How the Internet of Things Changes Business Models

Abstract illustration with logistics infrastructure Image source: www.kerlink.fr

Abstract illustration with logistics infrastructure Image source: www.kerlink.fr

There has been great discussion about how the Internet of Things will change so much, but less of this has perhaps been devoted to how business models may change than might be expected. This is the topic of a recent discussion by Gordon Hui (2014) writing for the Harvard Business Review. As Hui explains the likelihood of change to business models is huge, and the changes may be quite transformational. Hui argues that it will be necessary to rethink what “value creation” and “value capture” mean in this context. Starting with value creation, Hui explains that this involves:

“…performing activities that increase the value of a company’s offering and encourage customer willingness to pay.”

Value Creation

This is considered by Hui to be central to current types of business model. Under this type of model, value creation involves companies competing with each other on features and innovation in this regard. This is followed by competition on price. However, Hui believes that with the Internet of Things products are not released in the same way. That is because as he explains, it is possible to make “over the air updates” that can be sent to customers regularly. That means that organisations can respond to customer behaviour much more quickly than in the past, transforming the idea of a feature against feature competition between organisations. Additionally the fact that products can be connected with one another, according to Hui provides the opportunity for value creation in areas such as analytics, forecasting, process optimisation and customer service.

Hui summarises the value creation changes by arguing that in a traditional product mind set, the customer needs focused on are existing needs, and production reacts to what customers want. In the Internet of Things, however, it is believed that it will be possible to address customer needs in real time, and to predict needs. The product offering in the past would have been a stand-alone product that becomes outdated over a period of time, according to Hui. In the new scheme of things such products would be regularly refreshed so that they do not become obsolete and also linking them with other products will create synergy and usefulness. As well as this Hui argues that in value creation an “information convergence creates the experience for current products and enables services.”

Value Capture

Turning to value capture, which Hui defines as being the “monetisation of customer value”, it is argued that in the past companies have captured value by setting the right price in order to get the maximum profits possible from sales of each product unit. Organisations have sought to make themselves more competitive by controlling key points in the value chain according to Hui. Hui argues that the path to profit will not revolve around selling the next product, but rather will focus on enabling recurring revenue instead. Control points will not be IP ownership and such, but will rather be more likely to be ways to add personalisation and build network effects between products. Additionally capability development will focus not just on core competencies and existing resources and processes but instead on understanding how other organisations in the same ecosystem make money.

In particular, Hui argues that in the Internet of Things there are more opportunities to expand control points. Personalization and context that is achieved through information gained over time is less likely to make the customer want to change provider. As Hui puts it, they become more “locked in”. At the same time, Hui believes that growing internal capabilities will be less important than looking at how potential partnerships can be leveraged so that partners working on the same opportunity can create long term success for both. The company can no longer be seen as a vacuum according to Hui.

Taking it back to Michael Porter and the strategies of competition, Hui opines that the strategies outlined in this classic book of differentiation, focus and cost leadership are still in existence today. However, he also believes that these strategies cannot be seen as being separated from one another, and they are becoming increasingly connected. It is Hui’s belief that companies will have to bear this in mind when pursuing success in a world of the Internet of Things. It remains to be seen whether he is right.