www.harborresearch.com

2013 20152014

theubiquity

shift

smart systemsdisruption

HarborResearch

smart systems perspective

Page 2

The Advent of Smart Systems, Services & The Internet of Things....

These forces are informing a new trend we call “Smart Systems.” In its simplest form, Smart Systems is a concept in which inputs—from machines, people, video streams, maps, newsfeeds, sensors, and more—is digitized and placed onto networks. These inputs are integrated into systems that connect people, devices, business processes, and content to enable collective awareness.

Pervasive Network Integration

Value-Added Services

New Application Values

Broader reach and range of dependable wireless networks will drive significant new applications value from improved reliability, quality and data rates.

Availability of new managed services based on data aggregation, management and analytics capabilities.

Ability to sense and respond in real time will drive more adaptive capabilities. Significant growth for asset management, location tracking services, security, and supply chain integration based on interactions among devices, mobile workers and systems management.

Virtually all electronic and electro-mechanical products are being designed to automatically transmit information about status, performance and usage and can interact with people and other devices in real-time.

Connectivity of Things & People

©2010 - 2013 Harbor Research, Inc. All rights reserved. http://www.harborresearch.com info@harborresearch..com USA • 800.595.9368 • 303.786.9000

smart systems perspective

Page 3

Smart Connected Services Enable Manufacturers To Access A Much Larger Percentage of Their Customers’ Life Cycle Spending...

Smart Services Opens Up Many New Growth Opportunities For Product OEMs Across The Customer’s Usage Life Cycle

This phenomenon is not just about the dichotomy between people communicating with people or machines communicating with machines: it also includes people communicating with machines (e.g. a networked ATM), and machines communicating with people (e.g. automated stock ticker alerts on your PDA). The Internet’s most profound potential lies in its ability to connect smart sensors, devices, and ordinary products into a global “digital nervous system” that will allow people and businesses to achieve undreamed-of awareness, efficiency and optimization.

Beyond efficient support of products and equipment, the convergence of collaborative systems and machine communications will enable nearly new modes of interaction and implies a total paradigm-shift. The depth of this shift has begun to suggest itself, but it is by no means accomplished.

Visionary product manufacturers and service companies are already leveraging embedded computing and networking technologies to deliver smart, remotely monitorable goods that will support entirely new modes of customer-device interaction and service delivery.

Life Cycle Cost To Support Equipment Can Range from 5X To As Much As 15X The Purchase Cost of the Device

0%

20%

40%

60%

80%

100%

Machine or Equipment

Purchase Price

Software Updates

Labor Costs

Support Contracts

Energy & Resources

Parts Replacement

Cost of Downtime

Administration

smart systems perspective

Page 4

As networks have invaded the “physical” world, traditionally unique components and interfaces between and among electronic as well as mechanical elements are becoming more and more standardized.

The implications of these trends are enormous. No product development organization or its suppliers of componentry and sub-systems will be able to ignore these forces -- product and service design will increasingly be influenced by common components and sub-systems. Vertically defined, stand-alone products and application markets will increasingly become a part of a larger “horizontal” set of standards for hardware, software and communications.

As it becomes easier and easier to design and develop smart systems, competitive differentiation will shift away from unique, vertically focused product features towards how the product is actually used and how the product fosters interactions between and among users in a networked context.

The opportunities this opens up to forward thinking product and service organizations are nearly infinite. Businesses can begin to explore many new possibilities for system solutions unthinkable just a few years ago.

Connectivity & Integration Will Become Universal As Components, Platforms & Systems Become Ever More Standardized, Open and Collaborative...

However, As The Physical and Virtual Worlds Continue To Converge, The Traditional Business Models Manufacturers Have Relied On For Decades Will Be Severely Disrupted....

smart systems perspective

Page 5

How Well Prepared Are Manufacturers For The Advent of Smart Systems and Services?

In Most Companies, People, Functions & Processes Are Too Disconnected To Create New Smart Systems Opportunities....

Large organizations have many rules and policies that often seem completely disconnected. We have created language, business processes and systems that seem to be a triumph of technique over value and performance. Consequently, most businesses today are organized around functional disciplines that only interact on an “as needed” basis.

Most knowledge comes from human experience and expertise. Today, however, knowledge and expertise largely resides in functional silos and systems dispersed across organizations. Acting singularly, functional organizations are constrained by the resources under their control. Legacy processes and habits inhibit any natural ability to communicate and work together to solve big problems or create new solutions. In many companies, lean practices have been applied so aggressively that people are simply consumed by “running the business.” It restricts their ability to harness the collective intelligence available throughout a company and its networks to ensure timely decisions and creative solutions.

In this environment growth is dependent on interacting in new and creative ways. Linking functions by breaking down the barriers to communication is the first step, but it can’t stop there. The key is building collaborative networks.

R&D & New Business Development

Marketing& Sales

Purchasing &Strategic Sourcing

smart systems perspective

Page 6

In Fact, We Believe New Business Creation In Most Industrial Manufacturers Is Broken ..........

Venture Development For The Internet of Things Requires A Different Approach .......

An Approach That Can Span From Very Early Stage To Growth Maturity .....

Early stage nurturing of new technology ventures is really a “no-man’s” land today

These types of opportunities are not well addressed by either corporate venture programs or institutional investors

The “spread bet” mode of venture capitalists & private equity firms has been increasingly trending towards more and more conservative investments for several years .....

Corporations have become addicted to acquisitions and consolidation as a growth mechanism ........ companies are willing to overpay for established businesses to mitigate risk ........ players need to understand that to create sustaining value they must take risks .....but how?

Existing schemas, institutions and approaches for new venture development are, for the most part, broken....

The complexity, interdependent relationships and related timing required for new growth ventures in the Internet of Things arena only compound the challenges

Diversifed Industrial Players Need To Completely Re-Think How To Create New Growth Ventures...

smart systems perspective

Page 7

Why Should Manufacturers Care? Because Opportunities Of Vast Scale and Scope Are Available To Product OEMs and Value Adders...

If the opportunity scale across the broad range of building related devices equals approximately 6X the value of base products in smart services value, then the overall market opportunity in the smart connected buildings arena equates to almost a trillion dollars in value added services

If you examine the cumulative opportunity that grows from the smart buildings arena, as just one example, and consider the leverage available through relationships to capture information, aggregate intelligence, provide facility and energy optimization, this opportunity alone in just one or two product sectors could amount to as much as hundreds of biillions of value add.

Smart System Application Opportunities In Buildings, Facilities and Energy Management

$ Tier 1 PBT% 10-20% 11-16% 8-12% 13-16% 12-14%

8-10

%

4-6%

10-1

2%

10-1

2%

10-1

2%

10-1

2%

3-5%

8-10

%

6-10

%

12-1

6%

9-11

%

6-15

%

0-5%

4-7%

8-12

%

11-13% 11-14% 8-10%

9-15

%

10-12%

5-10

\%

13-15%

14-1

7%

8-11

%

8-10

%

10-1

4%

8-12

%

10-1

4%

8-12

%

Sales $B 3.8 6.1 4.8 3.6 2.5 18 10 11.3 10.3 3.

4 1 1 3 4 8.5 0.3

0.2 10 1.6 9 1.5 3.8 5.0 2.8 4.7 2.1 2 0.8

0.5

0.5

0.4

1.6

Pow

er

Con

trol

Circ

uit

Bre

aker

s

Driv

es

Wiri

ng

Dev

ices

Fuse

s

Mec

hani

cal

Equi

pmen

t

End

Dev

ic's

BA

Equi

p.

Syst

em

Inst

alla

tion

Intr

usio

n D

etec

tion

Acc

ess

Con

trol

CC

TV

Ala

rm D

evcs

Ala

rm P

anls

Inst

all &

Se

rvic

e

Lam

ps

Ligh

ting

Fixt

ures

CAT

V/D

BS

Soun

d,

Secu

., &

Elev

ator

s

Encl

osur

es

Pow

er

Qua

lity

&

Rel

iabi

lity

Rac

eway

s &

fitti

ngs

Pow

er

Con

nect

ors

Term

inal

B

lock

s &

I/O

Ligh

ting

Con

trol

Secu

rity

&

Acc

ess

Sens

ors

Met

erin

g

Fac.

Mgm

t. So

ftwar

e

Inte

rnet

En

able

men

t

Net

wor

k Se

rvic

es

Plat

form

s

App

licat

ions

Transport Applications & App'l ServicesElectrical Distribution Infrastructure Home InfLighting CableBAS Security Fire

SiemensHonHon Schneider Sie

Johnson Controls

Trane UTCTrn

Sch

Schneider

16

Trn

JCI

SchSch

JCI HonSiemensJCI

Tyco UTCCarCarrier

HoneywellHoneywell

Genlyte Thomas

Bel

de

ALG

SieHon.

FCI SiemensT&B

Sie

men

s

Perf

Tim

es F

iber

National Ser. Ind.

Lithonia

GE

SierraCinturion

LutronLegrandIntmtc

Land

is &

Gyr

Hager

Hubbell

UTC (Otis)

Power Delivery & Control

ABB

Telit

Thysen KruppLII

Col

eman

Schneider

Com

msc

ope

Cooper

Emerson

Eaton

SchUTC

Schneider

Cooper

Itron

Liberty

KONEGene

sysGoodman

Tyco

�itsubishi

�ockwell

UTC Tyco

Pentair

�ittal

Fu�i

Siemens�itsubishi

ABBHitachi

SchindlerSiemens

Leviton Bel

den

Tyco

Phi

lips

Schneider

Cooper

Ferra�

Siemens

Tyco

% o

f Mar

ket

Eaton

Schneider

Siemens

GE�itsABBToshFu�i

��

ABB

�askawa

�ockwell

Danfoss

LegrandMitsubishi

Schneider

Schneider

GEHubbell

ToshibaHagar

Eaton

Siemens

�atsushita

Legrand

HagerPanduit

Siemens

Daikin Elster

UTC (Carrier)

Phoenix Contact

Honeywell

�tshta

Leviton

UTC

�a go

Schneider

Sim

ple

�OK

Tyco

H

oney

wel

l

T&B

EGS

IB�

ATT

�odafone

�eri�on

�elo

Trid

ium

Digi

Fed�E

Cooper

PCS

Enernoc

Comverge Pacific

Controls

A�eda

$170B

smart systems perspective

Page 8 Bubble size = Enterprise Value

1996 1997 1998 1999 2000 20022001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Honeywell/Measurex

Siebe/APV

Siebe/Eurotherm

AlliedSignal/ Honeywell

Honeywell/Pitway

Danaher/Cooper Industries

ABB/Entrelec

Schneider/Legrand GE/Interlogix

Siebe/ BTR

KKR/Legrand

Eaton/Delta Electronic

GE Power Systems/Jenbacher Werke

UTC/Chubb

IMS Meters/Invensys

Schneider/TAC Building Automation

Honeywell/Silent Wireless

Schneider/ MGE UPS

Eaton/Powerware

ABB/Elsag Bailey

UTC/Kidde

GE/Edwards

Schneider/BEI Technologies

Schneider/Andover Controls

Parker Hannifan/SSD Drives

Honeywell/Novar

Doughty Hanson/Moeller

Barclays PE/Alstom Power Conversion

Johnson Electric/SAIA Burgess

Baldor Electric/Reliance & Dodge

Eaton/Moeller

Chicago Bridge & Iron/LummusEaton/

MGE Small Systems UPS

Eaton/Phoenixtec

Emerson/Roxar

Emerson/ Artesyn

Tech

Bouygues/Alston

Schneider/APC

3i/ DuezPower Systems

Cooper Industries/MTL Instruments

Schneider/Xantrex

Emerson/Chlonde

Johnson Controls/

York

UTC/GE

Security

Alstom & Schneider/Areva T&D

Doosan/Skoda Power

Danaher/BeckmanCoulter

Cooper/ Laird

Regal Veloit/A.O Smith EPC

Caterpillar/Electro Motive Diesel

Siemens/Militronics GE/

Wellstream

Schneider/Leader Harvest

ABB/Chloride

GE/John Wood

GroupCaterpillar/Bucyrus

ABB/Ventyx

Honeywell/ Sperian

Schneider/Telvant

Dresser Rand/ Grupo Guasco

GE/Dresser

3M/ Cogent

3M/ Winterthur

LBO France/Converteam

Honeywell/Norcross

Danaher/Keithley Instruments

Robbins & Meyers/ T-3

Catepillar/ MWM

ATI/Ladish GE/

Converteam

UTX/Goodrich

ABB/ Baldor Electric

Terex/ DemagSulzer/

Cardio Solutons

Pentair/Norit ProcesTechnolgies

10 Mar 2000Nasdaq all time high

10 Mar 2000Stock Market Crash

7 Mar 2003Recovery in stock

5 Oct 2007All time high for the S&P 500

6 Mar 2009Trough in the S&P 500

5 Aug 2011S&P downgrades US debt

3.0

9.0

15.0

21.0

Abandoned

More Importantly, There Are Fewer and Fewer Acquistion Targets Left For Manufacturers...Global expansion; re-engineering; lean practices; mergers and acquisitions - all reasonable strategies for growth and value creation. But in a marketplace of rapidly consolidating businesses what worked in the past is less likely to work now or in the future. For many companies, these strategies have already reached the point of diminishing returns.

smart systems perspective

Page 9

What Progress Has Really Been Made In Driving Organic Smart Services Opportunities?In many ways, most of the larger diversified industrials have not gotten any further than “first base” in realizing connected smart systems and services values....

ProvideBusiness

Process Improvements

ImproveOperating

Efficiencies

EnhanceTechnology

Infrastructure

Cust

omer

Ben

efit

Simple Compound Complex

Customer Value

Many lines of business have moved to smart remote services programs that, to date, are largely focused only on services delivery ef-ficiencies

Based on Harbor Research analysis, many/most of these systems only utilize about 5% of the data value collected ..........

While many players are talking a Big Data game, few are realizing any significant new value from machine data and analytics

smart systems perspective

Page 10

Machine To Machine Systems and Smart Services Technologies Are Still Evolving To date, remote services opportunity has been comprised of “simple” monitoring applications & related tracking/location services….. future development will be focused on collaboration between devices, people and systems

Connections

Time

Compound

•  Integrated Automation, Condition Monitoring & Asset Management Systems

•  Managed Security Services

Complex

•  Crowd-Sourced Content for Machine Troubleshooting

•  Brokerage / Auction for Spare Parts or Sub-Contractors

Simple

•  Equipment Monitoring •  Maintenance Dispatch •  Alerts & Alarms

Complex Applications Applications that drive interactions between and among devices, device sub-systems and people and can also allow extending/expanding values from third party collaboration and large scale [big] data integration/analytics •  Multi-Vendor Brokered Services •  Integrated Real Time Pricing for Electricity •  Multi-vendor Maintenance Collaboration

Sensor Data Fusion / Integration

Compound Applications Applications that involve multiple collaborating [peer-peer] devices or significant interactions between and among devices, systems and people. •  Multi-Party Equipment Support •  Real-Time Demand Response

Maintenance Support & Collaboration

Real-Time Demand

Response

IT, Ops & Process

Automation Integration

Collaboration & Analytics

Simple Applications Applications tend to be remote support-driven applications that involve monitoring/upgrades of installed base of machines in the field – such as motors, instruments, machines, etc.

•  Tracking •  Product Support •  Product Upgrades •  Diagnostics / Monitoring

Industrial Equipment Monitoring

Field Force

Dispatch

smart systems perspective

Page 11

So What Will It Take To Really Win Big In The Future Smart Services Arena? To drive success, players will need a whole new frame of reference to work with

Developing Solutions Based on User Centered Experience

Organizing The Rapidly Growing Amounts of Data From Open Systems For Discerning Valuable Patterns via Analytics

Understanding Behaviors Well Enough To Motivate Real Collaboration Across Organizations, Functions and Delivery Chains

Leveraging Human Capital and Skills In This Connected World Will Create Entirely New Solution Values

Potential To Engage & Leverage Extended Communities of Users, Companies, OEMs, Suppliers With Real-Time Interactions and Information Value

Emerging Technologies, If Properly Nurtured and Applied, Can Foster Many Opportunities To Disrupt Current Competitive Structure

Technology Skills

Relationships

Experience

Data & Content

Behaviors

The solutions we are describing here will have far less managerial hierarchy, command and control decision making or proprietary ownership of ideas than companies have been accustomed to.

These networks will be self-organized by people who are motivated to explore and develop ideas they care deeply about.

Collaborative innovation will extend beyond ideas about new products and services to the very manner in which business is conducted.

To discover, design and develop innovative systems, organizations must consider all the elements involved and the context they fit into.

smart systems perspective

Page 12

What Is The Internet Of Things and ... ... Why Is It So Important?

Where Are The Opportunities and … … How Do We Get There?

Where Are The Opportunities and … … How Do We Get There?

In the not too distant future, hundreds of millions, then billions, of individuals and businesses, with bil-lions, then trillions of smart, communicating devices, will stretch the boundaries of today’s business and social systems and create the potential to change the way we work, learn, entertain and innovate.

Global expansion; re-engineering; lean practices; mergers and acquisitions. For most companies these strategies for growth and value creation have reached the point of diminishing returns. As networks continue to integrate the physical and virtual worlds - the Internet of Things - what worked in the past to drive growth is less likely to work now or in the future...

The assumption that the role of new business design and development is only about making existing products or services more attractive no longer works.

We believe smart systems design needs to transcend discreet product or service innovation. Business developers need to creatively imagine fully developed systems and whole marketplaces.

To discover, design and develop innovative smart systems, organizations will need new and uniquely facilitated processes….

Smart systems and services will increasingly have less managerial hierarchy, command and control decision mak-ing or proprietary ownership of ideas. Diverse collaborative networks will be self-organized

by people who are motivated to explore and develop ideas they care deeply about. Business innovation will extend beyond ideas about new products and services to the very manner in which business is conducted.

Building new ventures for the Internet of Things requires new and very different modes of design and development – organiza-tions will need to push the boundaries of collaboration to include many new and unfamiliar participants – “strange bedfellows…..”

Discover

Define

Design

Develop

Understanding Emerging

Smart SystemOpportunities

Anticipating Experiences,

Interactions and

Relationships

Determining Value Creation Role

BuildingThePlatform

The Internet of Things Will Force Manufacturers To Create New Ways To Create Growth... ......“R&D For New Business Design”

smart systems perspective

Page 13©2010 - 2013 Harbor Research, Inc. All rights reserved. http://www.harborresearch.com info@harborresearch..com USA • 800.595.9368 • 303.786.9000

Value Created ............ Is Informed By Community Interactions ....The relationships and interactions we help foster serve as a context for deep insight and more value creation. Every relationship building event, every workshop and platform project, regardless of its focus, is enhanced by the range and depth of these relationships.

Harbor seeks out clients whose strategic and business develop-ment mode shows a desire to drive disruption and manage change effectively, both in their organiza-tion and through their relationships in the marketplace. These are the forward looking competitors who can benefit most directly from the breadth of knowledge and process skills embodied in Harbor.

lairtsudnI Energy & Infrastructure Consumer Healthcare Buildings Transportation