Industrial Strength Business Modeling

8 Strategies to Transition to a Product-as-a-Service Business Model

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Bsquare senior director of products Dave McCarthy agrees: The best power-by-the-hour pitches come with added benefits. General Electric, for instance, leases jet engines but also will help airlines optimize fuel consumption. I get worried any time you get into a service contract where things are included in the price you pay that you have no control over.

The shift from selling a product to a service can send ripples reverberating throughout an organization. To pull off the transition, an organization must weigh how the change will affect everything from accounting to IT architectures, business procedures, and sales and marketing. Public companies switching over to an as-a-service model will likely have to adjust their quarterly earnings reports, taxes, sales procedures and marketing activities. It is one reason you see more industrial companies adding chief digital officers to their rosters and developing IoT centers of excellence.

Executives can start assessing their in-house expertise, but there will likely be gaps. Steve Brumer, a partner at Advisors, says it is vital to have the right executive talent when leveraging IoT to change business models. As IoT explodes and more companies want to get into it, you will have to have more of an executive focus to help pull all these pieces together.

If you are on the buying end of an as-a-service contract, you will likely assume that the vendor selling it will assure that it is secure. Security, however, is rarely so simple in the world of enterprise IoT. Simply put, as the scale of IoT increases to encompass tens of billions of devices, so does the attack surface for cybercriminals. This fact incentivizes all companies involved to minimize their liability and risk.

What is a Business Strategy?

One key area for this is in the implementation. If something goes wrong, both parties are likely to point fingers. Another consideration is monitoring the traffic to and from IoT devices. Scrutinizing traffic analytics, IoT device traffic flow and metadata telemetry reduces risk. Legal frameworks guiding as-a-service contracts could have a dramatic effect on power-by-the-hour contracts. Ultimately, it is highly likely that government will play a bigger role in regulating industries deemed as critical infrastructure, Zahn says.

Such business models could gain a foothold when it comes to analytics-as-a-service or managed services, he says, but are not likely to gain ground in systems that have primary responsibility for production and safety. A maker of farm equipment, for instance, could get into the commodities market by leveraging data from its network of connected tractors and harvesters. In a similar vein, Caterpillar recently increased the size of its data services unit to help support the growth of its network of , connected sensors installed in machinery globally.

The goal of the initiative is to sell its customers custom reports and analytics to help inform the management of building and mining projects, according to a post in WSJ. The sellers in such business models can use data to boost their customer service while the buyers gain in terms of flexibility. The most-enlightened arrangement would be a mutual sharing of data that results in gains for all of the parties involved. Leveraging the Shift to a Data Centric World. Everybody wins if you get the right data to the right constituent at the right time. Tamara McCleary , CEO of Thulium, agrees on the power of sharing IoT data but stresses that organizations must be careful when considering power-by-the-hour business models.

The renter or the owner? It will likely be the latter, McCleary says. If data is the new currency of the IoT world, organizations that best harness AI and machine learning tools could dominate the landscape. In a sober-minded business world, she recommends that enterprise companies contemplate the potential ramifications of such business models. Who is on the other end and what do they have planned? Log in with your IoT World Today account. Your email address will not be published. The product-as-a-service business model is gaining popularity as companies look to establish lucrative subscription-based product lines.

To simplify the transition, follow these eight strategies. Written by Brian Buntz 14th June Read the Fine Print Through a Security Lens If you are on the buying end of an as-a-service contract, you will likely assume that the vendor selling it will assure that it is secure. Keep an Eye on Regulation Legal frameworks guiding as-a-service contracts could have a dramatic effect on power-by-the-hour contracts.

IoT Predictions for Less Hype, More Pragmatism 1. To provide a safe, efficient transportation system that supports economic opportunity and livable communities for Oregonians. From this, ODOT derives five critical strategic objectives: ODOT further explains the meaning of each objective in concrete terms. And, it provides tangible performance measures for each goal, which are useful for developing the Department's strategy. In this way, performance measures also help set targets, plan budgets, and evaluate Department performance.

Some businesspeople are not pleased when they think they have just heard that their firm's "only" objective is "earning profits. People understandably ask whether strategy builders should place these objectives on the same high-level as the profit objective. The firm takes these responsibilities seriously. And they emphasize these values in communications and reports. Their importance notwithstanding, high-level mission statements and values like these are not part of the firm's generic business strategy.

They do not use these values to differentiate themselves from competitors. The set of values, on the other hand, help shape the ways the firm designs and implements lower-level strategies, such as its marketing strategy or its operational strategy,. In most cases, the selected approach results from two choices. The strategy builder must choose: Strategy formulation Step 3 addresses the "How" question: Exactly how does the company achieve objectives?

For firms in competitive industries, the question becomes this: Specifically, how does the company win against competitors, create customer demand, and earn, sustain, and grow profits? For these firms, the generic business strategy is a competitive strategy.

Changing the Game in Your Industry

For many decades, textbooks and business articles have put forward the idea that strategic planners have essentially only two possible plans of attack: Firstly, differentiation and secondly, cost leadership. Here, the firm provides uniquely desirable products and services. Firms that choose a differentiation strategy to create and communicate uniqueness through one or more of the following Firms that pursue cost leadership goals minimize their production and selling costs. Companies with a "cost leadership" strategy can charge industry average prices and still earn handsome profits because their costs are lower than the competition.

However, firms using cost leadership may also add an element of differentiation by selling at lower prices. Even so, they can still realize acceptable margins because their costs are low. Discussions on business strategy usually refer to several ideas of Michael Porter.

These stem primarily from Porter's books, Competitive Strategy 1 and Competitive Advantage 2 Porter's approach adds a second choice for strategy builders: Porter's system allows strategy builders to select between attack plans "Differentiation" and "Cost leadership," but also to choose the level of market scope for competitive activities. The strategy may target a broad market, or it may target a narrowly focused market. As a result, under Porter's system, the strategy builder chooses from four generic competitive strategies.

Exhibit 1 shows the possibilities. In competitive industries, each firm chooses the strategy it believes it is best prepared to exploit. Making that judgment, however, calls for excellent and detailed knowledge in several different areas. Strategy builders, in other words, need access to information about their firm—some of which is public, and some of which is probably proprietary, or "inside" information.

The strategy builder identified the firm's industry in Step 1 Build on the vision. Naming the industry sector helps identify the firm's competitors. From this, the strategy builder finds which strategies are working in this market, and which are not. Incidentally, firms cannot hide their generic strategies from competitors. One firm can reasonably deduce the strategic plan of another from knowledge of the competitor's product history, pricing history, and marketing messages.

In Step 1 Build on the vision , the strategy builder also states the firm's offerings, its value proposition, its target customers, and its target market. Knowledge in the above areas may be considered the necessary "background" for choosing and building a strategic plan. From this, strategy builders sense intuitively which general strategy will serve the firm best. And they may at this point have some sense of how the firm will differentiate itself and create customer demand. This much, however, is not yet a strategy.

Strategy formulation Step 4 completes the general business strategy by developing the business model inherent in the strategic plan. Here, the challenge is to build a quantitative model, implied by the approach, that is realistic and credible. When the firm chooses to implement the strategy, the model becomes the cornerstone of the firm's business plan. In that capacity, the model also supports forecasting of sales revenues, costs, margins, and profits.

In its purest form, the business model looks like a very brief version of the firm's Income statement. Like the Income statement, the model starts with sales revenues. Estimated expenses are subtracted from these to create margins and profits—gross profit, gross margin, operating profit before taxes, and operating profits and margin after taxes.

Exhibit 2 shows two models, from two different firms, each with its generic strategy. Business models for firms Alpha and Beta. Each firm develops its model from its generic strategy proposal.

The models rely on sales and cost assumptions they believe are reasonable. Before comparing the Alpha and Beta models, it will be helpful to discuss briefly how the strategy builder creates the model from a strategy proposal and the Step 3 background information.

Innovating Business Models

The quantitative model with profits and margins develops naturally when the strategy builder makes these estimates:. Firm alpha has chosen to propose a broad differentiation strategy. The firm intends to differentiate itself primarily in these terms:. Alpha's model in Exhibit 2 shows the likely results of applying this strategy: However, Alpha's expenses for selling, administration, and overhead are also relatively high. Therefore, despite the high gross margins, the overall after-tax net operating profit margin is only 5. Firm beta has chosen to propose a cost leadership strategy, targeting a broad market.

For this, Beta will differentiate itself from competitors by selling at prices below industry averages. Success with the strategic plan depends on keeping expenses low. Nevertheless, Beta's lower cost structure still results in an overall after-tax net operating profit margin of 5. Because the general strategy objective is to increase owner value by earning, sustaining, and growing profits, Alpha will have to decide whether these results are "Excellent," "Just acceptable," or "Unacceptable.

Generic plans need support, however, from quite a few lower level strategies. Strategy formulation Step 5 completes the strategic framework that supports the general strategic plan. Success with the highest-level strategy is due to the underlying product strategy, branding strategy, and operational strategy, for instance, to name just a few. Industry analysts typically describe Apple's general strategic plan as follows:. This generic strategy focuses on key features that differentiate the firm and its products from competitors.

Through the broad differentiation generic strategy, Apple stands out in the market. For example, emphasis on elegant design combined with user-friendliness and high-end branding effectively differentiate the firm. The broad differentiation generic strategy means that Apple always aims to set itself apart from competitors not by price but by other vital features beneficial to customers.

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