As the former CEO from 2001 to 2011 of Insitu, a drone company, I often get asked for advice on how to structure a drone business. We had a modicum of success. We started at a time of several hundred drone businesses (we called them UAVs then) and fought our way to being one of the top 5 with revenue approaching $500 million. We timed it right in terms of maximizing tour growth rate within a time of high military needs.
Now, there are many multitudes of start-ups as the civilian markets are hoping to be unlocked in the coming years. As people have sought me out for my perspectives, I’ve heard some pretty wild ideas, including some innovative approaches. As you would expect there is plenty of overlap, redundancy, and inefficient approaches currently in the offing. Given a large number of new businesses/competitors, it seems prudent to understand and optimize the key ways to deliver value. What follows is a thumbnail sketch of the advice I have offered focussed on how to structure the business value delivery chain to maximize the probability of success.
Here is a picture that shows depicts the 5 key elements in value delivery chain for the drone business segment:
As can be seen, the five key stages for value delivery are:
- R&D and Engineering: This stage is where new technologies are tested, validated, and refined. It’s also where technologies are readied for manufacture.
- Production: This stage is where the drones, ground stations, launchers, retrievers, sensors, and communication devices are either manufactured or assembled into final systems.
- Operations: This includes training, flight operations, regulatory compliance, maintenance, and logistics.
- Data Management: The stage is where data from the sources are collected and prepared for its ultimate purpose. A key part of this stage is finding the best ways to transform data into information.
- Information Markets: This the ultimate customer relationship, the one who puts in the compensation from outside the chain and is the prime value determinant. All of the other segments must be funded by this customer in steady state (not counting various forms of venture investment).
One of my most important observations is that it is virtually impossible to build a company that is world class in every part of this value delivery chain. So each team attacking this market must determine which part of the chain they want to own and which part they want to outsource or partner.
For example, at Insitu, we were fully integrated and used our partnerships to pretend that we did every phase. But, in reality, we partnered on R&D, outsourced virtually all production (but final assembly and test), and partnered on operations and data management. However, we worked hard to be in a steering position with our end user customers or as listed above the information markets. During my years at Insitu, this was mostly various forms of the US or foreign militaries.
Challenges of Each Stage
R&D and Engineering:
- Fun Quotient – Most people doing a start-up presume they need to be involved at the R&D phase. It’s certainly the most sexy/fun stage. But the likelihood that someone can add distinctive value at this stage is remote with the thousands of engineers currently pursuing this market.
- Moore’s Law – Everyone knows that Moore’s Law says that things get continuously better. If a team focusing on this area takes too long to develop their new product they can easily get leap-frogged before release. What makes things worse is that every product will get leap-frogged. It’s hard to stay in front.
- Obsolescence – The previous element refers to performance. What is particularly frustrating is that parts of a design become obsolete and are no longer available, which necessitates redesigning the product to accommodate new parts which weren’t backward compatible. At Insitu, we probably had a dozen such parts causing problems at any one time with nearly a hundred over the course of two years. This is not how anyone would prefer to spend their time.
- Product Engineering – R&D is pretty fun. Building a product for end-user use is difficult. I remember that one of my colleagues in the UAV industry (focused on research projects) was shocked to hear that we needed 3 times the engineers after the design had completed R&D to launch the product and keep it in service. It is hard work getting a product into production and to deal with the constant changes as indicated by the previous two bullets.
- Quality Systems – Creating a reproducible product that meets specification takes a comprehensive quality program. It is exacting, time-consuming, and burdensome. One way to test if an organization is ready for production is observe the handling of the multitude of electronics during assembly. Are the technicians electrically grounded with protection for static discharge? If not, it’s just an R&D hobby shop. Compliance and testing each step of the way are required.
- Inventory Management – Too little inventory and production schedules or customer opportunities are missed. Too much inventory and the finances are crushed. It’s a fine line to manage the financial performance of production.
- Testing & Measurement — Developing and maintaining a culture of the constant test, measurement, and improvement does not come naturally. It is hard work.
- Standards & Curriculum – Providing services with drones is like any other customer delivery service. There must be standards to insure a reproducible high-quality product and a curriculum for developing operators against that standard.
- Hiring & Training – Delivery or drone operations requires putting people into the field who are properly trained and motivated.
- Maintenance — All vehicles require ground maintenance before and after flights. A good estimate would be for every hour of flight there should be about X hours of maintenance. The X hours of maintenance will occur cumulatively as the maintenance between each operation and during periodically scheduled maintenance functions (say every 50 hours). Depending on the complexity and size of the vehicle X can range from .5 to 70. The later is for full-size helicopter systems. Plus subsystems could put other preventative and restorative maintenance loads on the operations team.
- Gov’t Compliance — All drone operations require compliance with government regulations related to the airspace but also the theater of operations.
- Logistics — All field operations require the support of parts, materials, maintenance, dispatch, and replenishment. We used to contract out medical support; but there is a multitude of such details.
- Safety and Risk Management — Operating air vehicles not only requires compliance but proactive programs to protect people and property from problems and to minimize the adverse affects when their is a problem.
- Loss of Vehicle – By the nature of the operation drones are inherently fraught with issues. In the early days at Insitu we averaged 50 hours between total loss of vehicles. Through continuous quality improvement systems involving hundreds of people we reduced this to thousands of hours between total loss of the vehicles. Even in this case, the total replacement of a vehicle is a major factor in the operation cost models.
- Storage, Conversion, Fusion — Collecting the data from the drone’s sensors can be a challenge. It has to be processed, downloaded, and stored. In many cases it needs to be fused with other data (e.g., gps position, time, etc.) and then prepped for distribution.
- Security – In many cases the data and its transmission need to be secure.
- Volume for Analysis — There is a huge amount of data and some pre-processing to look for changes has long been on the agenda. But unfortunately, most data still needs to be surveyed and analyzed by human eyes. Most data gets unused.
- User Friendly — A key source of advantage will be the speed and user friendliness of converting the data into information.
- Customer Relationships — Capturing customers is a key component of any business. I have noticed that many drone entrepreneurs talk long and hard about the technologies and positioning. But as mentioned previously the end user customers are the prime source of funds that are inserted into the whole value chain. Identifying, cultivating, and winning customers is probably the most critical part of the whole process.
- Competitive Response — There will be leap frogs in technology and changes in business models, but the ultimate challenge will be maintaining the customer relationships in the face of a continuous onslaught from new entrants into the field. Developing agility to respond to competitive threats is critical.
Clearly, developing innovation and market leadership in each phase of the value chain is nearly an insurmountable challenge. My advice is to focus on the parts of the value chain for which the most value can be created and protected. However, if I am required to recommend only one phase, I would select the Information Markets or the end-user customer relationships as the most critical and valuable phase of the value chain. Owning those put the entrepreneur in the best position to optimize the remainder of the value chain through exploiting in-house, outsourced, or partnered resources.