TECH SPECIAL.... Tech-enabled disruption of products and services: The new battleground for industrial companies PART I

Tech-enabled disruption of products and services: The new battleground for industrial companies PART I

Industrial companies are finding that technology is an important link in the value chain for innovation and product development. The transformation is challenging, but there are ways to getting it started.

With economic profit flatlining, industrial companies are turning to revenue growth to drive value. Using technology to innovate and develop new products and services is fast becoming the new battleground. Companies are not only enhancing their offerings through software and data but making the transition from selling hardware-based products to creating tech-enabled businesses.

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The effect on the industrial sector will be profound. In the auto sector, for example, estimates suggest global revenues will almost double from $3.5 trillion in 2016 to $6.6 trillion by 2030. As much as 84 percent of this growth is expected to derive from disruptive new offerings such as shared mobility, connectivity, and electrification. To get a share of this growth, companies have no option but to pursue tech-enabled innovation for themselves.

What’s more, innovation in products will go hand in hand with innovation in business and revenue models, just as aerospace-engine original equipment manufacturers (OEMs) have long since made the transition from selling engines to selling power by the hour. Similarly, agricultural-equipment providers are selling farmers not only tractors and harvesters but productivity solutions enabled by connectivity and remote monitoring.

This article examines how much value could be created by tech-enabled product innovation in the industrial sector, identifies the key digital levers and enablers companies need to have in place, and suggests how they can go about capturing a fair share of the value at stake.

Sources of value

McKinsey’s analysis indicates that using technology to improve innovation and product development could deliver $166 billion to $477 billion in new revenue and $8 billion to $25 billion from margin expansion through greater efficiency in R&D. Exhibit 1 illustrates how this opportunity breaks down across the subsectors in the industrial sector.

Exhibit 1 SEE IN THE ORIGINAL ARTICLE

Exhibit 2 provides an overview of the key levers and enablers needed to capture value from the three main sources we identified, namely:

Exhibit 2 SEE IN THE ORIGINAL ARTICLE

Extract value from connected products and services

Our analysis indicates that connected products could deliver $34 billion to $95 billion in incremental industry revenue growth. As the costs of sensors, connectivity, and computing continue to fall, leading companies are harnessing technology to reinvent their products and services and launch innovative new offerings in a bid to leapfrog competitors and gain market share.

In line-haul trucking, for instance, technology will make it possible to reimagine operations across the entire value chain, as illustrated in Exhibit 3. A commercial fleet could save on fuel costs and improve vehicle performance by calibrating vehicles over the air to match operating conditions. A dealership could spec vehicles more intelligently by using data on individual customers’ usage patterns, and cut wait times at service facilities by managing inventory and triaging service jobs in real time. At distribution centers, semi-autonomous tractors could save time spent moving trailers around the yard and reduce the incidence of damage. Finally, manufacturers of line-haul trucks could collect data on duty cycles to inform R&D and cut warranty costs.

Exhibit 3 SEE IN THE ORIGINAL ARTICLE

Bringing connected products to life in this way requires industrial companies to address a number of practical challenges. Chief among them is building an IoT platform—a complex undertaking, especially for a sector that has traditionally treated engineering and IT as separate disciplines. Another challenge is deciding on the most suitable architecture from a wide array of providers and options, such as building on a generic IoT platform or procuring a turnkey solution from a specialty IoT partner.

Successful companies take two key steps to facilitate product connection:

Ensure that use cases drive platform requirements both while developing minimum viable products (MVPs) and over the long term. For example, use cases that require the real-time processing of large data sets, such as autonomous driving, demand significant edge computing capacity in the vehicle as well as in the cloud, while use cases based on aggregating data from a multitude of devices, such as consumption trends from connected appliances,
can be handled exclusively in the cloud, at much lower cost.

Take an end-to-end approach to architecture. A siloed approach, in which device, cloud, and app data are all handled independently, is likely to cause duplication, with each layer over-developing its own features rather than delivering functionality across the whole customer experience. By contrast, focusing on adding incremental end-to-end capability forces companies to address dependencies between data models, communication protocols, and so on, at an early stage in development programs, thereby greatly reducing risk.

Creating data-enabled business models

New business models offer the largest opportunity in tech-enabled product development, with an estimated $132 billion to $382 billion in incremental industry revenue growth. Some of these business models are likely to disaggregate value chains in much the same way that Uber is disrupting investment allocations for automotive companies, and increasingly aerospace companies as well. Manufacturers of mining equipment, for example, could explore a range of opportunities to create new revenue streams, such as charging insurers for vehicle usage data that helps them set premiums or offering mining companies uptime as a service (Exhibit 4).

Exhibit 4 SEE IN THE ORIGINAL ARTICLE

Unplanned downtime accounts for more than 10 percent of working time and causes considerable operational disruption. Our analysis indicates that a mere 1 percent improvement in the availability of earth-moving equipment could create more than $200 million in value in the US alone. An OEM could reap enormous benefits by offering uptime as a service, issuing a reliability guarantee for its equipment, and claiming a share of the value thus created for its customers.

Launching data-enabled businesses can be even more challenging for an industrial company than creating connected products, especially in two key aspects:

Getting from data to insight to value. Many industrial companies assume that the raw data generated by their IoT offerings is monetizable in its own right, but this is seldom the case. Companies usually need to combine multiple data streams—often including third-party data sets—before they can achieve a level of insight that yields commercial value. Another common misconception is that IoT offerings generate so much data that companies should be able to discover a silver bullet somewhere in it. Misled by this belief, one multinational industrial company tied up dozens of highly qualified data scientists for a decade on data projects that failed to find a viable route to market or indeed demonstrate any real commercial potential. Successful companies make sure that data-enabled offerings are owned by the business from the outset, and they take care to answer the question, “Who values this offering, and can I sell it to them?”

Getting to market. Pushing data-enabled offerings through existing channels and sales teams is likely to produce mixed outcomes at best. Reps may lack the expertise and customer connections to sell the new offerings effectively and may turn to other products to make up their quota, leaving the innovations branded as failures. One building-management company developed a data-driven product to reduce clients’ operational and energy expenses, opting to launch the new offering through its existing branches to get to market quickly. However, one of the product’s core benefits lay in reducing the time building owners spent on service issues in the local branches, while the company rewarded its branch managers based on the number of service hours they sold. Given the clear conflict of interest, branch managers mostly ignored the new offering.

Leading industrial companies aren’t afraid to cannibalize their core if it brings them greater overall benefits, and they plan their organization, hiring, and incentives to support their new offering and maximize its chances of success.

CONTINUED IN PART II

By Venkat Atluri, Jeremy Eaton, Mithun Kamat, Satya Rao, and Saloni Sahni

https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/tech-enabled-disruption-of-products-and-services?cid=other-eml-alt-mip-mck-oth-1811&hlkid=618679184bf8401282d097408c405f04&hctky=1627601&hdpid=40950bab-bdef-4ff9-9eb4-9ea21456999b