John Deere: Lessons From 177 Years of Innovation
One of the best places to see how technology innovation can drive global growth is probably where you’d least expect to see software transforming a business: on the farm. A digital revolution is changing agriculture, enabling farmers to carry out the biblical injunction “as you sow, so shall you reap,” with iPads running farming apps that make it possible to plant, plow and harvest with the accuracy of a space mission and the convenience of an Android device or iPhone.
It’s called “precision agriculture,” and in the vanguard of the movement is one of the oldest, most stable industrial companies in the world—Deere Inc. Founded by an enterprising metalworker in Illinois when the Midwestern state was still covered with tall native grasses, Deere is using the tools and techniques of Silicon Valley to transform farming.
Today’s farmers manage vast holdings of land as collections of individual parcels. With soil composition and moisture data mapped to the square inch, farmers can deliver just enough of the right seed, fertilizer, pesticides and water in just the right place and at just the right time to maximize production from their land and equipment.
Seeing this, Deere staked its future not only on building tractors and combines, but on creating tools to manage farming systems that integrate equipment and information. With a global research and development network focused on improving the farming experience, Deere’s approach to making farm equipment has more in common with Apple’s approach to listening to music than with a traditional manufacturer’s way of developing products. Its suite of apps for tilling, spraying and baling crops—JDLink—can be found in the iTunes App Store along with Mobile Farm Manager, which pulls up complex agronomic data as easily as iTunes pulls up a favorite song or helps you create a Genius playlist.
Though Wall Street sometimes struggles to assess and value innovation, Apple showed that spending hefty sums on innovation and high valuations can go hand in hand. A steady stream of pioneering products showed the world the immense value that can be created by transforming companies from mere manufacturers of things into creative organizations that change the way work is done.
This was the approach Deere took when it first went into business in 1837 producing steel-bladed plows designed especially for the huge scale and unique soil of the American Midwest. Since that time, Deere focused on keeping the company drama-free and stable—it has had only nine CEO’s since its founding. It also created one of the few global brands not based on a consumer product or technology, but on innovating across two of the most important and essential economic sectors—food and agriculture. World demand for food is “largely unaffected by periodic swings in the economy,” said Deere CEO Samuel Allen. “Global trends based on population growth and rising living standards remain intact.”
Get a Tattoo
Deere’s headquarters on a 1,400-acre campus in Moline, Ill., designed by famed modernist architect Eero Saarinen, is a long way from San Jose, Calif. Even so, what’s going on inside the building would seem familiar to many who work in Silicon Valley. The building itself is an aggressive paean to growth, which for many years was defined as a never-ending series of new, high-quality products, met enthusiastically in the marketplace, producing good returns for investors and employees. The other measure of how the company was doing was how it competed against its chief rival, International Harvester, for decades the sector’s biggest player. Then, something happened. With 2013 revenue just shy of $38 billion, Deere overtook IH to become No. 1 against a new IH, which was formed from a merger in 2013 between Italy’s Fiat S.p.A., an industrial and agricultural products manufacturer, and CNH Global N.V., a diversified Dutch industrial firm. In 2013, CNH Industrial had revenue of €25.9 billion, about $32 billion.
Businesses grow when they translate innovation into performance, said Barry Jaruzelski, senior vice president and global leader of the engineered products and services practice at Strategy&, a consulting firm now part of Pricewaterhouse-Coopers. Innovation leaders have “the ability to use directly generated understanding of end-users to solve unarticulated customer needs, in tandem with strong cross-functional linkages that go beyond manufacturing efficiency to ensure excellent after-market service,” he said.
It turns out the company’s strategic goals laid out in the 1950s remain the building blocks for its success today. Deere posted return on invested capital (ROIC) at a rate higher than 20 percent during the past 10 years, compared to the company’s cost of capital that analysts estimate at just over 9 percent.
Allen said the company generates growth by “creating product and service solutions that solve real problems and create value for our customers and our company.” A robust global expansion strategy and a bushel of recent innovation awards for Deere and its new products confirm the company’s ability to convert new ideas into business results. Investors are taking notice. “Deere’s stable, highly competent leadership is one reason why the company has been able to consistently develop innovations,” according to Turner Investments, which holds Deere stock in mutual funds and institutional accounts that it manages.
Long a brand powerhouse in the American Farm Belt, Deere’s green machines today command global acclaim. For example, Deere has become the best-loved agricultural machinery in Ukraine, the breadbasket for Eastern Europe and much of Russia, and it surpassed iconic brands such as Harley-Davidson, Chevrolet and Jack Daniels in global brand-power rankings. An online comment about a recent story in the Wisconsin State Journal reminded competitors what they’re facing when they try to woo a Deere customer: “Get a John Deere tattoo. Then we’ll talk.”
A Global Growth Workshop
Tractors and combines are major investments—accounting for as much as half of the total cost of crop production—and Deere relies on “the competitive strength of enterprise-wide innovation” to develop and deliver machinery and control systems that improve productivity, said Allen. Deere engineers strike deals with research scientists and creative producers around the world if it will lead to products and services that help farmers.
Deere today runs five Global Technology Innovation Centers, up from a single North American R&D center six years ago. The commitment reflects the impetus to find the best ideas and materials, a custom that dates to John Deere’s practice of ordering steel made to his specifications. Deere began what is now a 14-year collaboration with the Fraunhofer Institute for Factory Operation and Automation in Magdeburg, Germany, when it was working with new simulation technology, said Thomas Schulze, head of the institute’s Competence Center for Simulation. The institute is one of the research centers in Germany’s Fraunhofer-Gesellschaft, a national system for academic-business collaboration in applied science and engineering. Deere has several projects under way with the institute, said Schulze, including harnessing virtual reality tools to improve training effectiveness. “The most important work is for quality improvement that leads to high customer satisfaction,” Schulze said.
Deere’s Iowa-based baling unit, for example, recently unveiled new technologies developed in conjunction with Tama Plastic Industry, a partnership between two Israeli kibbutzes that leads the market in agricultural packaging and crop protection. To reduce cotton harvesting time, Tama developed packaging material that allows Deere’s cotton picker to bale the cotton without stopping the picker. During 2013, Deere rolled out another innovation developed with Tama technology—B-Wrap, a material that keeps moisture out of round hay bales while allowing water vapor to escape through microscopic pores. B-Wrap was designed to preserve hay so well that farmers don’t need to store it in a barn. That will reduce storage costs and spoilage, and could even lead to happier cows—Deere said hay protected by B-Wrap “looked and smelled like the day it was baled, even after spending a winter outside.”
Deere’s overseas operations have spawned some of the company’s most progressive innovations. In the 1990s, for example, Deere’s unit in Finland invented a “walking harvester” that allowed loggers to move over soft, sloping or uneven ground in forests. The spider-like device helped pave the way for environmentally friendly machines, and a prototype sits in the Deere Pavilion in Moline. A control and stability system distributed weight and support equally to the harvester’s feet according to terrain readings from sensors in each leg; a system based on the prototype is now used in all Deere forest equipment, while the latest versions of the control system and hydraulics help Deere’s agricultural harvesters cause less stress on farmland.
Asian rice farming presents an entirely different set of challenges. Deere has been adapting its know-how to rice cultivation for more than 100 years, and today produces its rice-farming lineup in Ningbo, China. The successor to a rice binder Deere built in the 1920s, today’s R40 small-track combine utilizes a special separator for paddy rice harvesting, an innovation that can also be used for wheat and other small grains. The Ningbo plant is part of Deere’s increasing presence in China, which includes plans for new plants to produce construction equipment, engines and large farm machinery. The expansion illustrates how Deere integrates product development with market opportunity—China’s agricultural mechanization has increased to 52 percent from 42 percent in 2007, and the government plans to reach a 60 percent mechanization level in five years, primarily through increased machinery use in rice paddy farming.
The ability to combine detailed field data with improved machinery management is good news for a growing world and Deere shareholders. “We expect continued mechanization increases that should help to boost yields and alleviate supply issues,” wrote Morningstar analyst Adam Fleck in 2012. One of Deere’s most far-reaching innovations is FarmSight, a software platform introduced in 2012 that encompasses databases of soil, seed and other information about a farm, delivered to Deere customers through Mobile Farm Manager apps available from the Apple Store. Farmers in the field access information through a Web portal to make better decisions about every farming operation—tilling, seeding, harvesting, soil management, watering and fertilization. Intelligent seeding systems, for example, adjust depth and seed type during planting and establish a record for each row.
Addressing farm ROI, Deere’s proprietary JDLink fleet optimization network lets farmers know “which machines are earning or idling.” Consistent with its mobile strategy, last summer Deere unveiled iPhone, iPad and Android apps for accessing JDLink’s fleet database. Illustrating Deere’s deep-rooted commitment to innovation, both JDLink and FarmSight use the company’s own GPS system; competitors use third-party GPS tools that can be harder to integrate into a holistic system. Investors think those in-house capabilities give Deere an edge. “Proprietary products and services,” according to Turner Investments, “could generate double-digit earnings growth over the next several years in the precision agriculture segments.”
Customer-Focuse, Open to Ideas
When John Deere revolutionized 19th-century American agriculture with a single new tool, he was doing what successful innovators always do—addressing customers’ needs. Innovative companies typically have hefty R&D budgets, but money is not the key ingredient. “If spending determined R&D success, Silicon Valley would never have happened,” said Jaruzelski. By itself, he added, “technology does not equate to innovation—using technology to meet users’ needs is innovation.” In its eighth Global Innovation 1000 study, Strategy& found it’s the early innings that count when designing new products and services. The most successful innovators systematically followed a disciplined process to generate ideas and used rigorous criteria to decide which ideas to develop commercially.
But Wall Street struggles to reward innovators. According to Chris Malloy, a professor at Harvard Business School, investors don’t reward the stocks of firms that have proven they’re effective at R&D, even though a company’s R&D spending record can predict its success at innovation. “Innovation is one of the more-opaque activities companies undertake,” said Malloy, “yet it can have a huge impact on a firm’s overall value.” Although the market ultimately realizes that R&D spending turns into stronger sales—as much as 78 basis points per month—it can take as long as a year for good news about an innovation to be fully reflected in the innovator’s share price. “It looks like investors initially ignore easily accessible data on R&D success,” said Malloy.
Malloy and his team analyzed U.S. corporate R&D effectiveness by reviewing R&D spending relative to sales revenue, new patents, patent citations and new product launches. Bottom line: Companies that demonstrated both large R&D budgets and a history of converting innovation into revenue were likely to continue that performance. But in the short term, investors didn’t reward those companies with share price premiums over those of companies that spent the same percentage of sales on R&D but showed a poor record of converting that spending to new products and sales.
Investors may be right to be skeptical about the value of innovation. According to Strategy&, most companies themselves don’t believe they’re very good at it—only 43 percent believe they were highly effective at generating new ideas, and just 36 percent believe they excelled at converting ideas to growth. Those are the two activities most critical for innovation success, and a mere 25 percent believe their companies are highly effective at both stages. But in the long run it pays to get innovation right, Strategy& says—most of the survey respondents who said their companies were highly effective at both generating ideas and converting them to products also reported that they outperformed their peers in terms of revenue growth, market cap growth and EBITDA as a percentage of revenue.
Whatever doubts plague Wall Street and Corporate America about conducting and valuing innovation, Deere’s R&D prowess has translated into one of the top brand franchises in the world. Deere has marched steadily up the ranks of the 100 Best Global Brands list compiled by Interbrand, one of the world’s leading brand-value consultancies, since debuting at No. 97 in 2010. Now standing at 79, the company has made farming hip, leapfrogging iconic brands in part by turning its dealerships into multimedia retail stores selling Deere accessories, clothing and toy tractors alongside the real thing.
That rank wouldn’t surprise some of the most brand-loyal consumers in the world—Midwestern tractor owners. The Wisconsin State Journal cited a survey of 2,000 Midwest farmers by Farm Equipment magazine, which found that 65 percent of farmers said they were loyal to a brand when buying tractors, field equipment or combines. Deere leaves its competitors in the dust, with 67 percent of farmers citing John Deere as their primary brand, compared to 17 percent for Case IH and just 9 percent for New Holland.
These days Deere is topping the charts in new markets such as Ukraine. John Deere himself would recognize Ukraine’s potential as a market for farming technology—it’s endowed with the same rich, black soil that was clogging American plows when the Vermont blacksmith arrived in Illinois. Arable land covers 71 percent of Ukraine’s area, and most of that terrain is covered with “chernozem”—the Russian moniker for one of the most fertile soils in the world.
Chernozem is the humus-rich layer left when glacial lakes dried up, depositing pulverized minerals that created black soil zones in three places on earth—the North American plains, Argentina’s pampas and the grassy Eurasian steppe that stretches from Hungary to Mongolia. Situated on that seemingly endless plain, Ukraine accounts for about 25 percent of the world’s chernozem surface area, according to Dragon Capital, a Kiev-based investment bank active in the region’s thriving agribusiness sector.
Ukraine’s farmers strive to maintain the fertility and quality of that land. “We tend to appropriately use every square meter of black soil we have,” said Mykola Guta, general director of Mriya Agro Holding. Guta is one of five members of the founding family that controls 80 percent of the Frankfurt-listed company.
For Ukrainian farmers, that means driving a Deere. Ukrainians rival their Badger State colleagues when it comes brand loyalty. According to the Ukrainian Agribusiness Club’s “AgroBrand” ranking, Deere is “the undisputed leader in brand recognition” among agricultural machinery makers. With 55 percent of survey respondents favoring the green machines from Moline, Deere easily surpassed Germany’s Claas, which garnered 23 percent of the votes.
Deere anchors the 1,700-unit fleet Mriya used to implement precision farming methods as it expanded from 50 hectares of land under cultivation in 1992 to nearly 300,000 today. Of the 250 new machines Mriya added in the past few years, 136 were Deere products, including 20 of Deere’s most advanced new S680 combines. To nurture such relationships with customer-service lessons learned at home, Deere in the past two years has added new dealers, bringing the total to eight distributors in Ukraine, and recently opened a major parts warehouse to ensure speedy delivery to customers.
While some analysts note the upside for farm machinery stocks is limited by moderating demand for equipment in Deere’s primary North American and European markets, global population growth and the potential to raise yields in the world’s new breadbasket bode well for leaders in the precision agriculture sector. “Technology is and will continue to be the No. 1 driver behind our ability to meet the demands of a growing population in a way that stewards resources,” said Paul Rea, vice president, U.S. crop operations for chemical company BASF.
Linked to the Land
John Deere’s steel plow enabled farmers to till some of the richest soil in the world, in the process transforming the American prairie into the world’s breadbasket. He also had the confidence to build a new kind of enterprise—moving his factory to a Mississippi River town to gain access to transportation, and ordering his own steel to make plows at a time when it was unheard of to build a product before having orders in hand.
Today’s Deere reflects the founder’s enterprising spirit. Deere impacts the global food chain from tillage to storage, perhaps more completely than any other company involved in agriculture. Its engineers harness the latest developments in material science, seed research, telematics, mobile communications, robotics and automation for a singular purpose—to help farmers grow more food while conserving water and energy, and most importantly, preserving the soil. “The land is my livelihood,” said one grower who participated in the BASF survey. “If I ruin it, I am out of business.”
Crop production has long been a global industry, but today the stakes are far higher than the economics of tractor and combine sales and servicing. While agriculture has been thriving on innovation in information technology, crop genetics and energy efficiency, it has also become a strategic issue.
The key strategic risk is China’s need to ensure food supplies for a massive population with rising expectations. Chinese food policy is shaping up to be the defining agricultural story of the early 21st century. And China’s effort to meet its need brings it face to face with Deere’s global expansion.
As important as Ukraine is to Deere as a source of customers, it’s far more important to China as a source of grains for its hungry, growing, urban population. According to a Voice of America report, “China wants to lock down a portion of the bounty flowing from the black soils of this farming nation the size of France.”
Ukraine’s black earth represents a source of domestic tranquility to China’s leadership, and China is willing to secure urban peace with multibillion-dollar credit lines to Ukrainian agribusiness operators. UkrLandFarming, or ULF, Ukraine’s largest agribusiness operator with more than half a million hectares of farmland under cultivation, negotiated $4 billion in credit from three Chinese agencies in 2012. The first goal is to export corn to China. As the first country outside the Americas to do so, Ukraine will join the global agriculture elite, barely 20 years after its government held Deere tractors as leverage to collect loans from farmers struggling to cope with Soviet collectivization.
Already a leading exporter of grain, Ukraine shipped out 18.5 million tons of grain in 2013 and hopes to more than double that amount to 40 million tons by 2020. China looms large in those plans. In late 2013 a Chinese company reportedly arranged to buy or lease 5 percent of Ukraine’s land area—about the size of Massachusetts—to grow grains for China for 50 years. The deal came after Ukraine lifted a law barring foreigners from buying Ukrainian. As part of the deal, China’s export-import bank has given Ukraine a $3 billion loan for agricultural development. But the deal may be in jeopardy from the tensions between Ukraine and Russia, and some reports have said China is demanding the return of the loan proceeds because Ukraine has not supplied enough grain under the agreement. Stay tuned.