In this digital age, competition between companies is rapidly changing and industry boundaries are transforming. But what does it mean for companies?
To understand the competitive and industry transformation taking place, you need to look beyond the technologies themselves. The illustration below shows how the basis for competition has shifted from product to product-system to system-of-systems.
Based on Michal E. Porter and James E. Heppelmann: How Smart Connected Products are Transforming Competition, Harvard Business Reviews, Nov. 2014
Historically, companies have competed on products. These products are increasingly becoming smart – with computers inside them – and connected, which allow them to draw on functionality from the cloud and communicate with other products. The value of one product can now be optimised with other related products, which shifts the basis for competition from the functionality of the discrete product to the performance to the broader product-system. For example, a tractor company might now be part of a farm equipment product-system, which integrates closely linked farm equipment such as tractors, tillers and planters to enable better overall performance.
Increasingly, we also see competition shift from product-systems to broader system-of-systems, which link an array of product systems together and draw on related external information. For example, the tractor company might now find itself competing in a broader farm management system-of-system and a car company might be competing in a broader smart city system-of-systems. See illustrations.
A hearing aid company might become part of a broader healthcare and wellbeing system-of-system, as illustrated below.
Companies whose products have the greatest impact on the total system performance will be in the best position to capture value from it. New system integrators such as tech companies and start-ups might be able take control – and profits – from existing product focused companies.
In the digital age all companies need to consider where they compete – at the product, product-system or system-of-systems level. We believe, the more they move to the right, the more value they are able to create and capture.
How smart, Connected Products Are Transforming Competition, Porter and Heppelmann, HBR November 2014.
Life in the Digital Vortex, Global Center for Digital Business Transformation – an IMD and Cisco Initiative, 2017
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