Here is an excerpt from an article written by Michael E. Porter and James E. Heppelmann for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

* * *

The evolution of products into intelligent, connected devices — which are increasingly embedded in broader systems — is radically reshaping companies and competition.

Smart thermostats control a growing array of home devices, transmitting data about their use back to manufacturers. Intelligent, networked industrial machines autonomously coordinate and optimize work. Cars stream data about their operation, location, and environment to their makers and receive software upgrades that enhance their performance or head off problems before they occur. 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.

In our previous HBR article, “How Smart, Connected Products Are Transforming Competition” (November 2014), we examined the implications external to the firm, looking in detail at how smart, connected products affect rivalry, industry structure, industry boundaries, and strategy. In this article we’ll explore their internal implications: how the nature of smart, connected products substantially changes the work of virtually every function within the manufacturing firm. The core functions—product development, IT, manufacturing, logistics, marketing, sales, and after-sale service—are being redefined, and the intensity of coordination among them is increasing. Entirely new functions are emerging, including those to manage the staggering quantities of data now available. All of this has major implications for the classic organizational structure of manufacturers. What is under way is perhaps the most substantial change in the manufacturing firm since the Second Industrial Revolution, more than a century ago.

Implications for Strategy

In a smart, connected world, companies face 10 new strategic decisions. A firm’s choices will have a major impact on every activity in its value chain.

o Which set of smart, connected product capabilities and features should the company pursue?
o How much functionality should be embedded in the product and how much in the cloud?
o Should the company pursue an open or closed system?
o Should the company develop the full set of smart, connected product capabilities and infrastructure internally or outsource to vendors and partners?
o What data must the company capture, secure, and analyze to maximize the value of its offering?
o How does the company manage ownership and access rights to its product data?
o Should the company fully or partially disintermediate distribution channels or service networks?
o Should the company change its business model?
o Should the company enter new businesses by monetizing its product data through selling it to outside parties?
o Should the company expand its scope?

The New Product Capabilities

To fully grasp how smart, connected products are changing how companies work, we must first understand their inherent components, technology, and capabilities—something that our previous article examined. To recap:

All smart, connected products, from home appliances to industrial equipment, share three core elements: [begin] physical [end] components (such as mechanical and electrical parts); [begin] smart [end] components (sensors, microprocessors, data storage, controls, software, an embedded operating system, and a digital user interface); and [begin] connectivity [end] components (ports, antennae, protocols, and networks that enable communication between the product and the product cloud, which runs on remote servers and contains the product’s external operating system).

Smart, connected products require a whole new supporting technology infrastructure. This “technology stack” provides a gateway for data exchange between the product and the user and integrates data from business systems, external sources, and other related products. The technology stack also serves as the platform for data storage and analytics, runs applications, and safeguards access to products and the data flowing to and from them.

This infrastructure enables extraordinary new product capabilities. First, products can monitor and report on their own condition and environment, helping to generate previously unavailable insights into their performance and use. Second, complex product operations can be controlled by the users, through numerous remote-access options. That gives users the unprecedented ability to customize the function, performance, and interface of products and to operate them in hazardous or hard-to-reach environments.

Third, the combination of monitoring data and remote-control capability creates new opportunities for optimization. Algorithms can substantially improve product performance, utilization, and uptime, and how products work with related products in broader systems, such as smart buildings and smart farms. Fourth, the combination of monitoring data, remote control, and optimization algorithms allows autonomy. Products can learn, adapt to the environment and to user preferences, service themselves, and operate on their own.

* * *

Here is a direct link to the complete article.

Michael E. Porter is a University Professor based at Harvard Business School.

James E. Heppelmann is the president and CEO of PTC, a software company that helps manufacturers create, operate, and service products.