B2B Transformation in the Electronics Industry

it’s my pleasure now to introduce Paul Brody Paul is a vice president and partner in IBM’s global business service organization and he leads our electronics industry in terms of all the services that we do which is which are quite have quite a bit and Paul you can see that the the the title here the presentation of sustaining competitiveness through business model transformation but but really you know Paul’s we’ve had a lot of lessons about what’s going on in the you know business to consumer marketplace and the real question is in the business-to-business marketplace you know how can we also employ a lot of those same lessons and how can we learn a little bit and adapt those things as as we move forward so with that I’d like to ask Paul to come up to the stage so thank you very much I’m so happy to see that most of you came back from the break so i would like to start just by saying you know this is the most amazing group i feel a little bit challenged this is the most amazing group of speakers i think that we’ve ever had in the six years that i’ve been coming to these events so you have all set the bar very high for me and I will try to hurtle it but the some risk i won’t i will say i heard a couple of speakers say they talked about IBM they said IBM is our trusted partner and we we work with them closely and we depend upon them and when I hear that I am so grateful and so humbled right I it’s the highest compliment that anyone can pay to us to say that we are your trusted partner and so I’m truly grateful for the time your valuable time that you are spending here over these two days and I hope that we continue to earn that designation as a trusted and thoughtful partner so what I like to do today is probably in the category of thoughtful I’m known inside of IBM as somebody who is rarely right but never in doubt so I have an opinion about everything and I love to share it even when it’s not necessarily wanted and what I want to do today is talk a little bit about the transformation that’s gone on in the consumer space and how we should be thinking about applying it to what’s happening in the enterprise right how companies that sell to each other how companies that sell industrial equipment and non consumer products what lessons should we be taking from these enormous transformations because the fact is consumers are leading the way now that wasn’t always true right there was a time right many of you know IBM for our great early product punch cards typewriters but there was a time when other companies disrupted IBM and those companies were companies like Wang which wanted to sell automated word processors and frankly was they actually made a better product and we did write enterprises used to disrupt each other a lot before consumers were busy leading the marketplace and heaven forbid now it’s true iBM has disrupted I bein has been disrupted many times occasionally we succeed in disrupting other companies we did it a long time ago we disrupted Apple we changed the game in the personal computing business and we are by the way I want a really hat tip to JD because we are at IBM we are so proud of what lenovo has done with our business and we are we’re proud of our small contribution and a success that you guys have had doing what we couldn’t which is kicking HP over and over again I also really congratulate you for forgiving a case study about failure right now I can’t do that because we have too many to choose from at IBM but I think we learn a lot from our mistakes and I also want to learn a lot from what’s going on in the consumer space and apply it to the enterprise environment so lately its consumers that have been driving all of this transformation and I’m not going to go into the details but consumers what consumers have been doing is they’ve been taking things that used to be products discrete items and they’ve been wrapping them all together they don’t really think about an iphone as a piece of hardware that comes with an operating system it’s a integrated product right Android is a service that includes gmail and maps and all other kinds of Google services right in many cases not always but in many cases right all of these things have been wrapped together and something that we have been calling this transition from products to services right and this

transition has had an enormous impact now I grant you I’m going to show you a chart here and this is not a horas chart it doesn’t animate okay and it’s not quite as good but this is a snapshot of the consumer at global consumer electronics market in 2001 and here’s this market in 2011 exactly 10 years later over the course of 10 years this is my animation of the course of 10 years Apple went from being worth about 7 billion dollars to being worth more than the entire Japanese and Korean consumer electronics industries combined by market capitalization right and this was this is looking back just to 2011 things obviously gone substantially further since then right so clearly in the consumer space an enormous transition has happened right we’ve gone from products to services and in the course of that happening it’s created a set of winners and losers right this industry has been completely turned over the same thing cannot be said in the enterprise space right so whether it’s software services or power systems or jet engines for the most part business-to-business products aren’t being transformed at anything like the same rate and what I’d like to do today is talk about a couple of things first of all give you a few examples of the market itself secondly talk about what are the obstacles why is it that b2b transactions haven’t gone through this radical transformation right and also share with you my view that in fact DS Tran informations are accelerating that the barriers that have slowed down transformation in the enterprise space are starting to crumble right and when that happens the transformation will be every bit as fast in the enterprise space as it was in the consumer space so let me give you let me give you a sign of a kind of an equivalent chart here this is in enterprise software right so if we just set this up and it’s a simplification I grant you but if you think about companies like SI p and oracle they sell traditional enterprise software right you pay for a license you get a piece of software there are other companies that sell entirely an online service like NetSuite workday and salesforce com today the stock market thinks that all three of those companies are worth less than half of se SI p right and a tiny fraction of what sa p and oracle are worth right so what the market says what the stock market says is we don’t think this transformation has happened and I would argue that this is a little bit like Apple in 2001 right everybody looks at this and says transformation hasn’t happened yet these companies are just not that valuable right and I would argue in fact that this transformation is coming is coming very very quickly in a whole range of enterprise in b2b segments so how do we know that this transformation is is not here yet well it’s not here yet I mean you look the stock market says it’s not here but it’s also not here if you go and talk to some of big clients right so this is one it’s one of my favorite they are a big b2b seller they sell power and automation equipment right big transformers industrial equipment and I asked them three questions I said first of all what portion of your devices can actually be connected to the Internet and managed remotely right and their answer was about half of our devices right and but of the devices that can be connected actually they said two thirds maybe the devices that can be connected only about a third are actually connected the second question I asked is what do you do with this data all this data is flowing in from these connected devices turns out the answer is pretty much nothing right I asked a message do you use it to predict when the product will break down do you use it to forecast how much maintenance they need their answer was no we just gather some data on it right statistics it’s interesting and then I asked them finally I said how do you sell this stuff do you sell it as a solution right you sell it as a service or do you sell it as here’s the product and now if it breaks i’ll sell you a service contract or a spare part and their answer was the latter it’s a product right and if it breaks we sell you a service contract or some spare parts so the stock market says b2b companies haven’t transformed from products to connected services and our clients say the same thing they’re not selling connected services they’re just selling products today now why is that I

will argue that if you sit down with your our clients that what they’ll tell you is you know be the bee is different it’s different than B to C right for a whole bunch of reasons and my own experience is that although those reasons are true today they are changing quickly so let me zero in on and a couple one of those things so first of all why is it that b2b isn’t the same as B to C and I always hear three answers first of all it’s the relationship is driving the sale right we’ve been playing golf together for 10 years right you always ask about my kids right you know all about my business right that’s a big part of it the second thing that we often hear is we have a huge installed base right there are billions of dollars millions of devices of all kinds out there in the industrial world right when we when you know when we switch on the lights there are thousands of devices transformers switches substations right and they’re not installed for one year or two years they don’t depreciate in six months they’re here for 10 20 30 50 years right eight so that installed base means that I can’t just sever my relationship with a b2b supplier easily right and that installed base is what drives most of the revenue and profited many of these companies by the way in my in the past life I was a I was a consultant with mckinsey & company and one of my first engagements was an aircraft manufacturer and at that time the aircraft company they made more than one hundred percent of their annual profits with spare parts and do you know what our first recommendation was raised the price of spare parts and then lastly what clients will tell you is buying a b2b technology whether it’s a transformer or a factory automation system or a photocopier is much more complicated than buying a cell phone and so consequently you can’t just switch easily right it’s a lot of knowledge and intelligence it goes into that right so it’s really hard for these transitions to take place and if they’re going to take place at all it’s going to happen very slowly now there’s big elements of truth in all three of these statements but they’re not as powerful and it’s sort of irrefutable as you might believe I I think that very significant portions of our industry are going to be transformed over the coming years and let me go a little bit into why unless somebody wants to stop me here and tell me I’m completely wrong now okay it’s good all right so first of all relationships right I would argue that social networking is commoditizing relationships right relationships in fact mostly belong to people I am friends with Bruce I’m friends with JD and relationships go with the salesperson and sales people can be paid they can change jobs right and thanks to the miracle of services like LinkedIn right when I change jobs it takes me two clicks to announce that to thousands of people right in fact what that means is that sales relationships are easier to move around right social networks have made it easier to grab I’m somebody with a big network and move them to a new company in the market right there there are sales people right now who are going from established players to new ones and when to do that with two clicks of a button they’re taking their entire rolodex with them and there’s nothing that can stop that from happening right secondly analytics and online marketplaces are in any case reducing the power of the relationship sale okay when you sell a product that can be analyzed and managed that means we can determine in a fairly objective way which product is actually better right you can manage and support those products and you can conduct a very transparent online purchasing process and the result is that no matter how much Bruce may like me because I always lose when we play golf I am by the way a terrible golf player just awful uh and actually clients like that they like to win when you play golf with them but no matter how much I lose it golf it doesn’t change the fact that if I don’t have a competitive product it’s going to show up in these very transparent online marketplaces another thing that’s happening is the value of the installed base is going down right so at IBM we spend a lot of time thinking about China China is a very very important market to us and in fact all of our senior executives spend tremendous amount of time in China last quarter I visited China six times in 12 weeks it cannot emphasize enough how important China is

as a source of growth right but China doesn’t have the same long-held installed base that the US and Europe does right in China it’s about new production right new facilities new infrastructure and by 2025 China will be the largest market in the world so when you sit there and tell me that your big installed base in Europe US and Europe is is very valuable I’m not always certain that that’s really going to survive your that’s going to make the difference for your company JD pointed this out china is the market where enterprises compete right and by the way this client that I had many years ago at McKinsey when we told them to raise the prices of spare parts they did and it substantially helped their profits but in the end it did not save them because they could not win any new aircraft orders right at the end of the day installed base may generate a lot of profit it will not determine your survival secondly the economics of manufacturing are changing right one of the reasons why the installed base is powerful and important is industrial products are complex and they are often made in relatively small volumes right and spare parts are hard to come by how many spare parts does alcatel have for a rail road switch that was made in 1950 and installed somewhere in rural France not many right now what’s changing is in the past if that device broke down or you needed to replace it there were a limited number of places to get spare parts and they were very expensive today I can make a scan of that spare part and I can print it on my own with a 3d printer right and what we are seeing here is the companies are actually telling their clients print your own spare parts you can download schematics for scared spare parts and so we believe over the coming few years that power of that in that long installed base it’s going to diminish for this reason as well it’ll be very easy to build and manufacture low volume replacements or spares or new devices lastly we think that when you shift from selling a product to a service you transform the economics and I’ve got here an example from the the business of photocopying right so many years ago by many years ago I mean like three years ago to how many three iphones ago a long long time ago companies sold photocopiers and then you bought toner and paper and service right and by the way they install these copiers all over the place and after that they basically had no idea what you did with them today you don’t buy copier if you’re a large enterprise you buy pages of service okay and the company that installs these devices is responsible for maintaining them from managing them for making sure that there’s toner and service and and and paper and everything in them right and they connect all of these devices to the internet and they manage them and so they know which devices get used which ones don’t which ones break down how to make sure that they’re available and how many devices to actually have and it turns out that they take something that’s very complex right how many printers should I have how much toner should i buy how much should I be paying for service and they boil it down to a very simple number which is this is how many cents you should pay per page copied or printed they take something complex they make it simple and at the same time they use all this data about how you’re using the product and where you’re using it to substantially reduce the price so our friends of the company called forteza they do analysis they showed that across about a hundred and ten companies the average company that shifted from buying a product to a service when they shifted it they saved about thirty percent of their costs right thirty percent in cost savings right is a very easy decision right depending on how much money you’re spending you know you can make a quick you can take what was a complicated decision and make it very simple yes I’m going to switch to this service so if we think back to the this discussion right I relationships that used to be powerful and enduring have become less important right transparency has come to the procurement process right and it’s the value of the installed base has declined and now on top of that you can take something that was complicated and make it very you know parts and labor and service and devices and turn it into a very simple price per page price per

flight hour price per unit of measure right you can make a complex product into a simple service right when that happens you have rapid dramatic transformation right and I love this picture because I think this picture shows nicely what happens when large enterprises try to make really aggressive turns things tend to fall apart a bit but that is exactly what many enterprises are at risk of facing right and i want to show you with this picture with you because this particular one shows what happens in the printing and copying business when the market went from products to services so for years people who had been saying hey you should just buy pages of output up until about two thousand seven basically everybody said that’s great but not interested but about 2007 they really got the connected value proposition right and they were able to start saying things like i’ll guarantee you thirty percent cost reduction and when that happened in the course of three years the whole market the majority of the market shifted from buying devices and toner and service to buying copying and printing as a service so three years the majority of the market transformed okay now that doesn’t look so different than the kind of picture we might see in a consumer electronics business and I know it’s not so different because I stole one of Horace’s pictures this is the profit share in the consumer in the phone business over the last three years from two thousand four years from 2007 to 2011 so you can see that in the space of about four years we shifted from a market driven by Nokia to one driven by Apple complete dramatic market share shift in four years that doesn’t look that different than what happened in the printing and copying business right the market shifted from product to service in just three years right and by the way in a way that is very similar to consumer electronics this seems to be a winner-take-all business so in the consumer electronics something like ninety-nine percent of all the mobile phone profits and Horace will correct me when I’m wrong go to apple and samsung now if you do cloud hosting of websites ninety-six percent of that market goes to the top three providers seventy-four percent of the market for cellular infrastructure goes to the top three players right and fifty-two percent of the printing and copying market go to the top three players so these markets when they transform they don’t just change what’s being sold they change they produce winners and losers right and overwhelmingly they drive significant consolidation of the market and a good example here is the printing and copying business it’s been undergoing pretty dramatic transformation I grant you if you can read this you don’t need glasses in fact nobody should be able to read it but my point is you can really see this market has been thinning out for decades but as I see its accelerated recently right and at the same time as lots of companies are going out of business this whole new ecosystem of application service providers has been created right so it’s not just companies like Apple that need app ecosystems even companies that make printers and copiers need ecosystems of service companies of systems managers of software developers almost every type of industry as it moves from being a product to a service needs to develop and create its own ecosystem to support that okay so I’ve talked about where enterprises have liked in transformation I’ve talked about why I think in some key areas enterprise b2b sales are headed for transformation now let me try to talk about how we can prepare for the future because the truth is no matter how good your analytics are you cannot predict the future but I would argue that you can at least try to prepare to some degree for it so I think in in my experience there’s three critical conclusions that we can draw from when market shift from products to services in the b2b space first of all it’s driven by the business ace right when the business case becomes crystal clear when it becomes absolutely obvious that you can make dramatic savings that drives immediate transformation right twenty thirty forty percent savings that makes a decision easy right secondly when the transformation starts it moves quickly it moves as fast in consumer products as

it does it moves as fast as you might expect it to in consumer products right so no matter how great your relationship no matter how many times you lose to the customer playing golf right when this industry transformation starts it’s going to move quickly and then lastly these connected products and services markets are in general winner take all markets right so we can’t easily assume that just because we’ve been coasting along at ten percent market share that that’s going to continue right the odds are that the company that cracks the code on how to do this well they’re going to take their share of the market from whatever it is ten twenty thirty percent to there may be something closer that fifty or sixty percent and everybody else will struggle for kind of that what’s left so and by the way you know disruptive competitors do a great job of figuring out how this transformation might happen right and it’s because they see the market in different ways right amazon looks at the market they don’t think they’re a retailer i think in many ways they think of themselves as kind of a technology company right another example i really like is a u.s. is in the u.s. is called square so square enables you to buy stuff with your credit card through your mobile phone but they don’t think of themselves as a credit card company or as a transaction processor right they think of themselves as a company that gathers and sells consumer insight now turn that around the American Express thinks of themselves as a credit card company right and they get paid every time you swipe the card so for them that what they sell our transactions and you know marketing data is a little extra on the side for them if you’re square what they sell is marketing insight and the cost of transactions is something they give away you should be scared when he starts to think of your business as something that they give away right I will be very worried the day that somebody decides a consulting is something that we should give away right and i would actually really appreciate it if Horace would start charging for access to his website and then the last one is free free is a great company in France they took an IP TV set-top business and said you know we have millions of set-top boxes in the homes around the country right and all of them have Wi-Fi maybe we could use that to build a mobile network since most people make their calls at home right or at the office where they have Wi-Fi and it’s usually free we can literally charge nothing for the entry level right and they have completely disrupted the market in France for mobile phones because they looked at the market from in height entirely different space now how do you do that right so take an example of something like a numerical controlled machine tool right now how you look at the product and how your customer looks at the product may be completely different right you think of it as you know your product but your customer could look at it a bunch of different ways i could say wow this thing is really expensive to own and operate right and I wish I didn’t have to own it right or they may look at it differently they say you know our ability to use these tools as a critical differentiator and I need to control it and I must have it right or they could look at it entirely differently and say you know what this piece of my production process is a weak link right every time it goes down I lose millions of dollars right so if you can understand how your client sees your product then you can figure out how to change the value proposition right if your clients what they care about is up time they want a hundred percent up time we heard from TSMC this morning one hundred percent up time is worth millions of dollars so if that’s so important maybe you should be selling up time not machine tools right if it’s you know failure risk or come if its commodity maybe you should be selling cost per unit of output and helping your client manage down their costs but figuring out this way to change your perspective on the product I believe is one of the key skills in managing this transition from selling a product to a service right and by the way I believe you need to do that before the market transition happens I was reading a great article by Clayton Christensen about the transitions that’s happened in the newspaper business and he talks a lot about the fact that in the newspapers a lot of them thought hey business is great and they kept thinking that businesses was okay right up until it wasn’t but by the time the business was really collapsing it was too late to make dramatic changes to their value proposition in their approach so in this that same respect we have to anticipate the transformation of our markets before

it actually occurs how do you anticipate that I believe you do it from what I would call an outside in perspective right some of the biggest transitions have occurred entirely driven by the sales force the truth is that when IBM got into the services business we did not really know that much what we were doing okay what we knew was that our clients wanted to get out of the data business they wanted to get out of the data center business they wanted to stop having to hire and manage all of these people and so we said we’ll take him right IBM salespeople said we’ll take him right and they they went forward and in truth is that they were selling this vision and meeting the customers need before finance and supply chain and the service organization were really ready to follow right but they started with the customer need and they kind of tried to line up the organization as quickly as they could behind that and truth be told that’s exactly what Xerox did in the printing and copying business they didn’t start from the inside out and say hey we need to redesign our whole value chain they said we got a customers who are asking for a different value proposition we need to start selling it that way right and they had to actually work backwards and say okay now i’m selling all these contracts how do I really change my business operating model right it was an outside-in process and truth be told it’s pretty messy right it doesn’t look very elegant or strategic doesn’t fit nicely on a slide you know IBM lost a lot of money on bad contracts that we signed right because we didn’t fully understand this we were getting into this business all the responsibilities that came with it right but in the end it turned out to be a very smart move for us so I want to finish with just one thought which is you know above all else write it you know IBM as I mentioned at the beginning I can’t tell you many stories about failure because we have too many to choose from right we’ve been disrupted more than we’ve disrupted anybody else right and strange thing is we’re still around right i mean i could give you an incredible list of businesses that IBM has screwed up the very first smartphone was made by IBM i guess we didn’t stick stick to it right the first pcs you know the first laptops right we we developed those right relational databases i mean i could go on right we are great at coming up with businesses and then letting other companies figure out how to make money from them right so how is it that IBM has survived and a couple years ago we celebrated our 100th anniversary and a lot of smart journalists and historians looked at the long history of IBM and they said what is it about IBM that has caused it to survive so many mistakes and the answer is customer focus right long before we had a services business we were focused and crazy about service right and even to this day we spend all of our time obsessing and thinking about what is it our clients need right I spend more time thinking about how you try to run your business then I sometimes spent then thinking about how to run mine right we’re focused on optimizing your business and as a result we spend a lot of time having this discussion what do our clients need how will they manage transformation and I think that that is the only sort of enduring protection in an era of substantial transformation so with that I do want to acknowledge our friends at forty sahu shared a lot of terrific data with us around the transformation to b2b space and I want to conclude by as as was done yesterday by posing the question to you what is holding back the transformation of your own industry segment right and how far have you seen some of these trends like the commoditization of relationships or the ability to connect and transform products and the services take in your business questions comments complaints you’re talking about for product transformed to services now I just got back from from San Francisco with the sales force they’re showing a lot of case study in terms of how business is using socio to become a service platform what’s your take on that because in u.s i can see that happening but also in asia i see that some challenges there just want to see what you think about that second question if i can the in terms of the consumer behavior for b2b what what are the ski substance that you think is relevant what I’m trying to say is a lot of beta bees there to handle with a lot of vendors but now you want to turn it into service now we’re talking about B to C so also then that substance is a little different and how do we find that balance thank you okay so 22 difficult questions the first one I would say is you know in terms of social yes it’s God had a big impact in

the US and Europe my view is is having a huge impact in China right you know you can see I’ve got my sign of Weibo ID I don’t have any followers so anybody who wants to follow me on sign of Weibo please it’s a little competition inside of IBM as to who has the most and I’m losing right now but in China social media is incredibly powerful right and so we you know in Africa too so for example in them in sub-saharan Africa facebook has a program where if you sign up for facebook they will give you airtime credit and they will they will kind of not charge you for data usage to access basic version of Facebook and we see tremendous facebook usage in sub-saharan Africa there’s basically no where on earth that isn’t you know where social component isn’t very huge and it’s huge in the b2b space as well I mean one of the things that’s driving salesforce com is the social discussion that goes on on linkedin right like i’m on salesforce are you on sales first what do you think of Salesforce why did you switch from something else right you know if you look at you know what how these things spread they spread in a way that this remarkably consumer like right in fact in Ginni Rometty our CEO talks about how we need to work on making IBM more consumable right I don’t think there are many products from IBM today that you can go to our website whip out your credit card and start paying for but that’s where we need to get to even we have to take all of this enterprise complexity right and we have to make it incredibly simple and it’s very challenging but I think that’s the bar that’s being set by services like salesforce com taking tremendous complexity they’re making it incredibly simple and it’s spreading through the enterprise space just as fast as a consumer product will JD so I tend to like these crystal ball questions so you talked to a lot of customers great presentation great example of the copier business kind of moving to this what other enterprise businesses are ripe for that transition over the next say two to five years so great question you know I think so in an IBM and we idly spend my time focusing on electronics and we think about their six segments a semiconductor power and automation consumer electronics network equipment and medical devices and if I think about where we are like office equipment very far down that path right I think power and automation is also going to move there in that direction right people are going to start to buy tooling and equipment on a services type of basis right I think far beyond five years but within certainly within an area that we are thinking about and talking a lot to our clients about is medical devices right so if you look at the way insurers by they really want to buy health right they want to make you healthy right and a lot of the diseases that we treat the vast majority of diseases that are treated today by healthcare systems are not single interventions right you have an infection you get an antibiotic they are chronic diseases you don’t get enough exercise you have to change your habits right those things are best managed as ongoing services so we think even medical devices will be transformed pretty quickly thank you Bruce you