In 2011 GE initiated a radically new business model which derived revenues from ongoing improvements in existing infrastructure. The instrument for delivering these improvements was GE’s industrial internet enabled digital transformation strategy – a multibillion dollar program to add digital sensors to machines to monitor operations data and building advanced analytic capabilities to improve the productivity of installed hardware.
Digital transformation is not about conventional disruptions which replace existing products and technologies with new ones. Digital transformation is about making legacy infrastructure more productive, about connecting and recombining hardware and utilising data in new ways. GE is partnering with global energy giant E.ON. As demand for power increases, E.ON, which runs wind turbine farms, meets demand by dynamically balancing load in advance using predictive analytics as well as by real time dynamic control. The result is lower requirements of additional hardware purchases. Additional capacity is created by enhancing equipment performance, utilisation and maintenance. GE’s revenue is computed as a percentage of the additional revenue generated. The revenue is far more than profits on an equivalent amount of new equipment sales.
GE has embedded software running medical systems, oil rigs, utility companies, rail and other industrial infrastructure worldwide. The software uses data sourced using embedded sensors and microprocessors connecting hundreds of thousands of GE devices. The software runs on an industrial internet called Predix and stores data in a cloud environment operated by GE. The operational data so obtained is used to predict performance requirements, anticipate failures, calibrate maintenance cycles, redistribute load and minimise downtime. GE’s railroad customers are using predictivity optimisation solutions to move freight faster, achieve higher speed of trains, reduction in crew and improved on time performances.
Combined with the advantage GE already commands due to its superior hardware, the new business model gives GE a significant sustainable competitive advantage.
The go-to-market strategy for GE has to be different. Salespeople must now understand the value that can be created by this new business model. The offering is more complex. It is not industrial hardware any more but a solution derived from technology, connectivity and analytics which combine with clients’ proprietary financial and operational data. GE sales people now need to understand how the client spends and makes money and how to help the client increase revenues, reduce operational costs, improve operational productivity and extend the productive life of capital investments made.
The selling cycle includes a range of activities beginning with development of the customer value proposition to fulfilment of the potential of the opportunity. The revenue model is no longer the proceeds of a sale but a share of value created on an ongoing basis. In order to sustain this business model GE needs to acquire new capabilities which it is building through joint ventures.
GE Healthcare formed a joint venture with Microsoft called Caradigm to develop software to drive continuous improvement in healthcare systems.
GE Aviation’s joint venture with Accenture named Taleris developed software and analytics capabilities to manage airline operations. Taleris has signed multibillion dollar deals with United Arab Emirates and Etihad Airways to predict maintenance issues and recommend preventive approaches.
GE Aviation partnered with Alaska airlines to develop an algorithm to better predict flight arrival times. The algorithm was able to predict flight turnaround times with 40% more accuracy than existing technologies.
GE has partnered with potential competitors including Amazon for cloud technologies, Intel for sensors, CISCO for network connectivity and Accenture for service delivery.
New structure and risks: Outcome based business models create radically new opportunities where revenues are derived from capabilities which have high development costs and require the ability to develop the initial value proposition and create a complex delivery ecosystem. Revenues are substantially dependent on the client organization’s ability to operate systems effectively, and capitalise on the gains from the association. Collaboration with complementary product and service providers makes the company vulnerable to the risk of creating competition. The model offers opportunities to build strategic partnerships with customers, dramatically escalates switching costs and builds differentiation in an environment increasingly characterised by commoditisation, price competition and threats from low cost economies.