How smart and connected products are transforming competition.
Keynote speech by Michael E. Porter, Bishop William Lawrence University Professor at The Institute for Strategy and Competitiveness, based at the Harvard Business School, at the National Competitiveness Forum
“Smart, connected products are starting to transform what products can do and how value is created for the customer.”
“There is a whole new rhythm of IT security that is emerging too. Earlier, we protected our data center from intrusion, but now we have a much harder security and privacy issue because there is a lot more data coming from the product and we have the cloud.”
My newest work in strategy and competition is around the changing nature of products, i.e. smart connected products. There is a lot of discussion on Internet of Things (IoT), but we have found that it does not capture the essence. The Internet is well established, and the only change is the product and what it can do. From a technology point of view, it is one of the most profound dynamics and change drivers, and I think it’s going to prove to be even bigger than the previous IT booms that have had a profound impact on competition.
It is affecting manufacturing industries; virtually every manufacturing good now is seeing a change in the nature of competition. It is impacting service industries because companies can operate differently with these kinds of products service. It is also impacting the IT field where India has been a major player. The real question is- Is India equipped to play the next round? I think the answer is – it could, but it is a big leap, which is going to involve new skills and new ways of looking at things.
New Wave Of Smart Connected Products
With the advent of modern IT since the 1960s, firms started changing what they did and how they did it. The first transformation was, to allow the automation of activities within the value chain, the culture of information and its processing, product design and order processing across the value chain – all of which became more productive. Then there was the second wave of transformation across the supply chain management, customer relationship management, and product lifecycle management with the emergence of the Internet; a new generation of coordination across the whole value chain, across geography, with business partners and with customers.
A new wave has touched the whole IT-driven competition; smart connected products with not just physical, electrical and mechanical components but also smartness in the form of sensors. Sensors measure a lot of things about the product. We have electronic control characteristics instead of mechanical controls and more flexible onboard user interfaces, which are the smart part of the product. Then there is connectivity between the product and the Internet via some form of wireless or Bluetooth or more than one technology. That product is further tethered to a product cloud. Product cloud is running not only in the product, on a server, in a data center but is operating a lot of stuff. It allows the product to work and submits a lot of the functionality of the product on this product cloud. This smart connected product is starting to transform what products can do and how we create value for the customer. It is impacting the nature of competition- who we are competing with, what competitive advantages can we build and what competitive advantages no longer matter.
The basic functionality of smart connected products can be classified into four different categories. These products are generating lots of data and sensing their operation. With the ability to monitor how the product is doing, we can even control the product remotely. It enables us to control the operation of the product in more sophisticated ways than we ever could before, because of the invented software and electronics. So, we have changed the way we can control products and as a result are getting a lot of new functionality. Now, having the ability to monitor the information and controlling the product also introduces a third layer- i.e. optimization. If we have algorithms, we can start optimizing the working and operation of a product. We can sense whether it needs to be repaired and can sometimes repair it remotely. We can now finally build autonomy. Products can run and repair themselves because of these fundamental capabilities that have been embedded in them for the first time.
A manufacturing company today not only has to make a product but also has to operate its technology infrastructure forever so that the product can be operable. It is an opportunity because this infrastructure allows us to super-improve that product even after we have shipped it. So, technology stack is, at one level, a barrier of entry but it’s also a tremendous enabler to changing value and the nature of competition.
The real core of the new technology necessary for a manufacturing company is this notion of a product cloud. It is a set of software running on a server either within the company or on a rented server. This product cloud has a database where the product is inserting data. There is a platform on which applications can run. Service applications control various kinds of applications running on this cloud that give instructions to the product. It’s not just that technology stack that is operating, there is a surrounding structure also. From just having a physical product somewhere, all of a sudden, we have a product that we can access in different ways, even remotely if we can access the cloud that has contact with it. So, the security and the identity issues that have to surround the product now are much more complex.
New World, New Competition
This new world has a profound impact on competition at the industry level. One, it creates more opportunities for product differentiation. It can shift rivalry away from price. It can make it hard to get into business and protect from new competitors. All these things are potential positives for competition, and they can potentially improve profitability in businesses. However, at the same time, some challenges are potentially created like the higher fixed cost. This kind of product has higher fixed cost than the previous mechanical product. The New companies that understand the new world are getting into industries they could never get in before because the traditional barriers of entry were too high. So, this is a game changing potential discontinuity in the nature of industry competition. One of the other major dynamics of smart connected products is, in general, an expansion of industry boundaries.
Changes Within A Company
We have looked into the outside implications for competition but what about the inside of a company? How is a company changing? Let’s take a few of the functions of manufacturing company. Now, the first place to start is the data. This new data coming in is to be stored in different ways than the traditional data. It is unstructured data. There are new kinds of databases to store it in. There are new kinds of analytics to look at it and understand what it tells us- typically called data analytics. A whole new way of analyzing data that most companies have never done before requires new kind of people. We are now starting to see companies form unified data organizations rather than having each function hold the data for its function separately. We are now integrating that data because the data has profound impacts on functions, and a new position of ‘chief information officer’ has emerged to manage the data in manufacturing companies.
Product design with these new capabilities is changing dramatically. One of the most profound changes is that it is no longer mechanical engineering or software engineering, it is now systems engineering. In fact, it’s not a design; it’s a new model. We see continual evergreen customization and continual improvement of the design where the product can be continuously updated through connectivity and software. So one has to design to support new business models. The nature of product development is entirely transformed within most manufacturing companies. The mix of personnel involved is being changed. The physical manufacturing part is being changed as well in a variety of ways. The physical complexity of products is going down a little bit because a lot of the variability of the product can be generated through the software instead of the hardware and a lot of the finalization of the product can be done late even in the field.
Making the physical product alone is no longer making the product. We have to run the infrastructure to run the product forever. It has to be seamless and continuously available because without this cloud; the product is not going to be able to function well. So, the whole notion of manufacturing has broadened in some interesting ways.
What about marketing? In the traditional marketing model, we make a product, sell the product, chat with the customer every once in a while, and then we try to sell another product. In this new world, we have an ongoing relationship with that customer because we know what is happening to that product, how often that product is being used, whether it’s functioning well or poorly, the customers also have more visibility. It is a different kind of customer relationship where one has to take responsibility for making sure that the client is getting value out of the product, working with them to make sure that they are taking advantage of the product, and making them aware of the opportunities offered by the product. It is a new marketing rhythm, and it requires a different kind of capability.
The service function is being radically reconfigured. We can now be proactive about service. We can see breakdowns before they are going to happen and the pattern of data that the product is giving. So reengineered service and the data are allowing us to provide new services to our customers that we have never been able to offer before.
There is a whole new rhythm of IT security that is emerging too. Earlier, we protected our data center from intrusion, but now we have a much harder security and privacy issue because there is a lot more data coming from the product and we have the cloud. If we can penetrate the software in the product, we can get into the cloud too. So, there is an incredible need now to protect people’s data in addition to protecting the company’s data because it’s even more vulnerable.
New Organizational Models
Let us look at some of the organizational changes. Traditionally the business unit and the manufacturing firm have looked the same for a long time. It’s been in a functional structure with various coordinating mechanisms that were used when needed. This traditional organization model breaks down in a smart connected product world given the nature of the data and the new kind of deeper and continuous coordination that is necessary.
The organizational model needs to change, and most companies do not understand this yet. While this is a very nascent, the organization issue will get bigger and bigger in the field of smart connected products. There are some organizational changes that we believe should set in. One, unified data organization is the first major organizational change we are seeing. We have to get all the data in one place because it’s too complicated to store and analyze it. The skills and the expertise to do this are in short supply. So, it is essential to have unified data. The second change is the need to blur the boundary between IT and R&D (research & development) which traditionally have been separate groups. The IT works on the data systems, and R&D does the product development. Now, these things are merging. Third, a new theme or a sub-function has come up. It is to make sure that infrastructure keeps running but is updated and enhanced over time in a seamless way. Many companies may need a new group to manage this process- to interact with R&D, manufacturing, infrastructure, and service and coordinate this new function. We are also seeing the need for a new kind of customer facing organization, called customer success management. It is a group of people who are monitoring the success of the customer all the time and making sure if the customer is using the product, then they are getting the maximum value- getting good uptime, taking advantage of the features and the functionalities.
So, a manufacturing firm is going to look different than it has for the last 50 or 75 years. It’s going to start to embody some new needs because of this fundamental change in the nature of products, what those products can do, and how that changes the nature of work inside the firm. The period of transition will be a complicated one, as companies will have to run the old and the new models together. This next stage of IT, however, is going to change productivity in a really profound way not just inside the company but also outside, in terms of the use of the products resulting into higher levels of impact and functionality.