For decades, innovation has been driven by hardware with software consigned to an enabling role. Today, the move towards large-scale digitalisation is reversing these roles, with software driving innovation and hardware becoming increasingly commoditised. A new generation of smart systems is set to emerge based on software-centric technologies such as the industrial internet of things, artificial intelligence, block chain and cloud computing technologies.

The emergence of software as a driving force of innovation has profound consequences for industry. In the same way that 3D printing offers entirely new possibilities for designing and manufacturing physical components, so software-driven innovation offers companies completely new opportunities to better understand and more rapidly address the changing needs of customers. New products, services and business models better attuned to market demand and delivered more efficiently are the result. The ability to use software to drive innovation is therefore a key component in the digitalization strategy of any business.

Speed of Innovation

The shift from hardware to software-driven innovation has far-reaching consequences. The biggest difference is the speed at which innovation happens. In comparison with physical components, software components can be updated almost continuously. Since software increasingly determines the functionality of a product, so feature updates can be rapidly introduced, problems quickly solved and the operating efficiency of systems constantly improved. For example, Tesla provides owners of its vehicles with multiple software updates per year, continuously delivering new and improved features and performance updates, even after delivery.

With speed comes the ability to experiment and learn what the market wants. New product features can be A/B tested and revised or optimized based on facts collected from end users. For example, Spotify releases frequent updates to its product and focuses on functionality as a metric, measuring how different versions of a feature impact use and feeding that knowledge back into development. In short, the speed with which software can be updated creates the potential for a hitherto unforeseen level of customer intimacy and interaction.

A focus on speed also delivers development efficiency improvements. The quest to tighten the loop between customers and engineers naturally leads organisations to constantly seek more efficient and effective ways of working. In contrast, a focus on efficiency alone tends to lead to a more rigid organisation, less able to react quickly to changes in customer demand.

Knowledge is Power

Software systems are capable of generating huge amounts of detailed data about the services or products that they enable. Such “big data” provides another way to better understand the performance of a product or to gain insights into the needs of the customer, leading to an increasing level of customer intimacy, interaction and satisfaction. Data about an organisation’s operations can also be used to continuously monitor and optimise its own internal performance.

The emergence of (Industrial) Internet of Things and Cloud Computing platforms provides a generally available means for the collection and processing of data from potentially widely distributed products, devices or sensors, thereby opening up the realm of big data collection and analytics to every organisation.

However, big data of itself is not particularly useful. Rather it is the information that can be extracted from it that ultimately has value. Extracting information from large volumes of data requires the use of cutting-edge software technologies, such as data mining and data analytics. Innovation comes from combining these software technologies together with a business’s own unique knowledge of its markets to create new or deeper insights into value creation opportunities.

Getting Smart

Smart systems go one step further: they use information extracted from data to automatically learn about a system and to adjust its operation accordingly. Machine learning, deep learning and A.I. are software technologies that are driving innovations in the way that the world interacts with us. For example, Smart mobility aims to deliver us mobility-as-a-service solutions, such as autonomous vehicles that are available on demand. Smart health systems aim to proactively diagnostic health problems and inform us accordingly. Again software is the key to the creation of new, hitherto unimaginable products and services with the potential to disrupt your competitors and deliver game-changing value to your customers.

New Business Models

The ability to innovate based on speed, knowledge and intelligence offers businesses boundless opportunities to improve their competitive performance. New or enhanced business models more closely attuned to the needs of your customers become possible. Servitization – the shift from selling a standalone product to selling a product-service system more closely coupled to the needs of the customer – is already a clear trend that is forecast to cause widespread market disruption. If this term is new to you, it simply refers to the shift from selling a standalone product to selling a product-service system more closely coupled to the needs of the customer. For instance, car ownership is forecast to drop dramatically in the next 10 years, to be replaced by mobility-as-a-service schemes. For automotive manufactures, this means finding ways to sell cars as a service rather than as a product.

In some cases servitization has already risen to dominate various markets: the largest taxi company in the world, Uber, owns no taxis; the largest property rental company in the world, Airbnb, owns no property. Servitization is a perfect example of a business model innovation driven by software that will sooner or later affect every kind of business and touch every end user.

Ultimately, the collection of data, its transformation into information and the application smart technologies allows businesses to understand their customers in unprecedented ways and provide them with new or better products and services ever more closely attuned to their needs.

Strategy

Digitisation and the emergence of smart systems is an ongoing force majeure that disrupts every market that it touches. It is only a matter of time before it reaches you. Succeeding at digitisation requires adopting a strategy that focuses on mastering software-driven innovation and on developing new or enhanced business models. Winners will use speed and data to increase customer intimacy, interaction and satisfaction. Losers will join Kodak and Nokia in the annals of history.