This is what the success factors of digital business models look like

The machinery and plant engineering sector must transform in times of increasing international competitive pressure. Digital transformation thus becomes the key question for success. The options companies have in this regard are highlighted by the Impuls Foundation of the VDMA in its new short study 'Success factors of digital business models', which was created by the FIR Institute of RWTH Aachen.

The short study shows how companies can successfully transition from being a traditional product manufacturer to an intelligent solution provider and what strategic measures are necessary to make the most of the opportunities offered by digital business models. Central to this is the ability to further develop physical products with services and digital products into integrated total solutions.

Combining proven and digital business models

Hartmut Rauen, deputy managing director of the VDMA, says: "The high global competitive intensity shows how essential it is for the industry to position itself for the future. Integrated total solutions offer the opportunity to combine proven methods with digital business models, thus initiating the necessary transformation and unlocking additional revenue potential."

As part of the study, the FIR identified four stages of digital transformation and describes the key challenges and success factors for each stage. Thorsten Theeuwen, project manager at FIR and one of the authors, explains: "The four stages of digital transformation - networking of smart machines, optimization of service, offering digital products, and the subscription business - provide clear guidance for companies that want to actively shape their transition to digital business models. Each stage presents specific challenges, but also opportunities that enable companies to remain sustainably competitive."

Central role of change management

Particular attention is also given to the role of change management. This is crucial to accompany the transformation from product manufacturer to solution provider and to anchor it sustainably in the corporate culture. Through transparent communication, rapid implementation of visible added value, and the qualification of key personnel, resistance is reduced and employees are actively involved in the transformation. This successfully shifts the focus from the machine to integrated, digital solutions.

Equally central is the ability to simultaneously operate traditional and digital business models. Companies can promote this through structural measures, such as separate units for digital business models, or with contextual approaches where employees flexibly operate between both business areas. It is crucial that physical products and digital solutions are perceived not as competing but as complementary, in order to optimally utilize synergies and deliberately drive innovation.

Practical recommendations for companies

The short study concludes with practical recommendations for companies that want to advance their digital transformation. It provides an overview of successful strategies and shows how companies can profitably use new technologies and innovative business approaches. Prof. Dr.-Ing. Matthias Niemeyer, CEO of Uhlmann Group Holding and member of the board of trustees of the IMPULS Foundation of VDMA, emphasizes the importance of the study for mechanical engineering: "The study comes at a crucial time for our industry, as the markets are currently changing disruptively. Despite numerous initiatives and investments in digital technologies, there are still open fields of action that need to be addressed with the help of the study."

The four stages of change

The aim of the study is to clearly illustrate the characteristics of digital business models for companies in the mechanical and plant engineering sector and to substantiate these models with relevant practical examples. Against this background, the study clearly shows that German mechanical and plant engineers are facing a significant transformation to evolve from a traditional product provider to an intelligent solution provider. This development is necessary to remain competitive in an increasingly globalized and digitized market.

However, successful change not only involves technological advancements but also requires profound changes in internal processes for service delivery and the fundamental corporate culture. The necessary change is structured along four stages that demonstrate the development opportunities towards a digital business model. The foundation is formed by smart machines that enable the initial digitization of production processes.

To successfully manage this stage, companies must be able to systematically collect data and create transparency. As a result, this enables companies to offer their customers added value in the form of increased performance and efficiency of manufacturing processes.

For the next stage of transformation in service excellence, the service business is built as a framework for further stages of transformation on one hand, but also developed as a revenue and margin-strong business area on the other. This enables the financing of further developments in the field of digital products, but also requires a high level of competence among employees and leaders. In particular, companies must be able to use data analysis tools to continuously question and optimize their service processes. This requires the consistent anchoring of a customer-oriented service culture within the company. This ensures that the service concept is internalized and lived by all employees.

The following stage of transformation focuses on digital products that enable companies in the machinery and plant engineering sector to offer added value beyond their mature physical products. These digital products include platform solutions, data-based services, and complementary digital services that can be offered independently of the physical machines. The success of digital products largely depends on how well they meet the specific needs of customers. Close collaboration with customers, especially during the development phase, is therefore essential. Furthermore, customer feedback should be systematically collected during the usage phase and integrated into the further development of services.

At the same time, test and pilot versions help increase the acceptance of new products and allow customers to experience the added value for themselves. In light of the created value, pricing is also a crucial factor, as traditional cost-plus approaches fall short. Digital products allow for much more extensive pricing based on perceived value than physical machines.

Subscription businesses, as the final stage of transformation, connect the previous transformation stages with the goal of creating a long-term bond between provider and customer through participatory, collaborative service delivery. These models not only offer recurring revenue streams but also the opportunity to integrate as a provider into the customers' value chains. A distinctive feature of subscription businesses is that ownership of the machines and equipment remains with the manufacturer.

This model centers on the transfer of operational risks from the operator to the provider. With the increasing assumption of operational risk, specific pricing models can be used. The assumption of such risks by the manufacturer aligns the business interests of both parties and thus fosters a partnership relationship.

Significant need for action

The study further shows that there is a significant need for action, particularly in the areas of change management, ambidexterity, and sustainability. Companies must strategically and convincingly communicate internal change to achieve broad acceptance among all stakeholders. Targeted approaches are required to actively and sustainably implement the necessary personnel and structural changes.

Additionally, companies need practical guides that define how to build the right skills to enable the coexistence of traditional and digital business models. It must be ensured that companies maintain an overview while being able to best meet customer needs.

Finally, sustainability, which is increasingly supported not only by political goals and stakeholder expectations, is becoming the decisive benchmark for all business activities and must therefore be anchored as a central guideline for entrepreneurial action. Companies need to be shown approaches, such as how to develop 'green services' and integrate them into their service offerings.

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For the sustainable success of digital transformation, these topics offer a variety of opportunities and possibilities that, considering the expectations of all relevant stakeholders, can lead to the prosperity and long-term competitiveness of the machinery and plant engineering sector.

The complete study is now available on the website of the IMPULS Foundation of the VDMA and on the VDMA website for download.

Source: VDMA