Laying the foundation through strategic decisions

Corporate strategy has always been the foundation for gaining a competitive advantage. In the course of their research Porter and Heppelmann identified 10 new strategic decisions that companies will confront in the world of smart, connected products:[1]

  1. Which of the capabilities and functions enabled by intelligence and connectivity should a company integrate into its product?
  2. Which part of the functionality should be integrated directly into the product and which one should be executed in the product cloud?
  3. Should the company pursue an open or closed system?
  4. Should a company independently develop the full range of smart, connected products and technological infrastructure or aspire to collaborate with a technology supplier?
  5. What data must be collected, analyzed and protected to increase the value of the offer?
  6. How should the ownership and access rights of the product data be regulated?
  7. Should a company partially or completely cope without intermediaries such as sales or service partners?
  8. Should the existing business model be adapted?
  9. Should new business areas be opened up by the sale of product data to third parties?
  10. Should a company expand its borders?

strategische Entscheidungen bedürfen einer guten Planung

The decisions involve compromises and they are influenced by the circumstances in the company. There is also a dependency between them. The potentials of the individual decisions must reinforce each other and define a distinctive and coherent strategic positioning of the company.[2]

(1) Which of the capabilities and functions enabled by intelligence and connectivity should a company integrate into its product?

You have to determine which functions provide your customers in relation to the cost with real added value for which they are willing to pay. The usually high degree of innovation by smart, connected products makes it more difficult for customers to recognise the added value. Traditional approaches to assess willingness to pay are therefore often only of limited use.[3]

The selection of functions must be adapted to the respective market segment and must strengthen the company’s competitive position.[2]

(2) Which part of the functionality should be integrated directly into the product and which one should be executed in the product cloud?

Resources: Due to limited resources, some functions cannot be practically embedded directly into the smart, connected products and therefore have to be outsourced to the product cloud.[4]

Response time: Functions requiring a short response time (e.g. a safety shutdown) should be implemented directly into the smart, connected product.[2]

Autonomy: Highly automated smart, connected products typically require the embedding of most of the functionality directly into the product.[2]

Network availability and security: Embedding most of the functionality directly into the smart, connected product allows to reduce dependency on network availability and the amount of data to be transmitted to the product cloud. Decreasing the amount of data means also to reduce the risk of compromising sensitive or confidential data in the course of transmission.[2]

Site of operation: Embedding features in the product cloud allows you to reduce the costs and dangers associated with operating smart, connected products in remote or dangerous locations. For example, the processing of the product-submitted data on the level of contamination at the point of use of the product in the product cloud allows the immediate initiation of appropriate countermeasures.[5]

User interface: If a smart, connected product has a very complex user interface or frequent adjustments are required, it is recommended to outsource the user interface to the product cloud (for example in a smartphone application) instead of equip the product itself with a display and controls.[5]

Frequency of updates: Features embedded in the product cloud and user interfaces simplify product changes and updates.[5]

geplante Handlungen nach der Entscheidung
(3) Should the company pursue an open or closed system?

The approach of a closed system allows a business to gain a competitive edge by retaining control over the data, the technology and the direction of the development of the smart, connected product and the product cloud. Therefore, the alignment of the elements of the system can be optimized. Other manufacturers who want to integrate their product into the closed system will only have limited access to the system without a corresponding licence agreement. Such an approach involves significant investment. It offers the most promising opportunities for companies that already have a dominant position in their industry. However, with the variety of emerging technologies, the challenge increases, as customers increasingly decline limited choice due to a closed approach.[6]

In contrast companies adopting an open system approach typically introduce an Application Programming Interface (API) or a development environment as part of the launch of their product. They allow any other company to create appropriate applications or services for the product to participate in the development system. By involving multiple companies, such an approach leads to a fast implementation for system innovation and application development. In addition to diversity, in case of an open system, customers also benefit from the opportunity to choose from offerings from different vendors for both the smart, connected products and the platform that connects them.[6]

(4) Should a company independently develop the full range of smart, connected products and technological infrastructure or aspire to collaborate with a technology supplier?

In case of partner involvement, it is important to decide for each of the externally related elements of whether a customized solution or the licensing of an existing technology is more appropriate.[6] If a customer-specific solution is strived for, this usually means a comprehensive cooperation with the technology supplier during the development phase and later operation.

 stratgeschiche Entscheidungen treffen(5) What data must be collected, analysed and protected to increase the value of the offer?

The recording of data by sensors, as well as the transmission, storing, analysis and protection of unauthorised access increase the costs. Companies therefore need to weigh up which data, in relation to the costs incurred for their recording, the functionality of the product, the efficiency in the value chain or the understanding of a wider ecosystem (smart, connected products, platform online services, etc.) increase the desired level and thus increase the value of the offer.[7]

(6) How should the ownership and access rights to the product data be regulated?

For example, in case of the product-as-a-service model, the smart, connected product is owned by the manufacturer but that may not apply to the product data generated by the user during the use.[7]

Pentland[8] takes a clear approach in this regard and considers data as a good that is the property of the producer, which he can freely dispose of and thus, at its sole discretion, retain, donate, sell or exchange for another consideration.

(7) Should a company partially or completely cope without intermediaries such as sales or service partners?

The decision to dispense with intermediaries is largely influenced by the structure of the partner network. What matters is whether the partners represent simple sales channels or take on key services like customer training and what proportion of the partner’s activity can be replaced by the capabilities of smart, connected products. In addition customers must understand that traditional channels are no longer needed and would incur additional costs.[7]

Grundsteinlegung durch strategische Entscheidungen (8) Should the existing business model be adapted?

The data provided by smart, connected products regarding their use by customers allows companies to develop entirely new business models.

(9) Should new business areas be opened up by the sale of product data to third parties?

The information gathered by smart, connected products can have a value for customers away from established business areas. This idea opens up opportunities for the development of completely new service, where instead of the smart, connected product or related services the data available is the primary value.[9]

(10) Should a company expand its borders?

Have products performed their services isolated so far they now become components of optimized systems consisting of related products or components of “System of Systems”.[7] The term a “System of Systems” describes the merging of capabilities and resources from the previously mentioned ecosystems to an even more complex system with the goal of achieving higher functionality than the mere sum of the individual systems.[10]

At least two strategic decisions result for companies. The first deals with the question of whether the company should expand its business to related products or other parts of the System of Systems. The subject of the second decision is whether efforts should be made to create a platform for linking related products and their information, even if the company does not itself manufacture or control all the components involved.[7]

Smart, connected products ultimately shift industry boundaries and competitive fields. This, together with the growing number and variety of networks within which smart, connected products interact, forces companies to rethink their mission and their value proposition.[7]

Blog series: With smart, connected products into a new business era

Part 1: Introduction
Part 2: The importance of business model innovation
Part 3: Laying the foundation through strategic decisions
Part 4: Break the valid industry logic
Part 5: 5 value-creation layers for IoT applications
Part 6: Break the valid industry logic with smart, connected products
Part 7: The Generation of Value of Things in the Internet of Things

References list

  1. Porter, M. E., & Heppelmann, J. E. (2014, November). How Smart, Connected Products Are Transforming Competition. Harvard Business Review, S.
    78–88.
  2. Porter, M. E., & Heppelmann, J. E. (2014, November). How Smart, Connected Products Are Transforming Competition. Harvard Business Review, S. 78
  3. Dawid, H., Decker, R., Hermann, T., Jahnke, H., Klat, W., König, R., & Stummer, C. (2016). Management science in the era of smart consumer products: challenges and research perspectives. Central European Journal of Operations Research, S. 2
  4. Dawid, H., Decker, R., Hermann, T., Jahnke, H., Klat, W., König, R., & Stummer, C. (2016). Management science in the era of smart consumer products: challenges and research perspectives. Central European Journal of Operations Research, S. 5
  5. Porter, M. E., & Heppelmann, J. E. (2014, November). How Smart, Connected Products Are Transforming Competition. Harvard Business Review, S. 79
  6. Porter, M. E., & Heppelmann, J. E. (2014, November). How Smart, Connected Products Are Transforming Competition. Harvard Business Review, S. 79-80
  7. Porter, M. E., & Heppelmann, J. E. (2014, November). How Smart, Connected Products Are Transforming Competition. Harvard Business Review, S. 71-88
  8. Pentland, A. (2009). Reality mining of mobile communications: Toward a new deal on data. The Global Information Technology Report 2008–2009, S. 79
  9.  Fleisch, E., Weinberger, M., & Wortmann, F. (2014). Geschäftsmodelle im Internet der Dinge. HMD Praxis der Wirtschaftsinformatik, 51(6), S. 822
  10. Maier, M. W. (1998). Architecting principles for systems-of-systems. Systems Engineering, 1(4), S. 272

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