In my last blog on digital transformation in the chemical industry, I discussed the opportunity for leaders to embrace the opportunity to re-think their business models. One approach involved competing on outcomes; selling and delivering quantifiable results to customers as opposed to increasingly commoditized chemicals. One comment I hear quite often is that “we’re a commodity chemical company, not a consumer goods or service company, and we’re tired of hearing about Uber…we don’t think that applies to us.” Fair enough.
Something to consider: the companies which have successfully migrated to outcome-based business models, did not typically do so overnight. Morphing into a new business model is a process, and it’s OK not to know necessarily where you will end up at the time you begin. From my observation, the process of arriving at a new outcome-based business model typically happens in three stages.
The first stage involves becoming more intimate with your customer. In chemical manufacturing, this would typically mean instrumenting your customers’ use of your products to the degree possible in order to better understand how they acquire it, transport it, store it, apply it, and use it. What is the variability of their first pass yield using your product? What factors influence that? Are there external sources of data which you can use to complement this data? Such insight can help uncover what separates the top quartile users of your product from the fourth quartile users, which leads to the second stage.
The second stage involves providing value-added services to customers in order to help them perform better with your products. Armed with the insight gained from instrumenting your customers’ use of your products, you can now not only drive product improvement, but also provide value-added services to customer, elevating those in the lower quartiles to top quartile users. Such services can be used to increase share of wallet among customers with whom you are not the sole source, or as a source of increased revenues through service delivery.
The third stage comes after you have matured the product/services combination associated with reliably driving quantifiably improved customer performance using your products. This will allow you to draw an appropriate boundary around a particular portion of your customers’ business or operations which you can potentially take over, and offer as an outcome-based business model.
While not taken from the chemical industry, an SAP customer who makes industrial grade compressors offers an excellent example. For years, this company manufactured and delivered compressor equipment to their customers. The performance and reliability which customers achieved was principally up to the customer. As they saw increasing commoditization in the industry, they began to look for new business models. After better understanding their customers’ use of their machines, they were able to define a business model which allowed them to profitably deliver “compressed air” at a negotiated service level rather than selling machines any longer. They even discovered that the way they had learned to run their own equipment could reduce energy consumption which ensured that they could benefit from the energy economies they achieved for their customers. This offered differentiation and value all around.
So, if you’re concerned that you can’t *yet* envision that new business model, don’t let the opacity in your vision stop you. Begin! Begin by instrumenting your customers’ use of your product – perhaps with an IoT proof-of-concept project. Characterize what you measure and learn and turn it into value-added services which help customers make better (more profitable) use of your products. In time, you will very likely discover a way to reliably deliver an outcome-based business model which differentiates you and drives real and quantifiable value.
Start your journey now! Understand more about the value digital transformation brings to your company and establish the right platform and roadmap for transition.