As technology continues to change our daily lives, it has found many adepts who think about creative ways of applying it. Previous barriers to massive deployment were related to elevated price points or limited interoperability between systems. For many applications, technology was more a barrier than an enabler. Sometimes value and differentiation was created just by overcoming the technical barriers. Today, it’s not unusual for creative new solutions to come together with new business models that have implications for manufacturers, machine builders, and the system integrators that put these solutions together.
Revolutions don’t always feel like revolutions. Akin to being on a drifting boat, pulled by a gentle stream, we often aren’t aware of the change in our location until we have a reference point in sight. Most of us have lived through dramatic changes and yet may not have fully recognized the magnitude of the change until after the transformation was complete.
Those who were in the travel agency business saw their main source of business, the sale of airline tickets, migrate entirely to the internet and away from their businesses. Those who could not redefine their business to other value-adding areas (e.g., packaged tours and individualized travel) did not survive. While the traditional travel agency got decimated, new opportunities arose for internet-based providers such as Expedia that allowed users to purchase all of their travel from their PC or smartphone.
We have all witnessed how technology has gained a more prominent space in our personal lives to the point where many of us have a hard time visualizing being “off the grid.” Technology’s penetration of the consumer market (seen, for example, in the ubiquity of smartphones) has not only converted a broad population to become technology advocates, but also it has increased the number of minds that think of deploying these technologies in new and unexpected ways.
Innovation along business models
Technology development and broad deployment has enabled important business model innovation with dramatic business implications. What does this mean? Uber and Airbnb provide good examples. At a basic level, ride-sharing company Uber provides individualized transportation to get a user from Point A to Point B. This doesn’t look very different from what a conventional cab offers, but consider it more closely: Uber leverages technology to allows regular drivers to become part-time cab drivers; offers a reliable, customer-friendly and convenient interface through which riders order, pay, and rate their driver; and presents a global vs. local offer, which allows a dramatic scaling up of the business.
Uber can be viewed as a very efficient broker between a group that needs point-A-to-point-B transportation and individuals who are willing to provide a ride in their car for a fee. You can make a similar statement about online room-rental service Airbnb. In the latter case, the brokerage takes place between those in need of a place to stay and those willing to rent their places with spare capacity.
What’s new and different is the business model being deployed and its dramatic impact in the short existence of these companies and their offered services. Uber was founded in 2009, and since then, it has been able to grow its company value to an estimated $70 billion. It operates in more than 600 cities around the world. Interestingly enough, in some cities, Uber’s approach to transportation is viewed as part of the solution to traffic congestion problems. Airbnb was founded in 2008 and displays 3 million lodging listings; it operates in cities in 191 countries. A recent round of funding placed the company’s value at $31 billion.
Business model innovation for industrial markets
The industrial market has historically been a capital investment-driven market. Manufacturers have made important investments in capital goods (e.g., infrastructure, machinery, etc.) that allowed them to create their products and deliver their services. These investments have in some cases provided competitive advantage and created barriers to new entrants, as only those with ample access to capital could fully participate. At the same time, these were investments in fixed assets that had limited flexibility for alternative redeployment.
Providing alternatives to upfront capital investment, new business models were introduced over time. Leasing of capital goods is an early example. This approach allows the user of the leased product to free up capital for other uses and in the process, improve financial KPIs as these leased products were not included in the company’s balance sheet as assets. Industrial companies can lease their fleet of delivery trucks or large capital machinery such as power-generation turbines or backup generators. Long-term lease arrangements can also be crafted for buildings, even ones erected specifically for tenants.
In the industrial space, technology development has often been directed at improving the efficiency and safety of processes and machines. Done correctly, technology can enable the delivery of highly differentiated value propositions, in particular around improving customer service levels.
- Proactive approach to maintenance via predictive technology and improved scheduling.
- Better anticipation of peak demand.
- Sensing of inventory levels with automated replenishment deliveries.
- Expert systems to guide technicians and orders required spare parts.
- Billing based on actual consumption.
An important business model innovation for machines (albeit commercial) was when Xerox decided in 1959 to deliver its new model 914 exclusively as a leased (not sold) copier. This proved to be a great decision as it made it easier for users to adopt the new technology and gave Xerox the upside of exploding use. Leasing is widely accepted today, with 26% of new passenger vehicles being leased in the U.S. and 45% of all aircraft being delivered to airlines around the world.
Expanding from the traditional leasing proposition, several machine builders have extended the reach of their value propositions through innovation on the business model front.
- Elevators: ThyssenKrupp has deployed an ambitious initiative whereby it wants to remotely connect its base of 1.1 million elevators installed around the world to provide predictive and proactive maintenance and perform analytics. Technician visits will be scheduled before breakdowns can occur and will be planned for low-demand times. The technician should be able to walk in with an understanding of the issues affecting the elevator’s performance and with the equipment required to fix any problems immediately.
- F&B packaging: Tetra Pak provides an aseptic packaging machine; the company charges clients for the actual consumed packaging material.
- Commercial jet engines: The main suppliers, GE and Rolls Royce, charge customers per flying hour of the engine allowing airlines to move more of their costs to a variable basis.
Analytics has received a lot of media attention. Applied to asset management, it can deliver predictive condition monitoring and with it a proactive approach to maintenance. New on the analytics front are:
- Dramatically lower price points, allowing technologies to be deployed for smaller assets. When the technology was introduced, only very large assets (e.g. a power generating turbine) could afford it.
- The ability to easily, cheaply, and securely monitor the assets remotely.
- Leveraging of open-source code, which reduces development cost and speed to market.
With the ability to remotely monitor and analyze their machinery, some machine suppliers assume all maintenance responsibility and move their business from the supply of the capital good (the machine) to the delivery of units of packaged products. Deployment of remote access and predictive analytics enables this.
Walking through a factory, it’s common to see equipment and personnel that are not part of the company’s assets or headcount. Providers of capital equipment often provide their machines as leased assets and some plants have outsourced services like security and maintenance to outside providers. This is nothing new, but what’s changing is the depth and breadth of the provided services and often the way they are financially deployed.
Examples where specific functions are handled by outside, specialized firms:
- Air fractionation: Praxair and Air Liquide deploy on-site in plants and charge based on consumption.
- Industrial water management: Ecolab ensures that water in the plant (on cooling towers, for example) meets specifications by monitoring it remotely and taking action, as by deploying chemicals, when needed.
Technology is key in these areas as remote monitoring is required. Information is often brought to a service center where experts and analytics can be leveraged toward problem-solving. In some cases, a service technician needs to be sent with specific instructions to follow.
Technology will allow some manufacturers to better leverage their machinery, most often representing a very high cost fixed asset. MakeTime, a Louisville, KY-based company, pairs buyers of machined parts with a vetted network of CNC-machined parts suppliers. For this they leverage their platform: Customers upload technical drawings to a cloud-based master library and suppliers can bid for the jobs, driving them toward full utilization of their machines. Buyers benefit from the ability to get their parts produced from a wide network of vetted suppliers, and they likely receive a competitive price as they are leveraging suppliers’ spare capacity.
Technology will allow manufacturers to get closer to their supply chains and plants (and allow benchmarking among them – e.g., on safety or energy efficiency) and also the consumers of their products.
The industrial market is understandably very conservative. Plants need to ensure the safety of their workers, their assets, and the end users of their produced goods. This ingrained “safety first” culture needs to be preserved, and new safety-related challenges, such as cybersecurity, need to be (and are being) taken very seriously. Unfortunately, this has often resulted in simplistic bans that have reduced the adoption rate of newer service offers. Our industrial players would benefit greatly from following the examples of highly regulated industries, such as the financial industry, which has been able to move to the cloud in a secure way.
Industrial players also have a natural human resistance to change. As baby boomers retire, the industrial market will have to adopt more-efficient business approaches. Newer hires will be more open to the use of technology and will require it to bridge the knowledge gap they will have with retiring experts. These factors will ensure wider adoption of newer business models.
We’re living in an important revolution, whether we realize it or not. Every industrial company will be transformed; this includes manufacturers, machine builders, and system integrators. Wide adoption of technology, including in the consumer space, has added many minds looking at ways to deploy it in creative ways to solve real problems.
If technology was an obstacle in the past either because of price point or complexity, today it has become an enabler. It is also less of a differentiator. Value creation and differentiation will be accomplished through innovative, customer-centric solutions. Business models to deliver these solutions, along with the ability to partner with nontraditional parties, will determine success. An exciting future is ahead.