Welcome to the Industrial Internet: An Analysis for Middle Market Companies
Marco Annunziata, chief economist at GE, was one of a dozen speakers at the October 2013 TED@BCG conference in San Francisco. Any audience member whose attention was waning likely snapped out of it after hearing Annunziata's opening lines:
"In the past 200 years, we have had two major revolutions: the Industrial Revolution and the Internet Revolution. Now we are experiencing another metamorphic change: the Industrial Internet. It brings together intelligent machines, advanced analytics, and the creativity of people. It is the marriage of minds and machines."
Individual machines equipped with electronic sensors, cameras, and other hardware generate incredible amounts of data, often continuously. And powerful software can now sift through cloud-stored data to provide deep analytics, which helps those machines operate more efficiently and in new ways - under the guidance not just of humans, but of the machines themselves.
"The machines are now brilliant: self-aware, predictive, social and active," Annunziata told the crowd. "They communicate seamlessly with each other and with us. As a result, information comes to us when we need it, without having to look for it."
The hardware-software combination enables humans to know where an asset is located, its activity, its current configuration and condition, and any operational adjustments that must be made so that the machine's task is properly executed and the machine itself remains functional.
When that predictability is spread across whole fleets of locomotives, airplanes, and other machines - or across entire systems like hospitals and power grids - the resulting asset and system optimization unleashes huge productivity gains, cost reductions, and profit growth. And, perhaps more importantly, optimization unleashes product innovation on a scale that Annunziata thinks will be revolutionary, in the same way the Industrial and Internet Revolutions drove massive economic growth through new consumer demand and labor needs.
The Immediate Gains of the Industrial Internet
The steadily dropping costs of hardware and software alike mean that middle market companies will be able to take advantage of these innovations:
- Sensors and other performance-capturing components cost an average of 30 percent less versus 2009.
- The progress of cloud computing has made the collection and processing of data so cheap that sampling and data batches are giving way to uninterrupted data streams. Software identifies patterns so that the machines can actually learn, thus improving their task execution and operational performance over time.
- With 50 percent of all data worldwide estimated to come from industrial sources by 2020, it's probable that firms who fail to act now and plan their use of this technology will be disadvantaged in just a few years.
Of course, firms in the middle market always face the dilemma of battling nimble smaller competitors as well as deep-pocketed larger competitors. Steady adoption of the Industrial Internet will be critical for middle market organizations so that their rivals cannot create competitive gaps in efficiency and productivity, profitability, and talent acquisition and retention.
Ready to Invest in the Future
Middle market firms report that they have resources to invest, and are amenable to spending in ways that support this emerging entity.
- In the latest Middle Market Indicator from the National Center for the Middle Market, two out of three executives plan to make capital investments over the next 12 months. Information technology was the second most important investment priority for these business leaders.
- A 2013 report from Deloitte Consulting LLP found that 46 percent of middle market executives ranked technology as one of their top three investment priorities in 2013.
- Cloud computing and business automation were the most popular anticipated investments, with 34 percent of respondents choosing cloud computing as one their top three investment choices going forward. "Cloud has become much more baked into business and IT strategy, and we see it changing the economics and cadence of technology investment in growing organizations," said Mike Mitchell, principal, cloud ERP innovation for Deloitte. "We see cloud . . . as a differentiator for fast-growing mid-market firms."
- In early 2012, KPMG released a survey of middle market executives. The top initiatives were the need for significant improvement of operational processes and related tech (24 percent) plus significant investment in organic growth (22 percent). These figures were almost unchanged from 2011, making them perennial concerns.
- The same KPMG survey found that 62 percent of executives said they have significant cash on the balance sheet. While waiting for the recovery to take full hold, 60 percent planned to increase capital spending. Prime spending areas were in IT (43 percent), new products or services (39 percent) and business acquisition (34 percent). The last two areas become easier to act on after there's significant investment in the first.
Middle market executives have been aware of the potential of cloud computing for some time: 55 percent said they expect cloud computing to have a tangible impact on their business model/operations. Cost reduction was the largest anticipated change; interaction with customers and suppliers was next. A 2013 GE trends report found that, in spite of the present economic climate, middle market IT spending would rise "as organizations seek to gain a competitive advantage."
Innovation Comes from People
Executives' desire for organic growth and new revenues, as shown in the KPMG survey, could eventually produce results with the implementation of the Industrial Internet. Given the relatively high level of uncertainty in the present economic climate, "mid-market companies need to take prudent actions to improve their businesses, recognizing that existing models, processes, and strategies may not be the formula for continued growth," the report concluded.
More than machinery, data-capturing hardware, and analytical software, people will be even more critical to maximizing this technology's potential. A 2013 GE report on the Industrial lnternet said that for benefits to be maximized, two critical processes must occur.
- Big data must be turned into valuable insights. Use the data in tandem with software-based analytics that draw from industry-specific expertise and experience.
- Automate information delivery and make sure it reaches the correct decision-makers in a timely fashion with a software-enabled intelligent network. People will produce your innovative vision, and the relevant data and insights need to be right at their fingertips.
Annunziata wrapped up his TED@BCG talk with an emphasis on this human factor: "There will be new types of jobs as new uses come up for the applications. Not just new high-skill jobs for those who understand the machines and the data, but also for managers who understand their industry and the analytics, and can reorganize the business to take full advantage of the technology." In other words, new jobs will develop and support new products that fulfill new customer demands.
Given that middle market firms traditionally struggle with creating advancement opportunities for young talent and cannot give aspiring leaders P&L responsibilities, the Industrial Internet may even help overcome this challenge. The only question is how quickly will these companies make the Industrial lnternet a primary internal focus.
Rob Carey is an NCMM contributor and a features writer who has focused on the business-to-business niche since 1992. He spent his first 15 years at Nielsen Business Media, rising from editorial intern to editorial director. Since then, he has been the principal of New York-based Meetings & Hospitality Insight, working with large hospitality brands in addition to various media outlets. Circle him on Google+.