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Farming?
We Have an App for That
John Deere: Lessons From 177 Years of Innovation
BY C H R I S TO P H E R O ’ D E A
O
Raul Colon
NE 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 steelbladed 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.”
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Get a Tattoo
D
eere’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
practice at Strategy&, a consulting
firm now part of PricewaterhouseCoopers. 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.
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,
“Go get a John Deere tattoo,
then we’ll talk…”
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
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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
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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
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.
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,
ractors and combines are
sloping or uneven ground in forests.
major investments—acThe spider-like device helped pave
counting for as much as half
the way for environmentally friendly
of the total cost of crop producmachines, and a prototype sits in the
tion—and Deere relies on “the comDeere Pavilion in Moline. A control
petitive strength of enterprise-wide
and stability system distributed
innovation” to develop and deliver
weight and support equally to the
machinery and control systems that
harvester’s feet according to terrain
improve productivity, said
readings from sensors in
Allen. Deere engineers
each leg; a system based on
strike deals with research
the prototype is now used in
CHINA’S AGRICULTURAL
scientists and creative proall Deere forest equipment,
MECHANIZATION HAS
ducers around the world if
while the latest versions
it will lead to products and
of the control system and
INCREASED TO
services that help farmers.
hydraulics help Deere’s agriDeere today runs five
cultural harvesters cause less
Global Technology Instress on farmland.
AND THE GOVERNMENT
novation Centers, up from
Asian rice farming presa single North American
ents
an entirely different set
PLANS TO REACH A
R&D center six years ago.
of challenges. Deere has been
The commitment reflects
adapting its know-how to rice
the impetus to find the
cultivation for more than 100
MECHANIZATION LEVEL
best ideas and materials, a
years, and today produces
custom that dates to John
its rice-farming lineup in
IN FIVE YEARS, PRIMARILY
Deere’s practice of ordering
Ningbo, China. The sucTHROUGH INCREASED
steel made to his specificacessor to a rice binder Deere
tions. Deere began what is
built in the 1920s, today’s
MACHINERY USE IN
now a 14-year collaboration
R40 small-track combine
with the Fraunhofer InstiRICE PADDY FARMING.
utilizes a special separator
tute for Factory Operation
for paddy rice harvesting,
and Automation in Magdean innovation that can also
burg, Germany, when it was working
During 2013, Deere rolled out another
be used for wheat and other small
with new simulation technology,
innovation developed with Tama
grains. The Ningbo plant is part of
said Thomas Schulze, head of the
technology—B-Wrap, a material that
Deere’s increasing presence in China,
institute’s Competence Center for
keeps moisture out of round hay bales
which includes plans for new plants
Simulation. The institute is one of
while allowing water vapor to escape
to produce construction equipment,
the research centers in Germany’s
through microscopic pores. B-Wrap
engines and large farm machinery.
Fraunhofer-Gesellschaft, a national
was designed to preserve hay so well
The expansion illustrates how Deere
system for academic-business colthat farmers don’t need to store it
integrates product development with
laboration in applied science and enin a barn. That will reduce storage
market opportunity—China’s agrigineering. Deere has several projects
costs and spoilage, and could even
cultural mechanization has increased
under way with the institute, said
lead to happier cows—Deere said hay
to 52 percent from 42 percent in 2007,
Schulze, including harnessing virprotected by B-Wrap “looked and
and the government plans to reach a
tual reality tools to improve training
smelled like the day it was baled, even
60 percent mechanization level in five
effectiveness. “The most important
after spending a winter outside.”
years, primarily through increased
work is for quality improvement that
Deere’s overseas operations have
machinery use in rice paddy farming.
T
52 PERCENT,
60 PERCENT
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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 Farm-
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Sight 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.”
CustomerFocused, Open
to Ideas
W
hen 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
FarmSight
spending deDeere’s
termined R&D
FarmSight
success, Silicon
is a software
platform that
Valley would
encompasses
never have
databases of
soil, seed
happened,” said
and other
Jaruzelski. By
information
about a farm,
itself, he added,
delivered to
“technology
customers on
does not equate
their iPads,
iPhones and
to innovation—
other mobile
using techdevices.
nology 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.
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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 moreopaque 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
Deere’s unit in Finland invented a
“walking harvester”... The spider-like device
helped pave the way for environmentally
friendly machines, and a prototype sits
in the Deere Pavilion in Moline, Ill.
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.
Brand-Loyal
Farmers
W
hatever 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
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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
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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
C
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.
ROP 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.
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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
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
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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
J
ohn 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.” Strategic Agriculture
A John Deere combine harvesting grain in a field
near the town of Kalush, Western Ukraine.
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.
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