For the past few years, some have justifiably questioned whether innovation has been going through a period of stagnation, especially when compared to major 19th and 20th century innovations like electricity, cars and airplanes. Have we pretty much stopped solving big problems? “We wanted flying cars - instead we got 140 characters,” is how PayPal cofounder Peter Thiel succinctly expressed this sentiment in a 2011 New Yorker article.
Others argue that while the nature of innovation is definitely changing as we evolve and adapt to an information-based digital economy, it’s impact is no less transformative. Last week, for example, I discussed a recent article in Wired by Kevin Kelly on the future of AI. Kelly fully expects that AI will transform the global economy and civilization in general, much as electricity did more than a century ago. “Everything that we formerly electrified we will now cognitize,” he said. “There is almost nothing we can think of that cannot be made new, different, or interesting by infusing it with some extra IQ… This is a big deal, and now it’s here.” I totally agree.
An equally optimistic view was expressed in another excellent article, - How Smart Connected Products are Transforming Competition, - published in the November issue of the Harvard Business Review by Michael Porter and James Heppelmann.
We generally think of products as physical entities, - e.g., clothes, light bulbs, appliances, cars, - some quite simple and some much more complex, built using sophisticated mechanical and/or electrical components. The article introduces a whole new class of smart connected products - “complex systems that combine hardware, sensors, data storage, microprocessors, software, and connectivity in myriad ways.”
This new wave of IT-based innovation, - the third such wave in the past 50 years, - is once more having a major impact on competition and strategy. In the 1960s and 1970s, IT brought automation to a number of discrete business processes, including transaction processing, financial planning, engineering design, inventory management, payroll and personnel records. Then in the 1990s, the connectivity and universal reach of the Internet enabled companies to integrate and better coordinate all their various processes, as well as to go beyond the boundaries of the enterprise and develop global supply chains and distribution channels and a large variety of online customer services.
The first two IT waves helped companies become significantly more productive by reengineering their operations, but their products were largely unaffected. This is now changing with the emergence of cloud computing, Internet of Things (IoT), Big Data and other major innovations whose combined impact is driving this third IT wave and the ensuing new era of smart connected products.
The world’s digital and physical infrastructures are essentially converging. IT is now an integral part of the products themselves. “Embedded sensors, processors, software, and connectivity in products (in effect, computers are being put inside products), coupled with a product cloud in which product data is stored and analyzed and some applications are run, are driving dramatic improvements in product functionality and performance. Massive amounts of new product-usage data enable many of those improvements.” These improvements include:
- Monitoring of the product’s conditions, its external environment, and its operations and usage.
- Control of various product functions to better respond to changes in its environment, as well as to personalize the user experience.
- Optimization of the product’s overall operations based on actual performance data, and reduction of downtimes through predictive maintenance and remote service.
- Autonomous product operation, including learning from their environment, adapting to users’ preferences and self-diagnosing and service.
This new class of products is reshaping and expanding industry boundaries, as competition shifts from individual physical products to increasingly comprehensive systems that encompass a number of related products and services. The article illustrates this shifting industry boundaries using a farm tractor as an example, as it evolves from a classic machine to a component in a farm management system.
The classic tractor becomes smart as it adds sensors, computing elements, software and other technologies that help it monitor and adapt to its local environment. It morphs into a smart, connected tractor by linking to its product cloud for more advanced capabilities like predictive diagnostics and remote support. It joins a farm equipment system by sharing data and control information to better coordinate with related machines like tillers, planters and combine harvesters. Finally, the tractor becomes a component of an overall farm management system, that includes not just farm equipment, but also irrigation, seed optimization and weather data systems.
Companies have to decide how to best incorporate smart connected capabilities into their various products and services, as well as what role they wants to play in the emerging ecosystems and value chains. According to Porter and Heppelmann, every company now faces 10 major strategic choices in 3 main areas:
- Which set of smart, connected product capabilities and features should the company pursue?;
- How much functionality should be embedded in the product and how much in the cloud?;
- Should the company pursue an open or closed system?;
- Should the company develop the full set of smart, connected product capabilities and infrastructure internally or outsource to vendors and partners?
- What data must the company capture, secure, and analyze to maximize the value of its offering?;
- How does the company manage ownership and access rights to its product data?;
- Should the company enter new businesses by monetizing its product data through selling it to outside parties?
- Should the company fully or partially disintermediate distribution channels or service networks?;
- Should the company change its business model?;
- Should the company expand its scope?
These highly complex and interdependent choices will have a major impact in determining the strategic directions and competitive positioning of the company. Some choices will require the company to complement its engineering talent with skills in areas like software development, big data and analytics, network security and remote maintenance and service. Even harder than the addition of different skills are the cultural implications of changing from a hardware-centric to a software-, data-, and services-centric company. The chosen strategy must not only be competitive in the marketplace, but it must also be realistically achievable given the company’s overall talent set and culture.
“Smart, connected products are changing how value is created for customers, how companies compete, and the boundaries of competition itself,” says the article in its concluding section. “These shifts will affect virtually every industry, directly or indirectly. But smart, connected products will have a broader impact even than this. They will affect the trajectory of the overall economy, giving rise to the next era of IT-driven productivity growth for companies, their customers, and the global economy at a time when the impact of earlier waves of IT has largely played itself out and productivity growth has slowed down.”
“This third wave of IT not only will create step function improvements in product capability and performance but will radically improve our ability to meet many business and human needs. Across many fields, products will be far more efficient, effective, safe, reliable, and more fully utilized, while conserving scarce natural resources such as energy, water, and raw materials. This opportunity to drive rapid innovation and economic growth, and with it a return to prosperity growth, comes none too soon.”