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How is the Internet

of things Transforming

Businesses ?

MARCO SCACCHI

How is the Internet of Things Transforming Businesses?

this phenomenon has massively increased from 2012 to 2017. This should not come as a surprise if we consider all the attention the Internet of things has received from newspapers, industry publications, and social media.

Using another type of visualization (figure 1.2), we can discover how in the last five years the term ‘Internet of things’ has been particularly popular in Asia, a fact that supports projections that show the future robust growth of the IoT in this corner of the world. In particular, the top 10 cities are all in the Asian continent and include Seoul, Bengaluru, Yokohama, Singapore and the IT capital of India, Hyderabad. San Francisco, a few kilometers from Cupertino and the Silicon Valley, only comes 11th on this list.

Generally speaking, the term ‘Internet of things’ has come to indicate the network of physical objects that include Internet connectivity, and the interactions between these objects and other Internet-connected

Figure 1.1

Figure 1.2

IntroductionThe capacity to connect physical devices to the digital world, the so-called third wave in the development of the Internet, is going to radically change the world as we know it. This development is not only fundamentally transforming the way products themselves are – and will be - devised, built and used, but it is also dramatically reshaping the structures of entire industries, their business strategies, their value chains, the way they compete and the products and services they can offer. This ecosystem of highly interconnected devices, known as the Internet of things, provides opportunities as well as threats for virtually every industry vertical.

Competition is a crucial element in this development, as the Internet of things will create the need for new capabilities, will establish new sources of value creation and will define new ways in which companies gain a competitive advantage. This phenomenon is, however, expanding at a fast pace, and executives that do not ask themselves how the Internet of things will affect their businesses in the future are already forcing their companies to be left behind by their faster-moving competitors.

Figure 1.1 helps shed some light on how the Internet of things is not just a temporary buzzword, but it is, in fact, perceived as a real development. The graph, whose values have been taken from Google Trends, illustrates the popularity of the terms ‘IoT’ and ‘Internet of things’ in the last five years. It is evident how the interest in

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How is the Internet of Things Transforming Businesses?How is the Internet of Things Transforming Businesses?

Table 1.1

devices that communicate, analyze and share data through the use of networks and cloud-based platforms. The Internet of things might refer to a wide range of connected devices, including tools to monitor human health and wellness: thermostats, smart watches, home alarms, kitchen gadgets, factory machinery, smart light bulbs and even cars. From a semantic perspective, the use of the phrase ‘Internet of things’ might be misleading, because - as Professor Michael E. Porter and James E. Heppelmann already pointed out a few years ago - this term does not help in capturing the real nature and the potential business implications this phenomenon might have. The Internet is in fact just a process to transmit information, and not the value creator itself. What is ground-breaking is the nature of the ‘thing,’ and the far-reaching implications that data-generating smart, connected and integrated devices can have on the infrastructure of modern society.

Why is the IoT growing?The idea behind the Internet of things is rather old, as it has been in the air since the last century. For instance, in 1939, the Popular Mechanics Magazine published a landmark issue entirely dedicated to the ‘fully automated, high-tech home of the future.’ However, several years passed before the first IoT prototype – an Internet-connected coke machine - was created in the ‘80s. This opened up the way to other devices like the ‘Internet toaster’ and the ‘Trojan Room coffee pot,’ and eventually to the 1999 Proctor & Gamble presentation where Kevin Ashton coined the term IoT. From that moment to the beginning of 2012, IoT has then remained a ‘quiet’ phenomenon. However, through a series of technology shifts over the last ten years, IoT has received a significant acceleration in its development. There have been several reasons for this, nevertheless, among the most significant we find: Cheaper Components and Services Costs: In the last decade, global prices of sensors, bandwidth, GPS chips, processing power and data services have dropped, allowing a de facto acceleration in the development of the Internet of things.

The Mobile Revolution: The use of smartphones and the development of mobile applications and services has been equally important, as it has revolutionized consumers’ interactions with businesses and changed the ways services are purchased and consumed,

accelerating the development of the e-commerce era. This shift – in turn – has forced companies to rethink their strategic activities, spurring the allocation of significant investments in R&D to accelerate innovation with the goal of finding new technologies to capture information from potential and existing customers.

Advanced Analytics and Cloud-Based Services: The combination of cloud services, advanced data analytics, and the IoT is seen as a mutually beneficial relationship, as each one has accelerated the development of the other. Advanced data analytics and the development of new machine learning models have contributed to making sense of the massive amount of data, while cloud computing, thanks to the creation of a pathway for data to travel, has helped tackle the increasing pressure on the Internet infrastructure.

Programming: The way coding has evolved over the years, with the development of easier, more accessible and user-friendly programming has been another critical factor in the IoT development.

ForecastThe IoT ecosystem will keep growing in importance, and a significant amount of cash flowing through the market is expected in the next years. Gartner Inc. predicts that in the course of 2017 there will be 8.4 billion connected devices worldwide, a 31 percent increase from last year. These figures are expected to grow at an even greater pace in the next years, to reach 20.4 billion by 2020. From a geographic perspective, Greater China, North America, and Western Europe are driving the use of the Internet of things and the three regions will account for 67 percent of the IoT installed base in 2017. Not surprisingly, the consumer sector will be the biggest user of connected things with 5.2 billion devices, representing 63 percent of the total number of applications in use. The business segment will follow with 3.1 billion connected things in 2017. Overall, the applications most used will be smart TVs, smart electric meters, and commercial security cameras. In addition to smart meters, applications customized for specific industry verticals (including manufacturing and healthcare) will accelerate the use of smart devices among businesses through 2017, with projections that estimate the deployment of 1.6 billion units. Nevertheless, starting from 2018, cross-industry devices, such as those developed for smart buildings, will take the lead as connectivity will

be driven by higher volume, lower cost devices. In 2020, cross-industry devices will reach 4.4 billion units, while vertical-specific devices will amount to 3.2 billion units.

The Evolution of Smart Products To highlight the transformational impact of intelligent, connected and integrated products, it is helpful to outline their evolution from physical, mechanical products to complex and interconnected systems across five different phases:

• Physical Components: In the first phase, mechanical and electrical components are the fundamental elements of the physical device. However, while the physical device remains the core source of value creation, this is not sufficient to drive innovation, and the value creation at this stage is merely the sale of the product itself.

• Smart System: In the second phase, sensors, processors and embedded software allow for greater p e r s o n a l i z a t i o n , expanded user interface, and improved functionality and interactions. At this stage, devices are also able to collect historical product data. The value creation becomes the capability to offer enhanced products and services.

• Smart and Connected: In the third phase, connectivity is added to smart products to allow for remote monitoring and control, and eventually it will help to optimize existing processes through the ability of channeling data to and from connected products. At this point, the value creation of intelligent and connected devices lies in their capability to transform business processes.

• Product System: Intelligent, connected devices are

taken a step further and are integrated into a product system - e.g. a smart factory. At this stage, the product can perform real-time analytics and predictive modeling algorithms. The significant business value of this integration lays in the possibility of enabling entirely new business processes.

• System of Systems: The final stage happens when smart, connected products are coordinated with and across other products, through a complex ‘system of systems’ network that enables greater efficiencies. The business value here is not only the possibility to develop new services but also the ability to transform entire business models.

How will the Internet of things affect Industries?As we have just seen, the Internet of things might establish – and in some cases, even force – new business models, transform business processes, and modify competition as we have known up to this point. While the future development of the IoT might reshape entire sectors (see Table 1.1), four industries - according to Cognizant - are believed to be among those that will gain the most

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How is the Internet of Things Transforming Businesses?How is the Internet of Things Transforming Businesses?

from the development and the usage of the Internet of things. These are manufacturing, retail, financial services and information services industries (see Figure 1.3).

From a general perspective, the major IoT benefits for a business can be summarized as follows:

• Cost Savings and Revenues Increase: The primary strategic reason to justify the adoption of an IoT infrastructure in a company is the potential it might have to help achieve greater profits or savings. These can be realized through the optimization of existing processes, the decrease of operational risk, the development of new products and services (such as the so-called Sensing as-a-Service), and the ability to use the insights extrapolated from product data to gain market share. • Improved Asset Utilization and Management: The availability of real-time operational data can help decrease equipment failures, optimize asset utilization, run preventive maintenance operations, detect risks, and enable faster response times to critical situations.

• Efficient Processes and Decrease in Operational Costs: Insights gathered from real-time data can optimize production planning, reduce energy costs, increase the efficiency of business processes, and minimize human intervention on internal processes.

• Enhanced Customer Experience: The Internet of things can also be used to discover customer demographics, segment customers and improve targeted marketing strategies through the use of valuable product data

on why, what, where and how customers purchase, consume and use a company’s product or service.

• Improved Worker Productivity: It is believed that the Internet of things will improve employee productivity by enabling workflows optimization and through greater insights into occupancy rates, and employee efficiency and performance.

• Faster and Data-Driven Decision-Making: Businesses can utilize real-time product data to make faster decisions and decrease operational costs.

The IoT and Porter’s five forces model

To get a deeper understanding of the benefits and risks the Internet of things can produce for companies, it is also critical to analyze the effects intelligent, connected and integrated devices can have on industry competition. In any industry, competition is driven by the well-known Porter’s five forces, and it is the strength of these forces that eventually determines the nature of industry competition. To evaluate this, a widely-cited study by Professor Michael E. Porter on the transformational power of smart, connected technologies on competition can be used as a framework:

Bargaining Power of Buyers: According to Porter, three different aspects might decrease customers’ bargaining power: first off, as the IoT-driven competition is based more and more on product differentiation rather than on price, intelligent, connected and integrated products significantly decrease the buyers’ capacity to bargain. Secondly, as the IoT makes – for obvious reasons – the access to historical customer data easier than before, a purchaser’s cost to move to a new supplier increases, as customization becomes a key value enabler. Finally, the bargaining power of buyers decreases because firms are able to reduce their dependency on distribution channels.

Rivalry among Competitors: Smart, connected and integrated products and their capacity of gathering customers’ data reduces rivalry among competitors as

integrated devices have the ability to cause even greater disruption within the industry. This transformation might, however, also bring about positive changes by providing a way for brick-and-mortar retailers to compete and coexist with their online counterparts. For instance, data from IoT devices can contribute to optimize store layouts, enable fully automated checkouts, fine-tune inventory management and enable personalized shopping experiences through the use of customized shopping coupons based on a customer’s behavioral pattern. These and other innovations could eventually enable new business models and allow retailers to improve productivity, reduce costs, and raise sales.

The implementation of an IoT system in the retail industry might, therefore, transform the entire value chain, including the sector’s employees and consumers. The Internet of things has, in fact, the potential to decrease the need for labor in store, while increasing the amount of revenues per customer through customization and cross-channel selling.

The capacity of the retail industry to fully reap the benefits of the Internet of things will depend, however, not only on the evolution of technology, such as the continuous availability of low-cost sensors and processors, but also on the adoption of different business models, electronic payment systems, and new store formats.

IoT Implications for the Value Chain:The data gathered from intelligent, connected and integrated devices are transforming the traditional business value chain. IoT devices will have a profound impact on the value chain because the ‘thing’ does not represent the final product anymore, but rather a strategic mean in the value chain. Some businesses and processes will be particularly exposed:

IT InfrastructureFirms that want to succeed and gain market share in the IoT era have to plan substantial investments in the development of new IT infrastructures. This means the allocation of funds for a cloud infrastructure – for new hardware and connectivity components, such as processors and embedded sensors that can support new smart products – for software with an enhanced user-friendly interface – and for identity and security tools to secure the product and the data gathered from it.

Figure 1.3the ability to add value-added services and product differentiation increases. However, the increased upfront cost of product design, software development, and IT infrastructures might result in price pressures as businesses try to find ways to spread the same amount of fixed costs over a greater number of units sold to achieve economies of scale.

Threat of New Entrants: High fixed costs of IT infrastructures, sophisticated smart products design, and the ability to gather historical and real-time product data and utilize this information to improve the customers’ experience might create significant new obstacles and high barriers for potential new entrants. On the other hand, barriers to entry decrease if customers or employees reject, for privacy or other concerns, the capabilities of intelligent, connected products.

Threat of Substitutes: While smart products can reduce the threat of substitutes by offering higher performance and customization options compared to traditional devices and services, in several sectors the IoT might face new kinds of substitution threats, such as those coming from the so-called product-as-a-service businesses.

Suppliers Bargaining Power: As the value of the physical components decreases compared to the value creation of smart and connectivity components, the former can be replaced by software, and the influence of traditional suppliers and their bargaining power might decrease. However, this is only part of the story, as this shift in value creation increases the need for new and different IT-suppliers.

The Retail Industry at a Crossroad The IoT will reshape entire industries. However, it will be especially disruptive for the retail sector. The potential effects are thought to be so strong and far-reaching that 70% of retailers in the world plan to invest in IoT over the next four years. Intelligent, connected and integrated devices can, in fact, open up opportunities to revolutionize the customer experience and transform the retail supply chain for both online retailing and brick-and-mortar stores. The introduction and the development of information technology has already had a profound impact on the retail industry in the last two decades, with the emergence of online shopping as the major widespread consequence. Intelligent, connected and

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The IoT heightens the need for security, as its multi-layered nature multiplies the risks correlated with any movement of data, and requires different methods to protect the data flowing between products. Intelligent, connected and integrated devices are difficult to protect with physical measures, and they are a target for hackers and cyber attacks, as every communication node becomes a potential entry point. The ability to provide security to data gathered from smart devices does not only serve the purpose of protecting strategic business assets, but it also becomes a primary source of value creation and competitive advantage, as customers expect businesses to protect data gathered from IoT devices.

Marketing and SalesThe ability to access data collected from the product and monitor how it is used changes the focus of business development and CRM teams from selling —often a onetime business — to maximizing the value customers get from the product over time. This opens up important new requirements and opportunities for marketing and sales, and radically transforms marketing operations and businesses’ relationships with customers. In particular, the IoT can have an impact on three different aspects:

• Analytics: Intelligent, connected and integrated products open up new ways to analyze and extract insights from data. The information obtained from IoT devices provides much more detail on the product use, enabling, for instance, the possibility to discover in real-time what customers prefer or dislike about a product, and its usage pattern. By comparing customers’ usage patterns, marketing departments can do much finer customer segmentation—by industry, geography, organizational unit, and even more specific attributes. This deep-level knowledge can then be applied to develop pricing strategies, customized offerings or after-sale service packages and create features for particular segments that better match the desired price and value at the macro or even at the individual customer level.

• Customer Relationships: In the Internet of things era, the product becomes a means of delivering value, rather than the end itself, and therefore the focus shifts to the capacity to provide continuous value to the customer. Moreover, as the company remains connected to clients via the product, it has a new basis to create

a direct and ongoing relationship with them. These new developments challenge the traditional, often static, concept of customer-relationship management. The idea behind CRM is that customers will provide you with their feelings about your product, whereas in this new world, products become early-warning devices that tell businesses about what value the customer is getting or not getting.

• Monetization of IoT data: The new types and amount of data IoT devices can gather allow the creation of new business offerings and services. For instance, almost any data describing consumer behavior can be a valuable asset to marketers and insurance companies. Data about physical assets such as vehicles and buildings can be used to assess insurance risks. One company’s data exhaust could be another company’s gold mine, and that value could be monetized by the originator of the data.

HRThe Internet of things will also have an impact on HR functions. It will do so in three different ways.

• New Expertise: First of all, it will require a different kind of knowledge. The skills needed to devise, sell, and extract and analyze data from intelligent, connected and integrated devices are in high demand but in short supply at the moment. Data scientists, software developers, security experts, and systems integrator professionals will continue to be essential and highly sought-after. This is particularly the case for some industries, like manufacturing.

• New Compensation Models: IoT will push the HR function to devise new incentives and compensation models to retain talent, spur innovation and collaboration.

• Environment of Collaboration: IoT will increase the need for more virtual, agile and collaborative working environments.

ConclusionTo take advantage of the opportunities that will be created by the Internet of things, today’s businesses will need to completely rethink their orthodoxies about value creation and value capture. Old principles will, in fact, not apply to the web-connected economy anymore. The net effect that intelligent, connected and integrated products will have on businesses will obviously differ

across industries. However, some tendencies seem clear already:

• Benefits gained from the early accumulation and analysis of product usage data, alongside higher barriers to entry suggests that many industries may be subject to consolidation in the near future. Pressure towards consolidation could be especially intense in those industries whose business services will expand because of the transformation brought about by the IoT.

• Some industries and processes could start to become obsolete or change completely. For instance, parts of the transportation industry might become almost entirely automated in the near future.

• The manufacturing, retail and financial services industries will be among those that will gain the most – in terms of economic value – from the Internet of things.

BibliographyCognizant (2014). “Reaping the Benefits of the Internet of Things.” Accessed May 10, 2017, at https://www.cognizant.com/InsightsWhitepapers/Reaping-the-Benefits-of-the-Internet-of-Things.pdf Gregory, Jonathan (2014). “The Internet of Things: Revolutionizing the Retail Industry.” Accessed May 10, 2017, at https://www.accenture.com/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_14/Accenture-The-Internet-Of-Things.pdf Porter, Michael; Heppelmann James (2014). “How Smart, Connected Products Are Transforming Competition.” Accessed May 10, 2017, at https://hbr.org/2014/11/how-smart-connected-products-are-transforming-competition Presser, Mirko (2016). “The Rise of IoT” – Why Today?”. Accessed May 10, 2017, at http://iot.ieee.org/newsletter/january-2016/the-rise-of-iot-why-today.html

ABOUT THE AUTHOR:Marco Scacchi currently works as a research analyst at M-Brain UK. He previously worked as a graduate market intelligence analyst at Thales Alenia Space Italy, and as a project manager and market intelligence analyst at the Italian Society for International Organization.

He holds a Master’s Degree in Political Economy of the Middle East from King’s College London, a M.Sc. in Economic Security, Geopolitics and Intelligence from the Italian Association for the United Nations and a B.Sc. in Political Science with a major in demography.

Marco has a passion for business analytics, business statistics and programming languages, and he is the founder and editor of the ‘Data Crunching Intelligence 2.0’ blog.

Follow Marco Scacchi on LinkedIn at linkedin.com/in/marcoscacchi