WIXLIB

Smart, Connected Products and Industry CompetitionThreat of SubstituteProducts or Services-Higher utilization and productsharing reduce volume /- Systems disintermediatediscrete products Less dependence onmechanical components-Greater power ofIT vendorsBargainingPower ofChannelsRivalry AmongExisting CompetitorsBargaining Powerof Suppliers -Shift rivalry away from priceHigher fixed costs increase pressure todiscount Reduceddependency onchannels/service partnersBargainingPower ofBuyers Expandedopportunities fordifferentiation,segmentation,switching costs-/ New businessThreat of NewEntrants 03/29/2016 — NAM Smart Manufacturing SummitHigher barriers to entryNew entrants can leapfrog incumbents24models supportrecurring revenuebut can beterminated-/ Greater customervisibility of valueCopyright 2016 Professor Michael E. Porter and Jim Heppelmann

Smart, Connected Products and Industry CompetitionThreat of SubstituteProducts or Services-Higher utilization and productsharing reduce volume /- Systems disintermediatediscrete products Less dependence onmechanical components-Greater power ofIT vendorsBargainingPower ofChannelsRivalry AmongExisting CompetitorsBargaining Powerof Suppliers -Shift rivalry away from priceHigher fixed costs increase pressure todiscount /- Rivalry shifts from products to systems Reduceddependency onchannels/service partnersBargainingPower ofBuyers Expandedopportunities fordifferentiation,segmentation,switching costs-/ New businessThreat of NewEntrants 03/29/2016 — NAM Smart Manufacturing SummitHigher barriers to entryNew entrants can leapfrog incumbents25models supportrecurring revenuebut can beterminated-/ Greater customervisibility of valueCopyright 2016 Professor Michael E. Porter and Jim Heppelmann

Smart, Connected Products and Industry CompetitionThreat of SubstituteProducts or Services-Higher utilization and productsharing reduce volume /- Systems disintermediatediscrete products Less dependence onmechanical components-Greater power ofIT vendorsBargainingPower ofChannelsRivalry AmongExisting CompetitorsBargaining Powerof Suppliers -Shift rivalry away from priceHigher fixed costs increase pressure todiscount /- Rivalry shifts from products to systems Reduceddependency onchannels/service partnersBargainingPower ofBuyers Expandedopportunities fordifferentiation,segmentation,switching costs-/ New businessThreat of NewEntrants03/29/2016 — NAM Smart Manufacturing Summit -Higher barriers to entryNew entrants can leapfrog incumbentsmodels supportrecurring revenuebut can beterminated-/ Greater customervisibility of valueNew potential entrants from other parts of the productCopyrightsystem2016 Professor Michael E. Porter and Jim Heppelmann26

Smart, Connected Products ng Assimilating and extendingbest practices Creating a unique competitivepositionGetting to theproductivity frontier03/29/2016 — NAM Smart Manufacturing SummitDoing things differently todeliver distinctive value27Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

Ten Strategic Choices for ManufacturersWhich product capabilities to pursue?Expand product scope tosystems?1102Functionality embedded in theproduct vs. the cloud?Sell data tooutside parties?93Open or closed system?Change thebusiness model?84Technology development:internal or outsource?Disintermediate distributionor service channels?75What data to capture?6How to manage data rights, access, and security?03/29/2016 — NAM Smart Manufacturing Summit28Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

How Smart, Connected Products Transform the Value ChainFirm InfrastructureHuman Resource ManagementSupportActivitiesTechnology ProcurementOrderProcessing& OutboundLogisticsMarketing& SalesAfter-SalesServicenWhatbuyers arewilling topayPrimary Activities03/29/2016 — NAM Smart Manufacturing Summit29Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

Product DevelopmentConfigurable User Interface via aTractor Engine Mobile AppBikes Designed for SharingNew Principles of Product Design Products become complex systems involving sensors, software, connectivity, and operating in the cloud Product development shifts from largely mechanical engineering and product design to true interdisciplinary systemsengineering New design principles emerge, including: Design for low-cost variability of function Design for connected service Design for evergreen customization and improvement Design for system interoperability Design enabling new user interfaces Design for new business models Design for ongoing quality management03/29/2016 — NAM Smart Manufacturing Summit30Copyright 2016 Professor Michael E. Porter and Jim Heppelmann30

Inbound and Outbound LogisticsConnected Ordering and Tracking The early roots of SCPs were in the use of RFID (radio frequency identification) for product identification andtracking, allowing more efficient routing and faster delivery– SCPs go beyond RFID to enable continuous monitoring, allowing broader logistical improvements Locate and monitor key assets (e.g. raw materials, final products, containers) to optimize logistics, prevent qualityissues, and detect theft. Real- time data on customer usage and consumable status also enables predicting needs and further automatingorder processing, shipping, and delivery03/29/2016 — NAM Smart Manufacturing Summit31Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

Marketing & SalesSmart Home PlatformDemand BasedPricing ModelSingle Button OrderingRedefining Customer Relationships Shift from traditional transactional sales to proactively maximize ongoing product value for thecustomer, enabled by increased visibility of product use Greater opportunities for segmentation and personalization of features, special offers, or after-saleservice packages Enable more sophisticated pricing models based on usage at the segment or individual customer level Manage upgrades, replacement products and services over the product’s life Expand opportunities for new value added services (e.g. benchmarking) or business models (e.g.products as a service) Sell entire product systems or platforms03/29/2016 — NAM Smart Manufacturing Summit32Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

After-Sales ServiceRemote DiagnosticsOne-Stop ServiceAugmented RealityEnabled ServiceNew Service Delivery Approaches Shift from reactive service to proactive, predictive and remote service System-wide fixes and improvements can be proactively pushed to all units in use via the cloud Analysis of product performance data can anticipate problems and improve uptime and technician utilization Remote diagnostics allows for one-stop service and higher fix rates, while other problems are fixed remotely Incorporate augmented reality (AR) to make product operation, training, and service more efficient Potential to disrupt channel service providers through “digital proximity” and direct connections to products/customers Offer product as a service, and introduce entirely new value added services03/29/2016 — NAM Smart Manufacturing Summit33Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

Smart Manufacturing OperationsSmart, ConnectedAutomotive AssemblySmart ToolsPlant Floor VisibilityCapitalize on Smart, Connected Equipment Smart, connected equipment that integrates, automates, and optimizes the production process (e.g. Industrie 4.0 andSmart Manufacturing) to improve labor, material and energy efficiency SCPs hold the individual production steps, including control of the manufacturing equipment, to automatemanufacturing systems and enable multiple products on a single production line Connect equipment, factory sensors, and manufacturing systems to improve root cause analysis and corrective actionsand enable real-time and predictive quality measurement Smart tools and smart work instructions connected in real-time to manufacturing systems to improve efficiency, qualityand performance of assembly workers03/29/2016 — NAM Smart Manufacturing Summit34Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

Smart, Connected Product ManufacturingRemote Software Enhancement“Glass” Airplane CockpitCustomization via SoftwareRestructuring Production and Ongoing Product Operation SCPs can reduce the physical complexity of products as more features and variability are delivered via software,simplifying assembly SCPs enable later stage design changes, via software, and the ability to finalize the product post-manufacturing SCPs rely on a cloud-based technology stack that must be continuously and seamlessly operated and improved overthe product’s life The product can be modified and enhanced after purchase and customized based on the customer’s evolvingpreferences03/29/2016 — NAM Smart Manufacturing Summit35Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

The OLD Manufacturing ProcessUnexpected part qualityissue foundduring inspectionOperator stopsproducing the parts,begins a cascade ofprocess disruptionPOOR QUALITY DOWNTIME Parts are delivered lateto customerCAPA and traceabilityinitiatives are initiatedUNSATISFIEDCUSTOMER EXTRA WORK Parts already producedare quarantined forScrap or ReworkSCRAP &REWORK Material reviewboard meets foremergencytroubleshootingRepair parts located orordered andequipment repairimplementedCRISIS WORK PARTS & REPAIRWORK Unexpected problems and cascadingdelays result in significant loss ofprofitability and customer satisfactionThe NEW Manufacturing ProcessMachine learningdetects onset ofprocess anomaly andalerts operatorOperator analyzesproblem beforesignificant problemsmaterializeReplacement partscan be located orordered in advanceAugmented reality3D documentationensures quick fixMachine, process,and quality data iscollectedautomaticallyQuality parts aredelivered on-time tothe assembly lineMONITORING DOWNTIMEAVOIDANCE EXTRA LEADTIME QUICK FIX AUTO DATACAPTURE SATISFIEDCUSTOMER 03/29/2016 — NAM Smart Manufacturing Summit36Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

Implications for Organizational SMARKETINGSALESSERVICE ANDSUPPORT Businesses units are organized into distinct functional units Integration occurs through management committees, process flow handoffsand other mechanisms that facilitate coordination across the organization03/29/2016 — NAM Smart Manufacturing Summit37Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

The Shifting Organizational ModelLed by a chief data officer. Handlesunit-wide data aggregation andanalytics, collaborates with andshares information and insightsacross the firm.TRADITIONAL FUNCTIONSNEW FUNCTIONSCEOUNIFIED RKETINGSALESSERVICE 16 — NAM Smart Manufacturing SummitFINANCE38Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

The Shifting Organizational ModelLed by a chief data officer. Handlesunit-wide data aggregation andanalytics, collaborates with andshares information and insightsacross the firm.TRADITIONAL FUNCTIONSNEW FUNCTIONSCEOUNIFIED DATAORGANIZATIONITDeep collaboration reflectingthe new need for IT in productdevelopment. May lead to ITteams embedded in R&D orproduct design teams with ITrepresentation.03/29/2016 — NAM Smart Manufacturing NGSALESSERVICE ght 2016 Professor Michael E. Porter and Jim Heppelmann

The Shifting Organizational ModelLed by a chief data officer. Handlesunit-wide data aggregation andanalytics, collaborates with andshares information and insightsacross the firm.TRADITIONAL FUNCTIONSNEW FIED DATAORGANIZATIONITDeep collaboration reflectingthe new need for IT in productdevelopment. May lead to ITteams embedded in R&D orproduct design teams with ITrepresentation.03/29/2016 — NAM Smart Manufacturing SummitR&DMANUFACTURINGDEV-OPSOversees product updates,enhancements, and postsale service,and coordinates shorter release cycleswhile achieving 100% reliability.40SERVICE ANDSUPPORTCUSTOMERSUCCESSMANAGEMENTCopyright 2016 Professor Michael E. Porter and Jim Heppelmann

The Shifting Organizational ModelLed by a chief data officer. Handlesunit-wide data aggregation andanalytics, collaborates with andshares information and insightsacross the firm.TRADITIONAL FUNCTIONSNEW FIED DATAORGANIZATIONITDeep collaboration reflectingthe new need for IT in productdevelopment. May lead to ITteams embedded in R&D orproduct design teams with ITrepresentation.03/29/2016 — NAM Smart Manufacturing SummitR&DMANUFACTURINGDEV-OPSOversees product updates,enhancements, and postsale service,and coordinates shorter release cycleswhile achieving 100% reliability.41CUSTOMERSUCCESSMANAGEMENTSERVICE ANDSUPPORTTakes charge of the ongoingcustomer relationship, ensuringthat customers gain maximumvalue from the product.Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

The Larger Opportunity Smart, connected products are dramatically increasing opportunities for value creationand higher productivity throughout the economy SCPs create a whole new generation of lean, driving out waste SCPs will transform competition in many service industries, not just in manufacturing While there will be dislocations, the net effect is likely to be rising productivity, faster economicgrowth and improving prosperity SCPs will allow for better meeting human needs by conserving natural resources, improving healthand safety, raising energy efficiency, sharing products, and others SCPs will affect jobs and the nature of work The net effect on jobs will be positive, through faster growth, new businesses, new roles, andnew tools for training and human resource development The impact of SCPs is still in the early innings03/29/2016 — NAM Smart Manufacturing Summit42Copyright 2016 Professor Michael E. Porter and Jim Heppelmann

2014); and "How Smart, Connected Products Are Transforming Companies" (Harvard Business Review, 2015). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of