Sunday, May 31, 2015

Michael Porter sees Connectivity as Strategic Enabler

Last week I gave a keynote address on the Internet of Things to a group of primary sector companies, such as farming, fishing, timber, wine, etc.  The theme of the talk was digital disruption and, in particular, the Internet of Things.

From a business strategy perspective, Michael Porter and James Heppelmann's recent Harvard Business Review article provides a thorough and substantial argument for how the Internet of Things ('IoT') is already a disruptive force in many industries. Primary industries, such as farming, feature heavily throughout the Porter and Heppelman article. For example, GPS-enabled devices use and record field locations to more accurately help farmers understand inputs and outputs in agriculture production.

Manufacturing is likewise no longer just about producing the physical product as 'smart' products communicate data to the user or back to the manufacturer, or both.  Smart products provide value by linking to databases and 'big data' analytics in what can be called the 'service cloud,' a space that reaches far beyond traditional manufacturing plants.  As such, connectivity adds value.  As Porter and Heppelman put it,

"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.  The result is a virtuous cycle of value improvement.

Not surprisingly, Michael Porter interprets the strategic implications of the Internet of Things through his famous '5 Forces' model of industrial competition. Each of the five forces can be extended or undermined by machine-to-machine connectivity.  And, not surprisingly, the authors remind us that, just as technology in general is an enabler, not a strategic advantage in and of itself, so too, the Internet of Things will favor those with a strong, clear strategic platform to take advantage of machine-to-machine connectivity.

“What makes smart, connected products fundamentally different is not the Internet, but the changing nature of ‘things.’  It is the expanded capabilities of smart, connected products and the data they generate that are ushering in a new era of competition.  Companies must look beyond the technologies themselves to the competitive transformation taking place.

Connectivity is central to Porter and Heppelman's new work.  Indeed, the term is used frequently in the article, especially early on as they paint a picture of the current competitive and technological landscape.  Moreover, in their new model of the 'technology stack' the central element--right in the middle of the model--is 'connectivity,' enabling smart products to provide additional value and serve old and new customer needs, which in turn provides value to firms who can create and/or harness the Internet of Things and other connective technologies.

The authors suggest that, “the third wave of IT-driven transformation thus has the potential to be the biggest yet, triggering even more innovation, productivity gains, and economic growth than the previous two (automation and the rise of the Internet).”

Not only does Porter see increased connectivity as a new source of competitive advantage,  he also sees the potential of the Internet of Things to solve important human problems and make life better.  Smart products have the potential of helping manufacturers make better products, but also empowering individuals with useful personal data, for example health data from bio-sensors in wearable devices.

Whether or not you share Porter and Heppelmann's optimism for the Internet of Things, if your company is stalled in the headlights when it comes to digital strategy, put this article on your boss's desk!

For more on the Internet of Things, see my post called the Internet of Everything, when MIT's Technology Review's proclaimed 2013 as the "Year of the Internet of Things."


Michael Porter and James Heppelmann, Harvard Business Review, November, 2014.

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