The Challenges of Industry 4.0 for Small and Medium Sized Enterprises

– by Dr. Christian Schröder –

It is often lamented that small and mid-sized companies show greater deficits in the implemention of Industry 4.0 compared to big companies. We wanted to know if this impression is correct or not: we examined the relationship between different firm-specific factors and the degree to which small and medium-sized enterprises digitized their business processes in the manufacturing sector in the three German federal states North Rhine-Westphalia, Bavaria, and Baden-Wuerttemberg. We measured the degree of digital interconnection between the business units as well to external partners and the use of smart products because we understand Industry 4.0 as the digital interconnection of all entities which are involved in the value-added process. However beside this objective measurement we also asked the companies to assess their potential for digitization.

The results of our survey: almost one third of the 1400 respondents feel (very) good positioned in the digitization process. This opinion is especially shared by respondents of small companies. As a result, they see less potential to further digitize their business processes as compared to their larger counterparts.

How do you assess the potential for digitization in your enterprise? 

Source: IfM Bonn Survey 2016.

Small businesses overestimate their degree of digitization

In fact, this evaluation is misleading: our results show that especially small companies are comparatively less involved in exchanging data between their own departments and the departments of other companies. This becomes evident when considering firms that have not taken any steps to digitize their production department and, hence, can be seen as digital laggards: small businesses belong to this group of companies four times more often than medium and large sized companies do.

Digitization in small companies is mainly motivated by cutting costs. In most of the cases, the firms exchange data with suppliers and service companies, whereas sales, purchasing, and controlling departments are usually involved too. But only a minority of small and medium-sized companies is engaged in the implementation of data based business models or the production of smart products. In the survey they identified as main obstacles the organizational problems. This is one problem – but not the only one. Only a few small and medium-sized companies take specific activities or develop a strategy to deal with the increasing digitalization.

Digital strategies pay off

Of course, it is difficult to observe all the new technolgies besides the daily business. And it is also true that especially the small companies haven’t the same finance power than the bigger one. But for the future, it is mandatory for the small and also most of the medium-sized companies to develop a digital strategy if they want to safeguard their competitiveness. This strategy should encompass the intended future picture of the business model which builds on existing strengths as well as the transparent and open communication of this vision toward the company’s staff. The next step is to adopt the appropriate technology and to develop organizational structures and processes that support the digital business transformation. At the same time it is necessary to empower the staff by using this new technologies and to implement an innovation-friendly culture. In doing so firms are able to respond to new challenges in a fast yet flexible manner.

Dr. Christian Schröder is project manager of the IfM Bonn (Institut für Mittel-standsforschung). He concentrates on doing research of digitization with his team since several years. Some other studies in his research field are “Disruptive Innovations: Chances and Risks for the German Mittelstand”, “The Challenges of Industry 4.0 for Small and Medium-sized Enterprises” and “Relevance of the Digitalization for the German Mittelstand”.