Industry 4.0 resets the competitive landscape

Below is a transcript of this podcast. Some parts have been edited for clarity.

Michael Hainsworth: There’s plenty of hype surrounding the 4th Industrial Revolution. While enterprise digitalization strategies and the approaches they take will reshape the competitive landscape, they’ll reshape us as people, too. So how do we cut through the noise to know which way to go? For insight, we went straight to the horse’s mouth. Henrik von Scheel is considered the father of Industry 4.0, tasked by German Chancellor Angela Merkel following the 2008 financial crisis to guide the country to a digitalized future.  

The work he did laid the foundation for everything we understand today about what comes next. At the time he identified five key trends: mobile, big data, the cloud, competitiveness, and productivity. Today he says it’s more like 77. So, I began our conversation by asking the man: how do you feel about being the father of civilization’s next big leap?

Henrik von Scheel: It's never something that I woke up to, but I actually just feel like a normal human being. In reality, most of the honor of this I give to my teacher. When I was 12 years old, I was highly dyslexic, and I was in a special school, and he was one of the teachers that used a lot of attention on me.

And he realized that I'm special because I can see patterns. So, he just encouraged me and gave me techniques, how I could overcome my dyslexia. And he kicked started my ability to see patterns. So, I give him a lot of the honors. He's a traditional teacher, bad breath, working all hours, investing in young people, but he's an amazing guy. Unfortunately, right, when he died, I was at his funeral. I was actually the only one at his funeral. I was surprised.

MH: Wow, this person who gave you so much power by overcoming the dyslexia in helping you understand the importance of seeking out patterns, how do you apply that to your core expertise today, which is strategy?

HVS: Well, it's simple, I simplify things to the max, right. So most people, they overcomplicate strategy. You can put strategy in one sentence, right. Strategy is about focusing on not what to do, where to differentiate and what to focus on. And only in that order, that's it. Then you can write papers and books on it, but actually that's it.

MH: You don't want to overcomplicate things. What do you mean you don't want to overcomplicate things? I'm looking at 77 mega trends that you report on colliding together, creating this exponential pressure on all industries and consumers. And that's why we call it an industrial revolution.

HVS: Yes. And it came like a shock to us as well, so we were evolving into it as well. Right. So, it ignited in Germany. And in Germany, you have two guys, like Jeff Bezos and Elon Musk, and it’s called Henning Kagermann, who's the co-founder of SAP. That's like the giant of the giants in software development. And then Professor Scheer who's the father of our process thinking today. 

And they were called together with me to do the strategy for Germany, it was in 2008, right in the crisis. And Angela Merkel, she called us in. And it's funny, right, when the Germans do strategy, they normally like to take somebody along that is not German, because Germans are not really good at listening to Germans. Right?

So they used me as the punching bag to push forward and we did the strategy and the ideas. And we used a lot of times, in fact, I used nearly seven and a half months, every evening together with the chancellor to go through the different aspects on what the strategy would be, right. But the short view was we realize that there's five trends matching together, right?

These are mobile, big data, internet and cloud. And these were not something that was combined as one today. They were all separated, right? So, we call that a Digital Agenda. That's what you, when you have your phone, your phone in 2008 was separated. The internet was not part of your phone, big data was not part of your phone, the social media was not part of your phone.

All of these things were separated, and they suddenly started to merge, and we realized that, and we called it a Digital Agenda. And that became this big thing, but very short after, a half year later, we realized that it's even worse than what we thought. And we realized that there are 77 trends that are merging together in different sequences that are bringing upon us the biggest change ever, right.

It will change every aspect of our human experience, how we consume, how our economy works, how business interacts, every aspect of our lives, faster than ever before.

MH: So, it's your job to see the trends. In previous revolutions, it took decades for a technological leap to translate into a revolution. Where are we now? And how has Industry 4.0 played out since your 2008 work aimed at directing Germany and the broader European Union in this direction?

HVS: Like any industrial revolution, the ability to adapt to it relies on how fast we can learn skills and our capabilities and competencies, right? Every industrial revolution has been mainly driven by technologies. And we have that too in the Fourth Industrial Revolution, we have 17 technologies. And the other trends they are the effect of the 17 technology trends, right, but they are huge. Right.

We have environmental changes that we need to focus on. We have a reality change that is coming, right?  So, the industrial revolution is merging in four specific elements, right. So, we have to take care on how we can do that, right. In order to cope with that, our ability, we are humans, so we are totally obsessed with technology in any kind, right?

So, when you look at these 17 technology sets, right, they are certain of them that are really, really big. Blockchain, for example, artificial intelligence, right. As we say, IoT and digitalization too, right. But IoT and digitalization is, I'm saying it nice, but I'm saying, "Come on guys, get on board."

I mean, it's not rocket science, right? So, the other parts where we're moving into smart automation, artificial intelligence, blockchain, Web 3.0, all of these aspects, they are transformational in any aspect, right. A huge transformation, right? And most organizations don't even realize how big these transformational assets are.

MH: When you say, “come on, get on board” with IoT in Industry 4.0 type technologies, normally manufacturing is an area that would be most excited about this type of transformation, but you point out they're the least likely to adapt. Why?

HVS: Yes. When you categorize them very roughly into two archetypes, right. They are the cautious starters that are not just constrained: they are looking at it, let's see, we don't want to be the first ones. We might just burn our fingers, right. With them, I say, okay, you don't have to do the big bang on digitalization but do digital connectivity and sensoring.

So do the RFID (radio frequency identification) devices, connect your main workflows around it. You don't have to do the big bang, right. Then we have the frustrated archetype companies, the ones that have so many scars on their back, if a consultant comes into the door, right, they're nearly getting a heart attack and just stressing out by saying hi, right, because they realize they have no return on investment. They barely have any budgets. They have no real realized benefits. They've been pushed from all corners and sides, right. So, they had a very cautious one. And then I would highly recommend doing best practices, right. And mostly do it themself. Connectivity is really not rocket science. You can start up with digital connectivity and sensoring.

So, RFID devices, right, connect to your key process. You can start with that for $15K. Then you can do digital engineering, right? Everything in your research development, everything that connects to your procurement, to your warehouse management, you can do most of this yourself, where you see, where are the bottlenecks, where I have complex processes and easy process. Let's do it there, right.

That would cost them around, if they do it themselves, around 30 to 50K, we're not talking about ERP (Enterprise Resource Planning) project, we're talking about things that they can get a good consultant in and just get done easily. And most of it do it themselves.  

Then we have the archetypes that are ready to go. They are embracing the future and they want to go, right.

They want to connect with their suppliers, supply chain management and all of this, right. They will reap the benefits first, right. And the benefits are huge, right. You can get them inventory cost down by 15 to 20%, right. Just that you know where the product is to send where an in which manner, right.

Because there is around 15% of products in inventory that are not being located at the right time, to be sent out. So, we talk about delays, workforce. We talk about a lot of hidden costs just behind that, right. And that is an easy fix, right? An RFID device, if you buy a whole bag from India or China, RFD devices, right, it will not cost you more than $150.

Maybe if you buy the good stuff, maybe $1000, but then you're also on top in it. If you pay more than that, you’re probably being ripped off. Right. And then just start the simple thing, just connect them. Right. What you need for that is a good telecommunication infrastructure. The biggest challenge you always face in IoT is that you hit your own broadband level coverage, right?

So that means you have to have a good telecommunication provider that is able to create the infrastructure, because what you have is you have your data pinning from products to products, from devices to devices, that are pinning all on each other, right? So that's something that normal manufacturing experience very fast.

Once they start with it, they hit the clip level very fast that the infrastructure is just, it's been squeezed. So that's where you go twin, digital twin or you come with a telecommunication provider and get a good infrastructure, right. That's also not rocket science in principle, right. Just ask the guys to have the solutions. It's not like it's a new thing.

MH: And there's an opportunity for the manufacturing sector to work with those within the telecommunications industry to help make 4.0 a reality for them. I can't imagine we would be discussing Industry 4.0 if we didn't have 5G.

HVS: Yes. Exactly. So, I always say 6G, because the promise of 5G should be one terabyte upload and one terabyte download. I think we're lucky if we get 250 megabyte or one gigabyte upload and download, right.

MH: One terabyte, why would we need one terabyte of bandwidth capability in such short order? We're already 100 times faster than 4G.

HVS: Yes. We're going even faster. Right? I mean, a normal manufacturer, if you just looked at closed loop, right. For them, they're already hitting the level, right. If you look at BMW, if you look at Rolls-Royce, if you look at these normal manufacturing, right.

They are closing off for their own systems because the infrastructure is not strong enough because they have robots, they have infrastructure. They have all of this that is loading on one network, right. I'm not talking about the consumers that are uploading their videos up and down, right.

MH: Right. So, this is artificial intelligence, machine learning, algorithms being able to recognize camera stuff.

HVS: Yes. And that is, for them, if you work in manufacturing in a plant, in a sandwich flipping machine or whatever, right, real-time information is essential. Because if you don't get the real-time, you have a whole assembly line that gets a bottleneck up, right.

So, the real-time information going forth and back, or at the warehouse management, or if you look at Novozymes in terms of their huge tanks they have, right. Any information from them cannot be output-driven information, it must only be real-time information.

MH: So, one of the things that I learned at Mobile World Congress 2022, like the first time we could actually meet in-person in three years, was that 5G is the foundation that will build upon to get to that 6G, to that terabyte level and all of that kind of stuff. As we work our way towards that next generation, next generation technology, you've written that Industry 4.0 is resetting the competitive landscape. What do you mean by that?

HVS: Let’s look at the new landscape, right? New industries will emerge that it's not even coming, right. So, when you look at the technology evolutions, there's three steps, right? We are in the second step, right.

The third step, bioinformatics, nanotechnology, quantum, cybersecurity, right? All of them sounds for you a little bit like rocket science, but they're not. Right. So, let me just ask you the simple question, who will be the leader in meat production in four years? It will not be the traditional meat producers. It will be artificial meat.

Okay. Good. Where will that come from? That will come not from the traditional agriculture, that will come from a bioinformatic industry. Okay. Well, then you say good, who will be the new leader on search? Well, will it be Google? No, I don't think so. Right. It will be led by Web 3.0, right.

One of these telecommunication providers that creates an infrastructure that is able to carry it will also be the one that's going to be the new element, the carrier of the search, right. Well, then you say, okay, why that? Well, we cannot even do the metaverse if we don't have an infrastructure for the metaverse. Right.

So even though we are so excited about the metaverse and we are all going to have goggles on and so on, we can't even get the bandwidth through for the infrastructure if you are in the house and five people are doing the same stuff, it won't even happen. Right. So that means we have an infrastructure that needs to be built and is being built as we speak, right, that will carry the next step.

Right. So that's just two industries, right. But then also when you look at Tesla, right. Tesla has seriously come from nowhere. All the American providers in automotive industry, they are moving behind. Tesla came and moved at the very front, even in Germany and all these other countries where you say, US was not the leader in automotive anymore, but suddenly US came to the very front.

And that came from an industry that has nothing to do with automotive, right. And that is where you see the disruption coming in, players that have no core competencies in this, right. And when you think about it, what Tesla is doing, right? The second industrial revolution was carried by one key element, the motor development, the automotive motor development.

That has been the core engine for growth for Europe and for the world since then, that is Tesla changing. They're taking on the biggest hurdle of all.

MH: So, then what is the consistent theme? When we talk about Industry 4.0 resetting the competitive landscape, what is it that creates that reset that allows players who either had nothing to do with an industry, such as Tesla coming on the scene, or ones that had been in the industry the whole time rising to the top? What is it that is within Industry 4.0 and the individual companies that creates that competitive reset?

HVS: So that's actually a good question, right? Because see, when I'm being invited into companies and do it, right, it's actually the same thing I do. We create the core element on a value chain on how they operate. And then we look at two elements. We look on the trends, but we divide the trends into two elements, right? 

One element is the forces. That is what is changing their current operation, right. That's cost, performance and operating model. So, what do they need to adapt to stay competitive? And then the other ones are the drivers. The drivers are the least focused on, but the biggest revenue potential, right? That means that drivers are the opportunities out there that are out there from the 77 trends, but you need to design the future. Normally you adapt to regulations, you adapt to what the competition doing. So, you adapt to towards something. But the other hand you go and drive something, right?  

Let me take the example, with Elon Musk. I worked with Elon Musk six months on doing the assembly line on automotive in his plants, right? You would say, "Well, Henrik, that's totally waste of money." Right? Because the automotive value chain on how to, there's nothing new in that, right?

That's exactly the point what Elon wanted. He said, "Henrik, I want to do it in a way that is most effective and that nobody has done it before. No rules and design a new assembly line." The assembly line in automotive industry has not changed. It's the same, a simple line that they do in all different manufacturers.

Tesla is the first company that was willing to throw money on the table and to look at something and put it into thousand pieces, and they have the coolest assembly line now. That will be a competitive force for them on how fast they can produce across the world to deliver fast, right. That is what I'm meaning with the forces and the drivers, right?

MH: So then let's extend this. You say that a company should look at Industry 4.0 from three perspectives. What not to do, where to differentiate and what to focus on, but you say it needs to be done in that specific order. We need to start with what not to do. It sounds like this is an extension of your story about Tesla.

HVS: Yes. Most are so excited about everything, and they have a whole list of what to do, right? That is what I call the danger point. Right? When I was with Steve Jobs at apple, he threw McKinsey and Deloitte out and I came into the door and he was not an easy guy, to put it mild. Right. That means he had his clear view on how to do things, right.

And I realized I needed to bring something on the table for him where I could out model his own biases, because his own bias was so strong that his own team did not dare to say anything. I came out as an expert and I needed to out model his own model, right. So, I developed a specific model for Apple, which is called the can, want, should do model, right.

Which outlines exactly what not to do in the beginning, right. So, you outline on what is it you can do, then you look at what you want to do. And the one to do is where Steve Jobs, he wrote down all the list on what he wants, right. He was dictating what to do, right. And that is where I said, okay, that's why I highlighted to him, this is the danger zone, right.

This is like giving your child the rules to eat pizza every night and he will eat pizza every night. So, then the first thing you have to go down to is to the should, and the should is why you are looking on internal and external elements you need to adapt to or opportunities within. And that exercise, it ignited him, right. Because Steve was by design, a designer, he was a visionary designer.

So, he wanted to create, he didn't want to solve problems. And that was his challenge because he just came with solution because he didn't want to hear the problems all the time, right. So, he created the solution, so he became a true designer. He loved it, right. So, this is the can, want, should do model that you normally go through once you decide on what not to do?

You don't say what you want to do. You only decide on what not to do, right. Then you use most of the time to focus on how I want to differentiate. And that's the point where most organizations, they want to have competitive advantage. And I'm saying to most organizations, don't say that word. Because competitive advantage takes many, many years to develop. It takes scars to develop.

You have to fail so many times that you will throw up. But why don't you go for competitive dynamics, hyper competitiveness, right, competitive rivalry. Right. Most of these terminologies, they're not even aware of, but they're a subset of it where they compete because competitiveness is something you design.

So, you design, for example, competitive rivalry, you design based on your price and your quality that your rivalry with your specific competition on time, on price, on quality on a specific time. Wow, right. But that is something you don't wake up to, you design it in your supply chain management. Right. You design it in your brand management, right. So, you have to be very specific on where you want to differentiate and how. Does that make sense?

MH: Well, particularly makes sense with your point about failing, fail fast as a tech industry mantra, but you've said to me in the past that you have to repeat, fail and repeat again. That sounds like something scary for an enterprise looking to build an effective Industry 4.0 deployment, telling them right out of the gate, you're going to try and you're going to fail.

HVS: Yes. Exactly. Right. And my main recommendations for the leading companies, I always segment them into two buckets, and say, from now on you have two buckets. One is a child that is focusing on transformation. So, you do performance, cost and operations. So, you whip it out, that you get the most out of the operation that it runs. And then that's called running the business. 

And then you have one that is designing the business. Where you have a team that decides your new operations and you are okay with that they fail. And when they fail, you ask them to have a special session and to understand what is it they failed with and why didn't it work? Right.

So, you try to understand why it failed. If the hypothesis was wrong, if the approach was wrong, if the design was wrong, if the market was not there, right. So, you segment it and try an error out. And you are okay with failing three, four times, you have a budget to fail, right.

And the guys you also hire on this are these strange guys that you wouldn't really put in front of your customers, right. But they're the innovators, right? They're not the traditional corporate guys. They're the guys who are just designing cool stuff.

MH: 10 years back, it was okay to have one strategy. You say that today we need three. We need to focus on growth, we need operational excellence in mergers and acquisitions or shareholder value. How does that get applied to Industry 4.0?

HVS: Well, well, well, you know today, I think it's necessary to at minimum two strategies. Right? I think it's difficult to manage just two. And I think the challenge within organizations is number one, to align executives, right, on a common understanding of where the company is. And number two is actually designing strategies that are executable right.

So, most strategies fail because either they're not real strategies or they are linked with very strong biases, right. So, it's more wishful thinking than very operational, right. So, when you look and saying good, so why is it that some, what would you suggest not to fail? Right. Don't focus on the silos, right?

So, when you have a strategy that is operational excellence, growth or whatever, don't do the siloed one, right? Focus on, for example, elements where you can go beyond being the analytical one, right? When you have a benchmark and report, you become very biased into this view. Right. And focus on not being, sometimes the best takes the good away, right?

Because then you focus on you want to be even better and it has to be perfect, right? Things will never be perfect. Things evolve, right. When you get a child, it actually looks quite ugly. But to the parents, it looks beautiful. It's first when you get into second, third, fourth, five months, it actually looks nice.

It gets hair and it interacts, the face just gets a normal balance again, right. But when you look at a child after birth, it looks ugly, but don't tell the mother, but that's the same thing with the strategy and everything that you normally do corporately, right. You try to do it perfect, but it's okay that it's ugly and then you evolve it as it goes along.

MH: Okay. Well, let's get you to grade mother in that case. In my interview with Jennifer Kent from Parks Associates last month on their Industry 4.0 research, I asked her to grade the companies they interviewed in their survey. So let me ask you a similar question. What grade would you give governments around the world in setting Industry 4.0 friendly policies?

HVS: So, they're really good at digitalization. They are actually somewhat good at the corporate world. They're very, very bad in terms of education, right, education, how we're educated on the Industry 4.0, the schools are not mandated in a smart way.

They're not really evolving because the knowledge that we need today is cross competence knowledge, right? So, when you look at the Industry 4.0, the four waves that are coming, right, we have a technology wave, we have a environment wave, we have economic revolution and we have a reality of revolution.

And the reality of revolution is the one that is coming two, three years. And that's very strong cross competences between quantum science, physics, right. And then applied science, business world and architecture. Right. And these three worlds have nothing to do with each other, right. Most people, if they hear quantum science, they're already getting tired of just listening to the word.

Right. They just start yawning. Oh, oh, oh, okay. Next. Right. That will be the biggest shift in how we program, how our supply chain works, how we see things in reality, it would be the biggest shift ever. Right. So, if we don't learn how to apply it now in school, we are missing the industrial revolution also has an evolution on learning and skills. So, schools need to be added to that, right.

In terms of government, I should say, they're using a lot of focus on managing and controlling. And I think sometimes it takes away the innovation part, right? Because yes, you don't have to restrict everything just because it goes the wrong way.

I think human society has a way that we can find the right path, right. If we see what we have come as human society the last 100 years, it's amazing. So, I think that we don't have to regulate everything. Sometimes we should let it evolve, right.

MH: To end this conversation, let's come back to the point that you are essentially considered the father of Industry 4.0. So much like asking the guy who invented the graphics interchange format, if it's GIF or JIF, how do we contract Industry 4.0, is it 4.0, 4 dot oh, is it I 4, give it to me straight.

HVS: You can say whatever you want, right. You can say whatever one you want.

MH: You’re not helping!!!

HVS: The Fourth Industrial Revolution has an impact on every part of our life. And we are one of the most blessed generations of all. We live better. We have better food. We have more time. We have more money.

We have more than any other previous generations, but we are also the one generation that needs to take the most important decisions on society, on how we need to develop our own skills, on how we need to adapt and how we need to train the next generation to adapt.

Because change is constant, but the rate of change is even bigger.  

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