As construction machinery manufacturers increasingly sell connected products, the building sector looks set to build a new image for itself as a technology enthusiast and embrace digitization.
The construction industry has a reputation as a technology laggard, with dire repercussions for productivity and profitability.
Last year, researchers at strategy house McKinsey & Company singled it out as a sector “ripe for disruption”, calculating that large projects typically take 20 percent longer to finish than scheduled and come in 80 percent over budget. Worse still, productivity in the building industry has actually declined in some markets since the 1990s.
More digitization and the introduction of IoT technologies could do much to rectify the situation, McKinsey’s analysts say in their report, and this week there have been signs that the sector is starting to understand that. A report from Berg Insight forecasts healthy growth in the global installed base of construction equipment telematics systems, which reached 1.8 million units in 2016. By 2021, that number is set to reach 4.6 million units.
The European market accounted for almost 0.4 million units at the end of last year, with the North American market estimated to be slightly larger, and the rest of the world accounting for more than half of the global installed base.
“Most major CE OEMs [original equipment manufacturers] have introduced telematics offerings for its customers, either independently or in collaboration with telematics partners,” says Berg Insight’s report.
These are commonly factory-installed as standard, at least for heavier machines, it adds, with Caterpillar and Komatsu ranking as the leading OEMs in terms of the number of CE telematics systems deployed worldwide. These two companies together account for more than one million telematics units today, said Berg Insight analyst Rickard Andersson.
Other key players include Hitachi Construction (based in Japan), Hyundai Construction Equipment (South Korea), JCB (UK), Volvo CE (Sweden) and Deere & Company (US). Smaller players include Doosan Infracore (South Korea), Liebherr (Switzerland) and CNH Industrial (UK).
“Notably, half of the top 10 OEMs have surpassed the milestone of 100,000 telematics units globally,” said Mr Andersson.
This is important, because these telematics systems can help construction firms locate equipment on busy building sites and assess their recent utilization and performance. Beyond that, the data collected can be used to detect maintenance requirements and send automated alerts for preventative maintenance.
In short, the construction industry has much to gain (and it seems, little to lose) by getting new insights into bulky and expensive machinery that firms typically hope to use for many years to come.
Discrete manufacturers that create building products are facing challenges from industry competitors that have gone through a digital transformation. The companies that don’t follow suit and digitalize the business will fall behind. In an IDC white paper, authors Kimberly Knickle, Heather Ashton, and Jeffrey Hojlo stated that “by 2018, nearly one-third of [discrete manufacturing] industry leaders will be disrupted by competitors that are digitally enabled.”
One main way discrete manufacturers are moving forward is by integrating services with current product offerings. This combination is tied in with providing better customer experiences. To achieve this new business model, manufacturers need to rely on technology and Internet of Things (IoT).
How can building manufacturers use technology to stay relevant in the industry and move past competitors?
Modern customers are looking for a better experience. Providing that experience can improve business for manufacturers. Building products manufacturers can shift their business models to add services to their product offerings. They can provide services that install and maintain the products they sell.
Selling products straight to customers can also be new for businesses that sold them through a second company. Previously, customers might have bought kitchen cabinets at a home improvement store. Now, theycan buy them straight from the manufacturer. The same company will also install the cabinets. This setup could fit many types of building product manufacturers. Those that sell windows, carpets, doors, faucets, or other building materials could all install their products.
Adding services to keep up with changing demands doesn’t need to be difficult. Manufacturers can team up with third-party contractors. These service providers become integrated into the shop experience. This setup allows manufacturers to offer services to customers without dramatically changing their businesses. Companies that want to keep everything within the business can instead choose to provide their own service staff members.
Adding services has the potential to help manufacturers in numerous ways. Benefits include providing stability from seasonal changes, adding profitability and revenue, meeting demands of consumers, and distinguishing the brand.
Using IoT to include services
IoT is helping manufacturing companies use technology to drive new business processes and business models and offer new services. It allows new ways of running the business to meet the needs of companies and consumers. The products are connected to IoT with sensors and software that allow functions like remote monitoring. These kinds of benefits can help companies keep track of their products to check for defects and provide services.
In particular, service enablement can be used as an IoT scenario with building products. Companies can use service enablement to bring together different providers to create a service-oriented business model. Using IoT, companies could use a program to integrate their products and services, and to efficiently run the new type of business.
Heraeus Additive Manufacturing is a company that has used a technology platform to incorporate its additive manufacturing process into broader production and supply chains. A specific platform can help manufacturing companies better collaborate with service providers and other companies. Virtual project rooms help the different companies work together to meet supply and demand needs. Head of Heraeus Additive Manufacturing Tobias Caspari said that this type of virtual platform streamlines the process of collaboration between different experts.
Customers are demanding more from companies. Many manufacturing companies are finding ways to satisfy that demand by offering services on top of products. For example, they now install and maintain the products they sell. They are using technology to manage the different parts of the company. It helps different companies work together to meet customer demand. Manufacturing companies that don’t keep up with this type of change can expect to lose relevance with consumers. Using technology and new business methods helps discrete manufacturers compete and improve their businesses.
Our research at Young People in Social Action (YPSA), Bangladesh revealed that developing multimedia talking books would not be enough to ensure proper learning among students. For that to happen, the students required access to rich vocabulary libraries for proper understanding of language. (We have been supported by a2i program’s Service Innovation Fund to develop Bangladesh’s first accessible dictionaries in English and Bangla available in both online and offline modes.)
People are amazed to see persons with visual impairment using computers and smartphones. This has been made easy thanks to the open-source screen-reading software that can convert text to speech. People with visual impairment can also use the standard QWERTY keyboard just like everybody else as it has become second nature. Among the 50 people working at YPSA, 32 have a disability. ICTs have helped them overcome physical barriers.
In the role of a2i’s national consultant for disability, I am working on making different websites accessible for all following W3C’s Web Content Accessibility Guidelines (WCAG) 2.0 standard to achieve sustainable goals by 2030 where no one would be left behind. Among these websites, the most significant one is the National Portal which is a harmonized system of public websites that reduce the hassle, time, and costs incurred by citizens in accessing and availing themselves of government information and services.
I am also leading an initiative as part of a2i to encourage the Bangladesh government to take the steps necessary to ratify the Marrakesh VIP Treaty to facilitate access to published works for people who are blind, visually impaired, or otherwise print disabled. The Marrakesh VIP Treaty is an international agreement that will help an estimated 285 million blind people worldwide have greater access to books published in accessible formats. Implementing the Marrakesh VIP Treaty would remove restrictions on the ability of Bangladesh to import legally-produced audio and Braille books without specific permission from the publishers.
Now that I look back at my life, I cannot help but be amazed. While I did not have any teachers at school trained to teach blind students, here I was, about 15 years later, teaching blind people how to access content using the power of ICT and the Internet. For the last 20 years, I have been closely working on promoting accessible technology and information for people with disabilities. In the process, I have engaged in multiple dialogues with leading think tanks and policymakers who are promoting the agenda of accessible information for all, including the Internet Society, APNIC, the DAISY Consortium, ITU, the Accessible Books Consortium of WIPO, and the Global Alliance of Accessible Technology and Environments (GAATES).
Lastly, I tried to inspire people in my community to move forward to use “accessible technology” for the betterment of all and to create a community so they can take another big step towards living their lives with blindness. I am ever grateful to YPSA for trusting my abilities. I acknowledge Access to Information (a2i) program for their overall support in implementing initiatives for the empowerment of persons with disabilities. I strongly believe that together we can build a world free of barriers.
Vashkar Bhattacharjee will be attending the Internet Governance Forum (IGF) later this month as an IGF Ambassador, where this year’s theme is Shape Your Digital Future. He welcomes other attendees to reach out to him to learn more about his work.
The Internet Society strives towards a future where “The Internet is for Everyone”. Visit the Accessibility Toolkit page to learn how every person in the Internet community can contribute to a more accessible Internet.
In my last blog, I talked about characteristics of manufacturing IoT innovators that help them outperform others in the industry. Here, I will talk about the short-term and long-term investments your company needs to bring your IoT transformation to fruition.
Interest in the Internet of Things (IoT) among manufacturers has reached a fever pitch. Executives in every sector recognize opportunities to improve quality, speed, security, and costs by applying smart devices to operations and plant processes.
Unfortunately, hoping for IoT benefits isn’t enough to achieve IoT success – especially when a company doesn’t have the network infrastructure and information technology (IT) to deploy IoT solutions. Yet many executives simply don’t realize how complicated and far-reaching an IoT transformation will be.
Vision, strategy, and leadership: An IoT deployment will link many functions and fiefdoms within an organization; to make sure that connection leads to collaboration, senior executives must offer strategic guidance and commitment. That’s a problem at most companies, because only 11% of manufacturers have implemented an IoT strategy for operations. Even worse, 10% of manufacturing executives “don’t know” who leads their company’s IoT strategy. It’s no wonder that the biggest IoT challenge in operations is “identifying opportunities/benefits of IoT” (44% of manufacturers).
Skills and experience: Industries as diverse as consumer goods, chemical processing, and textile milling can leverage the IoT – if they have the smarts to do so. The IoT requires new skillsets within plants and among suppliers. The ability to incorporate high-tech electronics into products – including commodities such as concrete, fabrics, rubber, etc. – will be new to most manufacturers. More than a third of manufacturers report that skills/talent to leverage data/intelligence is an IoT operations challenge.
Network capabilities and capacities: Antiquated technology is the biggest IoT headache that manufacturers encounter in capturing, communicating, and leveraging data from operations. Only 10% have network infrastructures capable of machine-to-machine communications, and just 13% have networks capable of machine-to-enterprise communications. A quarter of manufacturers report that network capacity is a problem, too. And even when technology and bandwidth are available, cooperation among operations technology (OT) staff in the plant and IT staff in the business is often limited, hindering transfer and optimization of IoT data.
Manufacturers can achieve game-changing competitive advantage with the IoT – but few are ready. Most still need to develop networks, systems, and applications that transform data into insights. That will require short-term upgrades (e.g., update antiquated equipment, sensors, and controls; apply IoT intelligence to pressing problems, such as safety and data security) and longer-term investments and change (e.g., connect enterprise and supply-chain data streams; combine IoT intelligence with business analytics for improved forecasting, planning, and decisions).
Can your IoT infrastructure deliver on the promise of the IoT?
Stay tuned for more on how your company can increase productivity and profitability with IoT, analytics, machine learning, and artificial intelligence. In the meantime, download the report “The IoT is Delivering the Future – Now” to learn more about the complexity of an IoT transformation.
Business model innovation has become an increasingly hot topic in management circles, and understandably so. No management activity is more important than having clarity about how the organization creates, delivers, and captures value. It requires, among other things, knowing what customers want, how value can be best delivered, and how to enlist strategic partners to achieve maximum benefit.
Although the ability to develop strong value propositions can enable companies to “get by,” in our view many of today’s most successful businesses are those that are able to place themselves in the “sweet spot” of business model scalability. Scalability is about achieving profitable growth and is therefore a fundamental consideration for managers and investors alike. If managers are incapable of factoring scalability attributes into their business model design, they risk being left behind, much the way bookstores owned by Borders Group Inc. were eclipsed by Amazon.com Inc.
Over a five-year period, we studied scalability in the context of more than 90 Scandinavian businesses and also examined the experiences of a number of well-known businesses, including Google, Apple, and Groupon. (See “About the Research.”) In the course of our research, we identified five patterns by which companies can achieve scalability. The first pattern involved adding new distribution channels. The second entailed freeing the business from traditional capacity constraints. The third involved outsourcing capital investments to partners who, in effect, became participants in the business model. The fourth was to have customers and other partners assume multiple roles in the business model. And the fifth pattern was to establish platform models in which even competitors may become customers. Based on these patterns, we have developed a framework for identifying potential levers for business model scalability, along with a road map that managers can use to improve their business models.
Over and above the need to create value propositions that are difficult for competitors to replicate, managers need to develop business models that are capable of achieving positive and accelerating returns on the investments made. When companies restructure or invest in acquisitions, it’s common for them to identify synergies that reduce costs and simplify workflows and product offerings. However, simply thinking in terms of synergies isn’t enough; such synergies don’t necessarily lead to improvements in business model scalability. To achieve scalability, managers and entrepreneurs need to remove capacity constraints. They have opportunities to do this in a variety of ways: by collaborating with partners, by encouraging partners to play multiple roles in the business model, by creating platforms to attract new partners, or even by working with current competitors.
Accelerating Returns to Scale
What do we mean by “scalable”? We use the term scalability to identify where changes in size or volume are possible and seem worthwhile. Scalability refers to a system’s ability to expand output on demand when resources are added. Linking scalability to business models provides us with a framework for discussing and estimating business potential, which is important to both executives and many stakeholders because, among other things, it has implications for hiring and skill development. Another important characteristic of scalability is that the organization has sufficient flexibility to grow while incorporating the effects of external pressures, such as new competitors, altered regulation, or macroeconomic pressure.
The first dimension of scalability is the degree to which increased input can create higher output. The second dimension of scalability relates to the ability of the business model to accelerate the returns on the additional investment. Accelerating returns to scale are typically found in business models where new resources, capabilities, or value propositions provide completely new properties to an existing industry.1 Amazon.com’s retailing business model offers a good example. For example, the company’s algorithms introduce customers to products they may not have considered but might be of interest to them as they shop online.
In those situations where returns to scale are declining rather than increasing, managers should figure out how quickly to exit the business. If the returns are falling precipitously, it might make sense to pull out quickly. Even when returns are flat, further investments may be unattractive. As a general rule, executives should invest capital where they can generate increasing returns to scale.
Scalability Patterns in Business Models
A scalable business model is one that is flexible and where the addition of new resources brings increasing returns. In the course of our research, we searched for business model attributes that were sufficiently flexible to cope with internal demands and external forces and where the potential wasn’t constrained by physical or material assets (such as labor shortages, machine capacity, cash liquidity, or storage capacity). Below we will examine the five patterns of business model scalability individually.
Pattern A: Add new distribution channels. While the notion of selling through multiple distribution channels isn’t novel, it’s useful to understand what happens when an additional channel is added. As long as the implementation of a new distribution channel does not cannibalize sales in existing channels, adding a new sales channel can allow a company to spread the costs of overhead and reap benefits from increased sales.
We found this to be the case at Copenhagen Seafood A/S, a Danish supplier of fresh fish. The company, which had traditionally sold only to high-end restaurants, added the sale of fresh fish directly to retail customers, enabling it to offer restaurant-quality seafood to individuals at reasonable prices. Because restaurants typically ask for specific cuts of fish, the percentage of waste can be high. By adding the retail channel, Copenhagen Seafood was able to cultivate a new clientele with people who relished the opportunity to buy from a seafood supplier closely associated with some of the city’s best-known restaurants.2
Pattern B: Explore ways to work around traditional capacity constraints. Scalability often means finding ways to overcome traditional capacity constraints. Obviously, constraints vary from industry to industry. In the pharmaceutical industry, the constraints might involve the cost of establishing research infrastructure and the ability to develop new products and receive approval for new products. However, when viewing constraints from the perspective of business model innovation, companies should ask themselves if they can find ways to work around existing constraints. In the private banking sector, for example, a company might bypass capacity constraints by focusing on customer relationship activities and outsourcing infrastructure management to others. In a similar vein, a consulting company with a business model focused on hourly billing for large government organizations explored bypassing that constraint by marketing standard outputs and simpler reports to a new customer segment consisting of smaller businesses.
Pattern C: Shift capital requirements to partners. Every organization needs to prioritize its investments and determine which are most critical. CFOs are encouraged to optimize the cash liquidity constraints, cash flow, and working capital attributes of their business models. Given that many companies place a high value on cash, business models that shift capital requirements to strategic partners can be desirable.3
One company we studied was Sky-Watch A/S, a company based in Støvring, Denmark, that develops and manufactures drones suited for a variety of industrial settings. Sky-Watch’s business model has fewer resource constraints than some of its close competitors thanks to management’s decision to concentrate on turning the core platform into an open platform that allows customers and strategic partners to add their own hardware and software.
Pattern D: Leverage the work of partners. Companies need to pay attention to what their customers and strategic partners value. Managers should use this knowledge to optimize the value proposition of the products and services they offer to customers. The key is to find smart ways to leverage the resources of partners. For example, Tupperware Brands Corp., based in Orlando, Florida, is famous for leveraging a community of sales representatives who have an interest in selling the company’s food-storage products to a widening circle of people. Groupon Inc. likewise turns customers into partners by giving them incentives to spread the word about the company. Similar strategies can be leveraged for distribution methods, building customer loyalty, giving access to resources, and performing other activities according to the value configuration of the business model.
Pattern E: Implement platform models. A variation on leveraging partners involves using platform-based business models. Platform models are based on collaboration and can take different forms. For example, PrintConnect.com of Würselen, Germany, operates a web-based workflow platform for printing and packaging that links partners across the value chain. Some platform business models predate the web: Visa Inc., which connects businesses with credit card users, is an example.
When looking at business model innovation from a platform perspective, an important question is, “How do we turn competitors into partners or perhaps even customers?” For example, The Relationship Factory,4 a company based in Aarhus, Denmark, that organizes professional networking groups for managers, opted for a platform model to achieve business model scalability. It makes its software platform available to competitors on a private-label basis, thereby providing the company with a supplemental and recurring revenue stream on top of its traditional service-based activities. While competitors continue to rely heavily on their sale of service hours, the company is able to generate incremental revenue by selling “ease of use” to its competitors as well as benchmarking data across the industry.
A Road Map to Business Model Scalability
The patterns we have discussed above describe how companies can adjust their business models to make them scalable. While traditional thinking typically leads to synergy effects and, at best, positive returns that are linear to the investments, some of the companies we studied showed that it was possible to redesign business models to achieve accelerating returns. However, achieving accelerating returns is not easy. It requires thinking strategically in terms of the value propositions of stakeholders, strategic partners, and customers involved in the immediate business ecosystem. Aligning and leveraging the competencies and motivations of these stakeholders can lead to better cooperation. It can also build greater trust and loyalty among partners, which will pay off in the long term.
To implement the patterns for scalability, it is often necessary to identify activities and resources where collaborating with partners is advantageous and can strengthen the offering’s value proposition to customers. These patterns can assist managers in rethinking how their business models make use of partners, customers, and other stakeholders. Rather than just relying on traditional analytical exercises such as analyzing cost structures, product-segment profitability, and market-segment growth, managers can work on achieving business model scalability by asking a different set of questions. The questions will often lead to the identification of new partners and potentially new roles.
We suggest that companies pursue three steps:
1. Identify potential strategic partners. Scalability typically involves connecting strategic partners to the value proposition, either through sharing activities or resources. Given that scalability requires thinking beyond simply sharing costs, executives should ask themselves the following:
Are there potential strategic partners that could perform activities in our business model — or provide resources to it — in ways that would help improve the value proposition to our customers?
2. Ask questions that reveal a road map to scalability. Asking questions can trigger ideas about how to reconfigure a business model. When encountering novel ways of doing business, managers should analyze how such a business model would play out for their own company. We have found that the following questions can be helpful:
How does this novel business model challenge our existing way of thinking about the business?
What would we need to do differently to implement this business model?
Which other companies excel at what we are trying to do, and what can we learn from them?
What are the key value drivers of this particular business model?
Could this business model lead to scalability?
Based on the ideas you are able to generate, we recommend using the following questions to help clarify potential avenues for scalability:
Are there potential strategic partners that can offer features (at minimal or no cost to our company) that enrich the existing value proposition to our customers, while receiving value themselves?
Are there alternative configurations that free the business model from existing capacity constraints?
Would it make sense to establish a platform for other businesses to buy into — and thus create alternative ways of generating revenue?
Is it possible to change the role of existing stakeholders and utilize them in multiple roles in the business model?
Who would pay for either access to our customer base or knowledge about our customers and their characteristics?
Which mechanisms are in place to create customer lock-in?
How agile is our company in reacting to threats from new entrants or new technologies?
3. Analyze the scalability attributes of business model options. When all of the ideas generated have been presented, executives should facilitate a discussion to start to evaluate potential business models. They should analyze the attributes of the various options and consider how they might be configured to achieve accelerating returns on investments.
Traditionally, some companies have developed business models that focus on achieving economies of scale while other companies have been more geared toward creating economies of scope through differentiation. We have found that scalability goes beyond this traditional distinction and that identifying the sweet spot of business model scalability involves identifying accelerating returns on input.
In cases of declining returns to scale, managers should focus on downsizing the business so as not to cannibalize existing value. In cases where the returns on additional inputs are constant, managers should attempt to find ways to increase returns or invest excess capital elsewhere. When the business is able to generate positive, albeit linear, returns on additional inputs, the existence of synergies can make this a favorable place to be, although the company may be stuck with a business model that is at best average. In this case, managers should attempt to improve their business model using one of the five patterns described above.
Having a road map for business model scalability can be enormously helpful for managers, whether they are involved in developing new business models from scratch or innovating, rejuvenating, or redesigning existing business models. Although much of the recent research about business model innovation examines the alignment between value propositions and customer needs,5 business model scalability depends on close alignment between the value proposition and strategic partners.
The patterns we have identified as gateways to scalable business models (for example, enriching value propositions, removing capacity constraints, and changing the role of stakeholders in business models) provide avenues for managers to explore. Identifying business model configurations that allow for such characteristics should be a top priority for managers as they develop and review their corporate strategies.