from Constellation Research, Inc. Prior to photocopying, scanning, and digitizing items for internal or personal use, please
contact Constellation Research, Inc. All trade names, trademarks, or registered trademarks are trade names, trademarks, or registered trademarks of their respective owners.
Information contained in this publication has been compiled from sources believed to be reliable, but the accuracy of this information is not guaranteed. Constellation Research,
Inc. disclaims all warranties and conditions with regard to the content, express or implied, including warranties of merchantability and fitness for a particular purpose, nor assumes
any legal liability for the accuracy, completeness, or usefulness of any information contained herein. Any reference to a commercial product, process, or service does not imply or
constitute an endorsement of the same by Constellation Research, Inc.
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold or distributed with the understanding that
Constellation Research, Inc. is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a
competent professional person should be sought. Constellation Research, Inc. assumes no liability for how this information is used or applied nor makes any express warranties on
outcomes. (Modified from the Declaration of Principles jointly adopted by the American Bar Association and a Committee of Publishers and Associations.)
Your trust is important to us, and as such, we believe in being open and transparent about our financial relationships. With our clients’ permission, we publish their names on
our website.
San Francisco | Belfast | Boston | Colorado Springs | Cupertino | Denver | London | New York | Northern Virginia
Palo Alto | Pune | Sacramento | Santa Monica | Sydney | Toronto | Washington, D.C
