THE TRANSFORMATIONAL EFFECT OF SMART PRODUCTS ON DISCRETE MANUFACTURERS

THE TRANSFORMATIONAL EFFECT OF SMART PRODUCTS ON DISCRETE MANUFACTURERS Towards a new model: assessment of the stage of development Alberto Cresto ESCP Europe Master in Management May 2016

Sponsored by Momenta Partners

Abstract

The Internet of Things is the new wave of innovation and promises to bring a revolution across industries. Particularly, smart connected products will deeply transform discrete manufacturers activities and business model. The capabilities of smart products open a whole new world of expanding opportunities that go beyond the traditional limit of physical products. Pumps could offer water infrastructure management services, smart equipment coordinate and optimize complex and dislocated industrial processes, stopping breakages before they occur. Real time product data will push radical changes to Product Development, Marketing & Sales and many more functions, influencing discrete product manufacturers to move from a pure product offering to a hybrid or pure service offering. New, diverse ecosystem will emerge, whose size will benefit all participants, and will evolve toward a model where activities, services and processes are grouped and connected into systems and then into systems of systems. The academic literature has done an excellent job in defining these emerging tendencies and formalizing the potential steps of this transformation. Still we don’t know where we are in this transition, lost in the hype of blogs, news and futuristic business reports.

This study’s objective is to challenge the hypotheses proposed so far around this topic in order to understand the real opportunities and challenges in the Connected Industry.

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Acknowledgements

First and foremost, I would like to thank my family, the deepest roots of all my achievements, the reason behind everything that is good in me and why I have turned out the way that I am.

Also, thanks to my girlfriend and to my friends for having made the last few years the best of my life.

I am particularly grateful for the invaluable assistance given by Ken Forster, without whose help this thesis would not have been possible; I would also like to extend my sincere thanks to all of the companies that accepted to participate in this study.

Alberto Cresto

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Affidavit

ESCP Europe

I, the undersigned, do hereby state that I have not plagiarised the paper enclosed and that I am the only author of all sentences within this text. Any sentence included which was written by another author was placed within quotation marks, with explicit indication of its source. I am aware that by contravening the stated ESCP Europe rules on plagiarism, I break the recognised academic principles and I expose myself to sanctions upon which the disciplinary committee will decide.

I also confirm this work has not previously been submitted during studies prior to ESCP Europe. If this work has been written during studies conducted in parallel to my time at ESCP Europe, I must state it.

I accept full responsibility for the content of this paper.

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Alberto Cresto 08/05/2016

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List of figures Figure 1, Cisco - The Internet of Everything .......................................................................... 12 Figure 2, Value forecasts review done by the writer ............................................................ 13 Figure 3, (Ronga, Hu, Lin, Shi, Guo, 2014) ......................................................................... 16 Figure 4, (Ronga, Hu, Lin, Shi, Guo, 2014) ......................................................................... 17 Figure 5 (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014) ............................................................................................................. 20 Figure 6, adaptation of (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014) ....................................................................................... 22 Figure 7 (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014) ............................................................................................................. 24 Figure 8, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014) ............................................................................................................. 45 Figure 9, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014) ............................................................................................................. 58

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List of evidences Evidence 1 ......................................................................................................................... 46 Evidence 2 ......................................................................................................................... 47 Evidence 3 ......................................................................................................................... 47 Evidence 4 ......................................................................................................................... 48 Evidence 5 ......................................................................................................................... 49 Evidence 6 ......................................................................................................................... 50 Evidence 7 ......................................................................................................................... 50 Evidence 8 ......................................................................................................................... 51 Evidence 9 ......................................................................................................................... 52 Evidence 10 ....................................................................................................................... 52 Evidence 11 ....................................................................................................................... 52 Evidence 12 ....................................................................................................................... 53 Evidence 13 ....................................................................................................................... 53 Evidence 14 ....................................................................................................................... 54 Evidence 15 ....................................................................................................................... 54 Evidence 16 ....................................................................................................................... 55 Evidence 17 ....................................................................................................................... 56 Evidence 18 ....................................................................................................................... 57 Evidence 19 ....................................................................................................................... 58 6

Evidence 20 ....................................................................................................................... 59 Evidence 21 ....................................................................................................................... 59 Evidence 22 ....................................................................................................................... 60 Evidence 23 ....................................................................................................................... 60 Evidence 24 ....................................................................................................................... 60 Evidence 25 ....................................................................................................................... 61 Evidence 26 ....................................................................................................................... 62 Evidence 27 ....................................................................................................................... 63 Evidence 28 ....................................................................................................................... 63 Evidence 29 ....................................................................................................................... 64 Evidence 30 ....................................................................................................................... 64 Evidence 31 ....................................................................................................................... 65 Evidence 32 ....................................................................................................................... 65 Evidence 33 ....................................................................................................................... 66 Evidence 34 ....................................................................................................................... 66

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Index

Abstract ........................................................................................................................... 2 Acknowledgements ............................................................................................................ 3 Affidavit ........................................................................................................................... 4 List of figures .................................................................................................................... 5 List of evidences................................................................................................................ 6 Index ................................................................................................................................ 8 1. Introduction ............................................................................................................. 11 2. Literature Review ..................................................................................................... 15 IoT-enabled ecosystems ................................................................................................ 15 Smart, connected products ........................................................................................... 18 Capabilities of smart connected products ................................................................... 20 A changing competitive scenario ............................................................................... 21 The evolution of product system and systems of systems ........................................... 22 The transformation effect of smart connected products across functions ..................... 25 Product Development & Design ............................................................................ 26 Manufacturing & Quality Management ................................................................. 27 Logistics ............................................................................................................... 28 Data Analytics ..................................................................................................... 28 Marketing & Sales ................................................................................................ 28 After-sale services ................................................................................................. 30 Security................................................................................................................ 31 Human Resources ................................................................................................. 31 An organizational perspective towards a new model ................................................... 32 Organizational Implications .................................................................................. 32 Making the transition ........................................................................................... 34 8

3. The academic hypotheses .......................................................................................... 37 4. Methodology ............................................................................................................. 39 The rationale ............................................................................................................... 39 The interviewees .......................................................................................................... 40 Potential biases............................................................................................................ 40 Practical steps ............................................................................................................. 41 Contents of the survey ................................................................................................. 42 5. The analysis of the results ......................................................................................... 44 H1. Capabilities of smart connected products & corporate strategies ............................. 45 H2. Product Development and Release ......................................................................... 46 Incremental product design and evergreen product design .......................................... 47 Software upgrades, software-enabled customization and low-cost variability ............... 48 H3. Logistics ................................................................................................................ 49 H4. The stage of development of the transition toward connected products ................... 50 H5. Value added, smart product-enabled services .......................................................... 51 H6. Pricing and customer relation ................................................................................ 55 H7. Product System and System of Systems ................................................................. 57 The ecosystem evolution ........................................................................................... 58 Increased cooperation ................................................................................................ 59 Correlation between ecosystem size and service value ................................................ 61 Smart products are reshaping industry boundaries ..................................................... 61 H8. Data exploitation and monetization ....................................................................... 62 Few financial considerations ......................................................................................... 64 6. Discussion ................................................................................................................ 67 Conclusion ................................................................................................................... 67 Limitations .................................................................................................................. 69 Recommendations for future research ........................................................................... 70 9

Bibliography ...................................................................................................................... 72 Annexes.............................................................................................................................. 73 Annex A ......................................................................................................................... 73 Annex B .......................................................................................................................... 74 Annex C ......................................................................................................................... 76 Annex D ......................................................................................................................... 79

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1.

Introduction

The Internet of Things is the great promise of the new millennium, a natural step forward able to connect the physical and the digital worlds. Recent times have been characterized by a myriad of articles unveiling a connected revolution able to provide an unseen growth in human history. Nevertheless, the concept of the Internet of Things has its roots in the very early days of internet applications: British entrepreneur Kevin Ashton first coined the term in 1999 while working at Auto-ID Labs referring to a global network of objects connected to radio-frequency identification. Since then the internet has increasingly connected the world and its activities but the concept has never been often used to define this trend until recent times.

However, to what we refer with the Internet of Things? The Internet of Things is a scenario where every device, machinery, person, process and activities is connected to the internet and thus able to generate, compute and exchange information. This might seem not very revolutionary, as we have seen this is occurring by the very beginning of the Internet era.

What is revolutionary is to which extent we are now able to connect things: in a single word everything. This is probably why pioneers companies like Cisco Systems prefer to call it the Internet of Everything, to capture a much larger scope where also intangible process and activities, software and people are connected to the physical world of things. Three typologies of connections power this architecture that claims to embrace the whole world in the next decades: ยง

Machine to Machine (M2M)

ยง

Machine to Person (M2P)

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Person to Person (P2P)

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Figure 1, Cisco - The Internet of Everything

Why have we waited almost twenty years to embrace such a revolution since the first time we named it? Because only now we are able to implement it, thanks to a combination of technological, sociological and economics factors. First and foremost, the decreasing price of connectivity and the outstanding capacity of the Internet protocol v.6, which can provide 7.9Ă—1028 times as many as the previous IPv4. Secondly, the decreasing price and size of sensors and the related ability to embed them in miniaturized objects as well as their extended battery capacity. Thirdly, the possibility to gather, handle and compute the ocean of unstructured data coming from sensors, thanks to Big Data and its most recent evolutions (like Data in Motion). Finally, the mobile penetration and the utilization of internet applications that are on a skyrocketing trend since the beginning of the decade.

So, what is changing and why this brings great expectations? We are now entering a new age where, differently from before, we are no longer collecting, inputting and computing information in discrete time sustaining high costs in time consuming tasks. Information can now be automatically generated and computed in real time, often without being even stored, bringing the knowledge about our world to unprecedented limits: “a full 90 percent of all the data in the world has been generated over the last two years�, (SINTEF, 2013). The potential related to this brave, new, connected world spans across any industry leaving none unaffected.

The value at stake is immense and assumes various forms according to different verticals and nature of businesses (B2C or B2B). While forecasts differ widely according to how the concept 12

is defined and what the underlying value includes, they all agree that the Internet of Things will bring at least a two trillion-dollar opportunity in the world economy.

Figure 2, Value forecasts review done by the writer

The following is a review created by the writer of global market forecasts provided by multiple sources.

This giant market opportunity is attracting multi-billion investments from the largest corporations in the world, hoping to transform these extraordinary expectations into revenues, increase market shares and a favorable positioning in a new connected economy. On the other hand, countless startups try to provide game-changing solutions in any industry. No other innovation, except for the internet itself, had such a large scope: in every B2B business across Energy, Manufacturing, Power, Building and many more the Internet of Things promises to provide smarter, self-optimizing and autonomous processes while on the B2C side in Retail, Insurance, Banking (just to name some) to offer better services at a cheaper price.

Expectations are great, huge investments are being made and blooming ecosystems are flourishing, but where are we now? Though academics and corporations have outlined an ideal roadmap for our connected future, challenges remain many and it is difficult to discern the hype from the reality.

This study’s objective is to address a tiny side of this revolution and its promises, already addressed by the academic literature, and to challenge it against the real business world. The

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research question is to assess the stage of development of the transformational effects provided by smart, connected products to discrete B2B manufacturers.

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2.

Literature Review

As we have seen so far the Internet of Things offers plenty of opportunities and is deeply transforming almost any industry. But what are the underlying factors that sustain this transformation? What are challenges? These opportunities come at a cost: firms need to change and adapt to a new context, where industry boundaries are thinner and relationships with the ecosystem are more dependent and interconnected.

Despite the novelty of the subject some topics have already raised the interest of academics and researchers.

IoT-enabled ecosystems The Internet of Things based business ecosystem has been addressed by Ke Ronga, Guangyu Hu, Yong Lin, Yongjiang Shi, Liang Guo in Understanding business ecosystem using a 6C framework in Internet-of-Things-based sectors. The paper constructs a 6C framework – building on the already developed 3C framework for network interactions– to analyze how the Internet of Things actually transforms the traditional supply chain in a more sophisticated, interconnected network of interactions involving all the stakeholders, the so called Ecosystem “a loosely connected business community made up of different levels of organizations that share a common goal and co-evolve with each other […]with a broader view of cross-industry collaboration, rather than only collaboration with directly linked partners in the supply chain […] including industrial players, government, industrial associations and other customers, beyond the boundaries of traditional industry relations” (Ronga, Hu, Lin, Shi, Guo, 2014).

The research argues that more than the technology per se the real basis of value creation sits in these economic and social links. Hence the aim of the study is to deconstruct the ecosystem to its most basic components, the so called 6Cs. Context addresses the lifecycle stage of a certain industry, its mission, its environmental features able to pose opportunities and threats, looking at the reasons why a certain 15

ecosystem tends to emerge and where it could expand. Construct “defines the fundamental structure and supportive infrastructure of a business ecosystem.” (Ronga, Hu, Lin, Shi, Guo, 2014).

Configuration goes a step further presenting the external relationships amongst players and structures while Cooperation reveals the mechanisms beyond these interactions, that in Internet of Things based ecosystems “are no longer that of supplier-customer; such organizations are now dependent on each other and share in a common fate” (Ronga, Hu, Lin, Shi, Guo, 2014), or synergies which were not possible before. Capability identifies the key success factors which lie behind a certain industry activities and whose achievement is the underlying reason of existence of the ecosystem. Change investigates “how a system configuration pattern shifts dramatically from one type to another” (Ronga, Hu, Lin, Shi, Guo, 2014). A main driver here consists in how open is knowledge transfer within the ecosystem.

This framework is then applied to multiple case studies in six different industries at different stages of development and with different degrees of open/close knowledge transferability.

Firms chosen are Focal Firms “at the center of a business ecosystem since they own the product platforms which other stakeholders could add value to.” (Ronga, Hu, Lin, Shi, Guo, 2014).

Figure 3 is an example of the 6C framework application to the car rental industry.

Figure 3, (Ronga, Hu, Lin, Shi, Guo, 2014)

The conjoint analysis of the use cases suggests an interesting pattern which puts in relation the development stage of the ecosystem and the willingness of the focal firm to further extend 16

the network of relationships to the external environment (the openness of an ecosystem). The less an ecosystem is developed, and thus the less focal firm’s value proposition is finalized and explored, the more it is open to bring in new players, links and connections with different stakeholder. Vice versa when an ecosystem is perfectly functioning the willingness to increase its scope slows down: the scope narrows from all the external stakeholders to the focal firm’s customers.

Figure 4, (Ronga, Hu, Lin, Shi, Guo, 2014)

While findings are interesting but not able to lead to a generalization, due to the scarce number of uses case and the limited availability of well-developed Internet of Things-based ecosystems, this paper has the credit of starting the field of research related to the subject.

The ecosystem, given the very nature and the capabilities of Internet of Things technologies, has indeed a central role in transforming businesses, value proposition and creating new means of cooperation within, and sometimes beyond, a certain industry. The 6C framework

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appears to be an effective way of capturing the ecosystem components and their interactions.

While the study admits that an Internet of Things based ecosystem “is not a fixed-value chain; instead, it contains different levels of organizations/roles that share the same fate and can transform themselves from being a fragmented social network in the early stages into a value network that gives benefits to the stakeholders” (Zott and Amit, 2007) and that “the two key features of the business model, efficiency and innovation, can be exploited to a higher extent in Internet of Things-driven ecosystems. The reason for this is that the openness of the focal firm's platform allows more and more business partners connect with each other and create more value for end users”, (Adner and Kapoor, 2011), it does not go further in analyzing how this value creation occurs, what drivers are able to unlock it as well as which challenges need to be overcome and what are the implications in a given business ecosystem.

Almost any industry will face deep and unforeseen transformations that will reshape competition, declare winners and losers, and change the dynamics behind its ecosystem. All the drivers to these changes boil down to the capabilities of the Internet of Things and the new opportunities it poses to today’s businesses.

Smart, connected products A particularly interesting case is the transformational effect on the discrete manufacturing industry provided by smart, connected products. “Discrete manufacturing is the production of distinct items. Automobiles, furniture, toys, smartphones, and airplanes are examples of discrete manufacturing products.” (Wikipedia, 2016) . The resulting products are easily identifiable and differ greatly from process manufacturing where the products are undifferentiated, for example oil, natural gas and salt. The amount of data generated by connected products as well as the possibility to remotely control them are opening a whole new world of opportunities to manufacturers, both in terms of internal activities (production operations, performance and product improvement) and external activities (new services to 18

end customer, new markets and new means of cooperation). This has great relevance and impact on the traditional value system and value creation in such industry.

This topic is addressed by an article published on the Harvard Business Review by Michael Porter and James Heppelmann How Smart, Connected Products Are Transforming Competition, 2014. The aim of the study is to provide the main elements of connected products able to transform the role of discrete manufacturers and the basis of competition in their industry. Existing companies need new strategic competences and face new opportunities and threats: the internet and the information it carries are not any good without a clear vision of where they can lead. “Smart, connected products raise a new set of strategic choices related to how value is created and captured, how the prodigious amount of new (and sensitive) data they generate is utilized and managed, how relationships with traditional business partners such as channels are redefined, and what role companies should play as industry boundaries are expanded.” (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014) While news and marketing make a large use of the word “smart” to describe intelligent product able to provide new functionalities, Porter and Heppelmann precisely define the three core elements of a smart, connected product: “physical components, smart components, and connectivity components. Smart components amplify the capabilities and value of the physical components, while connectivity amplifies the capabilities and value of the smart components and enables some of them to exist outside the physical product itself” (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014). Given these premises Connectivity represent what is commonly described as smart: the information exchange amongst many different actors and the enablement of functions that stands outside the piece of equipment, in what Porter and Heppelmann call the “product cloud”. It is evident that the very nature of smart, connected products induces discrete manufacturers to deal with a new set of challenges and requirements: the development of the so called Technology Stack, 19

the infrastructure sitting behind all new capabilities enabled by the Internet of Things. This requires substantial investments both in Capex and new skills, not typical of a traditional manufacturer, and implies a huge transformation in business model.

Capabilities of smart connected products Further in the analysis Porter and Heppelmann outline what the connectivity components enable in a smart, connected product. Grouped in 4 main categories, these new capabilities build on each other in an incremental way.

Figure 5 (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014)

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Each of these capabilities can constitute the core of value creation, depending on a particular use case or more broadly on a specific industry requirement.

Clearly a smart, connected product is no longer a simple piece of equipment as well as smart connected product manufacturers are no longer merely equipment provider. This reflects in a deep industry transformation which shapes accordingly the basis of competition and its configuration: Porter suggests no industry will be affected like the manufacturing industry by the advent of the Internet of Things.

A changing competitive scenario The framework proposed is, of course, the Five Competitive Forces: the bargaining power of buyers, the nature and intensity of the rivalry among existing competitors, the threat of new entrants, the threat of substitute products or services, and the bargaining power of suppliers.

While the output of the analysis, and the impact of smart products on the five forces, changes according to different verticals the framework is a valuable tool to understand how competition evolves, posing new challenges and offering new opportunities to discrete manufacturers.

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Figure 6, adaptation of (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014)

This figure shows the effect of smart, connected products on competition. An upward arrows represents an increase in the related force while a downward arrow represents a decrease in the related force.

The evolution of product system and systems of systems More, the adoption of the Internet of Things may not only changes the basis of competition within an industry but it could actually change the frontiers of the industry itself: “The competitive boundaries of an industry widen to encompass a set of related products that together meet a broader underlying need […] The basis of competition thus shifts from the functionality of a discrete product to the performance of the broader product system, in which the firm is just one actor.”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014) 22

This expansion might start from the activities that are closer to the manufacturers, for example ones standing in the value chain, to the broader ecosystem. This evolution eventually leads to the creation and connection of systems of systems “a set of disparate product systems as well as related external information that can be coordinated and optimized�. (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014)

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Figure 7 (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014)

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In this changing scenario “some tendencies seem clear. First, rising barriers to entry, coupled with first-mover advantages stemming from the early accumulation and analysis of product usage data, suggests that many industries may undergo consolidation. […] Single product manufacturers will have difficulty competing with multiproduct companies that can optimize product performance across broader systems.” (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014) Drivers of a success are likely to be two: operational efficiency, in a new set of activities traditionally out of manufacturers’ core competences, and strategic positioning, “how a company 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.” (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014)

The transformation effect of smart connected products across functions The capabilities of smart, connected products allow, and sometime forces, discrete manufacturers to undertake new business models. Even though theoretically more profitable and plenty of opportunities, these new business models pose a great number of challenges and a painful transformation to achieve.

McKinsey has estimated the Internet of Things value at stake in manufacturing, which measures “both direct financial impact, such as potential savings from improved machine utilization, and non-financial factors, such as consumer time saved or improved health” (McKinsey Global Institute, 2015), in a range between $1.2 trillion to $3.7 trillion per year by 2025. The full report, McKinsey Global Institute – The Internet of Things: mapping the value beyond the hype, June 2015, goes further in the analysis outlining the main drivers of the transformation able to unlock this huge value pool. As it is easily possible to guess, smart connected products have the potential to deeply transform how activities are organized and carried out by discrete manufacturers. Also Michael Porter and James Heppelmann have 25

analyzed this topic in article meant to complete their first collaboration, How Smart, Connected Products Are Transforming Companies, October 2015. They suggest that the evolution taking place “is perhaps the most substantial change in the manufacturing firm since the Second Industrial Revolution”. At the center of this revolution there is data. Once generated by internal operation across the value chain, today data is automatically and continuously produced in great volume and variety by the product itself, an unprecedented direct mean of communication between the manufacturer and the customer.

The following is the general impact of smart connected product on discrete manufacturers’ value chain as a rearrangement of the McKinsey report and the follow-up article by Porter and Heppelmann. In order to be in line with the aim of this research the writer has focused on manufacturers producing B2B equipment.

Product Development & Design As explained before, the product is now a complex system grouping very different components and functionalities: the product development focus is thus shifting from the traditional mechanical engineering skillset to a software engineering one. The nature of smart connected products is not only changing the competences needed but is also shaking some of the most ancient assumptions in the industry. The first is the trend towards a 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 […] Meeting customer needs for variability through software, not hardware, is a critical new design discipline”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015).

The ability to modify easily a product is linked to the following point of the analysis: upgrades via software. As the physical part becomes less and less relevant and as more value sits in the digital component the release of new discrete generation will be rarer. An improvement or the 26

fix of a performance issue will most of the time occurs through a remote intervention on the software.

The control needs to shift from a manual one directly on the product to a wide range of remote interfaces (tablets, smartphones or specific equipment) able to increase the information available to user, with the aid of the so called augmented reality: “these interfaces are less costly to implement and easier to modify than physical controls, and they enable greater operator mobility”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015).

Manufacturing & Quality Management Generally, manufacturers may benefit in their manufacturing operation from the same kind of service they could provide with smart, connected products to their customers.

As expressed above, manufacturers enjoy simplified physical components (as opposed to software) and a favorable reconfiguration of the assembly process: in line with the concept of remote upgrade and low-cost variability the customization can now occur at the very last stage of production or even done by the customer in its own premises. The main transformation refers to operations optimization and includes “using sensors, rather than human judgment (and human errors), to adjust the performance of machinery. It also involves the use of data from production machinery to adjust workflows. This is done by remotely tracking, monitoring, and adjusting machinery, based on sensor data from different parts of the plant (and even across plants).”, (McKinsey Global Institute, 2015).

Also ongoing quality management becomes an industry standard “enabling continuous monitoring of real-world performance data, allowing companies to identify and address design problems that testing failed to expose”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015). Simulations of the product in its usage

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environment are replaced by real-time conjoint analysis of the real product and the real context (which may be different from the expected one) in which it operates.

More, aside the traditional discrete operations, manufacturers need to manage a continuous flow of operations: the improvement and the maintenance of the technology stack.

Logistics Majority of the activities, internal and external, related to logistics benefit from an increased transparency and visibility with evident advantages for all stakeholders in the supply chain.

The result is a set of more aware, interconnected and rich relationships with a consequent reduction of lead time and delays. Also inventory optimization is achieved: an enhanced sensor-based inventory visibility which enables automatic replenishment and restocking as well as an increased transparency across the whole supply chain.

Data Analytics The centrality of data in smart, connected product will impose the rise of a new function involving all the activities related to “the management, governance, analysis, and security of that data is developing into a major new business function”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015). This constitutes a real competitive advantage across many other traditional functions, from R&D of physical components, manufacturing, marketing and sales and so on and so forth.

Marketing & Sales Service based business models constitute the most rewarding and challenging opportunity for discrete manufacturers as they allow to expand their scope of activities in the value system and in the broader ecosystem. “The Internet of Things enables “anything as a service” business models for all kinds of other products, potentially letting many kinds of companies shift from

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selling products to selling services based on those products”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015). Automated procurement, inventory optimization, predictive and remote maintenance, plus a countless number of vertical-specific services extend or increase revenue streams. As we can see many internal benefits for manufactures mirror a potential service to customers. The product, before a simple piece of equipment, becomes the platform to launch an expanding set of services, whose value increases as more related products and activities in the system are smart and connected. The great amount of data gathered can even help manufacturers conceive new services and discover new needs, creating a virtuous cycle. “Products continue to evolve long after entering service. The relationship a firm has with its products— and with its customers— is becoming continuous and open-ended” says Porter, “with a shift in customer relationship from selling—often a predominantly onetime transaction—to maximizing the customer’s value from the product over time” (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015). Still, this is not an easy step to make and requires manufacturers to undertake a deep organizational and technological transformation.

New pricing Models will become a reality both in term of micro-segmentation and usage-based revenue model: “Customized, dynamic pricing models based on specific customer preferences, as well as the usage context, can provide benefits for both companies and consumers.” , (McKinsey Global Institute, 2015) while “Marketers can apply this deeper knowledge to tailor special offers or after-sale service packages, create features for certain segments, and develop more-sophisticated pricing strategies that better match price and value at the segment or even the individual customer level” (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015)

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New customer relationships. As the product becomes a means of delivering value more than the value itself, a closer and more intimate link emerges between provider and customer in form of an ongoing and direct dialogue. After-sale surveys are replaced by real-time, real-word data about the product, allowing for further improvements. This is another virtuous capability of smart, connected products: “Having full transparency about how customers use products helps companies develop entirely new business models […] creating “win-win” scenarios for the customer and the company”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015).

Manufacturers will sell a system rather than a product. As the value proposition broaden with the transition from product to system, and systems of systems “sales and marketing teams will need broader knowledge to position their offerings as components of larger smart, connected systems” (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015) with an increased importance of partnerships and interoperability.

Monetization of IoT data can become a real profit center for connected manufacturers.

Indeed, most of the information gathered by smart, connected products can be worth to players across the industry and sometime beyond:” One company’s data exhaust could be another company’s gold mine, and that value could be monetized by the originator of the data”, (McKinsey Global Institute, 2015).

After-sale services Almost any capability of smart, connected products can be monetized as a service to increase the value of the product itself. Also every internal benefit highlighted so far for discrete manufacturers can be the basis of a service provided to their customers.

Predictive Maintenance refers to the capacity to prevent breakages and failures before they occur, leveraging on data on automatically and continuously produced by the product itself.

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In this scenario the maintenance routines are replaced by a just in time intervention when required. Also Remote Maintenance of the (most valuable) software components, which decreases cost of replacement and increases customer satisfaction, can be provided as a service. Equally Remote Monitoring can enable features such as quality management as a service for any B2B customer.

Security Security is not normally a major concern for discrete manufacturers but it will become soon for those entering the smart world. The huge amount of sensible data produced, transferred and computed across all functions imposes manufacturers to increase and ensure the highest level of security: every smart, connected product can be a point of access and a potential target for hackers. Security is likely to become a real source of value and an aspect of potential differentiation. Aside security also transparency, clear policies and intellectual properties will be keys.

Human Resources Transformations across functions and changes in business model induce also a shift in how human resources are procured and managed. First, the transition from hardware to software will urge manufacturers to acquire a new set of skills across the whole value chain: from product development to marketing and sales. New business models will require far more coordination across functions and activities as data becomes the link to blend any discipline within the organization.

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An organizational perspective towards a new model Organizational Implications Porter and Heppelmann go further in the analysis outlining the most evident changes occurring in manufacturers entering the connected industry. The study suggests that traditional manufacturers will start a transformation which has many points of contact with the software industry, but it is far more complex. This is due to the fact that aside all new functionalities and capabilities of smart, connected product manufacturers will still need to “design, produce, and support complex physical products”. And they need to do so finding the right balance and the required harmony with these two merging but contradictory realities: as this is likely to constitute the main challenge it is also supposed to be a strong basis for competitive advantage. “As Jay W. Lorsch and Paul R. Lawrence argued in the classic work Organization and Environment, every organizational structure must combine two basic elements: differentiation and integration. Dissimilar tasks, such as sales and engineering, need to be “differentiated,” or organized into distinct units. At the same time, the activities of those separate units need to be “integrated” to coordinate and align them. Smart, connected products have a major impact on both differentiation and integration in manufacturing.”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015) While these two aspects have been extremely important throughout the whole history of manufacturing and have been the very base of the modern organizational theory, they are likely to assume even more relevance with the advent of smart, connected products. Indeed, today, traditional manufacturers satisfy this need for coordination with recurrent, but not continuous, formal processes led by the business unit leadership team. However, with the emergence of smart, connected products “this classic model breaks down. The need to coordinate across product design, cloud operations, service improvement, and customer 32

engagement is continuous and never ends, even after the sale” (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015) and periodic alignment will no longer be sufficient. As seen before functional roles overlap, new critical functions emerge on top and within traditional ones, while the scope of other ones is extended by the new availability of data, most of time useful and used across all manufacturer activities. Also this new real time data availability challenges the traditional centralized control in favor of decentralized, highly integrated and much more responsive model. More, traditional “dumb” products are likely to remain in the manufacturers portfolio adding complexity in the organizational structures.

In this uncertain scenario some aspects start taking shape: §

Deeper and close collaboration between IT and R&D departments to seamlessly manage the software now embedded in the physical product. The extent and the nature of this collaboration will constitute a crucial challenge to achieve success.

§

The rise of new critical functions: o Data management group to deal with unprecedented amount of information generated by smart, connected products. o Development-Operation group, whose aim is to achieve “evergreen product design, continuous product operation and support, and ongoing product upgrades” by combining software developers and exponents from all operational units involved. This unit is responsible for performance of smart products after they have left the factory and “organizes and leads teams that shorten productrelease cycles, manage product updates and patches, and deliver new services and enhancements post-sale”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015). o Customer Success management group makes sure the customer gets the most out of the product and its new functionalities: the product as-a-service model 33

increase the need of customer satisfaction and after sale services. The group will be responsible for “monitoring product use and performance data to gauge the value customers capture and identifying ways to increase it” (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015) collaborating closely and continuously with marketing, sales and services. §

Security as a cross-functional crucial need. Today responsibility for security is held by CIO, CTO or CDO (Chief Data Officer) where this is already in place. This leadership structure is no more appropriate for companies like connected manufacturers, where data is at the center of the business model and have serious implications for almost any functions and departments: “security cuts across product development, dev-ops, IT, the field service group, and other units. Especially strong collaboration among R&D, IT, and the data organization is essential. The data organization, along with IT, will normally be responsible for securing product data, defining user access and rights protocols, and identifying and complying with regulations. The R&D and dev-ops teams will take the lead on reducing vulnerabilities in the physical product”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015).

Making the transition Given that established manufacturers are likely to produce both conventional and smart products for a certain period of time, the phenomenon subject of this thesis will be, in most cases, evolutionary rather than revolutionary. Acquiring skills needed is costly and to avoid duplication of activities across the organization is a priority. Ways undertaken by manufacturers are many and differ depending on the interest and the impact the Internet of Things may have on their business: some are encouraging smart product initiatives at a business unit level with the supervision of the IT department or a cross functional steering committee. Others are acquiring or partnering with software companies to acquire quickly the 34

needed expertise, perspective and talent. In multi-business companies, at a corporate level, overlay structures are emerging to manage the technology stack, define the roadmap and evangelize the transition. The strategies identified so far can be summarized as follows:

§

Stand-alone business unit, which gathers all the connected expertise of the corporate, defines the overall strategy working with all affected business units and has profit-andloss responsibility. While in some case this model provides the benefit of creating a core division in other case it might deters connected initiative springing from other units.

§

Center of excellence, which houses key expertise in Internet of Things initiatives without suffering a profit-and-loss responsibility. It constitutes a cost center that business units can tap when needed.

§

Cross-business unit steering committee, “of thought leaders across the various business units, who champion opportunities, share expertise, and facilitate collaboration. Such committees usually lack formal decision-making authority, which can limit their ability to drive change.”, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Companies, 2015).

Though some models are emerging, companies still lack a defined framework to manage this important transition. While the benefits are clear, the way to achieve them counts many obstacles to overcome. Some lay outside the firm’s area of action. First, the technological aspect: prices for sensors, basic hardware and batteries must continue to drop while the computing capacity needs to keep increasing in its performance and decreasing in its price.

More, a higher degree of interoperability should be reached to unlock all the possible benefits “without interoperability, at least 40 percent of potential benefits cannot be realized”, (McKinsey Global Institute, 2015). Other aspects are under manufacturers’ control: all the organizational issues related to connecting the “physical and digital worlds, challenging

35

conventional notions of organizational responsibilities. Traditionally, the IT organization was separate and distinct from the operating organization that is charged with managing the physical

environment.�,

(McKinsey

Global

Institute,

2015).

Privacy,

confidentiality,

intellectual property and security about data will be keys for manufacturers of smart, connected products. Other organizational concerns lay in changes on how revenues are generated, decisions taken, and relationship with other stakeholders managed. The adaptation to a different business environment, processes and business models are more likely to determine the success of the transition rather than the pure technical requirements.

The aim of this study is to assess the stage of development of this transition identifying its most recurrent aspects and challenges, while testing some of the hypotheses proposed by the academic world so far.

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3.

The academic hypotheses

As expressed above this study aims to discern the stage of development of the hypotheses identified during the draft of the literature review and to find evidences potentially able to support or contrast them. This section will explicate precisely which of these hypotheses were addressed in the survey. ยง

H1: the fundamental capabilities of smart, connected products are monitoring, control, optimization and autonomy. Companies are building their offerings around one or more of these capabilities.

ยง

H2: the advent of smart connected products will transform how products are conceived and brought to market by discrete manufacturers thanks to: o Incremental product design o Product upgrades via software o Software-enabled customization and low-cost variability o Evergreen design and continuous on-going quality management

ยง

H3: smart products will be able to increase inventory and supply chain visibility, allowing discrete manufacturers to provide related services to the ecosystem.

ยง

H4: discrete manufacturers will keep producing both traditional and smart connected products for quite a long time.

ยง

H5: smart connected products will enable discrete manufacturers to expand in the service industry thanks to their capabilities and data they generate, possibly attacking verticals before covered by independent third party providers. Data availability will reinforce the service launch and service enhancement loop. Two major services provided by discrete manufacturers will be: o Preventive maintenance o Remote maintenance 37

§

H6: smart connected products will deeply affect pricing (both in monetary term and in how it is applied) and will strengthen customer relationships.

§

H7: smart connected product will: o radically transform the ecosystem in which discrete manufacturers operate, and make value of services enabled by smart products increase as the ecosystem grows in its size o push manufacturers into selling systems more than products o reshape industry boundaries o increase cooperation

§

H8: Data generated by smart connected products could be monetized externally and exploited internally, though companies will have more data than what they can handle.

All of these hypotheses are challenged against B2B discrete manufacturers’ direct experience.

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4.

Methodology

The methodology chosen to assess the stage of development of the phenomenon at issue is a survey targeted to discrete manufacturers that have started undertaking this transition.

The rationale In the first place the writer has considered conducting a qualitative and extensive survey to a limited numbers of companies in order to develop 1-2 detailed case studies. While this would have allowed a deep understanding of the process underlying the transition from traditional to connected manufacturing, its steps and ideally the formulation of a hypothetical framework, the writer has realized that he would not be able to conduct such an analysis. First because of time and space constraints: the information needed to create a detailed use case would require multiple and ongoing face to face interviews with almost any business functions in a given company, which do not meet the amount of time available both to interviewees and interviewer. Secondly, a qualitative approach though providing a very detailed view of the phenomenon, would have an empirical value limited to very specific verticals and mined by the heterogeneity of different discrete manufacturers, thus not being able to lead to any form of generalization. Thirdly, the innovative nature of the subject and its strategic and competitive implications would have make reticent the companies interviewed and possibly bias the related results.

For the reasons above, the writer has decided to pursue a quantitative approach on a much larger number of discrete manufacturers. As opposed to a qualitative study, the approach chosen tries to investigate aspects common to any discrete manufacturer undertaking the transition.

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The interviewees The companies interviewed are B2B discrete manufacturers that have started producing smart connected products. The full list of companies invited to participate is available in Annex A. Some of them are pure B2B discrete manufacturers producing a single product, some are discrete manufacturers producing different lines of products and some others are large conglomerate groups with one or more division devoted to discrete manufacturing.

The individuals representing companies interviewed and actually taking the survey have been selected amongst managerial level, current and former employees involved in the division/group producing smart connected products. The engagement rules proposed to companies interviewed (Annex C) protect individuals’ personal information from being divulgated and impose to the writer to reflect results only in an anonymized and aggregated way, thus with no reference to any particular participant.

Potential biases At this point is relevant to mention that the writer is currently working as a Venture Associate for Momenta Partners, a Venture Capital investment fund and Advisory firm with a strong focus on Internet of Things and Industrial Automation. Momenta Partners has sponsored and supported this master thesis since its very beginning, bringing valuable industry expertise and supervising the overall direction of the research. With this regard the writer wants to underline the help received by Ken Forster, Managing Director of the Momenta Partners, in making introductions to individuals and companies invited to participate in the study. This support, without which the study would not have been possible, and the professional involvement of the writer in Momenta Partners are not likely to have biased the interviewees’ responses. Indeed, between Momenta Partners and interviewees there

40

is not any kind of working relationship, contractual obligation or any other factor able to bring biases into the interviewees’ responses.

The clauses of engagement rules were set to make people comfortable in taking the survey and try to give them the highest degree of freedom and objectivity in providing answers. Their total indemnification from potential consequences of their answers is supposed to have not brought biases into the analysis.

Practical steps The initial approach towards potential participants was to send a concise but complete introductory email (Annex B) outlining the: §

The research question

§

The academic areas touched by the research

§

Purpose and use of the information

§

The opportunity for participants to access the full result of the study

§

The estimated length of the survey (in minutes, tested by the writer and some volunteers) and the number of questions to be posed.

The outreach email was sent with attached the literature review paragraph of this thesis, but the survey was conceived in the first place to not require a preliminary reading by the interviewees.

The outreach email included Engagement Rules and Executive Summary of the survey (Annex C) outlining the use of the information gathered, the contribution expected by participants and the writer’s obligation to not disclose any personal information able to led to the identification of interviewees and to reflect results only in aggregate. The rules were set to make people comfortable in taking the survey and try to give them the highest degree of freedom and objectivity in providing answers.

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After the interviewees’ acceptance to participate in the study the writer has forwarded them the link to the take the survey online. The first rate of response to the outreach email saw only two companies out of thirty-five accepting to take the survey. After having waited two weeks the writer has forwarded a recall email to companies invited that had not replied to the first outreach. This additional effort resulted in other 6 companies deciding to participate in the study.

As agreed with participants, according to the engagement rules, the names of these eight companies will not be divulgated.

As expressed in the outreach email and in the engagement rules participants’ involvement might have required additional thirty-minutes call to go deeper in some areas addressed by the study. Unfortunately, the limited amount of time between the reception of survey results and the deadline to present this study has not allowed the writer to carry out follow-up calls.

Contents of the survey The survey (available in Annex D) follows some of the topics addressed in the literature review. Not every subject was included in order to create a survey whose length would have appeared fair and acceptable to interviewees.

Starting from the literature review, the study assesses the transformational effects on the following business activities: §

Product Development & Manufacturing o Product design o Product upgrades and software-enabled customization o Product release

§

Logistics o Transparency & visibility 42

o Service enablement §

Marketing & Sales o Pricing models and pricing changes o Customer relationship o Service enablement

§

Security & Data Management

The literature review proposes a summary of connected products capabilities and features that can be combined by smart product manufacturers to pursue different business models and strategies. The survey investigates: §

Which capability/capabilities constitute/s the core of the offering

The survey also challenges the academic literature with regard to connected ecosystem, connected product systems and systems of systems. §

Relation between size and service value

§

Stage of development of manufacturer’s strategy

§

Ecosystem openness

§

Ecosystem composition (industry perspective)

Finally, the research wants to estimate the financial results related to undertaking such a transition, the impact of value added services enabled by smart products, of smart and traditional products themselves and of the new data gathered from products.

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5.

The analysis of the results

As mentioned in the Methodology section, eight companies involved in the transition at issue have accepted to take the survey and actively participated in the study. While the engagement rules do not allow the writer to share their identity, it is fair and relevant to underline their respective field of activities and their industry.

The eight discrete manufacturers involved in this study are actively operating in the following industry: §

Industrial pumps

§

Energy

§

Transportation

§

Water management

§

Sensing and control equipment

§

Industrial equipment

§

Supply chain and logistics

The respective current and former employees were holding or had hold the following roles at the time of the study: §

Partner

§

CTO, Analytics Business Unit

§

Distribution Manager

§

Data Manager

§

Vice President, Marketing & Strategy

§

Investment Manager

§

Marketing Manager

§

Director

44

The approach of the analysis is to challenge what proposed by the academic literature against what is actually occurring as express by discrete manufacturers themselves. Indeed, the survey sections were built with this particular purpose: the analysis of the results will follow some of the points addressed in the literature review Amongst companies interviewed 75% were historically traditional manufacturers (thus with no connected capabilities at the beginning of their activity) while 25% of them was born with at least a minimum of connected offering in its portfolio. Nevertheless, all of them is now undertaking a deep transformational effort to increase and further develop the production of smart connected products to extent never seen before in their history.

H1. Capabilities of smart connected products & corporate strategies Figure 8, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014)

The study wanted to provide some evidences about the extent to which each or combinations of these capabilities were currently deployed in the market, constituting the core offering of the discrete manufacturers interviewed (H1).

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Evidence 1

As shown in Evidence 1 Monitoring, the most basic capability, is currently provided by almost all discrete manufacturers interviewed. This is quite evident as it is the mininum viable offering of a smart connected product. On the other hand Control is deployed by 62,5% and this descending trend continues with Optimization (50%) up to Autonomy (only 20 %).

According to the literature review this can be explained by two factors: ยง

Not necessary all product offering led to autonomy: each capabilities provide value to an extent that depend on a specific use case

ยง

The technical complexity augment exponentially moving from monitoring versus autonomy

These results show how monitoring, control and optimization constitute already a reality in the market while autonomy has not already reached a wide diffusion.

H2. Product Development and Release Another aspect challenged by the survey is the rise of new practices in Product Development (H2), strongly sustained by the additional and more and more important software component.

46

Incremental product design and evergreen product design The first trend identified by academics was the ever increasing continuous timing of product upgrades and product releases: functionalities can now be enhanced via the software components which, as opposed to the hardware, can be customized remotely, easily extended without the need of multiple and subsequent releases.

Evidence 2

All the participants have declared to enjoy Incremental Product Design, thus releasing early product in the market and adding the capabilities mentioned above later on leveraging on the “soft� nature of smart connected product capabilities. According to the result more than simple hypothesis this seems to be a well-established reality. This is also consistent with the idea that releasing early a smart product in the market will help gather extremely relevant data in order to properly extend functionalities according to the customers’ needs. This is also confirmed by the following Evidence.

Evidence 3

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Indeed, all companies interviewed believe that the capabilities of smart products will deeply transform product design and quality management, making shift the timing of these activities to sporadic, discrete events to a rather continuous and ongoing process.

Software upgrades, software-enabled customization and low-cost variability The next step of the analysis is to understand to what extent a software upgrade can replace a product release: intuitively the hardware component will reach at a certain point the obsolescence.

Evidence 4

62,5% of discrete manufacturers interviewed see a software-based product upgrade as a viable alternative to a new product release. While discrepancies in participants responses are largely due to the nature of their activities and to the degree of hardware innovation of their industry, the analysis of Evidences 2, 3 and 4 seems to support what expressed by the literature review so far.

The last point addressed by this section related to product development wants to assess the stage of development of another relevant trend emergeing from early academic research: the Customization via Software.

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Evidence 5

In line with previous results of this section, 75% of interviewees declare to be able to target different customer simply by using a different software on the very same product. This is a very interesting result if the cost of software and hardware components are to be compared: smart connected products are able to provide an unseen variability capacity in terms of product features, the so-called Low-Cost Variability.

In conclusion with respect to Product Development, Product Release and the influence of software on these activities results of the study perfectly align with the hypothesis provided by the academic literature here reviewed.

H3. Logistics Another relevant aspect of the transformational effect provided by smart connected products is related to the increase in visibility and transparency throughout the supply chain: the literature states that embedded connectivity in smart products can indeed provide the ability to provide a real-time tracking capability. While this have tremendous benefit in inventory activities, the extent to which this capability is applicable to discrete manufacturers varies widely according to the nature of their business.

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Evidence 6

Evidence 7

Also in this section results sustain what proposed by academics: 87,5% of participants are already able to benefit from an enhanced supply chain visibility and even more notably 62,5% are currently monetizing this as a service with respect to their downstream logistics. This is the first Internet of Things-enabled service we encounter in this study, and it is something that was traditionally out of a traditional manufacturer scope of activity.

This is the widest section of the analysis and was a central part of the survey taken by companies interviewed.

H4. The stage of development of the transition toward connected products The first preliminary point to be addressed is to which extent smart products are taking over traditional ones. With respect to this the literature review says that traditional and smart products will co-exist still for quite a long time (H4).

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Evidence 8

Very interestingly 25% of participants have already completely shifted their business toward smart, connected products and hence abandoning the production of traditional, “dumb” products.

So this phenomenon is occurring earlier than what imagined by previous studies. Of course in the analysis of this data one should mind how relevant is the scope of activity of each companies: large diversified manufacturers will be likely to take much more time to complete the transition.

H5. Value added, smart product-enabled services The core concept of smart connected products when related to discrete manufacturers is the possibility to provide smart, value added services using the product itself as a service platform (H5).

As seen in the literature review this poses on two main aspects: §

a: The capabilities of the smart product itself, which can be combined to provide valuable services

§

b: The before unseen data availability about the customer, usage, performance, processes coming from the product and, in some cases, from the system in which the product is a connected component.

Not surprisingly 75% of participants were already providing some sort of product related services before the advent of smart connected products.

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Evidence 9

Indeed, the novelty consists in how these services are conceived, delivered, consumed and related to the wider ecosystem.

Evidence 10

HP 5. a. is supported by the results shown in Evidence 10, reporting that in 87,5% of the cases a smart product enabled the launch of new value-added services. Starting from this, in order to understand what is the nature of these services and why these are different from services provided before the arrival of smart connected products, the study wants to understand if the competitive scope of manufacturers has changed.

Evidence 11

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Newly enabled services were traditionally provided by independent third parties before in 42,9% of the cases. The remaining 57,1% is likely to fall either in services never provided before (e.g. inventory visibility) or in amelioration of services traditionally provided by discrete manufacturers.

The literature review suggests that the expansion of manufacturers activities in fields never approached before will be a recurrent phenomenon: the results of this study are not strong enough to fully confirm this hypothesis but, nevertheless show that at least in some industries, independent third parties service providers are being attacked by smart product manufacturers.

Also HP 5.b. is supported by some findings of this study, as shown in the following Evidences 12 and 13.

Evidence 12

Evidence 13

In 100% of the cases data collected from products were fundamentals in both enabling the launch of the services and in their consequent enhancement, accordingly with what emerged in 53

the analysis of Product Development and Release. Thus, in conclusion, these two hypotheses are fully supported by the finding of this research.

More in detail, two services that are often mentioned by academic literature and business reports are related to equipment maintenance: Remote Maintenance and Preventive Maintenance. Indeed, smart connected products are supposed to unlock the ability to fix remotely issues as they occur or even be able to predict failures and hence prevent them before they happen.

Evidence 14

Evidence 15

As evident from Evidences 14 and 15, these two services are not just part of the hype around the Internet of Things but they already constitute a valuable offering of some discrete manufacturers. Indeed 71,4% of participants stated that they are already providing preventive maintenance services while all the remaining part is planning to do so. Similarly, with respect to remote maintenance more than half of interviewees is currently offering remote 54

maintenance while 28,6% is developing this service and only the 14,3% is neither providing it neither planning to. These findings, together with Evidence 7 previously analyzed, are supporting the hypotheses expressed by academics. Notably, we can also underline a consistency with the findings related to the capabilities: remote maintenance (which requires control) sees a lower degree application than preventive maintenance (which requires monitor) due to the higher complexity of the technological solution.

H6. Pricing and customer relation The result of the transition from the sales of discrete products towards the sale of productenabled services is likely to affect pricing and revenue model, according to the most recent academic researches (H6). This should consist in a lower relevance of the product price in favor of a newly created price for enabled services or even new pricing model for the product per se, made possible by the capabilities of smart, connected products (e.g. pay-per-usage, event-based pricing models, ‌) Evidence 16 addresses the so-called Hardware Commoditization (the product itself), in other words the loss of importance of the product physical components in favor of smart components that, according to literature, should reflect in their prices.

Evidence 16

Findings do not fully support this hypothesis, showing that 75% of participants has not changed their pricing for the product decreasing it. This is due to many reasons: 55

ยง

the fact that discrete manufacturers may see product-enabled services as an additional revenue stream more than a replacement for one coming from products: the value surplus provided by services require an increased overall price more than a similar but differently composed one.

ยง

Discrete manufactures provide the service at no cost in order to make the product more appealing and marketable

While the product price is not yet changing, the way it is calculated is. According to the academic literature, smart products can enable different pricing models based on consumption. This, in case of B2B discrete manufacturers, should allow customer to replace a one-time capital expenditure with an on-going, pay-as-you-need service model.

Evidence 17

Findings show how more than half of discrete manufacturers interviewed have changed the basis of their pricing model, moving toward more dynamic and service-like approaches.

Finally, smart connected products are supposed to tighten the relationship between manufacturers and customers thanks to: ยง

Ongoing, continuous exchange of data and feed-backs

ยง

Increased collaboration

ยง

Shift towards a service model

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Evidence 18 challenges this hypothesis against discrete manufacturers’ perspective.

Evidence 18

Findings show that in 100% of discrete manufacturers smart, connected products had reinforced their relationships with clients, thus fully supporting the hypothesis of the academic literature.

H7. Product System and System of Systems One of the more intriguing aspect of smart connected products is the network of connections that is now made possible between different components of a certain process or activity. The literature review defines Smart Product, Product System and System of Systems as the incremental steps of this phenomenon. This should result in less neat industry boundaries and increased cooperation between companies and different sectors based on more mutual data exchange. Moreover, the size of the system in which a given product is placed should be positively correlated with the value of services provided within the system. These hypotheses are challenged by the current section of the research.

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The ecosystem evolution Evidence 19 assesses the general stage of development of this phenomenon.

Figure 9, (Porter and Heppelmann, How Smart, Connected Products Are Transforming Competition, 2014)

Evidence 19

Findings of the analysis show that the academic literature has done a great job in defining the fundamental steps of this process. While half of participants affirms to be in the first stage of this evolution, smart connected product, we can notably underline that 37,5% has already moved towards a product system and 12,5% has already achieved the final stage, the so called system of systems.

The Evidence 20 shows how 25% of manufacturers is already able to sell on the market a full proprietary product system while the other 75% is currently providing a single product, that

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can eventually be placed into a system of different manufacturers’ products. This evidence shows that what proposed by the academic literature is actually happening.

Evidence 20

The relevance of this framework, proposed by Porter and Heppelmann, is also stressed by the following Evidence 21. Another important point is that even though some of them are not yet in the late stages of the evolution, everyone is strategically looking to reach the end of it.

Evidence 21

Indeed, 100% of companies interviewed have confirmed that achieving a system of systems is the final objective of their connected strategy.

Increased cooperation Going further this research has tried to understand if discrete manufacturers are facing the consequences that academic research links to this evolution. Evidence 22, challenges the academic hypothesis of increased cooperation.

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Evidence 22

Findings show how 87,5% of participants let other players in the ecosystem access their product data, thus allowing them to provide a related service. This very high percentage is definitively consistent with the related hypothesis, and reinforced by the following Evidence 23.

Evidence 23

More than half of participants affirm that they are providing newly enabled services in a partnership with another firm, of course gaining mutual benefits. Another evidence supporting the hypothesis of increased cooperation is provided by Evidence 24.

Evidence 24

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One tier of discrete manufacturers provides data to other while the remaining two tiers provide and receive data from other players, meaning that none of companies interviewed is exclusively holding the information gathered from smart connected products.

Correlation between ecosystem size and service value But why would companies give away such valuable data? The academic literature suggests that this is due to the positive correlation between the size of the ecosystem and the value of Internet of Things-enabled services.

Evidence 25 challenges this hypothesis against manufactures’ perspective.

Evidence 25

Also this academic hypothesis is definitively supported by participants’ responses as well as their strategies in terms of sharing data and information about the system in which they operate.

Smart products are reshaping industry boundaries Finally, academic researches propose that industry boundaries will become thinner and more confused due to increased cooperation, potential synergies across different sectors and the launch of new services that go beyond the scope of traditional manufacturers.

Evidence 26 challenges this hypothesis analyzing the percentage of players in the ecosystem coming from different industries or verticals.

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Evidence 26

Interestingly, also this academic belief is supported by some evidences provided by this study.

Indeed, 75% of participants currently shares their ecosystem with players coming from a different industry: §

37,5% state that 10-20% of the ecosystem players come from a different vertical

§

Another 37,5% state that up to 40% of the players in the ecosystem come from a different vertical

§

25% state they are not aware of the composition of their ecosystem.

H8. Data exploitation and monetization Data generation are doubtless one of the fundamental aspect of smart connected products and more generally of the Internet of Things. The literature review suggests that companies will be able: §

to monetize them externally to third parties

§

to exploit them for internal operations, though not being able to take full advantage of them due to their very large amount

This section of the study challenges these hypotheses against discrete manufacturers’ perspective.

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Evidence 27

With respect to data monetization only 37,5% of participants stated that they are currently able to generate revenues from the sale of product data to third parties. The reason for this limited percentage can be imputed to the novelty of smart connected products and to the fact the ecosystems are not yet well-developed. Findings are not enough strong to support this hypothesis.

This study tries also to understand the weight of this monetization in manufacturers total revenues.

Evidence 28

In line with previous results 62,5% of participants reported that revenues generated by data do not go further than 20% of the total revenues, while 37,5% of participants stated that they are not in possess of this information

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Evidence 29

On the other hand, findings shown by Evidence 29 demonstrate that companies are not actually able to fully exploit their data, not even internally. Indeed, 37,5% of participants stated that they cannot exploit more than 40% of product-generated data. Only 12,5% of discrete manufacturers interviewed are able to exploit more than 80% of these data.

In conclusion the hypotheses provided by academic literature about data monetization seem to be not yet established according to discrete manufacturers interviewed, while difficulties in effectively handling and exploiting product-generated data are confirmed by findings.

Few financial considerations In order to include in this study a financial perspective of the transition, some additional questions not related to academic hypotheses were included in the survey taken by discrete manufacturers.

Firstly, the survey tries to discern the financial weights of smart products and conventional products respectively.

Evidence 30

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As shown in Evidence 30, revenues generated by the sale of smart connected products are still limited: only 12,5% of participants go above 80% of total revenues while 37,5% report that these do not exceed 20% of total revenues. Another 37,5% say that revenues generated by smart products fall in 40-60% of total revenues.

Evidence 31

On the other hand, Evidence 31 present the percentage of revenues generated by conventional products. As 62,5% of participants still generates more than 40% of their revenues from conventional products (including a 37,5% of participants that go beyond 80% of revenues), these confirm to be still a very relevant financial source for discrete manufacturers interviewed.

More, the financial contribution from product-enabled services is taken into account. As evident from Evidence 32, 75% of manufacturers generate less than 20% with the sale of services while a 12,5% of participants report it to fall between 20-40% of total revenues.

Evidence 32

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The conjoint analysis of these findings, in line with academic belief, confirm that productenabled services and smart products are becoming a reality but they are still far from some revolutionary and hyped scenarios mentioned in blogs, news and some business reports.

Finally, this study wants to understand whether this transition has been economically beneficial, at least in terms of revenues, for discrete manufacturers invited to participate.

Evidence 33

Evidence 33 shows how half of participants has enjoyed higher revenues and the other half has not while 25% rather not disclose this information. A more meaningful information is provided by the following Evidence 34.

Evidence 34

Indeed, 50% of participants stated they see higher margin after the transition from conventional to smart products.

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6.

Discussion

This section of the research provides a brief summary of findings analyzed in the previous part, acknowledges the limits of this study and formulates some recommendations for further research.

Conclusion This study has overall confirmed that hypotheses regarding the transformation effect of smart, connected products on discrete manufacturers are currently taking place, sometime not to the extent proposed by the literature review.

The following is a summary of the results of the analysis compared to the hypotheses identified in the literature review of this study.

H1: findings confirm that the capabilities outlined by the academic literature are already offered in the market. Consistently with what stated in the literature review, autonomy is today the less diffused capability while monitoring, control and optimization are already deployed by at least 50% of participant, proving to be a reality in the smart product offering.

H2: findings show how the hypotheses on the transformational effect on product development, design and release, largely due to the software components of smart connected products, are actually occurring amongst participants. All of them have enjoyed incremental product design, 62,5% of them uses software-based product upgrades and 75% is able to target different customer with a software-based customization.

H3: findings report 87,5% of discrete manufacturers able to increase inventory and supply chain visibility thanks to their smart, connected products, while 62,5% of participants is already able to monetize these services with respect to their downstream logistics.

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H4: findings report that 25% of companies interviewed has already completely shifted their production towards smart, connected products. This is partially in conflict with the academic literature that was imagining a much slower pace for this phenomenon.

H5: with 87,5% of participants stating that smart connected products have allowed them to launch value-added services the result of the analysis totally support what proposed by this hypothesis. Also, is fully supported the idea that at the basis of this enablement there are product data with 100% of participants stating that product-generated data were fundamental both in the conception and in the enhancement of these services. More, the hypothesis that these services will allow discrete manufactures to expand their scope of activity is confirmed by the 42% of participant currently offering service before provided by third parties. Finally, the rise of both preventive maintenance and remote maintenance services is confirmed by this study with the totality of interviewees offering these services or planning to do so.

H6: Findings do not support yet the hypothesis of a physical product commoditization (only 25% of participants stated this is occurring) while confirm the emergence of new pricing enabled by the capabilities of smart products and related services (57,1% of manufacturers).

Finally, 100% of companies has stated that smart products had reinforced their customer relationships, perfectly in line with what proposed by the literature review.

H7: Findings related to this hypothesis fully support what proposed in terms of ecosystem evolution (notably reporting that 50% of discrete manufacturers has reached at least the second stage of development), indeed 100% of participants see a system of systems as the final achievement of their current strategy. Within the ecosystem the level of cooperation is consistent with what stated by the academic literature, with 87,5% of companies letting third parties accessing their data and 57,1% affirming to provide services in a partnership with another firm. More, consistently with the literature 71,4% of participants say that the value of their services correlates to the size of the ecosystem. Finally, also the transformational effect 68

on industry boundaries seems to be confirmed with 37,5% stating that 10-20% of the ecosystem players come from a different vertical and another 37,5% stating that up to 40% of the players in the ecosystem come from a different vertical.

H8: findings are consistent with the hypothesis of a difficult exploitation of the large amount of data with only 12,5% of participants reporting to be able to exploit more than 80% of their product data. Findings also confirm the emergence of external data monetization with 37,5% of interviewees already able to do so.

The writer think that the academic literature has done an excellent job in spotting the trends, phenomena and transformational effects challenged by this study. Indeed, though some of them might not be a reality yet this research shows both facts and early signs of their emergence.

Smart connected products and product-enabled services have still a long way to go to meet the great expectations associated with their adoption. It is too early today to know whether they will be able to open us a new connected world.

Limitations This study has some limitations and this section is meant to underline them.

Firstly, the writer was not able to access a larger data set and to interview a greater number of discrete manufacturers. This do not allow the results of this study to led to any kind of generalization.

Secondly, this study does not take into account extremely relevant differences amongst the universe of companies interviewed. Being the Internet of Things a concept applicable to almost any industry a general study is likely to not put a fair weight on characteristics typical of each sector, which could have possibly limited the relevance of the findings.

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Thirdly, the writer has not been able to conduct follow-up phone interviews with companies invited to participate. These would have been indeed very useful to go a step further in the analysis and take into account the potential biases previously highlighted.

More, the nature of smart connected products spans over a multitude of different disciplines and business functions. The literature review of this study is based solely on academic literature addressing smart, connected products. Nevertheless, a wider review also on related disciplines, would have benefited the result of this work.

Finally, the little availability of data had not allowed the writer to go further in developing the conclusions and enriching the literature but have rather limited him to a general validation of the hypotheses previously expressed.

Recommendations for future research The topic here addressed is rather a novelty and the writer hopes that someone will proceed from this point, hopefully helped by what found by this study.

Further research should: ยง

Starting from the literature review of this study, identify and challenge hypotheses not addressed by this study, e.g.: Security, Human Resources, Data Analytics

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Either be a very extensive quantitative study on a large number of companies or a detailed portfolio of case studies devoted to a single, precise vertical.

ยง

Take into account differences between companies undertaking this transition and companies that were founded to produce smart, connected products.

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Take into account differences between manufacturers that are large conglomerate groups and companies that provide a single product line in a given vertical.

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Provide a suggested framework to manage this complex, risky and potentially rewarding transition taking into account most recurrent challenges and best practices.

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Further address the correlation between smart products and reinforced customer relationships

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Further study the evolution of smart product-enabled ecosystems, their structure, context, connections following the 6c framework here reviewed.

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Address more in detail the effect of smart connected products on competition, starting from Porter’s Five Forces.

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Bibliography Adner and Kapoor. (2011). Value creation in innovation ecosystems: how the structure of technological interdependence affects firm performance in new technology generations.

Strategic Management Journal.

McKinsey Global Institute. (2015). The Internet of Things: mapping the value behind the hype.

Porter and Heppelmann. (2014). How Smart, Connected Products Are Transforming Competition. Harvard Business Review.

Porter and Heppelmann. (2015). How Smart, Connected Products Are Transforming Companies. Harvard Business Review.

Ronga, Hu, Lin, Shi, Guo. (2014). Understanding business ecosystem using a 6C framework in Internet-of-Things-based sectors.

SINTEF. (2013). Big Data – for better or worse.

Wikipedia. (2016). Discrete Manufacturing.

Zott and Amit. (2007). Business Model Design and the Performance of Entrepreneurial Firms.

Organizational Science.

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Annexes Annex A Annex A shows the list of companies approached to participate in the study.

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GRUNDFOS

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Hitachi Construction Machinery

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Philips

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Telenor connexion

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Bosh Software Innovation

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AircraftIT MRO

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General Electric

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GE Digital

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Caterpillar

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Fern and Rose

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ABB

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SAP

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Honeywell

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CNH Industrial

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Alstom

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AGCO

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Schneider Electric

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Rolls-Royce

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Xylem Inc.

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Diebold

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Lockheed Martin Corporation

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Sysmex

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Fujitsu

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Siemens

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Samsung Electronics

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Thales Group

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United Technologies

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DJI

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Konecranes

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Accenture

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Danaher Corporation

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Cognizant

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Dassault Systemes

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Hyundai Heavy Industries

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Annex B Annex B shows the outreach email used to contact potential participants.

Dear ----, I am contacting you in relation to the Master Thesis that I am currently writing at ESCP Europe Business School, as part of the Master in Management.

The research is focused on the potentially transformative effect of smart connected products on influencing discrete product manufacturers to move from a pure product offering to a hybrid or pure service offering (i.e. product as a service). The goal is to enhance the academic literature while hopefully challenging some of the hype around this topic in order to understand the real opportunities and challenges in the Connected Industry. The focus is Marketing & Sales, with some digression into organizational issues and IoT technology.

I would love to have ---- represented in this study. Participation would be focused on a 20 minute online, closed-end survey (36 closed-end questions) tailored for manufacturers that started this transition. I could potentially ask for a short follow-up phone interview to go deeper in some key aspects of the research. The focus is Marketing & Sales, with some digression into organizational issues and IoT related topics. All results will be confidential and the results will be reflected only in aggregate. The full study will be distributed to all participants.

Your opinion would bring an inestimable contribution to the study and I would offer in return an aggregated report of my findings.

I would give you access to it before the publication date, after which the thesis will be integrated in my ESCP Europe academics database.

Here is attached the literature review challenged by the survey. The survey does not require you to read the literature review if you are not willing to.

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You can also find attached the engagement rules where you can find an executive summary of topics addressed in the survey.

Sincerely, Alberto Cresto

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Annex C The Annex D shows the Executive Summary and Engagement Rules proposed to participants.

The transformational effect of smart connected products on discrete manufacturers: Assessing the stage of development of what proposed by the academic literature.

Executive Summary This thesis objective is to assess through specific use cases the transformational effect provided by smart connected products on discrete manufacturers. The methodology is to challenge what proposed so far by academic literature in order to understand how many of these hypotheses are already occurring in the business world.

The survey is composed of 36 closed-end questions on the following topics, mirroring the structure of the research literature review. The tools used is Google Forms.

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Smart connected products o Capabilities §

Monitor

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Control

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Optimization

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Autonomy

o Effects on competition §

Product System

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System of Systems

o Transformational effects on discrete manufacturers’ activities §

Product Development

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Manufacturing 76

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Logistics

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Marketing & Sales

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After-Sale Services

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Security

o Organizational implications §

Coordination

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New functions/group

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Rules of engagement The writer of this thesis will not share any of your personal information able to lead to the interviewee identity.

The survey will take less than 20 minutes and is composed of 36 closed-end questions.

The data will be used for a to challenge the hypotheses proposed by academic literature about the transformational effect of smart connected products on discrete manufacturers.

The output will be shared with you before the publication date for your review and will be accessible in the ESCP Europe academic database.

Paris, France 11.04.2016 _____________________ Alberto Cresto ESCP Europe Master Student

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Annex D Annex D reports the Survey taken by participants in its integrality.

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