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Industrial manufacturers: Take the leap and create strategies for IoT investment

01 August, 2018

Bobby Bono
Industrial Manufacturing Leader, PwC US
Barry Jaruzelski
Partner, PwC US

Industrial manufacturers cannot only rely on traditional machinery for revenue streams anymore. They realize that customers are increasingly seeking improved efficiency and production transparency from connected technologies and digitization – but getting there is the challenge.

Our recent survey revealed that 72% of manufacturing companies are increasing their level of digitization and expect to be able to be ranked as digitally advanced by 2020, compared with 33% currently. These companies are committing $907 billion every year globally – about 5% of revenues – toward greater connectivity and smarter factories.

However, despite the optimistic projections for advances like the Internet of Things and 3D printing, industrial equipment manufacturers have barely dipped their toes in the water of these aspects of Industry 4.0. There are a couple of reasons why. The lack of standardization in this relatively new arena makes R&D efforts expensive and arduous. In addition, customers fearing technological obsolescence of freshly purchased equipment may be reluctant to take a chance on products that require long testing periods and learning curves.

There is not a cookie-cutter solution to these challenges. However, it’s time for industrial manufacturing executives to reexamine their company’s portfolio and figure out how to become a digitally oriented organization that can quickly adapt to new technologies.

We have outlined two paths that will help start the process of rightsizing your portfolio by freeing up capital to invest in emerging technologies, which could potentially be a significant revenue stream driver in the future.

Route A: Spin-offs

In the past, industrial companies have aggressively acquired assets that had to do with Industry 4.0, causing them to create a diversified product portfolio. However, this may be blocking opportunities for financial and strategic resources to be spent on targeting new growth platforms and innovations in product areas closer to the company’s core and customer needs.

By divesting unneeded parts of their portfolios, industrial manufacturers can free up cash for R&D, begin a broader streamlining of the overall corporate bureaucracy, help identify and shed business units that don’t impact IoT technology, and stay off the radar screen of activist investors.

We understand acquisitions in digital and IoT areas are tempting, but it’s important for industrial manufacturers not to waste the opportunity to build more connected technology capabilities internally.

Route B: Digital divisions

There are several ways that industrial manufacturers are approaching digitalization. At a minimum, digital novices may not have a comprehensive digital strategy, but are partnering with innovative companies to access certain necessary technologies. Others are vertically integrating modified technologies into their product and service offerings. Digitally advanced industrial manufacturers are either collaborating with other companies to develop new digital technologies that they can own and embed into their products or are creating technology-focused R&D units that operate almost as separate companies.

By having a digital unit, it’s a departure from traditional operating models and can inject more entrepreneurship into the organization. For example, prototyping allows the start-up teams to quickly develop and test new products and capabilities without the delays inherent in large organizations. In addition, these teams could test the market with so-called minimum viable products, which have sufficient features to attract early adopters who can provide feedback for subsequent full-fledged versions of equipment or device. These digital divisions can reap long-term benefits as they scale up and grow in both size and resources as IoT adoption speeds up.

All these aspirations to become IoT-enabled cannot happen without a culture that’s willing to take risks. Within that culture, an organization needs talented employees who can manage, implement, and sustain a specialized portfolio of products and services in a cutting-edge and connected manufacturing world. It’s essential to create within the organization a consistency of core values and a shared mission among diverse employees who feel empowered to work across functions to test out new ideas and challenge the status quo.

Once industrial manufacturers decide to go full forward with IoT and connected technologies, they first need to take a step back and get a deep understanding of their core strengths, operational goals and vision for the future. Then they can decide whether to invest, divest, build up capabilities organically, or add to their digital strengths through M&A or external alliances.