The US Census Bureau maintains a very meticulous list of industry categories, known as the North American Industry Classification System (NAICS). This is recognized as the definitive guide to understanding who falls into which category — be it copper, nickel, lead, and zinc mining; or dog and cat food manufacturing; or sports and recreation instruction. But what happens when every company becomes a technology company? It may become more difficult to pigeonhole an organization into a single category.
Large enterprises with substantial M&A budgets have been dabbling in diversification for decades. Remember when Sears got into banking? Or Exxon’s foray into office information systems? Now, with the advent of technology and disrupted business models, facilitating well-connected ecosystems of partners and innovators, many companies are jumping across NAICS classifications not only into adjacent industries, but outside their core sectors all together.
For example, manufacturers are increasingly building up capacity as maintenance services providers — what’s referred to as servitization. “Entire industries are moving from traditional customer interactions to connected, long-term customer relationships,” a report from Accenture illustrates. For example, with intelligent sensors within the units they install, elevator manufacturers now provide ongoing, 24×7 service along with preventative maintenance service to building and facilities operators,
There’s another twist. A majority of equipment manufacturers, 76%, either currently offer or plan to offer Equipment-as-a-Service options for customers, a survey released in August 2022 by Relayr finds. Within this model, an original equipment manufacturer rents equipment to end users, versus one-time purchases.
Then there is the emerging Manufacturing as a Service model, based on a “machine economy,” as described in a recent report out of the Industry IoT Consortium. This economy is being built upon “a network of smart, connected, and economically independent devices and machines acting as autonomous market participants, executing economic transactions and other activities with little to no human intervention.”
Manufacturers aren’t the only types of companies expanding their realms through technology. For example, “there is crossover between healthcare and technology in telemedicine,” says Joe Collura, vice president of solution engineering at SS&C Blue Prism. “The energy and environmental industries cross over in delivering renewable energy solutions such as solar, wind and hydropower.”
Two adjacent industries — banks and insurance — are increasingly blending their offerings within applications and mobile apps, a survey of 200 global financial services executives from Chubb finds. An example would be shipping insurance offered with online product purchases. At this time, a majority of financial executives report that up to 10% of their revenues come from insurance — a level that is expected to double over the next three years.
“A convergence between banking, insurance and wealth management has resulted in consumers having an average of 6.3 financial products, but only half of which are from their main bank,” confirms Muqsit Ashraf, strategy lead for Accenture. “The boundaries between industries are increasingly blurring with extending value chains that can unlock value opportunities through new products and services.”
The hybridization of industry groups is now seen across the spectrum. “We operate across 19 industries at Accenture and often help our clients cross into adjacent industries,” says Ashraf. “There has been a sharp rise in ecosystem deals – where acquirers look to gain access to assets from outside of their core businesses.”
Perhaps the most striking example of cross-industry pollination is the widespread evolution for many companies into technology companies. “Industry hybridization has become more pervasive as technology continues to advance and industries overlap in unprecedented ways,” says Collura. “Regardless of the industry, almost every company has transformed into a technology company, as it is now essential to provide seamless customer service and solutions powered by artificial intelligence and robotic process automation.”
Both “physical and digital technologies are accelerating this trend,” says Ashraf. “On the digital side, technologies like generative AI are fundamentally changing the ways we work across industries. AI will enable gains in customer experience, productivity, capital efficiency and business resilience. In other instances, it will introduce new business models and ways of collaborating that can increase crossover in industries.”
With increased industry hybridization come many unknowns that need to be understood. “These unknowns are around technology, market potential, customer appetite, and business and operating models,” Ashraf cautions.
Regulatory and legal challenges are also a potential issue. “Different industries may have distinct regulations, standards and compliance requirements,” says Collura. “Privacy and security concerns come to mind as the integration of technologies from different industries can increase the potential for data breaches, cyberattacks and privacy violations.”
Communication and collaboration across and beyond industries is essential. “The ecosystem can come together to offer new products and services underpinned by innovative business and commercial models,” says Ashraf. “When companies are deciding whether to build, buy or partner to secure capabilities they need for growth, M&A and partnering jump to the top of the list – along with joint ventures, equity investments and other financing vehicles.”
Partnerships, M&A and organic growth “all play a role in the evolution of businesses,” Collura agrees. “Technological advances and rapidly changing consumer demand are equally responsible for driving further hybridization. These factors go hand-in-hand as the unprecedented amount of venture capital in recent years has enabled more startups, acquisition and opportunities for synergy between companies.”
Read the full article here
