“Designed by Apple in California. Assembled in China”. Printed on the back of an iPhone, a product that has been making legendary profits. Over the past decades, numerous studies have been published that analyze the phenomenon that profitability in the production and service value chain is increasingly shifting towards research, development and innovation rather than production and delivery of services. “Good design is good business. The hundred year-old quotation from Thomas J. Watson, founder of IBM, is more relevant than ever.
Innovation is money
Stan Shih, Acer’s founder, introduced the concept called the Smiling Curve around 1992. In a graph, where the vertical axis represents value-added and the horizontal axis the sequential steps in the production value chain, from research and development through manufacturing to marketing activity, the resulting curve looks like a smile. This is an easily memorable visualization of the observation that the beginning and end of the value chain bring considerably higher added value than the middle of it.
Compared to the nineties, nowadays the smile is becoming wider and increasingly one-sided. It is becoming wider, because on one hand technological developments and more and more sophisticated management methods are resulting in greater cost efficiency, and on the other hand potential locations for production plants and international shared service center investments are in furious competition for investments. Meanwhile, due to the opportunities created by cloud computing and digitization, a long list of software-based innovators are transforming whole industries. Many of these transformative companies are achieving extreme high valuations, as with Airbnb, Spotify and WhatsApp.
The smile is becoming one-sided because, in the area of social media, traditional marketing tools have proven to be less effective. Consumers are way more informed than they used to be ten or even five years ago, do not accept marketing messages without criticism and instead value design and experienced product/service quality.
The spectacular success of Under Armour, a sportswear company with which IBM signed a strategic cooperation agreement, is a great example of how to benefit from this shift in consumer behavior. Within the framework of this cooperation, Under Armour’s service combined with what’s been branded a Cognitive Coaching System will serve as a personal health consultant, fitness trainer and assistant, by providing athletes with timely, evidence-based coaching around sleep, fitness, activity and nutrition, including outcomes achieved based on others “like you.” Innovative initiatives like this also contributed to Under Armour in the US overtaking Adidas on the basis of sales in 2015 and moving up to second place behind Nike.
Competition for investments
Coming back to the value chain, Hungary and several neighboring countries are fairly successful in the race for investments. According to the recently published IBM Global Location Trends 2016 report, in terms in terms of absolute numbers, Serbia, Hungary, Poland and the Czech Republic are among the top twenty and per 100,000 inhabitants Macedonia is the world leader, while Serbia is second, Hungary is fifth, Slovakia is sixth and the Czech Republic is in seventh place. As far as the the most value-added jobs created as a result of foreign investment is concerned, the performance of the region is less outstanding. This list is led by Ireland, Singapore and Switzerland, while it is worth mentioning that Estonia is eighth and Lithuania is in tenth place.
An another study, by Roland Berger, on the preparedness of European countries for the changes expected due to the so called fourth industrial revolution, paints a similar picture of the region. According to the analysts, while the Czech Republic, Slovakia, Slovenia, Hungary and Lithuania all have substantial industrial capacity, high value-added activities are less present in these countries than in Ireland, Germany and Sweden, which are leading the way in Europe.
After building a solid base, Hungary and its above-mentioned neighbors now should focus on developing its innovation capabilities.
Customer is king again
The latest trend is Mass Customization: in production and service delivery, leading companies are combining the low unit costs of mass production processes with the flexibility of individual customization. This client-centric approach focuses on customer needs: we are not looking for customers for a product, but instead we are looking for a solution to solve a customer problem in a way that exceeds their expectations. This is what Henry Ford did, and he explained his approach like this: “If I had asked people what they wanted, they would have said faster horses.”
The new paradigm requires new product and service development approaches. IBM has developed its own methodology, called IBM Design Thinking, to create spellbinding experiences combining human creativity, teamwork and the almost unlimited technological toolset available to us.
The Wimbledon tennis championship is a great example of this, where cutting edge technology has been used to build an outstanding digital experience for tennis fans all around the world. Just a few examples: 9.5 million social media records were analyzed by IBM Cognitive Solutions to gain a deep understanding of what the followers feel and think, while 41 million points were analyzed to determine the keys to the match of every player in order to turn data into valuable insights. Data are collected and analyzed in real time to produce statistics for TV commentators, journalists and also for the Wimbledon digital platforms. In a YouTube video, Serena Williams and IBM Watson discuss how Watson Analytics can customize sports training programs based on biomarker data. The results are impressive: 542 million views on the official website and a 125% increase in the number of individual mobile visitors.
Collaboration
Innovation is no longer about lonely geniuses. Whole ecosystems are competing with each other, and cooperation is at least as equally important as individual skills. Almost all of us use social media platforms in our private lives. Similar technologies are spreading in the field of business innovation too. Beyond reaping the benefits of utilizing modern communication channels, businesses are also looking for guarantees that their data are secure and for additional services that boost the effectiveness and efficiency of the innovation processes.
The law is no exception
Even conservative industries such as legal services are changing. Clients are looking for the digital experiences they are becoming accustomed to in other industries. Relatively high hourly fees make this an attractive market for innovators who are looking for solutions to improve collaborative efficiency in this domain.
Ferenc Pongrácz
Business Development Executive
IBM Southeast Europe