16 Sep 2015 18:23 IST

Strategy in the world of ‘Internet-of-things’

It could help organisations achieve a formidable competitive advantage and superior performance

The world is curious about what’s the next big thing to happen in the IT space, and the “internet of things’ is the ‘it’ thing for the moment.

While IT specialists call it the 5th wave (Mainframe, PC, Interconnected PCs, and Internet being the earlier four waves), Strategy Guru Michael Porter, however, calls it the 3rd. His reckoning is that the earlier two waves that disrupted the way businesses are run are the invention of computers and invention of the Internet.

While Porter in his HBR article How smart, connected products are redefining competition has assessed the impact of these on strategy, I would like to use a combination of some of the frameworks laid out in his piece, along with some frameworks existinging in the realms strategy and value creation, to illustrate my view/opinion on how the Internet of things will impact strategy management.

Potential impact

Before we begin on that, let us spend some time on looking at the potential impact of ‘Internet of things’ or ‘I-o-T’ in general.

While the first wave of computerisation enabled organisations to handle large data and manipulate the same, the second wave of PC democratised this and took work close to the shop floor (lowest levels of hierarchy) and ‘distributed’ data capturing and data usage.

The third wave of interconnected PCs (LAN) enabled collaborative work across organisation possible. Till now, the focus was on automating organisational routines, data capturing and distribution and generally enable the organisation to perform its routine efficiently and effectively.

Subsequent technological developments enabled companies to make the products smart by incorporating features that made the products ‘self-manage’ the routine functions, store information, possess ‘memory’ and so on.

With the advent of the Internet, these lead to possibilities of remote management and manipulation and control of many products (though remote control by itself is not new as an idea).

So this wave of Internet not only made exchange of data very easy and cheap and real time, but also enabled, to some extent, ‘Intelligent’ products.

What the fifth wave i.e. the ‘Internet of things’ has enabled is not only smart- communicating products but also enabled product features residing out side the physical product in the form of ‘Product Cloud’.

These developments not only have the ability to completely reconfigure any conventional product or service, but also in the process, completely redefine the industry boundaries/structure.

It is important for top management, responsible for strategy management, not only to reckon with this but also seek to positively leverage this tostay relevant.

Value creation

Businesses are successful when they create (and also appropriate) value that is in excess of the cost incurred to create that value. Whether ‘Cost Leadership’ or ‘Differentiation’ or a combination of the two, the net outcome has to be to create value more than the cost to remain profitable. While Porter describes the value creation consisting of five distinct parts as ‘Value chain’, others have different frameworks to explain the same. One of such frameworks that makes immense sense to me is ‘The Value Disciplines’ model by Michael Treacy and Fred Wiersema.

This framework describes three generic value disciplines. Operational excellence, Product leadership and Customer Intimacy.

These basically cover the entire gamut of value creating activities in an organisation. Operational Excellence has to do with ability to execute the ‘manufacturing’ aspect of value creation with a focus on efficiency while Product leadership is established through very strong innovation. ‘Customer Intimacy’ is achieved through strong customer focus and service to delight the customers.

Any company must choose one of these value disciplines and act upon it consistently and vigorously establish excellence in order to create superior competitive advantage. One need not be excelling in all the three to succeed.

If you super-impose the potentials and power of the internet of things on this paradigm, one can amplify the scope for strategising. Organisations incur costs as they carry out ‘Activities’. An organisation at the end of the day is nothing but a collection of ‘Activities’. These activities while creating value also incur costs in that process. The organisations that are superior in managing the activities effectively and efficiently compared to competition, manage to deliver superior performance.

Coordination and Configuration

Now, according to an older paradigm of Porter, there are two aspects to the way activties occur. One is the ‘Configuration’ aspect and the second is the ‘Coordination’ aspect. Internet of things will help organisations to enhance both the ‘Configuration’ as well as ‘Coordination’ aspects of the organisation. The configuration aspect has to do with the basic way in which things are designed or structured while coordination has to do with the routines that are established. To illustrate, let us look at the example of ‘Fitness’ in human beings. It is determined by various factors that broadly classified as structural and operational.

The structural aspects in this example are the basic body structure (height, bone mass, DNA etc,) while the operational aspects are life style, food, and exercise.

As health is determined by a combination of these two, Porter hypothesises that the effectiveness of any set of activities is determined by both configuration and coordination aspects. One can leverage ‘Internet of things’ to redefine both configuration and coordination aspects, and if such efforts focus on one or two of the three ‘Value disciplines’; it could help organisations achieve a formidable competitive advantage and superior performance.

To read more from the Simply Strategy section, click here .