DIGITISING THE MANUFACTURING SME – DON'T MISS YOUR CHANCE

Around one per cent of almost 22 million SMEs operating within EU is categorised medium-sized (Annual Report on European SMEs 2013/2014, European Commission).

Roughly, a quarter of this amount is constituted by SMEs in the manufacturing sector. The total number of SMEs in Denmark is 179,843 and 3,347, respectively. In relative terms, this corresponds to 99.7% and 1.1% of the total number of enterprises (SBA Factsheet 2013, Denmark).

Yet, few would argue that SMEs—despite their wealth in numbers—belong to a segment constantly struggling to survive. Many reasons exist for that. Most prominently, SMEs generally do not carry sufficient critical mass to make a difference in the market; dominating cost focus tends to prevent growth objectives, same goes with risk aversion. Similarly, funding problems remains a recurring issue for numerous SMEs as well as strategic focus typically attracts a minority of management teams populating most SME corner offices; and for obvious reasons. They cannot afford to apply a long-term view, typically succombing to a short term, often day-to-day investment horizon.

In concert, these issues keep resurfacing as key contributors when failing to deliver a competitive performance, whilst simultaneously keeping the very same organisations from maintaining innovatively based business strategies. They also do not prove strong in attracting the needed competencies for that.

Particularly with regard to SMEs in the manufacturing sector, reports in both USA and EU highlight performance and characteristics, including influencing trade-barriers (USITC, 2014; European Commission [EU], 2012/13). The European Commission emphasises the difference between value-added performance of SMEs and large enterprises over the period 2008 to 2012, reflecting weakness in domestic demand (recession years). While typically a key market driver for SMEs, large enterprises benefit due to better export performance. Thus, while remaining a key contributor to EU growth—particularly when knowledge intensive—this is harmful to the strategically important manufacturing sector SMEs, performing worse than services SMEs from 2008-2012.

Sadly acknowledging the suffering of business environments across EU caused by the global recession, data still points to another critical set of strategic challenges. Specifically adding pressure to the manufacturing SME segment, digitised businesses and digital start-ups appear to be gaining momentum, applying advanced business via service-oriented enterprises models at the cost of e.g. the manufacturing sector SMEs through competition. Consequently, web-based service providers successfully exploit markets without having to fund costly infrastructures, and simply competing effectively by mining data based on IoT, predictive analytics.

Hence, new competitors—capable of doing a lot of damage to incumbents—materialise almost unexpected as smaller and agile companies. In retailing, entrepreneurs are “…cherry-picking subcategories of products and severely undercutting pricing on small volumes, forcing bigger companies to do the same….” (McKinsey Quarterly, 2014)**. In turn, costs of maintaining existing infrastructures—still predominantly supporting ‘analogue’ market conditions—are likely to be surging, subsequently challenging SMEs on re-orchestrating their strategies or soon being outcompeted, if failing to adapt to the new reality.

Earlier this year, Confederation of Danish Industry (DI)* launched a report on the performance of Danish SMEs when examining digital investments. It may not come as a surprise that conclusions arrive at a business segment generally lagging sufficient readiness in meeting a digital future. While large companies on average invest approximately EUR10K per employee on IT, SMEs place less than half (approximately EUR4K).

More interestingly, however, the report shows that differences exist across the SME population examined. More than eight out of ten SMEs with >100 employees believe that digitisation will affect growth and number of employees in a positive way in years to come. Correspondingly, less than seven out of ten in the group of SMEs with <100 employees believe that this is not the case. The good news is that a small group of SMEs across the population investigated—ranging from small start-ups to traditional enterprises—partly or fully embrace the digital future. The bad news is that the remaining group of companies only partly or not at all considers initiatives matching the rapidly changing market conditions.

Reasons for that paradigm appear to resemble aforementioned issues. Difficulties attracting the needed competencies to maintain and develop digital solutions as well as failure eying perspectives of business cases remain key with numerous management teams to refraining from pushing SME organisations further into building a future on IoT and big data business. As such, digitisation affects market dynamics in at least two critically impacting ways.

First, today data represents a pivotal resource to the companies understanding how to take advantage of it, rather than just a decade ago when the strategic approach to data was not critical. Operating competitively in a market nowadays implies mobilisation and application of upgraded AND digitised processes, fed by data on customers, product data, resource consumption, etc. This represents just one aspect of the agile business organisation. Other aspects point to the way the organisation collects analyses and subsequently applies data (predictive analytics). Did the organisation adopt a big data strategy? Which competencies are currently staffing the data team?

Second, business models are turned upside down by new entrants, skilfully taking advantage of the market opportunities unserved by incumbents while applying an entirely new way of serving customers. In turn, service solutions contain tailor-made product offerings, running an on-demand consumption concept. The idea: customers do not have to pay more than they consume. All data is logged and analysed, including details on the customer journey from first contact to the ‘Thank you, for your order’ message appears on customers’ screens. In turn, this serves as a resource in the short run, showing customers new products. On a long-term basis, the company is able to create a significantly enhanced opportunity for running an innovation strategy, e.g. through interpreting new concepts from data patterns.

The question, though, remains what managers should do in facing challenges of this kind. In any event, no matter what the board decides, making strategic choices typically imply de-selection of alternatives, including the nagging question persists in doing nothing. To the extent, management decides to move forward with a digital strategy, the board should be backing such an initiative, including the fact that it may not succeed overnight. The key questions are of course why, how and what to do, potentially also including a review of the way the organisation makes money in the market as well as how the entire business case is expected to create growth and profit in the short and/or long run.

The word why is important here. Many executives are misled in their efforts introducing initiatives on IoT and big-data, typically because either the timing or invested capital fails to produce the expected profit, both in the short and the long run. Potentially, this may lead to a missed chance of being part of the game, at all, straining existing funding issues further.

Instead, they should be asking themselves: Do we do this just because everyone else does? What is the trend in our own industry? Is there a chance we might act first-movers in our industry? What is the right thing for our organisation to do? What are costs of waiting? What, if we do not do anything, can we afford that? How is competition affected/changing in our market and how can we possibly get around that? What will customers do and what are their expectations? Etc.

Adjusting e.g. the manufacturing SME organisation to face a digital future may not be as complicated for one company as it is for the other. Many already succeeded in upgrading both strategies and organisations in aligning with new market dynamics. Still, strategic considerations are always imperative ensuring that the organisation executes at least a relevant counter-move to market conditions that both the board, executive management and employees can relate to.

Analyse the quick wins and options up for grabs. Carefully consider how and where in the organisation a digital strategy will affect the most. Many people are scared that automation and robotech will steal away their jobs. Consult colleagues in your industry, run a PoC, integrate [a] change management [program] and most of all inform employees. Take advantage of all the EU-based funding programs , crowd-funding alternatives, national funding programs, etc.

The ones actually succeeding in digitising their businesses similarly get to enjoy that access to new types of resources enables them to look differently at how to meet the demanding and constantly dynamic task of fulfilling customers' needs. Also, digitising your business means a ticket to entering entirely new markets far away from your existing ones, effectively and efficiently co-operating with new supplier networks. Finally, initiatives with agile organisations may potentially release the much needed capital required for the business to think strategically and innovatively.

Can your organisation afford not to engage? What price are you willing to pay to stay competitive in your market?

*) 'Analyse Digitale investeringer SMV', Confederation of Danish Industry (DI) report on digital investment volume among SMEs in Denmark, February 2017

**) Hirt, Martin and Willmott, Paul, “Strategic principles for competing in the digital age”, McKinsey Quarterly, May 2014