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Reaping the Recurring Benefits of Industry 4.0

A manufacturing executive playbook for business model transformation towards new revenue streams

Michael Mansard
Principal Director of Subscription Strategy, Zuora

Manufacturers are embracing a brave new Industry 4.0 world by embarking on ambitious digital transformation programs. For the most part, such digital transformation initiatives are viewed as an opportunity to make significant improvements to the company bottom line by harnessing technology for optimization, efficiency and cost saving. Yet the most transformative opportunities will come from business model innovation, with far-reaching impacts on the topline. This requires a mindset shift around value creation and capture – one that ought to be pioneered by industry leaders.

The market for predictive maintenance, for example, is expected to expand to about USD 11 billion by 2022 – a topic to which 81% of firms are currently devoting time and resources. Around the same number of firms believe that it will lead to strong growth of their service business in the future, replacing a significant amount of hardware product sales revenue.

Companies that have successfully made this business model transition have reaped its rewards: according to the Subscription Economy 500 companies. The risk of remaining in status quo is real: 90% of Fortune 500 companies have vanished since 1955. More worrying still, at current churn rates, nearly 50% of today’s Fortune 500 companies on the S&P 500 will no longer exist in the next 10 years, at risk of being wiped out by digital disruption.

Business model innovation in the Industry 4.0 age is fraught with complexity, but, if executed successfully, can unlock new value pools, while enabling new recurring and predictable revenue streams. Software companies of the likes of Adobe and Symantec have already paved the way, with many successful examples of business model shifts from traditional license and maintenance model to a subscription-based model.

In fact, since Adobe’s transition to the cloud five years ago, its share of recurring revenue has jumped from 19% to 70% today, with a corresponding 370% increase in its share price4. Even within the hardware space, leaders such as Schneider Electric, MANN+HUMMEL, Thales, CAT, and Siemens are already transforming their business models, and, as a result, are seeing increased revenue, new market opportunities, etc. They are also preparing themselves to fight back against future disruption.

However, the transition to recurring revenues for industrial companies will be much more challenging and complex, in terms of product/ market fit (or solution/market fit should we say!), revenue, cash flow and even balance sheet implications.

It is imperative, therefore, to have a clear vision, but remain flexible on implementation. Indeed, the more innovative, disruptive and uncertain the expected outcome, the more agile and flexible the approach needs to be.

Given the reality of physical goods, and therefore the absence of comparables, manufacturers are in need of a “how-to” guide that enables an understanding of the business model transformation required, a step-by-step plan to be followed for transformation, and the critical capabilities required to undertake said transformation. This whitepaper presents a pragmatic playbook for monetizing opportunities arising from Industry 4.0 for business leaders. It’s a play-by-play guide that outlines the critical capabilities required to make a business model shift and how to approach a transformation plan.

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