An executive’s guide to the Internet of Things

IoT

Here is a brief excerpt from an article written by Jacques Bughin, Michael Chui, and James Manyika for the McKinsey Quarterly, published by McKinsey & Company. Given the fact that the rate of adoption is accelerating, they identify and discuss six key realities that executives need to know. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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As the Internet of Things (IoT) has gained popular attention in the five years since we first published on the topic, it has also beguiled executives. When physical assets equipped with sensors give an information system the ability to capture, communicate, and process data—and even, in a sense, to collaborate—they create game-changing opportunities: production efficiency, distribution, and innovation all stand to benefit immensely. While the consumer’s adoption of fitness bands and connected household appliances might generate more media buzz, the potential for business usage is much greater. Research from the McKinsey Global Institute suggests that the operational efficiencies and greater market reach IoT affords will create substantial value in many industries.2 (For more, see the video “What’s the one piece of advice for a business leader interested in the Internet of Things?” And to see how experts believe the Internet of Things will evolve, see “The Internet of Things: Five critical questions.”)

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.

[Here is the first of six areas of focus that Bughin, Chui, and Manyika discuss.]

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 billion 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.

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Here is a direct link to the complete article.

Jacques Bughin is a director in McKinsey’s Brussels office; Michael Chui is a partner at the McKinsey Global Institute, where James Manyika is a director.

The authors wish to thank McKinsey’s Dan Aharon and Mark Patel for their contributions to this article.

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