How can smart connected products change the way manufacturers operate?

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.

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.

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.

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%.

SCPs with Exponential Value Creation Potential

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.