How smart connected products are transforming companies

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PORTER M.E., HEPPELMANN J.E., How smart connected products are transforming companies, Harvard Business Review, V. 92, i. 11, 64-88

Type Article
Link connected-products-are-transforming-competition
Topics Business Model, Competition


The peculiarities of smart, connected products, and the new opportunities these products offer to companies are well described by Porter and Heppelmann in this and other articles.

The core functions of manufacturing firms are product development, IT, manufacturing, logistics, marketing, sales, and after-sale service; they can all be redefined and modified thanks to the advent and employment of IoT. This is considered by the 2 authors as “the most substantial change in the manufacturing firm since the Second Industrial Revolution”. Every activity in the value chain is altered by IoT, and “[a]t the core of what is reshaping the value chain is data”.

Among the changes in firms' strategy, several concern (also) data – those data which are collected through IoT products (“traditional sources of data are being supplemented by another source – the product itself. […] This new product data is valuable by itself, yet its value increases exponentially when it is integrated with other data”). “Should the company pursue an open or closed system?”; “How does the company manage ownership and access rights to its product data?”; “Should the company enter new businesses by monetizing its product data through selling it to outside parties?”.

The IoT offers different kinds of capabilities, among which there is the “optimization” one. --> One of the effects of this optimization, if concretely implemented, is more sustainability.

Data can help manufacturers in knowing that a customer is using or will use the product heavily, and that such use will result in a premature failure. This could push manufacturer to offer preemptive service to preclude later costly repairs. --> But such awareness could also push manufacturer to ask more money for a provision of the product as-a-service, or to refuse top provide it as-a-service; or to ask for more money for the provision of the maintenance service which accompany the product sale. The same data could therefore be used exclusively for sustainability purposes which encounter the interests of both (cf. Calo) the manufacture and the consumer (I use the data on product use to provide preventive services and ensure longer life to the product), or to realize sustainability purposes which however result to also in discriminating the consumer (manufacturers collect data on product use and implement retaliation on those consumers which do not act in sustainable ways, in order to foster circularity), or to realize discrimination purposes towards consumers which even challenge sustainability (I do not offer maintenance service to those consumers which most need it, as they use the product more heavily, or I ask for more money to those consumers, and therefore less of them will subscribe to the sustainability-fostering service).

“[T]he ability to unlock the full value of data becomes a key source of competitive advantage”.

A challenge is that the collected data are often “unstructured and therefore difficult to be exploited.

The article contains a Table – “Creating New Value with Data” – which depicts very well how the data coming from and/or about smart connected products can create added value of descriptive, diagnostic, predictive or prescriptive nature, added value which benefits business, customer, and/or partner.

Among the peculiarities of smart, connected products there are:

  • Low-cost variability: “In conventional products, variability is costly because it requires variation in physical parts. But the software in smart, connected products makes variability far cheaper”. --> Reuse (in the sense we can find in the EEA Report) of products is therefore easier.
  • Evergreen design: they “can be continually upgraded via software”. --> More durable.
  • Connected service: “products can be designed to allow more remote service”. --> additional services circularity-friendly can be provided.
  • Support for new business models: “switch from transactional selling to product-as-a-service models. When a product is delivered as a service, the responsibility for and associated cost of maintenance remain with the manufacturer”. Moreover, data collection can help in charging consumers only for their actual use of the PSS (“Product-as-a-service models will allow customers to pay only for what they actually need. With data and connectivity, the sharing of assets (think cars or bikes) will become possible or easier than ever before.”).--> N.B.: We can have new business models in which the manufacturer remains the owner of the commercialized product, and therefore he is incentivized in ensuring longer life and maintenance of the product, given that he will bear the cost of product expiration or break. As-a-service business models therefore foster the circular economy (it is an economic variable which fosters circularity). Moreover, as consumers are charged only for their actual use, they are pushed to make a more responsible and efficient use of the product. There already are apps and other services which try to make consumers aware of what they spend using devices, home appliances etc., in order to make them more responsible; a PSS will even be more effective, as what they pay for the use will become completely transparent through the money asked at the end of the month/year for the use of the product.
  • Simplified component: thanks to IoT, we move “from mechanical parts to software. This shift eliminates physical components”. E.g. Withings.--> Less use of physical materials, which are scarce by nature, and therefore more sustainability.

Initiatives like Industrie 4.0 (Germany), Smart manufacturing (USA), and GE's Brilliant Factories's use IoT for manufacturing optimization.

“Waste will be cut or eliminated. Sensors in products can identify the need for service before a component fails, reducing downtime. Or they can reveal that maintenance isn’t yet necessary. An oil change, for instance, will take place only after oil contamination has hit a certain threshold, rather than according to a schedule. New data analytics will lead to previously unattainable efficiency improvements”.

“New ways to segment and customize. The data from smart, connected products provides a much sharper picture of product use, showing, for example, which features customers prefer or fail to use. By comparing usage patterns, companies can do much finer customer segmentation—by industry, geography, organizational unit, and even more-granular attributes. Marketers can apply this deeper knowledge to tailor special offers or after-sale service packages, create features for certain segments, and develop more-sophisticated pricing strategies that better match price and value at the segment or even the individual customer level.” --> Personalization and price discrimination. Systematized personalization, as Ryan Calo calls such a phenomenon; according to Porter and Heppelmann, it is not a negative inflection of IoT; according to Calo, it is not tout court negative; it is negative only when realizes business interests which are not aligned with the consumer ones.

With IoT, we start to “[f]ocus on systems, not discrete products”. We in fact need interoperability with related products (--> and services and data). There will be partnerships to connect products and fill gaps (--> but these partnerships will create anyway circular economieS. Not a comprehensive circular economy). “[I]ncentives will need to accommodate more complex revenue-sharing models”. --> EILKHER says, at p. 15585: “Based on the IoT data lifecycle discussed earlier, we divide an IoT data management system into an online, real-time frontend that interacts directly with the interconnected IoT objects and sensors, and an offline backend that handles the mass storage and in-depth analysis of IoT data. The data management frontend is communication-intensive; involving the propagation of query requests and result to and from sensors and smart objects. The backend is storage-intensive; involving the mass storage of produced data for later processing and analysis and more in-depth queries.” For the backend there is need for data interoperability, and other kinds of interoperability are not needed, or anyway not critical. For the frontend there is on the contrary need also for interoperability with the product itself, and not only with the data it produces, in order to provide for additional services.

“The data, connectivity, and analytics available through smart, connected products are expanding the traditional role of the service function and creating new offerings.” --> E.g. circularity.

“Customers expect products and their data to be safe. […] Security can also be enhanced by giving customers or users the ability to control when data is transmitted to the cloud and what type of data the manufacturer can collect”.

The manufacturers of IoT products can take some examples for their strategy from the software industry: e.g., conceiving the IoT products as parts of broader systems (enable integration of their products with third-party products; encouraging the formation of developer communities to create new uses for their products), or using analytics as a competitive advantage (--> this is an argument against data sharing, and which seems to be in contrast with the previous advice to involve third parties: in many cases are the data collected by the product which enable additional services; but if those data are kept closed in order to use them as competitive advantage, how can the previous suggestion be also followed? Surely, partnerships can be created, but then the value added through additional services will be really limited and exclusively depending on the initiative of the first manufacturer).

Not all products are IoT today: for a certain period, traditional products will coexist with IoT ones; --> therefore, IoT could be used also to improve sustainability of traditional products which already are in circulation, and not only used in the design phase of new products.

“Because of these new products, we are poised to make great progress in environmental stewardship—substantially increasing the efficiency of land, water, and materials use, as well as energy efficiency and the productivity of the food system.” “Smart, connected products will free us to purchase only the goods and services we need, to share products that we do not use much, and to get more out of the products that we already have. Instead of tossing out old products for the next generation, we will hold on to products that are continually improved, upgraded, and modernized.”--> IoT for environment.