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This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free...
Copyright 2015 © Professor Michael E. Porter220150925 – Porter Prize India – FINAL
The Third Wave of IT Driven Competition...
Copyright 2015 © Professor Michael E. Porter320150925 – Porter Prize India – FINAL
Smart, Connected Product Components
Sen...
Copyright 2015 © Professor Michael E. Porter420150925 – Porter Prize India – FINAL
Capabilities of Smart, Connected Produc...
Copyright 2015 © Professor Michael E. Porter520150925 – Porter Prize India – FINAL
The Technology Stack
Identity &
Securit...
Copyright 2015 © Professor Michael E. Porter620150925 – Porter Prize India – FINAL
Smart, Connected Products and Industry ...
Copyright 2015 © Professor Michael E. Porter720150925 – Porter Prize India – FINAL
Weather Data
System
Irrigation
System
S...
Copyright 2015 © Professor Michael E. Porter820150925 – Porter Prize India – FINAL
Smart, Connected Products and Industry ...
Copyright 2015 © Professor Michael E. Porter920150925 – Porter Prize India – FINAL
Ten Strategic Choices for Manufacturers...
Copyright 2015 © Professor Michael E. Porter1020150925 – Porter Prize India – FINAL
Value
What
buyers are
willing to
pay
C...
Copyright 2015 © Professor Michael E. Porter1120150925 – Porter Prize India – FINAL
The Product as a Sensor: The Data Lake...
Copyright 2015 © Professor Michael E. Porter1220150925 – Porter Prize India – FINAL
12
New Principles of Product Design
Co...
Copyright 2015 © Professor Michael E. Porter1320150925 – Porter Prize India – FINAL
Manufacturing
Restructuring Production...
Copyright 2015 © Professor Michael E. Porter1420150925 – Porter Prize India – FINAL
• Shifting from traditional transactio...
Copyright 2015 © Professor Michael E. Porter1520150925 – Porter Prize India – FINAL
15
• Shift from reactive service to pr...
Copyright 2015 © Professor Michael E. Porter1620150925 – Porter Prize India – FINAL
• Risk models must consider threats ac...
Copyright 2015 © Professor Michael E. Porter17
The Traditional Manufacturing Organization
CEO
FINANCE
HUMAN
RESOURCES
IT R...
Copyright 2015 © Professor Michael E. Porter18
A New Organizational Structure
CEO
FINANCE
HUMAN
RESOURCES
IT R&D MANUFACTU...
Copyright 2015 © Professor Michael E. Porter19
CEO
FINANCE
HUMAN
RESOURCES
IT R&D MANUFACTURING MARKETING SALES
SERVICE AN...
Copyright 2015 © Professor Michael E. Porter20
CEO
FINANCE
HUMAN
RESOURCES
UNIFIED DATA
ORGANIZATION
Draws teams from R&D,...
Copyright 2015 © Professor Michael E. Porter21
CEO
FINANCE
HUMAN
RESOURCES
IT R&D MANUFACTURING MARKETING SALES
SERVICE AN...
Copyright 2015 © Professor Michael E. Porter2220150925 – Porter Prize India – FINAL
Making the Transition
• The organizati...
Copyright 2015 © Professor Michael E. Porter23
Transitional Structures
Model Example Description Benefit Risk
Standalone S...
Copyright 2015 © Professor Michael E. Porter2420150925 – Porter Prize India – FINAL
• Smart, connected products dramatical...
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Michael E. Porter Presentation at Porter Prize 2015

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

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Michael E. Porter Presentation at Porter Prize 2015

  1. 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. 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. 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 11100011001000011000010100 00101000001110001101010111 00011001000011000010100001 01000001110011011001001100 11100011001000011000010100 00101000001110001101010111 00011001000011000010100001 01000001110011011001001100
  4. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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