Transforming Business By Leveraging Value-Based Innovation And Disruptive Business Models

We are now firmly in the Fourth Industrial Revolution driven forward by the Industrial Internet of Things (IIoT).

This powerful ecosystem of interconnected devices and systems will streamline processes, increase productivity, decrease costs and create new efficiencies in manufacturing as never before. But in doing so it will bring unprecedented disruption to every sector, from mining, rotating equipment, automotive repair and HVAC, through to industrial machinery, packaging and medical equipment.

This will change the way products are made and delivered and will touch every element in the industrial value chain — intelligent production processes, mass customization, cloud manufacturing platforms, collaborative innovation platforms, B2B e-commerce and intelligent product development tools — all will be impacted.

This will be the next evolution in the way business is done and it’s happening fast. Very fast. A forecast by International Data Corporation (IDC), for example, estimates that there will be 41.6 billion connected IoT devices by 2025 generating some 79.4 zettabytes (ZB) of data.

While the media focus of the Internet of Things is on consumer products, it is actually dwarfed by the size of the IIoT — over the next five years encompassing 100 billion devices in the industrial sector worldwide compared with a few billion consumer devices. So, it is manufacturing that will be the largest marketplace. By 2024, global spending by manufacturers on IIoT platforms is predicted to reach $12.44B.

Game-changing technology

That the IIoT is made possible at all is because of the coming together of a handful of technologies. There is high-speed internet connectivity that allows for the unprecedented networking of devices. The development of miniaturized sensor technology that can capture ever more localized performance, status and usage data in real-time. Falling costs of storage, computing power and network capacity allow these ever-greater volumes of Big Data to be warehoused for processing. While a growing range of increasingly sophisticated tools are able to analyze this data and make it usable.

So, by bringing these elements together, OEMs can have real-time knowledge about a piece of machinery that enables them to monitor and control it.

When sensor technology is coupled with preventative software, suddenly it is possible to eliminate routine onsite checks, and because the condition of machines is monitored remotely, maintenance can be carried out before breakdowns occur. This is something that could cut the maintenance costs of factory equipment by 40 percent, while increasing manufacturing productivity by as much as a quarter.

With remote monitoring, an OEM can collect data about the operations of any given unit and not only react faster to any impending issue, but even predict issues based on that data. That ability to engage in predictive maintenance from a distance is in fact a unique and distinctive selling point that OEMs can offer their customers.

However, this is not the real game-changer.

The major implication for manufacturers lies in the fact that when equipment is made with built-in sensors it can then be sold both as a product and a service. So, not only can maintenance, repairs and upgrades be done automatically through remote monitoring, but perhaps more importantly, machine performance can be also be monitored. 

Immediately this opens up the potential to tap into the much broader Anything-as-a-Service (XaaS) trend, and this is why manufacturers need to start turning to new innovative value-based business models and move away from the traditional asset ownership model.

A new business model required

In this new environment, revenue from software and data management becomes more profitable than the manufactured product itself. This means that the IIoT can turn entire industries from asset ownership to buying as-a-service where the aftermarket generates the largest revenue stream.

So, an aircraft engine manufacturer, for example, could embed intelligent IIoT-connected sensors into its turbines to generate usage data, which then enables airlines to lease engines by the minute or hour rather than having to buy them outright. Suddenly, this is no longer a transaction but a pay-per-use propulsion service.

Of course, this is nothing new. Rolls Royce’s ‘power by the hour’ jet engine initiatives dates back to the 1960s. Today, this model has flowed out into other sectors: Michelin invoice tires on the basis of miles travelled, while multinational lighting firm Phillips’s ‘pay per lux’ model charges for the actual amount of light that’s been consumed. And carmaker Audi’s has a subscription-based service that lets you ‘swap’ between their top-end models twice a month, rather than committing to a single-vehicle as you do with a standard long-term leasing arrangement.

Released from having to pay major upfront costs, smaller companies can move into new markets because they are able to enter into service agreements. They also have greater confidence from knowing that equipment will be well looked after since it remains the property of the OEM and there their responsibility. What is not to like?

Companies servicing high-value assets can also protect themselves in this rapidly changing marketplace by switching to an as-a-service model that enables them to offer the kind of financing and warrantability opportunities their customers will be increasingly looking for.

So, if you want to stay relevant, you will have to completely redefine your business models by shifting to a ‘service first’ mentality, encapsulated in a sustainable value proposition that you can defend against a range of non-traditional competitors drawn in by the democratization of the marketplace, where the cost of risk is minimized. These new market entrants will also bring with them innovative business models that not only leverage digital services to make assets work harder and smarter but also offer the cost certainty that Chief Financial Officers dream about. So, you had better be ready for them.

In such a disrupted environment, selling pre-packaged products through large, up-front deals no longer works, which effectively kills off the old capital expenditure (CAPEX) manufacturing model based on economies of scale and purchase of equipment outright.

For end customers, this new business model removes a significant upfront cost on equipment that won’t achieve an ROI for years and replaces it with an operational expense (OPEX), a much more manageable recurring fee that can be based, for instance, on equipment usage and which are backed by progressive approaches that warrant particular outcomes.

Consequently, OEMs will have to move away from a ‘make, sell, ship, forget’ mindset to a much more flexible ‘make, sell, own, operate and remember’ approach that encompasses new revenue models like Equipment-as-a-Service (EaaS), Pay-as-you-go and Function-on-Demand.

The IIoT blind spot

In an OPEX-oriented business model, risk can be seen as a performance enabler and opportunity creator.

Unfortunately, it seems many OEMs didn't get the memo and are in danger of missing the boat that is about to sail and will be difficult to catch up with once it does.

So, while a Gartner survey reports that 80% of those organizations that have adopted IoT are achieving better than expected results, many organizations still have no clear-cut strategy for bringing IIoT into their business. Scarily, a third of manufacturers don’t have any plans to develop an IIoT strategy for their products or processes.

This problem may not be evident right now, but those who don’t appreciate what is happening are likely to see their stock price drop and market capitalization stagnate as demand for their traditional products flatlines or falls.

Why this blind spot when it comes to taking advantage of the IIoT?

There is perhaps a sense among some that the IIoT is overhyped. But as with many technologies, it’s a bit like an iceberg, if you haven’t been paying attention, you’ll miss what’s below the surface.

This is about much more than merely digitally connecting a piece of equipment – whether it is a production line, a robot or a CNC machine – to your business systems.

Of course, some OEMs have taken the view that it is better to wait until the market is there, worried that if they move too early, they will make the wrong choice and commit to systems that limit their future flexibility.

That is, of course, the issue when adopting any new technology. However, waiting for a consensus to develop before investing in disruptive based approaches is generally an act of procrastination rather than the right decision. When it comes to technology, going early is nearly always better than going late. Those businesses that continue with the ‘old school’  business models they are currently using will only find themselves under growing pressure as they spiral more and more downward.

In any event, such fears are largely unjustified given that most IIoT technology is adaptable. And while your customers may not be ready right now for what IIoT can offer them, at some point soon they will be, and you must be ready to remain competitive.

By incorporating IIoT-ready technology, you can immediately start to market equipment as ‘IIoT-ready’, so when your customers want to take advantage of this extra functionality, they can do so easily. There is no need to buy new hardware, book a service call or spend money making substantial changes, which minimizes the disruption of any transition.

That means many of the cost concerns about IIoT are perceived rather than real, as it’s possible to become IIoT-ready without major capital investment.

So, perhaps the greatest obstacle to an IIoT driven business model is the ‘action paralysis’ that comes from not really knowing how to start the process.

A closing window of opportunity

The IIoT will bring once-in-a-lifetime business disruption. In the coming years, it will be critical to business success. For those who recognize that we are at a tipping point, the IIoT will create great opportunities that will enable them to become future leaders in their markets. On the other hand, organizations that dismiss the IIoT will be like those who ignored the internet 20 years ago and were left behind using a static business model based around the wrong mix of products and services.

OEMs need to be ready to navigate the coming disruption, which will become increasingly intense as tech start-ups and venture capital flow into the IIoT space, adding momentum and contributing to the pace of change.

Timeframes will become more condensed than even software vendors have faced in recent years. How wide the window of opportunity is will depend on your sector. For some, it can be measured in months, for others a handful of years.

But it’s coming sooner than you think and it’s time to get ready for it. Once it takes hold, the Industrial Internet of Things will expand very quickly, both domestically and internationally. China, for instance, is already betting big on IIoT — GSMA, the industry organization representing mobile network operators worldwide, forecasts that China will claim one-third of the global industrial IoT market by 2025.

Companies need to pivot faster — to disrupt before they are disrupted. However, what many industrial companies don’t fully appreciate is that to take advantage of the IIoT, they need to think like a technology company.

Which means that if you are a traditional manufacturer, the key question is 'Can you become a tech company faster than a tech company can learn your industry?’

About the author

Lou Leuzzi is an accomplished Global Technology Executive with years of experience in the use of innovative solutions to improve top and bottom-line growth. For the past 20 years he has focused on driving adoption of business transformation and digitalization initiatives to increase business value for customers and drive business outcomes across all industry segments. He is passionate about where technology meets strategy by exploiting the transformative potential of the Industrial Internet of Things.