Transforming industry: the digital revolution

Digital technologies, from the early computers of the 1950s to internet-equipped smartphones of the 21st century, have fundamentally changed the way industries function and have opened the way to trillion-dollar industries such as internet infrastructure, enterprise software, mobiles, online retail, gaming and apps, as the world exploded into the ‘digital revolution’.

These technologies have emerged incrementally and to varying degrees and speed across industrial sectors, growing hand in hand with increased levels of IT and automation. It is only recently that industry executives and analysts have started talking about another revolution taking place owing to the digitisation of industry, the 4th industrial revolution, or Industry 4.0.

In 2016 the World Economic Forum dedicated its flagship gathering at Davos to this phenomenon, as governments world-wide have begun designing national industrial strategies around the digitalisation of industry. But is this phase different from the digitalisation we have experienced so far?

To date, ICT and automation were in large part in silos (single machine, single production unit, single firm), and this will continue unabated as newer and better technologies come to market. What makes Industry 4.0 different is the prospect of a new level of digital interconnectedness and integration between firms, supply chains, production, products, customer and end-use applications, with the prospect of generating the same dynamics we have seen in the evolution of the internet – which is why phrases such as ‘industrial internet’ or ‘internet of things’ are often used to describe this new wave of transformation.

Several transformational digital technologies are contributing to open up possibilities in industry. Cheap sensing and pervasive wireless connectivity, the ability to capture, store and perform sophisticated analytics of vast quantities of data, the internet and the cloud, robotics and autonomy, blockchain, and last but certainly not least, additive manufacturing.

Adoption of new technologies is rarely driven by curiosity in capital-intensive industries, and hard metrics like ROI and NPV often rule supreme, but in times of rapid change it is hard to use old yardsticks. Instead it is competitive pressures that are creating ‘innovation imperatives’, which are starting to drive Industry 4.0 across industries.

The first imperative is to keep increasing efficiency, which tends to be the main motivator to adopt innovation. In the past 30 years manufacturing created a strong pull effect for control and automation technologies from countries like Germany and Japan, but Industry 4.0 could take the race to the next level. For instance PwC estimates that companies can achieve 3.6 per cent annual growth by digitising their value chains, and big data analytics could be used to optimise production at a systemic level, like in oil and gas, which could see efficiency increase by 6-8 per cent through using the wealth of data at their disposal.

The second imperative is that suppliers and customers now expect a firm to have digital interfaces to their operations. This requires firms to push to new levels of internal digitisation through real-time stock availability, pricing, quality controls and customised production.

A truly transformational approach in this respect is the use of application programming interfaces (APIs) that let processes and systems ‘talk to each other’ – a key building block of all digital ecosystems. Jeff Bezos, CEO and founder of online retailer Amazon, in 2002 famously demanded that all internal processes and assets had to have APIs, which some say played a crucial role to the phenomenal scalability of Amazon. Increasingly important aspects, such as ensuring that supply chains are ethical, environmental responsibilities and the ‘circular economy’ and mass customisation will all add further pressure to digitise internally and interface digitally with suppliers and customers.

It is the third innovation imperative that is perhaps the most directly attributable to Industry 4.0: new business models, ecosystems and dynamics could add 2-3 per cent per year on average to manufacturers’ revenues. Digital technologies and digital platforms are transforming linear supply and distribution chains into a digitally interconnected network of suppliers, manufacturers and customers, creating entirely new possibilities. Real-world examples of this are numerous: with manufacturers implementing sensors for data-gathering across products from tyres and training shoes to aeroplane engines, and additive manufacturing is now past hobbyist use and into the realm of industry.

In this rapidly changing landscape and faced with these imperatives, companies in industrial sectors need to re-learn how to innovate faster and better. While R&D still needs as strong a role as ever, market-facing innovation in the digital era requires companies to adopt an agile innovation culture driven by pilots, rapid iterations driven by customer feedback loops and an open-innovation, collaborative mindset to partner with best-in-class technology providers.

It’s not all rosy: these new technologies offer tremendous opportunities but can also create huge systemic challenges, such as skills shortages, understanding and mitigating the effects of workers displaced by automation, and increasing risk of cyber-attack. These, and other, issues should be very high up in the agenda for professional organisations, governments and NGOs if the benefits of this revolution are to accrue to people and society as a whole.