The Industrial Internet Six Critical Questions for Equipment Suppliers

By Massimo Russo, Richard Helm, and Grant McCabe

he Industrial Internet is here: smart, ny to resolve nearly a third of customer Tconnected machines generating prodi- problems remotely.1 Similarly, equipment gious amounts of data that can be analyzed providers can analyze customers’ equip- to improve operations. Inexpensive sensors, ment data and provide services to improve ubiquitous connectivity, the ever-declining performance: the potential increase in pro- cost of microprocessors and storage, and the ductivity through optimized, data-driven emergence of cloud-based storage and operations for customers can drive produc- software have made this shift possible. tivity increases of up to 30 percent. Traditional capital-equipment suppliers— which have historically focused on mechani- Yet while the promise of the Industrial cal- and electrical-engineering disciplines— Internet is significant, incumbent suppliers will need to rethink their business models will need to take specific measures in order and respond with new data- and software- to capture that promise. Intermediaries enabled services. Implemented correctly, such as system integrators and software these new business models will allow companies are marketing “smart” every- suppliers to strengthen their ties to the thing and positioning themselves to cap- customer and create new revenue sources. ture the data and software layers within existing processes. New start-ups are also There is tremendous value at stake. For forming to provide data-hosting and analyt- downtime-sensitive applications—includ- ics services to equipment customers. For ing, manufacturing and process indus- example, there are hundreds of start-ups tries—such technology can provide predic- providing fleet management software for tive-maintenance services that increase truck operators, potentially disrupting equipment reliability. For example, Trane, truck OEM and fleet operator relationships. a wholly owned subsidiary of Ingersoll Rand, makes HVAC systems embedded Given these shifts, equipment suppliers with digital sensors that allow the compa- need to rapidly define their strategy to cap-

For more on this topic, go to bcgperspectives.com ture the potential of the Industrial Internet. How Fast Will New Business Specifically, they must shift from a business Models Emerge? model built around engineering, product de- Historically, equipment suppliers have velopment, and manufacturing to an infor- been limited in their ability to exploit tech- mation-based model that leverages data, an- nologies for competitive advantage, pri- alytics, software, and services to unlock marily because the technologies them- value. In navigating this change, suppliers selves were expensive. (Noteworthy need to address six fundamental questions. exceptions are companies that develop highly advanced reliability-critical products, such as jet engines, with a large after- How Is Data Creating market to protect. These companies can New Value? justify correspondingly high R&D budgets.) Designing smart, connected equipment Yet the cost barrier is falling fast. Today, that collects operational data is merely ta- the capital investment required to innovate ble stakes. Suppliers need to understand through technology has dropped signifi- how to unlock value through the collection cantly, even as the sophistication of poten- and analysis of data and cultivate the abili- tial solutions has improved. ty to change the operational performance of their machines remotely. For example, For example, the cost of embedding 3,000 aircraft engine manufacturers can make in- smart sensors in a new power-plant boiler flight adjustments to optimize fuel efficien- has fallen to less than 1 percent of the total cy. (The worldwide market for aircraft- manufacturing cost. Adding 100 to 200 sen- performance-monitoring systems, which is sors to a large mining truck adds just 0.5 per- now worth more than $2.2 billion, is pro- cent in incremental manufacturing costs. The jected to grow at a compound annual rate potential value of the information those sen- of 6.8 percent through 2020, to more than sors generate is significant for individual $3.3 billion.) equipment components. But it is magnified once a critical mass of equipment is connect- Suppliers can begin by optimizing their own ed and smart. Also, once an entire fleet is machines—for example, by providing pre- connected, a transportation provider can op- dictive-maintenance services—but they also timize operations by dynamically rerouting need to understand what data to capture and trucks to improve service levels, utilize capac- at what resolution and frequency, as well ity more efficiently, and reduce travel time. as how to analyze that data to deliver insights that customers can act on. It is critical- That said, if equipment lives are long and ly important that this information be linked there is no retrofit opportunity, adoption to value—such as the potential savings for rates will be slow. Additionally, suppliers customers in downtime prevention and im- should not underestimate potential disrup- provements in operational performance. tions—such as a simple smartphone app that replaces expensive onboard telematics Suppliers generally understand that data- equipment. Is there a disrupter (like, say, driven analytics could be valuable, but they Uber in the limousine and taxi industry) struggle to determine where they should that leverages smartphones for connectivi- start. They need to define specific use cas- ty and dramatically changes an industry? es, clear value propositions that address Could a simple, low-cost temperature and specific customer needs. For example, a acceleration sensor with a processor and service provider in the trucking industry mesh network create an easy retrofit op- might collect data on operators’ driving portunity and capture enough data to ad- patterns and how to improve them to save dress valuable customers’ pain points? An fuel. In a more advanced version, a GPS- assessment of adoption rates will have to linked algorithm could anticipate elevation take these factors into consideration. changes in the road and recommend an op- timal speed to minimize braking and accel- There are other factors at play as well. The eration on declines and inclines. race to set global industrial standards is

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heating up, with the recently formed, U.S.- accelerated innovation cycles, as new en- led Industrial Internet Consortium and the trants with strong capabilities in software, Germany-led Industry 4.0 initiative as ex- data, and analytics join the market and ei- amples. Equipment suppliers as well as ther replace high-margin services or invent countries (in this case Germany) want to whole new markets. establish a leading position by setting standards early. For example, Nest Labs’ introduction of the connected intelligent thermostat (and Venture capital firms are directing their at- Google’s subsequent acquisition of Nest) tention—and investments—to Industrial has been a wake-up call for suppliers of Internet companies, making more than building-control devices. A division of $1.1 billion in Internet of Things invest- Google is seeking to provide energy man- ments in 2013 alone.2 Evrythng, a start-up agement services that are enabled purely that designs software that helps manufac- by data, encroaching on the market and turers connect with clients and partners customer interface historically occupied by through their own products, recently re- equipment providers and utilities. ceived $7 million in funding from a range of venture capital investors and technology Similarly, a start-up called FirstFuel Soft- players, including Cisco. Such innovation is ware can provide energy efficiency services accelerating as Silicon Valley increasingly to commercial real-estate clients through focuses on creating platforms for connect- data analytics. In this environment, indus- ed smart machines. tries are moving away from traditional, lin- ear value chains to much more complex The degree of competition is understand- ecosystems. Pure hardware providers that able: large system integrators, software ven- do not adapt run the risk of becoming com- dors, and technology providers see the In- modity businesses or worse—obsolete. dustrial Internet as a lucrative opportunity to help manufacturing companies capture As the industry structure evolves, certain as- the value. For example, Taleris, a joint ven- sets will become more relevant sources of ture of General Electric and Accenture, fo- innovation and growth. These include the cuses on airline fleet optimization; SAP has right to monitor and control installed equip- developed a predictive-maintenance offer ment and devices, more comprehensive that leverages its software and analytics industrial-software platforms that enable tools; and GE has announced that it is open- ecosystems (either open or proprietary), and ing its Industrial Internet platform for others new software- and data-enabled services to use. Given this spate of activity, however, that provide more than the traditional suite equipment suppliers must understand the of basic repair, support, and maintenance. dynamics in their industry, including how fast new services will emerge in their industry, what trigger points may accelerate adop- How Do We Play in This Space? tion, and who the potential disruptors are. Determining how to play requires a deep understanding of the value creation potential of data across the production chain; How Will Industry knowledge of where the hardware, data, Structures Change? analytics, and software control points are; Capital-equipment suppliers have long an assessment of potential business mod- benefited from a relatively stable value els and their economics; and an overall chain, which, in some sectors, dates back to view of how the ecosystem of players may the industrial revolution. In comparison, evolve. Because there is such a high degree the high-tech industry has much shorter of uncertainty, we advocate using several product life cycles and more frequent dis- tools to explore the various positions indus- ruptive innovations that are driven by soft- try players might take and to determine ware as well as hardware. As a result, in- where profit pools could migrate. These industrial-equipment suppliers now face clude scenario planning (a disciplined

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method of constructing alternate futures How Do We Get Started? within the company’s external environ- Manufacturers need to develop compelling ment), engaging in war games (assessing use cases—based on real customer needs— decisions in the context of the competitive for an integrated hardware, data, software, environment), and stress-testing (exploring and services offering that leverages not key assumptions and critical levers that only internal capabilities but also the full support specific strategies). power of an ecosystem. There is a basic path manufactures can follow to capture However, as digital technology becomes the promise of the Industrial Internet. more pervasive, equipment suppliers have one key advantage: because they are in the First, they need to gain a clear understand- best positions to harness the information ing of the customer value proposition—that asymmetry from their installed bases, they is, the specific need that a solution will ad- have a greater ability to detect trends dress. That accomplished, they should deter- across fleets and can, thus, provide clearer mine what data could be collected from the insights to their customers. installed base (either of new equipment or through a retrofit program) and capture the most granular data available from custom- What Capabilities ers. Next they have to clearly articulate the Do We Require to Win? “minimum viable product” that should be Once it defines a clear strategy for playing, released to a customer. The value proposi- an equipment provider needs to conduct tion can be built around optimizing equip- an honest assessment of internal capabili- ment performance, preventing downtime, ties. The addition of sensors, actuators, and or providing decision support to customers more advanced control systems into equip- (for example, optimizing a machine’s perfor- ment greatly increases the software-engi- mance or planning a particular operation). neering and integration skills required. The At this point, the manufacturer should con- data stream needs to be captured, stored, duct a pilot, testing an initiative and getting and analyzed, and this will require new ca- early feedback that can be applied to build- pabilities in cloud-based storage, big-data ing out the product and service portfolio. analytics, and software solutions. These ca- The goal must be to manage the software pabilities traditionally fall within the IT like a product. function, which is generally ill suited to deliver customer-facing applications. ccording to GE, the pace of change Accordingly, companies need to consider Ais about to accelerate, and the twenty- several critical questions. Does the organi- first century’s Industrial Internet revolu- zation have the agile software-develop- tion will be on the scale of the nineteenth ment and user experience capabilities to century’s Industrial Revolution, with corre- launch high-quality customer-facing appli- spondingly large opportunities for equip- cations? What are the capabilities of the ment manufacturers that seize the initia- engineering team for developing embed- tive. In this environment, manufacturers ded software? Is corporate IT the right must ask themselves a tough question: Do function to support new customer-facing we have a clear strategy and plan in place data services? What software product-man- to capture the emerging profit pools? agement capabilities are needed?

It is essential that companies decide which Notes capabilities to develop internally and 1. Nancy Pardo, “How Smart, Connected Products are Reshaping Manufacturing,” PTC, September 1, which to fill through external partners, ven- 2013, http://blogs.ptc.com/2013/09/01/how-con- dors, or acquisitions. In many industries, an nected-products-are-reshaping-manufacturing/. ecosystem of solution providers is already 2. “Internet of Things Companies Haul in More than emerging, allowing suppliers to close any $1 Billion in Venture Capital in 2013,” CB Insights, March 18, 2014, http://www.cbinsights.com/blog/ internal gaps quickly. internet-of-things-investing-snapshot/.

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About the Authors Massimo Russo is a senior partner and managing director in the Boston office of The Boston Consulting Group. You may contact him by e-mail at [email protected].

Richard Helm is a partner and managing director in the firm’s Sydney office. You may contact him by e-mail at [email protected].

Grant McCabe is a partner and managing director in BCG’s Melbourne office. You may contact him by e-mail at [email protected].

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advi- sor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 81 offices in 45 countries. For more information, please visit bcg.com.

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