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How the Internet of Things could transform the value chainWhy does the Internet of Things matter? What’s the value of placing sensors inmining equipment to measure product performance and operating conditions? Orgiving “smart pills” to cows to monitor their vital signs? In these shortvideos, the CEO of computer-software company PTC, James Heppelmann, explainshow the network of smart, connected technologies that make up the Internet ofThings improves how products are created, operated, and serviced. In addition,he has pointed out that these innovations aren’t concentrated in SiliconValley: they’re happening in the engineering and service departments ofmanufacturing companies across the United States, China, and Germany. Anedited transcript of Heppelmann’s remarks follows.#### Interview transcript## Internet of ThingsThe term Internet of Things doesn’t actually communicate much. It’s a catchyphrase and we all like it, but it’s not clear what it means. But when we say“smart, connected products,” then I think it becomes a little bit moretangible, and people really understand that much of the excitement here isn’tabout the Internet—it’s about the things.If you step back and say, “Why would people connect things to the Internet?What’s the point?”—I think there are three killer applications. The first isthat you can service things better if you can communicate with these thingsand have feedback loops. You can be proactive. You can be efficient. You canmaintain higher degrees of uptime. Better output with lesser input.The second thing you can do is you can operate these things better—operatethem remotely for reasons of safety, efficiency, accessibility, you name it.And the third thing is that you can make them better. You can have feedbackloops into the engineering and design processes to understand if the customersuse the product like you thought they would. How does the design perform inactual use for the customer? So I think that this will have a transformativeeffect on the way things are created, operated, and serviced. And a tremendousamount of efficiency and differentiation and value will be created as aresult.## How it could affect the value chainI think the idea of smart, connected products will have a dramatic impact onvalue chains because we’ve always thought of the value chain as being aroundthe product and that the product was just a dumb stone, if you will, movingthrough some smart value chain. But now, the product’s actually a first-classparticipant in its own value chain. It’s talking to its creators inengineering and manufacturing. It’s talking to the people who are supposed toservice it. It’s talking to its operators. It’s even talking to the sales andmarketing department about what the customer is thinking.The product becomes, for example, a sensor in the relationship with thecustomer. And this challenges the conventional concept of CRM. The idea ofcustomer-relationship management is that customers will talk to you abouttheir feelings about your product. And now, in this new world, we’re going tohave products that are early-warning devices that tell us about what value thecustomer is getting or not getting. What’s the degree of utilization? Whatkind of problems are customers having? What are the opportunities for upsell?When are customers going to need a replacement product, a consumable? You nameit. The product becomes a sensor in the relationship with your customer. Thatwill change a lot in terms of how things are created, sold, serviced,operated, and so forth.## What you should doManufacturing executives are very intimidated by what’s happening. If I werethe head of a company that’s been making diesel engines for the past 100years, my company would know diesel engines. But the definition of what is adiesel engine is now changing quickly. In the past ten years, we had theinclusion of embedded software and electronics. But now, when we step acrossthe line from a smart engine to a smart, connected engine, suddenly there’s anexplosion of new technological opportunities and concerns. I’m going to need adevice cloud and big data and integration and security and applications onsmartphones and tablets—and wow!Who in our engineering department understands that technology stack? You know,not many. Maybe you turn to your IT department; it’s actually more like whatthey do. Maybe you’re going to have to get your IT department involved inengineering your next-generation product. My advice would be to try tounderstand the layers of the technology stack, try to get to the point whereyou are going to really add value. Putting sensors in your products,collecting data within your products—you can add a lot of value there.You’ll probably then want to connect that to some type of a cloud solution youprobably need to purchase—a device cloud of sorts. You’re probably going toneed some big data analytics, and you’re going to need some investments in bigdata technology. You’re going to need security and integration technology and,again, that probably needs to come from the outside.But when it comes to the applications that help you to operate and service andcreate feedback loops, you’re going to want to get involved again because whoknows diesel engines and how to operate them better than the company that’sbeen making diesel engines for 100 years?## Three big risksI probably would put the biggest risks in three buckets. The first risk isthat I do nothing and somebody leapfrogs me. That’s a big problem, and we’veseen a few examples that have been pretty dramatic.The second risk is that I do something and it doesn’t work. I overestimatedthe capabilities of my internal engineering and IT departments. I invested alot of money, and it didn’t really produce a successful product. It didn’tscale, it didn’t perform, it didn’t work.And the third risk is the risk of unintended consequences. I built something.I began to collect data. That data got hacked and compromised. We’ve all seenexamples—when credit-card numbers get stolen and so forth. The company thatgets blamed actually was a victim, but the customers say, “I’m still going toblame you because if you’re going to take that type of information from me,then you have a duty to protect it, and you failed in that duty.”The mitigation for not doing anything and for being leapfrogged is that youneed to move forward with a strategy and a technology investigation and aprototype and then plan what you are going to do. And I’d say if you’re notalready doing that, you’re already vulnerable because a lot of companies aredeep into that process for sure. On the risk of doing something and it doesn’twork, it’s like any other big, new-product project you’re trying to do. Youhave to make sure that you actually have the capabilities to do this and thatyou understand how you’ll create value by doing it.And on the third item—unintended consequences, particularly around securityand availability—I think you need to find some good outside partners. Because,to be frank, most manufacturing companies are not really in a positioninternally to solve these problems.