10 Principles for Leading the Next Industrial Revolution PART I
Tools and techniques to ensure your company will stand out in the new age of digitization. See also “A Guide to Leading the Next Industrial Revolution.”
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. In a great wave of technological change, sensors are spreading through factories and warehouses, software is predicting the need for maintenance before a machine breaks down, power grids and loading docks are becoming intelligent, and custom-designed parts are being produced on demand. The leaders of the next industrial revolution are companies making advances in fields such as robotics, machine learning, digital fabrication (including 3D printing), the Industrial Internet, 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 to new types of opportunities and challenges for business and for society at large.
One key indicator 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 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.
Establishing Your Strategy
1. Rethink your business model.
2. 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 solely 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 you are falling into the trap of thinking that your company can make money indefinitely by following its traditional business model, you risk 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 Trumpf, 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 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 — the more effective they will be.