Some see a minefield of disruption when it comes to technology, where tech startups lurk at the ready to cannibalize entire industries overnight. Others see a field of opportunity, where clever manufacturers can find new ways to connect their customers to their products and tap into new revenue streams.

How does this play into the world of construction equipment?

The Association of Equipment Manufacturers recently partnered with consulting firm McKinsey & Co. to conduct a survey of heavy-equipment end users. The resulting report provides some insights into how equipment manufacturers can thrive in a changing technological environment rather than struggle.

“OEMs should be concerned but not panicked about these findings,” says McKinsey & Co. senior partner Asutosh Padhi. “OEMs still have the ability to be the natural providers of these new technologies, provided they’re able to innovate the core service offerings, and more importantly, move quickly on the software services and Internet of Things.”

1. Address Critical Control Points

You needn’t look any further than your own front pocket for an example of how quickly market share can slip through a company’s fingers.

Just a decade ago, companies like Nokia sat and watched as disruptors like Apple and Samsung gobbled up their share of the mobile phone market over a few short years. At the heart of this catastrophic disruption, Padhi says, was Nokia’s failure to foresee and prepare for a shift in the “killer app” — that is, the primary functionality that customers value in a product.

Today’s OEMs should pay particular attention to their customers’ shifting preferences, Padhi says. McKinsey’s research has identified a number of desirable use cases for new technology, any of which could become the next “killer app” in heavy, off-road equipment. This means manufacturers ought to be securing access to and expertise in technologies including sensors, equipment management platforms, visualization, analytics and machine learning.

“These all must be integrated and delivered in a way that really helps the end customer to create higher value by using the OEM’s products and services,” Padhi says.

2. Develop a Deep Understanding of Customer Decision Making

Even before Facebook’s recent corporate fall from grace amid privacy concerns, tracking and analyzing customer data was a sensitive subject.

In the survey of heavy-equipment owners, McKinsey senior partner Kevin Laczkowski says the majority said data privacy was a major concern. Three-quarters of those surveyed expect to know why OEMs are collecting data off their machines, and half said that they would hold it against the manufacturer if their data were compromised.

While this may not seem like the warmest reception for the suite of emerging Internet of Things advances in data analysis, Laczkowski says it’s all about how manufacturers position the new services with their customers. McKinsey’s research found that construction contractors were much more interested in machines that collect usage data if there is a clearly demonstrated benefit to them, like reduced maintenance costs.

Accordingly, McKinsey found increasing interest among heavy-equipment customers in researching and trying new products and services before committing to a purchase. Customers rated hands-on experience with a product and the advice of friends and colleagues very highly among the influences on their purchasing decisions.

“Customers are going to want to observe these technologies in action,” Laczkowski says. “They’re probably going to have a higher bar for assessing these and getting advice from colleagues, and OEMs are going to have to play a role in getting potential customers information and connected to other users in a way that they probably haven’t had to in the past.”

3. Adopt “Two-Speed” Research and Development

With more software powering the built-in technology on the next generation of heavy equipment, the slow and steady pace of “big iron” product development will have to evolve as well, Padhi says, or risk allowing more agile competitors to gain an advantage.

“If you look at world class software development, that follows a very different process,” Padhi says. “The focus is on multiple iterations, on developing a minimal viable product and then rapidly testing that product with customers to get quick feedback, and then continuously improving upon that.”

Padhi says that manufacturers will be required to take what he calls a “two-speed” approach to research and development. This approach combines the strength of traditional stage-gated hardware development with the agility that will be required for competitive software development.

“As we look at the future, we are going to quickly realize that hardware release and software release will be on a very different cadence,” Padhi says.

Similar to the model that Tesla employs in its advanced electric cars, and the model that has found wide acceptance among smartphone customers, Padhi says OEMs should introduce regular software updates, or “patches,” into their traditional R&D cycle. Hardware updates can still take place every handful of years, he says, but rolling out software updates wirelessly will allow OEMs to stay relevant by fixing bugs, addressing security concerns and even adding new features at a much more competitive pace.

“I think multiple software releases over the course of a year will soon be required,” Padhi says.

4. Drive Productivity Improvements to Fund New Technology

All the hype surrounding new technologies doesn’t do anything to answer a key question that’s critical in business — how are we going to pay for all this?

There’s good news and bad news, Laczkowski says, when it comes to manufacturers looking for ways to pay for new R&D projects. The bad news is that most new technological features are not going to pay for themselves.

Laczkowski explains that, when it comes to new tech, analysts separate them into two categories — “table stakes” and “differentiators.” Within five to 10 years, many table stakes technologies will have become standard features on heavy equipment, Laczkowski says, and consumers will expect to get them without paying extra.

“They’re just required to stay competitive in the marketplace,” Laczkowski says. “OEMs are going to have to leverage Industry 4.0 analytics and new sources of internal productivity to drive their cost structure down in order to fund these new technologies and maintain their margins.”

Differentiators, on the other hand, are unique features that certain OEMs are either first to market or uniquely positioned to own. Laczkowski says these technologies can allow a manufacturer to increase its prices, offset costs and expand margins.

“When these differentiators are introduced, there’s an opportunity to price them because there’s a real value to customers that they can’t get from other OEMs,” Laczkowski says.

Researchers from McKinsey presented the findings of this research project to AEM members at a Thinking Forward event in May in Chicago. Visit aem.org/think to learn about more of these free, upcoming events in a city near you, or listen to the AEM Thinking Forward Podcast for a recap of the presentation.

About the Author

Dusty Weis is AEM’s strategic communications manager, covering the impact that new and emerging trends and technologies will have on the construction, agriculture and manufacturing sectors. Email him at dweis@aem.org.