Many experts believe that the development and incorporation of internet-connected sensors – constituting the Internet of Things (IoT) – will optimize the production, consumption and maintenance of all types of existing products and services. But the IoT, in conjunction with so-called artificial or augmented intelligence (AI), creates an emergent and convergent industry of “data-facturing”, forced by data analytics intermediaries, which will lead to a complete overhaul of global production and its economics.

The industrial Internet of Things (IoT) consists of four converging technologies: small sensors that can be attached to products, bodies, or machines; ubiquitous internet connections to send data from these sensors into massive data warehouses in the cloud; the hardware machines that make products, and analytics software to extract insight from Big Data. This software not only provides empirical evidence of trends, but it can learn to manipulate its data to find trends that even its software programmers did not envision. It can also enable machines to learn and automatically adjust to new trend insights.

In a recent HBR article (“How Smart, Connected Products Are Transforming Competition, Harvard Business Review, November 2014), Michael Porter and James Heppelmann argued that, because products will be linked in real time to the manufacturer’s operations, to other products, and to third party service providers, the IoT may change the power of rivals, substitutes, new entrants, suppliers and buyers in existing industries.

There’s no doubt that the IoT will reshape almost every product and service in the medium term. However, Porter and Heppelmann’s recommendations for how business leaders can exploit this revolutionary trend stop short of preparing you for the vast revolution that is about to explode your industry. We are not just looking at a structural shift of expanding industry boundaries. We are looking at a potentially dramatic transition of power to data analytics intermediaries that will conduct “data-facturing.”

These data-facturers will use IoT data to predict and even control consumer buying patterns and expectations. Companies like Alibaba, Amazon, Baidu, Google, IBM, Microsoft, and Salesforce will augment their existing channel power to “help” (or perhaps even force) manufacturers to change their designs, value propositions, prices, and even profits. The source of their power will be the data they have assembled, the design, pricing and promotion conclusions they have extracted, and the manufacturing-machine learning this enables. They will increasingly have the flexibility to meet rapidly changing customer needs through their core strength – rapidly harvesting data from a trillion global data connections that will yield a myriad of opportunities that mature and fizzle quickly, perhaps too quickly for traditional manufacturers to grasp. As a result, much of the value of production may migrate to these data-facturers in the future. Just as all roads led to Rome, soon all value chains may lead to data intermediaries.

But with control over the data, timing and touch points to the consumer, these intermediaries will not just optimize the value chain. They will steer it. By forging relationships with multiple vendors, manufacturers, and customers, the intermediaries parlay their leverage into a contract with the vendor and manufacturer to supply goods of certain characteristics and upgrade capabilities. Analytics intermediaries may in fact acquire certain manufacturers to disrupt larger, more monolithic manufacturing incumbents. Combining their complementary skillsets, these “data-facturing” disruptors will be able to configure and re-configure valuable resources rapidly, navigating and assembling multi-dimensional value webs.

For illustration: an e-commerce intermediary could promote a certain product to consumers to flatter its own margins, even if its data can determine that the consumers might – all things being equal – prefer a different, less lucrative offering. The data-facturers could in fact create new terms for sellers and buyers, thereby anointing kings in the manufacturing world.

But it doesn’t stop there. So empowered, data intermediaries operate across industry boundaries. Indeed, because they have multiple empirical perspectives on a customer’s life – from previous purchases (and near-purchases) of consumer goods to services to leisure experiences – intermediaries enabled by the IoT will force sectors to converge. There will no longer be an automobile industry or a navigation industry or a shipping industry or an entertainment industry.

For instance, the car of the future will combine all of these into a unified value proposition. How, for instance, would you characterize a service that custom-designs, promotes and dynamically prices a vehicle for a certain buyer profile based on life patterns, schedules for both work and play, geographic context, a user’s social contacts, mood and aspirational profiles, financial capacity and driving characteristics? It would then rely on touch, noise, olfactory, motion, and other sensors within the vehicle, connected to cloud-based analytics engines, and command-and-control intelligence through all of the user’s electronic interfaces to continue to manage and upgrade the car throughout its lifecycle. Is this a digital butler, a driving experience, a logistics service, or a luxury product?

This scenario suggests that a manufacturer’s competitive advantage must incorporate both the control of its own data and its relationship with these intermediaries. For all but the most avant-garde manufacturers that still presents a steep learning curve. Therefore, managers in all production-based industries would do well to build both capabilities to predict the future and processes to adapt to that future. It is high time to secure talent, culture and operational structures and processes to ally with – and defend against – the budding sector of IoT-enabled intermediaries.

Written by Olaf J Groth, PhD. Professor of Strategy, Innovation, Management & Economics; Program Director of Digital Futures; Lead for Strategy & Innovation – Global Postgraduate Faculty Council, Hult International Business School.

Olaf Groth is an executive, adviser and capacity builder with 20 years of experience developing new innovation strategies, ventures, organizations and ecosystems. As such, he was recently invited by the World Economic Forum to join its global Expert Network community to provide thought-leadership on business and societal strategies for disruptive trends, such as the 4th Industrial Revolution, IOT, Autonomous Vehicles and AI.

Olaf currently develops future leaders as a Global Professor for Strategy, Innovation, Management & Economics and Program Director for Digital Futures at Hult. He also serves on the Global Faculty Council as Lead for Strategy & Innovation. From a home base in San Francisco he works throughout the school’s global network of campuses, which includes Boston, New York, London, Dubai, and Shanghai.

If you would like to find out more about Hult’s global business programs, download a brochure here.

This article was published by Ashridge and Economonitor.

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