Waves of Technology

Information communication technology is revolutionizing products.  Once composed solely of mechanical and electrical parts, products have become complex systems that combine hardware, sensors, data storage, microprocessors, software, and connectivity in myriad ways.  These “smart, connected products”-made possible by vast improvements in processing power and device miniaturization and by the network benefits of ubiquitous wireless connectivity-have unleashed a new era of competitions.

Smart, connected products offer exponentially expanding opportunities for new functionality, far greater reliability, much higher product utilization, and capabilities that cut across and transcend traditional product boundaries.  The changing nature of products is also disrupting value chains, forcing companies to rethink and retool nearly everything they do internally.

These new types of products alter industry structure and the nature of competitions, exposing companies to new competitive opportunities and threats.  They are reshaping industry boundaries and creating entirely new industries.  In many companies, smart, connected products will force the fundamental question, “What business am I in?”

Smart, connected products raise a new set of strategic choices related to how value is created and captured, how the prodigious amount of new.  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.

The phrase “internet of things” has arisen to reflect the growing number of smart, connected products and highlight the new opportunities they can represent.  Yet this phrase is not very helpful in understanding the phenomenon or its implications.  The internet, whether involving people to things, is simply a mechanism for transmitting information.  What makes smart, connected products fundamentally different is not the internet, but the changing nature of the “things.”  It is the expanded capabilities of smart, connected products and the data they generate that are ushering in a new era of competition.

The Third Wave of IT-Driven Competition

Twice before over the past 50 years, information technology radically reshaped competition and strategy; we now stand at the brink of a third transformation.  Before the advent of modern information technology, products were mechanical and activities in the value chain were performed using manual paper processes and verbal communication.  The first wave of IT, during the 1960s and 1970s, automated individual activities in the value chain, from order processing and bill paying to computer-aided design and manufacturing resource planning. The productivity of activities dramatically increased, in part because huge amounts of new data could be captured and analysed in each activity.  This led to the standardization of processes across companies and raised a dilemma for companies about how to capture IT’s operational benefits while maintaining distinctive strategies.

The rise of the internet, with its inexpensive and ubiquitous connectivity, unleashed the second wave of IT-driven transformation, in the 1980s and 1990s.  This enabled coordination and integration across individual activities; with outside suppliers, channels, and customers; and across geography.  It allowed firms, for example, to closely integrate globally distributed supply chains.

The first two waves gave rise to huge productivity gains and growth across the economy.  While the value chain was transformed, however, products themselves were largely unaffected.

Now, in the third wave, IT is becoming an integral part of the product itself, Embedded sensors, processors, software and connectivity in products, coupled with a product cloud in which product data is stored and analysed and some applications are run, are driving dramatic improvements in product functionality and performance.  Massive amounts of new product-usage data enable many of those improvements.

Another leap in productivity in the economy will be unleashed by these new and better products I addition, producing them will reshape the value chain yet again, by changing product design, marketing, manufacturing, and after-sale service and by creating the need for new activities such as product data analytics and security.  This will drive yet another wave of value-chain-based productivity improvement.  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.