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 Businesses


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.


Table of Contents

Consumers Lead Transformation, Enterprises Lag


Section Start: Background/Consumer Electronics Analogy

Consumer electronics have shifted radically to connected devices over
the 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 bookstore


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 share
Market 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


The consumer electronics market has short cycles and fast transitions
Products 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 life


Consumer adoption of new technologies historically has been fast and
generally 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 *Estimated

The global leadership positions in the electronics industry changed
dramatically 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 2
10 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 changed
dramatically 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 markets
11 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 not
quickly

• 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 signs


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 life


While the technology exists to support platforms and services, most big
enterprises do not want to disrupt their products-centric models
Case 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.


Some markets have seen significant transformation in B2B, but it is not yet a
general 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 equipment


Table of Contents

Eroding Obstacles to B2B Transformation


The same forces that powered very rapid changes in consumer markets
have 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 networks


Five big trends are transforming the business of selling and managing
electronics 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 model


Technology is making the sales process more competitive and less driven
purely 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 compared


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 benchmarking


Product markets also are changing as devices become dynamic and the
focus 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
Electronics


Barriers are crumbling, with standard technologies making it possible to
assemble 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
solutions


Shifting to a services model can simplify and accelerate buying decisions by
reducing 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 solutions


Case Study: Printing and copying have been the first and most thoroughly
transformed 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 revenue


The value proposition for the transition from a product model to a service
offering was compelling to clients and drove transformation
Total Ownership Cost Savings
from Implementing Service Business Model
45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
Dow Chemical Boeing Nationwide LCBO Other 105 companies

Source: Photizo Group, MPS Advisory Service, MarketWatch™

The result is that the shift to managed print services occurred in just three
years, from 2008 to 2011
• Virtuous Cycle: Inflection
Huge 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 vendors

The transition to managed print services has been accompanied by the
creation of a whole software and services ecosystem
Keys to growth Ecosystem Growth and Technology
1. Building out the infrastructure Adoption, 2006, 2009, and 2012
so dealers/resellers do not Professional
have to build their own services

2. Utilizing multipliers Resellers
Infrastructure
• Cost reduction
providers
• Sustainability OEMs
• Improved tools Software
3. 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™


Traditional hardware vendors have consolidated from 36 down to 15

28

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 Q4/2011


Table of Contents

Preparing for the Future


Key Conclusions: Electronics markets that are undergoing B2B
transformation 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 share


We believe there are three strategies that electronics companies should
embrace to prepare for transformation

Invest in client relationships

Go first

Drive transformation from the outside in


Without client intimacy, the chance of building a compelling value
proposition 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 Commons


Disruptive competitors have a history of re-framing the product and
objective, 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 network

34 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 followers
are 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™

When market transformation accelerates, organizations should drive
transformation 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 followed


Case Example: In managed print services, Xerox started with a per-page
business 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 development


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
drawers
38 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
transformation


• 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 decisions

Resources


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