10 Principles for Leading the Next
Industrial Revolution
Tools and techniques to ensure your company will stand out in the
new age of digitization.
It isn’t often that the
broad infrastructure that underlies industrial civilization undergoes a
dramatic transformation. But just such a change appears to be happening now. As
sensors spread through factories and warehouses, software predicts the need for
maintenance before it is manifest, power grids and loading docks become
intelligent, and custom-designed parts are produced on demand, the label the
next industrial revolution is coming to represent this great wave of
technological change. The leaders of this revolution are companies making
advances in fields such as robotics, machine learning, digital fabrication
(including 3D printing), the Internet of Things (IoT), data analytics and
blockchain (a system of decentralized, automated transaction verification).
Because these technologies all reinforce the others’ impact, they are leading
to a new level of proficiency, and new types of opportunities and
challenges for business and for society at large.
One key example is that conventional boundaries between
industries are eroding. It’s getting harder to tell the difference between,
say, a telecommunications company and an entertainment producer, or between a
retail bank and a retail store. The relationships among suppliers, producers,
and consumers are also blurring, more rapidly than many business decision
makers are prepared for.
The foundation of business strategy has long been the classic
value chain, which links together raw materials producers, manufacturers,
distributors, and (in the end) consumers through a well-established commercial
infrastructure characterized by a stable set of transactions. But now, the rise
of digital technology enables individuals to connect outside the value chain
and deliver more efficient, effective products and services. This will reduce
the importance of economies of scale and conventional divisions of labor.
Relationships among companies will be more fluid and the price and cost of
goods and services more volatile than they are today. There is one certainty,
however: Trustworthiness and a clear articulation of purpose, will become
more important to business. An enterprise that is continually changing must
balance that turbulence with purpose and trust, or people — including
employees, suppliers, customers, and regulators — will not be able to make the
full commitments that businesses need.
Our research at PwC suggests that the Industrial Internet presents
unprecedented potential gains for companies that claim leadership roles. Their
ability to realize these gains will depend, in part, on their actions during
these early years: the capabilities they build and the extent to which they
reframe their business and operating models to make the most of this new
technological infrastructure.
How, then, can you lead your company, whether it is large or
small, to play a pivotal role in the next industrial revolution? How can you
take advantage of your existing strengths while developing the digital prowess
and personal skill that you need? How do you balance the technological acumen
you require with the managerial skill to become a true market leader in this
field? How can you help the broader society meet the challenges posed by this
technology — issues related to privacy, employment, income equality, and
general well-being, among others — while still ensuring success for your
enterprise? The following 10 principles can help senior executives navigate the
uncertainties of the next few years in a systematic and profitable way.
1. Rethink your
business model.
The business world has
become accustomed to disruption. In industry after industry, incumbents that
cling to old business models lose ground to upstarts that introduce new
products and services at much lower prices. The next industrial revolution will
accelerate this sequence, especially in manufacturing, by reducing costs and
improving efficiency at a broad scale. Companies that are slow to change will
lose to those that rethink their business models to take advantage of the new
platforms and their new opportunities.
Consider, for example, the electric power utility industry, which
has essentially maintained the same business model since it began in 1882:
metered power generation, selling electrons to residential and commercial
customers. Now power utilities find themselves at the nexus of an evolving
technological ecosystem that allows them to offer a variety of new options —
and just in time, because the revenues from selling electrons are rapidly
shrinking. The new offerings include renewable energy from solar and wind
sources; sensor-based energy monitoring systems that use data analytics to
continuously improve efficiency; and heating, cooling, and facilities
management services. Some power utility companies are recasting their offerings
as “gateway hubs” for Internet access and home security. The utilities have the
potential to capture several new sources of value, but they will also face
unprecedented competition from technology and telecommunications companies.
Automakers, too, are anticipating a dramatic new business model; a
few years from now, they may no longer rely on individual car sales. They will
provide mobility on demand, through their stakes in shared or self-driving
vehicles. Manufacturers of tools, hardware, instruments, and heavy equipment
are adding sensors and connectivity to their products, enabling predictive
maintenance, security, and frequent upgrades. The healthcare industry is moving
toward its own adaptation of the IoT, with wearable sensors providing data that
health professionals can use for early diagnosis and better follow-up services.
Financial services, engineering and construction, and entertainment and media
are all poised for similar changes.
If your company is falling into the trap of thinking that it can
make money indefinitely by following its traditional business model, it risks
losing out to more flexible competitors. You are not in the same industry that
you were in before; soon, that industry may not even exist. Your path to
profitability is different. Your opportunities for raising capital have
changed. Your capabilities may not apply to the same customers they did before.
Your circumstances are probably different from those of any other company, so
you need to look freshly at them, without relying on an industry playbook, and
rethink your business model accordingly.
To fund new investments in R&D, operations, and customer
experience, you may have to cut back legacy activities that no longer apply.
This will take perseverance and discipline, but your competitive advantage lies
with your role in the infrastructure of the future. Selling or shutting down
less essential practices, and focusing your portfolio of products and services
more effectively, can make you fit for growth in this new world.
2. Build your
strategy around platforms.
What the value chain was to
the old industrial system, the platform is to the new. A platform is a
combination of interoperable standards and systems. It creates a plug-and-play
technological base on which a wide range of vendors and customers can interact
seamlessly with the same collection of hardware, software, services, and one
another. The most successful platforms match customers with vendors, maintain
an appealing and effective customer experience, and collect data and rents from
people who use the system. A business that controls a popular platform —
Microsoft with Windows, Apple with its mobile iOS, Amazon with its “everything
store” merchandising system, Facebook with social media, and Google with its
search engine — can influence the direction of evolution for a
business-to-consumer market. The same will be true of the new industrial
operating systems for business-to-business markets. The users of a platform
become, in effect, an ecosystem: a group of companies exchanging goods and
services, their fates bound together.
·
These are still the early days of platform building on the
Industrial Internet. Companies such as GE and Siemens are staking their claims
now. GE has announced its goal to be “the world’s first digital industrial
company”; its cloud-based Predix platform combines data analytics,
connectivity, cyber-protection, and offerings such as the Digital Twin, a
simulation of industrial processes based on digital profiles of more than half
a million machines. Siemens is developing its equally ambitious MindSphere platform
in collaboration with Microsoft, offering its apps on the Azure cloud starting
in 2017.
Other industrial platforms are more narrow, but equally
profitable. For example, the Trumpf company, based in Germany, has established
a platform called Axoom, which provides laser equipment, welding, and
metalworking equipment for the many small companies that build components from
metal and plastic, giving them all access to specialized 3D printing tools and
software. There will be platforms for specific types of supply chains, and
platforms for hospitals, banks, and other types of organizations. As
automobiles evolve into autonomous vehicles, they will be designed as
platforms, operating within “smart city” platforms that continue to improve the
ways in which autonomous vehicles navigate.
Your first step in establishing yourself as a participant in the
Industrial Internet is to figure out what role you can realistically play in
this platform-based world. Will you be a platform “enabler” like Axoom, GE, and
Siemens, a company responsible for building (and owning) the underlying
megahubs? Will you be an “engager” of customers, using the platform as a
vehicle for providing products and services? Will you be a platform “enhancer,”
a developer of new technologies on the platform, selling them primarily to
enablers and engagers? Or will you develop a business that combines two or
three of these roles?
If you become an enabler, building out your own platform, three
elements will help you stay ahead of competitors. First, digitize your own
enterprise — the platforms at GE and Siemens began as in-house services for
their own operations. Second, continually work on gaining efficiencies,
improving the technologies that you already have. Third, build cost reduction
into that continuous improvement; use sensors and analytics, for example, to
raise the quality and performance of your products and thus lower the costs.
These abilities take time and acumen to develop, and they will become core
distinctive elements of your platform.
3. Design for
customers.
Because the next industrial
revolution is driven by large-scale digital technology, it’s easy to overlook
the way it could affect human relationships. The new infrastructure is a web of
connections among people: Producers and consumers, in particular, are much more
closely connected than they used to be. Through smartphones and social media,
consumers can connect directly to primary producers of the products and
services they buy. Through sensors and data analytics, producers can be
thoroughly attuned to the needs, habits, and long-term interests of the people
who buy products and services. As a designer of the new platforms, or a
business leader participating in them, you have an unprecedented opportunity to
build a customer-centric enterprise, one that connects with what people
genuinely want and need from your company, thus generating commitment that will
last a lifetime.
For many large businesses, this represents a dramatic change.
Apparel companies, for example, are building new connections between the retail
store and the factory, so that retail customers’ preferences rapidly translate
into new clothing designs. A few farsighted companies, such as Inditex (Zara)
and H&M, have pioneered this approach in their own operations. Now, the
platforms of the Industrial Internet make it much easier for any apparel
manufacturer to follow suit. Banks, power utilities, and telecommunications
providers are making similar transitions: They are cleaning up their user
interfaces, offering new types of services, and solving customer problems in
faster, friendlier, more responsive, and more effective ways.
When you design for customer-centricity, you translate your
desired relationship and mutual commitment into the look and feel of your
enterprise. A true omnichannel customer experience connects every touch point:
all face-to-face contact, every retail environment, all online activity,
anything connected through a smartphone, and all the other myriad connections
between you and your customer. In the new infrastructure of your business,
there are far more touch points to work with. Customers live in an interactive
world. Their behavior is aggregated into data you can consult to make business
decisions. Your behavior, in turn, is more evident and transparent to them than
it has ever been before.
For example, consider a simple shopping transaction. A customer
places an order online for a shirt, trying it on in a virtual showroom, and
then picks it up in a local store. Can he or she move seamlessly from the
smartphone to the pickup point? Is it obvious how to try it on and pay for
it without waiting in line? Is it easy to pay? Does the store, abetted by
analytics, show the customer other items that would look good with that shirt?
You will need new levels of design acumen to succeed. People will
interact with your company through online automated systems, and perhaps
through robots in the physical world. Are these machines appealing or
frustrating? Do they draw upon knowledge of ergonomics and human sensitivity?
(Does it mimic the sequence and pacing of human interaction?) Equally
important, are your systems adaptable? The more easily professionals and
customers can change and customize their systems — without having to be an IT
professional to accomplish this — the more effective they will be.
Embracing New Practices
4. Raise your
technological acumen.
No matter what industry
you’re in, you live in a programmable world, and software will be key to your
competitiveness. Take the German auto industry, for example. For years it has
traded on a worldwide reputation for excellence in mechanical and powertrain
engineering. But from now on digital excellence will be at least as important.
This change is forcing some hard thinking about future industrial strategy, in
a country that is known, according to the Financial
Times, for relative weakness in IT. “In the
future, 50 to 60 percent of the value of a car will consist of digital devices
and tools,” said German federal chancellery chief of staff Peter Altmaier, one
of Angela Merkel’s senior advisors, at a panel debate in November 2016. “And 20
percent [will be] batteries. If we’re not careful, [German
manufacturers will] only be responsible for the windows, seats, and wheels.”
Every company, even if it’s in Silicon Valley, will need to
improve its technological acumen during the next few years. This is a matter
not just of recruiting people with software expertise, but of raising the
skills of everyone at your company. They need not just the technical training
to use digital tools, but insight into the patterns of technology — for
example, how to create an operations footprint that can take advantage of the
Industrial Internet, or how to accumulate the type of data that can foster
machine learning.
You will be adopting manufacturing execution systems that link the
elements of enterprise resource planning with all the factory operations of a
company and its suppliers. Augmented reality will enable operators and decision
makers to see data about operations (or anything else) on wearable
devices. A schematic might pop up, helping an engineer (or, in another
setting, a surgeon) determine where to direct a probe. Digital fabrication will
allow a wider range of components and products to be created close to where
they are needed, rather than being shipped long distances or going through
customs; the costs of this technology are dropping about 10 percent per year.
Interoperability among all these technologies is much more common than it was
in the past. This allows even the largest enterprise to coalesce around a more
coherent global strategy — and when your people have the right kind of digital
acumen, they can make the use of systems far more effective.
The industrial infrastructure will make it easier to design your
workplace for digital acumen. Set up displays with shop floor or financial
data, offering opportunities for employees to discuss their meaning and how to
improve them. If your factories have robots, design them as “cobots”:
collaborative robots, equipped with sensors that make them responsive to the
people who work nearby. The robots handle the rote tasks, such as moving parts
into position; the people handle the more fine-grained parts of the operation,
where judgment or artistry is required. Tailor office environments to the work
needs, learning opportunities, and emotional engagement of the people who work
in them, with collaborative workrooms that bring teams together easily with
videoconferencing and other digital connections. In general, design your work
spaces as opportunities for your people to learn — from experience, from the
increasingly intelligent technology around them, and from one another.
As people throughout your company become more comfortable with the
Industrial Internet, they will develop a collaborative culture of innovation.
They will also better understand the risks of the new world — for example,
risks related to accidents, privacy violations, and cyber-attack. This insight
will be invaluable, not just within your company, but across the platforms you
inhabit.
Because possible points of attack or vulnerability are spread
throughout the ecosystem, responsibility for their security needs to be shared
broadly, and frameworks for legal liability need to keep pace with
technological developments. CEOs and their boards may need to be as good at
judging when the world is not ready for their technology as they are at judging
when their technology is ready for the world.
5. Innovate rapidly
and openly.
Innovation and leadership
go hand in hand in the next industrial revolution. Many companies will seek
disruptive innovation, but a steady stream of incremental innovations can be
more profitable. Smaller innovations will be easier to generate and, more
important, easier to test in the market. With the tools of the Industrial
Internet, you can prototype new products, manufacture them in small batches
profitably, distribute them rapidly, and see how your customers respond before
rolling them out worldwide. As you continue to develop incremental innovations,
they can sometimes snowball into disruption. That’s what happened with the
smartphone, which evolved between 2000 and 2007 from a music player (the iPod)
into a world-changing device.
Rapid innovation is more effective when you are open to
collaboration with those outside your own company’s walls. Draw on a
broad group of participants, including the organizations that are
connected to your platform. Much of the technology in the Industrial Internet
is not just cross-functional, but cross-industry. When whole supply chains and
customer ecosystems are automated, integrated, and transformed, innovation
follows a similar pattern.
Siemens, for example, is making a billion-dollar investment in
what Lak Ananth, the head of the company’s Next47 startup unit, hopes will be
“a new era of collaboration between hungry early-stage startups.” The name
Next47 echoes the landmark year of 1847 when the company was founded. Areas of
collaborative venture capital investment include artificial intelligence,
autonomous machines, decentralized electrification (smart grids), connected
mobility, and blockchain applications.
6. Learn more from
your data.
The exponential increase in
real-time data — gathered from customers, equipment, and work processes — is
giving companies new insights. Gathering and analyzing data are important, but
they are only the beginning. It is critical to use the analytic results to
recognize important patterns, and to gain insights that help you make the right
choices and keep improving on the fly.
For example, getting
accurate information about progress and cost on construction sites has
always been a challenge. Now, a construction company or investor can use drones
to gather photographic images, overlay them with the original site plans,
verify contractor reports, and spot discrepancies as small as a centimeter
wide. In the agrochemical sector, farming companies also use drones, along with
data from weather reports and sensors mounted on their machinery, to fine-tune
their planting, fertilizing, and harvesting practices. Industrial companies of
all sorts now use data gathered from factory floor sensors to inform
maintenance and operational decisions. GE’s
chief digital officer, Bill Ruh,
estimated that just one performance increase
resulting from these efforts, in locomotives, saves one railroad US$200 million
per year.
In the military aerospace sector,
manufacturers are able to use the data set that is fed back from an aircraft to
create immersive and experiential simulation software and
training programs that can transform the training economics for fighter and
other flight crews. Wear and tear on the airframe can be minimized and the
aircraft reserved for the missions that matter, substantially reducing the
overall cost to customers of military training and preparedness.
And of course, in all industries, companies are now able to
develop highly customizable, on-demand manufacturing, with customers having
real-time access to design, supply, and demand systems. Direct feedback and
interfaces between manufacturing systems and customers’ own ordering and demand
planning systems are shortening lead times and improving capacity utilization
planning. One of the great frontiers in data analytics is materials. A plastics
maker that notices a customer using a polymer in one way could propose a
different approach, based on analysis of what other companies have done with
that same polymer.
To make the most of your data, integrate your analytics teams.
Schedule regular sessions in which people talk about what they are finding, and
how it could affect the business. Ensure that data from all your operations and
customer insights is considered. Draw in relevant information from other
companies and from the government. In doing this, you balance your proprietary
interest in your own data against the fact that open data sharing allows for
much more insight. Platforms make sophisticated data sharing of this sort far
easier than it used to be. Finally, in addition to any business changes you
make, revamp your analytics approach so that your data gathering and synthesis
will be still more effective next quarter.
7. Adopt innovative
financing models.
New large-scale
technologies inevitably put pressure on the old ways of raising money for them.
As the Industrial Internet expands, the ability to finance major capital
projects will remain one of the hallmark capabilities of an industrial company.
But the particulars will shift.
Infrastructure projects will closely follow the example of the
software industry, where cloud computing has sparked a quiet but pervasive
change. Software users no longer buy packages; instead, they subscribe to
software-as-a-service, paying rent to the provider in exchange for access and
continual upgrades. This approach affects the type of financing that tech
companies need, and the ways they manage return on investment.
Larger industrial firms will similarly move from financing
the ownership of factories and machinery to financing a pay-as-you-go system,
with smaller but more frequent rent charges for more flexible installations.
There will be less interest in replacing old equipment, and more interest in
continuing to upgrade it, using 3D printing and other forms of digital
fabrication to manufacture and customize new components. Industrial companies
will take a cue from Silicon Valley and finance more of their investments
through equity and venture capital, rather than through debt. Adjustable
pricing will also be more common; technology will allow B2B prices to vary
based on time of sale, amount of use, and type of application.
Amazon has been a pioneer with innovative financing, particularly
in the way it scales up and upgrades its platforms. It consistently innovates
in areas such as cloud computing and warehousing, which require large but
targeted investment. It has done so by repeatedly raising money from the stock
market and making a convincing case that these investments are going to pay off
in the long term. It has thus been able to put in money where other companies
didn’t have it. GE has had similarly strong financing acumen, drawing its
investment capital from the management (and divestment) of multiple businesses.
It’s building an enormously expensive platform almost from scratch. The company
has a staff of about 28,000 software engineers.
In the end, to fully develop the Industrial Internet (and thus to
continue the viability of industrial civilization), it will be necessary to
replace or upgrade every aspect of the world’s industrial infrastructure, with
capabilities and systems that didn’t exist before. Financing all this will
require as much expertise and creativity as the technological innovation, and
the technologists understand this. They are establishing metrics for tracking
short- and long-term returns, balancing immediate payback and long-range
aspiration. They are also embracing new mechanisms, such as blockchain, to
ensure that pricing, billing, transfer payments, and subsidies are reliable and
free of undue influence. By the time they are finished, the capital
infrastructure could be as boldly innovative, and as different from that of the
past, as the physical infrastructure that it made possible.
Making a Better World
8. Focus on purpose,
not products.
As a leader in the
Industrial Internet, you will probably develop a wide range of products and
services during any given five-year period, potentially in several sectors.
Many other companies will use the same platforms to enable their capabilities.
To differentiate your company, you need to develop a clear purpose: a value
proposition, more effective than anyone else’s, that applies to everything you
do. This means looking closely at the reasons people come to your company, the
outcomes they expect, and the ways you can deliver. When you are clear about
what your company is, and why you sell what you sell, people will trust you to
deliver what you promise.
Customers recognize when a company fulfills its purpose. They are
interested not in products or services, but in outcomes. Consumers at a premium
retailer are buying more than clothing or a coffee drink. They are
buying a distinctive experience as well. Instead of thinking of your
company as providing a particular type of product or service — electric power,
health records management, or automobile components, say — think of it as a
producer of outcomes. The customer needs to get somewhere, so you’re not a car
company; you’re a facilitator of mobility. Already in many cities, customers
are using vehicle sharing apps for short-term rentals (often of electric
vehicles), reserving cars where they need them and dropping them off when they
are finished. The house is cold, so you’re not just a fuel supplier. Your
purpose is to help make the home warm, possibly through energy consultation.
Ask yourself whether your company truly has an outcomes focus or
is still stuck in a physical product mind-set. Are you judging success
according to the meaningful differences you make to customers in terms of
satisfaction, quality of life, and productivity? Could better outcomes be
possible for customers if you could produce or provide goods and services in a
different way?
9. Be trustworthy
with data.
You already collect a vast
amount of data. As the IoT spreads to wearables, consumables, cars, and every
conceivable part of the home, what you know about people will increase
exponentially. The Industrial Internet will bring that level of data collection
into your workplace. Shared data is the fuel of the next industrial revolution,
and just as earning digital trust will be key to success, forfeiting people’s
trust will be a surefire route to failure.
You will need not only to manage customers’ behavior, but to
prevent outsiders from gaining access to critical information. Strong risk
management, cybersecurity, and data integrity systems are essential in helping
companies avoid breaches and better manage disruption to operations.
Transparency has to be an integral part of your strategy. Without a clear idea
of how rules are defined and implemented, for example, stakeholders may
question a company’s fairness and honesty.
Keep up with leading-edge
approaches to protecting sensitive information from cyberattack or theft.
Cloud-based systems built into most digital platforms will make it easier to
protect data by enabling companies to track and recognize intrusion in
near-real time. As PwC
cybersecurity experts David Burg and Tom Archer put it, your company will most likely protect
itself in the future “by monitoring activity across all its online systems, studying
not just the moves of hackers but the actions of legitimate customers as well.
Both types of visits, after all, are forms of repetitive human behavior,
opposite sides of the same coin.”
It might seem as if the lack of trust in large businesses and
government institutions, endemic throughout the world, will compromise your
ability to be trustworthy and transparent. But it actually creates a powerful
opportunity to differentiate your company. In PwC’s latest global survey of CEO
opinion, many CEOs recognize as much. Just under two-thirds of chief executives
(and three-quarters of those who head companies with revenues of more than $10
billion) believe that how their firm manages data will be a differentiating
factor in the future.
10. Put humanity
before machines.
You might think the
principle of putting people before machines is so obvious that it goes without
saying. But the history of technology is full of examples where the opposite
has happened. The Industrial Internet places unprecedented power in every
enterprise. As machines become increasingly interconnected, the quality of user
experience will spread in viral fashion. If people are shut out — of jobs,
creative opportunities, income, and customer satisfaction — then embracing
technology will backfire. Business, in particular, will thrive in this new
world only if its leaders understand the place of human values.
Set up your enterprise to
foster better connections among people, to encourage humane behavior, and to
build the requisite capabilities that overcome technological isolation. The
most important skills for accomplishing this will be those that can’t be
replicated by machines. Your company will need people who can understand the
technologies of the industrial infrastructure, such as artificial intelligence
and analytics, but who are also adept at working with an
organization’s culture. Helping people take pride in their endeavors,
as our colleague Jon Katzenbach suggests, will be critically important; so will
establishing a diversity of points of view, so that people from different
backgrounds can challenge one another’s perspectives.
Most important of all will be a basic attitude of respect for
human beings; as technology becomes more proficient at this larger scale, the
most distinctive thing about people will not be their ability to solve problems
or achieve results, but their empathy, intuitive judgment, and authenticity:
their abilities to care, connect, and choose, in ways we can’t predict in
advance.
What place will your company occupy as the next industrial
revolution unfolds? It depends on your ability to bring all these principles to
bear. You will combine your people, your capabilities, and your technological
acumen in ways that you never have before. We will soon not just see individual
fortunes change, but also see them move forward in ways that provide stability,
self-sufficiency, and a high quality of life. In a sense, this represents the
culmination of the wave of digital technology that started in the 1950s, and it
still has a few years to go before it stabilizes. By that time, we’ll be just
about ready to start all over again with yet another “next” industrial
revolution —assuming this one works out as well as we hope.
by Norbert
Schwieters and Bob
Moritz
https://www.strategy-business.com/article/10-Principles-for-Leading-the-Next-Industrial-Revolution?gko=f73d3&utm_source=itw&utm_medium=20170328&utm_campaign=resp
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