When we think of new electronic products being developed and brought to market, perhaps the hardware comes to mind first. However, what runs the hardware? The software. It’s fair to say that today a product’s software has become a significant source of competitive advantage, often surpassing hardware in importance for some electronics manufacturers.
Consider Apple’s iPhone in comparison to many Android models. Are users buying it primarily because of the phone hardware, or the software ecosystem?
We’ll examine why software drives innovation, user experience, and brand differentiation and look at the shift towards software-centric designs, based on thoughts about Richard Rumelt’s book, “Good Strategy, Bad Strategy.”
If you prefer listening to reading…
Introduction to the Importance of Software in Electronic Products.
When you talk about electronic products there is the hardware component such as the display, the enclosure, the battery, even the casing around it and so on, and the software.
If we consider cell phone technology the greatest change in the past 2 decades is their software. Technologically they still use the RF spectrum to make or receive a call which has not really changed since the 70s. What has changed the most is the software, operating systems, apps, and so on.
The key battleground to differentiate themselves for many hardware products like phones is more and more about software and less and less, relatively speaking, about hardware. (00:00)
Evolution of Chip Design at Intel.
Back in the 70s, Intel and the other microprocessor manufacturers were working on the design and manufacturing of custom chips for a single device. This meant that the cost of designing and developing a chip was becoming as important and even more important than the cost of manufacturing the chips.
One customer was struggling to afford their chips and asked Intel to lower their price which changed everything because Intel negotiated to be able to use their custom-designed chip and sell it to different companies for their products. They then did this for other chips and over time started designing chips that had a more general use and could be used for a range of different products with different software. The market we see today, where an Intel chip may be used in all kinds of products was born and we moved away from one manufacturer making the entire ecosystem for each product. (05:38)
Transition from Vertical to Horizontal Structure in Computers.
So we went to a much more horizontal structure, which is still the case when you look at computers these days. The big winners were Microsoft and, to a lesser extent, Intel because now you have the IBM PC and its clones which could all run with the same chips and OS. And then each module, so let’s say the keyboard, for example, also had its own chip to do local calculations and connect with the rest of the device which was made possible because of Intel’s moves in the 70s resulting in more multipurpose chips that could be made in very large quantities and then programmed in different ways.
Today, if you go to a store and buy a laptop, then visit a different one and purchase a mouse, the latter will connect due to that technology, and so we have this horizontally structured market with many modular components and companies competing with each other. Importantly, this spurs innovation, and you only need to go to Kickstarter and you’ll see many novel types of keyboards, for example, that all solve different problems or have unique styles.
If we look at hardware startups with products like keyboards, though, it’s not just about making the hardware, it’s also about the software to answer what exactly is it supposed to do? How is it supposed to behave? So the embedded firmware has become more important. (10:14)
Challenges and Expenses of Hardware Modifications.
Another reason software has become more important is the cost of modifying it compared to hardware. Let’s say your product sets out to solve a problem and you make the solution in the hardware, then, it’s set in stone, more or less for that model. Tweaks or corrections to improve it sometimes can’t be made until the next model, which could take some time and require the development of the new product.
Making hardware changes any sooner and you’d potentially be writing off an expensive custom-designed part (that solves the problem) and a lot of money on tooling, the costs of getting it tested and certified to certain safety standards, etc. This could be tens of thousands of dollars or more so it’s often not feasible. (13:19)
Advantages of Software Updates over Hardware Changes.
Software changes, if the value of the product lies there instead, are more feasible. For instance, if you find that something is wrong, you can follow Tesla’s lead and fix it with an over-the-air update, or if that’s not suitable for your issue, it may still be fast and simple to adjust a setting in your software; just a few keystrokes to recompile and then you’re done. Even for more complex problems reprogramming the software may take weeks, not the months required to make hardware changes, and it’s significantly cheaper too. So, due to this flexibility and cost, many companies with electronic products choose to focus on software to be the key differentiator and method of solving problems.
An example of an issue that can be solved with a relatively straightforward software fix would be products that spend too long in the warehouse and the battery management system didn’t control the charge of the battery allowing it to go to 0% and causing the product to be DOA to the consumer. A tweak to that BMS software would prevent this issue and, no doubt, a lot of returns and bad reviews. (15:24)
Increasing Importance of Software in the Automotive Industry.
Tesla is trying to do the same as the computer industry where the software and chips are critical, but with four wheels, a brake system, and an accelerator. Traditional internal combustion engine cars are also leaning more on software, although instead of making it in-house like Tesla they have found that they’re not usually very good at this, so they partner with companies like Google to provide proven software solutions for their vehicles, and that’s where more and more of the budget when you buy a car is going.
Traditional brands still have some way to go, and many consumers bemoan the removal of physical buttons and dials to control functions like the air conditioning, as the software controls aren’t as convenient…yet. (19:19)
Utilizing Software for Differentiation in Products.
From what I see with our customers, they are paying more and more attention to software, and there are several reasons for that.
- They’re really afraid of being copied by some companies in Shenzhen that see their products getting a lot of buzz and good reviews from a big crowdfunding campaign and start making something very similar and get it to market first. The China copycats tend to be poor at creating software, though, so the companies concentrate on creating a solid app that runs on Android or Apple with an attractive UX and UI design and keep this out of China. So even if the hardware is copied, they retain the differentiation from the copycat products by having superior software.
- They collect user information with their software and try to provide a more customized experience and build their brand recognition and loyalty, perhaps providing appropriate suggestions based on the data provided by each user. This builds more of a relationship with the brand than the simple, “I use the product and walk away” one with plainer hardware products. This is particularly important for Amazon vendors as Amazon does not provide consumer information, so to reach these users they need to be given an incentive to sign up on your website or app which they can only do through the software. (22:48)
Building Brand Recognition through Software Interaction.
Another benefit to building brand recognition with software is when people interact with a display or maybe a mobile app that goes with their product, it’s a way to get them into your branding elements and give a personality to your product.
Importantly, in this age of hardware copycats, such branding is defensible. Having a brand that is starting to become a little bit famous in your niche is an advantage. It does reassure customers, and if it attracts the attention of copycats can be defended especially if you’ve trademarked it.
Branded software, a unique startup jingle or sound, and the logo being shown on the display help build such recognition and, if it’s good to use, is memorable and valued by consumers. Coming back to the iPhone, that’s arguably why people purchase them, not the hardware which is not as technologically advanced as some Android phones. (26:06)