Michael E. Porter Presentation at Porter Prize 2015

This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “The Five Competitive Forces That Shape Strategy” (Harvard Business Review, 2008); On Competition (Harvard Business Review, 2008); “How Smart, Connected Products Are Transforming Competition” (Harvard Business Review, 2014), and “How Smart, Connected Products are Transforming Companies” (Harvard Business Review, 2015). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu.

How Smart, Connected Products are Transforming Competition and Companies

Professor Michael E. Porter Harvard Business School

Porter Prize India

September 25, 2015

http://www.isc.hbs.edu/







Copyright 2015 © Professor Michael E. Porter 2 20150925 – Porter Prize India – FINAL

The Third Wave of IT Driven Competition

Products are mechanical/electrical and information processing is performed manually

IT automates information collection and processing in activities across the value chain

The internet enables coordination and integration across the value-chain, with customers, with business partners, and across geography

IT is embedded in products themselves, transforming the way products create value and the nature of competition

Mechanical Products & Physical Processes

Value Chain Automation

Value Chain Dispersion and Integration

Smart, Connected Products

1800s 1960s 1980s 2000s Beyond


Smart, Connected Product Components

Sensors

Product Cloud

Electronics and Controls

Software

Enhanced UI on the Product

Mechanical

Smart, Connected

Product

Electrical

Connectivity

Physical Product

Smart Product 11100011001000011000010100001010000011100011010101110001100100001100001010000101000001110011011001001100

11100011001000011000010100001010000011100011010101110001100100001100001010000101000001110011011001001100


Capabilities of Smart, Connected Product

Smart, connected products enable new categories of capabilities, with each building on the preceding layers

1. Monitoring

2. Control

3. Optimization

4. Autonomy

Tracking location, product operation, product condition, and the surrounding environment

Physical or remote control of product via embedded software or the product cloud

Algorithms that optimize product operation, use, and service

The combination of other capabilities enables product autonomy


The Technology Stack Identity & Security Tools that manage user authentication and system access, as well as secure the product, connectivity, and the product cloud

External Information Sources A gateway for information from external sources – such as weather, traffic, commodity and energy prices, social media, and geo-mapping – that inform product capabilities

PRODUCT CLOUD

Network Communication

Product Data Database

Smart Product Applications

Rules/Analytics Engine

Application Platform

The protocols that enable communications between the product and the cloud (cellular, Wi-Fi, Bluetooth, others)

Big data database system that enables aggregation, normalization, and management of real-time and historical product data

Application development and execution environment enabling rapid creation of smart, connected business applications using data access, visualization, and run-time tools

The rules, business logic, and big data analytical capabilities that populate the algorithms involved in product operation and reveal new product insights

Software applications running on remote servers that manage the monitoring, control, optimization, and autonomous operation functions

PRODUCT

Product Hardware

Embedded sensors, processors, and connectivity port/antennas supplementing traditional mechanical and electrical components

Product Software

An embedded operating system, onboard software applications, enhanced user interface, and product control components

Integration with Business Systems Tools that integrate data from smart, connected products with core enterprise business systems such as ERP, CRM, and PLM

COMMUNICATIONS


Smart, Connected Products and Industry Competition

+ Shift rivalry away from price

- Higher fixed costs increase pressure to discount

+ Higher barriers to entry

- New entrants can leapfrog incumbents

+ Expanded opportunities for differentiation, segmentation, switching costs

+ Reduced dependency on channels/ service partners

- Greater customer visibility of value/ new business models

+ Less dependence on mechanical components

- Greater power of IT vendors

- Better utilization of products reduces volume

Threat of Substitute Products or Services

Threat of New Entrants

Rivalry Among Existing Competitors

Bargaining Power of Suppliers

Bargaining Power of Buyers


Weather Data System

Irrigation System

Seed Optimization

System

Farm Equipment

System

Farm Management

System Platform

Rain, humidity, temperature

sensors

Weather maps

Weather forecasts

Weather data application

Farm performance database

Seed database

Seed optimization application

Field sensors

Irrigation nodes

Irrigation application

SYSTEM OF SYSTEMS

TILLERS PLANTERS

TRACTOR FLEETS

Farm Equipment

System

COMBINE HARVESTERS

PRODUCT SYSTEM

+

+

SMART, CONNECTED PRODUCT

+

SMART PRODUCT

Expanding and Shifting Industry Boundaries Farm Equipment

PRODUCT


Smart, Connected Products and Industry Competition

+ Expanded opportunities for differentiation, segmentation, switching costs

+ Reduced dependency on channels/ service partners

- Greater customer visibility of value/ new business models

+ Less dependence on mechanical components

- Greater power of IT vendors

Threat of Substitute Products or Services

Threat of New Entrants

Rivalry Among Existing Competitors

Bargaining Power of Suppliers

Bargaining Power of Buyers

- Better utilization of products reduces volume

+/- Systems disintermediate discrete products

+ Higher barriers to entry

- New entrants can leapfrog incumbents

- New potential entrants from other parts of the product system

+ Shift rivalry away from price

- Higher fixed costs increase pressure to discount

+/- Rivalry shifts from products to systems


Ten Strategic Choices for Manufacturers Which product capabilities to pursue?

Functionality embedded in the product vs. the cloud?

Open or closed system?

Technology development: internal or outsource?

What data to capture?

How to manage data rights and access?

Disintermediate distribution or service channels?

Change the business model?

Sell data to outside parties?

Expand product scope to systems?

6

9

7

8

10

5

2

4

1

3


Value

What buyers are willing to pay

Competitive Advantage and the Value Chain

Support Activities

Inbound Logistics

Order Processing & Outbound

Logistics

M a

r g

i n

Primary Activities

Procurement

Firm Infrastructure

Technology Development

Marketing & Sales

After-Sales Service

Manufacturing

Human Resource Management


The Product as a Sensor: The Data Lake

• Stored in a new kind of unstructured database • Big data analytics to develop insights • Companies are forming unified data organizations

to manage this crucial resource

Copyright 2015 © Professor Michael E. Porter 12 20150925 – Porter Prize India – FINAL 12

New Principles of Product Design

Configurable Engine

Product Development

• Product development shifts from largely mechanical engineering and product design to true interdisciplinary systems engineering

• Products become complex systems involving sensors, software, connectivity, and operating in the cloud • New design principles emerge, including: − Design for low-cost variability

− Design for evergreen customization and improvement

− Design enabling new user interfaces − Design for ongoing quality management

− Design for connected service − Design for new business models − Design for system interoperability


Manufacturing

Restructuring Production Plus Ongoing Product Operation

• Smart, connected equipment that integrates, automates, and optimizes the production process (e.g. Industrie 4.0 and Smart Manufacturing)

• SCPs can reduce the physical complexity of products as more features and variability are delivered via software, simplifying assembly

• SCPs enable later stage design changes, and the ability to finalize the product post-manufacturing and even in the field

Physical Manufacturing Ongoing Product Operation • SCPs rely on a cloud-based technology stack that

must be continuously and seamlessly operated and improved over the product’s life

• The product can be modified after purchase and customized based on the customer’s evolving preferences


• Shifting from traditional transactional sales to proactively maximize ongoing product value for the customer, enabled by increased visibility of product use

• Greater opportunities for segmentation and personalization of features, special offers, or after-sale service packages

• Enabling more sophisticated pricing models based on usage at the segment or individual customer level

• Managing upgrades, replacement products and services over the product’s life • Expanding opportunities for new value added services (e.g. benchmarking) or business models (e.g.

products as a service)

• Selling entire product systems or platforms

Redefining Customer Relationships

Radar Speed Display

Remote Traffic Safety System

Marketing & Sales

Copyright 2015 © Professor Michael E. Porter 15 20150925 – Porter Prize India – FINAL 15

• Shift from reactive service to proactive, predictive and remote service − System-wide fixes and improvements can be proactively pushed to all units in use via the cloud − Analysis of actual product usage data can anticipate problems and improve efficiency, uptime, technician

utilization, and warranty management − Remote diagnostics allows for one-stop service and higher success rates, while many problems can be fixed

entirely by a remote technician • Augmented reality makes product operation, training, and service operations far more efficient • Potential to disrupt legacy channels and service providers through “digital proximity” and direct connections to

products and customers • Services move beyond repair to ultimately product as a service, and entirely new value added services become possible

New Service Delivery Approaches Elevator / Escalator Manufacturer

Urban Mobility Solutions

After-Sales Service


• Risk models must consider threats across all potential points of access: the device, the network to which it is connected, and the product cloud

• The job of ensuring IT security now cuts across all functions, e.g. embed security in product design

• Customers expect fair exchange of value for use of product data and transparent data rights policies are necessary

• Keeping customer data secure and private is an increasingly important source of value and a potential differentiator

Data Rights, Security, and Privacy

New Expectations for Security and Privacy

Copyright 2015 © Professor Michael E. Porter 17

The Traditional Manufacturing Organization

CEO

FINANCE HUMAN RESOURCES

IT R&D MANUFACTURING MARKETING SALES SERVICE AND SUPPORT

• Businesses units are organized into distinct functional units • Integration occurs through management committees, process flow handoffs

and other mechanisms that facilitate coordination across the organization


A New Organizational Structure

CEO



UNIFIED DATA ORGANIZATION

TRADITIONAL FUNCTIONS

NEW FUNCTIONS

Led by a chief data officer. Handles enterprise-wide data aggregation and

analytics, supports the functions’ analytics, and shares information and

insights across the firm.


CEO




Deep collaboration reflecting the new need for IT in product development. May lead to IT teams embedded in R&D or product design teams with IT representation.


NEW FUNCTIONS



CEO



Draws teams from R&D, IT, manufacturing, and service. Oversees product updates, postsale service and enhancements, and efforts to shorten product-release cycles.


NEW FUNCTIONS

DEV-OPS




CEO




DEV-OPS CUSTOMER SUCCESS

MANAGEMENT

Takes charge of the ongoing customer relationship and ensures that customers gain maximum value from the product.


NEW FUNCTIONS



Making the Transition

• The organizational changes needed are substantial and just beginning to appear

• Manufacturers will continue to produce and need to maintain traditional products for a sustained period of time

• The organizational transition will be evolutionary, not revolutionary and old and new structures will often need to operate in parallel

• Companies will often need hybrid or transitional structures to pool scare talent and avoid duplication


Transitional Structures

Model Example Description Benefit Risk

Standalone SCP Business Unit

A separate new business unit, with profit-and-loss responsibility, is charged with supporting the company’s SCP strategy. The unit aggregates the talent and mobilizes the technology and assets needed to bring new offerings to market.

• Able to innovate without the organizational baggage

• Pools skills and resources

• Separation may limit impact to the core business

SCP Center of Excellence

A separate corporate unit houses key expertise on smart, connected products. It does not have profit-and-loss responsibility but is a cost center that business units can tap.

• Focus and shared vision can create better solutions

• Limits growth and initiative across the organization

• Technology investments may not be extendable across businesses

Cross-Business Unit SCP Steering Committee

A cross-functional committee of thought leaders across business units, who champion opportunities, share expertise, and facilitate collaboration.

• Distributes input and learning across the organization

• Lack of authority and multiple stakeholders may slow development


• Smart, connected products dramatically increase opportunities for value creation and higher productivity throughout the economy, increasing economic growth and prosperity

• SCPs create a whole new generation of lean, driving out waste

• SCPs will transform competition in many service industries, not just in manufacturing

• SCPs will improve our ability to meet human needs by driving out waste and conserving resources

• This wave of innovation will undoubtedly alter the nature of work, but is likely to generate a net positive effect on jobs through faster growth together with creating new roles and training tools

• The impact of SCPs is still in the early innings

The Larger Opportunity

Education

Michael E. Porter Presentation at Porter Prize 2015