Business Horizons (2015) 58, 431440

Available online at www.sciencedirect.com

ScienceDirect
www.elsevier.com/locate/bushor

The Internet of Things (IoT): Applications,

investments, and challenges for enterprises
In Lee a,*, Kyoochun Lee b

a
School of Computer Sciences, Western Illinois University, Stipes Hall 442F, Macomb, IL 61455-1390, U.S.A.
b
Olin Corporation, Clayton, MO, U.S.A.

KEYWORDS Abstract The Internet of Things (IoT), also called the Internet of Everything or the
Cloud computing; Industrial Internet, is a new technology paradigm envisioned as a global network of
Internet of Things; machines and devices capable of interacting with each other. The IoT is recognized as
Radio frequency one of the most important areas of future technology and is gaining vast attention
identification; from a wide range of industries. This article presents five IoT technologies that are
Real options; essential in the deployment of successful IoT-based products and services and
Supply chain discusses three IoT categories for enterprise applications used to enhance customer
management value. In addition, it examines the net present value method and the real option
approach widely used in the justification of technology projects and illustrates how
the real option approach can be applied for IoT investment. Finally, this article
discusses five technical and managerial challenges.
# 2015 Kelley School of Business, Indiana University. Published by Elsevier Inc. All
rights reserved.

1. The Internet of Things (IoT) vendor-managed inventory systems, customer sup-

port systems, business intelligence applications, and
The Internet of Things (IoT), also called the Internet business analytics.
of Everything or the Industrial Internet, is a new Gartner (2014) forecasts that the IoT will reach
technology paradigm envisioned as a global network 26 billion units by 2020, up from 0.9 billion in 2009,
of machines and devices capable of interacting with and will impact the information available to supply
each other. The IoT is recognized as one of the most chain partners and how the supply chain operates.
important areas of future technology and is gaining From production line and warehousing to retail
vast attention from a wide range of industries. delivery and store shelving, the IoT is transforming
The true value of the IoT for enterprises can be business processes by providing more accurate and
fully realized when connected devices are able to real-time visibility into the flow of materials and
communicate with each other and integrate with products. Firms will invest in the IoT to redesign
factory workflows, improve tracking of materials,
and optimize distribution costs. For example, both
* Corresponding author
John Deere and UPS are already using IoT-enabled
E-mail addresses: i-lee@wiu.edu (I. Lee), fleet tracking technologies to cut costs and improve
kyoochun@gmail.com (K. Lee) supply efficiency.

0007-6813/$ see front matter # 2015 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.bushor.2015.03.008
432 I. Lee, K. Lee

In addition to manufacturers adoption of the IoT, waves, a tag, and a reader. The tag can store more
various service industries are in the process of data than traditional barcodes. The tag contains
adopting the IoT to increase revenue through en- data in the form of the Electronic Product Code
hanced services and become leaders in their mar- (EPC), a global RFID-based item identification sys-
kets. Disneys MagicBand is a new wristband with tem developed by the Auto-ID Center. Three types of
RFID chips that serves as a ticket and connects to tags are used. Passive RFID tags rely on radio fre-
Disneys data repository regarding park visitors. quency energy transferred from the reader to the
Krogers new IoT-based system, Retail Site Intelli- tag to power the tag; they are not battery-powered.
gence, is one complete retail platform of video Applications of these can be found in supply chains,
analytics, wireless devices, POS devices, handheld passports, electronic tolls, and item-level tracking.
sensors, IP cameras, and video management soft- Active RFID tags have their own battery supply and
ware that was designed to help customers have a can instigate communication with a reader. Active
better shopping experience by more easily finding tags can contain external sensors to monitor temper-
the products they want and saving time at checkout. ature, pressure, chemicals, and other conditions.
The adoption of this technology is rapidly gaining Active RFID tags are used in manufacturing, hospital
momentum as technological, societal, and compet- laboratories, and remote-sensing IT asset manage-
itive pressures push firms to innovate and transform ment. Semi-passive RFID tags use batteries to power
themselves. As IoT technology advances and increas- the microchip while communicating by drawing pow-
ing numbers of firms adopt the technology, IoT er from the reader. Active and semi-passive RFID tags
cost-benefit analysis will become a subject of great cost more than passive tags.
interest. Because of the potential but uncertain
benefits and high investment costs of the IoT, firms 2.2. Wireless sensor networks (WSN)
need to carefully assess every IoT-induced opportu-
nity and challenge to ensure that their resources are Wireless sensor networks (WSN) consist of spatially
spent judiciously. distributed autonomous sensor-equipped devices to
This article begins with a discussion of the five monitor physical or environmental conditions and can
essential IoT technologies used for the deployment cooperate with RFID systems to better track the
of successful IoT-based products and services and status of things such as their location, temperature,
identifies three IoT categories for enterprise appli- and movements (Atzori, Iera, & Morabito, 2010). WSN
cations. Then, it examines a net present value ap- allow different network topologies and multihop
proach and a real option approach widely used in the communication. Recent technological advances in
justification of technology projects and discusses low-power integrated circuits and wireless commu-
how real option valuation can be applied to IoT nications have made available efficient, low-cost,
investment. Finally, this article discusses five techni- low-power miniature devices for use in WSN applica-
cal and managerial challenges: data management, tions (Gubbi, Buyya, Marusic, & Palaniswami, 2013).
data mining, privacy, security, and chaos. WSN have primarily been used in cold chain
logistics that employ thermal and refrigerated pack-
2. Essential IoT technologies aging methods to transport temperature-sensitive
products (Hsueh & Chang, 2010; White & Cheong,
Five IoT technologies are widely used for the deploy- 2012). WSN are also used for maintenance and
ment of successful IoT-based products and services: tracking systems. For example, General Electric
deploys sensors in its jet engines, turbines, and
1. radio frequency identification (RFID); wind farms. By analyzing data in real time, GE saves
time and money associated with preventive main-
2. wireless sensor networks (WSN); tenance. Likewise, American Airlines uses sensors
capable of capturing 30 terabytes of data per flight
3. middleware; for services such as preventive maintenance.

4. cloud computing; and 2.3. Middleware

5. IoT application software. Middleware is a software layer interposed between

software applications to make it easier for software
2.1. Radio frequency identification (RFID) developers to perform communication and input/
output. Its feature of hiding the details of different
Radio frequency identification (RFID) allows auto- technologies is fundamental to free IoT developers
matic identification and data capture using radio from software services that are not directly relevant
The Internet of Things (IoT): Applications, investments, and challenges for enterprises 433

to the specific IoT application. Middleware gained other vital signs of a package, including when it is
popularity in the 1980s due to its major role in opened and whether it was tampered with along the
simplifying the integration of legacy technologies way.
into new ones. It also facilitated the development of While device-to-device applications do not nec-
new services in the distributed computing environ- essarily require data visualization, more and more
ment. A complex distributed infrastructure of the human-centered IoT applications provide visualiza-
IoT with numerous heterogeneous devices requires tion to present information to end users in an intui-
simplifying the development of new applications tive and easy-to-understand way and to allow
and services, so the use of middleware is an ideal interaction with the environment. It is important
fit with IoT application development. For example, for IoT applications to be built with intelligence so
Global Sensor Networks (GSN) is an open source devices can monitor the environment, identify prob-
sensor middleware platform enabling the develop- lems, communicate with each other, and potentially
ment and deployment of sensor services with almost resolve problems without the need for human
zero programming effort. Most middleware archi- intervention.
tectures for the IoT follow a service-oriented ap-
proach in order to support an unknown and dynamic 3. IoT applications to enhance
network topology. customer value

2.4. Cloud computing Despite growing popularity of the IoT, few studies
have focused on categorization of the IoT for enter-
Cloud computing is a model for on-demand access to prises (e.g., Chui, Loffler, & Roberts, 2010). Based
a shared pool of configurable resources (e.g., com- on the technology trends and literature review,
puters, networks, servers, storage, applications, this article identifies three IoT categories for enter-
services, software) that can be provisioned as In- prise applications: (1) monitoring and control, (2)
frastructure as a Service (IaaS) or Software as a big data and business analytics, and (3) information
Service (SaaS). One of the most important outcomes sharing and collaboration. Understanding how these
of the IoT is an enormous amount of data generated three IoT categories can enhance the customer
from devices connected to the Internet (Gubbi value of an organization is a prerequisite to success-
et al., 2013). Many IoT applications require massive ful IoT adoption. This article next discusses the
data storage, huge processing speed to enable real- three IoT categories, along with an illustration of
time decision making, and high-speed broadband real-world IoT applications developed to enhance
networks to stream data, audio, or video. Cloud customer value.
computing provides an ideal back-end solution for
handling huge data streams and processing them for 3.1. Monitoring and control
the unprecedented number of IoT devices and hu-
mans in real time. Monitoring and control systems collect data on equip-
ment performance, energy usage, and environmental
2.5. IoT applications conditions, and allow managers and automated
controllers to constantly track performance in real
The IoT facilitates the development of myriad time anywhere, anytime. Advanced monitoring and
industry-oriented and user-specific IoT applications. control technologies such as smart grid and smart
Whereas devices and networks provide physical metering reveal operational patterns, spot areas of
connectivity, IoT applications enable device-to- potential improvement, or predict future outcomes
device and human-to-device interactions in a reli- and optimize operations, leading to lower costs and
able and robust manner. IoT applications on devices higher productivity.
need to ensure that data/messages have been re- The smart home is known to be at the forefront of
ceived and acted upon properly in a timely manner. innovation regarding IoT monitoring and control
For example, transportation and logistics applica- systems. The primary value propositions are family
tions monitor the status of transported goods such and property protection and energy savings. For
as fruits, fresh-cut produce, meat, and dairy prod- example, the Verizon Home Monitoring and Control
ucts. During transportation, the conservation status network uses a wireless communications technology
(e.g., temperature, humidity, shock) is monitored designed specifically for remote control applica-
constantly and appropriate actions are taken auto- tions in home automation. IoT-enabled home appli-
matically to avoid spoilage when the connection is ances and devices can be monitored and controlled
out of range. For example, FedEx uses SenseAware outside the users home through a computer, tablet,
to keep tabs on the temperature, location, and or smartphone. The Verizon Home Monitoring and
434 I. Lee, K. Lee

Control network allows users to adjust the lights, more personalized oral care routine. The interactive
control the climate, manage the security system, electric toothbrush records brushing habits with mo-
receive automatic event notifications, and even bile technology while giving mouth-care tips along-
lock and unlock doors. side news headlines. This innovation provides users
The IoT is also used to monitor and control various with unprecedented control over their oral care.
components in cars. The primary customer value Tests of the interactive electric toothbrush have
propositions are drivers personalized experience shown that when connected, brushing time increases
and satisfaction. Ford and Intel teamed up in 2014 from less than 60 seconds with a manual toothbrush
to explore new opportunities to personalize the user to 2 minutes and 16 seconds with an electric tooth-
experience using facial recognition software and a brush, surpassing the 2-minute session recommended
mobile phone app. The joint research project, by dental professionals.
called Mobile Interior Imaging, incorporates per-
ceptual computing technology to offer improved 3.3. Information sharing and collaboration
privacy controls and to identify different drivers
and automatically adjust features based on an in- Information sharing and collaboration in the IoT can
dividuals preferences. The in-car experience is occur between people, between people and things,
then personalized further by displaying information and between things. Sensing a predefined event
specific to the driver, such as his/her calendar, music, is usually the first step for information sharing
and contacts. The customer value propositions and collaboration. In the supply chain area, infor-
are appropriately integrated into the connected mation sharing and collaboration enhance situa-
car environment to provide another revenue stream tional awareness and avoid information delay and
for Ford. distortion. For example, if sensors are placed
throughout a retail store where refrigeration is nec-
3.2. Big data and business analytics essary, alerts can be sent to the store managers
mobile device whenever the refrigerators malfunc-
IoT devices and machines with embedded sensors tion. The manager can then check the employee
and actuators generate enormous amounts of data status report to see who is available and send
and transmit it to business intelligence and analytics task assignments to that employee via his or her
tools for humans to make decisions. These data are IoT-enabled mobile device.
used to discover and resolve business issuessuch To enhance information sharing and collaboration
as changes in customer behaviors and market with shoppers, Macys is deploying shopkicks shop-
conditionsto increase customer satisfaction, and Beacon technology, an enhanced mobile location-
to provide value-added services to customers. Busi- based technology that uses ultrasound Bluetooth
ness analytics tools may be embedded into IoT Low Energy (BLE). ShopBeacon provides shopkick
devices, such as wearable health monitoring sen- app users with personalized department-level
sors, so that real-time decision making can take deals, discounts, recommendations, and rewards.
place at the source of data. As shoppers enter Macys, shopBeacon reminds
The IoT and advances in business analytics now those shopkick app users who have opted in. This
make it possible to capture vast amounts of individual enhancement in Macys information sharing with
health data. The IoT enables healthcare service shoppers allows for increased consumer engage-
providers to personalize patient care. New IoT tech- ment and promotional and marketing relevancy that
nologies provide data about a patients everyday lead to higher customer satisfaction and increase
behaviors and health, creating opportunities for care revenues. In September 2014, following a pilot test
providers to influence patients far more frequently of the application, Macys decided to roll out shop-
and effectively. For example, Humanas Healthsense Beacon in all of its 4,000 U.S. locations. Other major
eNeighbor1 remote monitoring system reports retailers such as Target, American Eagle Outfitters,
changes in the members normal patterns of move- and JCPenney also partnered with shopkick and
ment and activity to Humana care managersvia in- launched shopBeacon in 2014. Due to competitive
home sensors that measure routine daily activities pressure, there is expected to be a rapid adoption of
with data analyticsto help trigger interventions and shopBeacon at other national retailers, too.
help prevent adverse events from escalating to emer-
gency room visits or hospital stays. 4. Evolution of the foundational IoT
IoT-based big data are also transforming the technologies
healthcare product industry. For example, Proctor
& Gamble developed the Oral-B Pro 5000 interactive Various types of IoT applications have emerged, and
electric toothbrush to provide users with a smarter, the willingness of enterprises to utilize them is
The Internet of Things (IoT): Applications, investments, and challenges for enterprises 435

growing rapidly. According to Bradley, Barbier, and size of industry sector in each region. In the United
Handler (2013), the IoTwill generate $14.4 trillion in States, $4.6 trillion of value is most prevalent in the
value; the combination of increased revenues and services area. However, in China, $1.8 trillion of
lower costs will migrate among companies and in- value is derived from rapid economic growth, mainly
dustries from 2013 to 2022. From an industry per- in the manufacturing sector.
spective, four industries make up more than half of Table 1 shows projected evolution in the area of
the $14.4 trillion in value. These leading four indus- foundational IoT technologies: network, software
tries in terms of value at stake include manufactur- and algorithms, hardware, and data processing.
ing at 27%; retail trade at 11%; information services The network is the backbone of the IoT. It refers
at 9%; and finance and insurance, also at 9%. Other to uniquely identifiable objects (things) and their
industries such as wholesale, healthcare, and edu- virtual representations in an Internet-like structure.
cation lag behind in terms of value generation, with Network technology is moving to unobtrusive wire-
a range between 1% and 7%. Much of the value for free communication technology that allows device-
manufacturers comes from greater agility and flex- to-device applications to be deployed more flexibly.
ibility in factories, and from the ability to make the Network technology is evolving toward a context-
most of workers skills. Additionally, a large amount aware autonomous network.
of the value for retailers comes from connected Objects rely on software to communicate effec-
marketing and advertising. Geographic distributions tively with each other and to deliver enhanced
of the value are heavily driven by each regions functionality and connectivity. Software should
relative economic growth rate and by the relative be developed with the IoTs interoperability,

Table 1. Evolution of key IoT technologies

Before 2010 20102015 20152020 Beyond 2020
Network  Sensor networks  Self-aware and self-  Network context  Network cognition
organizing networks awareness  Self-learning, self-
 Sensor network repairing networks
location
transparency
 Delay-tolerant
networks
 Storage networks and
power networks
 Hybrid networking
technologies
Software and  Relational database  Large-scale, open  Goal-oriented  User-oriented
Algorithms integration semantic software software software
 IoT-oriented RDBMS modules  Distributed  The invisible IoT
 Event-based platforms  Composable intelligence,  Easy-to-deploy IoT
 Sensor middleware algorithms problem solving software
 Sensor networks  Next generation IoT-  Things-to-Things  Things-to-Humans
middleware based social software collaboration collaboration
 Proximity/  Next generation IoT- environments  IoT 4 All
Localization based enterprise
algorithms applications
Hardware  RFID tags and some  Multiprotocol,  Smart sensors  Nanotechnology and
sensors multistandards (biochemical) new
 Sensors built into readers  More sensors materials
mobile devices  More sensors and and actuators
 NFC in mobile phones actuators (tiny sensors)
 Smaller and cheaper  Secure, low-cost tags
MEMs technology (e.g., Silent Tags)
Data  Serial data processing  Energy, frequency  Context-aware  Cognitive processing
Processing  Parallel data spectrum-aware data data processing and
processing processing and data optimization
 Quality of services  Data processing responses
context adaptable
Source: Adapted from Sundmaeker, Guillemin, Friess, and Woelffle (2010, p. 74)
436 I. Lee, K. Lee

connectivity, privacy, and security requirements 5. IoT investment opportunities and

in mind. The focus of software development is evaluation (net present value vs. real
shifting to user-oriented, distributed intelligence
option approach)
and machine-to-machine and machine-to-human
collaboration.
Our survey shows the IoT is penetrating a wide
The news that Google is paying $3.2 billion in cash
range of industries including retailing, manufactur-
to buy Nest, a smart thermostat business, demon-
ing, healthcare, insurance, home appliances, heavy
strates the value of hardware in the IoT. Hardware is
equipment, airlines, and logistics. The benefits of
innovatively designed and robustly produced, driven
IoT technologies such as RFID-based merchandise
by the consumerized IoT devices which have myriad
tracking and home networking are concrete and
features, functionalities, and operating environ-
immediately measurable. Other IoT technologies
ments. While RFID tags and sensors have been the
such as intelligent automobiles and intelligent hos-
focus of hardware innovation, miniaturization
pital robot systems are in the experimental stage
of hardware and nanotechnology is leading the
and their benefits may be realized in the long term.
energy-efficient, low-power hardware evolution.
While the IoT is relatively new, investment oppor-
IoT devices generate enormous quantities of data
tunities abound, along with the development of
that need to be aggregated and analyzed in real time
various foundational technologies summarized in
to provide information regarding status, location,
Table 1. Companies are expected to take advantage
functionality, and environment of the devices. The
of the wave of IoT innovations in the coming years.
traditional data processing method does not work
In general, companies are going to take an im-
well in the real-time streaming data process of the
mediate investment or a wait-and-see approach to
IoT environment. Since processing large quantities
investment based on the maturity level of the spe-
of IoT data in real time will increase workloads of
cific IoT technologies. This section discusses two
data centers at an exponential rate, data processing
investment evaluation methods widely used in the
will become more context-aware, optimized, and
justification of technology projects.
cognitive.
In the IoT environment, a large number of
5.1. Net present value and real option
devices are connected with each other, and it is not
approach
feasible to process all the streaming data available
to those devices. Context-aware data processing
With so much potential value in the investment of
enables sensors and devices to use context-specific
IoT technology, firms need an appropriate measure
information such as location, temperature, and the
by which to properly assess its risks and rewards.
availability of a certain device to decide what data
The standard measure firms typically use to value
to collect and interpret to provide relevant infor-
projects, net present value (NPV), is inappropriate
mation to other devices or users. For example,
to use for several reasons. Chief among these in this
context-aware data processing can deliver rele-
circumstance is that it ignores flexibility in invest-
vant information to a user by knowing the users
ment such as reversibility and scalability in the
current location (e.g., within a department store,
evaluation horizon. No other technology investment
a park, or a museum). Cognitive data processing
has the flexibility that information technology in-
integrates the human cognition process into IoT
vestments in general have (Fichman, Keil, & Tiwana,
applications. Rather than being programmed to
2005). All of the aforementioned IoT technologies
deal with every possible data-processing need, a
may have had value arising from flexibility in
cognitive data-processing application is trained
investment. Thus, NPV tends to undervalue a
using artificial intelligence algorithms to sense, pre-
projects worth and is not suitable for high-risk
dict, infer, and learn tasks and environments. For
projects. In order to value the IoT more appropri-
example, cognitive data processing uses image rec-
ately, real option valuation may be an appropriate
ognition techniques to understand the surrounding
evaluation method. The following section discusses
environment, processes data for a user, and utilizes
how the real option valuation can be applied for IoT
feedback from the user to learn further. The opti-
investment.
mization of data processing is critical to timely
processing of the continuous stream of massive 5.2. Real options
amounts of data. Technological advances in opti-
mized data processing help make timely decisions As implied by their namesake, real options are the
in time-critical big data applications such as rightbut not the obligationto take an action
smart grids, environmental monitoring, and smart during a period of time. These include the options
manufacturing. to expand, contract, and wait. Real options can
The Internet of Things (IoT): Applications, investments, and challenges for enterprises 437

Table 2. Types of real option approaches

Type of Option Description
Option to Abandon/Switch This option gives management the option to abandon a project that is operating
at a loss and sell or redeploy the assets.
Option to Contract Similar to the option to abandon, this gives management the option to scale back
a project that is operating at a loss.
Option to Defer/Postpone This gives management the option to wait/learn more to see if a project will be
profitable.
Option to Expand This gives management the option to expand/scale up the project based on its
success.

prove particularly valuable in fields of high uncer- 5.3. Valuation

tainty and risk, such as information technology. As
reviewed by Li and Johnson (2002), two main char- Like financial options, real options can be calculated
acteristics make real options an appropriate appli- using the Black-Scholes model or decision trees. For
cation for IT investments. First, IT projects typically real options, using decision trees may be more
require high initial investments and are often irre- appropriate, as that will allow setting up possibili-
versible. Second, IT investments can have very high ties of the project according to what management
uncertainty and risk. IT projects such as IoT projects believes them to be. When valuing real options, it is
inherently contain technical uncertainty as well as especially important to stage the problem correctly
market uncertainty (Fichman et al., 2005). Also, IT and to understand how real options are analogous to
can advance at a rapid pace and change direction financial options. Table 3 provides a guide on how
quickly. These characteristics make real option val- they are related.
uation ideal in valuing IoT investment projects, as S represents the present value of cash flows from
it can capture value that otherwise would be the project; X represents the cost to invest in the
overlooked. project; s2 represents the riskiness of the project; T
Good managers intuitively understand real op- represents the period of time in which management
tions. They understand that simple cash profits are can take an action; and r represents the risk-free
not the only value a project can add; other oppor- rate the investment capital would earn.
tunities may arise from engaging in projects. Real Using decision trees to calculate the real option
option valuation allows management to quantify value, one can stage the possible values a project can
these options to more accurately reflect the value take, exercise the option at the optimal time/value
of a project and to have a real strategic impact on of the project, and discount backward in order to find
the value of a project. Table 2 lists four general the value of the option. For example, with a one-
types of real options. period decision tree, we begin with the starting
There are several examples of how real options value today, S0, and move forward one period. The
are used in valuation today. Any firm that operates value can either increase to Su or decrease to Sd. From
in a field of high uncertainty (e.g., pharmaceuti- here we can use the risk-free rate, r, and determine
cals) is likely to employ real options. Pharmaceuti-
cal companies face uncertainty not only in drug
development (akin to IT technical uncertainty) but Table 3. Real options variables
also in other external factors such as regulations Real Options Variable Financial
and patents (akin to IT market uncertainty). Real Options
option valuation is also used with movie deals. Movie Present Value of S Current
studios often purchase rightsthat is, real options Project Stock Price
to produce films. Film rights give the purchasing Investment Cost of X Option
studio the right but not the obligation to produce a a Project Exercise Price
movie. [Note that this is not the cost of producing the Riskiness/Uncertainty s2 Stock Price
movie, simply the value of the right to produce it.] of the Project Uncertainty
After rights are purchased, studios can then employ Time Window of T Time to
surveys and analysis to determine whether or not a the Project Expiration
production will be profitable. If the timing is not Time Value of Money r Risk-free Rate
right, these options allow the studio to wait and
Source: Adapted from Li & Johnson (2002)
perhaps produce the film at a later time.
438 I. Lee, K. Lee

the probability of success (p) and failure (1-p), the option value calculation, discounted back one
determine the expected payoffs using the project period.
value less the investment amount, and essentially While this example was simplified for readers from
work backward to determine the value of the option. non-finance backgrounds, more complicated scenar-
ios can be analyzed using the same principles. Many
5.4. Real options example IoT projects have unclear project scopes and goals
and are using breakthrough technologies; in such
Here we offer an example. A company is looking to scenarios, there is a higher risk of project failure
invest in new smart vending machines that will and greater irreversibility of investments than with
reduce costs and increase profits. Management be- traditional technology projects. Our example high-
lieves there is a probability of 0.55 that there will be lights the value of real option approaches to IoT
a high demand in this technology with a market projects.
value of $140m, and a probability of 0.45 that there
will be a low demand in this technology with a 6. Challenges in IoT development
market value of $40m. Figure 1 shows a decision
tree without real options. Based on the survey of IoT practices, this section
If the cost of investing in this technology at time discusses challenges in IoT development by enter-
zero is $100m and the discount rate is 8%, then from prises. As with any disruptive innovation, the IoT
a simple NPV calculation the value of the project is will present multiple challenges to adopting enter-
$12.04m, which the standard NPV rejects. prises. For example, due to the explosion of data
generated by IoT machines, Gartner (2014) suggested
Present Value of Cash In flow that data centers will face challenges in security, the
enterprise, consumer privacy, data itself, storage
140m0:55 40m0:45 management, server technologies, and data center
$87:96m
1:081 networking. This section discusses five technical and
NPV $87:96m  $100m $12:04m managerial challenges: data management, data min-
ing, privacy, security, and chaos.
However, management can use a real option ap-
proach to evaluate this investment as a phased fi- 6.1. Data management challenge
nancing and scaling option. The company could start
with a pilot project and better learn the market over IoT sensors and devices are generating massive
time. In the following year, management could avoid amounts of data that need to be processed and
full investment of $100m into this smart vending stored. The current architecture of the data center
machine technology if the market turns out to be is not prepared to deal with the heterogeneous
$40m, and only invest in this technology if the nature and sheer volume of personal and enterprise
market turns out to be $140m. Therefore, manage- data (Gartner, 2014). Few enterprises would be
ment can value the option using a decision tree able to invest in data storage sufficient to house all
that takes the higher value as the exercised the IoT data collected from their networks. Con-
option. The option value of this project from the sequently, they will prioritize data for operations
real option perspective is ($140m $100m)*0.55 + or backup based on needs and value. Data centers
($0m)*0.45 = $22m/(1.08)1 = $20.37m. As long as the will become more distributed to improve process-
pilot project costs less than $20.37m, this pilot proj- ing efficiency and response time as IoT devices
ect with a following investment in the smart vending become more widely used and consume more
machine technology is worth doing. Figure 2 shows bandwidth.

Figure 2. A decision tree with real options

Figure 1. A decision tree without real options
The Internet of Things (IoT): Applications, investments, and challenges for enterprises 439

6.2. Data mining challenge potential security threat escalates. Although the
IoT improves the productivity of companies and
As more data are available for processing and analy- enhances the quality of peoples lives, the IoT will
sis, the use of data mining tools becomes a necessity. also increase the potential attack surfaces for hack-
Data consist not only of traditional discrete data, but ers and other cyber criminals. A recent study by
also of streaming data generated from digital sensors Hewlett Packard (2014) revealed that 70% of the
in industrial equipment, automobiles, electrical me- most commonly used IoT devices contain serious
ters, and shipping crates. These streaming data are vulnerabilities. IoT devices have vulnerabilities
about location, movement, vibration, temperature, due to lack of transport encryption, insecure Web
humidity, and even chemical changes in the air. Data interfaces, inadequate software protection, and
mining tools can invoke corrective processes to ad- insufficient authorization. On average, each device
dress immediate operational issues or inform man- contained 25 holes, or risks of compromising the
agers of discoveries regarding competitors strategic home network. Devices on the IoT typically do not
moves and customers preference changes that use data encryption techniques.
will impact their short-term and long-term business Some IoT applications support sensitive infra-
activities. structures and strategic services such as the smart
Data need to be tamed and understood using grid and facility protection. Other IoT applications
computer and mathematical models. Traditional will increasingly generate enormous amounts of
data mining techniques are not directly applicable personal data about household, health, and finan-
to unstructured images and video data. Coupled cial status that enterprises will be able to leverage
with the need for the advanced data mining tools for their businesses. Lack of security and privacy will
to mine streaming data from sensor networks and create resistance to adoption of the IoT by firms and
image and video data, there is a shortage of individuals. Security challenges may be resolved by
competent data analysts. McKinsey Global Insti- training developers to incorporate security solutions
tute estimated that the United States needs (e.g., intrusion prevention systems, firewalls) into
140,000 to 190,000 more workers with analytical products and encouraging users to utilize IoT secu-
skills and 1.5 million managers and analysts with rity features that are built into their devices.
analytical skills to make business decisions based
on the analysis of big data (Manyika et al., 2011). 6.5. Chaos challenge

6.3. Privacy challenge The evolution of IoT technologies (e.g., chips,

sensors, wireless technologies) is in a hyper-
As is the case with smart health equipment and accelerated innovation cycle that is much faster
smart car emergency services, IoT devices can pro- than the typical consumer product innovation cycle.
vide a vast amount of data on IoT users location There are still competing standards, insufficient
and movements, health conditions, and purchasing security, privacy issues, complex communications,
preferencesall of which can spark significant pri- and proliferating numbers of poorly tested devices.
vacy concerns. Protecting privacy is often counter- If not designed carefully, multi-purpose devices and
productive to service providers in this scenario, as collaborative applications can turn our lives into
data generated by the IoT is key to improving chaos. In an unconnected world, a small error or
the quality of peoples lives and decreasing service mistake does not bring down a system; however, in a
providers costs by streamlining operations. The IoT is hyper-connected world, an error in one part of a
likely to improve the quality of peoples lives. system can cause disorder throughout. Smart home
According to the 2014 TRUSTe Internet of Things applications and medical monitoring and control
Privacy Index, only 22% of Internet users agreed that systems consist of interconnected sensors and com-
the benefits of smart devices outweighed any privacy munication devices and controllers. If a sensor of a
concerns (TRUSTe, 2014). While the IoT continues medical monitoring and control system malfunc-
to gain momentum through smart home systems tions, the controller may receive an incorrect sig-
and wearable devices, confidence in and acceptance nal, which may prove fatal to the patient. It is not
of the IoT will depend on the protection of users difficult to imagine smart home kits such as thermo-
privacy. stats and residential power meters breaking down or
being attacked by hackers, creating unexpected
6.4. Security challenge safety problems. The Internet bandwidth can get
saturated with data traffic of proliferating devices,
As a growing number and variety of connected creating system-wide performance problems. A sin-
devices are introduced into IoT networks, the gle device may have an insignificant problem, but
440 I. Lee, K. Lee

for the system as a whole, the chain reactions of Bradley, J., Barbier, J., & Handler, D. (2013). Embracing the
other connected devices can become disastrous. To Internet of Everything to capture your share of $14.4 trillion.
Cisco White Paper. Retrieved from http://www.cisco.com/
prevent chaos in the hyper-connected IoT world, web/about/ac79/docs/innov/IoE_Economy.pdf
businesses need to make every effort to reduce Chui, M., Loffler, M., & Roberts, R. (2010). The Internet of Things.
the complexity of connected systems, enhance McKinsey & Company. Retrieved from http://www.mckinsey.
the security and standardization of applications, com/insights/high_tech_telecoms_internet/the_internet_
and guarantee the safety and privacy of users any- of_things
Fichman, R., Keil, M., & Tiwana, A. (2005). Beyond valuation:
time, anywhere, on any device. Options Thinking in IT project management. California
Management Review, 47(2), 7496.
7. Conclusion Gartner. (2014, March 19). Gartner says the Internet of Things
will transform the data center. Retrieved from http://www.
gartner.com/newsroom/id/2684616
Because the IoT is such a recent development, there Gubbi, J., Buyya, R., Marusic, S., & Palaniswami, M. (2013).
is still a paucity of studies on the social, behavioral, Internet of Things (IoT): A vision, architectural elements,
economic, and managerial aspects of the IoT. This and future directions. Future Generation Computer Systems,
29(7), 16451660.
makes it very challenging for companies to make
Hewlett Packard. (2014, July 29). HP study reveals 70 percent of
informed decisions as regards IoT adoption/ Internet of Things devices vulnerable to attack. Retrieved
implementation. Our article is one of the first studies from http://www8.hp.com/us/en/hp-news/press-release.
on a conceptual model of IoT applications for enter- html?id=1744676#.VOTykPnF-ok
prises. In this article we identified three categories of Hsueh, C.-F., & Chang, M.-S. (2010). A model for intelligent
IoT applications: monitoring and control, big data transportation of perishable products. International Journal
of Intelligent Transportation Systems Research, 8(1), 3641.
and business analytics, and information sharing and Li, X., & Johnson, J. (2002). Evaluate IT investment opportunities
collaboration. We also presented investment oppor- using real options theory. Information Resources Management
tunities and investment evaluation with NPV and Journal, 15(3), 3247.
real options. Finally, we discussed five challenges Manyika, J., Chui, M., Brown, B., Bughin, J., Dobbs, R.,
in implementing IoT applications for enterprises. Roxburgh, C., et al. (2011, May). Big data: The next frontier
for innovation, competition, and productivity. McKinsey &
Company. Retrieved from http://www.mckinsey.com/
insights/business_technology/big_data_the_next_frontier_
Acknowledgment for_innovation
Sundmaeker, H., Guillemin, P., Friess, P., & Woelffle, S. (2010).
We offer special thanks to Editor Dr. Marc J. Vision and challenges for realising the Internet of Things.
Dollinger for his valuable comments and sugges- Accessible at http://www.researchgate.net/publication/
tions. 228664767_Vision_and_challenges_for_realising_the_
Internet_of_Things
TRUSTe. (2014). TRUSTe Internet of Things privacy indexUS
edition. Retrieved from http://www.truste.com/resources/
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