Strategic Choices: #4 Internal vs. Outsource Development

Should the Company Develop the Full Set of Smart, Connected Product Capabilities and Infrastructure Internally or Outsource to Vendors and Partners?

The article, How Smart, Connected Products Are Transforming Competition, published in the November 2014 issue of Harvard Business Review (HBR), identifies the ten strategic choices manufacturers must make to capitalize on IoT opportunities.

Co-Author and PTC CEO Jim Heppelmann explains the fourth strategic choice, should the company develop the full set of smart, connected product capabilities and infrastructure internally or outsource to vendors and partners, and provides a recommendation to get started.

Video Transcript

To look at this let's think about the new "technology stack" from the article.

  • To start with there's the product or the device that perhaps your company has made for dozens, even hundreds of years. That product is going to gain connectivity, so that it's capable of connecting to a cloud.

  • And then in that cloud we're going to find big data database technologies.

  • On top of that we're going to have application developments platforms so we can build multiple applications that share a common infrastructure.

  • We're probably going to need rules and analytics, and maybe big data analytics engines.

  • We're going to want to develop role specific applications for service technicians, for our sales and distribution force, and for our end users.

  • We're going to have to think about security, and data privacy.

  • We're going to have to worry about system integration to other business systems, and other information systems.

So when you step back and look at it, developing that technology stack yourself would require a substantial investment, and specialized skills that aren't that common today in manufacturing companies. Manufacturing companies that assemble those skills start to look a little bit like Silicon Valley companies and join that war for talent.

So with previous waves of technology we've seen some patterns develop. Early in the market we see vertically integrated solutions where a single vendor is providing an entire technology stack, but over time we see specialization. Some other company can produce a database better. Some other company can produce a technology for communications or for building applications or for security. We've seen this happen in the mainframe industry, and the PC industry, and mobile phone industry. So early movers who are vertically integrated can gain an advantage for a period of time, but they need to be careful not to overestimate their ability to sustain all the layers against all the companies that choose to specialize in that same technology. For companies that overestimate their capability, what's an advantage in the short term becomes a liability farther out.


So our recommendation would be ask yourself the tough question. Where can we really add value? Where is it that our knowledge of the product, or the processes that the product participates in, or the customer, or the market creates some advantage that no specialized company is going be able to replicate? That's where we should invest most of our energy and resources.

And then let's turn to a reasonably short list of outside parties who could help us assemble the rest of the solution without introducing too many moving parts. Then we'll get the best balance of proprietary intellectual property combined with off the shelf technology and expertise to bring a really great solution to market as fast as possible.