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Device Makers Must Evolve to Ecosystem Builders

Is your company a maker of high-tech devices or a builder of ecosystems? The answer to that question will determine the level of success most companies will report in the next five years as the high-tech market undergoes another episode of transformation. As in the past, this next phase in the evolutionary cycle will be wrenching: Many companies will fail for not altering their business offerings and processes quickly enough, while others will record extraordinary success.

First, a bit of history. Once upon a short time ago, all the major electronics equipment manufacturers and telecommunications service companies owned and controlled all parts of their extended supply chains. They owned semiconductor fabrication plants and manufactured most other components. OEMs ran manufacturing and assembly operations, test and assembly facilities, and shipped products directly to customers in addition to conducting warranty services, repairs, and end-of-life disposal. It was a tedious system, often wasteful, incredibly constraining, but comforting for OEMs because they controlled the end-to-end product lifecycle.

This vertical manufacturing system imploded in the 90s when OEMs began selling off semiconductor units and outsourcing most manufacturing and assembly functions. Companies began focusing on “core” businesses and disposed of non-essential functions to specialists that operated on low margins and compensated for this with high volumes — hence the rapid growth of contract manufacturers like {complink 2125|Foxconn Electronics Inc.} Companies like {complink 3538|Motorola Inc.} and {complink 4269|Koninklijke Philips Electronics N.V.} spun off their semiconductor units. A major consequence was the advent of fabless IC vendors, which focused on design services and outsourced wafer production to foundries such as {complink 5388|Taiwan Semiconductor Manufacturing Co. (TSMC)}.

A more fundamental change is occurring today, and it will be even more disruptive, not just to the electronics market but across multiple industries. Any company — again, regardless of the economic sector — that continues to focus on products (hardware or software) rather than on the creation of ecosystems will face severe difficulties in the next few years. It is no longer enough, for instance, to have the best PC, smartphone, medical diagnostic equipment, or industrial machinery; your equipment and the software supporting it must be a part of a larger ecosystem supporting the customer.

The extraordinary success {complink 379|Apple Inc.} has had in the consumer electronics market is anchored on this simple idea that the customer wants more than a standalone device. That's why Apple is now offering the iCloud, which allows consumers to access personal information, music, videos, files, etc., anywhere. What I see happening in the future is an environment where people have continual access, wherever they are, to information about themselves, properties, friends, and family.

How would such a future look? Here's an example: You left the house in a hurry and halfway through your flight you remember that you left all the lights on and, more worryingly, forgot to turn off the stove. No problem. You log on to the onboard connected device in the plane, access your connected-home system, and turn off the lights, the stove, any running water, and the heating system. By the way, you can also do this from your car, smartphone, office PC, or your tablet.

What would make such a world possible? All the elements and the technology that can transform our society in this direction are already available, and some are in production. {complink 9538|NXP Semiconductors N.V.}, for instance, is selling chips used in bulbs, electrical outlets, and extension cords that have wireless connectivity built into them. The package allows house owners to integrate their home lighting into private networks that can be accessed and controlled from anywhere.

Harman International, a supplier (traditionally) of high-end audio equipment, is rolling out through BMW and Mercedes a complete connectivity system that provides car owners access to their complete music, video, and other personal information via the Web — in other words, to allow their “complete ecosystem to follow them,” according to Dinesh Paliwal, CEO of the Stamford, Conn., company.

If you only build discrete devices, your company will die a slow death as the industry evolves. Success will demand partnering with suppliers — even with traditional rivals — that you may currently have no relationships with. In the case of Harman, the company has formed partnerships with {complink 2657|Intel Corp.} and {complink 5703|Texas Instruments Inc.}. It has also formed an advisory council of CTOs drawn from major high-tech companies, many of which Harman has not dealt with in the past but which have better visibility into the consumer electronics world.

“You need to reach out for fresh insight from sources outside your regular contacts,” says Sachin Lawande, CTO at Harman and co-president of the company's automotive business. Are you making connections beyond your traditional grid?

8 comments on “Device Makers Must Evolve to Ecosystem Builders

  1. Ashu001
    June 16, 2011

    Bolaji,

    You make very valid points in your post above.

    But my question is can each and every contract manufacturer afford to build this ecosystem?

    Do they have the R&D budgets?

    Will they be able to raise funding for more such projects???

    After they do operate on extremely slim margins.In that case,where is the cash for such Cash intensive investments going to come from?

    Also,Not every company has the Management will to make such changes.

    Basically,not every company can be more like Apple .Its just not possible.

    Will they all perish? I am not so sure.Niche-Manufacturers will continue to do very well in their specific areas.Also,I wont be surprised to see some of the biggest Manufacturers get broken up(by justice authorities) for Monopoly/Competitive reasons.

    Regards

    Ashish.

  2. prabhakar_deosthali
    June 16, 2011

    Bolaji, it is true that in today's scenario everything has a global perspective and anthing developed new has to make it clear to the world how it is going to be part of that global ecosystem. But that does not mean that every body has to create an ecosystem for whatever product or serice it offers.  The eco-system is a framework in which everybody has to operate. But each operator in this eco-system can just do a fraction of it. The components, the products, the software, the services, the manufacturing, the support , the waste disposal all  functions will be carried out by differnet agencies, As long as you are able to define where you fit in – who is your producer and who is your consumer , you can continue to do your activity without worrying of the total ecosystem because you become part of that eco-system chain. So there will be specalist companies, one offering devices, other offering connectivity, third offering the necessary cloud serives, the fourth offering the related application stores and so. The mesh of all these will create an ecosystem.

     

  3. SunitaT
    June 16, 2011

    “It is no longer enough, for instance, to have the best PC, smartphone, medical diagnostic equipment, or industrial machinery; your equipment and the software supporting it must be a part of a larger ecosystem supporting the customer.”

    Bolaji,

     I totally agree with your observation. Consumers these days are more demanding, they expect more returns for their investment. Infact one of the major reasons APPLE succeeded is because of its iStore. This trend will definitely put extra burden on the companies, but in the end it will hugely benefit the customers.

  4. jbond
    June 16, 2011

    This is a great article that has many valid points. There will be many companies left out if they don't change their mindset. The biggest downfall I see is the current overall cost. Many of these products and services are available currently. Yet they are still too expensive for the masses to purchase. For these products and services to really take off, the cost needs to be in reach with a larger amount of consumers. Hopefully these offerings will still be around to see the price adjustments hit, and for sales to dramatically pick up.

  5. FLYINGSCOT
    June 16, 2011

    This raises the question of standardization vs innovation.  To make the ecosystem work one could define and standardize how it works then suppliers design products to fit in that system.  Alternatively one can create whizbang cool products that everybody wants regardless which then creates the ecosystem around it as others try to capitalize on the buzz.  It would be interesting to hear opinions from others on how the ecosystem is likely to evolve.

  6. Nemos
    June 16, 2011

    I liked very much the History part of the Article. Furthermore, if you study your past you learn more and choose the better course for the future.

    “If you only build discrete devices, your company will die a slow death as the industry evolves” We have seen it in the past to happed many times, companies that do not involve, and they do not develop their services and products they are going to a slowly “business death”.

  7. stochastic excursion
    June 17, 2011

    True that a product chain broken up into specialized companies buys you flexibility.  The downside of this is loss of visibility and control.  Some companies may not want visibility when it comes to compliance issues.

  8. Anna Young
    June 18, 2011

    Bolaji you said, “Success will demand partnering with suppliers”

    If more high tech device makers and ecosystems builders work together, what are the benefits to the consumers?

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