Downturn and efficiency effects: Investment in digitization despite economic downturn?

Digital revolution, Industry 4.0 or the next industrial revolution: however, you look at it, everyone is talking about the upcoming transformation. Economic and social effects are broadly discussed, and increases in efficiency are highly praised. And yet, a slight doubt remains whether decision-makers – especially in medium-sized enterprises – are investing sufficiently in their own future viability.

The current study Digital Transformation 2018 [German] shows that in 2018 digitization finally penetrated the upper levels of business leaders, and the inevitability of a transformation has certainly been recognized and addressed. According to McKinsey, however, only half of medium-sized enterprises have recognized that it represents an opportunity for their own company or even the possibility of a disruption of their own business model – and investing in something that supposedly holds more risks than opportunities does not appear to be very attractive, especially with a projected economic downturn. Nevertheless, it is a good idea.

Risk factor: downturn

There is a lot of talk about the need for the digitization of business processes up to the transformation of whole business models. But relatively little is being done. Despite recognizing the need for action, only around 6% of German companies polled in 2018 see themselves as “very well” positioned for the digital transformation, while in the USA it was already 47% last year*. This raises the question as to why stronger investment is not being made even though there is a sense that it is possible to do better.

An explanation for the reluctance is provided by statistics, which do currently show a good economy, but in the long-term forecast an economic slowdown and thus a decline or at least a slowing of growth. Just recently at a meeting of G20 finance ministers and national bank heads in Buenos Aires, the IMF warned that global economic growth could sink by up to half a percentage point in 2020. In times of low interest, national debt in Italy, weaker economic growth in China and growing protectionism around the world, investments in improving existing products make more sense to many decision-makers, who after all sometimes work at maximum capacity, than in a disruption of existing business models thought to be in the future. The disruptive power of the coming change is not yet perceptible, and companies still have a lot of room to maneuver. But one thing is certain. Not only is competition from other countries growing tremendously, the buying behavior of customers will change significantly. Here, too, the demand for efficiency and interconnectivity is growing ever louder.

Recognize efficiency effects: Why investment in digitization is nevertheless worth it

So-called industry digitization is supposed to make production processes more efficient, increase the flexibility of companies, allow them to become more “agile” and generate revenue growth. How exactly that is supposed to work and how the announced advantages are to be quantified is often still unclear. At the same time, a well-chosen digitization strategy not only covers the networking of machine systems, it can also optimize the interface to the customer and provide valuable approaches for the efficient networking of production and services. With this, digitization, used correctly, offers not just an opportunity for new, profitable growth. Companies which are well-prepared and understand how to use the transformation for themselves will able to achieve a long-term increase in value with targeted investments and ensure the future of the company. Who is able to adapt wins – and can emerge from the forecast downturn as a winner.

How that can work is demonstrated by pioneering projects such as Adidas’ Speedfactory or Wilo’s Smart Factory. Projects like this are certainly not the rule in Germany, but they demonstrate what is possible. And they clearly show that digitization not only holds opportunities for individual companies, but can also produce a renewed economic upswing at the same time. While 10 years ago major manufacturers were criticized for moving their production very purposefully to Eastern Europe or even Asia for lower personnel costs, today it is apparent that digitization is making production in Germany increasingly attractive. New, fully automated production technologies increase efficiency, thus enabling more cost-effective manufacturing than abroad. Current studies by the Verein Deutscher Ingenieure (VDI; Association of German Engineers), the University of Applied Sciences Karlsruhe and the Fraunhofer Institute for Systems and Innovation Research (ISI) confirm that digitization is bringing production back to Germany – because it is becoming more cost-effective.

Digitization – if you’re going to do it, do it right

In order not to risk leaving value creation to others in the future and, at the same time, avoiding the risk of bad investments, it is a good idea to proceed with small, but steady steps. An iterative procedure requires, above all, a long-term digitization strategy to be implemented consistently. A first crucial step could be to identify core business areas, reject less lucrative areas if necessary and, in the best case, recognize completely new potentials. That way, it will become clear early on what medium and long-term advantages will open up and what investments urgently need to be made. When proceeding this way, it can be helpful to define customer-oriented goals. The determination of current problem areas, such as higher product quality or shorter delivery times, precludes bad investments early and provides innovative answers with new approaches to long neglected problems. Following a clear definition of the core business, gradual digitization can be introduced. Even if they will certainly fall short in perspective, initial measures in the management area can often lead to a quick increase in efficiency with little effort. Still cautious mid-sized enterprises in particular can benefit very clearly from their strengths in the major subject of digitization. With long-term orientation, the pioneering spirit of mid-sized enterprises and the agility resulting from their smaller size, they frequently have an advantage over large corporations. (For more on this, see: Evolution, not revolution)

As a cornerstone of the German economy, medium-sized enterprises should not continue to rest on their laurels. All hidden champions need to quickly recognize opportunities and use them even more actively. It is time to make one thing very clear. The competition of the future will not come from your own industry, but rather will be driven by the digital players. Those who show courage now will win, because the downturn can be countered to a degree by targeted investment in digitization.

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