How disruption manifests in the Electronics Industry

Market Impacts

Have we fooled ourselves into thinking that a device is the most interesting part of our business? Sure, a curved television is beautiful,an MRI machine can be elegantly modern and semiconductors are sold in the millions. But down to our engineering DNA, the electronics industry has been about product technology, where the focus has been on products and devices, and new shiny things.

Are we ready to transform ourselves?

There’s a virtuous transformation cycle we can apply from other industries that are being changed by the high tech world in which we operate : from products to service offerings like Spotify in the music industry or Uber in transportation, into customer-oriented ecosystems like Apple and Amazon that can collect the tsunami of data on usage, operations and consumers, leading to an increasing requirement to innovate and establish more agile processes.

These changes impact the competitive landscape in which the high tech and electronics companies operate, but also the perceptions and expectations of their consumers and clients.

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The transformation of the electronics industry poses both a risk and an opportunity for electronics companies, where the winners of tomorrow will be the companies that are able to cross the digital divide and win the hearts and minds of consumers or clients, and combine that with a sound business model and an agile and efficient business operation.

So, what are the key market disruptions that electronics faces, and how do those impact the decisions made in the boardroom?

  • Product-focused businesses are under pressure and are challenged on margins and scale, yet software and data opportunities abound
  • Concentrated platforms simultaneously enable and limit strategic opportunities
We’re each creating data every moment of every day, even in our sleep now.

Product-focused businesses are under pressure and are challenged on margins and scale, yet software and data opportunities abound

The Wall Street Journal noted that consumers are in love with their current devices. Great as that is, it’s a huge problem on a business designed around replacing those devices with greater frequency than consumers are currently willing to tolerate. (paywall)

As more people hold on to devices longer, new smartphone shipments plunged to historic lows at the end of 2017. Timothy W. Martin and Drew FitzGerald

Commoditization: Electronic hardware is threatened with becoming commoditized or standardized. Perceived value, and hence the differentiation for users, moves out of the device and into the ecosystem of apps, content, and services. It’s a build vs. buy question. Core value you build, commodities you buy.

Migration: Product-to-service transformation drives migration from discrete product sales to service and subscription models. Contrary to manufacturers who have core competency in engineering products; consumers desire better software and context-rich interactions — which don’t require hardware replacement. There are often software and apps that can be updated with a click and are free to the consumer — or freemium with payments for services embedded in the app.

Geography matters: Customization and localization will be increasingly deferred to software and services to allow for flexibility, speed to market and cost control. Consider language translation — there’s an app for that. Local shopping? Currency conversion is just a setting away. It seems obvious but bears stating: understanding a local market is better achieved with software than hardware. Consider IoT and government interactions for traffic or autonomous vehicles. This will likely vary by nation or even state and must be accounted for. That’s not a device consideration. Smarter buildings fall into the same set of concerns.

Scale: So, this leads us to the point that more differentiation in hardware detracts from scalability while more differentiation in software and context-dependent services is much simpler to scale up with lower margin costs.

Hence electronics companies should force themselves to look for different ways to pursue value, and transform their business model and organization to deal with the new reality.

Concentrated platforms simultaneously enable and limit strategic opportunities

New business ecosystems are emerging, founded on the operating principles of platform business models and the “sharing economy.” Besides providing new pathways in customer engagement, these new value propositions deliver rapid innovations in an emerging data economy.

Moving from value chains to ecosystems: The number of horizontal platforms with competing core capabilities will rationalize into few, diminishing value at the end-points around it (read: devices). At the same time, niche platforms will emerge but these may take time to reach scale. It’s no secret that most large consumer platforms have taken years to reach profitability; electronics companies cannot just lift and shift large amounts of cash flow into a platform world.

When Jeff Bezos famously said “Your margin is my opportunity,” you can imagine where he was looking.

Data and services platform providers are the new orchestrators of the ecosystem and they place electronics (read: device) companies on the periphery not at the center. Data and the insights it creates, become winner and take all markets. What’s more: as more information is shared across platforms and privacy rides shotgun, questions emerge regarding what data and AI capabilities should be shared and what should be kept “in-house”.

As key ecosystems start to share data from an increasing number of sources, trust, transparency and avoidance of bias become differentiators and companies need to decide which role to play in the ecosystem and the new value chain. The use of core horizontal platforms can expand the use of data for alternative purposes but also offers limited transparency to the consumer. It also simultaneously increases information sharing and that requires flexible integration of new data sources into business operations.

Few companies can fill all the different roles emerging across the ecosystem, e.g. data producer, data aggregator/custodian, data platform owner, insight provider or data presenter.

So what initially looked like a verticalization and consolidation across the industry might actually result into a horizontal fragmentation of the entire economy.

IBV Analysis for upcoming paper on Platforms

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