Why companies need to be smarter?

Since the Internet of Things comprises of several smart connected products that offer significant strategic and operational benefits, it has witnessed increasing adoption among consumers. They not only reshape competition within industries but also expand industry boundaries. This happens as the basis of competition shifts from products to product systems. The smartphone by itself has changed the game of not just mobile telephony. The amateur camera segment is also affected by smartphones. Music systems, gaming systems and televisions have all been impacted.

These devices force companies to build and support a brand-new tech-based infrastructure. This encompasses multiple layers that cover hardware, embedded software, connectivity, and a host of cloud-based solutions that support smart devices.

Impact on industry structure

Smart, connected devices have affected companies and profitability. In fact, it has a bearing on the industry structure itself. Competition has generally been driven by five competitive forces as framed by Michael Porter.

The five forces concept is a powerful framework that enables companies to comprehend and analyze the competitive forces at work in an industry and which drive the way economic value is divided among industry players.

As an innovator in the smart device segment, a company would need to know if it will gain from an idea or if another player could possibly do so.  A key supplier, your distribution channel or your customer) will rapidly capture the majority of the economic benefits of your idea?

Let us examine these forces.

The bargaining power of buyers

Smart products increase the scope for product differentiation and even price. Based on usage, a company can create target segments, customize the offering and peg the pricing accordingly.

Due to the intrinsic nature of these devices, companies can forge stronger relationships with the customer base. This decreases the customer propensity to switch.  Moreover, these products allow companies to curtail their dependency on channel partners and reduce their bargaining power from a company perspective.

The tyres of the future will inform owners of possible damage, tread inconsistencies or even impact of ambient temperature on driving conditions. In these scenarios, a tyre brand can develop stronger relations as an OEM and with the end-user.

Rivalry within the competitors

Smart, connected products have the power to reposition the competitive framework. It opens up opportunities for feature upgrades or value-added services. Such products can be customized niche segments or even single customers based on pricing and profitability.

Brands are now offering sports garments that can track body movement using embedded sensors. This acts as a virtual coach for amateur athletes.

Investment is critical as such offerings come with high initial fixed and R and D costs. Companies can however apportion fixed costs through larger volumes or stronger margins.

Rivalry is also on the rise as smart devices are part of a larger ecosystem. A trend noticed in the ‘smart home’ category. Lighting, music entertainment and consumer durables manufacturers now compete against one another.

The threat posed by new entrants

Generally, new players who enter an established category endure hurdles that range from higher fixed costs for product development to investments in technology. Established companies, however, can find it viable from a long-term perspective to generate predicted ROI and profitability.

Fitbit has a range that includes smartwatches, activity trackers, and other wireless-enabled wearable technology devices that measure health-related data. Xiaomi and Apple are already established players and leaders in this category.

Most medical device manufacturers have incorporated IoT in their range. Data Bridge Market Research predicts that the market will grow globally with a CAGR of 20.1% from now to 2028. Pegged at USD 30 bn in 2020, it is expected to touch USD 126 bn in 2028. A lot of new entrants are also making their foray felt. These include BAE Systems traditionally associated with defence equipment and Seiko Epson, traditionally associated with consumer electronics.

The bargaining power of suppliers.

Smart devices are breaking shackles and norms of traditional supplier relationships and the bargaining power quotient. Traditional suppliers stand to lose while the new emerging ‘smart’ supplier segment will rise.

The ‘smart’ components of these connected products deliver more value relative to the ‘physical’ parts of their structure. The physical components could get commoditized. Software could replace physical components over time. Software lowers demand for physical customization. The dependence on traditional vendors falls along with bargaining power.

On the other hand, smart devices herald new agile suppliers that manufacturers didn’t need before. These are primarily suppliers of software, sensors, operating systems, and other ‘smart’ based solutions. A company’s dependence on this technology stack is high. Moreover, many of these brands are mega titans themselves.

Such partners are giants with an extremely intelligent and exhaustive talent pool. The bargaining power of these partners can erode at the margin of the company it deals with.

The automobile industry has already weakened the positions of traditional auto OEMs. These suppliers lacked technological capability from a software point of view. Their position within the supplier hierarchy gets weakened when pitted against suppliers like Google.

Suppliers of this technology stack like Google also have greater access to product usage and customer data. This enables them to also reach out directly to customers.

The threat of substitutes.

A range of smart products can offer great performance and customization. They may even usurp the need for traditional products in the category.

There are cases, however, that these connected products create a different threat. This could be a wider range of possibilities. Fitbit’s wearable devices capture multiple complex data values and are also a substitute for the usual running watches and pedometers.

New business models enabled by smart, connected products can create a substitute for product ownership, reducing overall demand for a product. The Google driverless car service is an example. The Tesla smart car. Both will create tectonic shifts in the automobile industry or transportation.

Product-as-a-service is a model that is becoming popular. As car ownership patterns decline, the car-sharing and the ride-sharing market will rise. RelayRides and Uber are examples.

On completion of a detailed competitive analysis, a company can devise a strategy to expand or tread new business opportunities. The outcome should focus on acquiring market share or bloating the profit margin.

Allied Digital was traditionally a service provider. Through an analysis of trends and projections, we are now also focusing on smart city solutions, master integrator services and cloud migration as a service offering. This has been dictated by market forces and the demands of end customers.

 

The author is CEO – Integrated Solutions Group.