Smart, Connected Products: The shift in Strategy:
In this following post, we are going to examine how smart and connected products are changing product and business strategy and creating new opportunities for better product reliability, quality, and design.
Porter & Heppelmann (2013) writes that Information Technology (IT) has reshaped competition and strategy twice before over the past 50 years. Many activities that were before manual and paper-based become automated by using computer-aided design and different resource planning tools. Then in the 1980s and 1900s, the entrance of the internet has enabled coordination and integration with external partners and customers.
Now in this new wave, IT is playing a key part of the product itself. Products equipped with embedded sensors, processors, software, and connectivity offer new product data about usage and performance.
The definition of Smart and connected Products:
Porter & Heppelmann (2013) states that smart, connected products have three elements: Physical component, smart component and connectivity component. Let us examine them in detail below.
The physical component consists of the product’s mechanical and electrical parts. This can be the engine block or batteries in a car.
The smart component is referring to the sensors, microprocessors and data storage. This can be the engine control unit in a car.
The connectivity component relates to the antennae and protocols enabling wired or wireless connections. This can be an individual product connected through an interface or multiple products connected to each other to form a system.
Case Study: Multiple farm equipment is connected to each other to coordinate and optimize the farm system. The system shows geolocation data and automated tasks can be performed such as injecting fertilizing at specific times.
4 capabilities of Smart Products
In this new era, new product functions and capabilities are added to the core product adding customer value. These capabilities can be grouped into four areas and is shown in figure 1:
- Monitoring: When a product is equipped with sensors and connectivity it will be able to send data about its condition, operations, and external environment. The data collected can be used for alert notification and critical changes in components. The monitoring gives new sales opportunities and for compliance and warranty issues.
Case Study: Leading mining equipment manufacturer monitor operations condition, safety parameters and other service indicators for their entire fleets.
- Control: When a product is connected to the cloud, it gives new possibilities for remote control and commands. It can also be programmed with algorithms that respond to changes in its condition.
Case Study: Smart lightbulbs can be controlled via smartphones and be programmed to change its light depending on different factors. This allows the personalization of the user experience.
- Optimization: Smart, connected products will produce a rich flow of monitoring data ranging from its condition and performance. By using algorithms and analysis to analyze real-time or historical data manufactures can improve efficiency and utilization. With new connectivity options, real-time monitoring will enable preventative maintenance and reduce product downtime.
Case Study: In wind turbines, smart analytics of the data collected each blade is optimized to maximize wind energy. The turbine is equipped by a local microcontroller that controls the blades.
- Autonomy: When the product has passed monitoring, control, and optimization phase, it will be able to combine data from all levels to reach autonomy. This means it can operate without operators and learn about its environment, make self-diagnose and adapt to the user’s preferences.
Case Study: Smart vacuum cleaners use sensors and software to scan and clean floors in rooms with different layout without any operators. Other examples include mining equipment that can operate autonomous in areas where humans can’t reach.
New Industry Ecosystem:
Porter & Heppelmann (2013) explains that the dimensions of smart and connected products will reshape competition within many industries. In figure 2, one consulting company has illustrated their view on this new industry ecosystem. The original illustration is from Porter & Heppelmann (2014).
Digitalization is about value creation for customers and partners. Those organizations that can transform their business and collaborate in new ways will retain customers and create new opportunities for revenues. To illustrate this, Porter & Heppelmann (2013) are taking farm machinery as one example. It is no longer about one smart and connected product but rather about interconnected ecosystems. In the future, it is likely that the product itself will not be the core advantage but rather the systems that connect the products.
How to respond in this shifting industry structure?
Companies need to rethink their processes and practices to cope with this digital transformation. In order to compete in this new industry structure, companies need to differentiate themselves and operate effectively. This means improving and making practices efficient in the value chain. Porter & Heppelmann (2013) mentions four important areas that need to shift internally in the value chain.
Firstly, the smart and connected product will require new types of design principles. It is no longer about hardware design but also about software that needs to be customized. If predictive and remote service is to be achieved then it needs to be integrated within the product.
Secondly, if a product is going to be repaired remotely in real-time then this will require a new set of after-sales services. It will be no longer about supplying a component to repair a product but about software upgrades and product data need to be incorporated and shared within the whole company.
Thirdly, all of these new capabilities will require new skills sets such as big data analytics, software development, and system engineering.
And lastly, if a product is going to be smart and connected then there is a need for a robust security management for authentication and storage.
What to think about when creating Strategy:
Porter & Heppelmann (2013) has identified 10 new strategic choices that companies face in a smart, connected world. Below, we have created a graphic presentation of these areas and key implications for strategy:
Implications for New Business Models:
Traditionally a manufacturer focused on producing a physical good and then selling it via its dealer networks. This means that the owner is responsible for servicing the product and bears the risk of downtime and product failures. In a smart, connected ecosystem this is no longer the case. If a product is sold as-as service model then the manufacturer has ownership and takes responsibility for its downtime. Customers pay as they go, not upfront.
This type of thinking creates a dilemma for manufacturers as today many have good business selling spare parts and service contracts. The profitability of products sifts in a smart, connected ecosystem with increased buyer power. Another version is product sharing where the customer only pays for the use of the product. The main opportunity is that the manufacturer can take heftier charge if they can ensure that their products are reliable and can secure their up-time. A customer can use the product as a service but are then prepared to pay a premium as they are not responsible for their downtime.
Data as a new resource: Implications for Organizational Structure
As products are becoming smart and connected vast amount of data will be available and will change how firms interact with their customers. This will also lead to a change of work within the organizations and the different functions in product development, IT, manufacturing, logistics, marketing, sales, and after-sale service. In figure 3, an graphic is shown to illustrate the process from data source to insights.
Porter & Heppelmann (2013) points out that cross-functional collaboration and new functions will emerge. As data will become a critical resource, new functions will emerge including those that will manage huge quantities of data.
With data being the core of every interaction both internally and externally, three major effects are expected:
- As a product are becoming smart and connected data will become a core asset. However, the value of data will increase exponentially when it is integrated with other data. Envision combining service histories, inventory locations, and traffic patterns. This means that cross- functional and data sharing within the organization will be vital.
- New business function needs to be established to govern, analyze and secure the data being collected. Data Analytics will become a competitive advantage and will be used in problem-solving, pattern detection and new customer insights. Data Analytics functions will fall into four categories: descriptive, diagnostic, predictive, and prescriptive.
- Transform The Value Chain: Traditional functional work will shift as data will change product design, sales and service.
- Product Development Processes: Software will become a critical new design principle. It will now be possible to modify and update product features via the cloud. This requires a new type of collaboration between different functions such as sales, quality, and design teams.
- Manufacturing Processes: Factories will become smart with machines connected in new ecosystems. Sensors in the components will help to detect quality issues. As machines and products are connected to the cloud, product data is collected during the whole product life cycle.
- Logistics: Data collected from smart and connected products will allow route and delivery optimization.
In the new organization structure in the data era, coordination is necessary across multiple functions. Traditionally, organizations were built around separated functions units with periodic handoffs. In the new data era, some functions will overlap and collaborate during the entire product life cycle. Data will be a critical asset and need to be handled with care and some organizations may need to create a unified data unit. As software will become more important in the product design, teams need to be more agile and work with iterations to release product updates to enhance the product and provide maintenance.
We live in very exciting times where smart and connected product can create new opportunities for the economy. In the era of internet, cloud-computing and mobile could reshape competition and how organizations are structured and managed.
What is exciting from my point of view is that we can transform our economies and societies by this new digital transformation. Smart and connected products can help us in sharing and using resources more efficiently. It can also help us achieve better and more secure products, think of safer traffic systems or health-care applications connected to the cloud. The road ahead is uncertain but if we chose to bring out the positive effects of this new transformation our economy and society can prosper.
The insights in this post are from personal industrial and management perspective together with the research conducted by Porter and Hepellmann from Harvard Business Review.