From hardware to software: How semiconductor companies
can lead a successful transformation
Many
semiconductor companies struggle when attempting to transition from hardware to
software. How can they improve the process?
It’s a familiar
scenario: a semiconductor
company sees profits drop as core hardware products become commoditized. In
response, it tries to move into embedded software and associated application software. The transformation begins
optimistically, with the company projecting strong software sales, but
difficulties quickly emerge. Timelines increase, the project hits snags, and software revenues fall below expectations. Instead of
improving margins, the new business creates even more financial stress.
Despite these problems, we expect more
semiconductor companies to increase their software capabilities over the next
few years, attracted by the potential for high profits. To their credit, many
players have acknowledged that previous transformation attempts were subpar and
have made some improvements—for example, by taking a new approach to talent
recruitment or streamlining product development. These efforts have helped, but
they only address a few parts of the puzzle. No company has yet developed a
comprehensive approach for navigating all stages of a software transformation.
We’ve tried to fill this gap by developing
a framework based on our work with numerous companies in high-tech and advanced
industries, including semiconductor players. It focuses on ten recommendations
designed to optimize both strategy development and execution. Although the
framework aims to create a thriving software business, the recommendations will
also help companies enhance their core hardware business, which will always
provide some of their revenues.
Software
strategy: Keeping the focus on value
Traditional hardware players will be on
unfamiliar ground when creating a software strategy. With a limited knowledge
of the competitive landscape, customer needs, and effective pricing models,
they may have difficulty developing a targeted approach. The following steps
can help.
Creating
a detailed transformation plan and incorporating it into the existing corporate
strategy
Many semiconductor companies assume that
their existing corporate strategy will
serve them well for software. But software
customers are fundamentally different from their hardware counterparts,
requiring more frequent product upgrades and greater ongoing support. To reach
them, companies will need a specific plan.
As with hardware, the software strategy
will include a few basic elements—product offerings (including the main
business opportunity for each one), sources of differentiation, and specific
goals, such as the time frame for becoming a market leader. The best strategies
will go beyond this, however, by considering market research about common pain
points and inefficiencies that a strong software product could resolve. For
instance, Intel developed a high-performance software suite to assist with
advanced analytics after research revealed that customers wanted help with such
tasks. In some cases, companies may also gain a sense of a customer’s software
priorities and preferences through interactions on the hardware side.
Finally, the software strategy should
support the existing corporate strategy. That means executives need to consider
goals for the core hardware business—a segment that will always contribute to a
company’s bottom line, especially in the early days of a transformation, when
it may be difficult to take market share from digital natives with strong
customer ties. For instance, NVIDIA created deep-learning software based on its
latest-generation graphic-processing unit, hoping that the new product would
encourage sales of existing devices. It’s also important to support the brand
image articulated in the corporate strategy. Consider the auto manufacturer
Daimler, which has a reputation for producing leading-edge hardware. To
maintain its image as a technology leader, the company recently invested in
building the digital capabilities needed to create sophisticated software
offerings.
Involving
board members in strategy development from day one
At many semiconductor companies, IT middle
managers develop software strategies. This approach was appropriate when
software was a secondary offering, but today’s disruptive transformations,
which see businesses shifting their focus from hardware, require board-level
oversight from day one. Without central guidance, individual business units may
create a mélange of small-scale programs that use different tools and
platforms. In addition to generating low returns, these programs prevent
companies from realizing synergies resulting from scope and scale.
Given that semiconductor companies have
traditionally focused on hardware, board members will need to gather extensive
information on the software value chain before creating a strategy. They may be
able to gain customer insights by analyzing how their competitors moved into software,
since this could help them identify popular products and services.
As with any strategy, many board members
will have firm opinions about the best direction to take. Some, for example,
may want to focus on becoming the top software provider in the semiconductor
industry, while others view software as a lever for increasing hardware sales.
Boards may be able to avoid these differences by closely involving all members
in strategy development from the earliest stages. In some cases, it may help if
the board creates a fact base that members can consult when making decisions,
especially if leaders have limited software experience.
Taking
advantage of innate strengths, rather than imitating digital natives
Semiconductor companies may be tempted to
venture into areas where software start-ups are flourishing. Such moves may be
challenging, however, since they typically lack the agility and speed of
start-ups, as well as their highly specialized software skills. As an
alternative, we suggest that semiconductor companies focus on opportunities
where they can leverage their existing assets, such as a strong customer base,
brand loyalty, a broad hardware portfolio, and domain knowledge.
Consider, for example, a semiconductor
company that wants to develop network-communication software. If a start-up
already offers data-visualization software that charts network efficiency, it
could be difficult to create a competitive offering. A better strategy might
involve developing a software program that delivers additional insights based
on the semiconductor company’s proprietary data, such as the reasons why a
network access point had less data throughput on a certain day.
Semiconductor companies should also draw
on their long-standing and powerful partnerships with suppliers, IT companies,
and connectivity providers as they expand into software, since this will help
them achieve scale more rapidly and efficiently. In some cases, they may even
benefit from forming alliances with their traditional competitors. For
instance, Audi, BMW, and Daimler—normally rivals—jointly acquired HERE, a
data-mapping company, from Nokia. In addition to reducing the risks for each
company, the acquisition increased their ability to compete with established
mapping players.
Capturing
critical control points and network effects to create a competitive advantage
Across industries, many companies have
become software leaders by capturing control points—business segments that they
can dominate because they offer unique products or services such as software
programs based on proprietary data or algorithms. For instance, Siemens
captured a control point by creating innovative automation hardware and
software for manufacturing industries. The company now dominates this segment
and serves 80 percent of original-equipment manufacturer (OEM) manufacturing
lines, as well as 14 out of 15 major automotive OEMs.
In some cases, companies may attempt to
strengthen their control points by giving their unique assets to other
companies. The hope, of course, is that these companies will develop
complementary products for use in a single system. NVIDIA takes this approach
with its software-development kit for deep learning, which it provides free to
start-ups interested in machine learning.
In addition to helping companies win
control points, a strong product may generate a network effect—the phenomenon
by which it becomes more valuable as more people use it. And once the network
effect occurs, it may create new sources of income. For instance, Apple was
able to generate significant revenues from its app store after the iPhone’s
ascent.
A product with a network effect may also
boost a company’s reputation for knowledge and expertise, allowing it to shape
industry standards. For instance, Qualcomm was able to drive standardization
efforts for 3G wireless technology because its telecommunications equipment was
so popular. Since many of these standards are based on the company’s own
products, Qualcomm now derives one-third of its revenues and two-thirds of its
profits from licensing royalties.
Exploring
multiple pricing options for software, rather than providing it for free
Semiconductor players typically give
customers free software in combination with a hardware purchase, hoping to
encourage additional sales. Some companies also offer free software as a
stand-alone product to attract customers that do not need new hardware. When
companies do charge for software, many default to a one-time license fee
because it provides guaranteed revenue at time of sale and allows them to sell
additional services or charge for maintenance after a product warranty expires.
While free software and one-time fees are
sometimes appropriate, semiconductor companies should not automatically revert
to these models. Instead, they should evaluate several innovative pricing
options, including the following.
·
Under the “freemium” model, software is
free but customers must pay for improved features or functionality.
·
With on-demand subscription services,
customers pay only when they use software. Companies typically charge for any
necessary hardware, since software revenues vary greatly under this model and
may not cover their costs.
·
With fixed-subscription services,
customers pay a regular fee, regardless of how often they use software or
receive upgrades. They lease hardware or receive it free.
Semiconductor customers may object to
buying software, since they are accustomed to receiving it for free, so
companies will need to create compelling products. For instance, semiconductor
companies could provide software that allows multidevice configuration
management or secure over-the-air flashing.
Software
strategy: Optimizing execution
During each software transformation,
semiconductor companies embark on extensive hiring campaigns to attract the talent needed for execution. While they begin optimistically,
expecting the same enthusiastic response they receive when recruiting hardware
experts, their efforts often falter. Company culture is one obstacle. Many
software engineers do not believe that a traditional hardware player can create
an environment that promotes the development of leading-edge software products.
Some also fear that their career opportunities will be limited. To address
these concerns, semiconductor companies need to take a more innovative approach
to talent recruitment and retention, both for top executives and mid-level
managers. They also need to show their commitment to software by transforming
both their company culture and organizational structures.
Appointing
a high-profile software leader from another industry
Semiconductor companies that lack top
software talent should recruit experienced leaders from other industries,
rather than asking an internal hardware expert to manage the transformation.
Unlike lower-level managers, many of these executives view software
transformations as an exciting challenge, particularly if they began their
careers in hardware. To attract the best talent, companies must emphasize that
they will reward leaders for building the software business. They should also
give leaders some freedom to shape the transformation—for instance, by allowing
them to develop their own road map of improvement initiatives.
The appointment of a well-known software
executive sends a clear message that software is central to a company’s goals,
both internally and externally, and it may prompt other talented engineers to
investigate job opportunities. Experienced software leaders will also have
numerous industry contacts and can reach out to talented colleagues if an
appropriate position opens.
Taking
a more strategic approach to talent recruitment
Semiconductor companies will need to be
more aggressive and strategic when recruiting mid-level managers and
entry-level software staff, given their reluctance to consider traditional
hardware companies. First, they need to understand what high-tech employees
truly value. Some of these are obvious, such as high pay, but others are more
subtle. Drawing on our experience with high-tech companies, McKinsey has
created a framework that classifies the factors contributing to employee
satisfaction by four dimensions: compensation, job, company, and leadership. For
instance, we found that employees were more satisfied when they could work on
leading-edge content with up-to-date technology.
While it may be tempting to hire any
talented engineer who becomes available, semiconductor companies should
initially focus on recruiting the software and systems architects who handle
interface specification and other crucial tasks during early development. These
employees are in extremely high demand and are often difficult to find, but
teams will make little progress without their guidance.
Companies based outside of tech hubs like
Silicon Valley face additional recruitment hurdles because of the small local
talent pool. To attract a greater number of qualified applicants, including
recent software graduates, their leaders should consider opening a new site in
a location with a thriving technology culture. Software engineers often
gravitate to such areas, knowing that they will have multiple job options and
can strengthen their professional networks. The benefits associated with
improved recruitment will outweigh the drop in productivity that often occurs
when companies expand their geographic footprint.
Giving
software groups independence, including their own governance bodies
Software engineers differ from hardware
experts in how they think, work, and behave. Their projects are more likely to
require collaboration with coworkers, for instance, and their products go through more frequent testing and revision cycles. Such differences mean that a
well-intended effort to integrate software engineers into the existing
organization could backfire, with new employees leaving because the company’s
culture is unfamiliar.
The solution to this dilemma is simple:
semiconductor companies must adapt their organizational structures, rather than
expecting employees to change how they work. Executives should consolidate
software staff into a single group that has its own governance body and
decision-making power. For instance, software leaders should be able to
establish their own processes for product testing and version control. As an
added benefit, the group’s scale, combined with its independence, will signal
that software is central to a company’s goals. Consolidation will also ensure
that software employees use the same processes and tools, something that might
not happen if they were scattered across multiple departments.
Maintaining
separate processes for hardware and software development but ensuring that
groups communicate
Many companies follow sequential
development processes, always creating a hardware product before they devote
any attention to software. This strategy may seem logical, since software has
to run on devices, but it often leads to excessively long development timelines
and potential synchronization problems.
As an alternative, companies should pursue
a parallel development strategy enabled by leading-edge tools. Under this
model, software development begins before hardware is available, with engineers
testing their programs on virtual prototypes and making revisions. In some cases,
they may finish their work before the hardware team has a final product. For
this approach to succeed, hardware and software teams must discuss their
progress at critical points, especially during hardware releases with tape
outs, to reach consensus about goals, timelines, and desired features.
Considering
the acquisition of a software company
If companies have an aggressive timeline
for building their software capabilities, or if they are having difficulty
finding an adequate number of engineers, they should consider acquiring a
software company. This strategy could help reduce attrition, since team members
who have a good working relationship with their colleagues are less likely to
seek opportunities elsewhere. Established teams are also more productive from
day one, since they have a shared understanding of development processes and
procedures. On the downside, acquisition costs for a software company can be
two to five times higher than those for hardware companies.
The journey from a traditional, hardware-focused company
to one with strong software offerings—either stand-alone or within other
products—is long and difficult. This transformation is not a choice but a
necessity, since companies that focus solely on hardware will see their margins
continue to deteriorate, especially as customer preferences continue to shift
toward integrated solutions. The ten recommendations outlined here are not a
magic bullet, since transformations will always involve unexpected issues and
company-specific challenges, but they may eliminate the most perplexing
problems on the road from strategy to execution.
By Harald Bauer, Ondrej Burkacky, Jörn Kupferschmidt, and André
Rocha
http://www.mckinsey.com/industries/semiconductors/our-insights/from-hardware-to-software-how-semiconductor-companies-can-lead-a-successful-transformation?cid=other-alt-mip-mck-oth-1612
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