Smart connected products can unlock new ways to generate revenue and cost efficiencies. While the payoff may be years away, companies need to invest today to remain not just competitive, but relevant. 

The impact of digital disruption has left industrial manufacturers facing a stark choice: Innovate now or risk obsolescence in the future. If well-planned, smart connected products can offer industrial manufacturers new ways to drive innovation, save money, allow for top-line growth and create new business models. 

Smart connected products are revolutionizing the industrial manufacturing industry

Cloud computing, artificial intelligence (AI), machine learning (ML) and the Internet of Things (IoT) have spawned a new class of electro-mechanical products in industrial manufacturing. These smart connected products range from consumer devices to industrial machinery. They’re smart because they are capable of sensing, collecting and transmitting data within an ecosystem of connected devices and across all stakeholders, including end-users. They’re connected through IoT by using embedded software integrated with cloud-based platforms that are continuously evolving as market demands change.  

Smart connected products can share information about themselves, their environment and the end user. The range of smart connected products crosses a vast array of sectors, from automotive and health care, to smart packaging and industrial equipment.

Through IoT, manufacturers can more seamlessly integrate and optimize industrial production while improving output, efficiencies and cost savings. The key for manufacturers is to find the right balance between vertical innovation of smart connected products, while continuing to create existing products horizontally along the value chain.

The business case for investment

Manufacturing companies currently generate more than 1.8m terabytes of data each year. But they don’t know how to collect, analyze or monetize it. This limits their ability to gain valuable insights that could generate cost savings or new revenue streams. At the same time, emerging players are outpacing legacy manufacturers around innovation, cutting into market share and leaving them vulnerable to obsolescence.

Using their established record of product development as a springboard, manufacturers can transition from selling physical products to building software-defined, intelligent interconnected products. At the same time, they can build on their pre-existing products to remain competitive. They can also continue to expand their intellectual property (IP), by evolving current products, or building and buying new IP.

While there is a huge amount of upside for smart connected products, the considerable downside is the length of time it can take to realize the value from smart connected products, which could take years. This delayed return on investment (ROI) may push industrial manufacturers to take a wait-and-see approach. In the short term, companies may remain competitive. In the long term, sticking with the status quo to avoid the daunting upfront investment will likely threaten their survival.

Three ways industrial manufacturers can maximize the ROI of smart connected products in both the short and long term

Many manufacturers are already making the transition to smart connected products. Yet few are taking full advantage of the value creation potential. To maximize the opportunity and remain competitive and relevant in the industry, industrial manufacturers will need a course of action. Here are three ideas:

Focus on short-term savings to invest in long-term revenue generation

It can take time to generate revenue from smart connected products, so industrial manufacturers will want to consider funding their journey by reducing costs in a number of ways, including value engineering. These short-term cost savings initiatives can provide critical funding for investments in smart connected products.

Industrial manufacturers will also want to think about developing smart connected products for internal use cases (e.g., supply chain and manufacturing) first. This can help to speed up capability building and serve as a revenue bridge to create value in the short term, while companies focus on the longer-term goal of building out new lines of business.

Recent EY-Parthenon analysis on smart connected products value pools (economic value potential through cost reduction and operating efficiencies) over the next seven years indicates that industrial manufacturers could save an average of US$1.8t through a range of cost efficiencies.

Let startups and other partners do the heavy lifting early on

Leading manufacturers are adopting an ecosystem-driven approach to smart connected products. They’re using partnerships and connections with products from other manufacturers to promote data sharing. Value creation platforms help manufacturers capture new value pools across markets and industries, accelerate speed-to-market, reduce costs and spark innovation.

Ecosystems also unlock valuable insights by seamlessly connecting smart connected products, data, tools, and experiences. Industrial manufacturers that establish successful ecosystems can boost their revenue growth and earnings by more than 13%.

To maximize ROI, let startups and other partners do the hard work first, bringing them into the ecosystem once the market emerges and the risk profile improves. Alternatively, industrial manufacturers can buy or build a set of capabilities, taking advantage of the early innovations of others.

Get customers involved early

As manufacturers establish a closer connection with their customers, they must adjust and enhance their products and offerings to transform themselves into customer-focused organizations. By gaining an intimate knowledge of customers’ needs and delivering “signature moments” that drive brand and market differentiation, manufacturers can set new growth agendas. Incorporating smart connected products will unlock avenues for capitalization, positioning manufacturers as strategic players within evolving physical and digital ecosystems.

Industrial manufacturers can drive deep customer insights, comprehensive market fit, and scalable product development through four phases: explore, create, incubate and activate. It’s an approach that can deliver differentiated experiences, go-to-market opportunities, speed and agility, and paths to monetization – particularly when it is paired with an ecosystem-based approach, which is essential for competitive advantage in today’s market.

The key for maximizing ROI will be to get customers involved early and often. Manufacturers will want to use a lean startup approach so that they don’t overbuild, and then test low-cost, low-fidelity prototypes with customers that focus on learning and speed.

Based on the knowledge of their customers’ memorable moments and their learnings from the prototyping, manufacturers can pace releases to drive speed to market and build both early competitive advantage and stickiness with the market.

Leaders who take the smart connected product leap today will be better positioned to out-innovate and outperform in the future. Those who don’t may be fine for now, but risk irrelevance just a few years down the road.

A joint byline article from EY’s Global Advanced Manufacturing Sector Leader, Jerry Gootee and David Takeuchi, EY Global Strategy and Transformation Business Model Innovation Leader.