Converging on opportunity

Industry and product convergence are turning the world of management and company operations on its head, creating new opportunities and challenges for manufacturers.

There are two related forms of convergence changing the industrial landscape. Traditionally, industries were defined by sectors and product lines. Now the barriers are blending.

Some examples: Apple, a computer company, moved into telephony and music with the iPhone, iPod, iTunes and now the iPad; the search engine Google has entered the telecommunications market with Google Voice and the Google Android platform; the supermarkets Woolworths and Coles are making incursions into transport with petrol discounts; and Australia Post plans to set up an insurance company.

New competitive threats are emerging out of nowhere and they are creating new profit opportunities. In its latest results, Apple reported first quarter earnings of $3.38 billion, up more than 50 per cent on a year ago. This was driven largely by the sale of 8.74 million iPhones, an extraordinary feat for a company that started out as a computer specialist. Convergence has been Apple’s greatest strength as a manufacturer.

Much of that is being driven by a combination of technology and lifestyles, and one of the best examples of that is in the home. A 2008 study, funded by corporations including Whirlpool, Bell Canada, Cisco Systems, Hewlett-Packard, Microsoft and Procter & Gamble found that consumers were less interested in “automated” homes than having the appliances and electronic devices within their residences communicate and interact with one another. In the home, consumers are looking for specific product solutions such as a wireless memory card for digital cameras so their camera can “talk” to their computer and printer, and a personal multimedia player offering a range of video capabilities including the ability for them to download their favourite programs. Welcome to the world of convergence.

The one device that captures this revolution perfectly is the smart phone. People will not only use it for communicating but for watching video, scheduling, social networking, finding directions, taking notes and reading newspapers and magazines.

Another is telematics, the blending of computer and wireless technologies for motor vehicles. General Motors General Motors has developed a smart phone application allowing vehicle owners to control their car remotely. The app, available for the Droid by Motorola, Apple iPhone and Blackberry Storm, will allow Chevrolet Volt EV owners to remotely schedule charging, remotely start the vehicle and unlock the doors using their smart phone. Hughes Telematics, which is working with Mercedes Benz, has an in-car “personal information” system offering sports, weather, news, petrol prices and traffic on demand. Drivers can use the system to synchronise their vehicle with data from an MP3 player, PDA, or mobile phone, enabling voice-controlled access to personal play lists, address books, calendars and email.

Product and industry convergence seems to run counter to the work of strategy consultants who rely heavily on the “five forces” developed by leading management thinker Michael Porter. Porter’s strategic analysis says there are five threats to business: the threat of substitute products given the customer’s propensity to switch over to a competitor’s offering; the threat of new competitors entering the market; the intensity of the competitive rivalry between competitors; the bargaining power of customers that puts the firm under margin pressure; and finally, the bargaining power of suppliers.

Critics say the biggest flaws with Porter’s model are, first, the assumption that buyers, competitors and suppliers do not interact, and second, that there is a low level of uncertainty, allowing companies to plan ahead. Convergence changes all this. Companies now face threats from outside their sector. It’s a trend that is likely to grow.

This means manufacturers need to think differently and look out for trends ahead. It’s not so much a case of creating demand as it is of tapping into areas that seem to feed off each other, or that can contribute to each other. Apple’s insight into the way online technology was changing the music business through Napster, for example, allowed it to develop iTunes.

Societal trends are also driving the changes. With the economic downturn, consumers are looking for more value for their dollar and anything that combines different products might fit into that space.

Similarly, there is the impact of an ageing baby boomer population, More people wanting to stay fit, healthy and out of nursing homes has created a convergence of biology and engineering, creating new opportunities for manufacturers in medical technology.

At MIT, for example, cancer scientists are working with engineers to detect tumours early and deliver drugs safely. They are developing viruses that, when injected into the body can hone in on tumours and act like freight delivery agents that can take chemotherapy directly to malignant cells. They can also carry chemicals that can make otherwise unseen tumours more visible to imaging scans. Cancer specialists and engineers are now developing microscopic electrode wires, about one ten-thousandth the width of a human hair, that can potentially provide power for implantable medical devices.

Another trend creating convergence, and opportunities for advanced manufacturers, is climate change. The world of smart metres will create new areas for manufacturers. In his book Hot, Flat, and Crowded, Thomas Friedman writes about smart energy grids that would use power more efficiently, turning the home into a Smart Black Box (SBB) that controls and ensures the seamless inter-operability of lighting, home alarm systems, telephones, computers, internet connections and all other devices, while telling you how much energy they use and ensuring the heating, air-conditioning units, dishwasher, dryer, refrigerator and car battery can run at lower power. Just press the “sleep” button on the SBB control panel when you walk out the door and all lights and appliances either switch off or go to their lowest necessary power. Alternatively, you can call your SBB from your mobile on your way home to tell the house to “wake up”. It's a world where an electric car can charge and store energy at night.

Still, it is important that manufacturers look beyond convergence. If the history of the motor vehicle is anything to go by, we could ultimately be looking at divergence. Just as once-luxury features such as a compact-disc player, electric windows, air conditioning and remote central-locking are now common on cars, we can expect all mobile phones to eventually have GPS satellite navigation, capacity for mobile television and storage space for hundreds of music tracks.

But if anything, the motor vehicle has become more diverse. There are sports cars, family vehicles, city run-abouts and four-wheel drives for people with different needs. Some even have more than one car. A similar trend will happen with other products such as phones and home entertainment systems.

While convergence is transforming the industry, divergence will be just as critical. The car is the first example of this happening but many more will follow. For clues about the future, manufacturers should look at their driveways.