Three specialised segments of the construction industry have started to converge: energy efficiency, building automation and connected spaces. Consequently, the single smart buildings market is growing at an extremely accelerated pace — one that is dynamic and rising sharply in value and is estimated to reach about USD339 billion by 2022. To capture the opportunities, aspiring companies need to acquire the right capabilities, while established companies need to review their value propositions.
Implications for incumbents
The sub-segment of building materials is set to feel a considerable impact as the smart buildings market will be transformed by several disruptive changes. These include technological advances, new platforms, unfamiliar competitors, and shifting customer preferences. Traditional business models will be replaced by four new ones, all better adapted to new conditions and able to leverage the vast data that smart buildings constantly generate.
Ways to win
A four-step process can help companies navigate through uncertainties. By following these, companies can improve their understanding of the market, take advantage of available opportunities, and share fast-growing profit pools.
In many part of the three verticals consolidate, the market is maturing. But as it consolidates, it grows increasingly complicated, and participants and analysts find it harder than ever to navigate. For companies already involved in this dynamic market, the prospects are invigorating, though far from failsafe. Aspiring companies, meanwhile, must prepare thoroughly before jumping aboard, if they hope to secure a foothold. To capture the opportunities, established companies need to review their value propositions, and aspiring companies need to equip themselves with the right capabilities.
An evolving space
The smart buildings market is complicated because it is multidimensional. The principal dimensions are as follows:
• Domains, including lighting, HVAC and building materials
• Verticals such as residential, small commercial and industrial
• Links in the value chain such as products, system integration and operations
Traditionally, five business models have dominated the relevant sectors:
- Original Equipment Manufacturer (OEM): Companies of this type tend to focus exclusively on making equipment, typically within a single domain, such as lighting or HVAC. Some OEMs, however, have opted to pursue greater vertical or horizontal integration
- Systems Integration Specialist: These offer systems integration services, mainly engineering and design but sometimes also financing, project management, and installation in one or more domains
- Operations and Maintenance (O&M) Specialist: These provide facility management services, involving operations, repair and maintenance in one or more domains
- Vertically Integrated Company: These operate across stretches of the value chain, whether in a single domain such as lighting or in multiple domains such as HVAC and building management equipment and services. They may contract as full operators or on a pay-as-you-use basis
- Platform Specialist: These operate in the building automation and connected homes segments. They provide platforms that enable hardware and software in buildings to interact
Successful, though, these have been in the past and their future viability is dubious. They are poorly suited to the converging market and are vulnerable to the disruptive changes that are now underway—most notably, to changes involving technology, platforms, the competitive landscape and customer preferences.
The most powerful disruptive influences will come from technology and lead to:
- Refinements in data storage, sensors and machine-to-machine connectivity, spurring innovation and improving efficiency and data security
- Commoditisation of standard hardware components such as boilers, light bulbs and cameras — components that until recently yielded handsome margins for manufacturers
- Improved communication through higher-bandwidth, lower-energy consumption (permitting longer battery life) and lower-cost connectivity
- Further advances in big data and analytics
Newly available open-source standards are gaining popularity and prompting platform consolidation. In all likelihood, few current leaders will achieve the scale necessary to survive, so the overall number of platforms will probably fall.
Sources of competitive advantage are changing. In the past, equipment services companies might have differentiated themselves by offering financing to clients. But today, financing is fairly common or even standard. At the same time, equipment is becoming increasingly commoditised and plug-and-play, making installation much simpler. And capabilities such as data management, analytics and AI are becoming more crucial. As a result, proprietary technology ecosystems which used to last for decades are rapidly losing ground to open, fast-changing ecosystems.
Customers are better educated about buying options and more demanding than before. They expect products to offer more functions, greater operational simplicity, and a better user experience — all at a moderate price.
Implications for incumbents
As these four trends proceed, the three market segments involved—energy efficiency, building automation, and connected homes—are losing their individual identities and starting to merge into a unitary smart buildings market. Product and service offerings will continue to integrate, and companies that once occupied separate spaces may become direct competitors, with substantial revenues at stake.
Two traditional business models—OEMs and O&M specialists—are especially likely to feel the effects. Currently, these companies differ in their core business but increasingly they will compete at many pivotal points as they seek to supplement their products and services through M&A or by developing internal capabilities.
Vertically integrated companies are likely to begin offering straightforward financing and delivery solutions, which could be disruptive in the energy services segment. Complicating matters further, companies from unfamiliar sectors such as telecom, IT and utilities may infiltrate the market. Online intermediaries may try their luck too.
Another danger — or opportunity — for incumbents is that the market may change its idea of what is valuable and important. In one plausible scenario, value-added services such as energy analytics become a highly attractive feature and a source of differentiation; new platforms enable smart buildings systems, especially for homes and smaller buildings; and new technologies, coupled with growing customer demand, create new domains and accelerate growth in existing ones. If these developments do indeed occur, businesses will need to rethink their value propositions and business models.
The smart buildings market (in both commercial-industrial and residential aspects) will eventually be dominated by four new business models that differ significantly from the five prevailing ones. One common feature of the new models is their ability to leverage the vast data that smart buildings constantly generate. The four new models are as follows:
- Platform Specialist: Companies of this type will provide platforms that integrate equipment and software. As the platforms’ importance increases, so will the companies’ role
- Vertically Integrated Company: These — mainly OEMs and O&Ms that will expand their offerings — will collaborate or form partnerships to provide a complete suite of services from designing solutions to operational support
- Value-Added Services (VAS) Specialist: These will supply services such as consulting, programming and analytics. Upgraded platforms will enable some companies to offer services in multiple domains
- Multidomain Maintenance and VAS Company: These will offer a combination of maintenance and VAS in multiple domains
Any convergence of energy efficiency, building automation and connected buildings market segments will significantly affect one particular subsection of energy efficiency — building materials. Energy-efficient building materials — including windows, roof tiles, insulation and facades — already make up about 70% of the energy efficiency segment. Although the full extent of the impact remains unclear, it will certainly be powerful.
Companies that opt for any of these four new business models will have to develop the appropriate capabilities and gear up to respond nimbly to changes in customer preferences. Consider the example of companies that currently operate mainly as OEMs or O&M specialists. They should begin offering devices and services that can integrate seamlessly with one or more platforms; alternatively, they can take the calculated risk of betting that a specific platform will be a winner. They should also be ready to oblige any customers that demand new tools for advanced analytics to optimise decision making. Or consider the example of companies that currently operate mainly as platform specialists. They should begin building a critical mass of users in order to acquire the advantages of operating at scale, and identify the best way to monetise their offerings. This might involve offering subscriptions, selling software or cross-selling equipment.
The path ahead
To understand how the smart buildings market works and how to capitalise on opportunities, companies should consider adopting a four-step process:
• Prioritise and assess the areas of the market that you want to participate in: In assessing each area, take account of revenue, margins, growth prospects and potential ROI
• Analyse capabilities and strengths in the specific market segments of interest: This analysis should include identifying products and services to offer within each targeted domain; calculating the budget for each domain as a percentage of the total budget; and estimating the current share of each domain’s total revenue
• Assess the strength of your offering relative to that of competitors: Calculate their profitability and market share, and identify critical success factors — for example, brand strength, innovation and access to talent. This assessment will help you to decide where to place your bets
• Accurately assess your ability to adopt either of the emerging business models: Rate your readiness to integrate vertically; to expand into other domains; to build a winning platform; to offer value-added services; and to grow organically through partnerships, joint ventures and M&A
In all cases, companies need to continually review their strategy, so they can tap into the most promising profit pools at any time.