Commercializing Smart and Connected Products: A Value Chain Perspective

While the rise of smart and connected products ignites the virtuous cycle within the product network, they also present novel challenges for managing their value chain. Specifically, the unprecedented data richness coupled with ever-increasing product connectivity has led to the emergence of data network effects, which creates value both to the demand side and the supply side of a value chain, which in turn, offers new opportunities to further product innovation through cloud computing. This paper explores two research questions: (1) Whether and how should connected products commercialization leverage the data network effects by learning successful strategies from the software industry such as seeding? and (2) Whether and how do the connectivity among products and devices affect value chain design and coordination? To address these questions, we employ a game-theoretic model to examine a decentralized value chain consisting of an upstream manufacturer and a downstream retailer who choose their seeding and pricing strategies sequentially and independently. We find that, under the well-studied wholesale price contract, the value chain of connected products may achieve strategic coordination. We then consider the long-run analysis by endogenizing product connectivity. We find that, in the decentralized value chain, a manufacturer with a high innovation capability invests in product connectivity at a level higher than the centralized case. This implies that the classical double marginalization effects in value chain can play a surprisingly positive (rather than negative as shown in the literature) role in incentivizing greater product innovation. These findings appear novel in the literature, suggesting that the paradigm of value chain management has been profoundly changed in the era of smart and connected products.