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Case Grundfos: No Separate Digital Strategy

Needed
Posted on April 28, 2018 ! 1

The world’s leading pump manufacturer, Grundfos, operates in 56 countries. The

foundation owned company, with a 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 in

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 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:

1. Funding the Journey (Cost conscious, transparent and decisive)

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

3. Product and Solution Leadership (A Leading and differentiated product and

solution portfolio)

4. Service (Service as a commercial differentiator)

5. Customer & Collaboration (A customer-centric and collaborative culture).

It was at this point that our CEO and group management stated that we need to
understand digitalisation. We had to ask ourselves the basic questions: Why do
we need to digitalize 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 digitalization 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,
university professors, 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.

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 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, begun 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 ourselves
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. CEO 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 could we utilize 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

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 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 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 and not in the pumps
themselves.

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.

Digitalization is the transformational force in humanity that supports value

creation by connecting people, companies, products or literally anyone and
everything.

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

The pump does all this it 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 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 utilize and make a difference,
making the World’s water supply more efficient.

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 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 to about the money-making logic and what type of challenges and
pain points 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 a 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 if nobody is willing to pay for an offering if it
does not solve a broad enough issue.

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 Secondly, we don’t ask the team to generate a return of 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 the pumps in the
1940’s. 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 be when we utilize digitalisation and that will
really propel us forward.

Picture 1. Grundfors’ Continuous Transformation and Jumps of the S-curve

No doubt that 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

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 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 digitalize 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 of 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.

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 Picture 2. A Holistic Picture of Grundfos’ Digital Value Chain

Everyone must see where the value is created and where the 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 plate and how your operative model needs to be changed.

Key Findings of Grundfos Digital Journey

1. The Importance of working outside in

Technology driven companies are often driven inside out, meaning forecasting
and foreseeing type 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 utilize different ecosystems and
find new type of partners.

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 2. 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.

3. 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 organization.

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.

Marianne K. Knudsen

Senior Director, Head of Digital Commercial Offerings in Grundfos

Case story written by Timo Savolainen for the coming book about Leading
Continuous Business Transformation.

Timo Savolainen

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! 1 COMMENT

Amir Peleg

great piece!!

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