CEOs who see software as an enabler put their company at risk
My father worked his entire life for Philips’ TV business, initially as an electrical designer and later, in the seventies and eighties, as a project lead. In this period, challenges were borne out of physical constraints and manufacturability. The perception of a product’s value was highly related to the cost price of the product and the organization selling it. Software was seen as an enabler for the hardware – merely a configuration and not an essential part of the value proposition. My father never had much appreciation for software until he saw a 3D ultrasound picture of the growing baby in the belly of the wife of his grandson. He realized that the hardware was quite comparable to the normal 2D ultrasound, but the huge difference in perceived value came from the software.
Today, in the era of digitalization, we no longer perceive software as an enabler. We’re aware that the majority of customer value is created in software and that hardware has become the enabler. The related cost and revenue structure is changing as well, including recurrent revenues and cloud costs, R&D costs spread over the product lifecycle and the evolving nature of sales – the right to use rather than the right to own.
We’re now in a time where, thanks to Apple, a phone is a platform for all kinds of software applications – a trend totally missed by a hardware-centric company like Nokia. BMW redefined its mission to be a mobility provider, including car sharing and public transport services, in which the vehicle plays only a supporting role. Tesla repositioned the car as a computer on wheels. Amazon reinvented the way we organize companies by insisting that, for instance, an HR department doesn’t create documents but provides an API. Owners of a fleet of cars understand that saving fuel is not about buying cars with more efficient engines but about better routing using the latest traffic information. ING, a world-leading bank, has declared it will become an IT company in financial services, leveraging its financial assets. Neckermann with its paper catalogs doesn’t exist anymore as they didn’t anticipate the changes caused by digitalization, where Wehkamp invested in a digital shopping experience. Major gains in decarbonization and pollution reduction in the marine industry come from optimizing the routing and trim settings of the vessels and a perfect alignment of the route with the port operation and not from a more efficient engine. Companies like ASML have understood they can create much more customer value than just drawing the thinnest conducting line on a piece of silicon. With the Philips Hue system, even the value proposition of lamps and lighting has changed.
All of this comes with new business models: the price of the product relates to the value the solution offers customers every time the product is applied, instead of the one-off cost to create the physical asset or bring this asset to the consumer. New value propositions lead to different ways to create long-term relationships with customers and recurrent revenue streams, avoiding unnecessary costs in the value chain. Look, for instance, at the impact of the internet on the value chain in the retail industry.
I do see many companies struggling with this transition. A few years ago, there was a platform for companies in the Brainport area to help each other in this journey of digitalization. It’s a shame that the initiative died due to Covid and hasn’t been restarted.
A preliminary analysis revealed that one of the root causes of why some companies were struggling with digitalization was related to the makeup of their management boards. These are often composed of people who made their career in times when mechanical engineering was still the key competency and cost management was the prime focus of financial officers. I’ve seen a leading company in office supplies reimplementing its internal processes using modern IT technology, but not even considering whether new technology could also allow for new value propositions. It requires vision and guts to risk the short-term easy money.
It’s not a coincidence that Jeff Bezos, having obtained a degree in computer science, started Amazon inspired by the possibilities of the internet, that Steve Jobs started as a game designer at Atari, that Elon Musk started his career with a software company, that Google was founded by two computer scientists and that Mark Zuckerberg created software in highschool well before founding Facebook. These people understood the opportunities to grow their businesses with new value propositions once software was no longer seen as an enabler, in contrast to the many companies we’ve seen struggling. These people who have made a significant technology-related impact in the world understand what software is.
There’s no doubt in my mind that all businesses will sooner or later have to embark on the journey of digitalization. Of course, this transition won’t happen overnight and companies will have to continue to operate their traditional businesses in the interim. Companies that continue to see software as just an enabler will miss the boat, while management boards without sufficient understanding of what software is about will be the prime bottleneck in bringing their company toward a sustainable future.
