Looking Forward: Predicting Trends, Tailoring Products to Micro-Markets

Taking a Vertical Approach to Business Industrial companies tailoring products and capabilities to micromarkets www.mpi-group.net.com ©2014 The MPI Group. Navigating a new era T he last decade has served up formidable challenges for industrial manufacturers. While the economy has sagged and demand for existing products has wavered, new technologies, lower barriers to entry, and mounting global competition have ratcheted up the stakes. As a result, many organizations are discovering that it’s essential to rethink and sometimes reinvent the fundamental way they approach business … and how they view the marketplace. Some manufacturers are looking beyond their traditional product markets and exploring opportunities to introduce entirely new products. Others are focusing on ways to expand into new geographic areas. In many cases, as manufacturers look to grow their customer base, both paths lead to the same destination: micromarkets. Manufacturers are taking their relationships with existing customers and integrating themselves into new, more specialized work for these customers. This might mean developing a high-tech sensor and controls supporting a new line of intelligence- enabled production equipment, or contributing to a new, highly specialized missile system. As often happens, new technologies are at the center of this new kind of innovation and business success. But how organizations apply these critical tools to gain market advantage is changing. Manufacturers tap into existing market knowledge, workforce skills and capabilities, equipment and production methods, and customer and supplier relationships that served them well when addressing the needs of a broader market. But now, with insights gained through technologies — systems built specifically to accommodate standards, certifications, terminology — they can leverage their current production capabilities in ways that previously weren’t possible. In many cases, they are able to approach the business landscape in a new, fundamentally different and customized way — and gain a competitive, lucrative advantage. Micromarkets deliver a number of tangible benefits: • Higher margin and higher value specialized goods • Unique products that are difficult for a global market to copy • Products that offer greater value and forge tighter bonds with customers • New customer opportunities that result from the introduction of specialized goods and services. Taking a Vertical Approach to Business / The MPI Group 1 Manufacturers are taking their relationships with existing customers and integrating themselves into new, more specialized work for these customers. 2 Taking a Vertical Approach to Business / The MPI Group 1 Industrial Manufacturing 2014, PwC. Micromarkets create new opportunities — but also new challenges The emerging business environment is radically different than in times past. Traditionally, manufacturers built factories and assembly lines that produced a limited number of items. Customization was difficult and retooling a factory or assembly line to produce new or different products was expensive, time-consum- ing, and labor-intensive. Consequently, manufacturers continued to produce the same “tried-and-true” items for years. Product lifespans were typically measured in years — sometimes decades. Bobby Bono, the U.S. industrial manufacturing leader at PwC, noted in a January 2014 brief that a primary area of focus for manufacturers is “diversifying and improving the product portfolio mix to adapt to changing market conditions” and “winning new customers around the world.” This, in turn, requires manufacturers to customize products and services to meet more specific needs and to realign internal processes as well as their supply chains.1 This means that the dynamics of manufacturing, how manufacturers assess the marketplace, and whence future demand will arise are now markedly different. Rapid design and prototyping, agile manufacturing, crowdfunding, and the ability to plug in business systems and applications quickly via the cloud have made market entry easier. In many cases, small entrepreneurial organizations enjoy key strategic and tactical advantages when catering to highly specialized micromarkets. These small, agile companies respond quickly to sets of highly specialized demand instructions (often because they have no choice). But the same technologies and microproduct-tailored approach also wield enormous power for larger organizations that use their strengths to muscle into new markets. Although micromarkets may represent an unfamiliar frontier for some industrial manufacturers, others have previously ignored these opportunities as too small. But with new technologies and approaches that enable companies to tap many micromarkets, the revenue and profits no longer look so small. An organization looking to embark on a micromarket initiative must focus on several key factors: • Product specifications: Entry into a micromarket may force a manufacturer to rely on new and different sourcing methods, suppliers, manufacturing tools, and approaches in order to meet demanding customer specifications. What’s more, the enterprise may need to tap into new technologies in order to communicate effectively with its micromarket customers and process orders, in order to drive the efficiencies required for profitability. Taking a Vertical Approach to Business / The MPI Group 3 • Industry standards: New products, solutions, and services typically require new standards across a broad spectrum of processes and technologies. An initiative may touch organizations and institutes such as ASTM, ISO, IEEE, The Bluetooth Special Interest Group, and many others. It’s critical to understand how adherence to these standards will impact production for micromarkets — and profit margins. • Regulations: An initiative may intersect with various government regulations. In the U.S., the list might include OSHA, FCC, FDA, USDA and Sarbanes-Oxley, to name but a few. Venturing into a global environment increases the list dramati- cally, with specific regulations from the European Community (EC) as well as regions and specific countries. This may include everything from ingredient lists to trade laws. Here, too, it’s crucial to ensure that business systems and processes are readily adaptable in order to comply with regulations in the micromarket. • Packaging and labeling: Manufacturers may find it necessary to produce different packages and entirely different labels to match micromarkets and microsegments. In the global arena, this may translate into packaging items in different languages and addressing different cultural preferences. In addition, various countries may have specific packaging requirements. For industrial manufacturers, the larger challenge is often logistics — ensuring just-in-time or milk-run deliveries, sequencing parts and components for efficient installation into OEM product lines, and/or kitting or pre-assembly of components (even those that include other manufacturers’ goods). • Service and support: A micromarket may introduce new challenges regarding service and support. The environment may require revamping support systems, knowledge bases, online tools, and training or retraining employees to address new and different customer questions and problems. If a micromarket is at the cutting edge — imagine your company is a supplier for the Apple Watch — substantial training of support staff will be required. An inability to support products and customers may lead to poor sales and a failed initiative. • Business practices: Micromarkets may require new workflows and entirely new business systems — as well as a need to revamp existing enterprise resource planning (ERP), supply-chain management (SCM) systems, and customer relationship management (CRM) systems. Management may find it necessary to break down organizational silos and develop a more integrated and collaborative business model. In addition, the move into a micromarket may also require different partnerships and new distribution channels. Last but not least, serving specialized micromarkets may require a higher level of confidentiality and business-system security than has previously been required by other, broader markets. 4 Taking a Vertical Approach to Business / The MPI Group Supporting a micromarket strategy A growing number of manufacturers are introducing new products or customizing existing items to match the changing desires of B2B and B2C markets. For example, apparel manufacturers are allowing consumers to design their own shoes while food manufacturers permit consumers to personalize candy orders with special messages and images. Aerospace manufacturers allow their customers — typically airlines — to choose from a vast array of features. Computer makers now produce equipment designed to a customer’s specific configuration needs. Serving micro- markets further fuels customization. Transforming a micromarket strategy into bottom-line results will require significant changes to business processes, workflows, industrial systems, and information technology. Core areas of focus include: • Production equipment and tooling: Adopting a micromarket business strategy may mean revamping production lines and equipment internally. There may be a need to retool rapidly or create a more flexible manufacturing environment. However, this represents only part of the challenge. An organization may require a more agile and flexible business and IT infrastructure to accommodate its changing physical production, including use of cloud applications, mobility and collaboration features, and other tools. What’s more, there may also be a greater need to rely on outsourcing and multi-sourcing to achieve optimal production and price metrics. Some organizations will find it valuable to form new partnerships based on a rapid prototyping and production model. • R&D/design systems: Designing and engineering products for a micromarket may require entirely different R&D tools. This may include computer-aided design (CAD), modeling systems, project management systems, knowledge management tools, and other software that’s highly specific to the micromarket. It may also require more advanced computer simulations that allow what-if models and digitally testing of product-attribute tradeoffs before investing money, resources, capital, and labor in the development of an actual product. These tools also allow micromarket customers to engage in the design so that they get precisely what they need. • Production environments and industrial control solutions: New products and solutions that address a micromarket may require a radical revamping of industrial control systems. A manufacturer may need to reconfigure its facility, including installation of new IT systems, industrial machines, programmable logic controllers, and software to achieve desired quality controls and output levels and cost-efficient operations. For example, a pharmaceutical manufacturer working on a contract for a highly contagious virus is likely to need more secure laboratory and development space. Transforming a micromarket strategy into bottom-line results will require significant changes to business processes, workflows, industrial systems, and information technology. Taking a Vertical Approach to Business / The MPI Group 5 • Supply-chain, inventory-management, and other enterprise systems: Any change to manufacturing processes impacts a variety of touch points internally and externally. This means that an organization may require new systems or an upgrade to existing enterprise applications, such as enterprise asset management, product lifecycle management, customer relationship management, and service management. Even fundamental financial management systems may require upgrades to accommodate billing and invoicing procedures required by a micromarket customer. There may also be a need for custom web interfaces, portals, and mobile apps. • Business intelligence: Developing new products and solutions — and under- standing how they fit into the marketplace — often requires big data as well as powerful analytics tools. The ability to identify market opportunities, trends, and customer preferences is at the heart of any micromarket strategy. Establishing business and IT systems for micromarkets isn’t enough, however. There’s also a need to redefine how the organization does business — product development and testing, production processes, sales and marketing methods, logistics, and supply- chain management and collaboration. Putting a plan in action — growing sales and margins from micromarkets With a strategy, technology, and processes in place, business leaders pursue the micromarkets that will positively impact their top and bottom lines. They spot opportunities early and carve out their niche before the competition, gaining a competitive advantage with early presence. They build the right sourcing scenarios and partnerships to supplement their capabilities. And they focus their micromarket initiative on three key issues: • Skills, knowledge and expertise: According to The Manufacturing Institute, a majority of manufacturers (67 percent) indicated that they face a “moderate to severe” shortage of available, qualified workers, and 56 percent expect the problem to get worse over the next three to five years2. It’s critical to identify knowledge and skill gaps necessary for success with micromarkets — design and manufacturing engineers, sales staff, customer support. Where internal talent is lacking, be prepared to plug in consultants, independent contractors, and others on an as-needed basis. It may also be necessary to hire new employees and/or retrain existing employees to accommodate a micromarket strategy. In addition, organizations must introduce communication and collaboration tools to facilitate knowledge sharing. 2 2011 Skills Gap Report, The Manufacturing Institute and Deloitte Consulting. 5 Taking a Vertical Approach to Business / The MPI Group About The MPI Group www.mpi-group.com The MPI Group serves leaders with research, advice, and performance-targeted solutions that provide a competitive advantage in today’s fierce marketplace. MPI combines the disciplines of research, strategic advice, knowledge development, and hands-on leadership to create a difference — in performance, in profits, and in the people who make them possible. • Identifying the right equipment, tools, and systems required for success: It may be necessary to replace legacy systems with tools and technologies that promote an agile manufacturing environment. For instance, some manufacturers are turning to 3D-printing methods in order to rapidly design and/or produce custom products, in some cases fulfilling orders in minutes or hours rather than days or weeks. The Manufacturing Institute reports that the market for these devices will rise from $2.2 billion in 2012 to $6 billion by 2017.3 Others are introducing new ways to automate processes and eliminate steps, including advanced robotics and machine-to-machine communication through the Internet of Things. The common denominator among all these initiatives is a data-centric approach; metrics and key performance indicators (KPI) are critical elements. • Pilot, test, and refine: Over time a manufacturer will gain experience, confidence, and knowledge that allow the organization to better identify opportunities and apply vertical capabilities to other micromarkets. Each new micromarket builds the knowledge base for the next. This allows the organization to achieve economies of scale in expanding products and services. Building a better micromarket model Manufacturers face an array of challenges in order to grow sales, control costs, and generate profit. Micromarkets represent a significant — and growing — opportunity. Navigating this space requires new thinking, new tools, and, most importantly, an entirely new way to approach almost everything that takes place within the company — business strategy, analytics, innovation, etc. Is your organization equipped to prosper from micromarkets? 3 3D Printing and the New Shape of Industrial Manufacturing, The Manufacturing Institute and PwC, June 2014.