Smart connected products offer industrial manufacturers new ways to generate revenue and cost efficiencies for long-term value creation.


In brief

  • Industrial manufacturers must balance the need to future-proof their products for tomorrow while remaining competitive today.
  • Smart connected products enable vertical innovation for cost savings, top-line growth and new business models.
  • Challenging as it may be, the transition to smart connected products can accelerate innovation and unlock value for both customers and businesses.

The opportunity in smart connected products is now, but the payoff might be years down the road. That’s likely to discourage some companies from investing, which could be a fatal mistake.

By combining the right technology stack with the speed and agility of the cloud, smart connected products can drive innovation, create signature moments for stakeholders, monetize new business models and expand product portfolios based on platforms and applications.

The key for manufacturers is to find the right balance between vertical innovation of smart connected products, while continuing to innovate existing products horizontally along the value chain.

Implementing new business models enabled by vertical innovation

New business model diagram

Businessman with tablet and woman talking at assembly robot in a factory
1

Chapter 1

Risks and opportunities define the case for change

Digital disruption and intensifying competition are driving manufacturers to find new ways to create value.

Cloud computing, artificial intelligence (AI), machine learning (ML), and the Internet of Things (IoT) are giving rise to 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 the IoT by using embedded software integrated with cloud-based platforms that are continuously evolving as market demands change.  

Smart connected products ecosystem

An ecosystem of smart connected products illustrating the seamless link between physical and digital products.

Smart connected ecosystem diagram

Manufacturing companies currently generate more than 1.8m terabytes (pdf) (equivalent to watching 11,000 ultrahigh-definition movies) of data each year. Yet they have little idea how to collect, analyze or monetize it. This data is often left to languish in the silos that collected it, leaving companies without the valuable insights that could generate much needed cost savings or new revenue streams.

This situation is compounded by an intensifying increase in competition from emerging players who are already outpacing legacy industrial manufacturers around innovation, cutting into market share and leaving them vulnerable to obsolescence.

Manufacturers can use their established track record of product development as a springboard for transitioning from selling physical products to building software-defined (via EY.com Switzerland), intelligent, interconnected products. They can also continue to diversify their intellectual property (IP) portfolio by innovating existing products, and building or buying new IP to unlock future value and remain competitive.

However, realizing the value from smart connected products could take years.

This delayed return on investment (ROI) may prompt manufacturers to refrain from investing in smart connected products. By doing so, these manufacturers may remain competitive in the short term, but they will be at risk of being out innovated, outperformed and outmaneuvered by the competition in the long term. By the time they see the value in hopping on the smart connected product train, it may have already left the station. These companies stand to lose market share and possibly their existence as a company.

Value creation models can unlock revenue opportunities for long-term growth

To remain competitive, it is crucial that industrial manufacturers leverage a well-defined product value creation model. This involves identifying and understanding the various elements that contribute to the creation of value throughout the product's lifecycle, from development and production to marketing, distribution, sales, and customer support. This type of model can help to unlock significant revenue opportunities and enhance customer lifetime value by harnessing the potential of smart connected products throughout their lifecycle.

As manufacturers establish a closer connection with their customers, they must adjust and enhance their products and offerings to transform 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.

Short-term cost savings to invest in long-term revenue

Because it can take time for smart connected products to generate revenue, manufacturers can fund their journey through a variety of cost reduction initiatives including value engineering. These short-term cost savings are instrumental in providing the necessary financial resources to fund investments in smart connected products. Initially developing smart connected products for internal use cases (e.g., supply chain, manufacturing) can also help by accelerating capability-building and serving as a revenue bridge to create value in the short term, as new lines of business are being built.

A recent EY-Parthenon analysis on smart connected products value pools, which we define as economic value potential through cost reduction and operating efficiencies, over the next seven years suggests that industrial manufacturers could save an average of US1.8t through a variety of cost efficiencies.

Economic value potential of smart connected products
Average value of cost reductions and operating efficiencies by 2030

Examples of cost reduction initiatives include:

  • Inventory management. A distribution center could use IoT tracking to monitor product movement and storage, reducing errors and optimizing levels.
  • Supply chain visibility. Smart sensors enable real-time tracking of inventory and environmental factors in production sites, optimizing processes, ensuring compliance, and driving informed decisions.
  • Product development. IoT integration in prototypes and products allows manufacturers to collect real-time user data, which they can use to optimize development through data-driven decision-making. An example may include a smart refrigerator manufacturer using sensors to gather data for design improvements.
  • Operational excellence. In a factory setting, IoT devices can automate processes, optimize resource allocation and provide data-driven insights to enhance operational efficiency. IoT sensors monitor machine utilization, minimize downtime, and enhance production schedules, while connected devices enable predictive maintenance, process optimization, energy conservation, and bottleneck identification. IoT analytics streamline workflows and enhance productivity.
Businessman using digital tablet in front of digital charts
2

Chapter 2

Four strategies manufacturers must adopt to remain relevant

Smart connected products can unlock new revenue streams and cost savings with the right plan.

As growth and margin pressures increase to maximize business value beyond customer value, industrial manufacturers can use smart connected products to continue to unlock value pools through new revenue streams and cost reduction opportunities.

1. Address real-time data obstacles with a scalable, adaptable and secure value creation platform

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

The value of ecosystems
Percentage increase of revenue growth by setting up successful ecosystems

SCPs with Exponential Value Creation Potential

SCP value creation curve graph

For example, a European wind energy leader built a modern smart connected product platform for remote monitoring, updates and analytics. The company went from having zero visibility into the health of their wind turbines, to connecting, monitoring and controlling 30,000 wind turbines remotely by creating a smart connected product and IoT platform app. This provided an opportunity for remote updating of the software, resulting in increased performance and productivity, while newly implemented predictive maintenance capabilities resulted in a significant reduction of service costs.

2. Use vertical innovation to develop new business models

Traditionally, companies innovated horizontally along the value chain. With smart connected products, industrial manufacturers can innovate vertically. They can elevate the smart connected product stack by embedding intelligent systems and software for task automation, and to generate new revenue from personalization with the ability to gather new and deeper insights into customers.

Additionally, generative AI (GenAI) and natural language processing technologies can play a significant role in enabling smart products to seamlessly engage with users, by offering prescriptive instructions for maintaining equipment and identifying resolutions to problems encountered by operators.

3. Maximize business and customer value

Smart connected products go beyond customer value. They can also uncover revenue and cost saving opportunities for manufacturers. Developing commercialization roadmaps and executing on business case analyses can help manufacturers to determine clearly defined paths to monetization.

At the same time, industrial manufacturers generate cost savings by increasing the speed and agility of product development through platforms, operating models, customer, and sales support services.

4. Identify and capitalize on new value pools

Industrial manufacturers can use smart connected products to unlock value pools across new settings such as production sites, office and commercial spaces, passenger and commercial vehicles, homes, and retail environments. EY-Parthenon analysis of the revenue potential of smart connected products indicates that industrial manufacturers have the potential to generate incremental revenue of up to US$2.3 trillion by the year 2030.

Economic value potential of smart connected products
Incremental revenue generation by 2030

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Chapter 3

How to make a successful transition to smart connected products

Set the digital agenda early and develop an ecosystem-enabled commercialization solution with a path to monetization.

While the opportunities for smart connected products are abundant, industrial manufacturers need to be mindful of the challenges. Transitioning to smart connected products without the right experience can pose substantial risks for companies. Many manufacturers tend to fall short in five key areas:

  1. Insufficient market validation to gauge the product’s market viability
  2. Inadequate research, design, and testing with potential customers
  3. Immature technology or platform capabilities to develop an ecosystem
  4. Limited go-to-market experience
  5. Hurdles in securing capital, investment and financing for smart connected products because of longer ROI timeframes

For industrial manufacturers to make a successful transition to smart connected products, they will need to focus on four areas:

1. Set the digital agenda early

Industrial manufacturers will need to start with digitalization. Digital — and software specifically — is core to the smart connected products strategy. A strong focus on digital capabilities alongside the correct technology stack during the concept design phase rather than post launch is critical. Industrial manufacturers will want to pay particular attention to:

  • Desirability: Can we create win-win experiences and outcomes for all key stakeholders?
  • Feasibility: Can we design and engineer smart connected products with a digital platform to scale?
  • Viability: Can we generate revenue and what is the path to monetization?

2. Leverage multidisciplinary, agile pod teams

To achieve market viability, industrial manufacturers will want to deploy agile pod teams. Agile pod teams are self-organized and cross-functional (including researchers, designers, technologists, data scientists and business strategists), and work together to meet product goals. Team members collectively have the right skills to explore, create, incubate and activate smart connected products in the market.

By taking a multidisciplinary pod team approach to accelerate and de-risk the path to commercializing new business models, a US manufacturer of commercial water heaters and boilers was able to implement a flexible scalable and secure technology platform. The manufacturer developed value-engineered, smart connected water heater prototypes, and three new digital products around energy management and remote monitoring and serviceability. Using agile pod teams, the company reduced its time to market by 80% compared with its previous product development process.

3. Develop an end-to-end approach to commercialization fostered by ecosystems

Industrial manufacturers can create differentiated experiences through “signature moments” that address customers pain points for all players in the value chain through a new suite of digital solutions.

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.

4. Bridge the revenue gap with a clear path to monetization

New products can take three to four years to monetize effectively enough to deliver a satisfactory ROI. Given that executive leadership tends to measure results in quarterly earnings, boards and C-suites are hesitant to invest.

Manufacturers must bridge the revenue gap with interim value creation opportunities as they build the vertical innovation smart connected product stack. Business units will need to demonstrate the value potential of the proposed smart connected products, with a clear path to monetization to secure board and C-suite buy-in.

Although data-driven applications of smart connected products, such as predictive maintenance and remote monitoring, have become must-haves rather than nice-to-haves, finding true paths to monetization will define success. This will require the right combination of traditional products, a specialized proposed product portfolio, and the right partners within a particular ecosystem. This gives manufacturers the best chance to successfully carve out their space in the market and build their smart connected product stack.

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Chapter 4

Take two paths approach to value creation and seize advantage

Leaders who take the smart connected product leap today will be better positioned to out-innovate and outperform in the future.

Many manufacturers have embarked on the smart connected product journey. Yet few are taking full advantage of the value creation potential in the manufacturing sector.

To maximize the opportunity and remain competitive and relevant in the industry, industrial manufacturers will need a course of action that enables the use of smart connected products to drive innovation, increase competitiveness, accelerate speed to market, and create signature moments for users within platform-based ecosystems.

Manufacturers will need a comprehensive end-to-end commercialization solution, with a two-pronged monetization strategy. In the short term, the focus needs to be on optimizing cost savings and developing add-on services to existing products. This will provide a revenue bridge as they ramp up their vertical innovation smart connected product stack, positioning them to reap exponential revenue rewards three to four years down the road.

If industrial manufacturers think they can wait, they should think again. Others within and outside the industry willing to make the investment in smart connected products today, and assume the associated risks, will rapidly outpace and outperform, leaving slow adopters scrambling to catch up — if they can.

A special thank you to Adrian Reisch, EY Advanced Manufacturing Realized Europe West Leader Ernst & Young GmbH, Harsha Anand, EY Global Advanced Manufacturing & Mobility Analyst, Ernst & Young LLP, Mohit Ahuja, EY Global Advanced Manufacturing & Mobility Analyst, Ernst & Young LLP, Davinderpreet Gugnani, EY-Parthenon Senior Manager, Advanced Manufacturing and Mobility, Ernst & Young LLP, Sachin Lulla, EY Americas Advanced Manufacturing & Mobility Consulting Sector Leader, Ernst & Young LLP, Will Auchincloss, EY-Parthenon Americas Consumer Products and Retail Leader, Ernst & Young LLP, Umair Khalid, EY-Parthenon Senior Director, Consumer Products & Retail, Ernst & Young LLP, Johan Tioanda, Consulting Manager, Ernst & Young LLP; Jenna Lin, EY Consulting, Ernst & Young LLP; and Ashley Conner, EY UX Design Director, Ernst & Young LLP for contributing to this article.

Summary

Industrial manufacturers can harness the potential of smart connected products to unlock new revenue opportunities and cost savings. But realizing the exponential value may be a few years down the road.  Manufacturers need to find the right balance between vertical innovation of smart connected products, while continuing to innovate existing products horizontally along the value chain.

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