From Cost Center to Strategic Asset: Manufacturing's Digital Evolution
For decades, IT and manufacturing were relegated to the same category: necessary but uninspiring. They were cost centers—functions to optimize, not areas to innovate. IT was tasked with maintaining systems and enabling internal workflows, while manufacturing focused on producing goods as efficiently and reliably as possible. Meanwhile, competitive strategy revolved around product innovation, engineering breakthroughs, and brand differentiation.
The transition from Industry 3.0 to Industry 4.0 marks a fundamental shift in how manufacturing companies create and capture value. At its core, this evolution represents the transformation of two traditionally viewed cost centers—IT and Manufacturing—into critical sources of competitive advantage. This shift is reshaping not just operations and technology, but the very nature of executive leadership in manufacturing organizations.
The Cost Center Legacy
In the era of Industry 3.0, manufacturing excellence was primarily measured by cost efficiency. Plant managers were tasked with meeting production targets while minimizing expenses, viewing both manufacturing and IT operations as necessary costs of doing business. The real competitive advantages were thought to lie in product development, engineering excellence, and brand strength. This mindset led companies to focus relentlessly on cost reduction in their manufacturing operations, often at the expense of innovation and strategic capability building.
In this context, the Chief Operating Officer (COO), responsible for the largest budgets and headcounts in the organization, directed resources primarily toward incremental improvements. Capital expenditures (CapEx) were allocated to upgrading machinery or facilities, while operating expenditures (OpEx) focused on maintaining production efficiency. Innovation in manufacturing was limited to process optimizations or lean initiatives.
The value of IT and manufacturing was therefore framed in terms of their ability to minimize expenses rather than maximize impact. This perspective missed a critical opportunity: manufacturing is not only the core function of a manufacturing company but often its largest area of spend. Treating it as a cost center rather than a strategic asset left untapped potential on the table.
IT’s Early Digital Revolution
While manufacturing held steady in its traditional role, IT began to evolve. The rise of cloud computing, data analytics, and the Internet of Things (IoT) allowed IT leaders to demonstrate how technology could not just support the business but transform it.
CIOs began to move beyond their traditional focus on maintaining infrastructure and optimizing internal processes. They started to show how technology could drive entirely new business models. E-commerce, data-driven customer insights, and automation became powerful examples of how IT could unlock value.
This shift didn’t happen overnight, but it marked a turning point. IT began to be recognized as a function that could do more than modernize systems and provide tools to other departments. Early movers who invested heavily in IT capabilities—companies like Amazon, Walmart, and Tesla—demonstrated that technology could fundamentally reshape industry dynamics. The rise of e-commerce, cloud computing, and data analytics transformed IT from a support function into a strategic asset. Companies that continued to view IT as merely a cost center found themselves struggling to compete with more digitally savvy rivals.
Manufacturing’s Slower Journey
Manufacturing, by contrast, has been slower to embrace this transformation. The reasons for this lag are both structural and cultural.
Manufacturing systems are deeply capital-intensive. Factories, machinery, and production lines represent investments that often span decades. Unlike IT systems, which can be upgraded incrementally, manufacturing infrastructure requires significant upfront costs and extended timelines to modernize.
The manufacturing culture has historically prioritized stability and predictability over innovation. Operational uptime, throughput, and quality are paramount, leaving little room for experimentation or disruption.
Manufacturing has traditionally operated in isolation from other business functions. IT innovations that transformed customer experiences or back-office processes often felt disconnected from the realities of the shop floor. This siloed approach limited the cross-functional collaboration needed to drive systemic change.
Despite these challenges, manufacturing has always held immense potential. It is, after all, the core capability of a manufacturing company. Industry 4.0 has finally created the conditions for that potential to be realized.
The Industry 4.0 Catalyst
The advent of Industry 4.0 is finally forcing a fundamental rethinking of manufacturing's role. Smart factories, industrial IoT, and advanced analytics are transforming manufacturing operations from cost centers into strategic assets. Companies are discovering that manufacturing excellence can provide sustainable competitive advantages that are difficult for competitors to replicate. This transformation is particularly powerful because it leverages manufacturing's position as a core capability, creating opportunities for differentiation that weren't possible in the Industry 3.0 era.
The Role of the Modern COO
In this new landscape, the COO is emerging as a critical agent of transformation. Historically, the COO’s role was defined by operational excellence. They oversaw the largest budgets and headcounts, directed CapEx and OpEx expenditures, and ensured that production processes ran smoothly and efficiently.
But Industry 4.0 has expanded the scope of the COO’s influence. Today’s COOs are no longer just managing operations—they are leading innovation. They are tasked with integrating new technologies into production processes, harnessing data to drive smarter decisions, and aligning operational goals with broader business strategies.
The modern COO must also navigate the complexities of technology investment. With operations being the largest area of internal impact for technology, COOs are playing a growing role in shaping the company’s technology strategy. This requires close collaboration with CIOs to ensure that IT and operational technology (OT) investments are aligned and that the benefits of digital transformation are fully realized.
The Role of the Modern CIO
Today's Chief Information Officer faces a radically expanded mandate. No longer simply responsible for keeping systems running, the modern CIO must serve as a strategic business leader, technology integrator, and innovation driver. They must orchestrate the convergence of information technology and operational technology, ensure cybersecurity across all systems, and drive digital transformation initiatives. Most importantly, they must help create new business opportunities through technology while ensuring that digital investments deliver measurable value to the organization.
The Convergence of IT and Manufacturing
Perhaps the most profound change in the Industry 4.0 era is the convergence of IT and manufacturing. These two functions, historically siloed, are becoming deeply interconnected.
This convergence is driven by the realization that manufacturing operations can no longer function in isolation from the broader digital ecosystem. IoT devices on the factory floor are feeding data into enterprise systems; AI algorithms are analyzing production performance in real-time; and cloud-based platforms are enabling cross-functional collaboration.
The integration of IT and manufacturing is not just about technology—it’s about breaking down cultural and organizational barriers. Companies that succeed in this convergence are fostering new ways of working, where IT and manufacturing teams collaborate to achieve shared goals.
The results are transformative. Companies that embrace the convergence of IT and manufacturing are achieving higher levels of efficiency, agility, and innovation. They are turning their largest cost centers into engines of growth, creating value not just through what they produce, but through how they produce it.
The evolution from Industry 3.0 to Industry 4.0 is far more than a technological shift. It is a redefinition of roles, strategies, and possibilities. IT and manufacturing, once seen as back-office functions, are now at the forefront of business transformation. And the companies that recognize this shift are rewriting the rules of competition for the digital age.
Success Stories in Manufacturing
In the article Selling and Monetizing Data in B2B Markets published in Technovation, researchers highlight how industrial firms can unlock new revenue streams and competitive advantages by leveraging data in innovative ways. The study outlines four archetypical data-driven value propositions that manufacturers can leverage:
Data as a Product – Selling raw or processed data as a standalone offering.
Data-Enhanced Products – Embedding data-driven features into physical products.
Data-Driven Services – Using data insights to optimize customer processes.
Data-Enabled Performance Outcomes – Delivering guaranteed performance improvements based on data.
Below, we explore real-world examples of manufacturers excelling in each of these categories.
Johnson & Johnson MedTech
As part of its medical devices division, Johnson & Johnson MedTech uses data collected from surgical workflows to provide hospitals with actionable insights. Their data-driven services enable customers to automate the analysis of operational processes, improving performance and quality through continuous improvement. Their outcomes-focused value model includes advanced gain-sharing agreements, where customers pay based on the realized value of efficiency and quality improvements. This not only builds trust but also strengthens long-term customer relationships.
Continental
Continental has revolutionized its product offerings with data-enhanced smart truck tires. These tires are embedded with sensors that monitor tire pressure, temperature, and wear, providing real-time diagnostics and predictive maintenance. Customers benefit from reduced downtime and lower operational costs, while Continental monetizes this innovation through premium pricing models for data-enabled insights.
Hilti
Hilti enhances its construction tools with IoT-enabled sensors and cloud connectivity, offering services like tool tracking and fleet management. Through its On-Track software, Hilti provides contractors with data-driven services that reduce tool-related downtime and optimize asset management. This approach supports subscription-based revenue models and further differentiates Hilti in a competitive market.
KONE
KONE’s smart elevators, equipped with IoT sensors and predictive analytics, allow real-time monitoring and predictive maintenance. These data-driven services have reduced elevator downtime and improved the customer experience. The company monetizes these innovations through subscription-based contracts, combining maintenance services with the enhanced functionality of their smart products.
John Deere
John Deere exemplifies data-enabled performance outcomes by integrating IoT and analytics to optimize farming operations. By analyzing soil, weather, and machinery data, the company helps farmers increase crop yields. Customers pay based on achieved performance improvements, creating a win-win scenario and reinforcing John Deere's leadership in smart agriculture.
ABB
ABB integrates IoT and analytics into its industrial equipment, enabling energy and productivity optimization for customers. Their offerings span from data-driven services like diagnostics to performance outcomes such as energy savings. ABB’s model ensures customers retain ownership of raw data while ABB acts as a custodian, building trust and mitigating concerns about data privacy.
References:
Technovation - Paavo Ritala, Joona Keränen, Jessica Fishburn, Mika Ruokonen - Selling and monetizing data in B2B markets: Four data-driven value propositions, Volume 130, 2024, 102935, ISSN 0166-4972 - https://doi.org/10.1016/j.technovation.2023.102935
