How Smart, Connected Products are Transforming Competition

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1 How Smart, Connected Products are Transforming Competition Professor Michael E. Porter Harvard Business School James Heppelmann President & CEO, PTC Executive Event Munich, Germany January 21, 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); and How Smart, Connected Products Are Transforming Competition (Harvard Business Review, 2014). 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,

2 The Third Wave of IT Driven Competition 1800s 1960s 1980s 2000s Beyond Mechanical Products & Physical Processes Value Chain Automation Value Chain Dispersion and Integration Smart, Connected Products Products are mechanical and value chain activities are performed manually using analog information through paper processes and verbal communications IT used to automate information collection and processing in individual activities across the value chain The Internet enables coordination and integration across the value-chain, with customers and business partners, and across geography IT is embedded in products themselves, transforming value creation by products while also triggering a new wave of transformation in the value chain, and creating the need for entirely new activities 2

3 Smart, Connected Product Smart, Connected Product Components Product Cloud Database, Application Platform, Rules / Analytics Engine, Smart Product Applications Connectivity One to One, One to Many, Many to Many Smart Product Physical Product Enhanced UI Software Electronics and Controls Sensors Electrical Mechanical 3

4 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 Sensors and external data sources Software embedded in the product or in the product cloud Monitoring and control capabilities enable algorithms that optimize product operation and use Combining monitoring, control, and optimization enables autonomy 4

5 Monitor Product Condition Alert and Notify of Changes Monitor the Product s External Environment Monitor Product Operation / Use

6 Control Product Operation / Use Personalize User Experience 6

7 Enhance Product Performance 7 Perform Diagnostics / Service and Repair

8 Autonomous Product Operation Autonomous in Coordination with Other Products and Systems Autonomous Product Diagnostic / Service Autonomous Product Optimization

9 Identity & Security Tools that manage user authentication and system access, as well as secure the product, connectivity, and product cloud layers Smart, Connected Product Technology Stack Smart Product Applications Rules/Analytics Engine Application Platform Product Data Database Network Communication Product Software Product Hardware PRODUCT CLOUD Software Applications running on remote servers that manage the monitoring, control, optimization, and autonomous operation of product functions The rules, business logic, and big data analytical capabilities that populate the algorithms involved in product operation and reveal new product insights An application development and execution environment enabling the rapid creation of smart, connected business applications using data access, visualization, and run-time tools A big data database system that enables aggregation, normalization, and management of real-time and historical product data COMMUNICATIONS The protocols that enable communications between the product and the cloud PRODUCT An embedded operating system, onboard software applications, an enhanced user interface, and product control components Embedded sensors, processors, and a connectivity port/antenna that supplement traditional mechanical and electrical components External Information Sources A gateway for information from external sources such as weather, traffic, commodity and energy prices, social media, and geo-mapping that informs product capabilities Integration with Business Systems Tools that integrate data from smart, connected products with core enterprise business systems such as ERP, CRM, and PLM 9

10 External Data Examples Weather / Temperature Data 3 rd Party Partner and Supplier Data Current and Historical Traffic data and Patterns Geographical Terrain Big Data: A Whole New Level The New Data Lake Social Media Feeds Stock Market Data Operation Data (Log files) Customer / Operator Data Sales History Other Product Line / Product Family Data Current Location and Travel History Product Misuse Data Service and Maintenance History Supply Chain Data (Part and Supplier Information) Structural Load Inventory Data Warranty Details Enterprise Data Examples Engineering and Design Data Product Manufacturing History (digital birth certificate) Pressure Moisture Internal Temperature Feature Usage History Speed Product / Part Failure Product / Part Performance Smart, Connected Product Data Examples 10

11 Big Data Analytics Descriptive Analytics Diagnostic Analytics Predictive Analytics Prescriptive Analytics Complexity of Analysis and Impact to Business Batch Processing Real Time Processing 11

12 Smart, Connected Products Charting the Impact on Competition 1. How do smart, connected products affect the configuration of the value chain and the set of activities required to compete? 2. How do smart, connected products affect the structure of the industry and industry boundaries? 3. What new types of strategic choices will smart, connected products require companies to make to achieve competitive advantage? 4. What are the organizational implications of embracing these new types of products and the challenges that affect implementation success? 12

13 Impact of Smart, Connected Products on the Value Chain Support Activities Inbound Logistics (e.g., Customer Access, Data Collection, Incoming Material Storage, Service) Firm Infrastructure (e.g., Financing, Planning, Investor Relations) Human Resource Management (e.g., Recruiting, Training, Compensation System) Technology Development (e.g., Product Design, Process Design, Market Research) Procurement (e.g., Services, Machines, Advertising, Data) Operations (e.g., Assembly, Component Fabrication, Branch Operations) Outbound Logistics (e.g., Order Processing, Warehousing, Report Preparation) Marketing & Sales (e.g., Sales Force, Promotion, Advertising, Proposal Writing, Website) After-Sales Service (e.g., Installation, Customer Support, Complaint Resolution, Repair) M a r g i n Value What buyers are willing to pay Primary Activities The value chain is the activities involved in delivering value to customers Strategy is reflected in the set of choices about how activities are configured and linked together 13

14 Technology Development Configurable Engine Design increases in complexity with combined physical and digital elements, connectivity and the cloud Extensive product usage data enables rapid redesign and quality improvements New design principles emerge, such as: Systems engineering New Principles of Product Design Design for service (remote / predictive) Design for security Design for continuous upgrades Evergreen design vs. episodic Design for customization / personalization 14 14

15 Marketing & Sales Radar Speed Display Remote Traffic Safety System Redefining the Customer Relationship Product is a sensor that measures consumer value Focus shifts from a discrete product sale to streams of upgrades, replacement products and services over the product s life Improved segmentation, new pricing models, and value added services opportunities through access to customer usage data Potential new business models involving new, extended service offerings and selling products as a service 15

16 Manufacturing Operations Convergence of Physical and Digital Processes Smart, connected production equipment creates next generation automated factories (Industry 4.0) The complexity of physical parts and assembly is often simplified, and the number of physical parts declines as more variability is delivered via software Smart, connected products enable later stage design changes Embedded software creates the ability to finalize the product post manufacturing and even in the field The customer can become part of the manufacturing process 16

17 After-Sales Service Urban Mobility Solutions Elevator / Escalator Manufacturer New Service Delivery Approaches Shift from reactive service to predictive, proactive, and remote service Analyze actual product usage data to improve service efficiency, technician utilization, and warranty management Potential to disrupt channels and service providers through digital proximity and direct connections to products and customer 17

18 Human Resource Management Rain-sensing Windshield New Talent Requirements Need for new skills, such as software developers, data scientists, UI developers, and systems integrators New processes and approaches needed to recruit, integrate and retain new talent, often in high demand and located in other geographies Need to enable the collaboration between the IT, product and service organizations 18

19 Firm Infrastructure: Security More at Stake Easier To Attack Harder To Defend Issue Impact Magnitude Smart, Connected Product Security Lost Life vs. Internet Security Implications Lost Information Number of End Points Tens of Billions Half a Billion Entry Points Physical Access Processing Power Product Software, Network, and Cloud Distributed and Exposed Weak or Limited Processing Power Network, Data Center Centralized, Physically Protected Powerful Processors Security breaches can affect both physical and data assets Higher number of devices to launch attacks More complex systems and more types of attack entry points Many embedded devices can not count on physical security measures Many embedded devices can not support run-time security solutions 19

20 Firm Infrastructure: Security PRODUCT CLOUD System Vulnerabilities Smart Product Applications Application Vulnerabilities Unauthorized Users Rules/Analytics Engine Application Platform Application Vulnerabilities Identity & Security Product Data Database Denial of Service Network Communication Tampered Virtualization COMMUNICATIONS External Information Sources Integration with Business Systems Unauthorized Users Man-in-the-Middle Product Software PRODUCT OS Rootkit Embedded Application Vulnerabilities Tampered firmware Tampered Virtualization Product Hardware Device Impersonation 20

21 Impact of Smart, Connected Products on Industry Structure Threat of Substitute Products or Services Bargaining Power of Suppliers Rivalry Among Existing Competitors Bargaining Power of Buyers Threat of New Entrants Part of strategy is to drive a positive transformation in industry structure 21

22 Impact on Rivalry (+) New capabilities, tailoring, and value-added services shift rivalry away from price (-) Cost structure shifts to higher fixed cost, lower variable cost, increasing discounting pressure (-) Potential for zero-sum competition on features/ functions 22

23 Impact on Bargaining Power with Suppliers (+) Decreased power of mechanical suppliers (-) IT suppliers an increasing part of cost and functionality (-) New suppliers can gain additional leverage through product data and direct relationships with end users 23

24 Impact on Barriers to Entry (+) Higher fixed costs of product development, technology infrastructure (+) Potential first mover advantages based on product data and stickiness of customer relationships (-) New entrants leap frog incumbents who lack SCP skills 24

25 Impact on Bargaining Power with Buyers (+) Expanded opportunities for differentiation/ segmentation (+) New insights extend customer relationships creating stickiness (+) Reduced dependency on channels/ service partners (+/ -) Product as a service business model 25

26 Impact on Threat of Substitution (+) Functionality creates better performance versus substitutes (-) Product sharing models 26

27 Expanding Industry Boundaries Farm Equipment PRODUCT SMART PRODUCT SMART, CONNECTED PRODUCT PRODUCT SYSTEM SYSTEM OF SYSTEMS TILLERS TRACTORS Farm Equipment System COMBINE HARVESTERS PLANTERS Irrigation System Farm Equipment System Farm Management System Platform Weather Data System Field sensors Irrigation nodes Irrigation application Seed Optimization System Farm performance database Seed database Seed optimization application Rain, humidity, temperature sensors Weather maps Weather forecasts Weather data application 27

28 Joy Global: Building the Smart, Connected Mine 28

29 How Industry Definition Affects Competition Rivalry shifts from products to systems Threat of Substitute Products or Services Product systems disintermediate discrete products Bargaining Power of Suppliers Rivalry Among Existing Competitors Bargaining Power of Buyers Potential entrants from other parts of the product system Platform competitors enter while producing no products Threat of New Entrants 29 Buyers can choose among multiple system competitors

30 Systems Replace Discrete Products Pedometer Fitbit 30

31 Smart, Connected Products Strategy Operational Effectiveness Strategic Positioning Assimilating and extending best practices Creating a unique competitive position Getting to the productivity frontier Doing things differently to deliver distinctive value 31

32 Ten Strategic Choices Which product capabilities to pursue? Expand company scope? Functionality: embedded in the product vs. the cloud? Sell data to outside parties? 9 3 Open or closed system? Change the business model? 8 4 Technology development: internal or outsource? Disintermediate distribution or service channels? What data to capture? How to manage data rights and access? 32

33 Strategic Positioning: Ten Strategic Choices 1. Which smart, connected product capabilities and features should the company pursue? Focused Capabilities Wider Capabilities 33

34 Strategic Positioning: Ten Strategic Choices 2. How much functionality should be embedded in the product versus the cloud? Cloud-Driven Innovation Sound Quality Focus 34

35 Strategic Positioning: Ten Strategic Choices 3. Should the company pursue an open or closed system? Closed System Open System 35

36 Strategic Positioning: Ten Strategic Choices 4. Should the company develop the full set of smart, connected products capabilities and infrastructure internally or outsource to vendors and partners? Internal Development Partner Outsourcing 36

37 Strategic Positioning: Ten Strategic Choices 5. What data does the company need to capture, secure and analyze to maximize the value of its offering? Radiation Therapy Equipment Consumer Thermostat 37

38 Strategic Positioning: Ten Strategic Choices 6. How does the company manage ownership and access rights to the data it seeks and collects? All-in-One Health Monitor Pacemaker 38

39 Strategic Positioning: Ten Strategic Choices 7. Should the company fully or partially disintermediate distribution channels or service networks? Traditional Dealership Direct to Customer 39

40 Strategic Positioning: Ten Strategic Choices 8. Should the company change its business model? Transactional Sales Model Product-as-a-Service 40

41 Strategic Positioning: Ten Strategic Choices 9. Should the company enter new businesses by monetizing its product data by selling it to outside parties? Selling User Data to Advertisers Data Proprietary to GE 41

42 Strategic Positioning: Ten Strategic Choices 10. Should the company expand its scope? Product System Optimized to Work Together System of Systems 42

43 The Larger Opportunity The recent decade has been consumed with slow growth, cost reduction, reduced investment, limited innovation, and rising M&A, with focus on short-term profitability Slow economic growth and a diminished sense of opportunity Smart, connected products can change this trajectory Pace of innovation and investment Sustainability and resource utilization across the economy and society Productivity growth in the economy Economic growth, jobs and wages The U.S. has the potential to lead, but every country should benefit 43

44 Next Steps To help you understand your company s potential in the IoT space and how you can actively get started forming your winning strategy, we have developed the PTC Innovation Workshop. This personalized workshop will be delivered onsite at your company with the goal of helping you find new sources of value for your customers using PTC solutions. To request a PTC Innovation Workshop or for more information, please or visit us at PTC (Nasdaq: PTC) enables manufacturers to achieve sustained product and service advantage. The company's technology solutions transform the way products are created, operated, and serviced across the entire product lifecycle from conception and design to sourcing and service. Founded in 1985, PTC employs over 6,000 professionals serving more than 28,000 businesses in rapidly evolving, globally distributed manufacturing industries worldwide. 44

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