Photizo & IBM Viewpoint on B2B Transformation

May 2012 Products to Services Transformation in B2B Electronics: Past, Present, and Future Portions © IBM 2012 and © Photizo Group 2012

Objectives and Caveats for This Presentation• This presentation provides insight into why it is important to transform your business. It will define the industry and global drivers that make transformation an imperative.• The presentation cannot provide specific recommendations or diagnostics for the specific transformation your company requires. Each company’s situation is unique, and each transformation path will be different.• However, we do have the processes, models, and frameworks to build specific transformation plans and would be happy to discuss these with you.2 Portions © IBM 2012 and © Photizo Group 2012

Authors Contributors Paul R. Brody Dib Banerjee Partner Consultant, Strategy and Global Industry Leader, Transformation Electronics pbrody@us.ibm.com Global Business Services dbanerjee@us.ibm.com @pbrody @dibyob pbrody dibyajyoti-banerjee Rob Sethre Ann Priede Senior Consultant Vice President, Services and Publishing rsethre@photizogroup.com apriede@photizogroup.com @rtsethre @ahpriede robert-sethre ann-priede Edward Crowley CEO Doctorate Candidate, University of Manchester (UK) eacrowley@photizogroup.com Doctorate Topic: Japanese Firms and The Transformation from @PhotizoGroup Product Centric to Service ed-crowley Centric Businesses3 Portions © IBM 2012 and © Photizo Group 2012

Executive Summary• While consumer electronics markets have sprinted ahead in transforming products into services, the same transformation has been much slower to take shape in the B2B electronics industry.• Numerous forces have slowed down the transformation of the B2B side of the industry, including longer product life cycles, deep client sales relationships, and the cost and complexity of creating low-volume, high-value B2B technologies.• New technologies, from procurement systems to standardized components and 3D printing, are eroding those barriers to transformation.• Though technology is key to enabling transformation, transformation from products to services is most often driven by a compelling business case. • The market for printers and copiers is a great case example of how transformation can be slow in coming, but once it arrives with a strong value proposition, the result is a swift transformation.• When transformation does occur, it is often fast, usually taking less than one full product life cycle, and afterward the industry segment is often significantly consolidated in a winner-take-all model that looks very similar to consumer electronics.• Companies that wish to prepare for and survive this transformation should first and foremost invest in client intimacy to learn the ideal elements of a compelling business from the point of view of the client.4 Portions © IBM 2012 and © Photizo Group 2012

Table of Contents Consumers Lead Transformation, Enterprises Lag5 Portions © IBM 2012 and © Photizo Group 2012

Section Start: Background/Consumer Electronics AnalogyConsumer electronics have shifted radically to connected devices overthe last few years CONTENT Seamlessly integrated across multiple devices APPLICATIONS CONNECTIVITY SERVICE • Industry leaders have refused to allow their value proposition to be unbundled – there is no iPhone without iTunes, no Kindle without the Amazon bookstore6 Portions © IBM 2012 and © Photizo Group 2012

In the consumer electronics market, it has been winner take all, and the winner takes it all very, very quickly Winners and Losers in the Winners and Losers in the LCD TV Market, Notebook Market (Including Fourth-Quarter 2009 versus Fourth-Quarter 2010 Tablets), Second-Quarter 2010 30% versus Second-Quarter 2011 25% 25% Visio 20% Market shareMarket share Samsung 20% Apple Sony 15% Acer 15% LG HP 10% Toshiba 10% 5% 5% Q2 2010 Q2 2011* Q4 2009 Q4 2010 Source: IHS iSuppli February 2011 * Estimated Source: IDC 7 Portions © IBM 2012 and © Photizo Group 2012

The consumer electronics market has short cycles and fast transitionsProducts may be on different parts of the life cycle curve, but trend lines are almost always the same Typical consumer Saturation electronics curve: Market is flooded and • Short R&D cycles vulnerable • Rapid and steep growth • Increased competition floods Transformation Begins here the market • Peak followed quickly by steep decline More competitors and Commoditization products Rapid and steep growth Short R&D cycles Introduction/ R&D Growth Maturity Decline End of life8 Portions © IBM 2012 and © Photizo Group 2012

Consumer adoption of new technologies historically has been fast andgenerally accelerating even in periods of recession Technology Adoption (Measured by Population Penetration) in the United States, Radio versus TV versus Internet versus Mobile Internet, 1920–2011* 100% Percent of population penetration 80% 60% 40% 20% 0% 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Radio penetration data from Broadcasting and Cable Yearbook 1996, Internet penetration data from World Bank/ITU, Mobile Internet (smartphone) data from Morgan Stanley Research, and 3G data from Informa. Chart from Mary Meeker’s 2011 Internet Trends Presentation at Web 2.0 conference *Estimated9 Portions © IBM 2012 and © Photizo Group 2012

The global leadership positions in the electronics industry changeddramatically in just 10 years (1 of 2) Enterprise Market Value – November 2001 (Market Capitalization, in Billions of U.S. dollars) Long before people waited in line for iPads, they waited in line for the new PlayStation 210 Sources: Yahoo Finance, Bloomberg, and Thomson Reuters company financials and reports Portions © IBM 2012 and © Photizo Group 2012

The global leadership positions in the electronics industry changeddramatically in just 10 years (2 of 2) Enterprise Market Value – November 2011 (Market Capitalization, in Billions of U.S. dollars) We believe the same dramatic transformation is coming to B2B electronics markets11 Sources: Yahoo Finance, Bloomberg, and Thomson Reuters company financials and reports Portions © IBM 2012 and © Photizo Group 2012

Enterprise sellers believe change is coming for B2B…but not yet, and notquickly • Market is based on slower sales cycles • Longer product life cycles Historical paradigm • Different selling process for resisting change • Greater systems and product complexity • Comfortable, safe, and sustainable • Historically, change has come rapidly • Change is very disruptive Change will come • Led by new competitors and technology • Encumbent players are most at risk Ignoring the signs12 Portions © IBM 2012 and © Photizo Group 2012

B2B market llfe cycles are longer than consumer life cycles Saturation Transformation Market is mature but change Begins here Typical B2B Curve: has not yet occurred • Extended R&D cycles during growth phase Early Stages of • Allows for more incremental Commoditization Market Evolution product improvements • Little to no product • Slower but consistent growth differentiation • Fewer new market entrants in • Products stay in the the early stages market longer • Commoditization begins later • R&D cycles are but lasts much longer compressed • Mature stage lasts longer significantly • False sense of security • More new market Slow and steady entrants growth • Threats from outside competitors and new technologies Longer R&D and product development  Longer life cycles create a false sense of security that cycles business models won’t be disrupted Introduction/ R&D Growth Maturity Decline End of life13 Portions © IBM 2012 and © Photizo Group 2012

While the technology exists to support platforms and services, most bigenterprises do not want to disrupt their products-centric modelsCase Example: Large Energy and Industrial Automation Company Only half of the …none of the data …and technology is still devices that can be streamed is used sold as a product, not a connected are…. proactively… solution. 0% 30% 30% Other 40% 100% Connectable Predictive Connected Reactive Percentage of the installed based Percentage of the installed base in Revenue from bundled solutions that can be connected to the which analytics are applied to versus discrete product, service Internet and the proportion that usage and performance data to sales actually is being connected predict maintenance or other requirements Source: Data based on interviews with client executives. Numbers under 5 percent mean “unknown and thought to be very small” rather than 0.14 Portions © IBM 2012 and © Photizo Group 2012

Some markets have seen significant transformation in B2B, but it is not yet ageneral trend Most Transformed Less Transformed Office Network Medical Industrial Semicon equipment equipment devices automation Accelerants • Cloud • Outsourcing deals • Consumer health • High CapEx cost • Managed print for public networks devices on new factories • Software as a service • Mobile devices Brakes • Corporate security • Conservative • Corporate security • Very limited new fears insurance and fears investments • Legacy apps regulators Key trends • Cloud services are • Shift from private to • Bar is rising fast for • Initial services will • Initial services will a better fit for public networks by new medical be for maintaining be for maintaining mobile devices enterprises technologies existing equipment existing equipment15 Portions © IBM 2012 and © Photizo Group 2012

Table of Contents Eroding Obstacles to B2B Transformation16 Portions © IBM 2012 and © Photizo Group 2012

The same forces that powered very rapid changes in consumer marketshave been absent from B2B markets, but that is changing Consumer effects Enterprise impact today… tomorrow. • Content producers are • “Smart devices” like power attracted to large user base meters, printers, and HVAC The network effect systems are getting their own • Users look for rich set of apps apps and analytics and content • Shift to apps and content has • Value is shifting from the Increasing returns given “devices” like phones physical device to analytics the characteristics of software and services that have to scale with increasing returns to scale increasing returns • Highly visible device usage • Social networks for enterprise The social users create product visibility • Visible interaction on public bandwagon effect social networks17 Portions © IBM 2012 and © Photizo Group 2012

Five big trends are transforming the business of selling and managingelectronics in B2B markets Traditional obstacle to Category New enabler of rapid change rapid change Increased sales process • B2B based on much stronger • Highly mobile sales forces, take the transparency personal relationships rolodex with them • Less formal procurement • Modernized, fact-based procurement processes Analytics-driven value • Unable to share data • Compelling value propositions around propositions • Security fears over data sharing analytics • Access to benchmarking data Changing product markets • Long life with static product • Long life with dynamic product • Mature markets • Emerging markets focus Simplified and standardized • Engineered to order • Open standards for inter-operability product designs • Homogenous supplier ecosystems • Shift to configure to order over engineer to order The rise of service-based • Purchase of items and services • Shift in business model to integrated business models separately solution • Visibility to benefits of new model18 Portions © IBM 2012 and © Photizo Group 2012

Technology is making the sales process more competitive and less drivenpurely by relationships • Spend analytics provides new insights into how to reduce costs Online • Online marketplaces are marketplaces standardizing terms and making pricing transparent • Procurement systems make Spend Procurement rogue spending difficult analytics systems • B2B relationship selling is more difficult now Diminished • Business cases that depend B2B on capturing benefits are relationships easier to execute • Pricing and performance differences across solutions are more easily compared19 Portions © IBM 2012 and © Photizo Group 2012

Analytics provide more than a view of device usage, they provide a real-time, bottom-up view of operations Operations: Stand-alone devices • Copies printed • Toner required execute functions • Paper jams Operations: Connected devices • Copies printed • Toner required provide real-time • Paper jams insights that can be used to optimize Business activity: • New documents processed operations (account openings, deals closed) • Peak and off-peak work times Operational excellence: • Identify heavy and light users • User and office cost comparisons • Identification and transfer of best practices • Competitive benchmarking20 Portions © IBM 2012 and © Photizo Group 2012

Product markets also are changing as devices become dynamic and thefocus shifts to emerging markets The products are changing: As are the buyers: • By 2025, China is likely to be the biggest market in the world for several key industries • Emerging markets buyers are focused on new growth, mature market buyers are more focused on maintenance of existing systems Manufacturing • Simple • Multifunction Chemicals functionality • Continuously • Intended to be upgraded Petroleum in place for decades • Not Utilities upgradeable Electronics21 Portions © IBM 2012 and © Photizo Group 2012

Barriers are crumbling, with standard technologies making it possible toassemble complex, integrated systems more easily Always On Embedded Systems • Interconnected, • Shift from proprietary ubiquitous networks solutions to open • Wi-Fi architecture • High-speed cellular • Java • 4G and beyond • Web services Applications Integrated Workflow • Office document • Standardized device applications supported management tools across all devices: Mac, • Cloud-based solutions for PC, tablets, smartphones document management • PDF • Open APIs for third-party • E-mail solutions22 Portions © IBM 2012 and © Photizo Group 2012

Shifting to a services model can simplify and accelerate buying decisions byreducing complexity and up-front expense Simpler Decisions Product Business Services Business Model Model Lower capital expenditure Services are expensed Functionality in Blend of device and usually have lower hardware and cloud commitment requirements Less operational Fixed functions, no Continuous complexity upgrades updates A third party assumes management of the solution Faster buying Revenue is unit- Annuity decisions based up front relationship Sales cycles speed up even with complex enterprise solutions23 Portions © IBM 2012 and © Photizo Group 2012

Case Study: Printing and copying have been the first and most thoroughlytransformed B2B segments of the electronics industry Product Service • Printer • Price per page • Toner • Everything included • Service • Apps and analytics delivered in cloud • Printer is designed for low up-front cost • Device is networked to enable management • Toner generates profit • Designed for high reliability, • Focus on preventing long durability consumer from using third- party toner • Total cost per page to be minimized • Product is not designed for long service life • Downtime = lost revenue24 Portions © IBM 2012 and © Photizo Group 2012

The value proposition for the transition from a product model to a serviceoffering was compelling to clients and drove transformation Total Ownership Cost Savings from Implementing Service Business Model45%40%35%30%25%20%15%10% 5% 0% Dow Chemical Boeing Nationwide LCBO Other 105 companies Source: Photizo Group, MPS Advisory Service, MarketWatch™25 Portions © IBM 2012 and © Photizo Group 2012

The result is that the shift to managed print services occurred in just threeyears, from 2008 to 2011 • Virtuous Cycle: InflectionHuge Growth for Managed Print Services, Represented by point to rapid change: at the Number of MPS Programs Announced 15 percent of the 75% market, a sudden takeoff = Number of new MPS programs in the proportion of spending is shifting to = MPS program growth 58% managed print services 56% 2 11 • Huge Value Proposition: 45% Compelling 30+ percent 50% cost reductions for 31 customers, higher margins for winning vendors • Service Extension: Branching beyond copying 25% into 14% printers, processes, and other IT infrastructure 10 services 3% 4% 1% 2% 1 1 1 • Winner Takes All: 0% 1 Transformation driving 2004 2005 2006 2007 2008 2009 2010 2011 consolidation toward Source: Photizo Group, MPS Advisory Service, MarketWatch™ larger vendors26 Portions © IBM 2012 and © Photizo Group 2012

The transition to managed print services has been accompanied by thecreation of a whole software and services ecosystemKeys to growth Ecosystem Growth and Technology1. Building out the infrastructure Adoption, 2006, 2009, and 2012 so dealers/resellers do not Professional have to build their own services2. Utilizing multipliers Resellers Infrastructure • Cost reduction providers • Sustainability OEMs • Improved tools Software3. Market awareness • Companies realized they had to act • Difficult to build own MPS program • Required specialists to improve ability to ease into MPS 2006 2009 2012 • Example – FMAudit’s Deployer® solution Source: Photizo Group, MPS Advisory Service, MarketWatch™27 Portions © IBM 2012 and © Photizo Group 2012

Traditional hardware vendors have consolidated from 36 down to 15 Portions © IBM 2012 and © Photizo Group 201228

As in many B2C markets, fewer survivors in B2B printing and copying are taking a much bigger share of the profits In the consumer space, winners dominate profits. Will it be the same in the enterprise? Profit shares of eight mobile phone companies 100% HTC SE 75% Apple 50% LG 25% RIM Sam © Asymco Nokia 0% Q2/2007 Q4/2007 Q2/2008 Q4/2008 Q2/2009 Q4/2009 Q2/2010 Q4/2010 Q2/2011 Q4/201129 Portions © IBM 2012 and © Photizo Group 2012

Key Conclusions: Electronics markets that are undergoing B2Btransformation exhibit three key characteristics • 20-40 percent annual savings and Transformation is elimination of CapEx have had biggest business-case driven impact • Analytics, platforms, and new services come after transformation • Change can happen in between 0.5 and 1.0 Once product life cycles started, transformation • Three years in managed print services is swift • Five years in network equipment Connected-device • Transformed markets show rapid consolidation of industry players markets are • Profitability consolidation even stronger than “winner-take-all” market share31 Portions © IBM 2012 and © Photizo Group 2012

We believe there are three strategies that electronics companies shouldembrace to prepare for transformation Invest in client relationships Go first Drive transformation from the outside in32 Portions © IBM 2012 and © Photizo Group 2012

Without client intimacy, the chance of building a compelling valueproposition is limited The same piece …can be viewed from …with different of equipment… multiple value propositions: transformation options: A commodity that’s costly to Reduce cost of own and operate. ownership, eliminate capital expense A key differentiator in the Guarantee capacity, build overall solution deep design partnership A failure-prone “weak link” Sell uptime and results that causes down time instead of the device One part of a larger set of Expand to other markets to business issues sell total solution CNC image, Flickr Creative Commons33 Portions © IBM 2012 and © Photizo Group 2012

Disruptive competitors have a history of re-framing the product andobjective, leading to an entirely different sales cycle and value Amazon Cloud • Competition thought of Amazon as a retailer that was out of its depth • Amazon sees itself as a technology company Square • Competition thought it was selling transactions processing • Square is selling customer intimacy and analytics Free.fr • Competition thought it was selling cable TV • Free is building a national fixed and mobile network34 Data Center image, Flickr Creative Commons Portions © IBM 2012 and © Photizo Group 2012

In a winner-take-all model with very rapid market transitions, fast followersare at high risk of failure 99% Share of mobile device industry profits going to Apple and Samsung in 2011 Web-site hosting share of the top three 96% cloud infrastructure providers in 2011: Amazon, Rackspace, and Linode While not always as stark as in B2C, the winner-take-all nature Infrastructure share of top three mobile 74% systems vendors in 2010: Huawei, Ericsson and NSN of products-to-services transformations leaves the market transformed in relatively short order Proportion of the managed print services 52% business contracts taken by Xerox, HP, and Ricoh, the top three in 2010 Source: Asymco, Gartner, MobileNews, DailyWireless, Jack of All Clouds, and IBM Research Source: Photizo Group, 2011 MarketMetrics™35 Portions © IBM 2012 and © Photizo Group 2012

When market transformation accelerates, organizations should drivetransformation outside in, starting with client-facing work In B2B, leaders have often started with the client-focused value proposition and then aligned their organizations to support it • Started with the cost-per-page value proposition • Still completing the transformation to Sales a solutions and services organization Service SCM • Created the Integrated Systems R&D Solution Company in 1991, the predecessor to Global Services • ISSC became the world’s second- largest IT services firm in it’s first four years of operations • Alignment and integration of Global Finance Services followed36 Portions © IBM 2012 and © Photizo Group 2012

Case Example: In managed print services, Xerox started with a per-pagebusiness model and then optimized operations to support it • Xerox already had a strong field service organization • First, it made the offer to clients • With no real capability other than manual “meter reading” • Transformation followed: • First sales • Then marketing • And finally (much later) supply chain and product development37 Portions © IBM 2012 and © Photizo Group 2012

Transformation management cannot end with client-facing work, however;transformation needs to go all the way to every aspect of product design Cloud-based monitoring UPD Support for broad area analytics Intelligent remote install Powerful controller based on company print policies Open MIB to Prevention diagnostics support third-party software Remotely downloadable GPS for assessment configs and upgrades and MACD Secure de-install Very high-yield ship with supplies Biometric security AI-based supplies Mobile print support Multiple high-cap replenishment drawers38 Source: Photizo Group, MPS Advisory Service, MarketWatch™ Portions © IBM 2012 and © Photizo Group 2012

We cannot predict the future. We can only prepare for it. The enterprises Product-to-service transformation has been most likely to lead slower in B2B electronics than in consumer and survive this transition will make three key investments in: The traditional impediments to this transformation are now eroding quickly Client intimacy When transition does happen, it’s driven by a compelling business case, not just technology Leadership in new offerings Products-to-services transitions, when they happen, are swift and “winner-take-all” Outside-in transformation39 Portions © IBM 2012 and © Photizo Group 2012

• A leading consulting and marketing information firm for the technology industry that assists clients in transforming their business model from product-led to services-led through • Innovative and practical market intelligence and research • Consulting to address specific business transformation opportunities • Transformation centric educational events and training• We are a trusted consulting and advisory partner to Fortune 500 companies that offers visionary guidance to help make strategic business decisions40 Portions © IBM 2012 and © Photizo Group 2012

Photizo & IBM Viewpoint on B2B Transformation

by Paul Brody on Feb 04, 2013

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Photizo & IBM Viewpoint on B2B Transformation Presentation Transcript

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