Chapter 1 / Foundations of Information Systems in Business 5

REAL WORLD

CASE

Heidelberg, Honeywell, and Eaton: Using Information Technology to Build Smart Products and Services
Consider Heidelberger Druckmaschinen AG of Germany (commonly known as Heidelberg), the number-one maker of high-end printing presses for printers and print media producers throughout the world. For all of its long history, the company has offered repair services to its customers. But several years ago, Heidelberg developed the ability to monitor its equipment remotely using built-in sensors, networking microprocessors, and other information technologies. Heidelberg soon found that it could provide maintenance much more cost-effectively with these smart products. Now with its machines communicating continuously over the Internet, relaying information about their status between the print shops and Heidelbergs regional and global technical support specialists, the company has the access and insight to optimize printing performance in customers shops and minimize maintenance and repair costs for Heidelberg as well as its customers. With such smart services, Heidelberg now offers total support of its productswhich, for example, can extend even to the removal and resale of its machines. Thus the selfmonitoring and networking capabilities built into its products provide a strategic opportunity for Heidelberg to use information technology to become a partner in the successful operations of its customers, while reducing its costs and creating new sources of revenue from smart services. Honeywell International is another prime example of a company that is benefiting from smart products and services. This global conglomerate is involved in many different industries, one of which is control and automation systems for petroleum refineries. Honeywell recognized that such systems represented just a small part of the cost involved in operating and maintaining a refinery. So its engineers developed a new suite of customer smart services called Experion Process Knowledge System, or PKS, a system of information and operations technologies which is deployed at a customers refinery, but controlled and monitored remotely via network connections by Honeywell. PKS performs a variety of manufacturing equipment support and optimization tasks formerly performed by customer and Honeywell maintenance personnel. With Honeywells PKS smart services, customers experience fewer false alarms indicating a process is failing, less unanticipated downtime, and lower maintenance costs. They also work closely with Honeywell to learn from knowledge PKS provides concerning the performance of their refinery equipment and systems. The increased value provided by the PKS service enables Honeywell to charge a premium for its use, and in many cases Honeywell has been able to increase the scope of other services it provides to its customers. Our last example is Cleveland-based Eaton Corp., which began making axles and other truck parts in 1911, and later diversified into other engineered components, including residential circuit breakers. With the end of its first century in

n todays world, any manufacturing company that has not awakened to the fact that it must become a service business is in peril. Unfortunately, there are many businesses that still think of themselves as builders of things and state their measures of success solely in terms of the product. But even their more enlightened competitors, the ones whove begun to wrap valuable services around their products and profit directly from those services, are enjoying only a temporary advantage. They may be improving their customer relationships by taking on various tasks such as maintenance and replenishment of supplies, but that will get them only so far. A select group of companies is already upping the ante. Soon, it will not be enough for a company to offer services; it will have to provide smart services. Smart services go beyond the kinds of upkeep and upgrades companies are bundling with their products both in their value to customers and in the cost efficiencies they generate for their providers. To provide them, companies must use information technology to build smart products products with awareness and connectivityinto the products themselves. And they must be prepared to act on what these smart products reveal about their use. For example, maintenance is one of the key activities in the life cycle of a product where forward-looking manufacturers are using information technology to intervene, assist, and gain the benefits of providing smart services to their customers. Typically, their smart products can detect that a part is approaching failure and alert them to that fact, thus giving them the opportunity to own the provision of maintenance services and resulting benefits to their customers.

FIGURE 1.1

Virtually no business or organization, large or small, can compete without information systems and information technology. We truly live in a wired world.
Source: Rick Maiman/Corbis.

Module I / Foundation Concepts

business approaching, Eaton found itself in very mature businesses fighting with established competitors over every point of market share. Thats when a few visionary managers within the Electrical Products Division started to think about device connectivity and the broader solutions it could offer consumers. The system they envisioned, recently launched as Home Heartbeat, monitors the status of various home systems and alerts the home owner when something is amiss. To do this, it uses water sensors, open/closed sensors, and power sensors, all of which communicate to a base station over a wireless network. That base station communicates with a key fob device carried by the home owner, or it can be instructed to send an e-mail or text message to a cell phone if there is a change in the state of a sensor. Consider how useful this would be. Youre commuting by car or train to work, and it occurs to you that a space heater might have been left on. You can check your key fob to be reassured instead of having to turn back. (The key fob device communicates only within a limited range of distance, but captured data about the status of your home when you left it.) Home Heartbeat features a water shutoff valve that

can be automatically activated by sensors. So if youre on vacation and you hear about an unexpected cold front, power outage, or burst pipe back home, you can check your e-mail. In the meantime, you can be confident that if the water needed to be shut off, it was. Home Heartbeat is a good example of smart product and service innovation. Eaton used information technology to build awareness and connectivity into devices it was already selling, turning them into smart products. Then it was able to position itself not just as a product vendor, but as a service provider. No longer consigned to an obscure corner of the industry, the Eaton brand now stands for total home awareness. Now the company is playing the role of new business aggregator, as it courts an entirely new range of partners, from wireless carriers to insurance companies, to join with it in providing new smart services to businesses and consumers.
Source: Adapted from Glen Allmendinger and Ralph Lombreglia, Four Strategies for the Age of Smart Services, Harvard Business Review, October 2005, and Peter Weill and Sinan Aral, Generating Premium Returns on Your IT Investments, MIT Sloan Management Review, Winter 2006.

CASE STUDY QUESTIONS

1. Why should manufacturing companies build smart products and provide smart services? What business benefits can be gained? Provide several examples beyond those discussed in this case. 2. What information technologies are used by the companies in this case to build smart products and provide smart services? What other IT components might be used? Give examples of the capabilities they would provide. 3. What are some limitations of a smart products and smart services strategy? Give several examples that a business might encounter, and explain how it might overcome them.

REAL WORLD ACTIVITIES

1. Use the Internet to investigate how Heidelberg, Honeywell, and Eaton are proceeding in their use of smart products and services. Discover if they are expanding this approach and what benefits they are claiming for this strategy. 2. Now expand your Internet investigation to other manufacturing companies to discover several that are building smart products and offering smart services and what business value they are claiming for themselves and their customers. If this search is fruitless, select several companies from your Internet research and explain how and why they might employ a smart products and services strategy. 3. What security and privacy concerns might consumers have concerning Eatons Home Heartbeat service? Break into small groups with your classmates to discuss the rationale for these concerns, and consider what could be done to reduce any threats to security and privacy posed by such services, while improving the value of this new use of information technology.