Communications of the ACM

Communications of the ACM

Physical Product Reengineering with Embedded Information Technology

By Prabhudev Konana, Gautam Ray
Communications of the ACM, October 2007, Vol. 50 No. 10, Pages 72-78
10.1145/1290958.1290965
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Much of the intense interest in the information technology sector during the last decade has been about the creation of new business methods (Amazon.com and Priceline.com are two popular examples), the transformation of business processes, and the evolution of IT-enabled global sourcing. However, little research has focused on the ongoing physical product reengineering (PPR) required to incorporate simple sensors in complex embedded microprocessor and software systems (embedded information technology—EIT) into products. With competition and product commoditization in many sectors [11], there is an increasing focus on EIT to differentiate products and alter the nature of competition. This article explores the driving forces, challenges, and implications of PPR.

Firms are using EIT in traditional products (including airplanes, cars, refrigerators, and footwear) to add new features to improve the convenience, performance, safety, and security of the products. For instance, a modern automobile has more than 50 microprocessors to control various engine operations. EIT makes it easy to operate, control, monitor, diagnose, service, and customize products as well. Further, EIT provides critical information for manufacturers that enable them to offer new services, engage in process innovation, and build direct relationships with customers. Thus, PPR using EIT has important implications for firm scope (for example, downstream integration), industry competition, and business applications.

The use of EIT in physical products is not new [8]. In the 1980s, computer numerical control machines dramatically increased productivity and quality of machining processes. In the current PPR using EIT, products will be able to identify and correct problems before failure occurs by capturing and processing events. For example, the semiconductor manufacturing equipment manufacturer Applied Materials uses software to monitor quality and yield from sensor data obtained as wafers pass through various stages of operations and take corrective actions [4]. Software solutions are becoming part of machine operations and control. The advantage of software systems is that, unlike hardwired program logic, they can be remotely updated and revised. Further, bundling software within physical products enables firms to offer downstream services.

EIT enables manufacturers (or service providers) to map product health throughout its life cycle, seamlessly integrate physical operations with business processes, and capture service value during its life cycle. This life cycle mapping provides useful information (including quality problems and maintenance status) that can improve future models, enable manufacturers to offer services proactively, and strengthen linkages with customers. Automobile manufacturers, for instance, can remotely diagnose a car and recommend maintenance without the car being brought to a service center. Managing product life cycle and generating revenues over the life cycle of the product has become a successful strategy for manufacturers. For example, jet engine manufacturers, such as General Electric and Pratt & Whitney, make little profit from selling jet engines but reap significant revenues from servicing and upgrading those engines over their 40-year life cycle [2]. Similarly, life cycle mapping can provide guidance in stocking decisions of spare parts in various distribution centers, depending on the age of the cars in a given region. EIT also promises firms new revenue streams from complementary services using the physical product as the starting point (for example, GM's OnStar acts as a virtual advisor and provides immediate medical and emergency help).

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There are significant opportunities for product and process innovation with EIT. However, there are a number of challenges as well.

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Thus, firms have strategic reasons for PPR with EIT. There are significant opportunities for product and process innovation with EIT. However, there are a number of challenges as well. For instance, it is expected that the rate of innovation will increase and firms will need new capabilities to compete. Here, we discuss the different types of PPR, the driving forces behind PPR, the challenges, and the implications of PPR.

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Types of PPR

The various PPR initiatives can be mapped into three—somewhat distinct—categories along a continuum of product changes, from incremental to radical: product EIT enrichment, product digitization, and product substitution. Each type of PPR uses different levels of a firm's existing resources and capabilities and offers new business opportunities. The table here lists key differences in the characteristics of the three categories of PPR initiatives.

Product EIT Enrichment. Traditional products are reengineered to incorporate EIT to improve their performance, convenience, and quality. The basic functioning of the product, however, is not changed. The recent introduction of the Adidas "smart shoe," where EIT adapts the shoe's cushioning to individuals' preferences, is an example of product EIT enrichment. The primary objective of EIT here is to add features that differentiate the product. The firm builds on its existing knowledge and resources (such as infrastructure and human resources). Caterpillar, for instance, has several EIT¹ (including the Computer Aided Earthmoving System and Vital Information Management System in its equipment that enables operators to plan, operate, and manage their activities. Onboard computers provide key input to operators, such as topography, cross-sections, and location of the equipment relative to the plan, that improve productivity and utilization. These EIT features differentiate Caterpillar's products.

Product Digitization. In product digitization, existing physical products are redesigned to provide digital output that enables the firm to provide other products and services. An interesting example of product digitization is in cardiac monitoring. The existing process is human-intensive, time-consuming, performed infrequently, and expensive, since users need to schedule an appointment, wait in a doctor's office, and work according to insurance regulations on payments and frequency of tests (see the figure here). Monebo Technologies, a startup firm that recently received U.S. Food and Drug Administration approval for its intelligent electrocardiogram algorithms, has developed a product (the cardiac monitoring belt) where the heart activity is digitized and captured in real time on a computing device (for example, a PC/laptop or PDA) for further analysis. The monitoring belt may soon be available for purchase over-the-counter at a relatively low cost, and users can monitor heart activity anytime without constraint. The digitized output from the monitoring device is analyzed for risk level. If the risk level is above a particular threshold the computing device may alert the user or inform emergency services, much like services for home monitoring. In this category of PPR, EIT enables firms to capture information that enables them to offer new products and services. Although existing resources are relevant, new players can enter the market and threaten current products and manufacturers.

Product Substitution. In product substitution, existing products and processes are entirely replaced by digital technology. For example, digital photography is a perfect substitute for film-based photography. Existing equipment (film-processing equipment), manufacturing facilities, and inputs (silver) are abandoned in favor of digital technology. The upstream and downstream value chains that support the existing product are severely affected. A firm's existing competence and resources, such as patents, become irrelevant. Thus, product substitution is an extreme case where IT-led substitution, often coming from IT industry, radically alters products, processes, and the nature of competition [5].

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Driving Force Behind PPR

In many mature industries, firms increasingly find it difficult to differentiate their products as product performances converge. Strategy literature has examined the increasing competition and commoditization of products that has led to declining margins in traditional manufacturing [11]. However, services are less competitive and more profitable. This difference in profitability has caused many manufacturers to offer downstream services that allow them to build and maintain direct relationships with customers that last through the product life cycle. EIT in physical products provides an opportunity to satisfy changing customer preferences, differentiate products, seek revenue from downstream services, and provide complementary products/services, which are discussed here.

Changing Preference—Experience Economy. The idea of EIT in physical products aligns with several industry dynamics. Pine and Gilmore [7] suggest the emergence of the experience economy, where customers engage in personal interactions with a product or service at the physical, emotional, or intellectual level. In this context, EIT provides the capabilities for designers to create unique experiences for customers that provide emotional appeal. For example, the ability for footwear to adjust to an individual's cushioning preferences through EIT creates an experience and product differentiation that many are willing to pay a premium for.

Downstream Vertical Integration. As the installed base (products in use) becomes more important than new products sold, a considerable portion of the value added has shifted from manufacturing to servicing existing products. This is also reinforced by the rise in technological complexity of many manufactured products, which leads to an increase in service requirements. As the technological complexity increases, customers increasingly look toward the manufacturer for maintenance and updates. In response, manufacturers push downstream to capture this added value by embedding IT in the product that can signal when the product requires services. For example, HP toner can be embedded with technology where it signals when the toner is about to run out and can place a replacement order with HP.² Likewise, refrigerators can include EIT to place orders for replacement filter cartridges. Such devices help manufacturers establish a direct relationship with their customers and capture the downstream value.

Expanding Horizontal Scope. A benefit of PPR and the resulting direct relationship with the customer is that these relationships can be used to sell a variety of complementary services to the customer. For example, with OnStar, GM can offer passengers a variety of concierge services, like directions and reservations, in addition to safety and emergency services. Such services can be provided by GM itself or in alliance with partners. The key point is that OnStar puts GM in the position to offer an entire range of new services where it can capture the value-added margin. In addition, such services build switching costs that increase the manufacturer's ability to seek a premium [10]. Also, the more services a manufacturer is able to bundle in its offering, the greater the switching cost the manufacturer builds. Thus, one of the key motivations to use EIT is to build and capitalize on the direct relationship with the customer by offering a range of allied services to the customer.

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Challenges for PPR Using EIT

As PPR emerges firms will be subjected to certain risks and will have to make some key choices to be successful with PPR. Here, we highlight a few of the major challenges affecting adaptation.

Product Liability and Security. Software products have been generally immune from product liability by the extensive disclaimers that customers agree to before use. Failures due to errors and security lapses of software have not been challenged successfully. However, with more EIT—particularly software-driven products—traditional product liability may be extended to software products, as failure may lead to economic loss or injury [12]. For example, security issues will become critical when unauthorized accesses can tamper with product functioning or servicing. The products with significant software functions must be guarded against attacks from viruses that have plagued personal computers. This will impact software development practices in general and software testing in particular [9]. Existing practices (such as vaporware) that introduce buggy software products may not work with EIT.

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EIT in physical products provides an opportunity to satisfy changing customer preferences, differentiate products, seek revenue from downstream services, and provide complementary products/services.

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Modular Design. The IT industry has long practiced modular design [1]. Only recently have modular design practices permeated traditional product design. With increasing EIT, traditional products must adopt modular design principles more aggressively where IT components can be easily plugged into different physical components as building blocks. Modularity has significant implications for cost, quality, time-to-market, innovation, and competition.

Standards Choice. The interfaces of physical components with EIT also must be clearly specified. Firms have to make choices about whether to use proprietary interfaces or make interfaces open so that others can also provide services. The control versus openness choice has significant implications for market growth and market share. A proprietary interface will increase the manufacturer's market share in the services offered but may limit the development of the overall market. On the other hand, with an open interface, the manufacturer may increase the size of the services market where it increases revenue from royalties [10]. GM is currently dealing with this issue regarding OnStar. The manufacturer has to make a trade-off between the value of a higher market share in a proprietary environment against the value of a higher market share in an open environment.

Organizational Capabilities. With EIT and modular design practices, the rate of innovation is likely to increase, shrinking the product life cycle, widening product lines, and changing demand patterns [1]. Thus, a firm must have capabilities to address this new dynamic environment. This requires the firm to manage and structure its relationships with employees, customers, and suppliers similar to those observed during the introduction of computer-aided design/manufacturing and flexible manufacturing systems [6]. Firms may need increased coordination with different functional groups (such as product designers, marketing, and sales departments) and suppliers to meet the challenges in changing market conditions.

Channel Cooperation and Conflicts. The ability to forward-integrate into services can raise conflicts with existing channels of services. Remote diagnostic and repair capabilities put manufacturers directly in competition with outside service providers who have invested in assets and other manufacturer-specific resources. Firms have to intelligently navigate to avoid serious conflict. Manufacturers have the option of directly competing with these providers, but they are more likely to partner with them. This is consistent with the emerging trend toward network-based competition, where the basis of competitive advantage is moving from an individual firm's assets and capabilities to the assets and capabilities in the network of partnerships a firm has [3]. In this case, the manufacturer is well positioned to appropriate a significant portion of the value-added margin as it brings the most valuable resource to the partnership: the direct relationship with the customer.

Training and Work Force Development Strategy. For PPR with EIT to gain acceptance and widespread use, product designers have to become IT specialists so they can recognize EIT opportunities and act on them. Firms must also design a strategy to train and educate their work force in downstream activities, such as service, even when those operations are currently performed by other firms. Rapid investments in downstream operations like diagnostics and repair will need increased training, as without a trained work force the new product strategy may fail.

Privacy. A key concern in PPR with EIT is that manufacturers and service providers would have access to consumers' location and other personal information at any given time. This will necessarily raise privacy concerns similar to those associated with such technologies as radio frequency identification. Thus, firms need to have a well-defined privacy policy to safeguard consumer information, and policy makers have to protect the legal rights of individual consumers.

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Implications of PPR with EIT

As physical products increasingly embed IT, firms' core competencies will expand to include IT. For example, product designers will need IT knowledge along with their product-domain expertise. EIT in physical products will also complement the increasing move toward virtual product design, testing, and training.³ Similarly, manufacturing (for example, footwear) and service capabilities (for example, Monebo Technologies) for traditional products and services will begin to look more like consumer electronic plants and telecommunication service providers. Overall, EIT will demand advanced technological capabilities, and firms with superior IT capabilities will have a competitive advantage.

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As EIT becomes the basis of product differentiation, and the original point that allows firms to offer value-added services, IT will move from being a support function to the frontline of business activity.

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The trend toward PPR using EIT provides an opportunity for manufacturers to build and capitalize on direct relationships with customers. EIT will allow firms to differentiate their products, offer more downstream services themselves, and leverage their customer relationships to sell a broader range of services. PPR will enable IT to be involved in the most fundamental of manufacturing activities—product design. As EIT becomes the basis of product differentiation, and the origination point that allows firms to offer value-added services, IT will move from being a support function to the frontline of business activity.

However, challenges, such as product liability concerns, exist. The automobile manufacturer Toyota recalled an earlier version of the Prius hybrid car due to a software malfunction that caused the car to shut off when in motion. Further, development methodologies and retraining of designers are critical to realizing the potential of EIT [9]. Firms must address the challenges and threats described earlier and allocate resources to develop the required organizational capabilities. With an increasing amount of EIT in physical products, it won't be a surprise if some manufacturing firms employ more IT professionals than many large software firms. Thus, the IT component of the gross domestic product will continue to increase over time—the IT sector has grown from 2% in 1990 to 10% currently—and could possibly become one of the largest sectors in the U.S. economy.

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The Digital Library is published by the Association for Computing Machinery. Copyright © 2007 ACM, Inc.

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