The Chip in Your Head Bread

Two decades after the Internet became available for unrestricted commercial use, today’s ubiquitous technologies that arose because of it – cloud computing, enterprise mobility, and Big Data – are converging to launch another economic transformation. Though we talk about each of these technologies in discrete terms, none of them has the power to transform business […]


Two decades after the Internet became available for unrestricted commercial use, today’s ubiquitous technologies that arose because of it – cloud computing, enterprise mobility, and Big Data – are converging to launch another economic transformation. Though we talk about each of these technologies in discrete terms, none of them has the power to transform business singly as much as they do together. Internet of Things, or IoT, is the popular term for describing what connects them in an ecosystem of customers, suppliers, and business partners.

Like the Internet, the IoT promises to change how businesses and public sector agencies operate, how they make or save money, and how they deliver value to customers or constituents. Industry analysts estimate that tens of billions of smart things will be connected in the next decade, with an impact approaching or exceeding the GDP of the world’s largest economies. Consultancy McKinsey & Co. estimates US$6.2 trillion in benefits by 2025. Technology vendor Cisco projects that organizations will capture US$14.4 trillion in value during a similar period.

This transformation has already begun. The Economist Intelligence Unit reports that three-quarters of companies are already exploring IoT applications. Although the IoT will affect different industries at different rates and in different ways, no industry is likely to escape its impact. Of business leaders surveyed, 38% believe that the IoT will have a major impact in most markets and industries by 2015, especially in Asia.

Take the long view

Any IoT strategy must be thought of in terms of years and decades, not days and months. Although much can be done with the IoT already, its ecosystem’s technologies are still developing and will not reach their full potential for years to come. Given the dramatic implications the IoT has for changing business processes, business models, and cross-enterprise collaboration, the natural human responses to change – inertia and resistance – will kick in. Finally, not all companies or industries need the IoT in equal doses, although, like the Internet, the IoT will eventually become a part of how all of them do business.

But to sit and wait, as many companies did during the early stages of the Internet and the Web, will not pass muster this time around. The Internet and the Web ushered us into the digital business age; the IoT will be the full expression of this new age. That’s why companies that aren’t developing an IoT strategy today risk being left behind as competitors forge more efficient, effective work processes and launch new, potentially disruptive business models.


The Six Key Elements of an IoT Strategy

Here are six elements of an IoT strategy that you need to be thinking about today.

1. Develop the Business Case

For many companies, the business case for the IoT can be summed up in a single word: commoditization. “As technology brings ever-more efficiency to companies, the prices they can charge for their goods keep dropping,” says David Simchi-Levi, professor of engineering systems at MIT. “Thus, if you want to maintain the same margins, you need more and more innovation. IT provides that opportunity.”

“Indeed, as the cost of IT goes down, its capabilities are going up,” adds Simchi-Levi, “and as a result companies have opportunities to innovate. Since IT comes with data about everything in the business, companies have an opportunity to apply their own as well as external data to improve business and supply chain performance.”

The IoT presents the opportunity to expand the number of smart objects included in a business process and make the data from those objects available to other applications. Organizations have the opportunity to reap tremendous benefits from the IoT by distributing data more extensively throughout their value chain, creating the opportunity for suppliers and customers—and their suppliers and customers—to extract additional benefits from it.

The German government is developing a business case for the IoT through its Industry 4.0 initiative, launched in 2012. The government has put the IoT at the center of efforts to make its manufacturing companies more competitive. As outlined in a research note by Deutsche Bank recently, smart factories—heavily automated and integrated with smart energy grids, smart transportation (also called smart mobility), and smart logistics— would use real-time data to adapt production processes and resource use dynamically. This would enable them to reduce time to market and respond more quickly to customer demand. These networked factories would produce smart products, which would carry with them information about how and when they were made and how they should be used.

2. Investigate How the IoT Fits Your Industry

There are as many visions for the IoT as there are industries. A Morgan Stanley report for investors identified more than a dozen industries where the IoT could reduce inefficiencies or increase revenues, noting that “current or near-term applications are only scratching the surface” of its impact.

Every industry could potentially use the IoT differently, and many have already started to reap the benefits. Mining companies, for example, can monitor or operate machinery remotely, reducing fatalities and injuries. Rio Tinto operates a fleet of 60 autonomous trucks at three mines in Australia, reducing operating costs through lower fuel consumption and more consistent driving patterns that reduce maintenance.

In retail, Cumberland Farms, a regional chain of U.S. gasoline stations and convenience stores that is aligned with Gulf Oil, created a smartphone application that links Cumberland Farms gas pumps to a variety of payment options. Customers who use the app get discounts on their gasoline purchases. “You input your security code and the pump number, and the price of a gallon of gas goes down 10 cents,” explains W. David Stephenson, principal of Stephenson Strategies, an IoT consultancy. “You can see it on the display.”

Businesses or individuals that use the app may include multiple drivers on their accounts and use the purchasing data to manage their fuel expenses. The company recently reported saving consumers more than US$12 million since launching the service in 2012. In the first few months of the service, customer retention increased as much as 86%.

In addition to mining and retail, many other industry-specific applications for the IoT have emerged, such as:

Insurance. A device can monitor how automobile owners drive, and insurers can factor driving behavior into the rates they charge.

Healthcare. Devices can monitor patients’ vital signs and alert caregivers when a person needs medical attention.

Transportation. Shipping containers can be equipped to detect whether they’ve been opened or damaged and to track their location in real time.

Utilities. Smart electric meters enable power companies to understand consumption patterns better and manage them more efficiently. Smart water networks can detect leaks and save water, as well as generate more accurate and precise data on usage.

Automotive. The auto industry has 30 years of experience in putting sensors in vehicles and adding services on top of them—with mixed results. For example, General Motors’s OnStar service is profitable, but the company reportedly retains only about half of new car buyers after their free trial ends. However, a recent Accenture survey found that nearly 40% of drivers say that in-car technology is the main factor they consider when making a purchase.

3. Experiment with New or Improved Services

One of the IoT’s big benefits is that experimenting is cheap. Services in particular are a good way to start because they don’t require as much capital investment. They are also a way to differentiate yourself from competitors who think that the IoT simply means putting sensors on everything. “The mere fact that we can connect devices in itself has no value,” says Joe Barkai, a product marketing strategist.

It’s not clear how much more consumers would be willing to pay for, say, an intelligent washing machine. And if eventually all washers have intelligence built in, manufacturers then won’t be able to tout it as a selling point—or charge extra for it. “So it goes back to whether it can improve my efficiency as a service provider,” says Barkai. If a broken washer can report what is wrong with it, the repair technician can arrive with the correct part.

4. Find a Partner

The IoT’s ultimate value will be found in the processes driven through business networks. Organizations will need to rethink their business partnerships and forge new ones to make the IoT a reality.

At one level, this challenge is technical. The Internet of Things is much like the Internet in 1993, before the wide-scale adoption of the Web. It took vendors years to fully Web-enable their existing products and to create new, interoperable tools for managing, monitoring, and capturing online data. Similarly, technology companies will need to collaborate so that IoT application components are easy to assemble and integrate.

An end-user company that is influential in its industry and has a vision for the IoT could become a catalyst for deployment by others. That’s the role Walmart played in the early adoption of RFID technology, observes Josh Siegel, founder and CTO of CarKnow, a startup that is building an open platform for apps based on data from people’s automobiles. Walmart defined a key value proposition—inventory tracking—which pushed suppliers to adopt the technology and helped drive down the cost of using it for everyone.

A similar dynamic is at play today among emergency responders in the public sector. A U.S. government agency, the First Responder Network Authority (FirstNet), is building a nationwide mobile broadband network devoted to public safety (see How FirstNet is creating the foundation for a public safety Internet of Things).

5. Use the IoT to Drive New Business Models

Data collected from things shared among suppliers and customers is likely to lead to new revenue sources or completely new business models. For instance, companies that sell manufactured products are launching services based on data collected from those products.

Daimler Trucks North America puts sensors in its vehicles and offers a monitoring service for customers to expedite maintenance. “The truck must run or it doesn’t make money,” Dieter Haban, CIO with the company, told attendees at the 2014 MIT Sloan CIO Symposium. “For the customer, the interest is to have the truck operating 24×7.”

Data from the truck is sent to a call center for analysis, Haban explained at the symposium. If a maintenance issue is detected, Daimler Trucks informs the fleet owner and, if the issue is urgent, helps schedule an appointment with a dealer. The dealer also gets the information about the problem and is able to have the right parts on hand when the driver arrives.

6. Be Aware of the Roadblocks and Have Patience

Any innovation worth pursuing comes with risks, and the IoT is no different. Here are five:

Not all IoT business cases are alike. Individual companies don’t all have the same incentive to invest in the IoT. The more established the company, or the more specialized its business model, or the more specific the requirements are for using and protecting data, the harder it may be to develop a case for investment. For example, some companies may not see any value in retrofitting their machinery, which often has a lifespan measured in decades. They may limit their IoT investments to new equipment, which means their participation in device-enabled networks would advance slowly.

The company culture may not be ready. To get the value from their IoT investments, companies may also need to cultivate more data-savvy employees who understand what data to collect and how it can help them make better decisions. Supply chain managers, for instance, typically have been very successful making decisions based on intuition and gut feeling, says MIT’s Simchi-Levi. “When a young analyst comes up with a data-driven insight that is not necessarily consistent with a decision maker’s intuition, there is all of a sudden internal resistance.” Furthermore, organizations don’t like to share data. Many companies that could share existing data or integrate their business processes electronically right now don’t do it, even internally. “There are functional silos that isolate manufacturing from distribution, procurement, or marketing and sales,” notes Simchi-Levi. The silos are perpetuated in some cases by corporate politics or a lack of incentive to cooperate. When sharing data externally, companies may also worry about exposure.

Security could get worse before it gets better. Fifty billion more doorways to the Internet through networked objects means 50 billion more opportunities for mischief if the devices are hacked. “Companies have to figure out how to manage the risks of unauthorized access,” says Adam Binnie, head of new markets and innovation at analytics software maker Visier. “That’s a constant battle on the Internet, and we’re going to have to deal with that reality. You don’t want someone unlocking your car or turning off health monitoring equipment.” At the August 2014 Black Hat security conference, hackers proved that by hacking a Nest thermostat, they could control other devices connected to the same Wi-Fi network.

Privacy will become a bigger issue. Regulators around the world have raised concerns about consumer privacy. A European Commission working group is examining the impact of the IoT and wearable computers on the protection of personal data. In the United States, Edith Ramirez, who heads the Federal Trade Commission, has called for companies that make smart devices to “shift the burden of privacy protection off the shoulders of consumers” by building privacy into their products, giving consumers control over their data, and disclosing exactly what information the devices collect.

Early movers always pay a higher price. Deutsche Bank suggests that the full IoT vision will not become reality for another decade. Even though the cost of the IoT’s foundational technologies are dropping, any large-scale implementation isn’t a trivial investment. Early adopters have to shoulder the expense of application development, integration, security, and device management without the benefit of technical standards that still have to evolve. “The apps are custom built, and a lot of the time the platform is custom-built,” says Steve Hilton, cofounder and managing director of MachNation, an analyst firm specializing in the IoT. “It’s going to have to be a learning process, because we really don’t know what we want these devices to do [yet].”


Start Experimenting Now

Despite these obstacles, business leaders can’t sit back and wait to see how the IoT takes hold. Letting their competitors test the waters allows those companies to leap ahead. Companies that don’t have an IoT strategy risk falling behind those that are gaining practical experience with the technology now. Laggards may be disrupted by new business models that develop from the experiments occurring today.

The Internet of Things is already here, even if today’s capabilities don’t match futurists’ lofty visions. It’s time to embrace it, define its value, and confront its challenges. Companies that do will continue to thrive.

See more from SAP on the Internet of Things and join the conversation.

About the author:

Uwe Kubach is vice president, IoT Enablement, with SAP. SAP colleagues who provided valuable insights to this article include: Mahira Kalim, director of Product Marketing; James Marland, vice president, Network Strategy, Ariba, an SAP company; and David Landsman, senior manager, Ariba Discovery. Elana Varon, editor in chief of Digitalist Magazine, contributed research and writing.


Executive Quarterly, Q3 2015