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INDUSTRY X.0COMBINE ANDCONQUERUNLOCKING THE POWER OF DIGITAL

FOREWORDDave Abood and Aidan QuilliganMost of the business leaders we work withunderstand the power of digital. They seethe potential for digital technologies tobring about transformation and growth.And many are making big investments ina wide variety of cutting-edge technologies.But many simply aren’t getting the most out of their digital investments.That is, they’re not transforming their core businesses while growing intonew ones—what we call “Leading in the new.”What’s the evidence? We talked to executives at more than 900 largecompanies around the world, in the 21 biggest industrial countries.Only 13% said they were getting greater efficiency, cost savings and businessgrowth from their digital investments. That’s a low number, but the goodnews is that companies can seize the opportunity, now, to improve on both.It turns out that too many businesses are still deploying digitaltechnologies in a piecemeal fashion, with the resulting benefits flowing(naturally) to only one part of the organization. The honest answer tothis problem? Combination. Our research team unearthed valuabletechnological combinations to help companies significantly reducetheir cost per employee and grow their market cap.We fully recognize that combining digital technologies isn’t a simplegame of mix-and-match. Companies must do more than just changethemselves into digital businesses; they must completely reinvent theiroperating models, production and value chains to create more value withdigital. But our research yields a concrete solution: what we call IndustryX.0. It’s an action plan for becoming more adept at embracingtechnological change and profiting from it.We hope you’ll consider sharing this journey with us. This reportis a good place to start.UNLOCKING THE POWER OF DIGITAL INDUSTRY X.02

INTRODUCTIONCompanies the world over recognize that to drive down costs or forgenew revenue streams, digital technologies are imperative. Most, indeed,want to be digital leaders.Many, however, aren’t getting the value they expect from their digitalinvestments. According to a recent Accenture survey of executives,only 13% of companies are exploiting digital for greater efficiencyas well as new growth. “Leading in the new,” as Accenture defines it,plainly isn’t easy.Why? Because most companies are still investing in digital in apiecemeal fashion. They simply aren’t realizing the full value impactof taking a combined approach.To help companies understand better what this means for theirstock-market value and costs, we evaluated a set of 10 criticaltechnologies and determined the impact that can be achievedby combining them. We used econometric analysis to identify thetechnology mix with the most significant impact on financialperformance (See 'About the Research').ONLY 13%of companies are exploiting digital forgreater efficiency as well as new growthUNLOCKING THE POWER OF DIGITAL INDUSTRY X.03

THE RIGHTMIXUnderstandably, the technology mix forlowering costs differs from the mix bestsuited to drive top-line growth.Our research reveals that combining five digital technologies inparticular—autonomous vehicles, augmented and virtual reality,big data, machine learning and mobile computing—could helpcompanies achieve additional savings of over US 85,000 peremployee on average. And a slightly different mix of autonomousrobots, mobile computing, autonomous vehicles, 3D printing andmachine learning—could help companies gain additional marketcapitalization of just over US 6 billion on average.How technologies should be combined will, of course, vary acrossindustries; it will also most certainly change over time. But the impacton cost savings will prove significant, regardless of industry. Forinstance, companies in the industrial-equipment sector could realizeadditional cost savings of over US 43,000 per employee if theycombined autonomous robots, AI, blockchain, big data and 3Dprinting. Since industrial-equipment companies surveyed have anaverage employee base of just over 37,000, that could translate intototal savings of over US 1.6 billion on average. Oil & Gas companies,meanwhile, could gain over US 16 billion in market capitalization ifthey combined technologies such as virtual reality, big data and AI(see 'It's all in the combination').UNLOCKING THE POWER OF DIGITAL INDUSTRY X.04

US 85kUS 1.6bnaverage company savings per employee if five digitaltechnologies in particular—autonomous vehicles,augmented and virtual reality, big data, machinelearning and mobile computing are combinedaverage total savings for companies in theindustrial-equipment sector if they combinedautonomous robots, AI, blockchain, big dataand 3D printingUNLOCKING THE POWER OF DIGITAL INDUSTRY X.05

It’s all in the combinationIncremental savings in cost per employee by combining:3D PrintingAutonomousRobotsAutomotiveUS 63,365IndustrialEquipmentUS 43,358NaturalResourcesUS 77,775Aerospace& DefenseUS 51,107ChemicalsUS 91,261Mobile ComputingMedicalTechnologyUS 93,440AutonomousVehiclesElectronics& High TechUS 90,335LifeSciencesUS 79,612AIBlockchainDigital TwinBig DataMachine LearningAR/VRUNLOCKING THE POWER OF DIGITAL INDUSTRY X.06

Additional gains in market cap by combining:Mobile Computing3D PrintingNaturalResourcesUS 2,123 MNAerospace& DefenseUS 7,153 MNChemicalsUS 4,459 MNMedicalTechnologyUS 6,274 MNOil & GasUS 16,445 MNIndustrialEquipmentUS 2,428 MNLife SciencesUS 6,493 MNAutomotiveUS 1,863 MNConsumerGoods &ServicesUS 4,580 MNElectronics& High TechUS 26,792 MNUtilitiesUS 5,434 MNAutonomousRobotsAIAR/VRAutonomous VehiclesBig DataBlockchainDigital TwinMachine LearningIndustry X.0: the key to successful combinationsCreating value with digital isn’t just a simple game of mixing and matchingdigital technologies, however. Companies also need to completely reinventtheir operating models, production and value chains, becoming whatAccenture calls Industry X.0 businesses.UNLOCKING THE POWER OF DIGITAL INDUSTRY X.07

WHAT ISINDUSTRY X.0?Industry X.0 is the digital reinvention of industry.Industry X.0 businesses embrace constant technological change—and profitfrom it. They move beyond experimenting with IT bundles or SMAC (social, mobile,analytics, cloud) stacks, combining digital technologies to drive both top-lineand bottom-line growth. Industry X.0 businesses incorporate Industry 4.0’s coreoperational efficiencies, but also leverage combinations of advanced digitaltechnologies to continuously create new, hyper-personalized experiencesin both a business-to-consumer and business-to-business context.They also boast four distinct value characteristics. Industry X.0 businesses are:Smart:Living:Every product and productionprocess is self-monitoring,data-generating, and aware of itsever-evolving business context.There is an enterprise-wide culturalcapability to act with speed, focus,and agility, to meet needs andseize opportunities.Connected:Learning:Communications are end-to-endand multi directional, while datasharing among people, products,systems, assets and machineshappens in real time.Adaptive interactions help createincreasingly relevant and valuableuser experiences over time.UNLOCKING THE POWER OF DIGITAL INDUSTRY X.08

Industry X.0 businesses are significantlybetter than their peers at combiningdigital technologies.They make almost every component of their production self-monitoring,data-generating, and aware of its industrial context. They strive to buildend-to-end communications and data sharing among systems andmachines in real time. And they create relevant and valuable userexperiences over time by building digital architectures that enableadaptive interactions between machines, customers and workforce.Case in point: Schneider Electric, the French energy-managementmultinational. Schneider generates reams of data about production,consumption and electronic-batch processing—and uses thatdata to closely monitor the condition of equipment and ensure that keyperformance metrics are met.1 Using a proprietary algorithm—OPTICS,which includes advanced-pattern recognition and machine learningcapabilities—Schneider can predict equipment failures and takeappropriate action well in advance. Based on this intelligence,Schneider’s equipment can adapt to its environment at speed, reducingoverall downtime and improving asset utilization for its clients.2UNLOCKING THE POWER OF DIGITAL INDUSTRY X.09

BECOMING ANINDUSTRY X.0BUSINESSOur intensive case study research and economicvalue modeling reveals six imperatives Industry X.0businesses must address to become smarter,connected, living and learning.UNLOCKING THE POWER OF DIGITAL INDUSTRY X.0 10

1Transform the coreIndustry X.0 companies build their core engineeringand production systems around digital to drive newlevels of efficiency. They ensure that physical machinesand software systems are synchronized to unlockpreviously-unseen cost efficiencies—thus drivingup investment capacity.Caterpillar, for example, makes smart use of data generated fromconnected machines through its Cat Connect solution.3 Theconstruction- and mining-equipment company can relay key dataon equipment performance to mine operators,4 who then analyzethe data and make decisions on how to improve efficiency, boostproductivity, and enhance job-site safety.5 Thanks to Cat Connect,machines at the construction firm Strack Inc. now run for 48 hoursstraight, and the company’s fuel costs have dropped by 40%.62Focus on experiences and outcomesIndustry X.0 companies use their investmentcapacity to drive new, hyper-personalized experiencefor customers, via multiple “smart touchpoints.”This helps grow core businesses by enhancingcustomer engagement.Huawei, the Chinese multinational networking and telecommunicationsgiant, is one such enterprise. The company developed an automatednetwork traffic control system called Network Mind, which enablesself-adjusting control of voice and data services in ultra-large networks.Using technologies like online deep reinforcement learning and real-timebig data mining and analytics, Network Mind automatically adaptsand renews its traffic control models to match changes in networkconditions. Network Mind is up to 500% more efficient than existingcontrol methods in meeting key performance indicators such as taskcompletion and policy generation. Moreover, Network Mind is morethan 50 times more efficient at analyzing large optical network paths,and can analyze typical use cases such as optical network failureprevention in just 6 minutes—a huge improvement over the5 hours typically required.7UNLOCKING THE POWER OF DIGITAL INDUSTRY X.0 11

3 Innovate new business modelsIndustry X.0 companies ideate and create newbusiness models to drive differentiated value for theirclients and new revenue streams for themselves.Hitachi, the Japanese multinational conglomerate, embodies thisapproach. In 2016, the company introduced Lumada, an Internetof Things (IoT) platform that integrates commercial technologiesfrom Hitachi’s portfolio into an open and adaptable architecture.Thanks to Lumada’s heterogeneous architecture, Hitachi can supporta range of IoT applications and partner technologies that can be tailoredto digital ecosystems across multiple industries.8 For instance, Hitachi’sLumada-based solutions have helped energy companies reduce theirgeneration costs by 6%, grow operating profits by 122% and increasetrading volumes by nearly 150%.9 Similar solutions in manufacturinghave driven 10% reductions in total production cost, helped companiesachieve near-zero defect rates by the time of shipment, and improvedproduct quality and worker productivity.10 Hitachi’s 2016 revenues fromLumada were 900 billion yen11 and its market capitalization had risenby US 5.6 billion within a year of Lumada’s launch.124Build a digital-ready workforceIndustry X.0 companies source, train and retain talentwith digital-ready skills and encourage activecollaboration between people and machines.Airbus, for example, equips its factory workers with industrial-gradesmart glasses to determine aircraft-cabin seating design. Usingcontextual-marking instructions, the smart glasses display the requiredinformation for workers to mark the cabin floor quickly and accuratelyfor seating to be installed. The glasses also let workers scan barcodesprinted on the cabin parts, retrieving critical equipment informationfrom the cloud and displaying it on the glasses through augmentedreality, all with voice commands. As a result, productivity for thecabin-seat marking process has improved by 500%, and the errorrate has dropped to zero.13UNLOCKING THE POWER OF DIGITAL INDUSTRY X.0 12

5 Re-architect new ecosystemsIndustry X.0 companies create a robust ecosystemof suppliers, distributors, start-ups, and customersthat allows them to rapidly scale new businessmodels across the digital value chain.German conglomerate Siemens built such an ecosystem for itscloud-based, open IoT operating system MindSphere by partneringwith app developers, system integrators, technology partners andinfrastructure providers, including companies like Accenture, Amazon,SAP and Microsoft.14 Another planned initiative, the MindSphere RocketClub, aims to connect leading IoT start-ups with Siemens’ internationalpartners and customers to propel further adoption of MindSphere.15Siemens is also developing MindConnect Lib, which will make it easierfor developers to connect embedded devices to MindSphere.MindConnect Lib’s “northbound” application programming interface(API) will enable rapid integration of Siemens MindApps and partnerapps into Mindsphere, while its “southbound” API will simplifyconnection of third-party assets to MindSphere.166Pivot wiselyIndustry X.0 companies continually balanceinvestment and resource allocation between thecore business and the new business to synchronizeinnovation and growth.Google’s parent company Alphabet invests in multiple early-stagebusinesses under its Other Bets banner. The company wants toincubate successful businesses in the medium to long term.17 So, forinstance, while the Nest smart thermostat remains a top seller in itscategory, Nest Labs has continued to launch successful new productslike the Nest Cam Outdoor. Verily, another Alphabet business, has foundsuccess in the life sciences and healthcare space, with new solutions indiabetes management and robotic surgery.18 Revenues from Other Betsbusinesses jumped from US 327 million in 2014 to US 809 million in201619, contributing to almost 1% of Alphabet’s total revenues.20 Thoughsome Other Bets businesses have seen their share of losses, Alphabetcontinues to invest in the effort, mindful that such innovations canhave significant disruptive potential for the future.UNLOCKING THE POWER OF DIGITAL INDUSTRY X.0 13

ABOUTTHERESEARCHStep one – Conducting a sample survey:In 2017, Accenture conducted a survey of 931 seniorexecutives from large companies (with most of them havingsales turnover exceeding US 1 billion) across 12 manufacturingand production industries. The survey covered companies in:Australia, Brazil, Canada, China, Denmark, Finland, France,Germany, India, Ireland, Japan, Mexico, Norway, Republicof Korea (South Korea), Singapore, South Africa, Sweden,Switzerland, The Netherlands, the UK and USA.The survey sought to understand:a. Digital technologies being deployed by companies to drivenew-to-market efficiencies and hyper-personalized experiences;b. Challenges being faced by businesses while deployingdigital technologies;c. Investments being made by companies in digitaltechnologies and capabilities to deliver new efficienciesand hyper-personalized experiences;d. Capability-maturity of companies to drive new-to-marketefficiencies (New Efficiencies) and hyper-personalizedexperiences (New Experiences) with digital technologies.UNLOCKING THE POWER OF DIGITAL INDUSTRY X.0 14

Step two – Classifying companies:Companies surveyed were classified into relevant industries basedon industry-definitions followed by Accenture.Step three – Building data-sets for analysis:Consistent cross industry data-sets of key financial variables (e.g. capitalinvestment, wage bill, sales turnover, profits, market capitalization etc.)were constructed for the period 2010-2016 based on survey inputs andinformation sourced from reputed financial database (S&P Capital IQ).Step four – Defining performance dimensions:New Experiences and New Efficiencies were designated as ‘performancedimensions’ to understand the combinatorial impact of technologies onthe company’s top-line and bottom-line respectively. Principal componentanalysis was utilized to determine the optimal combinations of technologyto drive New Experiences and New Efficiencies.The result of the above analysis was then used to create TechnologyIndices to understand the impact of various technology combinationson the two performance dimensions.UNLOCKING THE POWER OF DIGITAL INDUSTRY X.0 15

Step five – Modeling the impact:Econometric modeling was deployed to:a. Identify statistically significant financial indicators of top-line andbottom-line performance. We arrived at, cost-per-employee andmarket capitalization, as the two statistically significant financialperformance indicators to capture the impact of technologycombinations (technology indices from the modeling perspective)on bottom-line and the top-line.b. Understand the relationship of the technology indexes withmarket capitalization and cost-per-employee of companiesacross 12 industries. Industry sample size (numbers mentioned in parentheses)towards measuring the impact of technology combinationson market capitalization while driving new experiences:–– Electronics & Hi-Tech (47), Aerospace & Defense (55)–– Automotive (45), Consumer Goods & Services (50), IndustrialEquipment (84), Life Sciences (78), Transportation (40),Medical Technology (40)–– Utilities (62), Natural Resources (58), Chemicals (67)and Oil & Gas (47)Industry sample size (numbers mentioned in parentheses)towards measuring the impact of technology combinationson cost-per-employee while driving new efficiencies:–– Electronics & Hi-Tech (46), Aerospace & Defense (53)–– Automotive (38), Consumer goods (43), IndustrialEquipment (78), Life Sciences (75), Transportation (44),Medical Technology (43)–– Utilities (66), Natural Resources (57), Chemicals (64)and Oil & Gas (49)We adapted Saunders & Brynjolfsson's (2016)21 to build an econometricmodel (see opposite). This model provides an estimate of the potentialimprovement in top and bottom-line performance (captured throughincrease in market capitalization and reduction in cost-per-employee)resulting from improvement in the technology combination indexresponsible for driving New Efficiencies and New Experiences.UNLOCKING THE POWER OF DIGITAL INDUSTRY X.0 16

FPit c ß1 Kit ß2 Fit ß3 ITit ß4 Eit ß5 Techit WhereImpact C ConstantFinancial Performance indicators Market Capitalization or Costper EmployeeK physical non-IT Capital(property, plant and equipment)F rest of non-IT Capitalrepresented on balance sheetIT IT SpendingE Number of EmployeesTech technology combinationindices to drive New Experiencesor New Efficiencies itß1 represents the impact inFinancial Performance due toincreasing the physical non-ITcapital by 1 unitß2 represents the impact inFinancial Performance due toincreasing the other non-ITcapital by 1 unitß3 represents the impact inFinancial Performance due toincreasing IT spending by 1 unitß4 represents the impact inFinancial Performance dueto increasing number ofemployees by 1 unitß5 represents the impact inFinancial Performance ofenhancing TechnologyCombination X by 1 unitStep six – Calculating the incrementaltop and bottom-line gain:The incremental gain mapped for each industry is the financial benefitcompanies in respective industries can derive if they were to apply theidentified optimal technology combinati