Here is an excerpt from an article by Jacques Bughin, Michael Chui, and James Manyika, one of the all-time most popular featured by The McKinsey Quarterly, published by McKinsey & Company.

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There are many implications for senior leaders across this horizon of change. In what follows, we identify three sets of opportunities: expanding pools of value in global B2B markets, new levers of operational excellence, and possibilities for innovative business models. In parallel, executives will need to deal with three sets of challenges: organizational misalignment, technological interoperability and analytics hurdles, and heightened cybersecurity risks.

Opportunities beckon . . .

IoT’s impact is already extending beyond its early, most visible applications. A much greater potential remains to be tapped.

[Consider these three of several strategic objectives.]

Creating B2B value globally

To make the Internet of Things more understandable, media coverage has often focused on consumer applications, such as wearable health and fitness devices, as well as the automation products that create smart homes. Our research reveals considerable value in those areas. Yet the more visible manifestations of IoT’s power shouldn’t distract executives from a core fact: business-to-business applications will account for nearly 70 percent of the value that we estimate will flow from IoT in the next ten years. We believe it could create as much as $11.1 trillion a year globally in economic value in nine different types of physical settings. Nearly $5 trillion would be generated almost exclusively in B2B settings: factories in the extended sense, such as those in manufacturing, agriculture, and even healthcare environments; work sites across mining, oil and gas, and construction; and, finally, offices.

There’s also a global dimension to IoT’s B2B potential. Emerging markets, whose manufacturing-intensive economies often supply goods to final manufacturers, will be prime areas for IoT adoption. But over the next ten years, the total economic impact from IoT will be greater in advanced economies, given the possibility of larger cost savings and higher adoption rates (Exhibit 1).

However, an estimated 38 percent of IoT’s overall worldwide value will likely be generated in developing economies, and eventually, the number of IoT deployments in such markets could surpass those in developed ones. In fact, deployments in developing economies are likely to exceed the global average in work-site settings (such as mining, oil and gas drilling, and construction) and in factories. For instance, China, with its large and growing industrial and manufacturing base, stands to reap major benefits not only on the factory floor but also in product distribution. In fact, developing economies could leapfrog the developed world in some IoT applications because there are fewer legacy technologies to displace.

Optimizing operations

Investing in IoT hardware—from sensors embedded in manufacturing equipment and products to electronically tagged items along the supply chain—is only the starting point of the value equation. The biggest competitive gains come when IoT data inform decisions. Our work shows that most of the new business value will arise from optimizing operations. For example, in factories, sensors will make processes more efficient, providing a constant flow of data to optimize workflows and staffing:

• Sensor data that are used to predict when equipment is wearing down or needs repair can reduce maintenance costs by as much as 40 percent and cut unplanned downtime in half.
• Inventory management could change radically, as well. At auto-parts supplier Wurth USA, cameras measure the number of components in iBins along production lines, and an inventory-management system automatically places supply orders to refill the containers.
• In mining, self-driving vehicles promise to raise productivity by 25 percent and output by 5 percent or more. They could also cut health and safety costs as much as 20 percent by reducing the number of workplace accidents.

IoT systems can also take the guesswork out of product development by gathering data about how products (including capital goods) function, as well as how they are actually used. Using data from equipment rather than information from customer focus groups or surveys, manufacturers will be able to modify designs so that new models perform better and to learn what features and functionality aren’t used and should therefore be eliminated or redesigned. By analyzing usage data, for example, a carmaker found that customers were not using the seat heater as frequently as would be expected from weather data. That information prompted a redesign to allow easier access: the carmaker updated the software for the dashboard touchscreen to include the seat-heater command. This illustrates another capability of connected devices: with the ability to download new features, these products can actually become more robust and valuable while in service, rather than depreciate in value.

Despite this value, most data generated by existing IoT sensors are ignored. In the oil-drilling industry, an early adopter, we found that only 1 percent of the data from the 30,000 sensors on a typical oil rig are used, and even this small fraction of data is not used for optimization, prediction, and data-driven decision making, which can drive large amounts of incremental value.

Creating innovative business models

IoT can also spur new business models that would shift competitive dynamics within industries. One example is using IoT data and connectivity to transform the sale of industrial machinery and other goods into a service. The pioneers of this trend were jet-engine manufacturers that shifted their business model to selling thrust and ancillary services rather than physical equipment. Now these models are proliferating across industries and settings. Transportation as a service, enabled by apps and geolocation devices, is encroaching on vehicle sales and traditional distribution alike. Manufacturers of products such as laser printers with IoT capabilities are morphing into robust service businesses.

IoT makes these business models possible in a number of ways. First, the ability to track when and how physical assets are actually used allows providers to price and charge for use. Second, the combined data from all these connected assets help a supplier to operate equipment much more efficiently than its customers would, since its customers would only have a limited view of their own equipment if they purchased and ran it themselves. Furthermore, analysis of IoT data can enable condition-based, predictive maintenance, which minimizes unplanned downtime.

This business-model shift will require product companies to develop and flex their service muscles. Product development, for instance, becomes service development, where value is cocreated with customers. It won’t be enough to focus on the product features customers will pay the most for. Developers will need to understand the business outcomes their customers seek and learn how to shape offerings to facilitate those outcomes most effectively. Service providers will also have to take on capacity-planning functions—including planning for peak usage and utilizing IoT data to forecast demand.

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