Smart connected products give industrials unprecedented opportunities

Traditionally, manufacturers innovated or applied inorganic strategies horizontally across the linear value chain to stimulate growth and tap new markets. Now, by leveraging technology, manufacturers can innovate vertically as well and add value to the length of the production stack, redefining the competitive dynamics across these emerging ecosystems that are capturing new sources of value in high growth, adjacent markets.

At the heart of this revolution is smart connected products (SCP)—networked offerings with intelligent components. SCPs expand the boundaries of possibility for manufacturers through a powerful combination of artificial intelligence, machine learning, the Internet of Things, and cloud computing.

Their ability to track the supply chain, plant production, and the performance of individual components while adding software-driven attributes at any point in production, delivery, or use mean that companies will soon have a deeper understanding than ever of the entire lifecycle of every product they manufacture—along with an unprecedented opportunity to make modifications at every stage.

We see the SCP revolution as a huge opportunity for manufacturers, one that could generate as much as $2.3 trillion in incremental revenue by 2030. Already, such products can sense, collect, and transmit data within an ecosystem of connected devices and every appropriate stakeholder. In a few years, their interconnection will make it possible to make ongoing improvements to a product as market demands change and as it sees opportunities to improve the performance or enhance the capabilities of particular components.

The power of data

We believe the transformational quality of SCP is likely to be seen first in electro-mechanical products used in industrial manufacturing. The machines in these factories produce a vast trove of data (more than 1.8 million terabytes) each year, most of which goes unharvested. With little understanding of how to collect, analyze, or monetize the informational equivalent of 11,000 high-definition movies, companies overlook countless opportunities to generate not only cost savings but new revenue streams.

By the end of the decade, a recent EY-Parthenon analysis of SCP value pools estimated that there may be a $1.8 trillion opportunity in cost reduction and enhanced operating efficiencies.

This is an important first step, because manufacturers will likely need these savings to finance the next generation of SCP. Such products may be so revolutionary, it may take time for developers to match features to market needs. Simply learning how to take full advantage of new sets of tools as well, such as generative AI and natural language processing, may also require a period of adjustment.

One example: an electric vehicle manufacturer using a smart, connected battery to uncover a variety of valuable opportunities in the electric vehicle and swappable battery value chains.

Beyond that, the advent of SCPs will demand that manufacturers develop a different set of capabilities, ones that go beyond their traditional expertise in designing, building, selling, and supporting physical products to building networked SCPs, and redefining their mission to include not just physical products but a wide range of intellectual property that can help serve traditional customers better as well as address entirely new markets.

Take, for example, a global HVAC company that recognized it could adapt one of its smart thermostats to sell through its residential business unit. First released in 2023, this product is expected to sell more than one million units in the next three years.

At the same time, the company needs to focus not just on the physical and electronic aspects of the SCP’s network, but also the customer, understanding which aspect of a product that customers value, and which points constitute signature moments for customers that drive (or could be used to drive) brand and market differentiation.

And it doesn’t stop there. Increasingly, manufacturers are finding value by adopting an ecosystem-driven approach that leverages partnerships and connections with other manufacturers to promote data sharing.

This can lead to greater visibility and awareness of value pools, which they can then use as new markets for their smart connected products. Indeed, our research finds that manufacturers which have learned how to build such smart ecosystems can boost their revenue growth and earnings by more than 13%.

One European wind energy company that has followed this strategy to create an SCP platform for remote monitoring, updates and analytics has gone from zero visibility into the health of its turbines to an ongoing connection to 30,000 turbines. This created an opportunity for remote software updates that improved performance and productivity, more predictive maintenance, and a significant reduction of service costs.

SCP, as soon as possible

This is complex work that demands a steady, deliberate response. However, many manufacturers are likely to find themselves under pressure to speed up their response as capabilities advance and their ecosystem evolves. They should be prepared for new entrants at every stage of production. Some of these new players may prove helpful. Others, on the contrary, may cut deeply into traditional sources of value.

Despite the complexity of the technology and the breadth of the opportunity, a winning response to the SCP revolution is likely to be conceptually simple:

Set your digital agenda early. Define which value pools you are well-positioned to pursue and what role you will play in that emerging market.
Define a holistic, end-to-end approach from concept to commercialization to ensure market viability of your SCP and digital solution portfolio. Think about organizing the work to be done across four key pillars: differentiated experience, smart connected (physical) product, secure and scalable digital platform, and the path to monetization.
Be diligent about the amount of investment you place in unproven solutions, focusing more investment, and accelerate the market-tested solutions on the path to commercialization.
Deploy multidisciplinary, agile teams or “pods”—self-organized and cross-functional groups who know how to work together throughout the innovation lifecycle. Such teams can accelerate delivery by 80% compared to conventional development processes.
Don’t forget to prepare the organization to ingest new products and services in the context of the current business model. This may require shifts in the current operating model, enterprise systems integrations to enable scalability, and change management.