Harvard Business Review (October 2005)

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Conducting a DICE Assessment

Where aggregators do choose to deliver services directly to the customer, they now own that relationship as never before, with distinct barriers to competition. Aggregators cannot be cut out of the services loop by competitors or channel partners because their possession of device-generated data allows them to offer services more intelligently and profitably than entities that cannot see into the status of the products in question.

Aggregators will make larger investments in data warehousing and data mining than will embedded innovators, and they will achieve some of their ROI by providing smart services to their distributor and system-integrator partners. For example, a large percentage of installed uninterruptible power supply UPS devices contain dead batteries.

Unfortunately, users discover this only when these devices fail to work during a power outage. In the embedded innovator model, a networked UPS device could initiate its own order for a battery replacement from the vendor—in itself, a smart service. But imagine how an aggregator could build on that opportunity. Eaton Electrical a global leader in circuit breaker technology , for instance, is bringing something called Home Heartbeat, a home monitoring system, to the consumer market.

Eaton has partnered with companies that sell power-quality devices, such as fire alarms, backup generators, and the UPS devices mentioned previously.

The story is all the more interesting because it goes beyond the business-to-business realm, bringing the benefits of machine-to-machine communication to home owners. Cleveland-based Eaton started out in making axles and other truck parts and later diversified into other engineered components, including residential circuit breakers. As the end of its first century in business approached, it found itself in very mature businesses fighting with established competitors over every point of market share.

The system they envisioned, recently launched as Home Heartbeat, monitors the status of a home and alerts the home owner when something is amiss. That base station communicates with a key fob device carried by the home owner. The system can also be instructed to send an e-mail or text message to a cell phone if there is a change in the state of a sensor. Pause for a moment to consider how useful this would be. You can check your key fob to be reassured instead of having to turn back. The key fob device works only within a certain range of distance but does capture data about the status of your home as you left it.

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Home Heartbeat features a water shut-off valve that can be automatically activated by sensors. Home Heartbeat is a good example of smart service innovation: Eaton built awareness and connectivity into the devices it was already selling and, in this way, was able to position itself not just as a product vendor but also as a service provider. No longer consigned to an obscure corner of the basement, the Eaton brand now stands for total home awareness.

And the company is now in the role of aggregator, courting an entirely new range of partners, from wireless carriers to insurance companies. Illinois-based Gardner Denver has a similarly expansive vision of how it might aggregate information from many sources to serve buyers of its air compressors. As a result, customers can buy subscriptions from the company and can receive performance trend information and preemptive maintenance service. But while Gardner Denver makes the compressors, any application of compressed air calls for a total system that includes components such as air coolers, filters, and dryers.

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The opportunity is especially appealing to a manufacturer like Gardner Denver, which is not the biggest in its industry and must sell through channels that are hardly captive to it. If it can use networked devices to tie customers, distributors, and other support elements into a closed-loop, asset management system, it can participate in the highest-value deals instead of being cut out of them. It is possible to succeed in the age of smart services simply by providing intelligent devices that play well with others. When you set out to create a product that can contribute valuable data or functionality to other connected products, you are pursuing a synergist model.

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Consider the Dutch electronics manufacturer Philips, which specializes in lighting ballasts and controls. The company believes there could be a huge opportunity for value creation if complementary manufacturers in building-systems equipment could share their data. That is, if data could be collected from all the electrical devices in a commercial facility, the aggregated information could then be used to create extraordinary levels of customer service. So Philips is helping to build a community of several parallel players in the commercial building-management arena in order to leverage all the valuable data about usage patterns, potential energy savings, and the like.

Through its participation in the ZigBee Alliance, a group formed to further the ZigBee standard, Philips has been pursuing a synergist model with several important global partners. What will stand in your way as you try to move forward in one of these business models? Automated information gathering can easily generate trillions of data points every day for a typical product manufacturer.

Each of these data points may be very tiny the torque, pressure, or temperature of a specific component or the physical location of a product , but they must all be validated and stored and then subjected to the sophisticated techniques data smoothing, data mining that turn them into intelligence that can be acted upon.

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For example, companies pursuing RFID-tagging initiatives will need organizationwide data standards and new middleware to synchronize the data from disparate sources into compatible formats. These initiatives hit a ceiling, though, when the expense of implementing them became hard to justify.

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  • Often, a smart services initiative will benefit each functional area to varying degrees—either in the scope of advantages gained or in the time needed to realize advantages—making it hard to get everyone to agree that the initiative makes sense and should be considered a financial priority. The frustration in organizations is immense, as middle managers who believe in the potential of smart service try to elevate the topic to a strategic level.

    A different manager invited us to his company for a presentation on the need to invest aggressively in remote services. What seems to be missing is a good script that communicates the opportunity to senior management in a compelling way.

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    If not, we expect the script ultimately to be handed to business leaders by equities analysts. Meanwhile, most product-centric companies remain at least a full step behind in their thinking. They know that their best hopes for growth lie in increasing the services component of their businesses, but they are focusing on the same kinds of services that have always surrounded their products. Their plan is to capture the adjacent service markets currently owned by other companies and persuade customers to pay for the marginally enhanced services they used to provide gratis. Making the ubiquity shift is challenging, but it starts with a simple insight: A device that can report back to its maker on its status and usage represents the foundation for much richer and longer-term customer relationships.

    For any given company, it may make the most sense to be an embedded innovator, a solutionist, an aggregator, or a synergist. But woe to the company that takes none of these paths; it will soon find its best customers locked in—and happily—to other smart service providers.

    Glen Allmendinger gallmendinger harborresearch. Ralph Lombreglia is a vice president at Harbor Research. Business models.

    Harvard Business Review, October 2005

    Glen Allmendinger Ralph Lombreglia. October Issue Explore the Archive.

    What Makes Service Smart? Connected products will be able to perform the following functions: Status. Status applications capture and report on the operation, performance, and usage of a given device or the environment being monitored. Diagnostic applications enable a device to self-optimize or allow a service person to monitor, troubleshoot, repair, and maintain devices. Upgrade applications augment the performance of a given device. They prevent problems with version control, technology obsolescence, and device failure. Control and Automation. Control and automation applications coordinate the sequenced activity of several devices.

    They can also cause devices to perform one-off, discrete actions. Profiling and Behavior Tracking. Profiling and behavior-tracking applications monitor variations in the location, culture, performance, usage, and sales of a device. These applications can create more customized or predictive responses for end users. Replenishment and Commerce. Replenishment and commerce applications monitor consumption of a device and buying patterns of the end user. These applications can initiate purchase orders or other transactions when replenishment is needed. Location Mapping and Logistics.

    Location mapping and logistics applications track and optimize the service support system for a device. These applications also support supply chain and sales activities.

    In general, a device is not a candidate for networking if it: Is not mechanical or electromechanical Is very simple or inexpensive and thus not worth the initial investment of networking Has no important information to share Has no available or reliable network access Has a very brief or very long year-plus life span The benefits of networking depend on the context, but there are some important issues to consider when deciding what to network: The Impact of a Device Failure.

    Not every failure is catastro-phic. What's in the Journals, February Business manners: Anything but love, actually. Management: The wood as well as the trees. Company bosses: Executive couching. Why honesty is the best policy. Churning at the top. Corporate bosses are being hired and fired like never before, and many more will go as the economic slowdown in America bites.

    Why is it proving so hard to find good leaders these days? Business books 3 : Of mice and man. The Ukrainian connection : How close does the Ukraine scandal bring Donald United States September 23rd, Streaming consciousness : The Emmys reveal a fragmented television Prospero September 23rd, Daily chart : Do congressional retirements help predict American election Graphic detail September 23rd, Business and finance September 23rd, Podcasts September 23rd, Populists together : Donald Trump plays the role of warm-up act to Narendra Democracy in America September 23rd, Islam and politics : Why American Muslims lean leftwards for Erasmus September 22nd, Want more from The Economist?

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