How Smart, Connected Products are Transforming ....…This presentation draws on ideas from...

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

Jim Heppelmann

President & CEO, PTC

NAM Smart Manufacturing Summit

03/29/2016

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







2 03/29/2016 — NAM Smart Manufacturing Summit Copyright 2016 © Professor Michael E. Porter and Jim Heppelmann

Products are

mechanical/electrical

and information

processing is performed

manually

IT automates processes

and information

collection in activities

across the value chain

The internet enables

coordination and

integration across the

value-chain, with

customers, business

partners, and across

geography

IT is embedded in

products themselves,

expanding 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

The Third Wave of IT Driven Competition


The Technology Stack

Identity &

Security

External

Information

Sources

PRODUCT CLOUD

PRODUCT

Network Communication

Product Data Database

Application Platform

Rules/Analytics Engine

Smart Product

Applications

Product Hardware

Product Software

AR Experiences

Integration

with

Business

Systems

COMMUNICATIONS


The Technology Stack

Identity &

Security

External

Information

Sources

ON-PREMISE/HOSTED CLOUD

EQUIPMENT

Local Historian

IT/OT Network Communication

Application Platform

Rules/Analytics Engine

Smart Equipment

Applications

Equipment Hardware

Equipment Software/Controller

AR Experiences

Big Data Database

Integration

with

Business

Systems

COMMUNICATIONS


Turning Product Data Into Insight

Data Lake

Prescriptive Analytics

“How to Improve Results?”

Predictive Analytics

“What Will Happen Next?”

Diagnostic Analytics

“Why Did It Happen?”

Descriptive Analytics

“What Happened?”

Enterprise Data

Data Analytics

Smart, Connected

Product Data

Condition

Operation and Use

External Data

Content and

Information

Environment Product

Details

Customer Detail

and History


Capabilities of Smart, Connected Product

Smart, connected products enable new categories of capabilities,

with each building on the preceding layers

1. Monitor

2. Control

3. Optimize

4. Automate

Sensors and external data

enables monitoring of:

• Product location

• Product operation

• Product condition

• Surrounding environment

Software embedded in the

product or cloud enables:

• Expanded and remote

control of product functions

• Unprecedented

customization and

personalization

Algorithms and analytics

can optimize:

• Product operation

• Capacity utilization

• Diagnostics, allowing for

predictive service and

repair

The combination of other

capabilities enables:

• Autonomous operation

• Self-coordination with other

products and systems

• Autonomous enhancement

and personalization

• Self-diagnosis and service


Overlaying the Digital and Physical Worlds

Enhance Visualize Operate Instruct

Enhance the user’s view

of the real world with

contextual, digital

information or

experiences

Overlay digital dashboard

to visualize information

about the product

operation and condition

in context

Interact with and

personalize a physical

product through an

augmented digital user

interface

Overlay instructions to

train or guide users on

how to operate or

service a product

Augmented Reality (AR):

• Superimposing data and computer graphics onto a

live view of the world

• Enhances existing SCP capabilities with new

experiences


Smart, Connected Products and Industry Competition

Threat of Substitute

Products or Services

Threat of New

Entrants

Rivalry Among

Existing Competitors

Bargaining Power

of Buyers Bargaining Power

of Suppliers





Threat of New

Entrants

Rivalry Among

Existing Competitors Bargaining Power

of Suppliers

Bargaining Power

of Buyers

+ Expanded opportunities for

differentiation, segmentation,

switching costs



+ Less dependence on

mechanical components



Threat of New

Entrants

Rivalry Among


of Suppliers

Bargaining Power

of Buyers



switching costs



+ Shift rivalry away from price + Less dependence on




Threat of New

Entrants

Rivalry Among


of Suppliers

Bargaining Power

of Buyers



switching costs







Threat of New

Entrants

Rivalry Among


of Suppliers

Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs





Threat of New

Entrants

Rivalry Among


of Suppliers

Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs



+ Higher barriers to entry



+ Shift rivalry away from price




Threat of New

Entrants

Rivalry Among


of Suppliers



Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs

-/+ New business

models support

recurring revenue

but can be

terminated

-/+ Greater customer

visibility of value

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs







- Greater power of

IT vendors



Threat of New

Entrants

Rivalry Among


of Suppliers

Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs

-/+ New business

models support

recurring revenue

but can be

terminated


visibility of value

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs







Threat of New

Entrants

Rivalry Among


of Suppliers

- Higher utilization and product

sharing reduce volume



- Greater power of

IT vendors

Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs

-/+ New business

models support

recurring revenue

but can be

terminated


visibility of value

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs




- Higher fixed costs increase

pressure to discount




- Greater power of

IT vendors



Threat of New

Entrants

Rivalry Among


of Suppliers



Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs

-/+ New business

models support

recurring revenue

but can be

terminated


visibility of value

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs




- Higher fixed costs increase

pressure to discount


- New entrants can leapfrog incumbents



- Greater power of

IT vendors



Threat of New

Entrants

Rivalry Among


of Suppliers



Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs

-/+ New business

models support

recurring revenue

but can be

terminated


visibility of value

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs


Expanding and Shifting Industry Boundaries Farm Equipment

Weather Data

System

Irrigation

System

Seed Optimization

System

Farm Equipment

System

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

PRODUCT

Farm

Management

System

Platform


File

Transfer

Field

Connect

Agronomic

Data

Machine

Monitoring




- Greater power of

IT vendors



Threat of New

Entrants

Rivalry Among


of Suppliers



+/- Systems disintermediate

discrete products




- Higher fixed costs increase pressure to

discount


Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs

-/+ New business

models support

recurring revenue

but can be

terminated


visibility of value




- Greater power of

IT vendors



Threat of New

Entrants

Rivalry Among


of Suppliers





discount

+/- Rivalry shifts from products to systems

Smart, Connected Products and Industry Competition - Higher utilization and product



discrete products

Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs

-/+ New business

models support

recurring revenue

but can be

terminated


visibility of value




- Greater power of

IT vendors



Threat of New

Entrants

Rivalry Among


of Suppliers



- New potential entrants from other parts of the product system



discount

+/- Rivalry shifts from products to systems

Smart, Connected Products and Industry Competition - Higher utilization and product



discrete products

Bargaining

Power of

Buyers

Bargaining

Power of

Channels

+ Reduced

dependency on

channels/

service partners

+ Expanded

opportunities for

differentiation,

segmentation,

switching costs

-/+ New business

models support

recurring revenue

but can be

terminated


visibility of value


• Creating a unique competitive

position

• Assimilating and extending

best practices

Operational

Effectiveness

Smart, Connected Products Strategy

Getting to the

productivity frontier

Doing things differently to

deliver distinctive value

Strategic

Positioning


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, access, and security?

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

Ten Strategic Choices for Manufacturers


Value

What

buyers are

willing to

pay

Support

Activities

a

r g

i

n

Primary Activities

Procurement

After-Sales

Service

Manufacturing

Firm Infrastructure

How Smart, Connected Products Transform the Value Chain

Human Resource Management

M Technology Development

Inbound

Logistics

Order

Processing

& Outbound

Logistics

Marketing

& Sales

30 03/29/2016 — NAM Smart Manufacturing Summit Copyright 2016 © Professor Michael E. Porter and Jim Heppelmann 30

New Principles of Product Design

Configurable

Tractor Engine

• Products become complex systems involving sensors, software, connectivity, and operating in the cloud

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

engineering

• New design principles emerge, including:

− Design for low-cost variability of function

− Design for evergreen customization and improvement

− Design enabling new user interfaces

− Design for ongoing quality management

− Design for connected service

− Design for system interoperability

− Design for new business models

User Interface via a

Mobile App

Bikes Designed for Sharing

Product Development


Inbound and Outbound Logistics

Connected Ordering and Tracking

• The early roots of SCPs were in the use of RFID (radio frequency identification) for product identification and

tracking, allowing more efficient routing and faster delivery

– SCPs go beyond RFID to enable continuous monitoring, allowing broader logistical improvements

• Locate and monitor key assets (e.g. raw materials, final products, containers) to optimize logistics, prevent quality

issues, and detect theft.

• Real- time data on customer usage and consumable status also enables predicting needs and further automating

order processing, shipping, and delivery


• Shift 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

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

• Manage upgrades, replacement products and services over the product’s life

• Expand opportunities for new value added services (e.g. benchmarking) or business models (e.g.

products as a service)

• Sell entire product systems or platforms

Redefining Customer Relationships

Smart Home Platform

Demand Based

Pricing Model Single Button Ordering

Marketing & Sales


• 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 product performance data can anticipate problems and improve uptime and technician utilization

Remote diagnostics allows for one-stop service and higher fix rates, while other problems are fixed remotely

• Incorporate augmented reality (AR) to make product operation, training, and service more efficient

• Potential to disrupt channel service providers through “digital proximity” and direct connections to products/customers

• Offer product as a service, and introduce entirely new value added services

New Service Delivery Approaches

Remote Diagnostics

Augmented Reality

Enabled Service

After-Sales Service

One-Stop Service


Capitalize on Smart, Connected Equipment

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

Smart Manufacturing) to improve labor, material and energy efficiency

• SCPs hold the individual production steps, including control of the manufacturing equipment, to automate

manufacturing systems and enable multiple products on a single production line

• Connect equipment, factory sensors, and manufacturing systems to improve root cause analysis and corrective actions

and enable real-time and predictive quality measurement

• Smart tools and smart work instructions connected in real-time to manufacturing systems to improve efficiency, quality

and performance of assembly workers

Smart, Connected

Automotive Assembly

Smart Manufacturing Operations

Plant Floor Visibility Smart Tools


Restructuring Production and Ongoing Product Operation

• 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, via software, and the ability to finalize the product post-manufacturing

• 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 and enhanced after purchase and customized based on the customer’s evolving

preferences

Customization via Software “Glass” Airplane Cockpit

Smart, Connected Product Manufacturing

Remote Software Enhancement


Parts are delivered late

to customer

UNSATISFIED

CUSTOMER = $

Repair parts located or

ordered and

equipment repair implemented

PARTS & REPAIR

WORK = $

Unexpected part quality

issue found

during inspection

POOR QUALITY = $

Operator stops

producing the parts,

begins a cascade of process disruption

DOWNTIME = $

Material review

board meets for

emergency troubleshooting

CRISIS WORK = $

Parts already produced

are quarantined for

Scrap or Rework

SCRAP &

REWORK = $

CAPA and traceability

initiatives are initiated

EXTRA WORK = $

Machine learning

detects onset of

process anomaly and

alerts operator

MONITORING = $

The OLD Manufacturing Process

The NEW Manufacturing Process Operator analyzes

problem before

significant problems

materialize

DOWNTIME

AVOIDANCE = $

Replacement parts

can be located or

ordered in advance

EXTRA LEAD

TIME = $

Augmented reality

3D documentation

ensures quick fix

QUICK FIX = $

Machine, process,

and quality data is

collected

automatically

AUTO DATA

CAPTURE = $

Quality parts are

delivered on-time to

the assembly line

SATISFIED

CUSTOMER = $

Unexpected problems and cascading

delays result in significant loss of

profitability and customer satisfaction


• 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

CEO

FINANCE HUMAN

RESOURCES

IT R&D MANUFACTURING MARKETING SALES SERVICE AND

SUPPORT

Implications for Organizational Structure


TRADITIONAL FUNCTIONS

NEW FUNCTIONS

CEO

FINANCE HUMAN

RESOURCES


SUPPORT

UNIFIED DATA

ORGANIZATION

DEV-OPS

CUSTOMER

SUCCESS

MANAGEMENT

Led by a chief data officer. Handles

unit-wide data aggregation and

analytics, collaborates with and

shares information and insights

across the firm.

The Shifting Organizational Model



NEW FUNCTIONS

CEO

FINANCE HUMAN

RESOURCES


SUPPORT

UNIFIED DATA

ORGANIZATION

DEV-OPS

CUSTOMER

SUCCESS

MANAGEMENT

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.





across the firm.




NEW FUNCTIONS

CEO

FINANCE HUMAN

RESOURCES


SUPPORT

UNIFIED DATA

ORGANIZATION

DEV-OPS

CUSTOMER

SUCCESS

MANAGEMENT

Oversees product updates,

enhancements, and postsale service,

and coordinates shorter release cycles

while achieving 100% reliability.






representation.





across the firm.




NEW FUNCTIONS

CEO

FINANCE HUMAN

RESOURCES


SUPPORT

UNIFIED DATA

ORGANIZATION

DEV-OPS

CUSTOMER

SUCCESS

MANAGEMENT

Takes charge of the ongoing

customer relationship, ensuring

that customers gain maximum

value from the product.

Oversees product updates,

enhancements, and postsale service,

and coordinates shorter release cycles

while achieving 100% reliability.






representation.





across the firm.



The Larger Opportunity

• Smart, connected products are dramatically increasing opportunities for value creation

and higher productivity throughout the economy

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

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

• While there will be dislocations, the net effect is likely to be rising productivity, faster economic

growth and improving prosperity

• SCPs will allow for better meeting human needs by conserving natural resources, improving health

and safety, raising energy efficiency, sharing products, and others

• SCPs will affect jobs and the nature of work

• The net effect on jobs will be positive, through faster growth, new businesses, new roles, and

new tools for training and human resource development

• The impact of SCPs is still in the early innings

How Smart, Connected Products are Transforming ....…This presentation draws on ideas from...

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