Growing Value through the Operating Model
John Deere is one of the world’s most successful manufacturers of tractors. Traditionally, the company creates value by building and selling high-quality machinery to facilitate intensive farming, compared to subsistence farming, as well as by enacting customer service agreements (CSAs) with farmers to maintain equipment. Farmers use tractors reduce the need for labor or livestock to cultivate crops and increase productivity.
More recently, John Deere has created additional value by investing heavily in digital technology to increase the value of its tractors considerably for labor-starved and time-sensitive farmers. Previously a pure play hardware player, the tractor company has integrated software, network connectivity, and data collecting sensors into its machinery that will eventually allow it to be the centerpiece of a larger agriculture ecosystem.
Data collection in particular is the key to John Deere’s new value creation model. Software that utilizes data collected from soil measuring sensors, GPS, weather meters and other sources is used to monitor, control, and optimize agriculture techniques.[i] For example, monitoring a tractor’s diagnostics allows for predictive analysis to prevent breakdowns before they occur; controlling a combine harvester allows for inventory control of cotton modules using RFID tags, bringing warehouse technology to fields; optimizing sprinkler systems with real-time collected National Weather Service data in the cloud will reduce water waste and ensure maximum crop yield.[ii]
Ultimately, John Deere is headed towards automation. As with the idea behind self-driving cars, farm equipment is already capable of communicating as an ecosystem to conduct complex tasks with multiple pieces of hardware. John Deere has created a platform on which multiple devices (tractors, combines, sprinkler systems, etc.) speak a similar language and can interact.
Even more interesting, John Deere has opened up its cloud-based platform, MyJohnDeere, to third party development.[iii] Not unlike Apple and the iPhone, John Deere is cultivating application development to grow the use cases for John Deere hardware. And with Apple’s model, each additional piece of hardware available to a farmer on the same platform creates network effects and additional value.
Reaping the Rewards Now and in the Future
John Deere currently captures value primarily through product differentiation. Always a benchmark brand for quality, the company’s new data initiatives enhance product offerings individually, and when bundled. For example, a tractor with self-diagnosing software is sold at a premium to an analog version, but when bundled with network connectivity and remote access becomes even more valuable. The latter product is, in a sense, actually a service: the ability to communicate directly with customer support at a local dealership regarding any mechanical malfunction. The dealer has access to the data from the customer’s tractor via the cloud and can troubleshoot the problem remotely. John Deere’s tech advantage, then, is one of superior customer service which commands a higher price point.
John Deere is also capturing value with the newfound stickiness of its product line. Because of higher switching costs between platforms – a farmer wouldn’t want to add a new combine harvester from a different brand when she already has a functioning John Deere network, customers will continue to buy John Deere products, increasing customer lifetime value. Further, analytics provide suggestions to customers on when to purchase spare parts directly from John Deere. Not unlike an Amazon recommendation engine, this data speeds up the flywheel of ancillary products around core products, the result being more cross-selling.
An interesting caveat to John Deere’s value capture model is how it is not doing so: selling data. The company, in an effort to retain trust from its customer base, has publicly shunned the possibility of selling agriculture data collected to, for example, commodity traders.[iv]
Still, with ample in-house development capability and new international research centers being established, it’s not hard to imagine John Deere conjuring entirely new value capturing models, particularly if and when autonomy in farming takes off. For example, if John Deere tractors continue to increase in reliability the company could even provide hardware and software as a service to be tied to performance of machinery or even crops. Already a significant financier of its own products, John Deere potentially has enough cash to support that model.
Regardless of the direction the company does go, they are quite advanced in their digital innovation and networks, even more so than general consumer facing companies in many regards. Before we know it, John Deere might even be the basis of a futuristic home OS:
[i] “How Smart, Connected Products Are Transforming Competition” HBR, Michael Porter & James Heppelmann; https://hbr.org/2014/11/how-smart-connected-products-are-transforming-competition
[ii] All examples taken from John Deere’s Agricultural Technology website, here: http://www.deere.com/en_US/campaigns/ag_turf/farmsight/farmsight.page
[iii] “John Deere is Using APIs to Grow the World’s Food Supply” Akana, Robert Medrano; https://blog.akana.com/john-deere/
[iv] “Should Farmers Give John Deere And Monsanto Their Data?” NPR, Dan Charles; http://www.npr.org/blogs/thesalt/2014/01/21/264577744/should-farmers-give-john-deere-and-monsanto-their-data