This document discusses how smart, connected products are transforming competition through three core elements - physical components, smart capabilities via sensors and software, and connectivity. These new technologies allow products to monitor use, control functions remotely, optimize performance, and operate autonomously. This shifts industry structures by changing how value is created and captured, competitive advantages are secured, and industry boundaries are defined as products become part of broader systems. Companies must make strategic choices around business models, data management, and whether to develop open or closed systems to take advantage of opportunities while securing competitive differentiation.

1. How Smart, Connected
Products Are Transforming
Competition
Michael E. Porter and James E. Heppelmann,
Harvard Business Review, Nov. 2014
Strategic Business Planning
Vassilis Kapatsoulias

2.  Idea in Brief
 IT-Driven Competition
 Smart, Connected Products
 The New Technology Stack
 What Can Smart, Connected Products Do?
 Reshaping Industry Structure
 New Industry Boundaries and Systems of Systems
 Competitive Advantage
 Implications for Strategy
 The Larger Opportunity
Table of Contents

3. • A changing environment
– New opportunities: functionality + capabilities  transcend boundaries
– Changing nature: disrupting value chain
– Rethink: products (conceive, design, source, manufacture, operate), IT
infrastructure (build, secure)
• New strategic choices
– How value is created and captured
– How companies work with partners
– How competitive advantage is secured
• ““What business am I in?”What business am I in?”
Idea in Brief

4. • First wave: 60s and 70s  automated activities
– Data analysis, process standardization  productivity ↑
• Second wave: 80s and 90s  coordination and integration
– Value chain transformed  productivity and growth ↑
• Third wave: IT is part of product  computers, cloud, data
– productivity ↑ ↑ ↑
– “Internet of things”: change everything?
• Rules of competition and competitive advantage are the same
IT-Driven
Competition

5. • 3 core elements
– Physical: mechanical, electrical parts
– Smart: sensors, microprocessors, data storage, controls, software,
operating system, enhanced user interface
– Connectivity: ports, antennae, protocols enabling connection
• One-to-one, one-to-many, many-to-many
• Exchange info, product cloud
• Innovation, breakthroughs  emerging across all manufacturing sectors
• Requirement: building new technology infrastructure (“technology
stack”)  rapid product application development and operation  data
– Product hardware/software/cloud, connectivity, security tools, external
information sources, integration with business systems
Smart, Connected
Products

6. • Monitoring: sensors, external data sources  condition, operating
characteristics
– Data  implications
• Control: software  remote commands or algorithms  control functions
– Personalize user experience and performance
• Optimization: monitoring + control  apply algorithms and analytics to
data
– Enhance product performance
– Allow predictive diagnostics, service, repair, updates
• Autonomy: learn – self-diagnose – adapt
– Autonomous product operation and coordination
– Product enhancement, personalization
What Can Smart,
Connected Products
Do?

7. • Bargaining power of buyers: product differentiation  competition not
only price
– Ability to segment, customize, capture value, value-added services (-)
– Customer relationships, switching costs, distribution independency (-)
– Understanding true product performance, access to usage data (+)
– Support from manufacturer ↓, product as a service  switching cost ↓ (+)
• Rivalry among competitors: differentiation, tailor, customize
– Broaden value proposition (data, service)
– Fixed costs ↑
– Tempt to enter feature and function arms race
– Broader product systems  rivalry ↑
Reshaping Industry
Structure

8. • Threat of new entrants:
– Obstacles:
1. Design, technology, IT infrastructure  high fixed costs
2. Broadening product definitions
3. First-mover advantages  buyer loyalty, switching costs
– Opportunities: embrace new capabilities  leapfrog/invalidate
incumbents
• Threat of substitutes: performance, customization, value  threats ↓
– New threats: wider capabilities, new business models  substitute
product ownership
• Bargaining power of suppliers: software replaces physical
components
– Traditional suppliers: reduced importance
– Powerful new suppliers  essential to differentiation and cost  high
bargaining power (can also gain leverage through end users and usage
data access)
Reshaping Industry
Structure

9. • Expanded definition: function optimized with other products
• Basis of competition: performance of broader product system
• Systems of systems: coordinate and optimize external information
• Products/designs with greatest impact  drive process, capture value
• Effect:
1. Rising barriers + first-mover advantage  consolidation
2. Consolidation pressures ↑  single products vs. multiproduct systems
3. New entrants emerge  “productless” strategies (connectivity)
New Industry
Boundaries and
Systems of Systems

10. • Differentiate  price premium, lower costs  superior profitability and growth
• Foundation: Operational Effectiveness (OE)  best practices across value chain
• Define distinctive strategic positioning  how to deliver unique value
• Design: new principles
– Hardware standardization through software-based customization and personalization
– Support ongoing upgrades
– Enable predictive, enhanced, and remote service
Expertise in systems engineering
Product development  late stage and post-purchase
Synchronize “clock speeds” development
Competitive
Advantage

11. • After-sale service: predictive maintenance and service productivity
– Use data  insights, validate/identify warranty
– Decrease service costs  replace physical parts with “software parts”
• Marketing: data  insights on positioning, communication
– Segmentation  bundles, pricing, tailoring through software
• Human resources: need to recruit new skills  high demand
– Software development, systems engineers, clouds, big data
• Security: robust security management  protect data, new
authentication
Competitive
Advantage

12. • Set of choices  reinforce one another, coherent
1. Set of capabilities and features
– Which features deliver real value, related to cost?  value equation
– Which segments to serve?
– Reinforce competitive advantage  extensive features  differentiation vs. low-
cost basic features
2. Functionality: embed in product or cloud?
– Cost, response time, connectivity risk, automation
– Network availability/reliability/security  dependence
– Location of product use: remote or hazardous?  mitigate dangers/cost
– Nature of user interface: complex or frequently changed?  cloud
– Frequency of service or product upgrades
Implications for
Strategy

13. 3. Open or closed system?
– Closed: single manufacturer  requires significant investment
• Competitive advantage: control/optimize design of all parts
• Become de facto industry standard  capture all value
– Open: interface and participate in the system
• Become de facto industry standard  no proprietary benefit
3. Capabilities & infrastructure: develop internally or outsource?
• Investment  skills (scarce, high in demand)
• In-house: control over features, first-mover advantage, overestimate ability
• Outsourcing: partners demand larger share, compromise ability to become experts
Combination of both
Identify opportunities: insight, innovation, competitive advantage, outsource future
commodities
Implications for
Strategy

14. 5. Type of data to capture, secure, and analyze (cost, rights,
complexity)
 Functionality value, value chain, efficiency, future improvement, frequency
 Consider product integrity, security
 Depends on positioning and strategies
5. Managing ownership and access rights: who owns the data?
• Outright or joint ownership
• Transparency, data-sharing framework (condition/performance/location)
• Customers want a say  make clear value proposition to encourage sharing
• “Click through” agreements
5. Disintermediation of distribution channels and service network
+ Revenue, margins, knowledge of needs, brand awareness, loyalty, pricing ease ↑
- Physical proximity required, losing partners to competitors, invest in functions
 Decide based on type of partner networks
Implications for
Strategy

15. 8. Change business model? (from traditional ownership to product-as-a-
service)
• Dilemma: economic incentives
• New model  profitability: pricing, terms of contracts
• Switching costs vs. perpetual ownership
 Hybrid models: bundles with warranty, service, performance-based
8. New business: monetizing product data
• Value of data  new services/businesses  reaction of core customers?
8. Expand the company’s scope (broadened industry boundaries)
a) Related products or parts: opportunities, risk, systems engineering
b) Platform that connects products & info
 Value proposition, systems engineering, IT skills, products central to
system
 Optimization: “inside product” or “outside product” (design vs.
algorithms)
Implications for
Strategy

16. • Changes in: value creation, competition, industry boundaries  economy,
productivity growth
• Improved ability to meet needs: efficiency, effectiveness, safety, reliability,
utilization, conservation
• Opportunity: rapid innovation and economic growth  prosperity growth
• Embrace opportunity: equip workers with skills, agree on rules and
regulations, overcome blocking efforts
• Make clear choice of strategy: consistent, reinforce choices  define
distinctive and realistic value proposition
The Larger
Opportunity