The Internet of Things (IoT) describes physical objects embedded with sensors and actuators that communicate with computing systems via wired or wireless networks—allowing the physical world to be digitally monitored or even controlled.

Does your house have a smart thermostat? Or do you wear a fitness tracker to help you stay physically active? If you do, you are part of the Internet of Things, or IoT. It’s become embedded in our lives, as well as in the way organizations operate.

IoT uses a variety of technologies to connect the digital and physical worlds. Physical objects are embedded with sensors—which can monitor things like temperature or motion, or really any change in environment—and actuators—which receive signals from sensors and then do something in response to those changes. The sensors and actuators communicate via wired (for example, Ethernet) or wireless (for example, WiFi, cellular) networks with computing systems that can monitor or manage the health and actions of connected objects and machines. 

The physical objects being monitored don’t have to be manufactured—they can include objects in nature, as well as people and animals. While some organizations might view IoT more expansively, our definition excludes systems in which all the embedded sensors are used just to receive intentional human input, such as smartphone apps, which receive data input primarily through a touchscreen, or other networked computer software, in which the sensors consist of a standard keyboard and mouse.

The constant connectivity that IoT enables, combined with data and analytics, provides new opportunities for companies to innovate products and services, as well as to increase the efficiency of operations. Indeed, IoT has emerged as one of the most significant trends in the digital transformation of business and the economy since the 2010s.

Ten rules of value-creating growth

To understand how organizations can try to overcome these obstacles, we studied the growth patterns of the sample companies through various lenses. Our findings suggest ten imperatives that should guide organizations seeking to outgrow and outearn their peers.

1. Put competitive advantage first. Start with a winning, scalable formula.
2. Make the trend your friend. Prioritize profitable, fast-growing markets.
3. Don’t be a laggard. It’s not enough to go with the flow—you need to outgrow your peers.
4. Turbocharge your core. Focus on growth in your core industry—you can’t win without it.
5. Look beyond the core. Nurture growth in adjacent business areas.
6. Grow where you know. Focus on growing where you have an ownership advantage.
7. Be a local hero. Commit to winning on the home front.
8. Go global if you can beat local. Expand internationally if you have a transferable advantage.
9. Acquire programmatically. Combine healthy organic growth with serial acquisitions.
10. It’s OK to shrink to grow. Ruthlessly prune your portfolio if you need to.

Getting markdowns right: Four questions to answer

A retailer’s markdown strategy should provide data-driven answers to the following four questions:

1. Selecting the right items: What items should be put on clearance, given their performance during the season?

To identify which items to mark down, a retailer should compare each item’s performance in the current season against the sales plan for that particular item. A simple data-visualization approach can help merchants easily identify which items in the portfolio are overperformers and which are underperformers.

2. In the right places: Where should items be put on clearance, given performance across store clusters or channels?

Ideally, a retailer would conduct item-level analysis for each store or store cluster rather than applying the same markdown strategy across all stores and channels. Store clusters could be derived based on, for example, climate zones, locations (rural versus urban), assortment tiers, or store sizes. An apparel retailer might find that certain swimwear SKUs sell well throughout the year in some of its urban stores in the Northeast United States. It could then apply markdowns more selectively, instead of simply marking down all swimwear in all Northeast US stores during the colder months.

Similarly, some markets might require more frequent price changes than other markets. By differentiating its markdown strategy based on consumer preferences and shopping behaviors in each location, a retailer can ensure that it is investing its markdown dollars where they’ll make the biggest difference.

The same logic applies to channels. Digital channels can more easily accommodate differentiated markdown approaches since pricing changes are easier and faster to execute digitally—and can be done without adversely affecting customer experience.

3. At the right times: When should items be marked down?

At best-in-class retailers, merchants and planners run scenario analyses to determine the timing and frequency of markdowns. Typically, they apply markdowns in phases, starting with a smaller discount—and then, depending on how the discounted items perform, further lowering prices a few weeks later. A typical mistake that retailers make is failing to revisit markdown decisions: an item could remain on the shelf for weeks if the initial markdown wasn’t deep enough.

4. At the right price: How deep should markdowns be to achieve margin and sell-through goals?

For an item identified as a markdown candidate, a retailer can derive the right clearance price—one that optimizes for both gross margin and sell-through—using consumer-centric analytical models and coherent business rules. Discount depth can vary across categories or SKUs. There are, of course, trade-offs between simplicity and precision: applying the same discount rate to all products within a category requires little effort from store associates, whereas applying differentiated discounting depths is a much more time-intensive exercise for store staff.

To optimize markdown pricing, top-performing retailers use industry-leading analytics and modeled elasticities that are grounded in full-year consumer pricing behavior, with specific adjustments for markdown.

A successful transition to the next horizon of digital commerce requires companies to get real about being customer first and make some hard choices.

Companies are in danger of missing the next e-commerce wave.
With e-commerce sales doubling in the past five years¹ and markets expected to almost double again by 2026,² companies are making sizable investments in their e-commerce capabilities. The problem is that many of these companies are locked into an increasingly outdated view of e-commerce as a “bolt-on” to the main business.
This approach to e-commerce needs a big upgrade grounded in a commitment to become indispensable to the customer through an exponentially deeper level of engagement online and offline. Delivering on this vision requires companies to put digitally driven commerce at the center of their organizations so they can orchestrate experiences that meet customers’ ever-rising expectations. We call this next horizon of value NeXT commerce.
This is not some far-flung fantasy. Some large incumbent companies are generating tens of millions of dollars in new value through a deeper commitment to digitally driven commerce, and they’re doing it quickly. Many more, however, are struggling to make the leap or are scared off by cost or channel-conflict concerns.
To understand what shifts are needed and how incumbents are making them, we surveyed nearly 50 senior commercial executives, discussed the future of e-commerce with more than 75 business leaders, and analyzed the more than 1,000 digital-commerce programs we’ve helped clients implement over the past three years.
Three core findings emerged from this research:
—

Six global forces, from rapidly shifting customer behaviors to a proliferation of new technologies, are exerting massive pressures on legacy business models.
—Successful companies are becoming indispensable to their customers by using digital to move past basic transactions and provide experiences that solve a much broader set of their customers’ problems.
—Many companies are avoiding the hard choices they need to make, often because of internal politics, fear of channel conflict, and large gaps in capabilities and tech, thereby missing out on the full potential value available to them.

Why now for NeXT
Making the leap to NeXT commerce is based on a recognition that digitally driven commerce is the future of business. Six
important trends are forcing the issue:
1.
Accelerating e-commerce. All signs point to strong growth ahead in B2C and B2B, with e-commerce set to grow more than 12 percent each year through 2026.1 The executives we surveyed expect total digital revenues to grow, on average, from 20 percent to 31 percent of total sales from 2022–24.2 There are at least 25 million “high-potential” digital customers in the United States and Europe who tried e-commerce for the first time during COVID but have not fully adopted it.3
2.
Fast-changing customer behaviors. Digital adoption rates over the course of COVID doubled around the globe, and a sample of leading executives expects that trend to continue.⁴ Social commerce, for example, is expected to more than double from 2021–25.⁵
3.
Sky-high customer expectations. Each successful digital innovation raises the customer-expectation bar for everyone else—Tik Tok for video, Amazon for convenience, Alibaba for relevance, to name just a few. If companies can’t meet rising expectations, customers will leave. Some 74 percent of B2B customers want product availability shown online, while 72 percent want to be able to buy through any channel they want.⁶
4.
Less-forgiving capital market expectations. The current approach to e-commerce is unsustainable for many companies, particularly in consumer businesses. Some three-quarters of retailers, for example, had negative EBIT margin growth, even as e-commerce became a larger share of revenue.⁷ The market is now punishing that strategy. A sample of North American e-commerce companies, for example, saw an average decline of more than 10 percent in EV/EBITDA from 2018–22, versus a decline of 2 percent for companies in general.⁸
5.
Massive advances in tech and data. New technologies have evolved to massively accelerate scale and speed. 5G has made data consumption cheaper and better for consumers, while the cloud has provided companies with enormous computational power for lower costs. Advances in AI and machine learning have enabled mind-blowing analytic capabilities and intelligence, while tech is enabling automation in almost every aspect of operations.
6.
Competitive pressures. B2B and B2C companies are facing crushing competitive forces from two sides. From one side, large, digital-first companies are harnessing their advantages to move into new markets, potentially threatening every established sector. From the other side, a proliferation of start-ups are launching innovative business models that can quickly scale. Funding for e-commerce start-ups reached a record $54 billion in 2021, up from $19 billion in 2020.⁹

What to do: Focus on the three Cs—customer, customer, customer
Most leaders’ thinking about e-commerce is too small. Time and again, we see companies trying to optimize existing products, services, or processes, thinking along the lines of “How can we improve our widget?” instead of “How can we better serve our customers?” To become indispensable to customers, companies need to develop a radically deeper and broader understanding of what their customers really want and how to provide it.
Making that shift starts with answering three questions.

1. Are you serving your customers or your stakeholders across channels?
   Few will have missed the explosion in the number of channels (and variation across those channels), from live commerce to the nascent metaverse. As of the end of 2021, B2B customers were typically using ten channels to complete their buying journeys, up from just five in 2016 (Exhibit 1).³
   Channel strategy can look a bit like a game of whack-a-mole, with businesses rolling out new channels in an effort to “catch up” to their customers and, as a result, trying to manage a dizzying array of channels, each with its own tech stack or data models. This creates major limitations on creating seamless and scalable customer journeys.
   NeXT commerce brands have instead pursued a “headless” channel strategy, where no single channel is favored over another, in order to serve customers wherever they are, online and off. They have built fully integrated customer, inventory, and order management systems that manage data and experience flows across channels and inventory locations based on what customers prefer rather than on how systems are set up.
   Grainger embraced this headless approach to provide whatever its customers needed by installing vending machines on factory floors so workers could access parts immediately. The machines are connected to automatic replenishment systems. The company also developed and continually added a range of services to its website and mobile app, such as access to previous orders, 24/7 customer service, and advanced search, as well as e-procurement and digital stock-fulfillment solutions. These digitally driven initiatives are now responsible for 75 percent of Grainger’s revenue.