The digitalization journey of a German manufacturer: How Siemens is increasingly becoming a Tech company

Siemens is undergoing a digital reinvention, focusing on data and analytics to protect its leadership position in the industrial equipment and services space.

Omnipresent mobile devices, greater processing power and faster internet connections. The world is witnessing one of the most disruptive transformations of our history: the digital transformation. According to Cisco VNI Forecast(1) – a well-known study published by the largest network devices company in the world – there will be a massive increase in connectivity levels over upcoming years. More importantly, the number of machine to machine (M2M) connections (i.e., connections between two or more microprocessors), largely used in automated factories or assembly lines, will grow substantially. This trend clearly shows an opportunity for digitalization to disrupt the industrial equipment & services space.

Table 1. Evolution of selected indicators according to Cisco VNI Forecast

Dimension

2015

2020

Growth per Year

Connected Devices

16.3 billion

26.3 billion

10%

M2M Connections

4.9 billion

12.2 billion

20%

Internet Traffic

1.7 exabytes / day

5.3 exabytes / day

25%

 

One successful example of embracing the digital transformation in the industrial equipment & services space is provided by Siemens. The company, a €76 billion in revenue (2) giant, was founded in 1847 and since then has been a leading supplier of systems and engineering solutions for several industries (e.g., Energy, Healthcare, Process Industries, Financial Services). Traditionally, Siemens had a relatively simple business model: it manufactured and supplied equipment for large industrial players – who relied on the German company to install trains, wind turbines or automate assembly lines.

However, Siemens has decided to undergo a reinvention – with a new business model, placed at the intersection of physical and digital worlds. Recently, the Germany-based company included digitalization as a key element of its strategy, focused on incorporating IT and data to craft new solutions for its clients. The left-hand side of [Figure 1] shows concepts that one would hardly associate with Siemens a few years ago.

Figure 1. Siemens Digitalization Pillars

siemensslide

Many of the rising trends in segments serviced by Siemens are only enabled via big data and advanced analytics. To protect its leadership position, Siemens started to morph into a technology services company – investing to develop state-of-the-art software and algorithms. The goal is to continue providing competitive advantage to its customers – even if it requires developing new skills. Very emblematic of its new phase is a tool Siemens recently launched, called Sinalytics(3). Sinalytics is a Siemens-owned tool that can securely connect to a variety of installed Siemens systems worldwide, remotely monitor them and extract real-time data. Through cutting-edge analytical methods, Siemens expects to analyze the data, recognize opportunities to improve the performance of the equipment, maximize the availability of the equipment and predict properly when maintenance will be needed – all that in addition to saving energy and reducing costs. Sinalytics is the latest addition to a business line that has been performing well: Digital Services and Vertical Software delivered, combined, around €3.7 billion in revenue in 2015(4).

Video 1. Sinalytics and Siemens Digital Services

However, the reinvention Siemens is undergoing comes at a cost. Many adjustments needed to be made on their operating model to adapt and be successful in this new space. [Table 2] summarizes some of the required changes.

Table 2. Description of some changes on Siemens operating model

Traditional Siemens

  “Digital” Siemens

Reactive (i.e., manufactures
and sells what customers buy)

Proactive (i.e., identifies opportunities
for engagement with customers)

Process-based (i.e., focuses on excelling
at manufacturing processes and routines)

Knowledge-based (i.e., requires intellectual
capital to add value using customer data)

Capital intensive (i.e., expanding product line requires huge amounts of money to set-up new plant or design new product)

Insight intensive (i.e., expanding or improving services requires insight generation from software architects or engineers)

 

It is undeniable that Siemens’ attempt to react to the digital transformation has been very successful. They are a benchmark for those willing to explore the digital revolution. However, there are two things Siemens could do, if they have not done yet:

  1. Develop partnerships with large technology firms active in the consumer space (e.g., Google, Facebook), with a twofold objective: (i) to understand solutions that have been succesfully applied in the consumer space and could be used in industrial applications and (ii) to anticipate consumer trends that could help them improve products for their customers (i.e., ultimately, Siemens’ clients will react to demands coming from the broad population in markets where they are active).
  2. Create a compatible human capital strategy – focusing on attracting top talent in the technology space. When it comes to softwate and algorithms, the knowledge and talent of software engineers play a big role – and Siemens needs to ensure it has the required talent to continue thriving with its new operating model.

These suggestions are small improvements to an execution that has been incredibly effective so far. In addition to improvements, risks should be addressed: how will clients react to sharing such critical data with Siemens? How to deal with confidentiality? To which extent Siemens gains bargaining power by being so integrated with its customers? If able to address these risks and keep momentum, Siemens will very likely be remembered as one of the driving forces of this digital transformation – and build a very solid foundation for continued success over the next 100 years. (785 words)

 


 

References

(1) Cisco VNI Forecast (http://www.cisco.com/c/m/en_us/solutions/service-provider/vni-forecast-highlights.html)

(2) Siemens AG Financial Stataments (http://www.siemens.com/investor/pool/en/investor_relations/Siemens_AR2015.pdf)

(3) Siemens Sinalytics (https://www.siemens.com/innovation/en/home/pictures-of-the-future/research-and-management/innovations-sinalytics.html)

(4) Siemens Digitalization Strategy Report (https://www.siemens.com/digitalisierung/public/pdf/Sinalytics-and-Digital-Services-Presentation.pdf)

 

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2 thoughts on “The digitalization journey of a German manufacturer: How Siemens is increasingly becoming a Tech company

  1. It is interesting to see how hardware giants such as Siemens and IBM are adopting to the new digital era. As you point out, their reactive operating structure was a very important enabler to hardware, because it would be extremely costly to operate in a very capital-intensive business with trial and error.

    One very important investment component of this new operating model is, as you pointed out, to go from capital-intensive to human-intensive. I think it is also important to think about the implications on the organizational structure. There are just so many people who wants meaningful work with less bureaucracy and these traditional hardware giants have traditionally been notorious for their bureaucratic organizational structures. Going forward, they should think more about organizational structures focused on flexibility and agility to truly embrace a tech culture of innovation.

  2. Wow, I was simply impressed by fact that a company with the history of 170years has greatly adapted operation’s model to today’s digital world. I agree with your idea of human capital strategy, and to add to it, another possible use of technology at Siemens is human capital management. As Siemens employs as many as more than 300,000 people, how to recruit, evaluate, retain and optimize human allocation would be really important. We have seen some hints of technology utilization in human resource management through cases like Accenture or Egon Zehnder. The gigantic international conglomerate can take advantage such the technology to develop constantly.

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