Porter Prize is named after Michael E. Porter who is Professor at Harvard Business School, living legend and father of modern strategy field

1. 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
Porter Prize India
September 25, 2015

2. Copyright 2015 © Professor Michael E. Porter220150925 – Porter Prize India – FINAL
The Third Wave of IT Driven Competition
Products are
mechanical/electrical
and information
processing is performed
manually
IT automates
information collection
and processing in
activities across the value
chain
The internet enables
coordination and
integration across the
value-chain, with
customers, with business
partners, and across
geography
IT is embedded in
products themselves,
transforming 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

3. Copyright 2015 © Professor Michael E. Porter320150925 – Porter Prize India – FINAL
Smart, Connected Product Components
Sensors
Product Cloud
Electronics and Controls
Software
Enhanced UI on the Product
Mechanical
Smart,
Connected
Product
Electrical
Connectivity
Physical
Product
Smart Product
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4. Copyright 2015 © Professor Michael E. Porter420150925 – Porter Prize India – FINAL
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
Tracking location,
product operation,
product condition,
and the surrounding
environment
Physical or remote
control of product via
embedded software or
the product cloud
Algorithms that
optimize product
operation, use,
and service
The combination of
other capabilities
enables product
autonomy

5. Copyright 2015 © Professor Michael E. Porter520150925 – Porter Prize India – FINAL
The Technology Stack
Identity &
Security
Tools that
manage user
authentication
and system
access, as
well as secure
the product,
connectivity,
and the
product cloud
External
Information
Sources
A gateway for
information
from external
sources –
such as
weather,
traffic,
commodity
and energy
prices, social
media, and
geo-mapping
– that inform
product
capabilities
PRODUCT CLOUD
Network
Communication
Product Data
Database
Smart Product
Applications
Rules/Analytics
Engine
Application
Platform
The protocols that enable communications between the
product and the cloud (cellular, Wi-Fi, Bluetooth, others)
Big data database system that enables aggregation,
normalization, and management of real-time and historical
product data
Application development and execution environment enabling
rapid creation of smart, connected business applications using
data access, visualization, and run-time tools
The rules, business logic, and big data analytical capabilities
that populate the algorithms involved in product operation and
reveal new product insights
Software applications running on remote servers that manage
the monitoring, control, optimization, and autonomous
operation functions
PRODUCT
Product
Hardware
Embedded sensors, processors, and connectivity
port/antennas supplementing traditional mechanical and
electrical components
Product
Software
An embedded operating system, onboard software
applications, enhanced user interface, and product control
components
Integration
with
Business
Systems
Tools that
integrate data
from smart,
connected
products with
core
enterprise
business
systems such
as ERP, CRM,
and PLM
COMMUNICATIONS

6. Copyright 2015 © Professor Michael E. Porter620150925 – Porter Prize India – FINAL
Smart, Connected Products and Industry Competition
+ Shift rivalry away from price
- Higher fixed costs increase
pressure to discount
+ Higher barriers to entry
- New entrants can leapfrog incumbents
+ Expanded opportunities for
differentiation, segmentation,
switching costs
+ Reduced dependency on channels/
service partners
- Greater customer visibility of value/
new business models
+ Less dependence on
mechanical components
- Greater power of
IT vendors
- Better utilization of products
reduces volume
Threat of Substitute
Products or Services
Threat of New
Entrants
Rivalry Among
Existing Competitors
Bargaining Power
of Suppliers
Bargaining Power
of Buyers

7. Copyright 2015 © Professor Michael E. Porter720150925 – Porter Prize India – FINAL
Weather Data
System
Irrigation
System
Seed
Optimization
System
Farm
Equipment
System
Farm
Management
System
Platform
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
Expanding and Shifting Industry Boundaries
Farm Equipment
PRODUCT

8. Copyright 2015 © Professor Michael E. Porter820150925 – Porter Prize India – FINAL
Smart, Connected Products and Industry Competition
+ Expanded opportunities for
differentiation, segmentation,
switching costs
+ Reduced dependency on channels/
service partners
- Greater customer visibility of value/
new business models
+ Less dependence on
mechanical components
- Greater power of
IT vendors
Threat of Substitute
Products or Services
Threat of New
Entrants
Rivalry Among
Existing Competitors
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
- Better utilization of products
reduces volume
+/- Systems disintermediate
discrete products
+ Higher barriers to entry
- New entrants can leapfrog incumbents
- New potential entrants from other parts of the product system
+ Shift rivalry away from price
- Higher fixed costs increase pressure to
discount
+/- Rivalry shifts from products to systems

9. Copyright 2015 © Professor Michael E. Porter920150925 – Porter Prize India – FINAL
Ten Strategic Choices for Manufacturers
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 and access?
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

10. Copyright 2015 © Professor Michael E. Porter1020150925 – Porter Prize India – FINAL
Value
What
buyers are
willing to
pay
Competitive Advantage and the Value Chain
Support
Activities
Inbound
Logistics
Order
Processing
& Outbound
Logistics
M
a
r
g
i
n
Primary Activities
Procurement
Firm Infrastructure
Technology Development
Marketing
& Sales
After-Sales
Service
Manufacturing
Human Resource Management

11. Copyright 2015 © Professor Michael E. Porter1120150925 – Porter Prize India – FINAL
The Product as a Sensor: The Data Lake
• Stored in a new kind of unstructured database
• Big data analytics to develop insights
• Companies are forming unified data organizations
to manage this crucial resource

12. Copyright 2015 © Professor Michael E. Porter1220150925 – Porter Prize India – FINAL
12
New Principles of Product Design
Configurable
Engine
Product Development
• Product development shifts from largely mechanical engineering and product design to true
interdisciplinary systems engineering
• Products become complex systems involving sensors, software, connectivity, and operating in the cloud
• ​New design principles emerge, including:
− Design for low-cost variability
− Design for evergreen customization and improvement
− Design enabling new user interfaces
− Design for ongoing quality management
− Design for connected service
− Design for new business models
− Design for system interoperability

13. Copyright 2015 © Professor Michael E. Porter1320150925 – Porter Prize India – FINAL
Manufacturing
Restructuring Production Plus Ongoing Product Operation
• Smart, connected equipment that integrates, automates, and
optimizes the production process (e.g. Industrie 4.0 and
Smart Manufacturing)
• 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, and the ability to
finalize the product post-manufacturing and even in the field
Physical Manufacturing Ongoing Product Operation
• 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 after purchase and
customized based on the customer’s evolving
preferences

14. Copyright 2015 © Professor Michael E. Porter1420150925 – Porter Prize India – FINAL
• Shifting 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
• Enabling more sophisticated pricing models based on usage at the segment or individual customer level
• Managing upgrades, replacement products and services over the product’s life
• Expanding opportunities for new value added services (e.g. benchmarking) or business models (e.g.
products as a service)
• Selling entire product systems or platforms
Redefining Customer Relationships
Radar Speed Display
Remote Traffic Safety System
Marketing & Sales

15. Copyright 2015 © Professor Michael E. Porter1520150925 – Porter Prize India – FINAL
15
• 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 actual product usage data can anticipate problems and improve efficiency, uptime, technician
utilization, and warranty management
− Remote diagnostics allows for one-stop service and higher success rates, while many problems can be fixed
entirely by a remote technician
• Augmented reality makes product operation, training, and service operations far more efficient
• Potential to disrupt legacy channels and service providers through “digital proximity” and direct connections to
products and customers
• Services move beyond repair to ultimately product as a service, and entirely new value added services become possible
New Service Delivery Approaches
Elevator / Escalator Manufacturer
Urban Mobility Solutions
After-Sales Service

16. Copyright 2015 © Professor Michael E. Porter1620150925 – Porter Prize India – FINAL
• Risk models must consider threats across all potential points of access: the device, the
network to which it is connected, and the product cloud
• The job of ensuring IT security now cuts across all functions, e.g. embed security in product
design
• Customers expect fair exchange of value for use of product data and transparent data
rights policies are necessary
• Keeping customer data secure and private is an increasingly important source of value and a
potential differentiator
Data Rights, Security, and Privacy
New Expectations for Security and Privacy

17. Copyright 2015 © Professor Michael E. Porter17
The Traditional Manufacturing Organization
CEO
FINANCE
HUMAN
RESOURCES
IT R&D MANUFACTURING MARKETING SALES
SERVICE AND
SUPPORT
• 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

18. Copyright 2015 © Professor Michael E. Porter18
A New Organizational Structure
CEO
FINANCE
HUMAN
RESOURCES
IT R&D MANUFACTURING MARKETING SALES
SERVICE AND
SUPPORT
UNIFIED DATA
ORGANIZATION
TRADITIONAL FUNCTIONS
NEW FUNCTIONS
Led by a chief data officer. Handles
enterprise-wide data aggregation and
analytics, supports the functions’
analytics, and shares information and
insights across the firm.

19. Copyright 2015 © Professor Michael E. Porter19
CEO
FINANCE
HUMAN
RESOURCES
IT R&D MANUFACTURING MARKETING SALES
SERVICE AND
SUPPORT
UNIFIED DATA
ORGANIZATION
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.
TRADITIONAL FUNCTIONS
NEW FUNCTIONS
A New Organizational Structure

20. Copyright 2015 © Professor Michael E. Porter20
CEO
FINANCE
HUMAN
RESOURCES
UNIFIED DATA
ORGANIZATION
Draws teams from R&D, IT, manufacturing,
and service. Oversees product updates,
postsale service and enhancements, and
efforts to shorten product-release cycles.
TRADITIONAL FUNCTIONS
NEW FUNCTIONS
DEV-OPS
IT R&D MANUFACTURING MARKETING SALES
SERVICE AND
SUPPORT
A New Organizational Structure

21. Copyright 2015 © Professor Michael E. Porter21
CEO
FINANCE
HUMAN
RESOURCES
IT R&D MANUFACTURING MARKETING SALES
SERVICE AND
SUPPORT
UNIFIED DATA
ORGANIZATION
DEV-OPS
CUSTOMER
SUCCESS
MANAGEMENT
Takes charge of the ongoing
customer relationship and
ensures that customers gain
maximum value from the
product.
TRADITIONAL FUNCTIONS
NEW FUNCTIONS
A New Organizational Structure

22. Copyright 2015 © Professor Michael E. Porter2220150925 – Porter Prize India – FINAL
Making the Transition
• The organizational changes needed are substantial and just beginning
to appear
• Manufacturers will continue to produce and need to maintain traditional
products for a sustained period of time
• The organizational transition will be evolutionary, not revolutionary and
old and new structures will often need to operate in parallel
• Companies will often need hybrid or transitional structures to pool
scare talent and avoid duplication

23. Copyright 2015 © Professor Michael E. Porter23
Transitional Structures
Model Example Description Benefit Risk
Standalone SCP
Business Unit
A separate new business unit, with profit-
and-loss responsibility, is charged with
supporting the company’s SCP strategy.
The unit aggregates the talent and
mobilizes the technology and assets
needed to bring new offerings to market.
• Able to innovate
without the
organizational
baggage
• Pools skills and
resources
• Separation may limit
impact to the core
business
SCP Center of
Excellence
A separate corporate unit houses key
expertise on smart, connected products. It
does not have profit-and-loss responsibility
but is a cost center that business units can
tap.
• Focus and shared
vision can create
better solutions
• Limits growth and
initiative across the
organization
• Technology
investments may not
be extendable across
businesses
Cross-Business
Unit SCP
Steering
Committee
A cross-functional committee of thought
leaders across business units, who
champion opportunities, share expertise,
and facilitate collaboration.
• Distributes input and
learning across the
organization
• Lack of authority and
multiple stakeholders
may slow
development

24. Copyright 2015 © Professor Michael E. Porter2420150925 – Porter Prize India – FINAL
• Smart, connected products dramatically increase opportunities for value creation and
higher productivity throughout the economy, increasing economic growth and
prosperity
• SCPs create a whole new generation of lean, driving out waste
• SCPs will transform competition in many service industries, not just in manufacturing
• SCPs will improve our ability to meet human needs by driving out waste and
conserving resources
• This wave of innovation will undoubtedly alter the nature of work, but is likely to
generate a net positive effect on jobs through faster growth together with creating
new roles and training tools
• The impact of SCPs is still in the early innings
The Larger Opportunity