Digital Transformation and The Internet of Things

Clairvoyance (Rene? Magritte, 1936)

The Industrial Internet of Things seems to be in full swing, as the digital transformation of business operations and customers engagement models promises to bring about radical business improvements, new customers and additional revenue streams.

And technology innovations continue to keep the conversation alive, as hardware miniaturization, reduced power consumption, falling hardware prices, and ubiquitous wireless connectivity proliferate and power practically all new products.

The confluence of new technologies and innovative business models fuels the growth of the Industrial Internet of Things. There are plenty of compelling arguments—both business-oriented and technology-induced—that the Industrial Internet of Things will, indeed, lead to a radical transformation in practically every business sector.

The Return of the Real-Time Enterprise?

Remember the real-time enterprise, the concept in business systems design aspiring to improve organizational responsiveness that was popular in the first decade of the 21st century? Perhaps you remember them as sense-and-respond networks or on-demand enterprises.

Though not particularly well-defined, the primary objectives of the real-time enterprise can be summarized as:

  • Reduce response times to market demands, including from customers and partners.
  • Increase transparency across the enterprise instead of keeping information within separate silos.
  • Improve operational efficiencies and reduce costs due to process automation and enhanced process visibility across internal and external functions, including supply chain partners.

Sounds a lot like the aspirations of the Industrial Internet of Things, doesn’t it?

Understanding the IoT Transformation

The Industrial Internet of Things delivers incrementally transformative value in a number of ways. It’s helpful to view IoT-centric transformations along the following four stages. These stages, or dimensions, are, by and large, sequential and provide increasingly greater value:

  • Automate. Embedded control software and device connectivity to automate operational and decision-making tasks.
  • Accelerate. IoT as a means to shorten the latency of information. Remote access, augmented by data analytics and decision-support systems, improves the organization’s response time. The vast majority of Internet of Things implementations today are focused tactically on accelerating response times and only to a lesser degree on optimizing resource allocation.
  • Enhance. Big data analytics, simulation tools, and similar decision-support aids to optimize all aspects of the product lifecycle by mining enterprise data. Unlike the previous two stages of IoT transformation, which are predominantly retrospective and tactically reactive, the depth and breadth of big data is exploited to improve the fidelity of long-term predictive decisions in product design and operations.
  • Engage. The pinnacle of IoT-centric product strategy: connected products coupled with advanced decision-making processes transform traditional business models and engage customers via innovative, fine-tuned, user-centric and outcome-based service offerings.

Restructuring the Value Chain

In his bestseller book Competitive Advantage: Creating and Sustaining Superior Performance, Harvard Business School professor Michael Porter describes the concept of the product value chain as a “general framework for thinking strategically about the activities involved in any business and assessing their relative cost and role in differentiation … The value chain provides a rigorous way to understand the sources of buyer value that command a premium price, and why one product substitutes for another.”

Porter views the manufacturing or service organization as a system made up of sequentially organized subsystems, each with inputs, transformation activities, and outputs. These subsystems are responsible for the organization’s primary value-generating activities: inbound logistics, operations, outbound logistics, marketing and sales, and service. In addition, secondary activities such as human resources, training, and IT infrastructure are in place to support the primary value chain activities.

How does the Industrial Internet of Things support and possibly enhance a company’s value chain activities?

Value chain-based processes focus on articulating and creating customer value-add activities, and the process interfaces between these activities. But, these subsystems can inadvertently lead to the formation of technology, process, and functional and silos surrounded by insurmountable walls of business culture.

The IoT gives companies greater visibility to the myriad of value chain activities that transform inputs to outputs and move the product lifecycle forward. It gives the organization greater ability to coalesce and analyze data from historical and transpiring value chain events—both negative and positive—and the agility to respond quickly and efficiently based on timely and objective data from across the value chain.

A simple example will illustrate this point. Practically all product companies generate and store product service transactions across the value chain: customer service visits, warranty claims, sales orders, and so forth. But all too often, these remain locked within the value chain functions (and IT systems) that have created them: service, warranty administration, and sales, respectively. However, a forward-looking product company will combine sales forecast, product service history, and real-time device data to project service operations workload, forecast warranty repair costs, and optimize service parts inventory.

The information created by connected products and coupled with enterprise systems is ready to alter and reshape every activity in the organization’s value chain. It both imposes and enables flexible and permeable value chain functional boundaries and changes the traditional order in which value chain decisions are being made.

Consequently, as much as the Industrial Internet of Things helps improve the efficiency and agility of an organization’s value chain operations, it is fundamental in disrupting and rearranging Porter’s original rigid incremental value chain model. Porter touches upon this idea, although not changing the principal value-chain model, in the HBR article How Smart, Connected Products Are Transforming Companies.

Get Ready

Many enterprises may not be amenable to redefining the traditional value-chain boundaries. But as the practice of IOT continues to spread and business value is becoming evident, functional boundaries must shift to accommodate new functional models and business practices. Your organization need to be working on envisioning new IoT-driven business models and highly optimized value chain operations fueled by pervasive visibility and heightened decision-making capacity.

Image: Clairvoyance (René Magritte, 1936)
This article was adopted from the book The Outcome Economy: How the Industrial Internet of Things is Transforming Every Business