Small and medium-sized enterprises need to do more than digitalize processes – they also need to keep overhauling their business models
The discussion surrounding digitalization and digital transformation has been a wake-up call for industry. Succeeding with digital transformation is often seen as a do-or-die issue in German industry, since the most recent advances in technology have every potential to disrupt business models – in ways that have probably never been seen before. In the maelstrom of rapid change and the breakdown of existing business models large parts of medium-sized companies have to assert their existence. Prof. Dr.-Ing. Jörg W. Fischer, director of the Steinbeis Transfer Center for Computer Applications in Engineering and professor of production management and virtual factories at Karlsruhe University of Applied Sciences, discusses the steps that SMEs can take to deal with this situation, and the role played by “configure to order.”
For a long time – almost unnoticed by the general public and largely unaffected by the discussion surrounding digitalization – small and medium-sized enterprises have been undergoing sweeping changes, shifting away from engineer-to-order (ETO) and moving closer to configure-to-order (CTO). Traditional mechanical engineering and machine construction used to be driven by ETO. This is where a made-to-measure solution is developed for clients to give them a custom-designed machine or equipment that they need. The ETO approach is a good fit with the trend toward individualization, but it also causes a whole series of problems. Because clients have to bear high development costs themselves, the machines or equipment they want to order is often too expensive. On top of that, the approach means that delivery times can often be up to nine or even twelve months. In the fast-moving and dynamic markets of today, this is too long. Most potential customers cannot plan around such long cycles, so they order the machines or equipment they need from companies with shorter delivery times. For businesses working according to ETO principles, it may not take long for this to threaten the existence of the company.
CONFIGURE-TO-ORDER: ADVANTAGES AND CHALLENGES
One way to get around this problem is to switch to CTO. The CTO approach gives customers predefined options so that they can configure products according to their requirements. Any possible configurations have been thought about in advance and ideally even developed in advance. Companies that succeed with this transition can cut delivery times from months to several days – with significant cost reductions.
The shift from ETO to CTO entails the introduction of completely new process patterns, which also entail changes throughout the company. These process patterns can only be introduced by using the very latest IT systems, and this also makes comprehensive digitalization in product development and order processing necessary. At many small and medium-sized business enterprises, which are typically organized according to classic functional structures, such changes are often impeded by existing departmental boundaries. Companies that recognize this problem frequently consider moving to a process-based organization. This often involves introducing overarching departments, such as a project management office (PMO), process management, or organization-based development. This diminishes the previous dominance of traditional, functional departments. Since this transition from ETO to CTO involves interdepartmental digitalization, if necessary central departments have to be set up. The aim of this is to plan the digitalization process at an overarching level, and sometimes companies introduce a chief process officer (CPO) or chief digital officer (CDO), whose job is to manage the overall digital transformation from the center.
DIGITALIZATION VS. DIGITAL TRANSFORMATION
All of these measures are important and they often lay a foundation for the journey ahead. Despite this, such digitalization measures should not be confused with the required digital transformation, because they will be of little help to a company if the previous business model is disrupted. This is where one sees the difference between digitalization and digital transformation. Digitalization is about the (part-)automation of business processes by introducing modern software solutions, whereas digital transformation is about a change in the company, even extending to new digital business models. In essence, the question is how a company can earn money in the future if its current business models fall apart. For example, what if the conventional approach of selling products directly to customers becomes the selling of services, as has happened in many sectors of industry? Is the German Mittelstand ready for that? And what happens if being able to integrate a supplied product into new scenarios suddenly becomes a key factor driving purchasing decisions?
To understand the implications of all this, we can look at a scenario involving cars, looking for a parking space, and a parking garage: No driver wants to waste time looking for a parking space. So it’s more than likely that customers will expect vehicles to find somewhere to park themselves. In the future, this will result in an interactive scenario comprising vehicles, providers of parking lots, and a central platform, and everything will communicate with everything else to guide vehicles independently to free parking spaces. Companies that want to offer products for such a scenario will need to predict this situation in order to prepare their products or services now.
Small and medium-sized firms therefore face a number of challenges. On the one hand, changing from ETO to CTO requires digitalization of central processes. On the other, the disruption caused in business models fundamentally changes how firms will need to operate in the market. There is no patent recipe for solving this situation. But in summary, there are a number of points that a company really needs to think about:
- digitalizing internal processes, something that is required anyway
- continually thinking ahead about any possible changes that may come about in business models
- the willingness of shareholders and management to make quick and bold business decisions, including providing access to the necessary financial means
- establishing an organization which is capable of taking action, with flat hierarchies, in order to be in a position to implement decisions quickly and thus create a flexible digital core for the company, networking all required information, across the board.