What separates leaders from laggards in the Internet of Things

Here is a brief excerpt from an article written by Michael Chui, Brett May, Subu Narayanan, and Ridham Shah for the McKinsey Quarterly, published by McKinsey & Company. 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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Even among companies working at scale with the Internet of Things, there’s a wide gap between top and bottom performers. Nine practices distinguish the leaders from their less successful peers.

For all the excitement that has built up around the Internet of Things (IoT)—the network of digitally connected devices whose economic value could amount to trillions of dollars per year—the IoT’s impact varies greatly from one company to next. Many enterprises have launched pilot projects to develop IoT-enabled products and services or use the IoT to achieve operational improvements. Of these, less than 30 percent have taken their IoT programs beyond the pilot phase, according to our research.

Yet even among companies with large-scale IoT efforts, a significant gap separates the top tier of performers from the bottom tier. In a survey of IoT practitioners at 300 businesses with mature IoT programs (those that have expanded beyond pilot projects), about one-sixth said their companies had seen a significant payoff from IoT, an aggregate cost and revenue impact of at least 15 percent.1 We call these companies IoT leaders. At the other end of the spectrum, about one-sixth of respondents—the IoT laggards—said their IoT efforts had yielded an aggregate revenue and cost improvement of less than 5 percent (Exhibit 1).

One-sixth of companies, the Internet of Things (IoT) leaders, reported a positive impact on their costs and revenues from their IoT initiatives.

What separates the leaders from the laggards? The superior performance of the leading companies appears to be a function of much more than luck. Our survey results indicate that their approaches to the IoT exhibit the following distinctive practices. These companies are aggressive: by pursuing a large number of IoT applications, they quickly climb the IoT learning curve and pass the point at which new applications consistently generate a great deal of value. They develop a clear idea about the commercial opportunities associated with IoT, and they align everyone in the organization, from the executive suite to the front lines, toward a common set of goals. And they’re pragmatic about how they implement their IoT plans, building their IoT offerings around existing products and services and relying on outside partners to furnish them with sophisticated technologies. In this article, we’ll offer a closer look at the nine practices that are closely associated with IoT leadership.

Be aggressive

The most surprising finding from our survey research is that IoT leaders implement many more potential IoT applications than their less successful peers. That might sound obvious. All other things being equal, one could reasonably predict that implementing more IoT applications produces more benefits. What’s less obvious is that the IoT has a steep learning curve, such that companies that get an early start or move quickly will reap the rewards of their efforts before slower-moving companies. Moreover, IoT leaders change business processes to capitalize on the potential of their IoT applications, and they go after opportunities to use advanced IoT end points such as autonomous vehicles and wearable devices. In these ways, the IoT rewards aggressive players.

Practice 1: Implement lots of use cases

We noted earlier that many companies have yet to move their IoT programs beyond small-bore pilot efforts. The reasons for this phenomenon vary, but one we hear often is that initial IoT use cases seldom produce the kind of significant financial impact that might encourage companies to press ahead with others. As it turns out, it’s not just those few use cases that can be unimpressive. Our survey suggests that the first 15 or so IoT use cases typically have a modest payback—and the average payback continues to rise until companies have implemented around 30 use cases (Exhibit 2). In other words, the 20th IoT use case that a company implements will likely have a greater financial impact than its tenth.

As companies implement more Internet of Things (IoT) use cases, they see increased financial impact, with the effect leveling of at around 30.

The formula for real financial impact—using the IoT in a high number of instances—was also evident when we compared IoT leaders and laggards. IoT leaders pursue 80 percent more IoT use cases than IoT laggards. The difference points to a disproportionate increase in financial gain: IoT leaders anticipate that their IoT use cases will boost their gross profits by 13 percent over the next three years, three times as much as IoT laggards.

One global transportation-equipment manufacturer’s experience with developing IoT-enabled products underscores the importance of scale. After the company launched its IoT strategy with four minimum viable products (MVPs), executives soon found that performance wasn’t improving as much as expected. A cadre of IoT leaders pushed back against voices of caution and tripled the number of MVPs. It turned out that putting managers in charge of more IoT projects and products focused their attention, creating a bias toward action. Previously unexpected synergies soon emerged: engineers used similar data architectures for multiple offerings and discovered ways the digital end products could support one another. Before long, the more aggressive slate of use cases had produced more than $1 billion in new revenue.

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Here is a direct link to the complete article.

Michael Chui is a partner in McKinsey’s San Francisco office; Brett May, chief operating officer of McKinsey’s IoT Ventures, is based in the Silicon Valley office; Subu Narayanan is a senior expert in the Chicago office; and Ridham Shah is a specialist in the Dallas office.


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