Case Grundfos: No separate digital strategy needed

The world’s leading pump manufacturer, Grundfos, operates in 56 countries. The foundation-owned company, with strong family representation, founded 1945, has delivered quality pumps for over 70 years. Grundfos pump systems, for example, ensure that 500 million people get clean groundwater from Grundfos submersible pumps and Grundfos’ flood control helps to protect the Shanghai Disney Resort.

Marianne K. Knudsen, Senior Director and Head of Digital Commercial Offerings at Grundfos, reveals why it is necessary for the Grundfos organisation to transform itself from a conventional hardware giant into a company fully capable of delivering customised digital solutions alongside its world-renowned pumps.

What could disrupt the business world as we know it today?

In 2015, the board of directors approved a new 2020 strategy for the Grundfos Group. Our strategy defined five must-win battles and provided guidance for our daily actions and decisions. The must-win battles are:

Funding the journey (Cost conscious, transparent and decisive)

  1. Supply chain (An End-to-End supply chain adding value)

  2. Product and solution leadership (A leading and differentiated product and solution portfolio)

  3. Service (Service as a commercial differentiator)

  4. Customer & collaboration (A customer-centric and collaborative culture).

It was at this point that our CEO and group management stated that we needed to understand digitalisation. We had to ask ourselves the basic questions: Why do we need to digitalise our business and what can we use digitalisation for to create more value for our customers and end users?

Firstly, we acquired an understanding of digitalisation through literature and from other companies and industries. Then we interviewed 30 thought leaders from around the world, and from different fields like the start-up environment, universities, distributors and end users.

Based on conversations with them and their answers to our questions regarding the danger of disruption to our industry and our company, we learned not only about the relevant threats, but also about new possibilities and business opportunities.

For example, one end user told us that they always used to change pumps proactively to ensure their business continuity. But now they had added sensors to our pumps, started to harvest data and, based on the information collected, began to predict pump breakdowns. As a direct result, they are going to buy significantly fewer pumps in the future.

These kinds of conversations really opened our eyes and moved our thinking beyond what we had imagined. We understood that we must move beyond just pumps if we wanted to stay in the game.

From pump manufacturer to an ecosystem of water

In the beginning of our digital journey we understood that digitalisation is not, for us, just a goal itself. Digitalisation is an enabler and that’s why we don’t need a separate digital strategy. Our company strategy tells where our company should aim its focus.

“Digitalisation is a key enabler of our strategy”

In 2015, we quickly took action and our CEO and Group President Mads Nipper established a digital task force. Nipper chaired the digital task force. Other members are the CFO and CIO with heads of group marketing and innovation.

Together, we started to investigate in which direction Grundfos should move and what kind of opportunities we could utilise as one of the largest pump manufacturers in the world.

Discussions with our innovative leaders and employees gave us good insights and allowed us to take several concrete and critical actions pioneering around hardware. One radical example that came up was this: what if we become a water company? Instead of selling hardware we could move into being a water company. Our DNA and core capabilities are in hardware manufacturing and moving in to selling water would be quite a big leap forward.

We also found it interesting to speculate about what would happen if we opened the whole ecosystem of our pumps. What would happen if we opened up all our hardware and allowed any start-up company to work with software and data from our pumps? Every business leader should be able to imagine what could happen if you created this kind of an ecosystem around your core products.

Benefits of digitalisation and the role of Artificial Intelligence

Pumps are not sexy products in the way that some consumer products are. In fact, we might be the only company on the planet who is truly passionate about pumps. Many of our end users, like facility managers, are not just interested in pumps.They are interested in what pumps can do for them.

We, for example, serve public water utilities that typically struggle with CaPex and Opex, and Grundfos allows them to reduce costs and improve performance by scaling up.

The benefits that Grundfos is looking for with digitalisation are to enable our products to communicate with each other and with other systems, a bit like building information systems.

“Digitalisation is the transformational force in humanity that supports value creation by connecting people, companies, products or literally anyone and everything.”

In the late 80s and early 90s we started to develop algorithms. We were the first pump manufacturing company in the world to embed software and electronics into pump products. Today, we have the ability to write software that meets different types of end user needs. One concrete example is called Autoadapt whereby the pump can automatically turn its speed up or down in reaction to the required demand or supply.

The pump does all this on its own, without being connected to the cloud or anything else. The pump simply measures what is happening and responds to it: am I needed to pull more water or push more water, and how do I operate myself to accommodate these needs.

This is something that we introduced years ago. Now with Artificial Intelligence we need to think what we could do when we operate within a big building, or even a city, based on algorithms that could adapt to what is happening in their surroundings.

Imagine Artificial Intelligence learning patterns in a small village, where you have, for example, three big farms and a small tomato factory or similar. How would it predict water consumption? How would it assess whether or not you have a leak in your water distribution system?

We are sure that if we apply Artificial Intelligence and machine learning, the algorithms will quickly find out if there is regular use of water, or if there is a leak in the water distribution network, by measuring and monitoring how water is used.

That is well beyond simply knowing what day is today or how much water we used yesterday or last year at the same time. Artificial Intelligence is here to stay, and we have plenty of opportunities to utilise and make a difference, making the world’s water supply more efficient.

Budgeting of the software business

Traditionally we have succeeded in the market by delivering energy efficient pump solutions and developing trendsetting water technologies. As far as hardware is concerned, we run our business well.

We have many mechanisms to forecast how many pumps we will sell. Therefore, working with budgets and business cases in our core business is something that we will continue to do for several years.

“Annual budget and forecasting is good for the manufacturing of hardware, but the software business is an opportunity to work differently.”

When it comes to digital offerings and our software development, the way we run our budget is different. We don’t ask teams to fill in long templates, but we do ask them about the money-making logic and what type of challenges they are solving, and if customers are willing to pay for the solution.

We give a development team money, with two conditions, because our attempt is to accelerate digital solutions development and provide offerings faster to the market.

Firstly, the team has limited time. Typically, software development runs in sprints and the longest sprint we have is 90 days. The team has the freedom to spend the money on whatever they want during the given time.

It is entirely up to the team to decide what scope they want to deliver. The only restriction to the scope is that its output must create some value for a customer or for an end-user. This means that nobody is willing to pay for an offering if it does not solve a broad enough issue.

Secondly, we don’t ask the team to generate a return on money. We ask them to create a certain number of users.

We encourage teams to go out and bring back as many new users of this offering or service as they can. With this approach we can talk about money and return of investment at a later stage.

An operating model of continuous business transformation

Grundfos have already transformed themselves three times over the years.

The first transformation happened when we began to produce pumps in the 1940s. The second transformation happened when we combined pumps with motors. The third transformation happened when we embedded electronics in our pumps. At that time we made a significant S-curve jump in our company. The fourth transformation will occur when we utilise digitalisation and that will really propel us forward.

No doubt we will also see many more opportunities to transform the company in the future. Those opportunities could be a true service-based company, as we are now a product plus service company. Or we could end up as a water company.

We will see companies transform in the future many times over. This happens because new types of disruptive technology enable companies to do things that were not previously possible. Therefore, we will see companies survive, only if they are capable of pivoting and constantly reinventing offerings that they bring to the market.

We are trying to digitalise our company by thoroughly understanding the needs of our end users. Our operative model and overall business model is to develop pumps, put them into boxes and ship them to end users through our distributors. That’s our route to market.

That model will be challenged in the future. Massive changes that we see in buying behaviour, systems that run autonomically, Artificial Intelligence and machine learning are moving the businesses much faster and in new ways that that we haven’t seen before.

“The world around us is truly changing and if we don’t change our operating and business model, we will be out of the market.”

All of what we have known in the past will be truly changed. We will be significantly challenged in the future, if we don’t constantly assess our complete operative model and route to market.

This is simply because we won’t be able to serve the market needs that are out there.

When we digitalise our business, it is our task to make sure that every part of our value chain, including suppliers, service providers, customers and end users has a holistic picture.

Picture: A holistic picture of Grundfos’ digital value chain

Everyone must see where value is created and where value is destroyed. Where value is destroyed, we can help to bring that to balance in our value chain.

Every company must start with defining why it is really making a difference in the world. In the new world you need to understand where you have a bigger business potential and how your operative model needs to be changed.

Key findings of Grundfos digital journey

The importance of working outside in

Technology-driven companies are often driven inside out, meaning forecasting and foreseeing types of functionalities. That enables end users and customers to get the hardware products they are looking for.

When you build digital opportunities, you need to work outside in. Otherwise you won’t get the change that enables you to utilise different ecosystems and find new types of partners.

Ways of working need to be changed

We have successfully developed pumps for many years. We do that through a waterfall model that works very well with pumps. We have practised that model for over 73 years and we are really good at it.

That, however, is not the way to work with digital. Here we must work in a more agile way and with teams that are truly empowered to make their own decisions.

You must build capabilities and competences while you are flying the aeroplane or building the bridge

Digitalisation needs to run alongside your core business if you are to be transformed inside out. We, for example, don’t have a digital transformation office sitting in Berlin or Boston. Our digital transformation office is here in Denmark at the frontline of our business organisation.

Digitalisation requires the ability to build new things while you maintain your core business. That requires a delicate balance between the new and the old.

This article was originally published in the book Surfing the Digital Tsunami. Text was written by Kati Lehmuskoski.

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