By Dusty Weis, Association of Equipment Manufacturers


There are two schools of thought when it comes to the impact of technology on today’s business environment.

Some see a minefield of disruption, where tech startups lurk at the ready to cannibalize entire industries overnight. But others see a field of opportunity, where clever manufacturers can find new ways to connect their customers to their products and tap into new revenue streams.

In order to help its members better understand where the dangers and opportunities lay, the Association of Equipment Manufacturers partnered with the global consulting firm McKinsey & Company to conduct a survey of heavy equipment end users. In a report compiling the customer insights, some of McKinsey’s top minds laid out five steps that manufacturers can take today in order to position themselves to thrive in tomorrow’s technological environment.

“OEMS should be concerned but not panicked about these findings,” according to senior partner Asutosh Padhi from McKinsey. “OEMs still have the ability to be the natural providers of these new technologies, provided they’re able to innovate the core service offerings, and more importantly, move quickly on the software services and Internet of Things.”

With the survey data showing that most business owners who use heavy equipment are interested in many of the different types of technology that will be hitting the market, Padhi and senior partner Kevin Laczkowski recommend these five steps to best position AEM members to thrive. These recommendations were presented to AEM members by McKinsey partner Paolo Sandrone at AEM's free Thinking Forward event on May 8 in Chicago.


1) Address Critical Control Points in the Ecosystem

You needn’t look any further than your own front pocket for an example of how quickly market share can slip through a company’s fingers.

Just a decade ago, companies like Nokia sat and watched as disruptors like Apple and Samsung gobbled up their share of the mobile phone market over a few short years. At the heart of this catastrophic disruption, Padhi says, was Nokia’s failure to foresee and prepare for a shift in the “killer app”—that is, the primary functionality that customers value in a product .

Today’s original equipment manufacturers (OEMs) should pay particular attention to their customers’ shifting preferences, Padhi says. McKinsey’s research has identified a number of desirable use cases for new technology, any of which could become the next “killer app” in heavy, off-road equipment.


“It's now going to be important for the OEMs, which are naturally well-positioned to win, to think through the critical control points that they should try to own,” says Asutosh Padhi, senior partner at the global consulting firm McKinsey & Company


This means manufacturers ought to be securing access to and expertise in technologies including sensors, equipment management platforms, visualization, analytics and machine learning, Padhi says. 

“These all must be integrated and delivered in a way that really helps the end customer to create higher value by using the OEM’s products and services,” he adds.


2) Develop a Deep Understanding of Customer Decision Journeys

Even before Facebook’s recent corporate fall from grace amid privacy concerns, tracking and analyzing customer data was a sensitive subject.

In McKinsey’s survey of heavy equipment owners, Laczkowski says the majority of them said data privacy was a major concern. Three-quarters of those surveyed expect to know why OEMs are collecting data off their machines, and half said that they would hold it against the manufacturer if their data were compromised.

While this may not seem like the warmest reception for the suite of emerging “Internet of Things” (IoT) advances in data analysis, Laczkowski says it’s all about how manufacturers position the new services with their customers. McKinsey’s research found that construction contractors and farm operators were much more interested in machines that collect usage data if there is a clearly demonstrated benefit to them, like reduced maintenance costs or better crop yield.


“The ability of OEMs to actually demonstrate value to the customer from these new technologies and use cases is absolutely critical,” says Kevin Laczkowski, senior partner at the global consulting firm McKinsey & Company


Accordingly, McKinsey found increasing interest among heavy equipment customers in researching and trying new products and services before committing to a purchase. Customers rated hands-on experience with a product and the advice of friends and colleagues very highly among the influences on their purchasing decisions.

“Customers are going to want to observe these technologies in action,” Laczkowski says. “They’re probably going to have a higher bar for assessing these and getting advice from colleagues, and OEMs are going to have to play a role in getting potential customers information and connected to other users in a way that they probably haven’t had to in the past.”

Ian Keyworth, an AEM member from ESAB Welding & Cutting Products who attended the Thinking Forward event in May, says McKinsey's insight hit home for him.

"I think customers don’t understand the value of new tech right now," Keyworth says. "We haven’t done a good enough job explaining the value, and I think they’re concerned about if they can actually keep an advanced machine running."


3) Adopt “Two-Speed” Research and Development

With more software powering the built-in technology on the next generation of heavy equipment, the slow and steady pace of “big iron” product development will have to evolve as well, Padhi says, or risk allowing more agile competitors to gain an advantage.

“If you look at world class software development, that follows a very different process,” Padhi says. “The focus is on multiple iterations, on developing a minimal viable product and then rapidly testing that product with customers to get quick feedback, and then continuously improving upon that.”

Padhi says that, in McKinsey’s view, manufacturers will be required to take what what he calls a “two-speed” approach to research and development. This approach combines the strength of traditional stage-gated hardware development with the agility that will be required for competitive software development.

“As we look at the future, we are going to quickly realize that hardware release and software release will be on a very different cadence,” Padhi says.

Similar to the model that Tesla employs in its advanced electric cars, and the model that has found wide acceptance among smartphone customers, Padhi says OEMs should introduce regular software updates, or “patches,” into their traditional R&D cycle. Hardware updates can still take place every handful of years, he says, but rolling out software updates wirelessly will allow OEMs to stay relevant by fixing bugs, addressing security concerns and even adding new features at a much more competitive pace.

“I think multiple software releases over the course of a year will soon be required,” Padhi says.


4) Drive Productivity Improvements to Fund New Technology

All the hype surrounding new technologies doesn’t do anything to answer a key question that’s critical in business—how are we going to pay for all this? 

There’s good news and bad news, Laczkowski says, when it comes to manufacturers looking for ways to pay for new R&D projects. The bad news is that most new technological features are not going to pay for themselves.

Laczkowski explains that, when it comes to new tech, analysts separate them into two categories—“table stakes” and “differentiators.” Within five to 10 years, many table stakes technologies will have become standard features on heavy equipment, Laczkowski says, and consumers will expect to get them without paying extra.

“They’re just required to stay competitive in the marketplace,” Laczkowski says. “OEMS are going to have to leverage Industry 4.0 analytics and new sources of internal productivity to drive their cost structure down in order to fund these new technologies and maintain their margins.”

Differentiators, on the other hand, are unique features that certain OEMs are either first to market or uniquely positioned to own. Laczkowski says these technologies can allow a manufacturer to increase its prices, offset costs and expand margins.

“When these differentiators are introduced, there’s an opportunity to price them because there’s a real value to customers that they can’t get from other OEMs,” Laczkowski says.


5) Rethink the Workforce Talent Model

As more products roll off the factory floor with integrated technology and software, it stands to reason that the people who build those products will need to have a greater understanding of the technology and software. But in a manufacturing industry that’s already struggling to fill jobs, Laczkowski says companies that fail to address these talent needs will be at a critical disadvantage.

One way to fill the high-tech skills gap is to hire more millennials, Laczkowski says. This new generation, currently aged 18-36, comes hardwired with technological inclinations, and will make up nearly 60 percent of the workforce by the year 2024.  

However, Laczkowski says manufacturers rooted in generations of tradition will have to update more than their dress code if they’re going to compete for the best millennial talent.

“The quality of the work environment, the opportunity to learn new skills and a calling toward a greater purpose are all things that millennials weight higher than previous generations,” Laczkowski says. “OEMs are going to have to consider these factors in their employee value propositions when they try and recruit this talent.”

And yet, with a booming economy, some high-tech jobs are in such high demand that equipment manufacturers may get edged out by Silicon Valley in the competition for top talent. That’s where Laczkowski says he sees a previously-unheard of trend taking root throughout the economy—partnerships springing up across industries in order to develop the most cutting edge technology solutions.

“Where before, some OEMs had the mentality of ‘it must be built here,’ we see that constraint being relaxed across several industries and partnerships forming where you don’t have the talent in house,” Laczkowski says.

In developing their high-tech repertoire, Laczkowski says manufacturers will face a critical inflection point—is this a table stakes technology which I can develop in cooperation with an outside partner, or is a differentiator for which I should pay top dollar to retain my talent and intellectual property in-house.

Laczkowski says you can identify the most successful manufacturers of tomorrow by picking out the companies which have best addressed these five steps today. And Derek McCullough, a senior product engineer from E.D. Etnyre who attended AEM's Thinking Forward event in Chicago, sees the wisdom in this.

"OEMs should probably really focus on this handful of things that their customers trust them to do," McCullough says. "Provide those services, and start to connect with third party providers for those other things that customers look to them for."


Researchers from McKinsey presented the findings of their research project to AEM members at a Thinking Forward event at the mHub innovation center in Chicago on May 8. Visit to learn about more of these free, upcoming events in a city near you, or listen to the AEM Thinking Forward Podcast for a recap of their presentation.

Dusty Weis is AEM’s strategic communications manager, covering the impact that new and emerging trends and technologies will have on the construction, agriculture and manufacturing sectors. Email him at or follow him on Twitter @dustyweis.

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