The capabilities of smart, connected products can
be grouped into four areas: monitoring, control,
optimization, and autonomy. Each builds on the
preceding one; to have control capability, for example,
a product must have monitoring capability.
mSensors and external
data sources enable the
comprehensive monitoring of:
• the product’s condition
• the external environment
• the product’s operation
and usage
Monitoring also enables alerts
and notifications of changes
Control
Software embedded in the
product or in the product
cloud enables:
• Control o f product functions
• Personalization of the user
experience
0 Monitoring and control
capabilities enable algorithms
that optimize product
operation and use in order to:
• Enhance product
performance
• Allow predictive diagnostics,
service, and repair
Combining monitoring, control,
and optimization allows:
• Autonomous product
operation
• Self-coordination of
operation with other
products and systems
• Autonomous product
enhancement and
personalization
• Self-diagnosis and
service
70 Harvard Business Review November 2014
HOW SMART, CONNECTED PRODUCTS ARE TRANSFORMING COMPETITION HBR.ORG
Smart, connected products ultimately can function with
complete autonomy. Human operators merely monitor
performance or watch over the fleet or the system, rather
than over individual units.
effective or often even possible. The same technology
also enables users to control and personalize
their interaction with the product in many new ways.
For example, users can adjust their Philips Lighting
hue lightbulbs via smartphone, turning them on and
off, programming them to blink red if an intruder is
detected, or dimming them slowly at night. Doorbot,
a smart, connected doorbell and lock, allows customers
to give visitors access to the home remotely after
screening them on their smartphones.
Optimization. The rich flow of monitoring data
from smart, connected products, coupled with the
capacity to control product operation, allows companies
to optimize product performance in numerous
ways, many of which have not been previously possible.
Smart, connected products can apply algorithms
and analytics to in-use or historical data to dramatically
improve output, utilization, and efficiency. In
wind turbines, for instance, a local microcontroller
can adjust each blade on every revolution to capture
maximum wind energy. And each turbine can be adjusted
to not only improve its performance but minimize
its impact on the efficiency of those nearby.
Real-time monitoring data on product condition
and product control capability enables firms to optimize
service by performing preventative maintenance
when failure is imminent and accomplishing
repairs remotely, thereby reducing product downtime
and the need to dispatch repair personnel. Even
when on-site repair is required, advance information
about what is broken, what parts are needed, and
how to accomplish the fix reduces service costs and
improves first-time fix rates. Diebold, for example,
monitors many of its automated teller machines for
early signs of trouble. After assessing a malfunctioning
ATM’s status, the machine is repaired remotely if
possible, or the company deploys a technician who
has been given a detailed diagnosis of the problem, a
recommended repair process, and, often, the needed
parts. Finally, like many smart, connected products,
Diebold’s ATMs can be updated when they are due
for feature enhancements. Often these can occur remotely,
via software.
Autonomy. Monitoring, control, and optimization
capabilities combine to allow smart, connected
products to achieve a previously unattainable level
of autonomy. At the simplest level is autonomous
product operation like that of the iRobot Roomba, a
vacuum cleaner that uses sensors and software to
scan and clean floors in rooms with different layouts.
More-sophisticated products are able to learn about
their environment, self-diagnose their own service
needs, and adapt to users’ preferences. Autonomy
not only can reduce the need for operators but can
improve safety in dangerous environments and facilitate
operation in remote locations.
Autonomous products can also act in coordination
with other products and systems. The value of
these capabilities can grow exponentially as more
and more products become connected. For example,
the energy efficiency of the electric grid increases as
more smart meters are connected, allowing the utility
to gain insight into and respond to demand patterns
over time.
Ultimately, products can function with complete
autonomy, applying algorithms that utilize data
about their performance and their environmentincluding
the activity of other products in the system—
and leveraging their ability to communicate
with other products. Human operators merely monitor
performance or watch over the fleet or the system,
rather than individual units. Joy Global’s Longwall
Mining System, for example, is able to operate autonomously
far underground, overseen by a mine
control center on the surface. Equipment is monitored
continuously for performance and faults, and
technicians are dispatched underground to deal with
issues requiring human intervention.
N o v em b e r 2 0 14 Harvard Business Review 71
SPOTLIGHT ON MANAGING THE INTERNET OF THINGS
Reshaping In d u s try S tru c tu re
To understand the effects of smart, connected products
on industry competition and profitability, we
must examine their impact on industry structure.
In any industry, competition is driven by five competitive
forces: the bargaining power of buyers, the
nature and intensity of the rivalry among existing
competitors, the threat of new entrants, the threat of
substitute products or services, and the bargaining
power of suppliers. The composition and strength of
these forces collectively determine the nature of industry
competition and the average profitability for
incumbent competitors. Industry structure changes
when new technology, customer needs, or other
factors shift these five forces. Smart, connected
products will substantially affect structure in many
industries, as did the previous wave of internet-enabled
IT. The effects will be greatest in manufacturing
industries.
Bargaining power of buyers. Smart, connected
products dramatically expand opportunities for
product differentiation, moving competition away
from price alone. Knowing how customers actually
use the products enhances a company’s ability to
segment customers, customize products, set prices
to better capture value, and extend value-added services.
Smart, connected products also allow companies
to develop much closer customer relationships.
Through capturing rich historical and product-usage
data, buyers’ costs of switching to a new supplier
increase. In addition, smart, connected products allow
firms to reduce their dependency on distribution
or service partners, or even disintermediate them,
thereby capturing more profit. All of this serves to
mitigate or reduce buyers’ bargaining power.
GE Aviation, for example, is now able to provide
more services to end users directly—a move that
improves its power relative to its immediate customers,
the airframe manufacturers. Information
gathered from hundreds of engine sensors, for example,
allows GE and airlines to optimize engine
performance by identifying discrepancies between
expected and actual performance. GE’s analysis of
fuel-use data, for example, allowed the Italian airline
Alitalia to identify changes to its flight procedures,
such as the position of wing flaps during landing,
that reduced fuel use. GE’s deep relationship
with the airlines serves to improve differentiation
with them while improving its clout with airframe
manufacturers.
THE FIVE FORCES THAT
SHAPE INDUSTRY COMPETITION
Smart, connected products w ill
have a transformative effect
on indus try structure. The five
forces th a t shape competition
provide the framework
THREAT
OF NEW
ENTRANTS
necessary fo r understanding the
significance o f these changes.
BARGAINING iS
POWER OF 1
SUPPLIERS V ■
, AMONG EXISTING 1 CzJ1*BARGAINING
POWER OF
BUYERS
t
THREAT OF
SUBSTITUTE
PRODUCTS OR
SERVICES
HBR.ORG F ora
fu ll discussion of
competitive strategy,
see Michael Porter’s
artic le “The Five
Competitive Forces That
Shape Strategy” (HBR,
January 2008).
However, smart, connected products can increase
buyer power by giving buyers a better understanding
of true product performance, allowing
them to play one manufacturer off another. Buyers
may also find that having access to product usage
data can decrease their reliance on the manufacturer
for advice and support. Finally, compared with
ownership models, “product as a service” business
models or product-sharing services (discussed below)
can increase buyers’ power by reducing the cost
of switching to a new manufacturer.
Rivalry among competitors. Smart, connected
products have the potential to shift rivalry, opening
up numerous new avenues for differentiation and
value-added services. These products also enable
firms to tailor offerings to more-specific segments of
the market, and even customize products for individual
customers, further enhancing differentiation
and price realization.
Smart, connected products also create opportunities
to broaden the value proposition beyond
products per se, to include valuable data and enhanced
service offerings. Babolat, for example, has
produced tennis rackets and related equipment
for 140 years. With its new Babolat Play Pure Drive
system, which puts sensors and connectivity in
the racket handle, the company now offers a service
to help players improve their game through
the tracking and analysis of ball speed, spin, and
impact location, delivered through a smartphone
application.
72 Harvard Business Review November 2014
HOW SMART, CONNECTED PRODUCTS ARE TRANSFORMING COMPETITION HBR.ORG
Offsetting this shift in rivalry away from price
is the migration of the cost structure of smart, connected
products toward higher fixed costs and lower
variable costs. This results from the higher upfront
costs of software development, more-complex product
design, and high fixed costs of developing the
technology stack, including reliable connectivity, robust
data storage, analytics, and security (see again
the exhibit “The New Technology Stack”). Industries
with high fixed cost structures are vulnerable to price
pressure as firms seek to spread their fixed costs
across a larger number of units sold.
The huge expansion of capabilities in smart, connected
products may also tempt companies to get
into a feature and function arms race with rivals and
give away too much of the improved product performance,
a dynamic that escalates costs and erodes
industry profitability.
Finally, rivalry among competitors can also increase
as smart, connected products become part
of broader product systems, a trend we will discuss
further. For example, manufacturers of home
lighting, audiovisual entertainment equipment,
and climate control systems have not historically
competed with one another. Yet each is now vying
for a place in the emerging “connected home” that
integrates and adds intelligence to a wide array of
products in the home.
Threat of new entrants. New entrants in a
smart, connected world face significant new obstacles,
starting with the high fixed costs of morecomplex
product design, embedded technology, and
multiple layers of new IT infrastructure. For example,
Thermo Fisher’s TruDefender FTi chemical analyzer
added connectivity to a product that already had
smart functionality, to enable chemical analysis from
hazardous environments to be transmitted to users
and mitigation to begin without having to wait for
the machine and personnel to be decontaminated.
Thermo Fisher needed to build a complete product
cloud to securely capture, analyze, and store product
data and distribute it both internally and to customers,
a substantial undertaking.
Broadening product definitions can raise barriers
to entrants even higher. Biotronik, a medical
device company, initially manufactured standalone
pacemakers, insulin pumps, and other devices.
Now it offers smart, connected devices, such
as a home health-monitoring system that includes
a data processing center that allows physicians to
remotely monitor their patients’ devices and clinical
status.
Barriers to entry also rise when agile incumbents
capture critical first-mover advantages by collecting
and accumulating product data and using it to improve
products and services and to redefine aftersale
service. Smart, connected products can also
increase buyer loyalty and switching costs, further
raising barriers to entry.
Barriers to entry go down, however, when
smart, connected products leapfrog or invalidate
the strengths and assets of incumbents. Moreover,
incumbents may hesitate to fully embrace the capabilities
of smart, connected products, preferring
to protect hardware-based strengths and profitable
legacy parts and service businesses. This opens the
door to new competitors, such as the “productless”
OnFarm, which is successfully competing with traditional
agricultural equipment makers to provide services
to farmers through collecting data on multiple
types of farm equipment to help growers make better
decisions, avoiding the need to be an equipment
manufacturer at all. In home automation, Crestron,
an integration solution provider, offers complex,
dedicated home systems with rich user interfaces.
Product companies are also facing challenges from
other nontraditional competitors like Apple, which
recently launched a simpler, smartphone-based approach
to managing the connected home.
Threat of substitutes. Smart, connected products
can offer superior performance, customization,
and customer value relative to traditional substitute
products, reducing substitution threats and improving
industry growth and profitability. However, in
many industries smart, connected products create
new types of substitution threats, such as wider
product capabilities that subsume conventional
products. For example, Fitbit’s wearable fitness device,
which captures multiple types of health-related
data including activity levels and sleep patterns, is a
substitute for conventional devices such as running
watches and pedometers.
New business models enabled by smart, connected
products can create a substitute for product
ownership, reducing overall demand for a product.
Product-as-a-service business models, for example,
allow users to have full access to a product but pay
only for the amount of product they use.
A variation of product-as-a-service is the
shared-usage model. Zipcar, for example, provides
N o v em b e r 2 0 14 Harvard Business Review 73
REDEFINING INDUSTRY BOUNDARIES
SPOTLIGHT ON MANAGING THE INTERNET OF THINGS________________________________________
The increasing capabilities o f smart, connected products not
only reshape competition within industries but expand industry
boundaries. This occurs as the basis of competition shifts from
discrete products, to product systems consisting of closely related
products, to systems of systems that link an array of p roduct
systems together. A tractor company, for example, may find itself
competing in a broader farm automation industry.
- Smart product
i. Product
+
o e . l i - Smart, connected product
+
+
customers with real-time access to vehicles when
and where they need them. This substitutes for car
ownership and has led traditional automakers to
enter the car-sharing market with offerings such
as RelayRides from GM, DriveNow from BMW, and
Dash from Toyota.
Another example is shared bike systems, which
are springing up in more and more cities. A smartphone
application shows the location of docking
stations where bikes can be picked up and returned,
and users are monitored and charged for the amount
of time they use the bikes. Clearly, shared usage
will reduce the need for urban residents to own
bikes, but it may encourage more residents to use
bikes since they do not have to buy and store them.
Convenient shared bikes will be a substitute not
only for purchased bikes but potentially for cars and
other forms of urban transportation. Smart, connected
capabilities make such substitutions for full
ownership possible.
Bargaining power of suppliers. Smart, connected
products are shaking up traditional supplier
relationships and redistributing bargaining
power. As the smart and connectivity components
of products deliver more value relative to physical
components, the physical components can be
commoditized or even replaced by software over
time. Software also reduces the need for physical tailoring
and hence the number of physical component
varieties. The importance of traditional suppliers to
total product cost will often decline, and their bargaining
power will fall.
However, smart, connected products often introduce
powerful new suppliers that manufacturers
have never needed before: providers of sensors, software,
connectivity, embedded operating systems,
and data storage, analytics, and other parts of the
technology stack. Some of these, like Google, Apple,
and AT&T, are giants in their own industries. They
have talent and capabilities that most manufacturing
companies have not historically needed but that
are becoming essential to product differentiation
and cost. The bargaining power of those new suppliers
can be high, allowing them to capture a bigger
share of overall product value and reduce manufacturers’
profitability.
A good example of these new types of suppliers
is the Open Automotive Alliance, in which General
Motors, Honda, Audi, and Hyundai recently joined
forces to utilize Google’s Android operating system
for their vehicles. The auto OEMs lacked the
specialized capabilities needed to develop a robust
74 Harvard Business Review N o v emb e r 20 14
embedded operating system that delivers an excellent
user experience while enabling an ecosystem of
developers to build applications. Auto OEMs’ traditional
clout relative to suppliers is greatly diminished
with suppliers like Google, which have not only substantial
resources and expertise but also strong consumer
brands and numerous related applications (for
example, consumers may prefer a car that can sync
with their smartphone, music, and apps).
New suppliers of the technology stack for smart,
connected products may also gain greater leverage
given their relationships with end users and access
to product usage data. As suppliers capture product
usage data from end users, they can also provide new
services to them, as GE has done with Alitalia.
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