DIGITAL SPECIAL.... The trillion-dollar opportunity for the industrial sector: How to extract full value from technology PART I

The trillion-dollar opportunity for the industrial sector: How to extract full value from technology PART I

The digital revolution is just beginning. As data, connectivity, and processing power expand, so do opportunities for industrial companies to extract value through innovative products, services, operational efficiencies, and business models.

With profitable growth in the industrial sector flatlining in recent years, companies have been striving to innovate faster, get much closer to customers, and achieve a step change in operational efficiency. Having exhausted the potential of traditional levers—capital-productivity programs, operational-cost reduction, footprint optimization, and the like—they urgently need to find new ways to grow their margins and their business. But how?

In our view, the explosion in data, connectivity, and cheap processing power and storage means that industrial companies should be looking to technology-enabled transformations for their next horizon of performance improvement and growth. To take just one trend, connected devices in use are expected to more than double between 2017 and 2020. As new data sources multiply and enable companies to generate and act on insights in real time, a whole range of innovative products, services, and business models is opening up.

A handful of leaders are already turning these trends to advantage and reaping early rewards. Yet across the sector as a whole, success stories are few and far between. After seeing promising results from early initiatives, many companies struggle to scale up and unlock value on a broader front. Indeed, when McKinsey surveyed executives developing IoT solutions in 2017, more than half had been running pilots for one to two years, and more than a quarter for even longer. So what’s going wrong?

In our view, a piecemeal approach to tech enablement lies at the root of the problem. Many companies are adopting artificial intelligence, machine learning, cloud services, and a host of other technologies on a case-by-case basis, instead of selecting technologies to serve their strategy or meet specific business goals. We believe success depends on a holistic approach to transformation. That means defining your aspirations, linking them to sources of business value, working out which technologies will help achieve them, and then doubling down to achieve impact across the enterprise.

Below, we analyze the value that could be unlocked across the industrial sector through successful tech enablement, look at where this value can be created in the business, identify the enablers needed to capture it, and consider the steps smart leaders take to make their transformation a success.

Sizing the prize

Our analysis shows that successful transformation across the whole industrial sector would be worth $0.8 trillion to $2 trillion in total return to shareholders, an increase of 9 to 22 percent. This value comes from two sources: an estimated $0.3 trillion to $0.9 trillion in revenue growth (an improvement of 3 to 10 percent), and $0.3 trillion to $0.7 trillion in margin expansion from efficiency gains (an improvement of 4 to 9 percent).

In turn, revenue growth is generated by a range of factors: new business models with services and features that unlock value for end users; better knowledge of customers that helps companies tailor products, develop new services, and increase customer loyalty; the broadening of channels and access to new customers via e-commerce; and the optimization of pricing across products and services. Meanwhile, the cost savings that drive margin expansion come from the use of automation, analytics, and digital tools to enhance workforce productivity across the business, coupled with the application of advanced analytics and product-customization techniques to optimize nonlabor costs.

We analyzed these sources of growth and savings both within the enterprise and at industry-segment level to determine where the value lies.

Where value can be captured

The value that could be captured from tech enablement across the industrial sector is divided among five areas of value creation within the enterprise: innovating and developing products and services; making and delivering; selling; servicing; and running the corporation (Exhibit 1).

Exhibit 1 SEE IN ORIGINAL ARTICLE

As part of our analysis, we identified how much additional value each of these five areas could contribute at an industry level. The results are illustrated in Exhibit 2.

Exhibit 2 SEE IN ORIGINAL ARTICLE

Finally, we examined how value is distributed across the four core segments in the industrial sector: automotive; commercial and other vehicles; aerospace and defense; and semiconductors and other industrial products, as shown in Exhibit 3.

Exhibit 3 SEE IN ORIGINAL ARTICLE

Innovating and developing products and services

As connectivity spreads, data sources proliferate, and valuable insights can be generated in real time, companies have unprecedented opportunities to innovate across the board in products, services, and business models. Successful innovation relies not only on sound data and technology but on a deep understanding of how to use them to tap into new sources of value. For industrial companies, this begins with an intimate knowledge of end users’ needs and pain points. Depending on where you sit in the value chain, this could well mean getting to know not just your customer but your customer’s customer. It’s also likely to mean expanding into unfamiliar areas outside the boundaries of your traditional business.

Manufacturers of heating, ventilation, and air conditioning (HVAC) systems, for example, are venturing beyond their core of equipment sales. By using technology to analyze data from motion, temperature, and energy-use sensors, they can take over temperature monitoring and control in the office or factory from corporations, and help them manage their energy costs. In much the same way, original-equipment manufacturers (OEMs) and suppliers selling agricultural equipment have devised sophisticated controls that automatically adjust operating parameters and settings in real time to suit external conditions. The speed and direction of, say, a harvester can be fine-tuned to crop density, enhancing productivity and reducing equipment wear and tear. Manufacturers can deliver and charge for these and many other features on demand.

Making and delivering

Businesses can capitalize on advances in automation, machine learning, and robotics to make themselves more cost-efficient, flexible, and responsive to customer needs. The new era of automated production and data exchange opens up a broad range of use cases that can cut cost, increase yield, and support new manufacturing methods. Take the autonomous guided vehicles that move materials in plants and distribution centers, like the Kiva robots (renamed to Amazon Robotics) that Amazon uses to pick and pack goods in its fulfillment hubs. Automation can cut storage, picking, and sorting costs by 10 to 30 percent—a hefty savings given that these activities typically account for up to 40 percent of costs in a distribution center.

In manufacturing, one of the many activities that lend themselves to automation is welding, a highly manual and error-prone process at most plants. Welding can account for 20 to 30 percent of the cost of manufacturing automotive equipment and large energy pipelines, for instance, and bad welds can be responsible for up to 5 percent of welding costs. Using robotic welding with intelligent controls, and monitoring quality during the process rather than afterward, can reduce bad welds by up to 80 percent, adding up to 0.5 percent to manufacturers’ margins.

Selling

Today’s industrial companies sell their equipment through a complex set of channels that have evolved over decades. However, as industrial buyers and end users become more digitally savvy, they are increasingly doing their product research and order tracking online, often via tablets or smartphones. Meanwhile, traditional channels and sales models are being disrupted by innovators using technology to carve out new roles in the value chain.

To catch up, industrial companies should first gain a clear understanding of how their customers are buying and then work back along each customer decision journey to assess which digital tools and channels will add most value to the sales process and how to reinvent their selling platform. The options to consider range from e-commerce through an analytics engine that informs pricing and proposes the next product to buy, and from microsegmentation to digital customer-experience tools. When applied throughout the business, tools like these can improve productivity, margins, and customer stickiness, boosting profitability for first movers in a given sector.

Servicing

In aerospace, automotive, commercial vehicles, and other advanced sectors, aftermarket sales have grown more quickly than other areas of the business as capital investment in new equipment has slowed. Accordingly, aftermarket services—the provision of parts, repairs, maintenance, and digital services for the equipment a manufacturer sells—are the new focus of attention for leading industrial companies. These services provide more stable revenues than sales of new equipment and, often, higher margins as well. One McKinsey analysis across 30 industries showed that the average EBIT (earnings before interest and taxes) margin was 25 percent for aftermarket services, compared with 10 percent for new equipment.²

The aftermarket service process is ripe for disruption. As innovative solutions such as predictive maintenance mature, manufacturers can use them to create stronger links with end customers, form a clearer view of how these customers use their products (and how the products perform), and capture increasing revenues from services. At the same time, tech enablement can be applied to field-force management, scheduling, and parts management to reduce costs and improve productivity.

By Venkat Atluri, Saloni Sahni, and Satya Rao

https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/the-trillion-dollar-opportunity-for-the-industrial-sector

CONTNUES  IN PART II