Parsons the New School for Design Chapter 6 Dada Movement Art History Summary Michael E. Porter is a University Professor based at Harvard Business School
Parsons the New School for Design Chapter 6 Dada Movement Art History Summary Michael E. Porter is a
University Professor based
at Harvard Business School.
James E. Heppelmann is the
president and CEO of PTC, a
software company that helps
manufacturers create, operate,
and service products.
CHRIS LABROOY
HBR.ORG
BY MICHAEL E. PORTER AND JAMES E. HEPPELMANN
October 2015 Harvard Business Review 97
HOW SMART, CONNECTED PRODUCTS ARE TRANSFORMING COMPANIES
The evolution of products into
intelligent, connected devices
which are increasingly
embedded in broader
systemsis radically reshaping
companies and competition.
Smart thermostats control a growing array of
home devices, transmitting data about their use
back to manufacturers. Intelligent, networked industrial machines autonomously coordinate and
optimize work. Cars stream data about their operation, location, and environment to their makers and
receive software upgrades that enhance their performance or head off problems before they occur.
Products continue to evolve long after entering service. The relationship a firm has with its products
and with its customersis becoming continuous
and open-ended.
In our previous HBR article, How Smart, Connected Products Are Transforming Competition
(November 2014), we examined the implications
external to the firm, looking in detail at how smart,
connected products affect rivalry, industry structure, industry boundaries, and strategy. (See the
sidebar Implications for Strategy.) In this article
well explore their internal implications: how the
nature of smart, connected products substantially changes the work of virtually every function
within the manufacturing firm. The core functions
product development, IT, manufacturing, logistics,
marketing, sales, and after-sale serviceare being
redefined, and the intensity of coordination among
them is increasing. Entirely new functions are
emerging, including those to manage the staggering
quantities of data now available. All of this has major
implications for the classic organizational structure
of manufacturers. What is under way is perhaps the
98 Harvard Business Review October 2015
most substantial change in the manufacturing firm
since the Second Industrial Revolution, more than
a century ago.
The New Product Capabilities
To fully grasp how smart, connected products are
changing how companies work, we must first understand their inherent components, technology, and
capabilitiessomething that our previous article
examined. To recap:
All smart, connected products, from home appliances to industrial equipment, share three core
elements: physical components (such as mechanical and electrical parts); smart components (sensors,
microprocessors, data storage, controls, software, an
embedded operating system, and a digital user interface); and connectivity components (ports, antennae,
protocols, and networks that enable communication
between the product and the product cloud, which
runs on remote servers and contains the products
external operating system).
Smart, connected products require a whole new
supporting technology infrastructure. This technology stack provides a gateway for data exchange
between the product and the user and integrates
data from business systems, external sources, and
other related products. The technology stack also
serves as the platform for data storage and analytics,
runs applications, and safeguards access to products and the data flowing to and from them. (See the
exhibit The New Technology Stack.)
HBR.ORG
Idea in Brief
A RADICAL SHIFT
Smart, connected products are
forcing companies to redefine
their industries and rethink
nearly everything they do,
beginning with their strategies.
This article, the second in a
two-part series, focuses on
the impact of these products
on companies operations and
organizational structure.
NEW RELATIONSHIPS
The unprecedented data
and capabilities that smart,
connected products provide
are changing the way firms
interact with their customers.
Those relationships are
becoming continuous and
open-ended.
This infrastructure enables extraordinary new
product capabilities. First, products can monitor
and report on their own condition and environment, helping to generate previously unavailable
insights into their performance and use. Second,
complex product operations can be controlled
by the users, through numerous remote-access
options. That gives users the unprecedented ability
to customize the function, performance, and interface of products and to operate them in hazardous or
hard-to-reach environments.
Third, the combination of monitoring data and
remote-control capability creates new opportunities
for optimization. Algorithms can substantially improve product performance, utilization, and uptime,
and how products work with related products in
broader systems, such as smart buildings and smart
farms. Fourth, the combination of monitoring data,
remote control, and optimization algorithms allows
autonomy. Products can learn, adapt to the environment and to user preferences, service themselves,
and operate on their own.
Reshaping the
Manufacturing Company
To create products and get them to customers, manufacturers perform a wide range of activities, which
generally take place in a standard set of functional
units: research and development (or engineering),
IT, manufacturing, logistics, marketing, sales, aftersale service, human resources, procurement, and
finance. The new capabilities of smart, connected
products alter every activity in this value chain. At
the core of what is reshaping the value chain is data.
THE NEW DATA RESOURCE. Before products
became smart and connected, data was generated
primarily by internal operations and through transactions across the value chainorder processing,
NEW PROCESSES
The new product capabilities
and infrastructure and the data
they generate are reshaping
the work of virtually every
function in the value chain,
including product development,
IT, manufacturing, logistics,
marketing, sales, and after-sale
service. In addition, far more
intense coordination among
functions is now required.
NEW STRUCTURES
New forms of cross-functional
collaboration and entirely
new functions are emerging.
These include unified
data organizations, units
to continuously improve
products postsale, and groups
charged with optimizing
customer relationships.
IMPLICATIONS
FOR STRATEGY
In a smart, connected world, companies face
10 new strategic decisions. A firms choices
will have a major impact on every activity in its
value chain.
1 Which set of smart, connected product
capabilities and features should the
company pursue?
2 How much functionality should be embedded
in the product and how much in the cloud?
3 Should the company pursue an open or
closed system?
4 Should the company develop the full set of
smart, connected product capabilities and
infrastructure internally or outsource to vendors
and partners?
5 What data must the company capture, secure,
and analyze to maximize the value of its o?ering?
6 How does the company manage ownership and
access rights to its product data?
7 Should the company fully or partially
disintermediate distribution channels or
service networks?
8 Should the company change its business model?
9 Should the company enter new businesses by
monetizing its product data through selling it
to outside parties?
10 Should the company expand its scope?
SOURCE HOW SMART, CONNECTED PRODUCTS ARE
TRANSFORMING COMPETITION, HBR, NOVEMBER 2014
October 2015 Harvard Business Review 99
HOW SMART, CONNECTED PRODUCTS ARE TRANSFORMING COMPANIES
interactions with suppliers, sales interactions, customer service visits, and so on. Firms supplemented
that data with information gathered from surveys,
research, and other external sources. By combining
the data, companies knew something about customers, demand, and costsbut much less about
the functioning of products. The responsibility for
defining and analyzing data tended to be decentralized within functions and siloed. Though functions
shared data (sales data, for example, might be used
to manage service parts inventory), they did so on a
limited, episodic basis.
Now, for the first time, these traditional sources
of data are being supplemented by another source
the product itself. Smart, connected products can
generate real-time readings that are unprecedented
in their variety and volume. Data now stands on
and performance. Knowing that a customers heavy
use of a product is likely to result in a premature
failure covered under warranty, for example, can
trigger preemptive service that may preclude later
costly repairs.
DATA ANALYTICS. As the ability to unlock the
full value of data becomes a key source of competitive advantage, the management, governance,
analysis, and security of that data is developing into
a major new business function.
While individual sensor readings are valuable,
companies often can unearth powerful insights by
identifying patterns in thousands of readings from
many products over time. For example, information
from disparate individual sensors, such as a cars
engine temperature, throttle position, and fuel consumption, can reveal how performance correlates
with the cars engineering specifications. Linking
combinations of readings to the occurrence of problems can be useful, and even when the root cause of
a problem is hard to deduce, those patterns can be
acted on. Data from sensors that measure heat and
vibration, for example, can predict an impending
bearing failure days or weeks in advance. Capturing
such insights is the domain of big data analytics,
which blend mathematics, computer science, and
business analysis techniques.
Big data analytics employ a family of new techniques to understand those patterns. A challenge is
that the data from smart, connected products and
related internal and external data are often unstructured. They may be in an array of formats, such as
sensor readings, locations, temperatures, and sales
and warranty history. Conventional approaches to
par with people, technology, and capital as a core
data aggregation and analysis, such as spreadsheets
asset of the corporation and in many businesses is
and database tables, are ill-suited to managing
perhaps becoming the decisive asset.
a wide variety of data formats. The emerging soluThis new product data is valuable by itself, yet its
tion is a data lake, a repository in which disparate
value increases exponentially when it is integrated
data streams can be stored in their native formats.
with other data, such as service histories, inventory
From there, the data can be studied with a set of
locations, commodity prices, and traffic patterns. new data analytics tools. Those tools fall into four
In a farm setting, data from humidity sensors can
categories: descriptive, diagnostic, predictive, and
be combined with weather forecasts to optimize
prescriptive. (For more details, see the exhibit
irrigation equipment and reduce water use. In Creating New Value with Data.)
To better understand the rich data generated
fleets of vehicles, information about the pending
service needs of each car or truck, and its location, by smart, connected products, companies are also
allows service departments to stage parts, sched- beginning to deploy a tool called a digital twin.
Originally conceived by the Defense Advanced
ule maintenance, and increase the efficiency of
Research Projects Agency (DARPA), a digital twin is
repairs. Data on warranty status becomes more
a 3-D virtual-reality replica of a physical product. As
valuable when combined with data on product use
Smart, connected products
require a rethinking of
design. At the most basic
level, product development
shifts from largely
mechanical engineering
to true interdisciplinary
systems engineering.
100 Harvard Business Review October 2015
HBR.ORG
THE NEW TECHNOLOGY STACK
Smart, connected products require companies to build and support an entirely new technology infrastructure.
This technology stack is made up of multiple layers, including new product hardware, embedded software,
connectivity, a product cloud consisting of software running on remote servers, a suite of security tools, a
gateway for external information sources, and integration with enterprise business systems.
PRODUCT CLOUD
SMART PRODUCT APPLICATIONS
Software applications running on remote servers that manage the monitoring,
control, optimization, and autonomous operation of product functions
RULES/ANALYTICS ENGINE
The rules, business logic, and big data analytical capabilities that populate the
algorithms involved in product operation and reveal new product insights
IDENTITY AND
SECURITY
Tools that
manage user
authentication
and system
access, as
well as secure
the product,
connectivity,
and product
cloud layers
APPLICATION PLATFORM
An application development and execution environment enabling the rapid
creation of smart, connected business applications using data access,
visualization, and run-time tools
PRODUCT DATA DATABASE
A big-data database system that enables aggregation, normalization,
and management of real-time and historical product data
CONNECTIVITY
NETWORK COMMUNICATION
The protocols that enable communications between the product and the cloud
EXTERNAL
INFORMATION
SOURCES
A gateway for
information
from external
sourcessuch
as weather,
tra?c,
commodity
and energy
prices, social
media, and
geomapping
that informs
product
capabilities
INTEGRATION
WITH
BUSINESS
SYSTEMS
Tools that
integrate data
from smart,
connected
products with
core enterprise
business systems
such as ERP, CRM,
and PLM
PRODUCT
PRODUCT SOFTWARE
An embedded operating system, onboard software applications,
an enhanced user interface, and product control components
PRODUCT HARDWARE
Embedded sensors, processors, and a connectivity port/antenna that
supplement traditional mechanical and electrical components
SOURCE HOW SMART, CONNECTED PRODUCTS ARE TRANSFORMING COMPETITION, HBR, NOVEMBER 2014
data streams in, the twin evolves to reflect how the
physical product has been altered and used and the
environmental conditions to which it has been exposed. Like an avatar for the actual product, the digital twin allows the company to visualize the status
and condition of a product that may be thousands
of miles away. Digital twins may also provide new
insights into how products can be better designed,
manufactured, operated, and serviced.
Transforming the Value Chain
The powerful new data available to companies,
together with new configurations and capabilities of smart, connected products, is restructuring
the traditional functions of businesssometimes
radically. This transformation started with product
development but is playing out across the value
chain. As it spreads, functional boundaries are
shifting, and new functions are being created.
PRODUCT DEVELOPMENT. Smart, connected
products require a fundamental rethinking of design.
At the most basic level, product development shifts
from largely mechanical engineering to true interdisciplinary systems engineering. Products have
become complex systems that contain software
and may have as much or more software in the
cloud. Thats why design teams are shifting from
a majority of mechanical engineers to a majority
of software engineers, and some manufacturers,
like GE, Airbus, and Danaher, are establishing
offices in software-engineering hubs like Boston
and Silicon Valley.
October 2015 Harvard Business Review 101
HOW SMART, CONNECTED PRODUCTS ARE TRANSFORMING COMPANIES
Smart, connected products also call for product design principles that depart dramatically
from tradition:
Low-cost variability. In conventional products,
variability is costly because it requires variation in
physical parts. But the software in smart, connected
products makes variability far cheaper. For example,
John Deere used to manufacture multiple versions
of engines, each providing a different level of horsepower. It now can alter the horsepower of a standard physical engine using software alone. Similarly,
digital user interfaces can replace dials and buttons,
making it easy and less expensive to modify a product by, say, changing control options. Meeting customer needs for variability through software, not
hardware, is a critical new design discipline.
Manufacturing goes beyond
production of the physical
object, because operating
a smart, connected product
requires a supporting
cloud-based system.
Variability is needed not only across customer
segments but also across geographies. Software
also makes it easier to localize products for different countries and languages. However, emerging
local regulations for data standards, such as those
governing the transmission of data across national
boundaries, require duplication of data storage infrastructure or applications. Such regulations are
introducing new country and regional differences,
sometimes for political reasons.
Evergreen design. In the old model, products
were designed in discrete generations. The new
product incorporated a full set of desired improvements, and the design was then fixed until the next
generation. Smart, connected products, however,
can be continually upgraded via software, often remotely. Products also can be fine-tuned to meet new
customer requirements or solve performance issues.
The performance of ABB Robotics industrial machines, for example, can be remotely monitored and
adjusted by end users during operation. Companies
102 Harvard Business Review October 2015
can release new features that are works-in-process,
not finalized. Recently, Tesla began putting an autopilot system in its cars, but with the intention of enhancing the systems capabilities over time through
remote software updates.
New user interfaces and augmented reality. The
digital user interface of a smart, connected product
can be put into a tablet or smartphone application,
enabling remote operation and even eliminating
the need for controls in the product itself. As noted,
these interfaces are less costly to implement and easier to modify than physical controls, and they enable
greater operator mobility.
Some products have begun incorporating a powerful new interface technology called augmented
reality. Through a smartphone or tablet pointed at
the product, or through smart glasses, augmented
reality applications tap into the product cloud and
generate a digital overlay of the product. This overlay
contains monitoring, operating, and service information that makes supporting or servicing the product
more efficient. Constructing these powerful digital
interfaces is another critical new design discipline.
Ongoing quality management. Testing that tries
to replicate the conditions in which customers will
use products has long been part of product development. The aim is to ensure that new offerings will live
up to their specifications and to minimize warranty
claims. Smart, connected products take quality management several steps farther, enabling continuous
monitoring of real-world performance data, allowing
companies to identify and address design problems
that testing failed to expose. In 2013, for example,
batteries in two Tesla Model S cars were punctured
and caught fire after drivers struck metal objects in
the road. The road conditions and speeds leading to
the punctures had not been simulated in testing, but
Tesla was able to reconstruct them. The company
then sent a software update to all vehicles that would
raise their suspension under those conditions, significantly reducing the chances of further punctures.
Connected service. Product designs now need
to incorporate additional instrumentation, data
collection capability, and diagnostic software features that monitor product health and performance
and warn service personnel of failures. And as
software increases functionality, products can be
designed to allow…
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