Over the last 10 years, John Deere, a maker of agricultural and construction equipment, has been an industry leader in using IT to maximize productivity and minimize costs for its customers. For Deere, the most important strategic question is not how it can create value for its customers w/IT - Deere has done a great job of that and will likely continue to be a leader in this area - the most important strategic questions are: 1) what can Deere do to capture its fair share of this value; 2) how can Deere maximize the total value it creates for its customers and, in turn, for itself; and 3) how can Deere ensure that it will continue to capture this value in the future?
I will focus on the agricultural sector in the memo and have come up with a recommendation that I think does a good job of addressing questions 1) and 2):
Deere's tractors are currently interface with 2 major IT systems: a telemetrics system, which is developed and operated in partnership with Qualcomm, and farm management software, which runs as standalone applications that process field data collected by sensors on the tractors. Since the tractors are GPS-enabled, the farm management software can determine exactly how each square foot of soil should be prepared the following year. This leads to significant reductions in pesticide and fertilizer costs and higher crop yields for the farmer.
I plan to recommend that Deere merge its farm management software with its telemetrics system so that it can offer the software as a service. This would allow Deere to charge on a per-acre basis each year (capture its fair share of the value) and would allow it to sell the service to farms of all sizes (maximize the total value by selling to all segments). The part I haven't quite figured out yet is how Deere can ensure that it will continue to capture the value into the future, which gets at the question of open vs. closed architecture.
So far, Deere has kept its architecture entirely open. This has served the company well, since it has enabled advanced operation of third party equipment, like sprayers and fertilizers, from the driver's seat. It has also allowed third-party software to be easily integrated with Deere's equipment to offer key functionality. However, an entirely open architecture could potentially allow 3rd parties to offer the same farm management software services as Deere, which would lead to lost revenue and pressure on margins. So, the question is should Deere change its open architecture policy and become "strategically open" to protect its software services business? If so, which services should it protect and what changes are required to do so?
My current thinking is that Deere should somehow close the architecture around data that can only be collected by its tractors (i.e. machine diagnostics and crop/soil info, although the latter gets a little tricky since it could also be collected by peripheral equipment) and remain open in all other areas so that Deere can continue to integrate with 3rd party operating software, equipment, and subcomponents. If anyone has thoughts on this I'd appreciate your comments.
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Good core point for the memo. I suggest that you not arrive quickly with one recommendation regarding closed versus open architecture. Sketch out a schematic of how tractor is a node in a broader agricultural/crop/farm system and show who the other players are. Then discuss the options available to Deere and the competencies required to extract value in the short-term (questions 1 and 2) and what may be the threats for question (3). What patterns of ecosystems are needed to win here? What lessons can it learn from OnStar and the auto sector? Will any of the big IT players come in as part of service deliver and capture the value away from Deere?
ReplyDeleteHey Matt,
ReplyDeletewhat about instead of closing all the architecture, does it make sense to protect the core capability with architectural control point. What are the competitors doing?
I wonder how the information can be analyzed and become useful for all the customers. Maybe you want to offer as a service on subscription basis some sort of online best practices considering the different conditions of the soil (location, weather, type of crop, etc.)
After thinking some more about OnStar and the state of telemetrics in agriculture, I now think that going open might be a better idea.
ReplyDeleteOnStar started out as proprietary system, but it wasn't until GM decoupled OnStar and made it available to other OEMs that the business really took off. I think Deere could be in a good position to do with its telemetrics system what GM did with OnStar.
Adoption of telemetrics in agriculture has been slow because costs have been too high and the benefits too low. However, costs have dropped significantly and experts predict that telemetrics will be the next big thing in agriculture, and that the tripping point will be reached when the perceived benefits outweigh the costs.
Right now, Deere is the only OEM with a telemetrics offering (the others are all one or two years away), and while there are 3rd party systems out there, they are generic and just offer location-related functionality. By merging its farm management software with the telemetrics service, Deere's offering would add a ton of value for farmers and would crush the cost-benefit obstacle that has been preventing wide-spread adoption.
The opportunity is obviously much bigger when you go for the whole market instead of just for Deere tractors. I think Deere could be in a position to win in an open, market-wide initiative and that the strategy certainly warrants consideration.