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A good definition of the new IoT value chain

The traditional manufacturing business value chain runs from components to the manufacturers to the end consumer. This shifted a bit when companies started pushing software as the source of most of their value, and now, as connectivity changes the equation, it will shift again. That is not to say that older value chains will become immediately irrelevant, but if they want to keep up, companies need to understand and adapt to new value chains as they emerge.

A report by Boston Consulting Group argues that the new business value chain will be comprised of three layers: enablers, which will provide the underlying infrastructure; contributors, which will use domain-specific knowledge and will build specific solutions on top of platforms; and orchestrators, which will own a platform and build out an ecosystem.

The report spends most of its time on the orchestrators because that’s what most of the big, incumbent players in the manufacturing and industrial world want to be. These incumbents need technical acumen, however, so they are signing deals with the likes of Amazon, IBM, Microsoft, and others — companies the report refers to as enablers — to provide the technical underpinnings. It will obviously benefit the enablers when various incumbents gain in power because they will bring their platform participants with them by using the underlying technical infrastructure they provide.

For example, the report cites Volkswagen’s deal to create a manufacturing platform on Amazon Web Services. Volkswagen is pushing its suppliers and partners to join that platform so they can share data and analytics. Both Volkswagen and AWS will benefit from building that value chain. Other vendors that join and can then share data will also benefit. The basics of this theory is that companies that want to become orchestration platforms can get there by taking advantage of their ability to aggregate and use lots of unique data, or by pulling vendors into their platform using network effects. And in some cases, they will do both.

So how does a company become an orchestrator? As benefits BCG’s customer base and expensive consulting fees, the report is targeted at the largest players of various industries. Companies such as Schneider Electric, Honeywell, and Avnet are deemed as being en route to this position by way of three different paths (see image above.) Companies can try to become a true platform by focusing on their ability to aggregate lots of data and provide it to multiple parties across a vertical or horizontal value chain. This is actually a route I see several startups chasing. For example, MachineMetrics is taking in data across multiple different machines in several industries and trying to parlay its insights into a broader service for a variety of customers.

Another route to becoming a platform or an orchestrator is by focusing on building a marketplace (BCG calls this a transaction platform). John Deere has taken this approach by using its own unique data and knowledge of farming (and the ownership of farm equipment) to build a platform on which other companies can put their applications. As the platform grows, it gets more data and attracts more end users, which means that any company wanting to participate in the agriculture business needs to have a conversation with Deere. Think of this as the Apple App Store model.

The third route to orchestrator status is by way of the innovation platform, the report’s description of which is pretty fuzzy. The idea is that a company that has a lot of customers in a given space also has a lot of interesting and useful data that it can use to attract startups and developers who want to build new use cases around that data. Generally, companies that try to build innovation platforms get weird when developers try to use their data to help a competitor or build a competitive solution, so I haven’t seen any real examples of this. The report notes that in some cases, businesses that build marketplaces can turn those marketplaces into de facto innovation platforms. Salesforce has done this on the software side, but these sorts of plays tend to engender bad feelings. Amazon’s efforts to launch features based on successful products made by startups building on its platform is just one example.

The report addresses these risks by blithely asserting that “platform and ecosystem co-opetition will ultimately become the norm in industrial IoT…” which is true and a fairly underappreciated challenge that everyone trying to build businesses in IoT hopes to solve. Co-opetition is a combination of competition and cooperation that fairly accurately describes what’s happening in business as technology and data become more entertained with operations. Dealing with the new reality will require lawyers, culture change, and new business metrics, all of which will be a long time coming.

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