How Smart Connected Products Are Transforming Competition
Michael E. Porter should need little introduction, he is the most-cited author in business and economics and a leading thinker on competitive strategy.
His work has intersected with IT in hugely influential articles published in the Harvard Business Review, each coming at a turning point in competitive strategy for enterprises. Now in 2014 he has authored another on “Connected Products” which, he believes, will change competition yet again.
Transforming value chains with IT-enabled, information-driven decisions: essentially describing how the maturity of ERP/CRM/PLM/SCM/etc. allowed companies to seek new vectors for competitive differentiation.
2001: “Strategy and the Internet“
Debunks myths about how the Internet would affect competition and talks about how it could be used to reinforce existing competitive advantages in industries.
The Internet of Things now allows companies to create new capabilities for differentiation and operational effectiveness. This requires a rethinking of “what business am I actually in?” and Porter gives a set of 10 key strategic choices to navigate this question.
Introducing the HBR Article: How Smart, Connected Products are Transforming Competition
One of the 10 key strategic choices to be made is of particular interest to me since my team and I work around the SAP Billing and Revenue Innovation Management (BRIM) solution and we spend a lot of time helping companies navigate through business model transformation. Here are some relevant excerpts from the article:
“No. 8. Should the company change its business model?
“Manufacturers have traditionally focused on producing a physical good and capturing value by transferring ownership of the good to the customer through a sales transaction. The owner is then responsible for the costs of servicing the product and other costs of use, while bearing the risks of downtime and other product failures and defects not covered by warranties.
“Smart, connected products allow the radical alteration of this long-standing business model. The manufacturer, through access to product data and the ability to anticipate, reduce, and repair failures, has an unprecedented ability to affect product performance and optimize service. This opens up a spectrum of new business models for capturing value, from a version of the traditional ownership model where the customer benefits from the new service efficiencies to the product-as-a-service model in which the manufacturer retains ownership and takes full responsibility for the costs of product operation and service in return for an ongoing charge. Customers pay as they go, not up front. Here, the value of product performance improvements that reduce operating cost (such as better energy efficiency) and service efficiencies are captured by the manufacturer.
“The profitability of product-as-a-service models depends on the pricing and terms of contracts, which are a function of bargaining power. Product-as-a-service models can increase buyers’ power, because customers may be able to switch after the contract period (if the product is not embedded as with an elevator), unlike with perpetual ownership.
“Companies can also pursue hybrid models between the extremes of product-as-a-service and conventional ownership, such as product sales bundled with warranty or service contracts, or product sales bundled with performance-based contracts. Service contracts allow the manufacturer to keep service in-house and capture more of the value from service efficiencies. In a performance-based contract, the manufacturer sells the product along with a contract that promises that the product will perform to certain specifications (such as percentage of uptime). Here, ownership is transferred, but the manufacturer maintains responsibility and bears the risk of product performance.”
Moving to Product-as-a-Service does indeed bring up many decisions like this; paths in the road that companies must explore and, ultimately, commit to strategically.
What we find in talking to customers across multiple industries is that there is no textbook right answer here. Since we are still in the early days of the business model transformation around smart connected products there is great room to experiment, to try different levels of direct end-customer engagement, to try out different models for monetization like subscriptions, usage-based charging and risk/reward sharing, and to try different partnering configurations with different levels of revenue sharing.
Frequently a single large enterprise may be trialling multiple different models in different lines of business and hence the person holding the emerging role of the Chief Digital Officer has her work cut out for her to weave it all into a coherent corporate strategy. What is clear is that in this new world of digitally transformed business models Run Simple is a necessary pre-condition for the agility required.