“Think Smart, Think Connected: Maintaining Competitive Advantage in an Open, Connected Landscape”

The findings of an executive summit on EU adoption of Internet-enabled device networking and machine-to-machine (M2M) communication.

[Editor’s note: The text that follows is only an excerpt from the full white paper, which is available for download in PDF format, 220 KB. The summit meeting discussed here was held in Paris, France on 11 July 2003, and was jointly facilitated by Spinnaker Venture Partners, LLC and Harbor Research, Inc.]

Executive Summary

• Increasing connectedness of owned and non-owned assets, and technology openness, are opening massive new opportunities in global business but also driving the need for new strategies and corporate cultures.
  
  
• All participants agreed that the future of their businesses will be shaped by connected devices. The opportunity lies essentially in a new realm of services based upon ubiquitous device information.
  
  
• Data security and privacy remain large concerns, but all participants felt confident that the push towards openness will move forward in spite of these challenges and that these hurdles will not hinder (or hold back) market acceptance. Rather, technical, process, and cultural solutions will emerge to address these challenges.
  
  
• The era of “going it alone” or “flying solo” is over. The “command-and-control” strategies of the past will not work in the complex, instantaneous, interwoven world of a global digital economy. The creative use of formal partnerships as well as strategic alliances will result in a re-organization of the existing alliance networks. New kinds of alliances and partnerships will be formed, leading to dramatically different alliance networks than we see today.
  
  
• The way that companies choose their technology and business alliances will be crucial to success.
  
  
• Increasing connectedness and openness means great opportunity but also great risk. Risks include the possibility of commoditization, the possible dilution of identity and leverage, and the possible loss of customer account control.
  
  
• It is vital to find ways to share risks and rewards as companies move toward greater asset-connectedness and openness. Some ways to share risk include joint ventures, joint-investing, and leveraging of infrastructure.

Background
Everyone agrees that the world is rapidly moving toward a global, services-based economy. But one rarely hears much detail about how this will come about, and how it will actually work. A global, services-based economy represents a paradigm-shift that arises out of an equally important shift in underlying technologies—the shift from purely human-centric electronic communication to global device-centric communication. The new realm of profitable services required by the new global economy will depend upon the availability of ubiquitous digital information from these newly connected devices.

In an effort to better understand the real-world impact of these developments on the global enterprise, and the current state of adoption behavior in the EU, Spinnaker Venture Partners and Harbor Research facilitated an executive summit meeting on 11 July 2003 in Paris, France, to discuss these issues with leaders of major global companies.

The summit was attended by top-level representatives from Air Liquide, France Telecom, IBM, MGE UPS Systems, and Schneider Electric.

To design the meeting, a modified Delphi research method was employed to survey a leading group of industry experts, including respondents not present at the meeting itself. Thus, the materials reviewed and discussed in the summit, and summarized here, represent the views of a broader group of participants, including ABB, Bayer, Invensys, Nokia, Schindler, Siemens, and Vodafone.

Connectedness and Openness Will Continue to Expand
The developments we see in global business have their origins in two basic phenomena:

• Increasing connectedness of physical and informational assets, both within the individual enterprise and across their customer base and supply chain.
  
  
• Increasing openness of technologies and standards, which makes possible increasing connectivity itself, as well as increasing information-sharing, collaboration, and interoperability of systems and physical products in the field.

All companies that we surveyed and met with at the summit agreed that the future of their businesses will be shaped by new, significant revenue opportunities emerging from the availability of the information provided by these newly connected devices. This world of smart, connected devices has been an important enabling platform, as business strives to serve customer driven needs with a service / solution business model.

The general concept of “connectedness” is less challenging than the concept of “openness.” The companies represented at the summit meeting are global entities that have already attained a high degree of connectedness with their customer base.

Much of that connectedness, however, has been accomplished to date with closed, proprietary systems. This is partly because dependable open standards and technologies have only recently become available. But more significantly, “openness” represents uncharted and risky terrain for most companies.

The summit participants agreed that an increasing adopton of “open” standards and systems for global connectedness presents significant business risk while providing access to the new growth and services opportunities driven by M2M. Thus, much of the summit discussion centered on the question of how to minimize risk while moving away from proprietary, closed solutions, and while making more and more enterprise information available for cross-enterprise sharing.

The drive to adopt more ubiquitous networking and communications technologies presents enormous challenges to the companies that have, early on, established extended service-based businesses to maintain control over their customer base and drive annuity-like revenue lines.

Air Liquide, which acted as host for the summit, is a global leader in industrial gases, with customers in over 70 countries. The company has been an aggressive early adopter of networked field devices and remote monitoring, and looks forward to evolving its existing initiatives.

“A key strategy for Air Liquide is to expand our revenues by building on our core capability to automatically manage remote production facilities,” said Jerome Girard, CEO of the Air Liquide Venture Services Division. He continued, “We are capitalizing on the trends in M2M to build new services offerings for our existing customers in markets such as healthcare and semiconductors, as well as to move Air Liquide into new markets such as remote hydro-plant management.”

Privacy and Security Will Become Most Significant Concerns
The security of enterprise data and the privacy of customer information were among the first concerns voiced by the summit participants. They were also the least controversial concerns—partly because everyone agreed on their importance, and partly because they are essentially technical problems that will eventually have clearly documented technical solutions.

Technology developers are well aware of the need for data security. Open systems like the Linux OS, and open communication protocols like the new ZigBee™ wireless connectivity standard, have been designed from the ground up to include multiple layers of data integrity and security. Real-world implementations will always reveal unexpected vulnerabilities, but thanks to global connectedness and collaboration, fixes will be fast and widely available.

The summit participants agreed that they could not move toward greater openness without solid demonstration of robust data integrity and security. But they also had little doubt that the active community of technology innovators and M2M-oriented startups, largely based in the U.S., would meet these challenges in the near future.

“We see as one of our greatest challenges the selection of the right constituents from this community for partnerships,” said Laurent Ferenczi, CTO at Air Liquide. “We need to clearly understand how to better apply capital in a shared-risk model that helps us achieve our objectives,” he concluded.

Business Culture Becomes Big Hurdle
Not surprisingly, the summit participants’ business concerns were more complex than their purely technological worries. In the existing culture of most enterprises, competitive advantage is usually perceived—to one degree or another—to lie in ownership, secrecy, and sometimes adversarial relationships with suppliers. It goes without saying that such a culture does not blend well with the notion of “openness.”

One participant from the technology supplier community summed it up this way: “Over the last several decades, the role of digital information technology in business has evolved from being first a luxury, then a mainstay, and finally what it is today—nothing less than the DNA of the evolution of business itself. We are presently undergoing an historic paradigm-shift from human-centric to device-centric use of global networking. The ‘infosphere’ of digital data generated by connected devices will soon become the very air that business breathes. Enterprises that do not find ways to live in this global information-atmosphere, and to share it with partners and alliances, will simply not survive.”

But how do businesses become more open and connected, change their underlying concepts of “ownership,” and yet remain distinct and profitable entities?

New Rules For Competing and Collaborating Underscore The Lessons of Open Source
Interviews with industry thought leaders conducted prior to the meeting suggest that an answer lies in the evolution of Open Source software. Less than a decade ago, Open Source was widely viewed as the province of hacker kooks who were somehow “against profit” and wanted to “give everything away.” That was, of course, a gross misunderstanding. Early Open Source advocates simply understood that core digital technologies would quickly become as fundamental to life and business as electricity itself, and that monopoly-enforced standards would be as bad as the market-fragmentation that results from no standards.

Today, Open Source has transformed the policies of the largest software companies in the world, and will continue to do so because it represents a fundamental evolutionary force.

The Open Source concept caught on and evolved so rapidly partly because it had a great “demo”: the Internet itself. Every time you send email or visit a Web site, you are using open technology developed and maintained by a global collaboration of software designers and network engineers. Even though it was originally private and closed, developed with military funding, the Internet is now a decentralized and open network.

The Internet and successive Open Source developments—e.g., the Linux OS, the middleware engine PHP, the MySQL database manager—have demonstrated that ownership of core enabling technologies is not a requirement for maintaining competitive advantage.

In fact, seen in the proper light, forgoing ownership at the core level is a great liberation. Why? Because it’s hard to maintain a profitable business trying to sell people core technologies. Those technologies—the network itself, access to the network, operating systems, code languages, database managers, and so on—quickly become part of the taken-for-granted fabric of reality, i.e., commodities with steadily declining profit.

[Editor’s note: The text above is only an excerpt from the full paper, which is available for download in PDF format, 220 KB.]

Copyright ©2003, Spinnaker Venture Partners, LLC and Harbor Research, Inc. All rights reserved.