This article tells the story about Sandvik CODE and how the Center for Digital Excellence (CODE) was strategically built to codify Sandvik’s core competence and win in digital manufacturing.
The article is co-authored by Hugo Nordell, Vice President of Strategy & Business Development at Sandvik Applied Manufacturing Technologies. The article was first published in IAM Magazine Issue 101, published by Law Business Research, in which CODE was anonymized using the euphemism BEACON.
The president of a new digital business unit was having a lunch meeting late in 2017 to discuss how the company was about to transform the industry. “We are making bold bets and need to have our house in order. Success is dependent on taking the right positions in the ecosystem and defending and sustaining those control points using intellectual property.”
“We cannot wait, the development is happening now and everybody knows it”
In the years since that meeting, the digital business unit (we have decided to anonymise the company so let us call it BEACON) has developed virtual tools to create a digital thread throughout its customer’s industrial process. In doing so, BEACON has not only improved what customers are able to do in digital manufacturing but transformed the industry ecosystem and its business model.
Facing new IP dynamics
Incumbents are overcoming both their lack of digital capabilities and their fear of new digital businesses cannibalising their core across several industrial sectors. In doing so, they have begun making moves to reinvent themselves and their businesses digitally. However, not everyone has realised that the digital business environment both introduces and accentuates a range of new IP management challenges.
On the fundamental level, the technology shift towards software and data complicates IP protection and is forcing companies to move outside their traditional comfort zone of hardware and systems engineering-focused patenting.
On a strategic level, the multi-layered nature of digital platforms is increasing complexity. To begin with, each company in an ecosystem that builds and contributes to a platform must ensure that it gets its fair share of the value created. Controlling strong IP positions, along with a well-developed practice of building good IP-based arguments, can be instrumental in negotiations with partners and suppliers. At the same time, use of intellectual property to uphold a platform’s competitive edge in relation to other platforms, or to provide collective protection for participants in the ecosystem, can prove critical for ensuring a platform’s long-term success. As platforms are typically subject to network effects and display winner-takes-all dynamics, even small advantages can have an outsized impact in the race to attract partners and customers.
In addition, disrupting the status quo in the industry changes the IP risk profile. Digitisation is breaking down industry barriers and IP-savvy players including Big Tech, hyperscalers and system integrators move from being adjacent or fringe to being on the inside. Such players present a dual challenge in that they typically hold an edge over industrial incumbents in both control and strategic use of data access, as well as in actively using patent portfolios for business purposes. With sizeable new profit pools at stake, many industrial incumbents face the challenge of adapting to a higher risk of IP conflict and increased IP-related costs.
The new IP dynamics were clear for the Nordic industrial when it launched the new digital business unit back in 2017. The company had made early moves to take a leading position in the industry’s digital transformation and had gained insights regarding both new opportunities and impending shifts in the competitive landscape. In an effort to accelerate the digital transformation and the company’s role in it, BEACON was launched as a digital innovation hub. Starting with just two people – a management consultant turned industrial general manager and a Silicon Valley technology entrepreneur – BEACON laid the foundations for what today has developed into a full business division. Four key building blocks paved the way to success:
- Defining the business opportunity (ie, the profit pool) by pinpointing productivity challenges in the customer’s value chain that could be addressed with digital tools;
- Defining the most attractive productivity control points in the value chain, in order to claim a disproportionally large share of the profit pool;
- Building up an effective digital innovation organisation capable of developing digital value propositions that both outperforms competition and is faster to market; and
- Building up an ecosystem of partners and contributors so as to have all the required technology, know-how and data components in place to address the business opportunity.
Realising the IP-related challenges ahead, intellectual property was closely integrated into all phases of the business development process. It formed a key component in competitive analysis and business strategy formulation – including the make-buy-partner strategy – and was taken into close consideration in the development of the BEACON organisation and operational way of working. In addition, it was actively used to attract and negotiate with ecosystem partners and contributors.
Defining the profit pool
In this several hundred-billion-dollar industry, some 70% of customer work is carried out using industrial machines that are programmed directly in workshops based on the skills of machine operators. BEACON’s business idea was to democratise manufacturing capabilities by placing its world-class domain know-how directly into the hands of customers, thereby solving problems that patrons could not solve on their own. Doing so has resulted in significant cost savings and productivity gains, creating a massive profit pool.
More specifically, this has meant creating a digital thread throughout the design and planning, preparation, execution and verification and evaluation steps of the manufacturing process, and developing virtual tools that leverage the data available throughout the digital thread.
One example of such a digital tool is an app for tablets that uses 3D visualisations, a touch interface and codified manufacturing know-how known as ‘recipes’ to improve machine programming. Rather than having machine operators manually translate computer-aided design drawings into code that controls the industrial machines, users insert a 3D model of what they want to produce into the app and state the material and machine that they want to use. The analytics backbone behind the app analyses the geometry and recommends the optimal processing methods, tools and manufacturing data.
This tool has revolutionised how data is leveraged in the industry. It has made the process of coding industrial machines between 50% and 70% faster than before, with error rates down by almost as much, while manufacturing productivity is up by between 10% and 20%. All this in an industry that generally strives for a 3% increase per year.
Key to the success of the tool is the agnostic and open collaboration around recipes with 3D models and manufacturing data to ease and expedite the process. Using the backbone built by BEACON and its partners, any customer workshop or machine maker can add its manufacturing data, pre-define recipes and get a share of the cost savings (ie, the jointly created profit pool).
Establishing key control points
The first thing that BEACON did was to map the industry value chain and identify bottlenecks where digital tools could significantly improve customer productivity and reduce costs. This analysis was designed to define control points that would allow the company to capture a considerable share of the joint profit pool.
The control point analysis included multiple studies and assessments grouped into three areas: desirability, scalability and defensibility. Each point was defined by a sub-process step in the manufacturing value chain, in combination with mapping the types of players addressing that step. Example process steps could be shop-floor asset tracking in the preparation phase and 3D metrology inspection in the verification and evaluation phase. Player types included both end-to-end players (eg, Siemens or Dassault Systems) and pure-play machine makers (eg, DMG Mori and Fanuc). More than 50 different points were analysed, resulting in a selection of six specific control points where BEACON intended to develop a leading presence.
Acknowledging the new realities of digital competition, the value-chain analysis covered the full scope of IP modes; knowing when software-based innovations created favourable situations from, for example, detectability and workaround standpoints, when trade secrets were the preferred control instrument, when corporate synergies created implicit or explicit control, and when developments should be patented.
BEACON proceeded to determine what capabilities would be necessary to establish a strong presence at each key control point, and whether the best mode for achieving this would be:
- developing capability and technology on its own;
- developing together with partners possessing complementary assets or capabilities; or
- making strategic acquisitions of well-positioned companies on the market.
Building on the control point analysis, BEACON set the direction for its IP activities. The number one priority was defensive – ensuring freedom to act in a rapidly transforming market with a portfolio aimed at deterring actions against BEACON and ensuring that certain threats do not materialise. BEACON recognised that this defensive need was critical not only in relation to itself but also to the broader ecosystem being built up in relation to the digital tools. To this end, BEACON engaged in systematic identification and assessment of IP risk in the relevant competitive landscapes.
BEACON’s secondary priorities were to use the IP portfolio to ensure differentiation, build reputation and secure relationships. By building domain IP leadership – including protecting key differentiating elements relative to competing platforms – BEACON wished to clearly demonstrate its leading ambition and long-term commitment to the ecosystem’s success.
Making the organisation fit for digital
A third component in BEACON’s success has been the organisational model upon which the digital innovation capability was built. This can be seen as a variant of an agile innovation organisation with a specific set of cross-functional teams and end-to-end capabilities. These teams work to solve data science, back-end and front-end development, and user experience tasks through phases such as catalysing, prototyping and developing production build software. BEACON’s growing team is a combination of company-internal transfers with deep domain knowledge and external recruits from top tech companies and start-ups with entrepreneurial, designer and software engineering skills.
The benefits of the model became apparent immediately. One of the first tasks that BEACON took on was to turn around a significant digital offering project, which had spent three years on the development and launch of a new software tool with underwhelming results. It was late to market and over budget, and the customer reception was lukewarm. In just three months, BEACON redeveloped and revamped the tool. At approximately 1% of the cost compared to previous digital projects, BEACON demonstrated that it could solve customer problems better and get to market 12 times faster. By starting small, defining success and engaging customers, BEACON produced tangible results that built credibility with the customer community. The success of the BEACON organisation has been a large part due to the creation of the company’s new business division.
The model has also helped BEACON to seamlessly integrate IP activities in the digital development process and to effectively generate intellectual property without slowing the pace of innovation. A typical challenge for agile innovation organisations is to qualify IP creation into the backlog of busy developers that are focused on customer value and innovation speed. BEACON overcame this by plugging IP professionals with strong software skills directly into selected agile teams. As part of the team, the IP professionals could then build deep domain business and technology knowledge and act as a fly on the wall to pick up on new developments that were both protectable and protection-worthy (ie, in line with the IP strategy). By making intellectual property an integrated part of strategic planning, BEACON was able to pinpoint the agile teams that could be expected to have the biggest impact on strategic IP portfolio build up and target these with embedded IP expertise.
Building a winning ecosystem
The final building block of BEACON’s foundation was an ecosystem with the right partners and contributors. The company knew that to get modern digital tools into industrial production with speed and at scale, it would need to orchestrate an industry-wide effort of partners and contributors with strong incentives to pull in the same direction. A number of guiding principles were put in place to build a strong and robust ecosystem where contributors would see an attractive long-term business opportunity. This included ensuring agnostic and interoperable solutions, improving aggregation and sharing knowledge for co-creation, moving know-how upstream in the value chain and enabling closed-loop learning cycles.
Based on these principles and a well-structured understanding of what the tech stack should look like, BEACON determined the best set-up for its ecosystem and assessed numerous different partners in everything from industrial connectivity solutions to knowledge graph solutions.
The portfolio of granted and pending patents proved instrumental in attracting the right collaboration partners and ecosystem contributors, as well as in steering negotiations on how costs and revenue should be distributed in the ecosystem. Together with these collaborators, BEACON developed a business platform that allowed them to codify, structure and make domain know-how easily accessible to customers.
The digital trend will continue to accelerate as industrial incumbents act on the market pull of realising the productivity gains and cost savings possible with Industry 4.0 and respond to the threat of customers going at it themselves together with cloud and platform providers.
As demonstrated by the BEACON case, a digital context introduces new modifications to already established IP management best practices. Examples of existing best practices include:
- developing an IP strategy firmly anchored in deep understanding of business objectives and the competitive landscape;
- letting the strategy guide proactive IP portfolio development in close collaboration with developers; and
- establishing strong relationships with other internal stakeholders to realise the business impact of established IP positions.
With digital, a few important adjustments and additions stand out.
IP considerations should be part of shaping the digital business strategy
BEACON went beyond aligning IP strategy with business objectives to integrating an IP perspective into developing the digital business strategy itself. Systematic IP analysis was critical both in identifying the key control points to be targeted and in the later stage of determining the right engagement strategy for building the required capabilities.
A fit-for-digital IP strategy should consider competitiveness on multiple levels
Shifting IP risk dynamics and increasingly platform-based competition drive a need for industrial incumbents to expand from their traditional focus on product protection. BEACON carefully considered multiple uses for intellectual property both in the competitive battle and in business relationships, in order to devise a strategy centred on driving success for both BEACON and the ecosystem of players that it is orchestrating.
The IP organisation should be fit for software-based and agile innovation
The ability to embed IP professionals with strong software understanding directly in the agile innovation teams was a key success factor in the implementation of BEACON’s IP strategy. When they have the right technical skill set and are empowered by a business priority-specific IP strategy, embedded IP professionals can drive the capture of new inventions largely independently. Based on a structured breakdown of the ecosystem tech stack with BEACON’s business strategic objectives layered on top, BEACON could direct patenting to business-critical areas and avoid spreading IP resources too thin. In this way, high filing levels have been maintained with minimal disruption to the agile development process.
When making an Industry 4.0 play, industrials should prioritise:
- carrying out a technology-based competitiveness analysis of possible control points, including assessing defendability with intellectual property;
- ensuring a multi-modal perspective on protection and careful consideration of new IP needs in both the competitive battle and business relationships;
- ensuring that the IP organisation is fit for agile development and equipped with strategically embedded IP professionals with the skill set to generate quality intellectual property with minimal disruption; and
- integrating intellectual property into the operational way of working to support and drive the realisation of the digital strategy.