I suspect that if you’re sufficiently interested in the IoT to be attending this track, you are at least pretty confident that the IoT will eventually have a major impact on the economy and your own company, but you may not have made any specific IoT investments and or created a comprehensive

IoT adoption strategy. This afternoon we’re going to consider tangible, affordable strategies that will allow you to begin incorporating the IoT into your operations, achieve some tangible benefits, and acquire basic understanding of the IoT and its benefits that you can later apply to more radical transformation.

If you haven’t made a real commitment to the IoT, you’re in good company. A December 2013 survey by the American Society for Quality found that only 13% of US manufacturers are using any smart manufacturing technologies so far.

However, I have a stark warning for you.

The IoT is now a reality: since 2009 there have been more things than people on the Internet, and Cisco says that 50 billion things will be linked by 2020, and the company’s John Chambers warned that 40% of the companies attending a recent seminar wouldn’t survive in a “meaningful way”

within 10 years if they don’t begin now to embrace the IoT.

Even if you aren’t looking to create IoT products for the consumer market, the IoT will change your business: the McKinsey Global Institute estimates that B2B uses can generate nearly 70 percent of potential value enabled by the IoT, and Gartner says a majority of IoT changes will be behind the firewall, dealing with corporate operations: as they call it, the “Intranet of Things.”

In other words, you simply don’t have time to wait.

Even though the price of sensors will drop and analytical tools will become more powerful, making the IoT even more robust in coming years, you must begin to develop and implement your IoT strategy

now.

In my talk this morning, I described how the Internet of Things can bring about radical transformation in everything you do, from product design to corporate organization.

However, there’s also a more modest, less-costly, less-jarring approach you can use to begin the transformation.

Several years ago, in the Managing

the Internet of Things Revolution e-guide that I wrote for SAP, I suggested that the way to test the waters, install the infrastructure you’ll need to make more radical changes, and to gain some important IoT experience is by using it first to dramatically increase the operating efficiency of your existing operations.

There’s no better model for this strategy than GE, the only member of the original Dow Jones Index that still exists — let alone thrives.

While I maintain that the company is probably the leading example of radical transformation through the IoT, its stated goal for its “Industrial Internet” initiative is more modest, to increase operating efficiency, first in its

own operations, and then in the various industries it serves, from railroads to health care, through IoT-based incremental improvements. As an admiring report from the Motley Fool said, “GE estimates that a 1% improvement in its productivity across its global manufacturing base translates to $500 million in annual savings. Worldwide, GE thinks a 1% improvement in industrial productivity could add $10 trillion to $15 trillion to worldwide GDP over the next 15 years.”Or, as GE put it elsewhere, just looking at benefits to the US economy: “If the cost savings and efficiency gains of the Industrial Internet can boost US productivity growth by 1-1.5 percentage points, the benefit in terms of economic

growth could be substantial, potentially translating to a gain of 25-40 percent of current per capita GDP.”

Let me emphasize that: they’re setting the bar very, very low: only a 1% boost in productivity, when in fact the improvement will probably be much, much higher.

Does that sound like a reasonable goal for your company?

So let’s go into this topic of building efficiency through the IoT in some more detail to decide how to begin.

The secret to such an increase in efficiency is a degree of precision in everything — everything — we do that was impossible in the past.

In the past, it was impossible for us to measure in real-time exactly what was happening in our supply chain, in our factories, in our distribution networks and with our products after they left the factory,

and to share that information instantly with everyone who needed it to to their job more efficiently and/or make better decisions.

That is really a profound difference, and it’s worth restating, because this is such a change from the past.

In the past, it was so difficult to collect data — about the state of our manufacturing equipment, about how products performed once they left the factory, that we were only able to gather limited data, typically from

mechanical gauges, read infrequently by humans and recorded on a clipboard. But what happened if there was a pressure spike in between the readings? What if his supervisor forget to check the form? What if there was a critical factor, such as metal fatigue, that couldn’t be detected by a gauge?

You get the picture: we didn’t have much data, and it was hard to share, so a lot of our strategy and daily operations were based on guesstimates.

But now, especially with the advent of the IoT, we have much more information, collected 24/7, and there’s still more to come with the full deployment of the IoT, so the smart place for you to begin with an incremental approach to the IoT is to make the investment now in cloud storage for data, data analysis tools such as HANA, and, dashboards and

visualization tools that will let everyone who needs it to share this data on a real time basis.

The great thing about investing in analytics is that it will pay off immediately, even before you invest in the rest of the IoT, simply by improving your ability to make sense of the growing amount of data you collect. As an MIT study several years ago documented, among the 179 large companies studied, the ones that switched to “data-driven decision making” had 5-6% higher productivity gains than were explained by other variables.

Once you have the analytical tools in place, you can begin to apply them in a variety of ways that will be valuable to begin with, and only gain in value as more IoT sensors are deployed and your volume of data increases. For example, you can begin now to profile your customers using measures such as customer lifetime value, based on past buying

decisions, and the analysis will become more and more valuable as sensors are deployed in the products themselves to show how customers actually use the products and as iBeacons at retailers provide more information on how they actually behave in a store.

Now let’s come back to GE, because it is pioneering what I call the “Era of Precision Manufacturing,” in which all aspects of the production cycle, from supply chain to the factory floor, to the distribution network and retailing, are linked to an unprecedented degree.

Why? Because, for the first time, they will

now be able to share real-time data about exactly what is happening, allowing unprecedented coordination and efficiency.

A number of companies, including Bosch and Johnson Controls, are creating systems to make this possible, but perhaps the best example is GE, which calls its initiative Brilliant Factories, and it is leading the way by eating its own dog food: applying the concept internally to its own 400 factories, then planning to spread the benefits to customers

through the machinery it builds. Look at this graphic of the benefits it

hopes to achieve!

To better understand why yourinitial IoT strategy could build a solid record of achievement by beginning with the Brilliant Factory approach, consider GE’s Durathon battery plant in Schenectady.

It makes high-precision back-up batteries for cell towers in remote areas of the world, and because it make take days to get a repair crew to

the site, GE puts sensors into the batteries that can, among other things, detect the earliest signs of failure, so the repair crew can be dispatched long before the battery ever fails: the so-called predictive maintenance approach that GE now is able to offer its customers as a benefit.

GE could just slap the sensors on when the battery is ready to leave the plant, but, instead, they’re designed in to the very beginning of the complex, weather-sensitive chemical process that creates the battery. That means that every single battery — not the sampling of products that are given quality checks elsewhere — is monitored throughout the production process.

But that’s not all: instead of that lowly

worker walking around a factory with a clipboard writing down gauge readings that his boss might or might not read, the manager of the Durathon plant walks around with an iPad, directly monitoring the readings from the 10,000 sensors embedded in the assembly-line machinery, as well as real-time data from the National Weather Service. That’s critical, because the chemical process that forms the battery is highly weather-dependent, and the manager can make real-time adjustments to the process based on the weather data. In fact, according to Industry Week, he’s even done it on the weekend from his home when a storm was predicted!

Imagine the precision that this kind of monitoring gives!

Or, for that matter, consider Siemens’ “factory of the future,” which manufactures its Simatic custom control devices, which include more than 50,000 annual product variations on 950 different products, made from 1.6 billion different components. Despite that complexity, it only has 15 defects per million, 99% reliability, and 100% traceability, because of the IoT sensor monitoring.

The factory will become more productive when more and more sensors are built into it: when the 10,000 sensors on the Durathon assembly line becomes commonplace. Make certain that because capital equipment is used for so long, that any new machinery your are considering today includes built-in sensors!

Predictive maintenance, which allows you to identify issues such as metal fatigue that aren’t apparent to the naked eye but will be documented by sensors, will allow you to deal with a maintenance issue in the earliest stages, when it can be dealt with as cheaply and quickly as possible, and during scheduled down-times, to avoid disruption.

The benefits of this new ability for everyone who needs it to share real-time data instantly can also benefit your company in another aspect of precision manufacturing.

For the first time, we can have true just-in-time supply chains and distribution networks, if we choose to share production data with suppliers and distributors, eliminating both

excess inventory and shortages. Instead of a linear process, in which each partner in the production and distribution business was unable to know exactly what the other was doing, we will have a continuous loop, with real-time IoT data as its hub, so each partner will know what the other is doing, allowing them to fine-tune the resupply process. In many cases this will be done on an automated, M2M basis, requiring no human intervention.

And, on what used to be the other end, the sales process, SAP’s prototype vending machine has shown that putting sensors in the machine and sharing the data instantly can not only lead to marketing insights, but also allow automated changes to distribution based not on historical patterns, but on what’s

happening right now.

Even as lowly a function as logistics will become precise with the IoT, and that’s critical. Consider just a few statistics about the current state of logistics today:*trucks in the US are, on average, only 60% full, and globally the efficiency is only 10%!*in the US, they were empty 20% of miles driven

*US business inventories were $1.6 trillion as of March, 2013 — so much for “just-in-time.”*time-sensitive products such as food, clothes and medical supplies are unsold because they can’t be delivered on time.

Instead, we’d move from the old point-to-point and hub-and-spoke systems to ones that are “distributed, multi-segment, intermodal.” A single, exhausted, over-worked (and more accident-prone) driver would be replaced by several. It’s a little counter-intuitive, but while it would take a driver 240 hours to get from Quebec to LA under the current system, instead, 17 drivers in a distributed one would each drive about 3 hours, and the cargo would get there in only 60 hours!

Under a new, linked logisitics system, the current fractionated, isolated warehouse and distribution mess would be replaced by a fully-integrated one involving all of the 535,000 facilities nationwide, cutting time and dramatically reducing environmental impacts and fuel consumption.

Trucking is such a quintessential 20th

century industry, but the IoT will reinvent it for the 21st!

Another early stage IoT approach that you can launch within the confines of your existing business and again focusing on increasing precision and reducing chance and variation focuses on workplace safety.

Especially in very large, complex workplaces such as ports or construction sites where there were many workers, many vehicles, and

many companies involved, the best we could do in the past was to plaster the site with warning signs and decals, and constantly remind workers of the need for safe practices. However, as a practical matter, these sites are characterized by constant changes, even in a single day, and lack of routine, so minimizing accidents was almost impossible to do on any kind of systematic way.

Now SAP is using the power of HANA to reduce harbor and construction site danger and accidents. Perhaps the most dramatic example is in Dubai — home to 25% of all construction cranes in the world — where it partnered with a worldwide leader in construction site safety, SK Solutions. Sensors are located on machinery throughout every site,

reporting real-time details about every activity: machinery’s position, movement, weight, and inertia and critical data from other sources (as with the GE Durathon factory’s use of weather data), including wind speed and direction, temperature, and more. Combining SK and HANA, site managers can detect potential collisions, and an auto pilot makes instant adjustments to eliminate operator errors. “The information is delivered on dashboards and mobile devices, visualized with live 3-D images with customizable views.”

Amazing!Equally incredible is the change at the

Port of Hamburg, Germany’s biggest port, which must juggle 9 million containers and 12,000 vessels a year, not to mention

a huge number of trucks and trains. You can imagine the potential for snarls and accidents. Since installing HANA, all of these components, including the drivers and other operators, are linked in real time. Average waiting time for each truckload has been cut 5 minutes, and there are 5,000 fewer truck hours daily. The coordination has gotten so precise that, if a trucker will be held up by a bridge opening, the nearby coffee shop will send a discount coupon to his iPad.

This is also the time to begin to decide what your long-term IoT strategy will be, both so you can target expenditures wisely and so that you can create a competitive advantage.Because only a few companies can take on multiple roles in the IoT, you will need to begin now to decide what niches to focus your efforts on,

influenced by factors such as your current products, what customers you serve, and your flexibility. Frank Burkett of Strategy& suggests, in A Strategist’s Guide to the IoT, that there are three major niches to consider:

•“Enablers,” such as Cisco, Google, HP, IBM, and Intel. They develop and implement the underlying technology such as sensors, the cloud and analytic tools. I suspect that none of you would fall into that category — that’s pretty much reserved for the pioneers, who already have massive infrastructure.•“Engagers,” is the most wide-open and easily penetrable category. It is primarily in the area of devices such as hubs and connected services that actually engage

customers. Engagers tend to be most active in hubs and connected services.•Finally, there are the “Enhancers,” which, according to Burkitt, are just beginning to emerge, and create “their own value-added services, on top of the services provided by Engagers, that are unique to the Internet of Things. They provide integrated services that reframe and repackage the products and services of the Engagers. They succeed by finding new ways of creating and extracting value from the data, relationships, and insights generated from IoT activity.” Examples range Progressive Insurance, which uses a plug-in device to measure drivers’ actual behavior to determine rates, to MetLife, which is using data customized to individuals’ needs, and

premiums based on their fitness habits.This process will take time, and you company’s early experience with implementing IoT technology will help guide your decisions.

Burkett says “You may also need to develop some “table stakes” capabilities that all IoT companies must have.” As I’ve already mentioned, that starts with having the tools to manage and analyze huge streams. In addition, he says you’ll need “… to integrate diverse portfolios of services, and to build business relationships with other IoT-related

companies, some of which may have very different cultures. You probably already have innovation processes in place, but they may not be customer-centric enough. You may also need to foster more opportunities for people in your company to experiment and learn rapidly about what works and what doesn’t.”

You’ll also need to consider whether to redesign products to include IoT devices that will give them new powers.

One of my favorite examples is the BigBelly, a municipal trash can like no other.

It would have been neat enough to have just made its initial solar-powered compacter, which will hold 5

times as much trash as a conventional wire one, without all the wind-blown litter or dented cans. But BigBelly had an IoT vision, and also built in wireless communications, which allows the container to notify the city DPW about how full it is, so it only needs to be emptied when actually near capacity, rather than just guessing when it might be full based on past experience. But that’s not all: the same wireless transmission system lets it create an instant mesh network that can serve people on the streets or be a critical tool for city agencies in an emergency.

If a humble trash container can become a communications hub, how can your product be transformed?

Another key decision you’ll face before launching an advanced IoT strategy is to decide whether to convert products you used to sell into services, another innovation that was impossible in the past, before the constant stream of data from products made possible by the IoT.

One of the most dramatic examples is Rolls Royce’s Total Care

program, which has dramatically eclipsed its sales of jet engines in recent years. These days, engine manufacturers are not any more in the business of selling engines, but selling thrust. Now, 80% of all Rolls engines are leased by the hour. The engines send a constant data stream from the 50-60 sensors on each of them to 4 center where each engine is under constant surveillance while in the air. That allows them to spot possible maintenance problems so early that replacement parts are in place at the plane’s destination, avoiding more costly repairs later — or catastrophe.

The company also markets the data streams to its customers so that they can combine the data with other real-time data such as weather conditions, to

optimize operating efficiency. Rolls now has a constant revenue stream, and its customers have more reliable engines. Everyone wins.

Could your company’s products go through a similar transformation?

And, in this early stage, you can also begin to consider more fundamental changes that could use the IoT’s promise of real-time data to all who need it to truly transform your company.

This morning I talked about how limits in how we were able to collect and share data in the past naturally led to the hierarchical and linear

management charts and practices that characterize most companies today —even IoT startups.

Now, because — for the first time ever — everyone who needs real-time information about things of all sorts to do their jobs more efficiently and/or make better decisions, can share that information instantly.

Think of it: all of the old work-aroundswe created to manage and share the limited information are no longer needed.

Instead, we need new management forms and practices to instead capitalize on this instant sharing of information, and I suggest that — just as we can now replace the old linear progression of supply chain — factory — distribution network with an integrated loop with IoT

data as its hub, so too can we replace the linear and hierarchical management structures with cyclical ones that also have IoT data as their hub, allowing us to break down information silos between departments, let departments — such as product design and marketing — that are concerned with the same issues to collaborate in real-time, and create new integrated decision-making skills and methods that capitalize on this real-time sharing.

I’d like to end on that note, and am glad to take questions!