How Smart, Connected Products Are Transforming

Competition

Michael E. Porter and James E. Heppelmann, Harvard Business Review, Nov. 2014

Strategic Business Planning

Vassilis Kapatsoulias

Idea in Brief IT-Driven Competition Smart, Connected Products The New Technology Stack What Can Smart, Connected Products Do? Reshaping Industry Structure New Industry Boundaries and Systems of Systems Competitive Advantage Implications for Strategy The Larger Opportunity

Table of Contents

• A changing environment– New opportunities: functionality + capabilities transcend boundaries– Changing nature: disrupting value chain– Rethink: products (conceive, design, source, manufacture, operate), IT

infrastructure (build, secure)

• New strategic choices– How value is created and captured– How companies work with partners– How competitive advantage is secured

• ““What business am I in?”What business am I in?”

Idea in Brief

• First wave: 60s and 70s automated activities

– Data analysis, process standardization productivity ↑

• Second wave: 80s and 90s coordination and integration

– Value chain transformed productivity and growth ↑

• Third wave: IT is part of product computers, cloud, data

– productivity ↑ ↑ ↑

– “Internet of things”: change everything?

• Rules of competition and competitive advantage are the same

IT-Driven Competition

• 3 core elements– Physical: mechanical, electrical parts

– Smart: sensors, microprocessors, data storage, controls, software, operating system, enhanced user interface

– Connectivity: ports, antennae, protocols enabling connection

• One-to-one, one-to-many, many-to-many

• Exchange info, product cloud

• Innovation, breakthroughs emerging across all manufacturing sectors

• Requirement: building new technology infrastructure (“technology stack”) rapid product application development and operation data

– Product hardware/software/cloud, connectivity, security tools, external information sources, integration with business systems

Smart, Connected Products

• Monitoring: sensors, external data sources condition, operating characteristics

– Data implications

• Control: software remote commands or algorithms control functions– Personalize user experience and performance

• Optimization: monitoring + control apply algorithms and analytics to data

– Enhance product performance– Allow predictive diagnostics, service, repair, updates

• Autonomy: learn – self-diagnose – adapt– Autonomous product operation and coordination– Product enhancement, personalization

What Can Smart, Connected Products

Do?

• Bargaining power of buyers: product differentiation competition not only price

– Ability to segment, customize, capture value, value-added services (-)

– Customer relationships, switching costs, distribution independency (-)

– Understanding true product performance, access to usage data (+)

– Support from manufacturer ↓, product as a service switching cost ↓ (+)

• Rivalry among competitors: differentiation, tailor, customize

– Broaden value proposition (data, service)

– Fixed costs ↑

– Tempt to enter feature and function arms race

– Broader product systems rivalry ↑

Reshaping Industry Structure

• Threat of new entrants:– Obstacles:

1. Design, technology, IT infrastructure high fixed costs2. Broadening product definitions3. First-mover advantages buyer loyalty, switching costs

– Opportunities: embrace new capabilities leapfrog/invalidate incumbents

• Threat of substitutes: performance, customization, value threats ↓– New threats: wider capabilities, new business models substitute

product ownership

• Bargaining power of suppliers: software replaces physical components

– Traditional suppliers: reduced importance– Powerful new suppliers essential to differentiation and cost high

bargaining power (can also gain leverage through end users and usage data access)

Reshaping Industry Structure

• Expanded definition: function optimized with other products

• Basis of competition: performance of broader product system

• Systems of systems: coordinate and optimize external information

• Products/designs with greatest impact drive process, capture value

• Effect: 1. Rising barriers + first-mover advantage consolidation

2. Consolidation pressures ↑ single products vs. multiproduct systems

3. New entrants emerge “productless” strategies (connectivity)

New Industry Boundaries and Systems

of Systems

• Differentiate price premium, lower costs superior profitability and growth

• Foundation: Operational Effectiveness (OE) best practices across value chain

• Define distinctive strategic positioning how to deliver unique value

• Design: new principles– Hardware standardization through software-based customization and personalization

– Support ongoing upgrades

– Enable predictive, enhanced, and remote service

Expertise in systems engineering

Product development late stage and post-purchase

Synchronize “clock speeds” development

Competitive Advantage

• After-sale service: predictive maintenance and service productivity– Use data insights, validate/identify warranty

– Decrease service costs replace physical parts with “software parts”

• Marketing: data insights on positioning, communication– Segmentation bundles, pricing, tailoring through software

• Human resources: need to recruit new skills high demand– Software development, systems engineers, clouds, big data

• Security: robust security management protect data, new authentication

Competitive Advantage

• Set of choices reinforce one another, coherent

1. Set of capabilities and features– Which features deliver real value, related to cost? value equation– Which segments to serve? – Reinforce competitive advantage extensive features differentiation vs. low-

cost basic features

2. Functionality: embed in product or cloud?– Cost, response time, connectivity risk, automation– Network availability/reliability/security dependence– Location of product use: remote or hazardous? mitigate dangers/cost– Nature of user interface: complex or frequently changed? cloud– Frequency of service or product upgrades

Implications for Strategy

3. Open or closed system?– Closed: single manufacturer requires significant investment

• Competitive advantage: control/optimize design of all parts

• Become de facto industry standard capture all value

– Open: interface and participate in the system

• Become de facto industry standard no proprietary benefit

4. Capabilities & infrastructure: develop internally or outsource?• Investment skills (scarce, high in demand)

• In-house: control over features, first-mover advantage, overestimate ability

• Outsourcing: partners demand larger share, compromise ability to become experts

Combination of both

Identify opportunities: insight, innovation, competitive advantage, outsource future commodities

Implications for Strategy

5. Type of data to capture, secure, and analyze (cost, rights, complexity)

Functionality value, value chain, efficiency, future improvement, frequency Consider product integrity, security Depends on positioning and strategies

6. Managing ownership and access rights: who owns the data?• Outright or joint ownership

• Transparency, data-sharing framework (condition/performance/location)

• Customers want a say make clear value proposition to encourage sharing

• “Click through” agreements

7. Disintermediation of distribution channels and service network+ Revenue, margins, knowledge of needs, brand awareness, loyalty, pricing ease ↑

- Physical proximity required, losing partners to competitors, invest in functions Decide based on type of partner networks

Implications for Strategy

8. Change business model? (from traditional ownership to product-as-a-service)

• Dilemma: economic incentives• New model profitability: pricing, terms of contracts• Switching costs vs. perpetual ownership Hybrid models: bundles with warranty, service, performance-based

9. New business: monetizing product data• Value of data new services/businesses reaction of core customers?

10. Expand the company’s scope (broadened industry boundaries)a) Related products or parts: opportunities, risk, systems engineeringb) Platform that connects products & info Value proposition, systems engineering, IT skills, products central to

system Optimization: “inside product” or “outside product” (design vs.

algorithms)

Implications for Strategy

• Changes in: value creation, competition, industry boundaries economy, productivity growth

• Improved ability to meet needs: efficiency, effectiveness, safety, reliability, utilization, conservation

• Opportunity: rapid innovation and economic growth prosperity growth

• Embrace opportunity: equip workers with skills, agree on rules and regulations, overcome blocking efforts

• Make clear choice of strategy: consistent, reinforce choices define distinctive and realistic value proposition

The Larger Opportunity