Smart, connected products dramatically expand opportunities for product differentiation, moving competition away from price alone. Knowing how customers actually use the products enhances a company’s ability to segment customers, customize products, set prices to better capture value, and extend value-added services. Smart, connected products also allow companies to develop much closer customer relationships. Through capturing rich historical and product-usage data, buyers’ costs of switching to a new supplier increase. In addition, smart, connected products allow firms to reduce their dependency on distribution or service partners, or even disintermediate them, thereby capturing more profit. All of this serves to mitigate or reduce buyers’ bargaining power.
.. Smart, connected products also create opportunities to broaden the value proposition beyond products per se, to include valuable data and enhanced service offerings. Babolat, for example, has produced tennis rackets and related equipment for 140 years. With its new Babolat Play Pure Drive system, which puts sensors and connectivity in the racket handle, the company now offers a service to help players improve their game through the tracking and analysis of ball speed, spin, and impact location, delivered through a smartphone application.
.. John Deere and AGCO, for example, are beginning to connect not only farm machinery but irrigation systems and soil and nutrient sources with information on weather, crop prices, and commodity futures to optimize overall farm performance. Smart homes, which involve numerous product systems including lighting, HVAC, entertainment, and security, are another example. Companies whose products and designs have the greatest impact on total system performance will be in the best position to drive this process and capture disproportionate value.
.. Companies that fail to adapt may find their traditional products becoming commoditized or may themselves be relegated to the role of OEM supplier, with system integrators in control
.. Whereas operational effectiveness is about doing things well, strategic positioning is about doing things differently. A company must choose how it will deliver unique value to the set of customers it chooses to serve. Strategy requires making trade-offs: deciding not only what to do but what not to do.
.. Expertise in systems engineering and in agile software development is essential to integrate a product’s hardware, electronics, software, operating system, and connectivity components—expertise that is not well developed in many manufacturing companies.
.. If either Philips Healthcare or GE Healthcare were the dominant manufacturer of medical imaging equipment, for example, it could drive a closed approach in which it could sell medical imaging management systems that included only its own or partners’ equipment to hospitals. However, neither company has the clout to restrict hospitals’ choice of other manufacturers’ equipment, so both companies’ imaging system platforms interface with other manufacturers’ machines.
.. For example, while software skills are not well developed in most manufacturing companies, Jeff Immelt recently said that “every industrial company will become a software company.”
.. For example, most companies should strive to maintain solid internal capabilities in areas such as device design, the user interface, systems engineering, data analytics, and rapid product application development.
.. 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.
.. Whirlpool, for example, currently has a healthy business selling spare parts and service contracts—a model that can dull incentives to make products more reliable, more durable, and easier to fix. If, instead, Whirlpool moved to a product-as-a-service model, in which it maintained ownership of the product and the customer simply paid for the use of the machine, the economic incentives would be turned upside down.
.. Product sharing, a variation of the product-as-a-service model, focuses on more efficient utilization of products that are used intermittently.
.. Smart, connected products not only transform existing products but often broaden industry boundaries. Products that have been separate and distinct can become parts of optimized systems of related products, or components of systems of systems. Shifting boundaries mean that companies that have been industry leaders for decades may find themselves playing more of a supporting role in a broader landscape.
“Inside product” optimization involves integrating individual product designs so that products work better together. “Outside product” optimization takes place through the algorithms that connect products and other information, where products themselves are modular. Inside product optimization creates the strongest rationale for expanding into related products and offering a proprietary platform. Outside product optimization favors an open platform, and the platform may be offered by a company that does not produce products at all.
.. Smart, connected products are changing how value is created for customers, how companies compete, and the boundaries of competition itself.
If the Roman army of 117 AD and the Mongol armies of Genghis Khan were to do battle, what would happen?
There’s an old saw that goes something like this:
Amateurs worry about strategy. Dilettantes worry about tactics. Professionals worry about logistics.
.. Logistics: horses need to eat 1.5% to 3% of their body weight in forage a day. Mongol horses were not large, but factor in 3 – 5 remounts for each Mongol warrior, and a Mongol army starts looking like a plague of locusts that has to move to survive. Mongol armies could not stay in any one place for long, within a brief period all available forage would be consumed and the Mongol army would have to move on or perish.
On the other side, the Roman army was primarily man-powered, not horse-powered. Men eat a lot less than horses and what they do eat is a lot easier to gather and store and protect.
The Man Who Built Catan
Teuber likes to play Catan online, but he tries to keep his profile anonymous: “When they find out it’s me, they don’t like to trade with me as much,” he said. The social aspect of the game is what Teuber seems proudest of. He mentioned that he once received a letter from an attendant at a sanitarium for children, who said that one of the boys there had never spoken to the other children. Then, at some point, the boy happened to notice a group of kids playing Catan. “He came to the other children and started to play,” Teuber said. “Now he gets contact with other people. Catan is the medium for that.”