Jim Heppelmann, CEO of PTC, on the Internet of Things

Jim Heppelmann, CEO, PTC

Jim Heppelmann, CEO, PTC

“The Internet of Things is more about the things than about the Internet,” Jim Heppelmann, President and CEO of PTC, told me recently. “The Internet is not going through a radical transformation,” he explained. “It’s evolving. But the step-function change is happening in the things.”

PTC may well be the Internet of Things’ best-kept secret. It is a $1.36 billion company with 28,000 customers worldwide, known primarily (by those who know it) as a pioneer in computer-aided product design and development. But in the last five years, under Heppelmann’s leadership, PTC has been going through a transformation, not unlike the products it helps its customers create, operate, and service.

“Creating, operating, and servicing smart, connected products is what the Internet of Things is all about,” says Heppelmann. Products are created today very differently than in the past, with the help of “a whole new technology stack,” Heppelmann maintains. “Today, part of the product is hardware and part of it is software and part of the software is in the product and part of it is in the cloud and the cloud has a whole new computing architecture. You need a data center before you can sell the first widget now.”

So today we have smart products and software is eating the world. But why connect the product to the Internet? “The number one reason,” says Heppelmann, “is to service them better. The number two reason is to operate them better.” But the sum of the changes is greater than the parts, resulting in improved, even new, business models. It’s a business transformation driven by digitization.

The evolution of PTC’s business is a great case study of how digitization is eating the world. For Heppelmann, taking a company known as “a CAD company, maybe a CAD and PLM company” to the suddenly-hot Internet of Things (IoT) market “is pretty logical.” He takes me on a 30-year journey, starting with the founding of the company by Sam Geisberg: “When you hear about 3D printers, think Sam Geisberg. The 3D technology that’s in use today is almost identical to what he invented—the first line of code he wrote is still running out there every day.”

The evolution of what PTC sells and what markets it is in, followed in lock-step the evolution of how its customers have developed, sold, and serviced their products. From what Heppelmann calls a local “team sport,” where co-located designers shared data back and forth and put together a common assembly of their individual contributions, PTC customers moved to a global team sport with product designers distributed throughout the world. That led PTC into the market for Product Lifecycle Management (PLM), acquiring in 1998 Windchill Technology (which Heppelmann founded), pioneering the use of the Web as a content and process management tool, and allowing for virtual assembly of products with parts designed in different locations.

Five years ago, Heppelmann was promoted from CTO of PTC to CEO. “When you put a CTO in the corner office,” he says, “companies start doing different things.” Following the transition of products from hardware-only (or mostly) to products “filled with software,” PTC moved to yet another new market, Application Lifecycle Management (ALM) or “software PLM.”

Helping PTC customers develop smart (software-heavy) products was “the first shift that probably not many people know we made,” says Heppelmann. “The second shift was that we realized our customers were changing their business models and service was becoming more and more important to them. They wanted to sell warranties and service contracts, they even wanted to sell the capability of the product rather than the product, a power-by-the hour kind of story. In every industry, our customers were building their service capacities.” Through a series of acquisitions, by 2009 PTC was in yet another new market, Service Lifecycle Management (SLM), providing their customers with the software they needed to design and manage service processes.

For many companies, service-as-a-business eventually led to connected products and to a new source of revenues—product operations.  Spare parts inventory management is a good example of the shift from a focus on increasing the efficiency of service processes to a more expansive view which includes the actual operations of the product. If you don’t have an intelligent way to determine how much spare parts inventory to carry and where to carry it, your only option, says Heppelmann, is to “carry lots, everywhere,” tying up “massive amounts of capital.” SLM applications are used to predict failure rates and optimize the parts inventory. But with connected products, you can do much more—monitor the condition of the product, increase predictive accuracy, respond intelligently to customer inquiries, and even provide preventive maintenance just before a part fails.

Monitoring and controlling a product, or “operate,” has joined “create” and “service,” leading PTC to yet another new market and clarifying what it meant to compete for a share of the “Internet of Things” market. With two separate acquisitions in the past year, ThingWorx and Axeda, PTC has assembled a portfolio to position it “as a clear leader in IoT enabling technology solutions.”

The Internet of Things in the form of various technologies has been evolving for many years and has spawned many standards, but not a single standard. “Typically, this means that a de-facto standard will emerge. Somebody will get momentum,“ says Heppelmann. “Our strategy now is to capture market share.”

There are a number of key elements to this “seed the market strategy.” PTC has re-oriented its sales force to find IoT pilot projects and work with customers on proof-of-concept projects. In addition, like other companies trying to establish themselves as the de-facto “platform” in an emerging market, PTC is allowing potential customers to download and play with the technology for free; enlarging its partner ecosystem; and investing in special programs for the higher-education sector so “a student could make their own smart connected product and play with it.”

Heppelmann describes these as “different ways for us to get our name out there.” An additional tried-and-true way to do that is to invest in the development and promotion of content that establishes PTC as a thought leader in the IoT market.  The cherry on top of that thought leadership campaign so far is no doubt “How smart, connected products are transforming competition,” co-written by Michael Porter and Jim Heppelmann , and published in the November issue of the Harvard Business Review.

Porter, the world’s foremost authority on competitive strategy, has been on PTC’s board of directors since 1995. “When I explained to our board of directors why the IoT is so important to our business and why I was so excited about it and why we need to make some acquisitions,” says Heppelmann, “I talked about how products are becoming first class participants in their own value chain. They are smart things that are interacting with that process and causing that process to make adjustments as it goes.”

Two of Porter’s seminal articles (also published in HBR) were about how information technology radically reshaped competition and strategy. In the 1985,”How information gives you competitive advantage” (with Victor Millar), Porter argued that the automation and standardization of processes across companies challenged them to capture IT’s benefits while maintaining distinctive strategies. In his 2001 article “Strategy and the Internet,” Porter showed that the Internet allowed companies to coordinate and integrate activities across multiple functions, external entities, and geographies, and urged companies to tailor their deployment of Internet technology to their particular strategies. “When Porter heard me talk about the idea that products would interact with their own value chains,” says Heppelmann, “he said that’s a concept that adds to his two previous papers—Jim, you’d have to help me write that.”

In the new HBR article, Porter and Heppelmann observe that in the past, IT helped transform the value chain, but products were largely unaffected. Now, IT is becoming an integral part of the product itself. Smart, connected products will drive another wave of value-chain-based productivity gains, potentially the biggest wave yet. These new products are reshaping industry boundaries and creating new industries. “In many companies,” say Porter and Heppelmann, “smart, connected products will force the fundamental question ‘What business am I in?’” In the article, they walk the reader through a framework for thinking about the IoT and the new set of strategic choices it implies.

The HBR article, Heppelmann told me, is intended to “capture the attention of the person in the corner office—trying to build strategic relationships with the people in the corner office while we are getting our hands dirty with the people who are prototyping and exploring.”

And there’s more to come, in a forthcoming Porter-Heppelmann HBR article which will flash out additional dimensions of the IoT, such as big data. “We see the IoT as the ultimate big data problem,” says Heppelmann, predicting the proliferation of companies specializing in specific “use cases” for big data analytics such as analytics for services or analytics for sales. “I don’t think we are going to find one generic tool like the Oracle database that is used widely across many use cases,” he says, indicating that this is a prime area of interest for PTC for future acquisitions.

Digitization is eating the world. It has been breaking down proprietary, closed and bounded systems, and expanding industry boundaries and business models with the boundless force of its ones and zeros. Now, all products are transforming from purely physical to physical/digital hybrids and purely digital products, connected by a vast digital network. PTC, one of the first companies to specialize in applying the digital to the physical, is poised to take advantage of the opportunity.

[Originally published on Forbes.com]