Three market trends drive collaborative value networks to the next level

By Greg Gorbach
ARC STRATEGIES
JANUARY 2011
Three Market Trends Drive Collaborative
Value Networks to the Next Level
Executive Overview .................................................................... 3
New Market Trends Drive Innovation in the Industrial Ecosystem ...... 4
Understanding the Emerging, Highly Interconnected Value
Networks .................................................................................. 7
Collaborate Throughout the Design-Make-Deliver Value Network ....... 9
A Word about CMM and CVN .......................................................11
Conclusion................................................................................11
VISION, EXPERIENCE, ANSWERS FOR INDUSTRY

ARC Strategies • January 2011
2 • Copyright © ARC Advisory Group • ARCweb.com
The Coming Decade Will Be About Empowering Value Networks
Business
Customers
Production
Suppliers
CMM
Chain
Operations
Supply
Two Complementary Models: CMM Highlights Plant-Centric
Integration, while CVN Highlights Lifecycle and Value Network
Dimensions of Collaboration

Copyright © ARC Advisory Group • ARCweb.com • 3
Now that the economy is recovering,
it is time for industrial companies to
take stock of their plant IT strategies
in light of important new technology,
economic, and demographic trends.
Bottom line: These systems will need
to foster even more innovation and
external collaboration.
Executive Overview
Three global trends, under way for some time, have reached the stage
where they are beginning to impact the industrial segment significantly.
The accelerating global shift of economic power creates opportunities for
new players, along with incentives to do things in
new ways. Changing workplace demographics will
open the door to many innovations as the old guard,
with their entrenched ways and methods, yield to
fresh and open-minded replacements. Rounding out
the perfect storm, at this precise point in time, IT solu-
tions have matured and next-generation architectures
begin to offer more power and capability in a more
accessible fashion.
Importantly, these forces act on the whole of the business ecosystem, not
just the industrial players themselves. This means that innovations
throughout the ecosystem will force business process changes for industrial
companies. To compete, companies will need to rely more on their value
network partners, and the entire value network will need to act in a more
flexible and dynamic manner.
In industrial companies, these changes will trigger a re-thinking of the IT
solution landscape as they adopt mobility, cloud, Internet of Things, and
other technology advances. The traditional view, with layers of applica-
tions that correspond to hierarchical business levels and are supported
separately and integrated to some degree, seems likely to fall out of fashion
as robust networks allow broad swaths of functionality to be delivered as
services. Initially, a few companies will decide that supporting IT plat-
forms and attending to IT security are not core competencies and can be
accomplished better by others. But things may change relatively quickly
throughout the industry when it is recognized that these companies not
only benefit from lower costs, better capability, and better security, but can
also react and change much more nimbly.
For some years now, a primary driver in the plant operations software
market has been the need to align plant operations with the business needs
of the enterprise. This need has been felt across all manufacturing seg-
ments: process, batch, and discrete. Already there is a subtle shift
underway, as business needs place more of a premium on collaboration

across dynamic market ecosystems and value networks. Aligning plant
operations with business needs is becoming more important than ever, yet
also more difficult to achieve.
It is also important to consider another dimension of the maturation of IT
capability. Processor power, network, and software advances increasingly
drive functionality that was once the exclusive province of software appli-
cations deep into production automation systems. As the automation
systems become smarter, plant equipment and systems become better able
to support the dynamic needs of extended value networks.
Now that the economy is recovering, industrial companies should take
stock of their plant IT strategies in light of important new technology, eco-
nomic, and demographic trends. Enterprise, design, plant software, and
automation systems will need to foster even more innovation and external
collaboration.
New Market Trends Drive Innovation in
the Industrial Ecosystem
The list of important market drivers has become familiar to many: global
competition, aging workforce, increasing regulations, dwindling resources,
increasing energy cost, water scarcity, recycling and disposal, climate
change, social responsibility, IT security, and the need to be more respon-
sive to customers and market dynamics. These are frequently cited as the
impetus for production system improvements and are not trivial matters
for industrial companies. The need to deal with them has led to many im-
provement projects, including plant IT installations and upgrades.
As 2010 draws to a close, it is becoming clear that some additional trends
are just now gently lapping at the shoreline, but may soon develop into a
tsunami that frames the resolution of all other trends. In particular, three
developing trends already impact the industrial marketplace to some de-
gree: the shift in global economic power, the increased accessibility and
capability of IT, and the rise of the Millennials. Together, these forces will
pressure industrial organizations to better understand and collaborate more
effectively with their value networks.

Global Economic Shift
Emerging-market companies now make up about 18 percent of the Fortune
Global 500, up from 4 percent in 1995, while developing economies make
up half of the global output. The "BRIC" (Brazil, Russia, India, China) has
evolved into the "Big 6," with the inclusion of Mexico and South Korea, and
is well on its way to becoming the Big 10. Increasingly, economic power
and activity transcends national and geographic borders, as multinational
companies expand.
This global economic shift creates new consumers with new expectations
and needs, but also generates new sources of capital and powering many
forms of innovation - in products, business processes, marketing, sales, and
delivery. New R&D centers sprouting up in the developing economies,
plus a broader willingness and ability in these populations to compete for a
bigger piece of the innovation pie, also underpin this wave of innovation.
More Players, Regional Economic Shifts, and Increasing IT Capability at
Lower Cost Drive Increasing Industrial Ecosystem Complexity
Powerful, Accessible IT Technology
Microsoft launched Windows 1.0 twenty-five years ago on November 20,
1985. This is but one of many IT technologies that have grown in power
and capability — and complexity — in the ensuing years. In addition, new
technologies with demonstrated power to re-make the traditional IT para-
digms have emerged. These include smart phones, the Cloud, and social
computing. Advances in hardware, software, networking, communica-

tions, and other technologies, as well as in reliability, usability, and stan-
dards, have created an infrastructure expectation for business and
consumers.
New It Capabilities Will Drive and Enable Many Business Ecosystem
Changes
Taken together, these advances mean that organizations have increasingly
easier and lower cost access to incredibly powerful information technologies.
Businesses throughout the value network can create new processes based on
analysis of data that was not previously available, monitor and interact in
real time with far-flung facilities, collaborate in sub-networks or external
competitive value networks, and reach out directly to customers. Advance-
ments in IT capabilities continue apace, but arguably, IT has already reached
a level of maturity sufficient to permit the disruption of existing relationships
and business models by introducing innovative new ones.
Demographics
Two sides of the same coin — the aging workforce and the rise of the Mil-
lennials — now drive changes in industrial companies. Concern about
departing expertise and knowledge as workers retire has been one reason
companies decide to implement new plant floor systems that can automate
many business processes to help mitigate this affect. What is changing now
is that the Millennials have different comfort levels with newer technolo-
gies, and their needs will increasingly influence technology decisions.
Another huge dimension to this discussion is that, in developing countries,

the proportion of young entrants to the workforce is much greater and their
impact will likely be greater as well.
Millennials Have Different Technology Expectations and Are Open to New
Ways of Doing Things
Understanding the Emerging, Highly
Interconnected Value Networks
The three trends — shift in global economic power, increased accessibility
and capability of IT, and increased influence of Millennials — act together
to create a world in which the rules of buying, selling, marketing, and com-
petition will change markedly. To survive and compete, industrial
companies will need to increase the breadth, scope, and character of their
external collaborations. In some situations, they will need to take the lead
to dynamically orchestrate distributed network agreements, execution, and
transactions to ensure orders are fulfilled as promised. In other situations,
they will need to let others take the lead, while participating profitably and
strategically.
As is always the case when significant shifts occur, it is difficult to see ex-
actly what the landscape will look like on the other side. But it is possible
to discern some important dimensions of the change already under way.
For example, it seems certain that companies will benefit from using new
technologies to collaborate more extensively with other value network par-
ticipants in all phases of value creation — including product
conceptualization and design, development of production assets, supplier
acquisition and management, sales, distribution and logistics, and warranty
support.

IT Trends Throughout the Ecosystem Will Increasingly Drive Production’s
Business Models (Example)
Consumer Market Power and Collaboration
Social media, mobility technology, and other technology advances now
empower consumers in new ways. They can readily discover friends' opi-
nions of a company's products, services, or brand. They can collaborate in
ad-hoc buying groups to negotiate for discounts or other terms. They can
discover competitive products and pricing. They can publish their own
opinions and thereby influence a company's profitability. And they can
find comparable products available nearby while shopping. We have just
begun to see the way these emerging behaviors will influence the manufac-
turing ecosystem.
Crowdsourcing, Co-Production, Outsourcing, and
Intermediaries
Consumers can now also help design a manufacturer's products. This can
take many forms, including "crowdsourcing," in which members of the ex-
ternal community develop the design; or custom designs are developed by
and for one customer, but made available to others. The idea of product
and packaging design collaboration with customers, sometimes termed "co-
production," should have a significant impact on competition. Greater con-
nectivity and collaboration will also lead to more outsourcing of core
activities, expansion of players in various parts of the value network into
adjacent segments, and competition from new players that can leverage

cloud computing or other technology to quickly establish a presence and
exploit underserved or especially profitable niches.
Product and Manufacturing Process Innovation
Another important aspect of value network collaboration involves collabo-
ration and virtualization in both product and manufacturing process
design. Suppliers are making much progress developing technologies that
eliminate bottlenecks that previously added cost and time in moving new
products into production. These advances can be seen in several areas, in-
cluding product modeling and simulation, production process modeling
and simulation, virtual commissioning, digital manufacturing, and digital
automation.
Collaborate Throughout the Design-
Make-Deliver Value Network
Today, manufacturers operate within one or more networks of companies
that work together to provide goods and services to end consumers. To
Today’s Manufacturers Operate within One or More Networks of
Companies that Work Together to Provide Goods and Services

compete effectively, better IT tools are being utilized throughout the value
network to speed and optimize innovation, production, and delivery of
goods and services. This trend will accelerate in the coming years.
Design
Collaboration opportunities in this area include co-production with customers,
more integration with component and other suppliers during the planning and
design process, and better integration with production operations, including
outsourcing partners. In addition, there is room for better information sharing
and collaboration in designing, building, commissioning, and handing over
production assets.
Make
The developing economic and technical changes will drive the need for ad-
ditional connectivity with distributed engineering organizations, suppliers,
customers, outsource partners, and
other entities in the value network.
This will require more robust,
modern plant floor systems than
currently found in many tradition-
al manufacturers' operations. This
represents both a real threat and a
huge opportunity for manufactur-
ers. Things are already beginning
to change, and this time around,
it's not likely to be a slow, linear,
incremental process. Those com-
panies that have been investing in
plant systems are probably in rea-
sonably good shape to make the
next steps, but it could be another
story for those that continue to
"wait and see."
Deliver
In some ways, the supply chain leads the way in collaboration. Players
here have been among the early adopters of mobility solutions, cloud com-
Manufacturers Stand to Benefit from Increased
Collaboration with Other Players throughout the
Dynamic Value Network Ecosystem

puting, GPS, RFID, and other technologies. The changing industrial value
network ecosystem will present many additional opportunities for these
players to take advantage of the lessons learned in supply chain collabora-
tion to expand their business and better serve customers.
A Word about CMM and CVN
ARC's decade-old CMM model positions the plant as a node within a colla-
borative value network. Much of the plant IT activity in the last decade
centered on improving visibility into individual plant operations and better
integrating plant and business systems. As a result, CMM was commonly
invoked to help visualize the interactions of processes and systems within a
single plant. In the coming decade, new trends will push manufacturers to
improve collaboration significantly across the entire value network ecosys-
tem. The CVN perspective complements and extends the CMM view to
help visualize the Lifecycle and Value Network dimensions of collabora-
tion.
Business
Customers
Production
Suppliers
CMM
Chain
Operations
Supply
CMM Highlights Plant-Centric Integration, While CVN Highlights Lifecycle
and Value Network Dimensions of Collaboration
Conclusion
Three trends — the shift in global economic power, increased accessibility
and capability of IT, and increased influence of Millennials — will drive in-
dustrial companies to ramp up the pace of innovation in products, business
models, and manufacturing strategies and processes. Robust, collaborative

plant IT systems will become even more important to enterprise success than
they are today. Engineering and supply chain systems will also play an im-
portant role in supporting the increasingly dynamic enterprise.
Because they already invest in their plant IT systems, leading manufactur-
ers have a good handle on how they can address and improve operating
excellence and compliance. Going forward, manufacturers will need to re-
visit these areas with an eye to increasing external collaboration and
information sharing with consumers and other value network partners.
Three Business Imperatives for Succeeding in a Changing Marketplace
Be effective. Be proactive. Be responsible. This is the mantra for industrial
companies in the coming decade.

Analyst: Greg Gorbach
Editor: Paul Miller
Distribution: EAS and MAS Clients
Acronym Reference: For a complete list of industry acronyms, refer to our
web page at www.arcweb.com/Research/IndustryTerms/
BRIC Brazil, Russia, India, China
CMM Collaborative Management Model
CPM Collaborative Production
Management
CRM Customer Relationship Manage-
ment
CVN Collaborative Value Network
ERP Enterprise Resource Planning
GPS Global Positioning System
IT Information Technology
MES Manufacturing Execution System
OpX Operational Excellence
PLM Product Lifecycle Management
RFID Radio-Frequency Identification
SRM Supplier Relationship
Management
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