Jan Bosch is research center director, professor, consultant and angel investor in start-ups. You can contact him at jan@janbosch.com or follow him on janbosch.com/blog, Linkedin (linkedin.com/in/janbosch) or Twitter (@JanBosch).

22 May 2019

Especially in the embedded systems industry, the approach has traditionally been to build products that get worse over time. We design, manufacture and sell a product to the customer, it slowly deteriorates and then we sell the customer a new product several years later (see figure 1). Even though the next product will be better than the last one, in between purchases, the customer is experiencing a continuously deteriorating product value. Although this approach has been the norm for decades, it has several challenges associated with it. Many in industry are aware of these, but often view them as immutable.

One of the important challenges is lack of clarity concerning customer value. As product development cycles tend to be measured in years, many decisions are taken within company walls based on an often qualitative understanding or set of beliefs as to what constitutes value for customers. As the beliefs tend to be qualitatively formulated, different teams often have different priorities concerning the factors constituting customer value, causing suboptimal or even contradictory decisions concerning the product. For example, in one case, a company had one team working on improving performance and another on increasing security. For a variety of reasons, these teams managed to negate each other’s progress resulting in no customer value despite significant investment.

Figure 1: Traditional value delivery to customers

A second important challenge is high risk. Companies invest hundreds, if not thousands, of person years of effort in the development of the next generation of a product without any real evidence that the decisions taken during development are the correct ones. Only after the start of manufacturing and sales will the company get real customer feedback, often expressed in sales numbers rather than tangible feedback on the product.

A third important challenge of the traditional approach is lack of customer feedback. Although companies conduct interviews, show early prototypes, and so on, the reality of customer feedback is that there’s often a significant delta between what customers say and what they do. Look no further than the fast-moving consumer goods industry, where more than 90 percent of new product introductions fail, despite very positive customer feedback during the design phase.

Perhaps the most important challenge is that long cycles result in a lack of business agility. Once the management team has approved the plans and budget for the next product generation, rapidly responding to changes in the market becomes very difficult as it often is prohibitively expensive to make changes to the product architecture once development is underway.

The alternative is to think about the company’s product portfolio in a fundamentally different way. Instead of selling products transactionally, companies should aim for continuously improving the value that their products, solutions and services deliver to customers (figure 2). This is already the norm in the online SaaS world, but it’s entirely feasible for embedded systems companies as well.

Figure 2: Continuously improving value delivery to customers

The basic concept is that the product (or system, solution or service) continuously delivers more value through four key elements: quantitatively measuring customer and product behavior in order to establish the real value delivery, continuously delivering new software versions and using A/B testing and other experimental approaches to quantitatively establish that the product is indeed improving, periodically upgrading electronics in order to meet the increasing demands of new software in terms of computational and storage requirements, and occasionally replacing mechanical components that are subject to wear and tear with new and improved versions.

Adopting this approach obviously requires changes throughout the company, including new business models. For embedded systems companies, this typically means that the initial product sales price becomes a smaller part of the overall monetization and services and maintenance fees become a larger part. Alternatively, value-based business models can be adopted where improving customer value delivery leads to higher revenue for the company as well.

Concluding, society as a whole is moving from transactional to continuous and so do software-intensive, embedded products, systems and solutions. Although it may feel as a risky move to change the business model and the monetization strategies, I believe that not doing so for the customers that are ready for this constitutes a higher risk. Customers want their products to get better every day and, to be honest, so do you. So, get moving on continuously improving value delivery to your customers.