An executive’s guide to the
Internet of Things
The rate of adoption is accelerating. Here are six
things you need to know.
As the Internet of
Things (IoT) has gained
popular attention in the five years since we first published on the
topic, it has also beguiled executives. When physical assets equipped with
sensors give an information system the ability to capture, communicate, and
process data—and even, in a sense, to collaborate—they create game-changing
opportunities: production efficiency, distribution, and innovation all stand to
benefit immensely. While the consumer’s adoption of fitness bands and connected
household appliances might generate more media buzz, the potential for business
usage is much greater. Research from the McKinsey Global Institute suggests
that the operational efficiencies and greater market reach IoT affords will
create substantial value in many industries.
There are many implications for senior leaders
across this horizon of change. In what follows, we identify three sets of
opportunities: expanding pools of value in global B2B markets, new levers of
operational excellence, and possibilities for innovative business models. In parallel,
executives will need to deal with three sets of challenges: organizational
misalignment, technological interoperability and analytics hurdles, and
heightened cybersecurity risks.
Opportunities beckon . .
.
IoT’s impact is already extending beyond its
early, most visible applications. A much greater potential remains to be
tapped.
Creating B2B value
globally
To make the Internet of Things more
understandable, media coverage has often focused on consumer applications, such
as wearable health and fitness devices, as well as the automation products that
create smart homes. Our research reveals considerable value in those areas. Yet
the more visible manifestations of IoT’s power shouldn’t distract executives
from a core fact: business-to-business applications will account for nearly 70
percent of the value that we estimate will flow from IoT in the next ten years.
We believe it could create as much as $11.1 trillion a year globally in
economic value in nine different types of physical settings. Nearly $5 billion
would be generated almost exclusively in B2B settings: factories in the
extended sense, such as those in manufacturing, agriculture, and even
healthcare environments; work sites across mining, oil and gas, and
construction; and, finally, offices.
There’s also a global dimension to IoT’s B2B
potential. Emerging markets, whose manufacturing-intensive economies often
supply goods to final manufacturers, will be prime areas for IoT adoption. But
over the next ten years, the total economic impact from IoT will be greater in
advanced economies, given the possibility of larger cost savings and higher
adoption rates
However, an estimated 38 percent of IoT’s
overall worldwide value will likely be generated in developing economies, and
eventually, the number of IoT deployments in such markets could surpass those
in developed ones. In fact, deployments in developing economies are likely to
exceed the global average in work-site settings (such as mining, oil and gas
drilling, and construction) and in factories. For instance, China, with its
large and growing industrial and manufacturing base, stands to reap major
benefits not only on the factory floor but also in product distribution. In
fact, developing economies could leapfrog the developed world in some IoT applications
because there are fewer legacy technologies to displace.
Optimizing operations
Investing in IoT hardware—from sensors
embedded in manufacturing equipment and products to electronically tagged items
along the supply chain—is only the starting point of the value equation. The
biggest competitive gains come when IoT data inform decisions. Our work shows
that most of the new business value will arise from optimizing operations. For
example, in factories, sensors will make processes more efficient, providing a
constant flow of data to optimize workflows and staffing:
·
Sensor data that are
used to predict when equipment is wearing down or needs repair can reduce
maintenance costs by as much as 40 percent and cut unplanned downtime in half.
·
Inventory management
could change radically, as well. At auto-parts supplier Wurth USA, cameras
measure the number of components in iBins along production lines, and an
inventory-management system automatically places supply orders to refill the
containers.
·
In mining, self-driving
vehicles promise to raise productivity by 25 percent and output by 5 percent or
more. They could also cut health and safety costs as much as 20 percent by
reducing the number of workplace accidents.
IoT systems can also take the guesswork out of
product development by gathering data about how products (including capital
goods) function, as well as how they are actually used. Using data from
equipment rather than information from customer focus groups or surveys,
manufacturers will be able to modify designs so that new models perform better
and to learn what features and functionality aren’t used and should therefore
be eliminated or redesigned. By analyzing usage data, for example, a carmaker
found that customers were not using the seat heater as frequently as would be
expected from weather data. That information prompted a redesign to allow
easier access: the carmaker updated the software for the dashboard touchscreen
to include the seat-heater command. This illustrates another capability of connected
devices: with the ability to download new features, these products can actually
become more robust and valuable while in service, rather than depreciate in
value.
Despite this value, most data generated by
existing IoT sensors are ignored. In the oil-drilling industry, an early
adopter, we found that only 1 percent of the data from the 30,000 sensors on a
typical oil rig are used, and even this small fraction of data is not used for
optimization, prediction, and data-driven decision making, which can drive
large amounts of incremental value.
Creating innovative
business models
IoT can also spur new business models that
would shift competitive dynamics within industries. One example is using IoT
data and connectivity to transform the sale of industrial machinery and other
goods into a service. The pioneers of this trend were jet-engine manufacturers
that shifted their business model to selling thrust and ancillary services
rather than physical equipment. Now these models are proliferating across
industries and settings. Transportation as a service, enabled by apps and
geolocation devices, is encroaching on vehicle sales and traditional
distribution alike. Manufacturers of products such as laser printers with IoT
capabilities are morphing into robust service businesses.
IoT makes these business models possible in a
number of ways. First, the ability to track when and how physical assets are
actually used allows providers to price and charge for use. Second, the
combined data from all these connected assets help a supplier to operate
equipment much more efficiently than its customers would, since its customers
would only have a limited view of their own equipment if they purchased and ran
it themselves. Furthermore, analysis of IoT data can enable condition-based,
predictive maintenance, which minimizes unplanned downtime.
This business-model shift will require product
companies to develop and flex their service muscles. Product development, for
instance, becomes service development, where value is cocreated with customers.
It won’t be enough to focus on the product features customers will pay the most
for. Developers will need to understand the business outcomes their customers
seek and learn how to shape offerings to facilitate those outcomes most
effectively. Service providers will also have to take on capacity-planning
functions—including planning for peak usage and utilizing IoT data to forecast
demand.
. . . but challenges
remain
As with any major technological shift, realizing
IoT’s potential will require significant management attention not just to new
technical imperatives but also to organizational issues.
Aligning the
organization
IoT will challenge traditional organizational
roles as information technology becomes widely embedded across assets,
inventories, and operations. One focal point will be the IT function, for the
Internet of Things requires it to assume a transformed role that spans beyond
computers, networks, mobile devices, and data centers. Instead, IT will have to
join with line managers to oversee IoT systems that are essential to improve
both the top and bottom lines.
In retailing, for instance, one of the largest
sources of value could be the sales lift that real-time, in-store personalized
offers are expected to deliver. This will require the sophisticated integration
of data across many sources: real-time location data (the shopper’s whereabouts
in a store), which would link to data from sensors in the building;
customer-relationship-management data, including the shopper’s online-browsing
history; and data from tags in the items on display, telling the customer to
enter a specific aisle, where he or she could use an instant coupon sent to a
phone to buy an item previously viewed online. In short, information technology
and operations technology will converge, both technically and in their metrics
of success. As a result, companies will have to align their IT and operational
leadership tightly, though traditionally these functions tended to work
separately and, more often than not, held each other at arm’s length.
Beyond expanding IT’s role, IoT will challenge
other notions of organizational responsibilities. Chief financial, marketing,
and operating officers, as well as leaders of business units, will have to be
receptive to linking up their systems. Companies may need to train employees in
new skills, so the organization can become more analytically rigorous and data
driven. Analytics experts and data scientists must be connected with executive
decision makers and (to optimize insights from the new data) with frontline
managers. In some cases, the decision makers will be algorithms. When companies
need large-scale real-time action—such as optimizing the control of equipment
across an entire factory—IoT systems will make decisions automatically.
Managers will monitor metrics and set policy.
Overcoming
interoperability and analytics hurdles
Strategies that use IoT data in an effective
way often call for interoperability. We estimate that nearly 40 percent of the
potential value, on average, will require different IoT systems to communicate
with one another and to integrate data. Relatively little of that is happening
now. For example, on offshore oil platforms today, components such as pumps are
often installed as connected devices, but in a limited fashion: devices
individually connect back to their manufacturers, which monitor and control
machines and can optimize their maintenance and performance individually.
However, data from multiple components and systems must be combined to identify
more than half of the predictable performance issues that arise in day-to-day
platform operations, including those that could impact overall oil-production
volumes.
Many large companies will have enough market
power to specify that their IoT vendors make systems interoperable. In some
cases, this will lead vendors to choose common standards that will ultimately
speed up adoption. In other cases, interoperability could also be achieved with
software platforms designed to combine data from multiple systems. That will
create new market opportunities for companies capable of integrating data from
diverse sources.
However, simply
bringing data together from different IoT systems won’t be enough. Indeed, IoT
may exacerbate many of the challenges we have observed when companies use big
data. In moving to a world where IoT is used for prediction and
optimization, companies face an analytics challenge. They’ll need to develop or
purchase, to customize, and then to deploy analytical software that extracts
actionable insights from the torrent of data IoT will generate. And in many
cases, the algorithms embedded in this software will have to analyze data
streams in real time—a task many traditional analytical tools are not designed
to do. This offers another potential market opportunity for innovative software
developers.
Facing up to the
security imperative
The prospect of implementing the Internet of
Things should prompt even greater concern about cybersecurity among executives.
IoT poses not only the normal risks associated with the increased use of data
but also the vastly greater risks of systemic breaches as organizations connect
to millions of embedded sensors and communications devices. Each is a potential
entry point for malicious hackers, and the damage from a break-in can be
literally life threatening—disrupting machine-control systems on an oil rig or
in a hospital, for example. The same interoperability that creates operational
efficiency and effectiveness also exposes more of a company’s units to
cyberrisks. Growing interconnections among companies and links with consumer
devices will create other challenges to the integrity of corporate networks,
too.
Companies will need to
rely on the capabilities of vendors to mitigate some of these risks. However,
preparing for a revolutionary change in distributed connectedness and
computation will also require a new strategic approach, which our colleagues
have described as “digital resilience.” In other words, companies need to
embed methods of protecting critical information into technology architectures,
business-model-innovation processes, and interactions with customers. They can
start by assessing the full set of risks in an integrated way and by creating
an extensive system of defenses that will be hard for hackers to penetrate.
Companies also need to tailor cybersecurity protections to the processes and
information assets of each of their businesses, which in an IoT world will
increasingly be linked. Given the extent of the risks and the cross-functional
nature (and significant cost) of the solutions, progress will require
senior-level participation and input.
IoT will soon become a differentiating factor
in competition. Senior leaders and board members must take a systems approach
to address the organizational challenges and risks this expansion of the
digital domain will create. That will allow companies to capture the full range
of benefits promised by the Internet of Things.
byJacques Bughin, Michael Chui, and James Manyika
http://www.mckinsey.com/Insights/Business_Technology/An_executives_guide_to_the_Internet_of_Things?cid=digital-eml-alt-mip-mck-oth-1508
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