Despite all the hype, businesses are still significantly under-estimating the business impact of Internet of Things (IoT) technology. In my last blog post, I explored at a high level the likely evolution of business models in the Big Shift. Now, I'll use IoT technologies to illustrate how just one of many technologies will enable the evolution of business models.
The Internet of Things space
For those who aren't familiar with IoT, it refers to a set of technologies that help to connect physical objects like buildings, machines and even human bodies into networks so that they can communicate with each other and so that we as humans can connect with these physical objects as well. The technologies to do this include sensors that can monitor the condition and context of physical objects, networking technology that can help these physical objects send and receive data, and actuators embedded in physical objects that can receive instructions and act to change the attributes of the physical objects. These technologies are also known by such labels as “Internet of Everything” or “Industrial Internet”, but for the purpose of this posting I'll refer to them under the more conventional label of Internet of Things (IoT).
Like all digital technologies, the price/performance of IoT technologies is evolving at an exponential rate. The result is to make “the invisible visible at scale.” We can now track our physical context with increasing granularity at ever-expanding levels, ranging from our immediate surroundings to our buildings, to our cities, to our countries, and ultimately to our globe (not to mention Mars and beyond). Increasingly, the technologies make it possible not only to “see” the invisible, but to help it evolve in ways that can dramatically improve the performance of these physical objects as well as our own performance.
Current applications for this technology
So, what have companies done with this technology? So far, the applications have been very limited. Perhaps understandably, the dominant application of this technology has been to reduce expenses in business operations. True to form, just as with the application of most digital technologies, companies have tended to focus on applying the technology to do what they already do, just faster and cheaper.
What are some examples? Perhaps the most common application is to use IoT technology to monitor the performance of machinery and signal when a malfunction might be imminent. Preventive maintenance can definitely increase machinery utilization rates and reduce costs associated with unexpected failures. An increasing amount of IoT technology is being deployed to monitor utilization of key inputs (for example, fuel or electricity) into large scale facilities like manufacturing plants or office buildings and adjusting these inputs in real-time to enhance efficiency. Another popular early application involves using IoT technology to monitor the movement of parts and products in logistics chains.
These applications all have important economic benefits. It’s understandable why companies are targeting these applications to reap near-term cost savings. But, there’s so much more potential that remains to be tapped. How about using this technology to evolve to new and more profitable business models, focusing on enhancing value delivered to the customer rather than simply seeking to reduce the company’s own operating expense?
Transaction to relationship
It used to be that, if you were in the product business, your goal was to sell the product, get the transaction done and book the revenue. In part, this was because once the product left your store or warehouse, you had very little visibility into how it was being used. That’s all changing now as IoT technologies become more affordable and available. These technologies now provide an opportunity to monitor the use of the product throughout the lifetime of the product.
Of course, the customers have to be willing to share this information with you. Why would they do that?
Well, what if you offered to charge the customer based on usage of the product, rather than requiring them to make large upfront payments for the product regardless of usage patterns down the road?
Here’s an even more intriguing option. What if customers could use IoT technologies not just to monitor usage of the product but also to track the impact that the product has in generating value for them? What if, for example, we could track the impact of a machine on the cycle time of a manufacturing process?
By making the invisible visible at scale, we open up a wide range of new options in terms of pricing of products, moving from upfront purchase payments to usage based pricing and, in certain cases, even moving to performance-based pricing - you pay for the performance improvement, rather than just usage. Now we’re moving from an episodic, transaction-based business model where we see the customer only when they order a product to a much richer, relationship-based model where we “see” the customer throughout the product life cycle and can work together to enhance the value that the customer derives from the product.
As we’ve discussed in our patterns of disruption work, one of the patterns of disruption that is likely to unseat incumbent leaders in a diverse group of industries is aligning price with use – look at what's already happening in cloud computing as we move to infrastructure as a service and software as a service business models. So, this is not just an attractive new business model, but has the potential to create significant competitive advantage relative to vendors who remain wedded to the upfront purchase pricing model.
Data to advice
IoT technologies generate a torrent of data. Who typically has the data? Each individual customer – as a result, it’s fragmented and has limited value.
As just mentioned above, customers might be motivated to share that data with the vendor if the vendor moved to a usage-based or performance-based pricing business model. But there are some other ways that customers might be motivated to share this data.
If the product vendor could provide tangible value in return for access to the data, customers would be much more likely to share their data. How might this happen? Vendors have an opportunity to aggregate data from the use of their products across all customers and can spot usage patterns that would not be visible to any individual customer.
If vendors were providing ancillary services that deliver value to the customer driven by this data, customers would now have more reason to provide access to this data. What if the vendor aggregated usage data from all of its customers and applied the data to develop much more accurate predictive models regarding events like product failure? Customers would likely be willing not only to contribute their data, but also pay the vendor for these predictive services, generating a new data-driven source of revenue for the vendor and enhanced value for the customer.
Vendors might even take this one step further and develop insight from the data that would enable them to offer prescriptive advice for the customer. They would not just help customers anticipate certain events, but give them advice on what they should do to enhance the value of the product given these circumstances. Depending on the value created from this advice, these prescriptive services could become a significant additional source of revenue. As these business models evolve, one might even imagine that the “sale” of the product would diminish in importance relative to the revenue generated from data-driven services enabled by the product purchase. In some cases, this could help companies evolve into a trusted advisor business model.
One to many
IoT technologies also have the potential to help vendors evolve into platform-based business models, where the value to the customer increasingly comes from being connected to a much broader range of more diverse resources. By enhancing visibility not only into the context of specific customers but also into the context of a growing range of other product and service providers, IoT technology could give vendors the ability to more effectively match emerging customer needs with the relevant expertise or capability required to address that need. As this visibility increases, vendors will be richly rewarded if they can address a broader range of customer needs that extend well beyond their individual capabilities. Platform business models will ultimately create far more value than conventional one-to-one product vendor business models.
As the deployment of IoT technology expands and as the connectivity across this technology increases, it may not even be necessary to operate a platform in order to connect the customer with the relevant expertise. The vendor could simply query the communications network to find the most appropriate resources to address the customer need, regardless of what platform, if any, that those resources happen to be using.
The evolution of business models from one-to-one to many-to-many opens up a very attractive opportunity for leveraged growth. Today, when companies think about growth, they typically focus on make versus buy as the two drivers of growth. Increasingly, there will be a third path to growth – connecting with relevant resources wherever they are and mobilizing them to add value to customers. This is economically a far more attractive path to growth since it reduces upfront investment and shrinks the lead-time before new revenue is generated.
Tying it all together - creating pull platforms and shaping strategies
So, IoT technology creates an opportunity to re-think business models at a fundamental level and to harness new ways to create, deliver and capture value. What are product vendors doing on this front? So far, very little. As indicated earlier, companies have been focusing on near-term efficiency improvements in their own operations but, by and large, their business models remain untouched.
There’s a significant white space here. And there’s an even bigger opportunity that so far has gone largely unnoticed.
This is not just about evolving business models to create and deliver more value. Two of the dimensions of business model evolution discussed above, “data to advice” and “one to many” have powerful network effects that are likely to drive significant concentration of value capture over time within a market or industry. The companies that understand this potential have an opportunity not just to evolve their business models, but to pursue “shaping strategies” that could restructure entire markets or industries and create privileged positions for value capture by the shaper.
The evolution of business models enabled by IoT is ultimately about the ability to harness the power of pull, moving from conventional push based business models that suffer from diminishing returns to scalable pull based business models that for the first time offer the potential to harness increasing returns. Yes, squeezing an additional percent or two out of operating expense is important, but it pales in comparison to the opportunity to change the game in more fundamental ways.
While opportunistic deployments of IoT are beginning to generate attention, the real potential of this technology will only be realized when executives embark on a more systematic assessment of the economic and strategic value of this technology. Harnessing this potential will require re-thinking at a more fundamental level what business the company is really in and what is required for sustained value capture. The good news is that frameworks to help in this analysis are available and can significantly accelerate and amplify the impact that this technology will have on business performance.