IEX 158 - The Smart Shift and Your Software Model

Your product WILL be smart and software driven. You need to build OEM competences.

If there is a phrase that sums up the evolution of business and technology over the course of the 21st Century, it's Marc Andreessens' pithy and prophetic phrase - "Software is Eating The World". He argued very coherently in 2011 that the financial evaluation models had not kept up with the success of software businesses. and judging by the last 10 years, he has more than been proven right. This has played out in 2 ways, both predicted by Andreessen. First, the growth of digital native businesses - such as Netflix, LinkedIn,  Amazon et all, to dominate entertainment, recruitment, and retail, and many other industries. Second, mainstream businesses such as Walmart,  Automotive, and energy companies like Shell, who are increasingly delivering and capturing value through software.

Photo by Marvin Meyer on Unsplash

What Andreessen didn't call out explicitly, and what we can see in 2021, is that every company needs to be working strategically on software that is embedded into their products and services. The falling costs of processing, communications, and storage (cloud) have made more and more use cases economically viable. According to  Grandview Research robotic vacuum cleaners account for a quarter of the US vacuum cleaner market, with iRobot the dominant company.

The reality is that this version of the future, too, is unevenly distributed. Some industries are naturally ahead, others are catching up. For Banks, Media, Entertainment, and Information companies, the product IS the software, from Natwest to Netflix. Sky for example now has a significant amount of software and intelligence running on its SkyQ boxes (for example, apps for Amazon, Netflix, Disney+ and Peloton), so it's not always about mobile phones and websites. This is also largely true of retailers and utility companies, for whom the customer experience is increasingly driven by the software.

Then we get to the world of physical goods. Tesla has been a frontrunner, with its SOTA (Software-Over-The-Air) model being used to change the physical performance of the car way back in 2014. This included upgrading spark plugs, raising the chassis, or temporarily improving the range of the battery. Many automotive businesses now have a SOTA/ FOTA program in place and it has become an industry staple. But away from this, companies that have software embedded alongside a traditionally physical product includes Lego (Mindstorms), Ikea (smart blinds), and Bosch (thermostats). And companies such as Ralph Lauren and Babolat are pushing software and smart capabilities into sportswear and sporting equipment. There is a discernible pattern here as the starting point for each category is often a premium product but as the economics of software play out, it becomes a mass market opportunity.

What does the software do? A number of things. In most cases it can monitor the product performance, allow technicians to test remotely, and feed performance and usage data back to the manufacturer. But beyond this, some of them measure consumer use or competence (Babolat, Ralph Lauren), some monitor the environment (Bosch), some improve product capabilities or features (Velux, Roomba), or change the core product features or capabilities (Tesla). Of course the products from Google or Amazon are also linking data across a range of connected products and building more sophisticated models of customer behaviours and needs.

So far so good and you can see where this is going - every company will spawn a software product organisation to manage this smart product range. And this is where there are significant challenges and gaps, the overcoming of which will shape winners and losers of this smart shift. Software OEMs are unique organisations with specific capabilities, challenges, and threats. From firmware, over the air updates, and platformisation, all the way to cyber security, risks, governance, ethics, and new supply chains - the business and operating models of a software OEM are lightyears away from traditional business models and competences that a typical manufacturing company might have built over decades.

A very recent illustration of the new challenges is the chip shortage which has forced automobile majors to scale back manufacturing. Toyota has cut worldwide production by 40% in September 2021. This raises the question of whether the auto industry needs to rethink its semiconductor supply chain.

Another unique software problem is cyber-security - and the implication of hackers accessing the product software are often more troubling than attacks on business systems, as some toy manufacturers found out, last year.

And lest we forget software changes and evolves much faster than the physical product, so while you might be releasing new models of cars, or domestic appliances every year at best, you might need to release software versions every few weeks. In fact at some point, with the shift in value, the question must be asked by manufacturers about whether the software is a means to sell more of the physical product, or whether the physical product is really a means to get customers to interact with the software. This may sound very far-fetched for automobiles, for example, but in a world of self-driving cars, shared ownership, and smart cities, understanding the patterns of consumers transportation needs may actually be the gold mine rather than trying to sell every consumer a new car.

Last but not the least as all the data released by these smart products gets utilised in improving product performance and consumer benefits, questions around ethical AI will challenge most businesses as the inherent biases in the data based on gender, age, or ethnicity end up being hardwired into the evolutionary path of the product. You may have know about how stab vests and crash test dummies are all designed primarily for men. This is a human cognitive bias. But take that at an industrial scale for product roadmaps created on the back of skewed data, and you can see how this can be particularly tricky landscape to navigate.

It's no mystery that many of the new organisational models and management practices around this new software driven model has emerged from digital native businesses. Spotify's engineering culture has been an inspiration for many. Netflix's management model is also well cited. But even beyond these examples, Silicon Valley has increasingly defined the current business culture, from dress codes to remote working models. But the risk of just leaving this to the tech companies, or even worse, letting a tech product company run this for you may be a high risk model. No bigger warning should be required than Borders, who handed over their eCommerce business to Amazon. Companies such as Netatmo are wooing many home products providers such as Velux Windows to become their smart partner. This is great for Netatmo. I'm less sure about the strategic value to Velux (although I confess, I know nothing about how the deal is structured).

Building your own software product capability (with or without technology partnerships) today is somewhat similar to having mobile application capabilities a decade ago, or web development capabilities 15 years ago. A time might come in future when many aspects of this will be standardised and can be outsourced. Today it's a differentiator and you don't want to be losing ground to your old and new competitors.

Reading this week

Sustainability: Imagining the climate-proof home in the US: using the least energy possible from the cleanest sources. Expect the $70,000 cost to come down significantly over the next few years. But still no drive towards energy storage and batteries, or better redistribution between demand points.

Innovation Ecosystems: A interesting update on the state of innovation funding and maturity of the UK's key innovation corridors in Cambridge and Oxford, and some of the lessons learnt.

Future of Work: The WEF Future Jobs report. Last week I spoke with Zara Nanu, the founder of Gapsquare, who pointed me to this report and also that women dominate a lot of the jobs which according this report are set to decline. Gapsquare offer pay analytics for inclusive employers. A summary is available here.

Advanced Materials: Radioactive diamonds from nuclear waste into long term batteries with 1000 year lives. Betavoltaic cells can be used for scenarios which require tiny amounts of energy for a long time, for example sensors.

Innovation in the Enterprise: The HBR asks why chief data officers have short tenures - and provides a framework for thinking about the future. Any new role invariably brings initial expectation mismatches. But given the centrality of data, how can the CDO role shaped up to be more robust?

AI Ethics: Teaching machines to unlearn. This is a fascinating and near-philosophical question. Can we make machines unlearn or specifically, forget selective elements of data, especially data that they have been trained on? If successful this would allow for protection of privacy even as we make AI better. But how can this be done, and even if you could do it, could you test this? Options include segregating the data into groups, or applying differential privacy. But you can expect to hear more about this problem in future.

Life Science: How bacteria survive for years in space and what we can learn from it:

Robotics: Tesla has announced that it will produce 'humanoid robots', with the purpose of 'eliminating dangerous, repetitive, boring tasks'. I'm sure somebody is asking the question - who decides what tasks are dangerous or boring? And while Tesla's ability to build bridges to exponential futures is well established, the secondary and unintended consequences may lie outside Tesla's remit.

Design: Microsoft is replacing its default font, which has been Calibri for some 15 years now. Tenorite, Bierstadt, Skeena, Seaford, and Grandview are some of the candidates to replace it. Here the creators talk through the fonts. And talk font concepts including geometric, grotesque, humanist, and more...

And before I go, I hope you’re watching the Paralympics. Google has a wonderful animation when you search for Paralympics 2021. See you next week!