10 Principles for Leading the Next Industrial Revolution PART II
CONTINUES FROM PART I
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 use of systems far more effectively.
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 analyzing data, 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. By doing so, 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 by 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. 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 cyber-attack 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 — 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