Two decades ago, Professor Michael Porter of Harvard Business School introduced the concept of a value chain; a set of activities that an organization carries out to create value for its customers. Since its inception, the value-chain model has been seen as a useful tool to not only help manufacturers understand the factors that impact the long-term profitability of their business, but also for developing a successful strategic plan.
Now, according to the November cover story of Harvard Business Review, “How Smart, Connected Products Are Transforming Competition”, written by Porter and Jim Heppelmann, CEO of Boston-based software company PTC, the emergence of smart, connected products is not only altering industry structure and the nature of competition, but disrupting value chains, and this is forcing companies to rethink and retool nearly everything they do internally.
The greatest impacts of smart, connected products to a firm’s value chain are:
New principles of product design: Smart, connected products need a whole new set of design principles (e.g., designs that enable personalization through software-based customization, designs that incorporate the ability to support ongoing product upgrades, and designs that enable predictive or remote service).
Redefined customer relationships: Thanks to insights from data analytics tools, firms can segment their market in more sophisticated ways and price bundles to those markets that capture more value. The ability to anticipate, reduce, and repair failures, also creates an unprecedented opportunity to affect product performance and optimize service, which opens up new business models, like product-as-a-service (PaaS).
New service delivery approaches: New service organizational structures and delivery processes are necessary in order to take advantage of product data that can uncover existing and future problems and enable companies to make preventative, and sometimes remote, repairs. Data also allows for considerable reductions in field-service dispatches and major efficiencies in spare-parts inventory control.
New layers of technology infrastructure: As highlighted in a previous post, smart, connected products require an entirely new technology infrastructure. Building and supporting the technology stack for smart, connected products requires substantial investment and new technology partners and suppliers for connectivity, big data analytics, and application development.
New talent requirements: Smart, connected products create major human resource requirements and challenges. The most urgent of these is the need to recruit new roles that are not common in manufacturing companies—many of which are in high demand, like software developers, systems engineers, and data scientists.
The value derived from these impacts on the value chain are increased product and service differentiation, new revenue streams, improved operational efficiency, and enhanced customer experience. These impacts and value opportunities will be discussed in greater detail in the second HBR article in this series.
To learn more, download the full report, “How Smart, Connected Products Are Transforming Competition” from PTC.com.
This work contains material first published in “How Smart, Connected Products Are Transforming Competition”, Harvard Business Review, November 2014.
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