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The IoT Killer App
James E. HeppelmannCEO, PTC
A Fireside ChatConnected Things 2015 Conference
MIT Media Lab2/26/15
John SallayFounder & Managing DirecctorThe NextVista Group
James Heppelmann John Sallay
From a broken model of things … 7To a model that works … 8
How IT got to be IoT … 9Products have different architectures … 10
Four levels of breakthrough capabilities … 11The fourth and ultimate level … 12
Product boundaries will change … 13One step beyond that: system of systems … 14
So industry boundaries will change too … 15You need to know where you fit in the IoT value chain … 16
We're in the second inning of IoT's evolution … 17Today's CRM is obsolete … 18
The ecosystem is key … 19Products will become platforms for delivering new capabilities … 20
Small companies have a golden opportunity … 21
What about industry consolidation? … 22Security concerns won't stop IoT … 23
Beware of brand risk … 24Centers of excellence will proliferate … 25
Data privacy issues today … 26Two things need to happen with private data … 27
Organizational change #1: more interdepartmental teaming … 28Organizational change #2: focus on after-sale value … 29Service providers can't rely on sunk cost advantage … 30
The tale of the connected washing machine … 31Startup strategy #1: the leapfrogger … 32
Startup strategy #2: work the business model … 33Startup strategy #3: the ecosystem play … 34
Big company strategy #1: strategic differentiation … 35Big company strategy #2: operational efficiency … 36
I often joke that if your oven goes down a couple ofdays before Thanksgiving, you know, you’re screwedbecause on the first service call they’re going to comeout and ask what kind of oven do you have and what’swrong with it. And then they’re going to say, “Give mea week because I’m going to have to order the spareparts and I’ll be back to install them." And the problemis two service calls on an oven costs more than a newoven. So, that model’s just not working.
From a broken model of things
But if you were monitoring and able to tap into that oven[via the Internet] and figure out what’s wrong with it --first of all, you might prevent the problem. Second of all,you might fix it remotely. Third of all, if you have to go fixit, you go there and nail it the first time.
To a model that works
The term Information Technology was coined whenpeople realized that value chain processes would workdifferently if we would capture information and pass itfrom one step to the next. The second biggestgenerational change was the Internet when we realizedwe can have extended value chains. We can involvecustomers on one end and suppliers on the other andcan more efficiently cross departments and systemsand geographies. The big breakthrough [with Internet ofThings] is that the things are now active participants intheir own value chain.
How IT got to be IoT
If you think about smart connected things, they’re partphysical, part digital. And the digital part is partly in theproduct and partly in the cloud. So suddenly now, ifyou’re shipping smart connected widgets and the cloudpart’s not ready, you can’t ship the widget. So now we’retalking about a pretty sophisticated technology stackthat’s behind every single smart connected product andthat has all kinds of ramifications for engineeringdepartments.
Products will have different architectures
There’s monitoring, if you can monitor things you canset limits and alerts and so forth. The next level wouldbe control. We can apply a bidirectional control loop,and begin to operate things remotely and actually get tothe third level, which would be optimize. Which meansnow we have algorithms, probably up in the cloud that[let you] say, “Well, what’s the best control signals I cansend to it? Or, how can a fleet of these things worktogether better as a team?”
Four levels of breakthrough capabilities
The fourth and ultimate level would beautonomous interaction. Let things process minidata streams from many different souces andstart making their own decisions. Sort of theGoogle autonomous car.
The fourth and ultimate level
Companies that used to make simple things,make smart things, and then connected things.And now they’re realizing that families ofconnected things could play together. If farmequipment is part physical and part digital, and ifthe digital part was shared to some degree sothat the farm equipment was generating a geodatabase of how much each little parcel of landproduced, then next spring when it’s time toplant the next crop, we can vary the degree offertilizer based on production last year.
Product boundaries will change
And so if you take the farm example, it’s not justthe farm equipment. Then you start puttingsensors in the field to measure the moisture thatyou connect to a weather forecasting serviceand then you connect that to the irrigationequipment and you start doing localizedwatering. If a given parcel of the field is sort ofdry but not an emergency and the weatherforecast says it’s going to rain in two days youcan wait.
One step beyond that: systems of systems
Accenture type system integrators are alsocapable of doing that. Because by the time youget to a smart automated farm, and you’re doingbroad system integration, it doesn’t so muchmatter if you make tractors or not anymore.
So industry boundaries will change too
Are you making simple things? Are your things acomponent of somebody else’s system? Are youmaking components? Are you making products?Are you making integrated families of products— product systems as we call it? Or are youmaking systems of systems? Are you a player insystems of systems? Or are you a competitor insystems of systems?
You need to know where you fit in the IoT value chain
We are in the second inning. You’ve seen a littlebit of the game, you sort of understand how it’splayed, but there’s still surprises. And you haveno clue how it will end. I mean, a lot of stuff isreal. Every automotive OEM is makingconnected cars right now. But they’re onlyscratching the tip of the iceberg. We don’t knowwho the winners will be. But we can see how thegame’s played and it’s a pretty interesting game.
We're in the second inning of IoT's evolution
CRM, like we know it today, is completelyobsolete. Because the whole notion of a helpdesk system is that the customer monitors thething you sold them. And if the thing you soldthem isn’t working the customer should call you.Well, how backwards is that?
Today's CRM is obsolete
What it’s going to take is ecosystems of peoplespecializing in every layer [of the technologystack] and then aligning together in anecosystem so that I can buy someday off theshelf a solution to manage a fleet of trucks or areal home automation solution or something likethat and there are different specialty firms atevery level contributing bits of communicationtechnology, big data technology, analytics,application platforms, security, end userapplications, and so forth.
The ecosystem is key
On the hardware side, you know one of thethings we talk about and has come up manytimes in our research is the idea of product as aplatform. I want to design a thing that I shiptoday and I want to keep adding to that thing. Iwant to deliver an automobile but I want to keepdelivering new capabilities into that automobileand maybe I want an ecosystem that can delivercapabilities into that automobile. A platform tome just means something that’s reusable in ashared sort of way.
Products will become platforms for delivering new capabilities
If you ask the big companies, the Internet ofThings strategy from Microsoft, Oracle, SAP,even IBM — is a little weak. They’re just notfocused on it. They’re big tanker ships that arehard to turn and people are protecting thebusiness they have. On the other hand it’s prettyeasy, particularly on the software side of thestack, to found a startup company. But then it’shard to get traction with it. So, what we did, wasacquire two startup companies.
Small companies have a golden opportunity
I think there could be consolidation of the currentgeneration of players. But at the same time theintroduction of next generation players that areleapfrogging into the industry with innovativenew ideas like Next did. Who’d a thought, shortof the Internet of Things, that you could get intothe thermostat industry?
What about industry consolidation?
When customers, say, “Oh, security, security,” Isay, ‘Hey, are your computing systems, relativelyspeaking, more or less secure today than theywere 10 years ago?’ I mean anybody who thinksthey’re more secure today despite all theinnovations in security [is wrong] because thebad guys have been advancing pretty quicklytoo. So I say, "Okay, do you plan on stop usingcomputers? Of course not. So, we’re going to dothis. We’re going to brute force our way throughthis."
Security concerns won't stop IoT
Maybe you’re a company that makes, let’s say,diesel engines. You’ve been making dieselengines for a hundred plus years. You’ve gotthat mastered. You don’t know anything aboutputting software in the cloud. That’s the problem.So, I think there going to be some products thatcome out that are amazingly bad products fromsurprisingly good companies. And that’s going tobe brand damage and that’s going to be adifferent kind of risk that people worry about.
Beware of brand risk
A lot companies that are saying, we need tobuild a center of excellence. We just don’t haveenough talent to cross a big conglomerate ormulti-business unit company. We don’t haveenough talent or capital to repeat this exercise inparallel five or six times. Let’s try to aggregatethe precious talent we have together and theprecious capital and try to get one good one andthen decide what to do next.
Centers of excellence will proliferate
That’s the kind of transparency we need — thatif I give you this, I get that back. Today we’regiving out all kinds of data. We don’t even knowwe’re giving it out and we’re not getting anythingback. And that’s the problem.
Data privacy issues today
One idea is what I call data commerce. We’regoing to have to be able to take a data streamfrom a thing into a cloud and then parcel it andsyndicate it out and send it up to a bunch ofother places. And sometimes we’ll charge peoplefor that and so forth. But we’re also going tohave to have pretty transparent disclosure withthe people who are supplying this data to us thatin fact they are supplying it and is it permissiblefor me to have it and what value do they get forgiving it to me.
Two things need to happen with private data
The basic theory of organizational strategy wasto create functional groups where there aredifferences. Like engineering’s different thansale so let’s have an engineering group and asales group. And then use general managementto knit across those differences. Well it turns outto be a little hard now to tell the differencebetween IT and engineering and productdevelopment. Because the IT guys now are onthe front line developing product. And it’sbecause engineering doesn’t know how to doclouds.
Organizational change #1: more interdepartmental teaming
Anytime there’s a time bounded service youhave to worry about it being renewed and a goodenough experience to hopefully expand it. Sothat leads to an organization that some softwarecompanies might call customer success or youcould call it customer care, which is somecombination of selling and technical support andsometimes even after-sale service to monitorthat customer to make sure they’re getting goodvalue and make sure they’re going to renew. So,shame on you if you sell something as a serviceand then treat it like a sunk cost, which it isn’t.
Organizational change #2: focus on after-sale value
If you were to buy Salesforce.com versus SAP,
which you purchase, if a year later you don’t
have any users of either, you cancel the
Salesforce contract because there’s no sunk
costs and you forge on with the SAP project. You
better make that work because you already paid
$5 million. You’re going make it work.
Service providers can't rely on sunk cost advantage
Not only do you know who owns [the machine],
you know how many loads of laundry they do,
what time of the day they do laundry, whether on
the hot cycle or the cold cycle, when it’s time to
sell them more detergent (if you want to get into
the business of consumables). And, by the way,
this customer barely ever uses his and this
[other customer] is running that residential
machine to death; we should get in there and
sell him a commercial unit. What I say is, you
now have intimate digital proximity to customers.
The tale of the connected washing machine
Do something that’s already done but do it in
some radical new way and do it long before the
dinosaurs figure out that the world is changing.
Startup strategy #1: the leapfrogger
Another idea would be go work the business
model. You know the idea of buying things and
barely using those things has given way to the
sharing economy. You know Uber is nothing
more than an Internet of Things play that taps
into latent transportation capacity.
Startup strategy #2: work the business model
A third thing I would say is that there are many
ecosystem opportunities. Come develop apps on
our platform. Join some other ecosystem. Think
of all the companies that have made a pretty
good business joining the Apple or the Android
ecosystem. I think that’s a least-risk, easiest
entry for an entrepreneur to get in.
Startup strategy #3: play the ecosystem
On the strategic differentiation side, ask: “What
can I do with my product that makes it
substantially different than my competitors?” And
there’s a whole new world of innovation
possibilities. It’s like we just opened up a new
Oklahoma land rush.
Big company strategy #1: strategic differentiation
On the operational efficiency, it’s just
unbelievable. I’d do engineering differently. I’d
do customer relationship management
differently. I would do service differently — more
proactive versus break-fix and get it right the first
time. I would automate my factories differently.
So I would look for massive operational
efficiencies.
Big company strategy #2: operational efficiency
For further reading:"How Smart, Connected Products are Transforming Competition"
by Michael E. Porter and James E. Heppelmann
From the November 2014 issue
MIT Enterprise Forum Cambridge Website
www.mitforumcambridge.org
MIT Enterprise Forum Cambridge Podcast
http://bit.ly/wzpcVw
Questions and feedback on this deck
Randall Cronk
rc@greatwriting.com
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