New business models: Disruption as an opportunity for mechanical engineering
In Germany, mechanical engineering primarily uses the possibilities of modern IT to automate and further perfect processes. The real question, however, is: What can I now do for my customers with digital technologies that was previously unthinkable? A revolution with completely new business models has therefore sometimes failed to materialize. But how can established mechanical engineers succeed in generating disruptive ideas and thus position themselves for the future?
The dictionary defines the word “disruptive” as something that “destroys.” In practice and in the business world, the term has also taken on an additional meaning as “something that interrupts” or “something new” that replaces “something old.” Disruptive business models refer to new business models that replace or “destroy” traditional business models (disruption = drastic, usually destructive change).*
One example of such an approach is Spotify. The music streaming provider has ousted several business models from the market – including the sale of traditional CDs as well as the paid download of music files. This was made possible because Spotify recognized the actual needs of users. After all, it's not about owning music, but about listening to music. This idea can be transferred to countless other areas, for example, in mobility – think of “car sharing.” This approach has the potential to displace traditional delivery models such as the purchase and leasing of cars, especially in urban environments.
How can companies protect themselves against disruption?
For many, disruption is a threatening scenario and a danger that should not be played down. Business should therefore observe the market with a high degree of sensitivity and not rely on their existing market position.
If the competitor's new alternative offers greater customer benefits, disruption cannot be stopped in the medium term. Those who want to be successful in the long term are forced to develop their own innovations. This requires a great deal of openness, vision and courage, as well as a strong innovation culture. In the same vein, the technological prerequisites often have to be created first.
Whoever succeeds in developing a new approach faces another challenge: The new and old business models must either be decoupled from each other, aligned with each other, or integrated. Moreover, if the new model is a disruptive innovation that can or should disrupt the company's own old business model, a transition strategy is also necessary. However, companies should by no means shy away from “self-disruption,” as it may well be necessary to ensure long-term survival.
How a new business model changes the market
Many experts believe that the mechanical engineering industry will change radically, driven by new technological and digital opportunities. For example, it is already becoming apparent that new business models that support the decentralization and flexibilization of production have enormous potential. Disruptive trends include subscription and pay-per-use. Here, for example, machines are no longer purchased, but production capacities are flexibly subscribed to. As a result, CAPEX (one-time investments) are replaced by OPEX (ongoing operating expenses). Billing is based, for example, on the actual time of use or the quantity produced. Especially in dynamic markets, where customer requirements change very quickly, this model is a clear advantage for its users. It offers a high degree of adaptability while eliminating previous investment risks. And machine manufacturers benefit as well, bringing new products to market faster and generating stable revenues.
Digitalization is almost invariably the starting point for new, scalable business models. In mechanical engineering, networking systems via the Industrial Internet of Things (IIoT) constitutes the basis for innovations. A fundamental measure for mechanical engineering companies must therefore be to make their products IIoT-capable.
In the second step, businesses should ask what needs their customers have now and in the foreseeable future, and what solutions customers are willing to pay for. A company can then take basically two different paths:
- Digital extension of the business model:
Further development of the existing business (e.g. IoT-enabling products and adding additional digital services)
- Full-scale rebuild:
Building a completely new digital business model independent of the existing core business (e.g. data-driven business model)
The latter approach enables the development of additional customer segments, but also presents organizations with entirely new challenges. For instance, they have to focus on optimal scalability. This means that even with disproportionate sales growth, costs must not increase to the same extent. As a rule, the development of a new, digital business model requires expertise that is not available in classic mechanical engineering companies. It therefore makes sense to enter into partnerships and become part of an existing Industry 4.0 ecosystem. This is exactly where ADAMOS comes in – a strategic alliance from the German mechanical and plant engineering sector.
In addition to continuing its traditional core business, the development of new business areas is crucial for the long-term success of a mechanical engineering company. And German SMEs in particular have demonstrated the art of (r)evolution for decades: They are constantly in the process of improving their products and also their processes. As such, they are shaping disruption themselves.
Taking a closer look at how customers will act in the near future is worthwhile. Disruptive business models lead to win-win situations. And this is already visible in many areas today: Developing innovations is becoming increasingly important. It is less a matter of selling them, but rather of continuously optimizing the added value through completely new business models and marketing that.
According to the University of St. Gallen, many disruptive business models are already existing business models that are being applied in another industry. More than 90 percent of all business model innovations are recombinations of 55 known business model patterns. (Cf. Business Model Navigator)
The opportunities offered by digitalization and networking are far from exhausted. Digital solutions can provide an enormous boost to the efficiency of productions. Digitalization is paving the way for disruptive business models.