Must-read Harvard Business Review Spotlight on Smart, Connected Products

The Harvard Business Review (HBR) has published a spotlight on managing the Internet of Things titled “How Smart, Connected Products Are Transforming Competition.” The article provides deep insight into the business ramifications of the exploding Internet of Things (IoT) and is a must-read for C-suite executives and top-level management. The authors of the article are Michael Porter of Harvard University and James Heppelmann, president and CEO of PTC. The article is not only something that should be read by the entire executive team, but the implications of the ten new strategic business choices detailed in the article should be evaluated against a company’s corporate strategy if they wish to survive what the authors have termed the “third wave of IT-driven competition.”

There have been few information technology trends that have taken hold as rapidly as the Internet of Things (IoT). The term “IoT” is has taken on a life of its own, and the projections for the growth and reach of the IoT are staggering. The Oxford Dictionaries definition of the IoT is “a proposed development of the Internet in which everyday objects have network connectivity, allowing them to send and receive data.” McKinsey defines the IoT, a.k.a. the “Industrial Internet,” as “networks of low-cost sensors and actuators for data collection, monitoring, decision making, and process optimization” and in a 2013 report, estimated that the IoT had the potential to unleash as much as $6.2 trillion (USD) in new economic value. Cisco estimates that there will be 25 billion devices connected by 2015 with another some 50 billion devices connected by 2020.

In this HBR article, Porter and Heppelmann provide a unique perspective into what the IoT means for businesses. The first section of the article brings new meaning to the IoT as they introduce it as the third wave of IT-driven competition. They write that in this third wave, IT is becoming an integral part of a product.

At the heart of the IoT are these smart, connected products, with three core elements: physical components, “smart” components, and connectivity components. Just as the first two waves of IT over the last 50 years (the rise of the computer and the rise of the Internet) dramatically changed products and industries, the authors state that this IoT third wave will “drive yet another wave of value-chain-based productivity improvements.” And, this next stage of IT change “has the potential to be the biggest yet, triggering even more innovation, productivity gains, and economic growth than the previous two.”

In the first part of the HBR article, we get a look at the new technology stack that will be needed to deploy, manage, and support smart, connected products. Keep in mind that this technology stack is just one view of how smart, connected products operate in the current state. The IoT technology stack is just being developed, and the future may see other wrinkles introduced, such as Cisco’s “fog” layer (for example, the Cisco 910 industrial router runs in the fog). But, the architecture presented is being deployed and used right now and vendors like PTC have these tools available to help manage a company’s smart, connected product technology needs.

In the next section of the article, Porter recasts his seminal work on “The Five Forces That Shape Strategy” (HBR, January 2008) as he examines how smart, connected products will have a transformative impact on industry competition. The five forces are: bargaining power of buyers; rivalry among competitors; threat of new entrants; threat of substitutes; and the bargaining power of suppliers. Here, the reader is given in-depth insight into how smart, connected products will impact industries and competition within industries. For example, smart, connected products can help reduce the threat of new entrants into a market because they make it possible to collect product data and provide better products and services based on this data. The five forces provide the framework for understanding the impact that this third wave of IT is having and will have in the near future on entire industry landscapes.

One of the most thought-provoking sections of the article is where the authors provide a clear view of what smart, connected industries of the future will look like. An industry example is that of a farm equipment manufacturer that is building a smart, connected tractor which becomes a farm equipment “system” in its own right. The manufacturer can now provide other services like automated maintenance and service. However, where these smart, connected product systems really gain intelligence is when one product system is connected to other systems, forming a system of systems. Extending and connecting the farm equipment system to a weather data system, an irrigation system, and a seed optimization system, all managed by a farm management system provides for and creates new industry opportunities.

The picture below is one look at how a smart city system of the future could be set up to coordinate weather, utility systems, traffic patterns, and public transportation systems. This smart city system could, for example, automatically detect that inclement weather has caused traffic congestion and mass transit snarls and automatically reschedule and reroute alternate resources to resolve the transportation issues. Of course, these systems of systems are not only on drawing boards of corporate think tanks, but are being rolled out right now by forward thinking companies.


Figure 1: System of systems for a smart city

Probably the most important section of the article is where Porter and Heppelmann lay out ten specific choices that companies will have to make to meet the challenges of the IoT. For example, a design choice is “How much functionality should be embedded in the product and how much in the cloud?” Another choice involves what data to capture, secure, and analyze. All ten of these decisions are discussed at length, and for each, the reader is given real-world examples of how companies are dealing with the specific challenges of the IoT. The reader sees that these choices are not all or nothing decisions, but each must be balanced to build the forward-looking strategy for the organization.

The HBR article is just the first in a two-part series in which the writers will examine how smart, connected products are shifting competition in many industries, and give insight into questions that companies must ask and answer to meet this third wave of IT. We won’t give the specific questions and answers here. It’s up to the reader to read the article and thoughtfully work through the implications of the IoT on his or her business. The reader may also want to keep this article on his or her desk so that it can be reviewed not only now but a few months from now as well, to see what choices remain to be made and if any need to be re-made.  The Harvard Business Review spotlight on managing the Internet of Things is a must-read article for any company currently pursuing the Internet of Things or looking to be a part of the smart, connected products revolution.