Software-Defined Products –a blessing and a curse for established manufacturer
What do an iPhone, a Thermomix, and a Tesla have in common? They are all products where the built-in software, rather than just the hardware, determines the product's success. Increasingly, these are referred to as “software-defined products.
The development of such products brings unique challenges for companies. In this article, I will briefly address the following questions:
- What defines a software-defined product?
- What do customers expect from these products?
- What implications does this have for traditional manufacturers?
- How can diconium support the development of software-defined products?
What defines a software-defined product?
Software-defined products are physical products whose functions and features are controlled and customized through software. However, it often goes beyond simple customization or control—it's about extending a product's functionality and potential applications. The iPhone and the Thermomix are excellent examples: a modern smartphone, with its integrated apps, offers far more functions than a traditional telephone, while the Thermomix, with its recipe database and software-based controls, far exceeds the capabilities of a conventional food processor. In both cases, software provides the key USPs (unique selling points) that drive the success of these products.
Software is also becoming increasingly important in more complex products, such as automobiles and industrial production machines, where it enhances functionality and even enables entirely new business models. For example, in modern vehicles, software can manage features such as engine performance updates or allow customers to purchase specific functionalities temporarily. Similarly, advanced production machines can transmit data on usage and wear, enabling proactive ordering of spare parts before a breakdown occurs.
In these examples, software serves as a central component of the product, offering the following advantages:
- Extending functionality
- Collecting usage data
- Keeping products up to date, thereby extending their lifecycle
- Enabling new business models beyond product sales
These are the key benefits of software-defined products, and they are driving the trend toward more and more items being made up not only of physical components but also of software code.
What do customers expect from such products?
Essentially, customers expect the same from software-defined products as they do from traditional ones: a first-class user experience, reliable quality, durability, and intuitive operation—ideally, something that’s even enjoyable to use.
However, what qualifies as "first-class," "reliable," and "intuitive" differs significantly between software and hardware. Customer expectations and benchmarks are shaped by their experiences with best-in-class software.
For example, anyone accustomed to using Google Maps for seamless, real-time navigation will expect the same quality from their car’s navigation system—and will be disappointed if it falls short. Similarly, someone used to updating their smartphone with a tap might find it baffling that an e-bike requires a PC and a cable for a firmware update.
Consumers who interact daily with near-flawless, polished software expect the same excellence in every product, even if its software features are still in their infancy or beta stage. Here, an advantage of software can quickly become a disadvantage: customers expect bugs to be fixed promptly because "it’s only software." Manufacturers must be equipped to meet this expectation.
For instance, I find myself frustrated with my e-reader, which crashes regularly due to a bug that hasn’t been addressed in over a year. This unfulfilled expectation undermines the product’s perceived value and my trust in the brand.
What implications does this have for traditional manufacturers?
The transition from being a manufacturer of primarily traditional products to one that produces software-defined products is far from trivial. This is especially evident in the automotive industry today. For decades, car manufacturers operated within long model cycles, without having to consider software as a critical component of their business. Now, faced with shifting customer expectations and a changing competitive landscape, they are under immense pressure to transform into manufacturers of software-defined vehicles.
While software has been present in vehicles for decades, it was never a central focus for customers, nor was its development treated as a strategic priority. Instead, software development followed processes more akin to those used for engines or transmissions—far removed from the fast-paced, iterative approach that defines modern software development.
What's different now? What skills distinguish a company that develops software-defined products?
As mentioned, software now plays a crucial role in influencing purchase decisions, acting as a unique selling point (USP) and noticeably enhancing the product. This means software must be closely aligned with customer needs, which are constantly evolving. This dynamic presents one of the biggest challenges: companies must learn to develop, adapt, and improve their products much faster than before.
In the past, software development often followed the same timelines as the planning cycles for physical products. Today, however, it must be far more agile to meet changing customer and market demands while driving innovation. This shift requires a significant transformation within organizations, affecting the entire process chain—from defining and evaluating requirements to solution development, testing, and rollout.
Previously, stability and security were the primary KPIs for software quality. Now, additional criteria have become just as critical: adaptability, short release cycles, and the ability to quickly integrate customer feedback.
This shift impacts all areas of the company, from management to IT. Strategic direction, investment, and planning must now be aligned with continuous software development. Product development teams, including IT, must better integrate data- and software-driven functions, accelerate planning cycles, and enhance flexibility. Marketing and user research also play essential roles in understanding customer expectations and effectively communicating the benefits of new features.
Ultimately, transitioning to software-defined products demands a transformation across many core areas of a business. This transition comes with a range of challenges and risks that must be carefully addressed when designing the necessary organizational, business, and IT architectures.
How diconium supports companies in software-defined products
diconium helps companies manage the complexity of transformation by focusing on three key areas: organization, business, and software. We assist businesses in building the necessary structures and processes to evolve into software delivery organizations.
Our approach is based on a "More With Less" principle, creating genuine value through intelligent resource management and the use of cutting-edge technologies such as AI and data analytics. This means that we not only develop products but also make processes more agile and efficient—from conceptualization to implementation and rollout.
Our goal is to enable companies to develop innovative products where software is a decisive factor in purchase decisions, thereby securing long-term competitive advantages.
