BACKGROUND

What do you do when the ocean starts turning red? (“Red Ocean Traps”, HBR March 2015)

The sea lanes you learned to successfully navigate over the last 100+ years are rapidly changing color as the ground rules of the game are being rewritten with the emergence of a new technology platform. Not only do you have to reinvent the entire product line based on a completely different technology, your market share is exposed to a new breed of aggressive and highly successful Asian competitors with teeth sharpened in the low cost/high volume semiconductor markets.

PLS is the global leader in the lighting industry. They have a widely recognized and valued brand, a comprehensive product line, well honed manufacturing efficiencies and market presence/insights supported by significant investments in R&D and M&A. The industry finds itself on the verge of transitioning from light generated with legacy analog technology based on glass and metal to a silicon-based platform. The complete product cycle would have to be transformed (R&D, product design, engineering,quality, standards, manufacturing and supply chain).

PROBLEM

There was considerable stress within the management team over the timing of the widespread market adoption of SSL (Solid State Lighting) and the news that formidable Asian competitors were actively investing in the arms race to drive down the price of LEDs as a strategy for entering a market they previously had been unable to play in. The old guard, (KdD) with decades of battling for market share on cost, distribution and product features believed LEDs (Light Emitting Diodes) were too expensive to have any near term impact on the business and were inclined to invest in a defensive manner, which meant stay on top of the technological advances via Corporate Technologies, but keep the focus on the well established existing modalities. They considered SSL to be a different enough that it would take time to align with the well established current standards and specifications in place. They were also keenly aware of customer reaction to the significant difference in price ($ vs ¢) preference for the only product performance they had ever known.

Another segment of management saw the change as inevitable and pushed to invest in LED technology and own the ability to compete on cost at the fundamental component level via manufacturing efficiencies, much as they had with their current advantage. Both views are based on the collective wisdom and experience of industry veterans and have merit.

What bet would you make given this scenario? Wait for the market direction and adoption to reach critical mass before committing the investment needed to compete on cost? Make the investment in LED manufacturing as the current market leader to maintain market share and gear up for battle with all competitors?

ANALYSIS

At BauNovus, we were intrigued by the potential for a new class of applications and products based on the “digitization” of lighting. This is hardly a novel insight as PHG Corporate Technologies (and PLS through M&A) were actively exploring a wide range of potential applications from energy efficiencies to novel form factors to networked lighting fixtures. The opportunity was fully appreciated, but lacking market traction, engagement or critical mass for execution.

Examining the value chain for lighting products provides some insight into the potential for greater value with more integration.

In the early stages of a novel technology such as LEDs, cost is traditionally dominated by the core component technology, in this case the semiconductor processes used to manufacture the fundamental lighting element (LEDs). These require expensive equipment (MOCVDs), facilities (class 10 clean rooms) and complex process development that can take years to meet acceptable yields and performance. However, this has been proven possible with considerable success by a wide range of global semiconductor manufacturers. It is only a matter of time before the cost of the key component is driven down to commodity status with corresponding low margins.

Lighting fixtures (luminaires) are the next level up and differentiate more on on cost/design + some level of functionality, than technology, but still represent low barriers to entry.

Lighting systems are more complex and generally dominated by controls companies who expect to drive fixture design and standards to meet their needs for connectivity and control. “Smart” systems feature integrated controls + sensors + possibly data collection to improve overall performance and operational efficiencies. The latest offerings tend to focus on energy savings.

The existing product lines consisted of a large number of localized brands with considerable overlap in product functionality, with much of their R&D capacity consumed with the impending transition to SSL. PLS NA was primarily a marketing company with a R&D budget of less than 3% of which most existing “innovation” took the form of redesigning existing luminaires for LEDs or improving manufacturing capability. It would be a considerable challenge to come up with something more competitive than a sheet metal box that lit up on demand.

There are examples of forward looking innovation within PLS, but the scope was generally limited to a specific business unit AOP without much meaningful connection or interaction in the context of a larger strategy.

INSIGHTS

We see a latent advantage in the ubiquity of lighting. It is everywhere. In our homes, offices, public buildings, city streets, vehicles, airplanes, etc. We think the widespread installation of lighting fixtures supports a credible presence for a class of products based on disruptive capabilities and form factors. The ocean may be turning red, but the emergence of SSL can also be seized as a rare opportunity to build on their market leadership, and make a move to higher margin, higher value integrated systems.

More than the intrinsic value of providing illumination, we see the installation of lighting fixtures as a preferred channel for the deployment of a sensor network to acquire and aggregate data at a higher resolution with lower cost for any given space. Data is the new oil, but the means to capture it are open to implementation.

Our insight notes a tremendous in-house advantage for PHG with a critical mass of R&D talent and manufacturing expertise to develop and integrate an optimal class of sensors, controls, optics, intelligence and network integration. This expertise could be leveraged to deliver optimal designs for innovative products.

Systems are generally dominated by controls companies. However we find this to be a highly fragmented market ripe for consolidation via turnkey solutions. A key benefit for customers is working with a single vendor who not only owns the fundamental deliverable (light) but the ability to offer novel capabilities and efficiencies of scale through ownership of a complete set of system components.

We also highly valued a key differentiating factor owned by PLS/PHG. As a commitment to the corporate byline (Health + Well Being) they conduct ongoing research to understand the fundamentals of the human experience wrt to lighting. This forward looking initiative generated a wealth of insight to drive innovative product development with value well beyond the commodity offerings of low cost providers.

ACTIONS : Own the value in system integration.

> Office Lighting

The challenge is to execute on the design and delivery of lighting based systems with a higher level of value added. The integration of sensors and controls with lighting fixtures requires a different level of engineering talent and a sales force/distribution channel capable of consultative selling. What market and applications to prioritize? What system specs and designs? How to meet and exceed customer expectations in a highly competitive market?

At BauNovus, we have first hand experience navigating the transformation of a components company into an industry leading systems innovator. Our first move was to pick a specific objective to provide focus for a limited set of resources and learn the lessons needed to compete effectively. The key insight discovered was the ability to “own the process”. Where we had formerly been dismissed as a “black box” integrated with much higher cost automation, we realigned customer perception to understand and value our technology as the process and technology that mattered the most to their business. This facilitated a highly productive engagement with the industry leaders and paved the way for market leadership in both innovation and revenue.

We see a similar scenario with PLS. Instead of accepting the status quo as a sheet metal box purchased on price, we advocate for a strategy to “Own the Space” to establish value and capture market leadership based on SSL.

Office Lighting is an example. There are many qualities and features currently offered with lighting products, but consider what impacts the productivity of people and their perception of “health and well being” in an office? Lighting of course, but also temperature, humidity, air quality and noise. Lighting might be addressed by one provider, temperature, humidity and air quality by HVAC companies with noise possibly considered by a supplier of office furniture. Energy savings are important and often pitched by a controls company.

The most common complaints in office space usually start with temperature based on many experiences in a large room of insurance underwriters where only a few thermostats control the temperature in large open areas. The quality of lighting affects productivity as well as being a major source of energy consumption.

Proximity/presence sensors can be used to dim or shut off lights to save energy when not needed. Additional controls can integrate window blinds for further improvements in comfort and energy savings for the office space. What we find interesting is the ability to embed sensors in each lighting fixture to create a network to monitor temperature with much higher resolution across large spaces and make smart adjustments in advance of any undesirable swings in settings. This provides a more comfortable office environment with the potential for energy savings. Sensor data can be collected and analyzed to develop insights into optimizing the overall “health and well being” for the space.

Implementation hinges on the ability to acquire data and generate “smart” settings. Market leadership can be claimed by the supplier of “smart” fixtures as that’s where the data is generated. HVAC and controls companies will see this as a major threat to their growth potential, but they don’t have the efficient channel to acquire the data needed to generate smarter algorithms. HVAC is generally controlled by a wall mounted thermostat with a few wires to operate an air conditioner/heat source and some dampers. These can easily be replaced by a smarter control with settings generated by usage analysis of a higher quality data base. Humidity and air quality could be just as easily integrated. Even noise can be addressed, as we’ve seen research done on “white noise” emitters which could easily be implemented in a lighting fixture.

There’s a lot behind this very brief overview, but the key point is recognizing the potential to access and own higher value added through systems integration. The market, applications and competition are well understood. It’s the combination of a new class of product features and selling strategy that would benefit most from an XTM to focus on the fundamentals of sensor design and integration, deployment to make the claim for “ownership of the space” and smart algorithms to establish value and capture mind share. Work has been done in all the critical areas, including self deployment of the network which is a major advantage in implementation (cost of skilled labor).

> School Vision

Another strategy to “Own the Space” is to differentiate at the highest level of system performance and benefit. This is where we see considerable advantage in the research done by PHG on the human factors related to “Health and Well Being” SV is a great example of applying research based insight to design a fixture capable of multiple settings to optimize the lighting for specific tasks/modes in a school setting. They range from normal to calm to energize to focus by adjusting the wavelength to enhance the ability of students to remain engaged with their studies and testing across the energy cycles human beings run through was they wake, eat, play and study. The benefit is a more productive learning environment and test scores to prove it. This is a highly differentiated competitive advantage that would be very difficult to counter by a low cost component supplier.

Truly innovative ideas in play here, but the project failed to have anywhere near the anticipated impact despite documenting quite good results. A review of the feedback and analysis of the rollout in Europe yielded a few insights and lessons that could be addressed for a more effective launch.

The fundamental performance was never the question as the improvement in test results in classrooms using this lighting were surprisingly good. The main issues documented in the feedback surveys focused on the cost (it was more expensive), operation (as it required teachers to program the lights per their class schedule) and the general credibility of lighting affecting something as “concrete” as test scores. The leading edge of innovation is a tough place to make a living.

Our review of the results and feedback resulted in a plan of action for a rollout in NA. First up is the issue of cost as school budgets are a highly visible and political topic. Teachers would rather see a raise in salary than a set of lights that make more work for them. The initial offering was done on a CFL platform which might have been more convenient at the time but was more difficult to install and operate. An LED-based implementation, while initially more expensive, had a clear path to lower cost per fixture. LEDs also offered greater energy savings which could impact the budget discussion in a positive way. In addition, we identified local utility companies with incentives to subsidize the adoption LED based lighting, and there’s no better PR than supporting your local school system.

Our first recommendation is to switch to an LED based platform. We see no other choice.

However, it’s the parents who are interested in the quality of education for their children and the improvement in test scores should have some leverage with the cost. After all it’s their money that pays for the school budget. While money seems to dominate perception at the supplier/contractor/distributor level, we found high profile cases where some of the poorest school districts in the country would make considerable sacrifices to improve the opportunity for their children in the form of school budgets. We’re also noting the highly charged and public political battles over test scores (re MCAS). The preliminary test score improvements were significantly higher than the test score deltas under fire which could render the key argument moot. Just saying.

Ease of installation and usability were cited, mainly programming the lights for the different modes. Using LEDs enables an easier design path for operation and simplifies the installation process. Network connectivity is an option which could be connected to a service to monitor and manage the programming with the potential to facilitate correlation of test scores with usage.

An XTM dedicated to evangelizing the promise and potential while identifying and defusing the arguments would be a key step in establishing PLS as more than just a provider of commodity lighting. First and foremost would be a pro-active initiative to continue to monitor and correlate test results with usage. While money and ease of use are critical success factors, we see the novelty of the benefits claimed to be the major issue with market adoption. The claims are different in ways that a concerned public might not feel comfortable with. Like what else does it affect? And does it affect everybody the same? Good questions.

The team would identify and focus on a few key installations with the goal of validating and extending the claims while tracking the potential variations based on environment, demographics, etc. There are still lessons to be learned including sufficient and broadly relevant data to win over the general market.

This initiative would also target and lobby key decision makers in the educational system for each state to facilitate the adoption of this technology as the preferred standard for school systems. It’s at least a $1.5B market in the US alone.

This is truly a multidimensional project. The necessary range and depth of expertise is not likely to be found within one business unit and executing on a novel strategy requires a considerable amount of effort and initiative. There are no guarantees but the combination of potential and risk is what makes it an ideal fit for an XTM.

These are just a couple of challenges that can be well served by an XTM. We have many additional examples. Please Contact Us for further interest and insights.