It’s rare that a day goes by without seeing an article in the business press about the Internet of Things (IoT)—some new smart technology that is doing unprecedented things. A key reason for the capability of new smart technology to do unprecedented things is the emerging ability of it to generate and transmit massive volumes of data. We are seeing that evolution across many business-to-business (B2B) sectors, and it’s hard to avoid marveling at what the engineers and designers have already achieved. However, the IoT is in its infancy and further advances—in areas such as sensors, processing speed, and communications technologies—will continue to challenge how B2B companies utilize the IoT to drive profitable growth.

The potential of IoT technologies and its ability to create data will challenge firms to identify how to translate their investments into business successes. As we have seen so many times in the past, breakout advances in technology invite “doing it because it can now be done,” rather than “doing it because the market wants it” approaches. We know the latter will define the IoT winners, but it will be especially hard for firms to enforce the discipline needed to avoid too many unprofitable investments that are pursued because it can be done.

Creating business successes from the IoT will be a challenge, not so much because success will require mastering huge volumes of data, but because success will require careful thought about how to focus newly available capabilities to translate data into value. That challenge will be amplified because many IoT successes will require that firms implement new business models, a difficult task we know all too well.[1] We believe that there are three growth strategies that will yield success stories for the firms that build upon them as they develop and implement their IoT and smart technology initiatives.

Take Costs Out

In discussions with B2B engineers and business leaders working on their company’s smart technology initiatives, we repeatedly hear an emphasis on incorporating new features and capabilities into their equipment. Yet, we often find that a clear plan of action as to how their firm will capture the value they are creating through such features and capabilities is missing. It is common knowledge that there are three ways in which a supplier can deliver value to their customers and open the possibility of capturing that value for themselves:

1. Selling more product
2. Reaching a higher price point
3. Improving the bottom line by taking costs out

We believe that the largest opportunity for IoT advances involves the third route to value creation and capture. Our determination is based, in part, on the fact that many equipment-related sales involve production capital—disconnected from product sales to end customers further along the customer chain—and because the IoT is an incredible tool through which suppliers can tap previously unavailable “value pools.”

For example, a client of ours supplies transportation equipment to its customers. Among the value pools that were identified, one involved pre-trip inspections designed to spot potential problems that needed to be resolved before the equipment was used. The inspections focused on four specific problems. One only required a quick visual inspection, but the other three required more attention (e.g., powering up the equipment, removing a panel, etc). Each pre-trip inspection involved a cost to the equipment user of more than $50. However, IoT capabilities would eliminate the expense, providing data from embedded sensors in the equipment directly. As one customer noted, “Across a fleet of our size and thinking about how many trips each piece of equipment makes a year, that’s real money”. There was no question that an IoT initiative that took the costs out of this value pool had the potential to create value for customers and reward the equipment supplier that enabled those savings.

Consider New Adjacent Businesses

In a previous engagement, we worked with a firm that approached the challenge of identifying IoT initiatives by asking the question, “What data would have a game-changing impact on our business?” [2] Their perspective was that if they could identify data that mattered, then they would focus their attention on figuring out how to build intelligence into their equipment that would make that data available. A team of engineers and sales people collaborated in an ideation session that yielded a wealth of answers to the question posed above.

One of the findings that emerged from that session was the number of ideas that involved instances in which new data could enable the firm to move into and succeed in adjacent businesses—connected to, but nonetheless, distinct from their current focus on equipment sales. One example of such an adjacent business model involved using newly available information to create an “aftermarket advantage,” which enabled lower costs of service that could translate into a competitive advantage and improved margins. Sometimes, taking on a new business role and competing with the existing participants in a market is the route to answering the business question cited in the previous section—that of figuring out how to capture the value being created in instances of lengthy and complex customer chains. A second adjacent business model involved offering a remote monitoring service that could manage performance and detect problems on behalf of their customers, many of whom operated the equipment at hundreds of sites. A third business model involved offering data-related technology to customers, recognizing that in many instances the customers would want to manage the collection and analysis of data related to their operations in house for competitive reasons.

The approach to IoT planning implemented by this firm started off on firm ground—rather than focusing on the technology and its potential, they focused on opportunities in their market environment to create and capture value. Each of the prospective business models that were identified had the potential to create a new revenue and profit stream in an adjacent business and, at the same time, add breadth to the relationships the firm had with its key customers.

Become Your Own Customer

The two strategies described above are market- and customer-focused—taking costs out of the value pool, which eliminates spending by equipment customers, and entering adjacent businesses by building intelligence into equipment to provide a valuable source of data that creates a competitive advantage. The third IoT growth strategy has an internal focus.

We worked with a client that provided an important component to OEMs in many distinct vertical markets. The first question we asked was, “What do you wish you knew about your customers that you don’t know today?” The answers that were provided were very enlightening. One participant noted that, “We split business with [name of a competitor], even with our best customers. I know it’s not just price, as we’ve tested that water. In fact, we know quite a bit about what it’s not; we just don’t know what it is that drives them one way or the other. I wish I knew why they sometimes pick us and other times pick them.” A second answer revealed, “We know that reliability is critical, that if our product development investments yielded improved reliability, it would pay off. But what we don’t know is what improvements would prevent the failures that happen. Nothing we’ve done so far has put the spotlight on specific problems to tell us where to make changes.”

What we found important about these and other examples that emerged from the discussion was that IoT advances had the potential to answer those questions in the future. In the former case, learning the characteristics of the operating environments in which the firm’s equipment was selected, and inferring why that was the case, had the potential to point to opportunities to evolve the equipment for the other environments in which competitor equipment was preferred. In the latter case, capturing data about what was going on with the equipment just prior to instances of failure had the potential to define the improvements that could avoid such failures. Enabling their equipment to provide meaningful data to drive the firm’s decisions on new product investments had the potential to ensure that future product development initiatives would be rewarded in the market.

Key Takeaway

IoT technologies will advance at breakneck speed and the amount and variety of data that will become available to firms will dwarf what we’ve seen thus far. It will overwhelm many firms as the volume of data to be mastered grows to unprecedented levels. It will also frustrate many firms that focus on what can now be done without first thinking through the business opportunities that will result from these newly created capabilities.

Success stories will result in many instances, but most of them will require a deliberate and thoughtful approach to generate a real understanding of how to translate new streams of data into value. Focusing on opportunities to take costs out of customers’ value pools, to gain a competitive data-driven advantage in adjacent markets, and to answer the previously unanswered questions that can enable your own firm to make sound decisions on investments are three strategies through which firms can build the foundation for IoT success stories.

[1] See George F. Brown, Jr., Now Comes the Hard Part – Managing Change, Employment Relations Today, Winter 2013.
[2] See George F. Brown, Jr., The Big Data Dilemma, Industry Week, June 27, 2013.