michael e. porter presentation at porter prize 2015
TRANSCRIPT
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
Copyright 2015 © Professor Michael E. Porter 2 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 3 20150925 – 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 11100011001000011000010100001010000011100011010101110001100100001100001010000101000001110011011001001100
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Copyright 2015 © Professor Michael E. Porter 4 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 5 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 6 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 7 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 8 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 9 20150925 – 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?
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Copyright 2015 © Professor Michael E. Porter 10 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 11 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 12 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 13 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 14 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 15 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 16 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 17
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
Copyright 2015 © Professor Michael E. Porter 18
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.
Copyright 2015 © Professor Michael E. Porter 19
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
Copyright 2015 © Professor Michael E. Porter 20
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
Copyright 2015 © Professor Michael E. Porter 21
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
Copyright 2015 © Professor Michael E. Porter 22 20150925 – 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
Copyright 2015 © Professor Michael E. Porter 23
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
Copyright 2015 © Professor Michael E. Porter 24 20150925 – 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