In its recent oil and gas outlook, Deloitte referenced consolidation as a top trend affecting the sector. Driven by margin pressures, increased competition, overspending and overextending, the landscape is rapidly changing as more agile players beat those who cannot keep up.
So, what’s the key to staying relevant amidst this consolidation? Transforming your market offerings.
Referred to as vertical value integration (VVI), the process of capturing more profit incentives and taking a different position in your ecosystem will be a game-changer for your business. Not only will you remain relevant but undergoing this type of digital transformation will ultimately set you up to outgrow the competition and lead the consolidation.
What is vertical value integration?
The best way to think about VVI is to break it up by each word: vertical, value and integration.
- Vertical describes the multiple third parties and vendors within your supply chain. This can include material and component suppliers, logistics, maintenance and service operations, and assets.
- Value is the surplus margin from higher prices and cost efficiencies provided to your end customers. Here it’s vital you own the customer relationship to capture the value with your new market offering.
- Integration comes in two parts: customer-facing and internal. You’ll need to create a coherent, simple offering weaving the value and vertical elements together on the front end. On the back end, data sharing with partners is key to monetizing your offering efficiently.
Enabling VVI within your organization
While monetizing data to capture more value isn’t for every business, most follow a similar path involving identifying market forces, delivering offerings to your end customers, and providing value to other partners in your ecosystem.
At Relayr, we like to think of this process as climbing a pyramid, with foundational ‘homework’ elements leading toward the top goal of vertical value integration.
The climb: Understanding market drivers in your industry
The first step in climbing the pyramid is understanding the ecosystem you’re operating in. You need to recognize regional, national and global players and learn about your positioning within the market.
Not every company will be as educated about these outside drivers, but you’re likely very aware of the pain points you’re currently exposed to within it. To get more thoughtful about the market, ask yourself: Are there supply-chain consolidations occurring in your segment of the industry? Are your customers demanding more flexible contracts? What about pushes for more sustainable resources or other incumbents threatening your business?
To successfully undergo a digital business transformation, you need to do this upfront work to uncover opportunities. It’ll likely be a mindset shift in how you operate, but it’ll set you up for building a solid business strategy focused on increasing value.
The peak: Develop a strategy that addresses your pain points.
Only after you consider the market forces driving your transformation can you move forward to the peak of the pyramid by developing a VVI strategy.
Most companies in the industrial sector will look at two market offerings for their end customers. Either they’ll want to transform into an equipment-as-a-service (EaaS) or a consumption/outcome-based business model. Or they want to capture more of the aftermarket through bundles and performance-based models that will attack the service side of the house.
Regardless of what route you select, avoid letting the bottom line solely guide your decisions. Today, the questions you should be asking revolve around what you need to change to make your offer more attractive to the market. What are the consequences, and what do you need to own or relinquish to third parties to create a viable transformation?
The foundation: How do you achieve new market offerings?
No pyramid can exist without a foundation. As mentioned, VVI takes into account your entire ecosystem of suppliers and third parties. To transform your operations and move forward with your strategy, you must get comfortable having these conversations and sharing data with your partners.
Things like asset health, cost visibility, maintenance optimization, and spare parts management are all robust enablers that support your new market offerings. Not only will these give immediate value and allow for risk transfers and financing conversations, but they’re also investments that will bring new, recurring and predictable monetization streams to your company.
Don’t wait to get started
Many experts urge that time is of the essence for any digital transformation scenario; however, that statement is more than true in this instance. The first-mover advantage in vertical value integration has never been more significant. If you wait until other companies have done it successfully, you’re already behind.
But, by understanding your ecosystem, positioning, and the overlying forces at play, you’ll uncover the opportunities that will keep your business at the forefront.
About the Author:
Krishna Yarramasu is the Vice President of Strategy at relayr, the Industrial Internet of Things (IIoT) powerhouse delivering the most complete solutions for risk-free digital transformations. To learn more, visit https://relayr.io.