Service- and Data-Centric Business Models Based on IoT and Industry 4.0
Traditional business models “Made in Germany” are under attack: products are becoming interchangeable, generating innovations with genuine added value for the customers is more difficult, global competition (China as one example) is catching up, and the price pressure from disruptors and intermediaries is reducing profit margins. On the other hand, service- and data-centric business models hold promise of growth.
Export-oriented core industries in Germany such as the automotive industry find themselves confronted by daunting challenges that are by no means limited to Dieselgate and political uncertainties such as possible tariffs on international trade. Customer expectations passed the boundaries of traditional product business long ago. Even the classic service model — starting with advice, then support, maintenance, and repairs after delivery — is running up against its limits. Demand has shifted recently in the direction of product-as-a-service: customers pay solely for what they use, and the manufacturer or provider retains ownership.
Many companies have already set out on this path. Well-known examples are car2go and DriveNow. Business models of this type are based on functions that, lumped together under the general term Industry 4.0, have become a part of product design and functional features: state-of-the-art electronics make up over 30 percent of the value of a car, coffee makers are computer-controlled and programmable, there are sensors communicating with smartphones in sneakers — the list goes on and on. Almost all articles of daily use can be interconnected and communicate with one another today. We are speaking here about cyber-physical systems that communicate with one another and with an infrastructure via the internet of things (IoT).
This is the path that must now be followed unerringly. For instance, Kone, the Finnish elevator manufacturer, will put more than a million elevators, escalators, and doors worldwide into the cloud in the coming years. The concept of 24/7 connected services stands here as well as a typical example of a modern business ecosystem: during the realization of the IoT connectivity, Kone will be supported by T-Systems, which will handle the cloud infrastructure, and by Huawei, which will provide the hardware for the connectivity. The aim and added value of the IoT solution is to offer a service portfolio as part of the Kone Care maintenance solution that can be individually tailored to customer wishes and requirements. In addition to customer-optimized maintenance, Kone's solution promises improved analyses and detailed diagnoses that contribute to higher performance and availability of the elevator systems. Kone expects its solution to provide improved analyses and detailed diagnoses that will contribute to greater performance capability and availability of the elevator systems. IBM has a role to play as yet another partner in the ecosystem. The data are analyzed with the help of Watson. This is only one small step removed from a business model in which Kone sells elevator utilization and no longer elevators and elevator installations.
Production companies that want to offer customer-centric services of this type generally discover that the new business models require skills they must first develop over time. While products are sold on the basis of price and features, service level agreements must be negotiated, operating processes must be implemented and monitored, and new price models must be developed when it comes to services. The business of services is also subject to another type of risk: whereas products are produced for storage in warehouses until they can be sold profitably at some point, the utilization of services fluctuates and demands management of capacities and revenues — often in real time. Frequently, the target group addressed directly for the service differs from that for the product so that marketing and communications must be redesigned. Moreover, a different group of competitors may become relevant for the new service portfolio.
Persevering in their existing business models is not a realistic option for many companies, so they must very carefully and cautiously plan and set out on the high-risk road toward the destination of customer-centric services. Besides the new challenges of the market, it is often necessary to overcome the forces of inertia within the company. An overnight revolution will rarely be successful. A step-by-step approach has proved to be appropriate in many cases of daily practice.
Missteps must be expected, and it may be necessary to make course corrections — methods such as design thinking or scrum as well as the Company ReBuilding approach based on cell division offer precise assistance. Initial successes generate motivation and momentum for the change. Overarching planning and strategy help to prevent the loss of focus on the desired direction. The right start is a decisive point for successful step-by-step realization. It provides the time for an evolutionary transformation before old and new competitors occupy the field.
Technology competence as the basis for new business models
A high level of technology competence in the company is essential for the success of new, customer-centric business models. It supports the future business models in two ways:
- For one, the new solutions cannot be realized technically without the technology. The communication of intelligent sensors in Kone’s elevators with web-based and in-house applications via wireless networks with full-area coverage demands a highly complex ICT solution.
- For another, employees from the IT department can act as catalysts for corporate transformation because most IT departments have long since become accustomed to thinking in terms of service orientation.
An IT department that is structured with an orientation to the future and thinks beyond the traditional world of ERP and office coupled with intense dialog with this IT department can be decisive for the success of the digital company. The following measures are important for exploiting the potential of IT:
- IT must enjoy the appropriate prestige in the company. If technology and IT drivers are the basis for future business models, IT must no longer be viewed as just a cost center, and the CIO, perhaps in the role of the chief digital officer as well, must be integrated directly into business responsibility.
- In technical and organizational terms, interfaces must be created between the classic business IT (which provides ERP and workplace solutions) and process and production IT (which — depending on the industry — is concerned with topics such as Industry 4.0 or SCAD systems) and the part of the IT that takes care of apps or applications relating to the internet.
- IT must also be brought into proximity to the business at the work and cultural level. The membership of successful innovation teams brings together various disciplines and includes representatives from business development, sales, product management, and IT. These teams require space for creative, interdisciplinary thinking that can be created by methods such as design thinking.
Data-centric, digital business models on the advance
By and large, the basis for service-centric business logic is the comprehensive use of data — from within the companies and from third parties. The internet sets the pace. Every industry and every company will find it worthwhile to understand the mechanisms in place there and to mirror them in its own portfolio.
The organization of information and the creation of virtual global information networks have become dominant success factors on the internet. Leading global players such as Google, Facebook, or LinkedIn have become information repositories that no longer sell physical goods or services directly on the basis of complex infrastructures, but offer instead data-centric products. They are information brokers who compile information from various sources, enable customers to contribute to the knowledge base of the company (prosumer approach), then store information in a structured and computer-oriented form and make it available via various channels.
These companies have been able to create a lock-in effect for their customers by offering a simple user interface and simple access to the stored information; by creating a database that is difficult to imitate and that gains in value from increased use by customers; and by developing special algorithms that generate the best possible benefits from the data. In many cases, their names have become synonymous with the market areas they have created.
Another key to market success on the internet is in the ability to use what is known in internet business jargon as the long-tail effect: the development of fully-automated customer interaction processes and the possibility both to serve and to use the diversified interactions of a very large number of users. Business models used by internet players enable them to earn money with every interaction, either directly (the PayPal model) or indirectly through advertising (the Google and Facebook models). In addition, they collect this diversity and integrate it into their database, increasing the value of their knowledge storehouse even further.
Data-centric, digital business models as successful growth drivers
Data-centric, digital business models have established themselves as major drivers for growth. The speed of developments has accelerated steadily as technologies such as big data and artificial intelligence have matured and left behind the signs of their impact in the business environment. Both new opportunities and the effects on current business models are great, and they will remain so. It is therefore important for all companies — without regard for industry and size — to begin to formulate their own service- and data-centric strategy and to gain experience during the initial steps of its realization. An interesting starting point could be to take advantage of an approach that we call data thinking to draft an overall view of the relevant data and on this basis to develop an understanding of the effects of data on one’s own business model and to be able to utilize data in the new business model.
The world is currently going through a so-called technology shock. The digitalization as the trigger redefines the parameters of economic action and changes whole societies. The drivers of our global economic system deal with it in different ways. The Silicon Valley model from the USA is based on creative destruction, i.e. digital platforms with a global reach are emerging in competition with established companies. The Chinese model, on the other hand, is based on a domestic market massively protected by the state and is currently proving to be particularly competitive in economic terms. The distribution of Fortune 500 companies shows significant growth, especially in Asia, while the number is declining in the USA. A shift to the East can also be seen in technological competence, including standards.
How do Germany and Europe move between these two dominant digital models? There are signs that a "European path" of its own is developing. In our view, cutting-edge technology and leapfrog innovation, originally the foundations of our established industry, are once again the key competencies in which we must invest all our resources. The "European Approach" requires ecosystems and a digital reengineering of established businesses for global relevance.
Our customers and business partners also confirmed this orientation at the premiere of the Detecon Red Carpet Event in September 2018. We have compiled the essence of this "European Path" for you in the magazine Rebuilding Europe.