Roland Berger Focus: Mastering The Industrial Internet Of .

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September 2017Mastering the Industrial Internet of Things (IIoT)IIoT offers major opportunities for industrial companies,but only if you handle them right.

2 Roland Berger Focus – Industrial Internet of ThingsManagement summaryThe Internet of Things (IoT) refers to the networking, viathe internet, of objects fitted with sensors that are ableto collect data. By extension, the Industrial internet ofThings (IIoT) refers to the application of the internet ofThings to the manufacturing industry.In the next three to five years, the IIoT is forecast to become a multibillion-dollar industry. Technology is advancing rapidly as platforms such as Predix from General Electric and MindSphere from Siemens enablemanufacturers to connect more and more devices torich cloud services. Just as the internet transformed theway people interact with each other, IIoT platforms aretransforming the way we interact with machines – andthe way machines interact with each other.This process of change is the source of uncertainty forcompanies, particularly those in the engineered products and high-tech industries. Not only is the new landscape difficult to navigate, it is hard to know where toposition yourself within it. What will its impact be onyour traditional business? What should your new business model look like? Should you develop your own IIoTplatform or choose an existing one? How can you harvest additional value through new digital services? Andwhat should you keep in mind when embarking on thischallenging journey?These were the questions we asked aswe put together this study. We offera structured view of IIoT and the layersof companies operating within it. First,we offer guidance on how to define afuture role for your company (Step 1).We then outline the options for youroffering (Step 2) and what to considerwhen choosing an IIoT platform (Step 3).We also identify where you can leverageIIoT to create additional value for yourcore offering (Step 4). Finally, we lookat some of the key success factors formastering the process, based on ourinsights from companies that startedadapting their business models early on.

Industrial Internet of Things – Roland Berger Focus 3Contents1. The lowdown – layer by layer . 4A structured view of IIoT and the layers of companies operating within it.2. How to navigate the new landscape, step by step . 6 Our four-step approach will enable you to successfully navigate theprocess of adapting your business model and prepare for the new challenge.3. Three success factors . 12Cover photo: chombosan/istockphoto By analyzing companies that set out early on the path to transformation, we can identifythree key success factors for shaping a future-oriented and profitable IIoT offering.

4 Roland Berger Focus – Industrial Internet of ThingsChapter 1:The lowdown –layer by layerA structured view of IIoT and the layersof companies operating within it.1  Cloud Serviceproviders (IaaS)2  Industrial Cloudplatforms (PaaS)3  Industrial apps/softwareproviders (SaaS)4  OEMs and othersenab ling connectivity ofequipment to the cloud5  End-users connectingdevices and usingvalue-adding apps

Industrial Internet of Things – Roland Berger Focus 5We identify five layers within IIoT: (1) cloud serviceproviders; (2) operators of industrial cloud platforms;(3) providers of industrial applications and software;(4) OEMs and other firms enabling equipment to beconnected to the cloud; and (5) end users who connecttheir devices to the cloud and make use of value-addingapplications.The first layer – cloud service providers such as AmazonWeb Services – is currently investing billions in infrastructure and cloud platforms. They supply computerand storage services and constantly enrich their platform functionality to enable further innovation. Thesecond layer consists of industrial cloud platforms suchas MindSphere (developed by Siemens), Predix (GE) orthe Bosch IoT Suite. A current priority for these companies is making it easy to connect to equipment in greenfield and brownfield applications. They also aim tomake it as simple as possible for customers to use highend-level services such as predictive maintenance. Sinceplatforms are most valuable at scale, we expect to seeconcentration in this part of the market, ultimately leaving a small set of leading platforms in each vertical industry. The third layer comprises the providers of industrial apps and software. These businesses play anessential role in enabling innovations in services andbusiness models. Companies operating here are transforming the way we interact with machines. The fourthlayer is made up of OEMs and other companies who enable equipment to be connected to cloud platforms anduse cloud-based industrial apps and services. Companies in this layer need to decide whether to build theirown IoT platform or leverage existing platforms. Thenthey must decide which services and business models todevelop to enhance their existing offering. The final layer consists of end users, who connect their devices toIIoT. These are the companies that leverage cloud-basedservices and business models to in crease the efficiencyof their operational equipment. AA: Industrial IoT ecosystems are currently developing along five business layersCloud ecosystem examplesRailPower plantsManufacturing plants1  Cloud serviceproviders (IaaS)Amazon Web ServicesOpen Telekom CloudMicrosoft AzureAmazon Web ServicesOpen Telekom CloudMicrosoft AzureAmazon Web ServicesOpen Telekom CloudMicrosoft Azure2  Industrial cloudplatforms (PaaS)SiemensMindSphereGeneral ElectricPredixOthers (e.g. Bosch, AXOOM)3  Industrial apps/softwareproviders (SaaS)HaConThetaRayPlataine4  OEMs and others whoenable connectivity ofequipment to the cloudSiemensGeneral ElectricBosch Rexroth5  End users who connectdevices and usevalue-adding appsRenfeExelonBoschSource: Roland Berger

6 Roland Berger Focus – Industrial Internet of ThingsChapter 2:How to navigatethe new landscape,step by stepOur four-step approach will enableyou to successfully navigate the processof adapting your business model.

Industrial Internet of Things – Roland Berger Focus 7STEP 1: DEFINE YOUR ROLEThe first step for companies as they embark upon theirchange journey is to decide on what role they wish toplay within IIoT. A carefully defined starting positionand business model will form the basis for all their future strategic decisions.In chapter 1, we outlined the various roles for companies in the engineered products and high-tech industries. Businesses must make sure that they understandthe different roles and options available to them. Inmany cases, this will depend on what sort of businessthey are and the sector they operate in.For traditional industrial companies in particular, it canbe difficult to define a future-oriented IIoT-based portfolio that enhances their current core offering. MostIIoT-related skills, such as developing digital services,do not yet form part of their core business. A key task forthese companies is therefore to work out which capabilities will prove to be true differentiators in their futureoffering. These are the capabilities that they should startbuilding up within their organizations. Then, an ecosystem of partners can provide the other components of acompelling offering.A useful tool in deciding which capabilities to build upin-house and which to source is the matrix shown inFigure B. The horizontals represent different possibleroles and areas of activity for companies: IoT application, IoT platform, IoT gateway, devices, sensors/chipsets. The verticals represent the different sectors: Industry 4.0, connected buildings, smart grids, and so on.We show the matrix as it might appear for one company; other companies may have different verticals oreven different horizontals. The color of the matrix boxes indicates whether the area is one where the companyshould compete with its own solution, form a partnership with a third party, or refrain from addressing it.Obviously, the coloring will look different for each company.In the end, it's rather simple: focus on what you are goodat and build a partner ecosystem for the skills you do notbring to a solution.To help them decide whether they should build up a c apability internally or partner with a third party,companies should ask themselves the following questions: Does the capability in question add specificvalue to my offering? Will I need this capability for a number offuture offerings? Is this capability difficult to source from athird party?If the answer to any one of the above questions is yes,the company should consider building up the capabilityitself. If the answer to any of the questions is no, it maybe better to search for partners who can provide the necessary capability at scale and with lower costs.This approach has proven valuable in practice. One ofour clients, a large vehicle manufacturer, used the matrix to reach an important strategic decision. They decided to invest in building up specific skills in predictivemaintenance analytics for a specific part of their portfolio, with the goal of increasing the profitability of theirlong-term service contracts. This specific focus led thecompany to invest in a clear use case for their portfolio,which proved to be highly successful.Traditionally, manufacturing companies tend to thinkin terms of their vertical. Part of the broader strategicquestion for such players is whether they should moveaway from this niche mindset and think across differentsectors. GE, Siemens and Bosch, for example, now address vertical segments that were not previously a corepart of their traditional offering – segments such as industrial manufacturing. Other companies, too, may findit useful to consider playing the game horizontally rather than just vertically as in the past.

8 Roland Berger Focus – Industrial Internet of ThingsB: In each ecosystem, players have to carefully choose their position in the IoT stack and activelyform partnerships.IIoT positioning of an industrial company sors/chip setsCompete with own solutionSource: Roland BergerPartner with other firm(s)Do not addressSMARTGRIDINTELLIGENTHEALTH

Industrial Internet of Things – Roland Berger Focus 9STEP 2: DEFINE YOUR OFFERINGAn immediate task for companies is to decide on theirIIoT offering. Companies have two options.The first is for companies to strive to increase the competitive advantage of their own products and services.A number of industrial companies are currently pursuing this strategy, seeking out ways to differentiate or improve their offering by launching IIoT services. Germanfiltration specialist Mann Hummel, for instance, hasintroduced an air filter connected to IoT that is able toshare information about air quality and to trigger eventsas necessary.The second option is for companies to sell their owndigital services. If they decide to develop digital servicessuch as predictive maintenance, they can often leveragethe new software and successfully sell the application toa wider audience. Alternatively, they can develop specific digital services that are designed for mass use, thereby creating a new revenue stream. For example, Bosch isactively developing microservices on its IIoT platform toprovide a feature-rich ecosystem, aiming to generaterevenue streams for digital services. Trumpf follows asimilar strategy, introducing digital services on its AXOOM platform that can also be purchased for use inthird-party machines.STEP 3: CHOOSE YOUR PLATFORMHaving decided their offering, companies must thenchose whether to create their own IIoT platform or useone provided by a third party (this refers to the secondlayer of IIoT A ). This decision will depend partly onwhich ecosystem offers the largest addressable marketand how easily the company can monetize its own IIoTofferings. Alternatively, can the company develop itsown ecosystem, one that is unlike those currently on offer? GE Predix, for example, was the first major player toenter the market and so has been able to build up astrong presence in some vertical markets. Siemens hastaken a different approach, establishing a presencefrom its strong position in discrete automation and expanding from this to other vertical industries. Trumpfcreated its IIoT platform AXOOM largely on its corestrength in manufacturing and focusses the platform onoptimizing the manufacturing process.Another important factor in the decision will be thetechnical investment. Does the IIoT platform – Predix,MindSphere, Bosch IoT Suite, or an alternative solution– offer additional functionality that justifies the price?It may in the case of industry-specific predictive maintenance services, or where the platform offers plug-andplay connectivity to a broad set of proprietary assets,such as the MindConnect functionality from Siemens.The bigger the platform and the broader its reach, thegreater the economies of scale and the more valuablethe platform for a company. For this reason, we expect tosee concentration within each vertical industry, with alimited number of platforms ultimately emerging as theleading solutions. This is similar to what we saw withmobile operating systems, where a process of consolidation has left only two major players competing for leadership: Google with Android and Apple with iOS.What happens in each vertical depends on many factors.Take the energy equipment industry, for example, withits consolidated structure consisting of a small numberof large players, especially in the area of energy generation. Here, we are likely to see companies such as GEleveraging their strong installed base to create a leadingIoT platform. Other industries, such as building technology, are more fragmented and so we will probably seenew players such as Google entering the market. Inthese industries, it is far more difficult to predict whowill eventually win, although the logic of economies ofscale and the value of concentration apply here, as in allother industries.Choosing to build their own IIoT platform could be anoption for some players in the engineered products and

10 Roland Berger Focus – Industrial Internet of ThingsC: IIoT enables companies to establish new types of digital services.Example: key IIoT use casesN ewdigitalsser vicePREDICTIVE MAINTENANCEVENDOR ASSET MONITORING–   Tracking and early detection of ano malies in machines throughadvanced data analysis (big data, artificial intelligence)to optimize costs, e.g. predictive maintenance for a turbine–   Tracking of anomalies in the operation of sold productsby the vendor–   Information/action in case of faults, e.g. information onasset status/"traffic gAlertSUPPLY CHAIN INTEGRATION/OPTIMIZATIONPRODUCT/SYSTEM OPTIMIZATION–   Connection of multiple parti ci pants in a supply chain in order tooptimize it, e.g. send notice of delayed delivery and automaticallyreschedule production–   Optimize a product through integration of data, e.g. if the trackin the next station is busy, slow down train to reduce or 1Vendor 2!IIoTplatformVendor 3Delayed delivery – Reschedule productionAlert"No trackavailable"TrainstationSlow down train to reduceenergy consumptionSource: Roland Bergerhigh-tech industries. But this avenue is open only tothose companies who are willing to make the substantial investments necessary. They will need to build-up aninternal software business. Small or medium-sized enterprises, even those in the famous German Mittelstand,are unlikely to have the necessary resources to developand maintain their own platforms. The platform busi-ness is always a scale game. After all, it makes no sensefor individual companies to build their own platformsunless they can gain scale at least within their own vertical – and across several verticals is better still.STEP 4: IDENTIFY THE ADDED VALUEStep 4 for companies is to identify where they can lever-

Industrial Internet of Things – Roland Berger Focus 11age IIoT to create additional value for their core offering.This involves answering the question: How can IIoT beof use to you and your business?A number of possibilities exist. Perhaps the most radicalis to adopt an entirely new revenue model, such as payper use. For example, instead of selling its newest Velarotrains to the Spanish national railroad operator Renfe,Siemens is selling the effective use of the train, bearingthe risk of defects itself.In fact, IIoT enables a whole range of new digital services that can have a major impact on industrial companies. Predictive maintenance, vendor asset monitoring,supply chain integration and optimization, product/system optimization – all of these services are now possibleas a result of the technological transformation. Many ofthem have been around for some years already, but theireasy integration into cloud services provides a new efficiency lever, especially if integrated with analytics thatmake effective use of all available data sources. CIn the area of predictive maintenance, for example,Daimler is using an IBM solution to optimize its internalproduction by collecting and analyzing machine data.This has delivered productivity improvements of around25 percent. Volvo has also implemented cloud-based IoTtechnology to optimize its inbound and outbound supply chain by means of increased integration with its partners. In the area of product/system optimization, Caterpillar is partnering with Uptake to offer customers theopportunity to track their operational efficiency, monitor their fleets and optimize fleet performance.But it's not just about picking the digital service thatsuits you and sticking to it. Companies can also combine digital services and new revenue models to createnew forms of offerings. Figure D presents an examplefrom a real-life study for a major industrial automationcompany. As you move up the steps, the value added byIIoT increases, each area of added value building on thelayers lower down. DD: How to increase the value added by the IIoT ateach step of the wayThe case of digital services for industrial assetsINCREASINGCUSTOMER VALUENew sis(e.g. maintenance(e.g. lifetimeprognosis)Remote anomalydetection withsolution proposal(e.g. smart lists)Sources/reasonsof failuresQualified remoteanomaly detection(e.g. KPIs that fall outsidea tolerance range)Remote conditionmonitoring/anomaly detection(e.g. red/green trafficlight)Source: Roland Berger

12 Roland Berger Focus – Industrial Internet of ThingsChapter 3:Three success factorsBy analyzing companies that set out early onthe path to transformation, we can identify threekey success factors for shaping a future-orientedand profitable IIoT offering.

Industrial Internet of Things – Roland Berger Focus 13#1 INCREASE YOUR SPEEDCompanies that can effectively speed up the progress oftheir transformation achieve greater and longer-lastingsuccess. The first and most obvious way to do this is toensure that IIoT is a matter of priority within the organization. The CEO must become its "chief storyteller" – arole effectively modeled by former GE CEO Jeff Immelt,or Bosch CEO Volkmar Denner, for example.In practice, we find that companies benefit from settingup an independent external unit (or new company) focusing on IIoT, reporting directly to the CEO. The idea isto create a healthy digital service business that is separate from your core activities and so not at risk of gettingbo

The Internet of Things (IoT) refers to the networking, via the internet, of objects fitted with sensors that are able to collect data. By extension, the Industrial internet of Things (IIoT) refers to the application of the internet of Things to the manufacturing industry. In the next three to five years, the IIoT is forecast to be-

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