Strategy

Let’s be clear, the foundation of strategy is changing as much as business itself. A core example of this is that conventional boundaries between industries are eroding. It’s getting harder to tell the difference between, say, a telecommunications company and an entertainment producer, or between a retail bank and a retail store. The relationships among suppliers, producers, and consumers are also blurring, more rapidly than many business decision makers are prepared for. The more static elements of markets and industries will be replaced by more dynamic ecosystems.

Trustworthiness and a clear articulation of purpose, has become significantly more important to business. A company that is continually changing must balance that turbulence with purpose and trust. Otherwise people — across employees, customers, collaboration partners, investors, regulators and more — will not be able to make the full commitments that businesses need.

The megashifts and technologies that are rapidly becoming omnipresent, presents unprecedented potential gains for companies that claim leadership roles. Their ability to realise sustainable gains based on the megashifts and technologies will depend, in part, on their actions during these early years: the capabilities they build and the extent to which they reframe their business and operating models to make the most of this new technological infrastructure.

How can you lead your company – large or small – in achieving digital maturity and to play a pivotal role in the coming years of fundamental change? How can you take advantage of your existing strengths while developing the digital prowess and personal mindsets, skills and behaviours that you need? How do you balance the technological acumen you require with the leadership mastery to remain or to become sustainable successful?  The following 10 principles can help senior executives navigate the uncertainties of the next few years in a systematic and profitable way.

We recommend the following 10 strategy components to successfully navigate the uncertainties of the next few years in a systematic and profitable way while building the company of the future.

Establishing Your Strategy

1.  Rethink your business model. The business world has become accustomed to disruption. In industry after industry, incumbents that cling to old business models lose ground to upstarts that introduce new products and services at much lower prices. The next industrial revolution will accelerate this sequence, especially in manufacturing, by reducing costs and improving efficiency at a broad scale. Companies that are slow to change will lose to those that rethink their business models to take advantage of the new platforms and their new opportunities.

2.  Build your strategy around platforms. What the value chain was to the old industrial system, the platform is to the new. A platform is a combination of interoperable standards and systems. It creates a plug-and-play technological base on which a wide range of vendors and customers can interact seamlessly with the same collection of hardware, software, services, and one another. The most successful platforms match customers with vendors, maintain an appealing and effective customer experience, and collect data and rents from people who use the system. A business that controls a popular platform — Microsoft with Windows, Apple with its mobile iOS, Amazon with its “everything store” merchandising system, Facebook with social media, and Google with its search engine — can influence the direction of evolution for a business-to-consumer market. The same will be true of the new industrial operating systems for business-to-business markets. The users of a platform become, in effect, an ecosystem: a group of companies exchanging goods and services, their fates bound together.

3.  Design for customers. Because the next industrial revolution is driven by large-scale digital technology, it’s easy to overlook the way it could affect human relationships. The new infrastructure is a web of connections among people: Producers and consumers, in particular, are much more closely connected than they used to be. Through smartphones and social media, consumers can connect directly to primary producers of the products and services they buy. Through sensors and data analytics, producers can be thoroughly attuned to the needs, habits, and long-term interests of the people who buy products and services. As a designer of the new platforms, or a business leader participating in them, you have an unprecedented opportunity to build a customer-centric enterprise, one that connects with what people genuinely want and need from your company, thus generating commitment that will last a lifetime.

4.  Raise your technological acumen. No matter what industry you’re in, you live in a programmable world, and software will be key to your competitiveness. Take the German auto industry, for example. For years it has traded on a worldwide reputation for excellence in mechanical and powertrain engineering. But from now on digital excellence will be at least as important. This change is forcing some hard thinking about future industrial strategy, in a country that is known, according to the Financial Times, for relative weakness in IT. “In the future, 50 to 60 percent of the value of a car will consist of digital devices and tools,” said German federal chancellery chief of staff Peter Altmaier, one of Angela Merkel’s senior advisors, at a panel debate in November 2016. “And 20 percent [will be] batteries. If we’re not careful, [German manufacturers will] only be responsible for the windows, seats, and wheels.”

5.  Innovate rapidly and openly. Innovation and leadership go hand in hand in the next industrial revolution. Many companies will seek disruptive innovation, but a steady stream of incremental innovations can be more profitable. Smaller innovations will be easier to generate and, more important, easier to test in the market. With the tools of the Industrial Internet, you can prototype new products, manufacture them in small batches profitably, distribute them rapidly, and see how your customers respond before rolling them out worldwide. As you continue to develop incremental innovations, they can sometimes snowball into disruption. That’s what happened with the smartphone, which evolved between 2000 and 2007 from a music player (the iPod) into a world-changing device.

6.  Learn more from your data. The exponential increase in real-time data — gathered from customers, equipment, and work processes — is giving companies new insights. Gathering and analyzing data are important, but they are only the beginning. It is critical to use the analytic results to recognize important patterns, and to gain insights that help you make the right choices and keep improving on the fly. For example, getting accurate information about progress and cost on construction sites has always been a challenge. Now, a construction company or investor can use drones to gather photographic images, overlay them with the original site plans, verify contractor reports, and spot discrepancies as small as a centimeter wide. In the agrochemical sector, farming companies also use drones, along with data from weather reports and sensors mounted on their machinery, to fine-tune their planting, fertilizing, and harvesting practices. Industrial companies of all sorts now use data gathered from factory floor sensors to inform maintenance and operational decisions. GE’s chief digital officer, Bill Ruh, estimated that just one performance increase resulting from these efforts, in locomotives, saves one railroad US$200 million per year.

7.  Adopt innovative financing models. New large-scale technologies inevitably put pressure on the old ways of raising money for them. As the Industrial Internet expands, the ability to finance major capital projects will remain one of the hallmark capabilities of an industrial company. But the particulars will shift.

Infrastructure projects will closely follow the example of the software industry, where cloud computing has sparked a quiet but pervasive change. Software users no longer buy packages; instead, they subscribe to software-as-a-service, paying rent to the provider in exchange for access and continual upgrades. This approach affects the type of financing that tech companies need, and the ways they manage return on investment. Larger industrial firms will similarly move from financing the ownership of factories and machinery to financing a pay-as-you-go system, with smaller but more frequent rent charges for more flexible installations. There will be less interest in replacing old equipment, and more interest in continuing to upgrade it, using 3D printing and other forms of digital fabrication to manufacture and customize new components. Industrial companies will take a cue from Silicon Valley and finance more of their investments through equity and venture capital, rather than through debt. Adjustable pricing will also be more common; technology will allow B2B prices to vary based on time of sale, amount of use, and type of application.

8.  Focus on purpose, not products. As a leader in the Industrial Internet, you will probably develop a wide range of products and services during any given five-year period, potentially in several sectors. Many other companies will use the same platforms to enable their capabilities. To differentiate your company, you need to develop a clear purpose: a value proposition, more effective than anyone else’s, that applies to everything you do. This means looking closely at the reasons people come to your company, the outcomes they expect, and the ways you can deliver. When you are clear about what your company is, and why you sell what you sell, people will trust you to deliver what you promise.

9.  Be trustworthy with data. You already collect a vast amount of data. As the IoT spreads to wearables, consumables, cars, and every conceivable part of the home, what you know about people will increase exponentially. The Industrial Internet will bring that level of data collection into your workplace. Shared data is the fuel of the next industrial revolution, and just as earning digital trust will be key to success, forfeiting people’s trust will be a surefire route to failure.

You will need not only to manage customers’ behavior, but to prevent outsiders from gaining access to critical information. Strong risk management, cybersecurity, and data integrity systems are essential in helping companies avoid breaches and better manage disruption to operations. Transparency has to be an integral part of your strategy. Without a clear idea of how rules are defined and implemented, for example, stakeholders may question a company’s fairness and honesty.

10. Put humanity before machines. You might think the principle of putting people before machines is so obvious that it goes without saying. But the history of technology is full of examples where the opposite has happened. The Industrial Internet places unprecedented power in every enterprise. As machines become increasingly interconnected, the quality of user experience will spread in viral fashion. If people are shut out — of jobs, creative opportunities, income, and customer satisfaction — then embracing technology will backfire. Business, in particular, will thrive in this new world only if its leaders understand the place of human values.

Set up your enterprise to foster better connections among people, to encourage humane behavior, and to build the requisite capabilities that overcome technological isolation. The most important skills for accomplishing this will be those that can’t be replicated by machines. Your company will need people who can understand the technologies of the industrial infrastructure, such as artificial intelligence and analytics, but who are also adept at working with an organization’s culture. Helping people take pride in their endeavors, as our colleague Jon Katzenbach suggests, will be critically important; so will establishing a diversity of points of view, so that people from different backgrounds can challenge one another’s perspectives.