An IoT Commentary: The Internet of Things & Smart Connected Products - What Business Am I Really In?

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1 Analyst Insight SHARE THIS REPORT An IoT Commentary: The Internet of Things & Smart Connected Products - What Business Am I Really In? The November 2014 issue of Harvard Business Review (HBR) sports a highly interesting Internet of Things (IoT) article, "How Smart, Connected Products are Transforming Competition." The article was co-authored by Harvard Business School professor Michael E. Porter and PTC CEO James E. Heppelmann, and digs deeply into the critical ways that today's smart, connected products (and "systems of such products," and "systems of systems of such products") are altering the business operating landscape, especially in the manufacturing industry, and creating enormous competitive transformation. The level of transformation that is now taking place is so significant, in fact, that the authors strongly suggest that even as manufacturers continue to manufacture products they will find themselves facing so many dynamic and rapidly evolving business scenarios that they will legitimately and fundamentally need to ask themselves (and keep asking themselves), "What business am I in?" We'll circle back to this provocative IoT notion later, but keep the question in mind throughout this commentary. Professor Porter is the person who coined the enterprise term "value chain" back in the 1980s; he has conducted extensive original research on this over the years, charting the ways technology shifts affect the enterprise value chain from end to end. Porter believes that the IoT represents an entirely new shift - and likely the most powerful technology and competitive transformation since he began charting them. The end result? That the IoT will cause tremendous and dramatic changes in the way enterprises run their businesses and operate their value chains going forward. Jim Heppelmann has, over the last year, engineered the acquisition by PTC of two major IoT vendors - ThingWorx and Axeda. PTC is a preeminent manufacturing industry product and service lifecycle management vendor, and also has a key computer-aided engineering (CAE) line of business. Blue Hill believes that these acquisitions are remarkable for several reasons. First, PTC has clearly identified two of the most significant IoT players within the current overall IoT landscape. Second, PTC has identified two vendors that offer complementary services to each other - there are minimal overlaps between the two vendor platforms and further, both fit specifically within PTC's own existing lines of business. It is worth noting that Professor Porter is a member of the board of directors of PTC. Third, and most important, though PTC will use ThingWorx and Axeda to offer enhanced IoT services to its customers, Axeda and ThingWorx are also already being fully utilized within PTC itself to enhance the way PTC works and operates internally and is deeply exploring how its various platforms will manifest themselves in new versions going forward as IoT-enabled AT A GLANCE In its November 2014 issue, Harvard Business Review published an extensive article on the Internet of Things titled "How Smart, Connected Products are Transforming Competition." Authored by PTC board member and Harvard Business School professor Michael Porter and PTC CEO James E. Heppelmann, the article takes a deep look into IoT-driven business transformation. Here we provide commentary on the article as well as a related view into how PTC itself is now undergoing an IoT-driven, extensive and disruptive transformation of its own - and how, in the process, it is answering the very same provocative question we've posed in our own headline. Page 1

2 platforms. To do so, PTC itself is undergoing a true internal state of competitive "disruption." PTC's internal teams at the R&D level have embraced the capabilities that Axeda (through IoT connectivity) and ThingWorx (through IoT agile app development) bring to the table for both PTC and its existing and prospective customers. Porter and Heppelmann combine and utilize their collective experiences and deep insights to weave together in the article an entirely cohesive and cogent perspective of the power that the IoT brings to the manufacturing vertical specifically and to the larger enterprise world more generally. As we'll see, the IoT raises important business and technical issues that must be clearly understood in order for any business to both successfully embrace the coming disruption within manufacturing and to successfully manage the many elements of that disruption to drive entirely new strategic and competitive advantages. There is as well no subtlety whatsoever demonstrated by Porter and Heppelmann with regard to failing to understand the magnitude of IoT-driven changes that are already in hand - the probable outcome under such circumstances will very likely be businesses being disrupted out of business. The article is quite blunt about these outcomes and there is truly no counter-argument to be made here. There is No "Internet" in The Internet of Things Porter and Heppelmann smartly set the IoT stage early in the article by noting that the "Internet" piece of IoT is little more than a now-ubiquitous communications vehicle - and one that has been around for quite some time. It is entirely well understood by today's business technology world, and though wireless and highly secure connectivity and communications remain challenging infrastructure issues (PTC solves this through Axeda's extensive IoT communications services), these are not the pieces of the IoT that drive (or will soon drive) technology change and disruption. For Porter and Heppelmann it is the "things" part of IoT that is the fundamental underpinning that will drive the third major wave of IT-driven competitive transformation. We certainly agree with this. Porter defines the first wave of transformation as having occurred in the 1960s and 1970s, which resulted in the automation of individual activities within the value chain. Porter defines the second wave as having generally occurred during the 1980s and 1990s as the Internet evolved from Arpanet into the World Wide Web (www) and today's Internet, which gave rise to inexpensive and always available connectivity. We will add this from our end: during the first decade of the 2000s we gained significant improvements in wireless connectivity, mobility, and the ability to wirelessly share data. Generally speaking, it now becomes possible to take the automated individual activities generated by the first technology wave and to coordinate and integrate them across partners, outside suppliers, customers and other business channels - all of it across geographic boundaries. These enabled globally distributed supply chains. An entirely new period of THE IMPORTANCE OF THINGS Professor Porter and Heppelmann smartly set the IoT stage by noting that the "Internet" piece of IoT is little more than a now ubiquitous and well-understood communications vehicle. Though wireless and highly-secure connectivity and communications remain challenging infrastructure issues (PTC solves this through its Axeda group's extensive IoT communications services), these are not the pieces of IoT that drive (or will soon drive) technology change, transformation or disruption. Page 2

3 competitive transformation emerged across every point in the now global enterprise value chain. It is important to understand these first two waves of IT-driven transformation for several reasons. First, both waves created a filter - those businesses that were able to engage and utilize transformation to develop competitive differentiators thrived while those that didn't or weren't able to failed. Second, both waves led to a common set of "competitive forces" that work to shape enterprise competition. The ability to effectively balance these forces - which we will return to in short order - typically determine how well companies are able to handle business transformation. This brings us, finally, to the "Things" part of IoT, and an important point that Heppelmann and Porter make: although both the first and second technology waves defined above created profound changes in the enterprise value chain, they did not in any way affect or otherwise transform the actual products that companies manufactured. That has now changed. Products (the "things") are now undergoing a rapid transformation - they are becoming smart, they are becoming fully connected, and they are becoming (to some degree) self-aware, with a basic set of functionality and interconnectivity. Over time, products will become much more fully self-aware. We note here that "self-aware" is our own term. Heppelmann and Porter put it slightly differently - they refer to it as products ultimately gaining "autonomy." To gain autonomy products need to go through four distinct phases of development and capability: Monitoring - the ability of a product (or product system) to know a product's own realtime operational conditions, external conditions, usage patterns and the ability to send alerts regarding them Control - the combination of monitoring and embedded software (or cloud-based software) that allows product functions to be controlled and user interfaces customized Optimization - the ability to utilize monitoring and control within algorithms that allow product performance to be enhanced and allow for predictive diagnostics, service and repair or such things as a "call home" service Autonomy - Products and product systems gain, among many other things, the ability to interact and coordinate with one another, essentially without the need of human intervention at any level. They gain the ability to self-diagnose and perform or request servicing Every level of capability defined above has a place in the IoT scheme of things. Though monitoring may be the least complex possibility with the largest number of products, it may also be the smart product type that delivers the greatest value depending, of course, on the application. Autonomous devices and the services they run will be the most complex. In terms of relative market size, the product hierarchy today generally looks as follows: SMART PRODUCTS Every level of smart product capability - monitoring, control, optimized or autonomous - has a place in the IoT scheme of things. Though monitoring may be the least complex possibility, it may also be the smart product type that delivers the greatest value depending, of course, on the application. Autonomous devices and the services they run will be the most complex. Page 3

4 Figure 1: Four Phases of Product Development and Capability to Achieve Autonomy Source:, December 2014 It will be interesting to see how the graphic above changes over the next decade. Will monitoring and control become one product category over time as hardware costs continue to fall? Will we leap directly to optimization and autonomy or will all smart, connected products become self-aware over the next ten years? The rate of technology creation and the ability to continue to drive miniaturization and nanoscale technology today is such that we would not bet against that outcome. Autonomous devices and a majority of smart product services housed in the product cloud is our most likely destination. The Underlying Smart Product Foundation Porter and Heppelmann make clear that IoT "things" - whether they are simple monitoring or fully-autonomous products - do not simply exist in a vacuum. The smart, connected products themselves, whether they are simple monitoring tools, or parts of gigantic inter-connected systems of earth-moving equipment, are enabled through a host of recent technology breakthroughs in microprocessor miniaturization, energy efficiency, and powerful new sensors. There is also a significant underlying foundation of support systems now in place that allow truly autonomous products to exist. These systems include cloud-based services where smart product software can live (rather than being embedded in the products themselves), and numerous software systems that provide for agile software development (such as PTC's ThingWorx), big data storage and analysis, and predictive real-time streaming data-based analytics - to name just a few. Finally, it is important to also note, as the authors certainly do, that the next generation Internet registration system, IPv6, is critical to the growth of autonomous or self-aware products and systems. IPv6 opens up, to quote the article directly, " 340 trillion trillion trillion (yes, trillion three times) potential new Internet addresses for individual devices, with Page 4

5 protocols that support greater security, simplify handoffs as devices move across networks, and allow devices to request addresses autonomously without the need for IT support." The Smart Connected Products Technology Stack Porter and Heppelmann strongly suggest that for manufacturers to become powerful participants in a smart product world, they will need to adopt and understand what the authors call the new Smart Connected Product Technology Stack. The following infographic (courtesy of PTC) shows the different components of the new stack. Figure 2: PTC s Smart Connected Product Technology Stack Source: PTC, December 2014 We won't take a closer look at the stack here, but it is worth pointing out the "Product Cloud" layers. Depending on a number of factors it will almost always be preferable to provide smart connected product software as cloud-based services rather than embedded in products - products simply announce themselves through whatever communications channel is best suited for a given device, and software services are provided. These layers will prove critical to most smart connected product design, deployment and support efforts. The stack shown above is important to product manufacturers, their internal software teams, and third-party software developers and manufacturing partners. It essentially provides the game plan for both how smart connected products need to be built, as well as providing the blueprint for how these products will interact, as the world evolves from simple products to connected products to systems of smart connected products, and finally onto systems of such systems. Page 5

6 It is especially interesting and informative to note - as shown below - how PTC's Axeda and ThingWorx platforms fit into the connected product stack for PTC. Keep in mind that PTC is a major product and service lifecycle vendor (PLM/SLM). PLM and SLM take on significant and major new importance for manufactures as they begin to build out IoT products. Figure 3: PTC s Smart Connected Product Technology Stack with Axeda and ThingWorx Source:, December 2014 The graphic above also serves as an excellent example of how PTC is delivering both technology and business transformation. For PTC, it has required a strong ability to embrace IoT-driven disruption - ThingWorx and Axeda are entirely new to PTC's existing platforms, yet PTC has rapidly engaged in the process of transforming itself through their integration in order to remain highly competitive. It is worth noting how existing PTC platforms are also integrated within the new stack. In working with the new IoT technology stack as it has done, PTC has positioned itself to stay ahead of the market curve, and has given itself non-trivial competitive advantages by doing so. In truth, we are not aware of any company at the present time that is able to boast of the IoT capabilities PTC has put in place for both internal and external use, while continuing to strongly leverage its existing products in new ways. That said, in their HBR article Heppelmann and Porter next delve into the key business issues that almost all manufacturers will need to focus on in order to ensure they remain as competitive as PTC has positioned itself to be. The More "Things" Change, the More they Remain the Same! What we find particularly interesting with this third wave of IT-driven competitive transformation - and this is in fact true of Porter's first and second waves as well - is that no Page 6

7 matter how new the next wave of technology is, when it comes down to developing a competitive business plan and executing it from a business perspective, Porter and Heppelmann make it exceedingly clear that the same business rules still apply that have applied for the last 50 years. To begin with, the same five forces ("Porter's Five Forces") that have always, as Porter puts it, shaped industry competition, strategy, and structure are the exact same forces that will guide today's businesses in how they transform themselves to remain competitive. The graphic below, as originally developed by Michael Porter, highlights these forces. Figure 4: Porter s Five Forces Source:, December 2014 It is not our goal to examine these forces in detail beyond what is described above - we defer to Porter and Heppelmann and their article for those details. What is important to note is that these forces are the same forces a business will encounter at both the macro and micro level. The CxO team of a Fortune 1,000 company will need to dive deeply into understanding these forces, but line-of-business teams at every level of that Fortune 1,000 organization or in small businesses of any size will need to deal with the same forces within their own realms of decision-making. The key takeaway here, as we noted at the very beginning of this commentary, is that in order to have a basis for tackling the five forces, an organization must first have a clear understanding of how they will execute their businesses going forward. In other words, the emerging world of smart connected products requires asking the very serious question: What business am I in? Page 7

8 What Business Am I Really In? Heppelmann and Porter provide a solid range of examples of existing companies that are either transforming themselves or new entities establishing businesses for the first time within our new smart, connected product world. Fortune 500 companies such as John Deere are transforming themselves from pure product companies developing and selling discrete products (for example, a bulldozer) to companies developing smart product systems of inter-related and interconnected smart products and services, and systems of product systems. Meanwhile, smaller companies without legacy product histories are jumping directly into smart, connected products. Sonos, for example, was the first mover in developing true wireless home speaker systems. But the wireless technology itself is only a part of the Sonos solution. Sonos opted to migrate its original user interface away from running on a custom-designed piece of hardware to an entirely software and cloud-based offering that works across ios and Android mobile devices, as well as across PCs and Macs. A Sonos system of speakers (and available music services that include streamed services) is controllable in real-time from any or all available devices simultaneously, and can stream different music from different sources to different speakers at the same time. It is a true smart connected product system. Regardless of whether a company is a John Deere or a Sonos, Heppelmann and Porter make it clear that all smart connected product manufacturers will need to tackle the five forces that shape competition, as noted above. Is Sonos a wireless speaker manufacturer or a builder of connected highly controllable systems? Can - or should - John Deere still classify itself as a maker of discrete earth moving and shaping equipment, or is it now truly a creator of systems of smart connected systems? In arriving at the answer to what businesses they will be in, the five forces we've noted will play a dominant role in shaping how every business answers the question. Ten Key Smart Connected Product Decision Points Once a company has determined it will become a smart connected product vendor, strategizing doesn't end there. Heppelmann and Porter have also identified ten key choices/decisions any such company must make as part of the process of identifying how they will transition to delivering smart connected products. They are as follows: 1. What smart connected product features and capabilities will be pursued? 2. How much functionality should be embedded, and how much should be product cloud-based? 3. Should a product system be open or closed? 4. What mix of services should be developed internally, outsourced, partnered, or acquired? WHAT BUSINESS AM I IN? Is Sonos a wireless speaker manufacturer, or a builder of connected, highly controllable systems? Can - or should - John Deere still classify itself as a maker of discrete earth moving and shaping equipment, or is it now truly a creator of systems of smart connected systems? In arriving at the answer to what businesses they will be in, the five business-shaping forces that have been highlighted will play a dominant role in shaping how every business answers the question. 5. What product data must be captured and analyzed to maximize product value? Page 8

9 6. How will product data ownership and access rights be managed? 7. Should distribution channels be partially or fully disintermediated? 8. Should a company change its core business model? 9. Should a company anticipate building new businesses and revenue streams by seeking to sell product data to third parties? 10. Should a company expand its overall scope? Though Porter and Heppelmann go into extensive details on each of these choice/decision points (and we won't do so here), they are easy enough to generally understand as presented above. Jim Heppelmann has pointed out to us that "there is no real right or wrong answer to these ten points, and they will be different relative to each company asking them. What is important, however, is that companies understand there must be alignment between all ten decision points." It is instructive to review how PTC has aligned itself to the new smart connected product technology stack discussed earlier, as it then becomes clear how PTC has responded to the ten decision points from its end. It is particularly noteworthy that PTC has taken two bold steps in how it has responded to decision point 4: it acquired Axeda and ThingWorx to bring extensive new IoT functionality in-house, and PTC is integrating their platforms for internal use in new and extended product development of its own platforms. Jane Wachutka, PTC's Executive Vice President, Core RD, has remarked to us that "all of my R&D teams have embraced what Axeda and ThingWorx open up for us. In a very real sense, we are already disrupting our own internal platforms, and in the process, rapidly moving to transform them to enable our own extensive base of customers to do the same." Interestingly, Wachutka has been extensively involved in artificial intelligence (AI) over the years, and noted to us that it is exciting to see autonomous smart connected products begin to emerge, as they will fulfill the promise of AI in very tangible and real ways - not just in the lab but out in the real world. Conclusions Clearly, we are living in dynamic new technology times. Just as clearly, businesses that manufacture products today, or are otherwise involved in ensuring manufacturers do so intelligently - at whatever level they do (PTC, John Deere, Sonos, etc.) - must come to grips with a rapidly changing product world. Those that fail to address this will be disrupted out of business. This isn't merely a fancy turn of words - both Heppelmann and Porter make it clear that many businesses are likely to fail. In drawing their extensive article to a close, Porter and Heppelmann point out that the true global benefits of the smart connected products era will not be found in the individual products themselves, but rather in the enormous value creation we can anticipate being delivered through them. The two authors leave nothing to the imagination when they state that those Professor Porter and Jim Heppelmann leave nothing to the imagination when they state that those businesses that successfully transform themselves, " will affect the trajectory of the overall economy, giving rise to the real era of IT-driven productivity growth for companies, their customers, and the global economy at a time when the impact of earlier waves of IT has largely played itself out and productivity growth has slowed down." Page 9

10 businesses that successfully transform themselves "will affect the trajectory of the overall economy, giving rise to the real era of IT-driven productivity growth for companies, their customers, and the global economy at a time when the impact of earlier waves of IT has largely played itself out and productivity growth has slowed down." Amen to that! Author: Tony Rizzo, Entrepreneur in Residence, Enterprise Mobile Research, [email protected] Published: January 2015 is the only industry analyst firm with a success-based methodology. Based on the Path to Success, provides unique and differentiated guidance to translate corporate technology investments into success for the three key stakeholders: the technologist, the financial buyer, and the line of business executive. Unless otherwise noted, the contents of this publication are copyrighted by and may not be hosted, archived, transmitted or reproduced, in any form or by any means without prior permission from. Page 10