Digitizing the Value Chain: It’s Not Just About Technology

Pradeep K. Wahi with Philip R. Egert, PhD

It is hard to pick up any trade magazine these days and not see an article on the digital revolution in manufacturing.  Apparently, how to digitize the value chain is the question de jour across boardrooms and C-suites as companies continually seek new levels of competitive advantage.  But I frequently find that these articles don’t speak to the realities of actually moving towards a digitized value chain. This is especially true for small to medium sized businesses where decisions on capital investments in digital technologies often have a very human component, and are frequently based on criteria other than pure cost-benefit or risk-reward analyses.  With that perspective, I offer the following thoughts about the Industry 4.0 revolution and digitizing the value chain.

The Industry 4.0 Revolution Is Real and Will Be Disruptive

Industry 4.0 represents the fourth industrial revolution in manufacturing and industry. See Figure 1. The revolution is characterized by a convergence of the Industrial Internet of Things (IIoT), cyber-physical systems, advanced robotics, additive manufacturing, big data analytics, and virtual/augmented reality to list just a few. And, even more interesting and unlike the three previous industrial revolutions, Industry 4.0 represents the first convergence of two disconnected worlds: Information Technology and Operational Technology. In other words, Industry 4.0 bridges the digital and physical worlds through hyper-connected digital networks across the entire value chain, from design to after-sales service.

Figure 1

By definition, revolutions are disruptive, and Industry 4.0 is no exception. In fact, experts predict this new wave of revolution will be the catalyst for just as much change as those that came before. For example, historical technological and product developments enabled by steam power, electricity, and digital machinery were based on the interplay of new technologies with their contemporary social structures, but within a well understood separation of what was machine and what was human.  By contrast, Industry 4.0 focuses on how new and existing tools can be used in innovative ways (many yet unforeseen) in a hybrid digital-physical/social structure.

And because Industry 4.0 is a revolution it will also occur at very uneven speeds with a wide variation in implementation projects, especially in the small business manufacturing sector. A survey by McKinsey in January 2015 of 300 leading manufacturing executives found that less than half felt their companies were prepared for Industry 4.0 (1).  In Germany, where Industry 4.0 is a national-level funded industrial priority, less than 20% of small to medium sized companies had digitized portions of their value chain (2).

While multinationals and larger manufacturers have already started implementing some of the Industry 4.0 foundational technologies in their factories, like robotics, cloud computing, and 3D printing, the transition will be tougher for small and medium-sized companies. The latter makes it imperative that small businesses integrate digital strategies with new business models to survive. For example, a small auto parts manufacturer can begin selling the data produced by its fire protection sensors to insurance companies, and all of a sudden the small business has a new business model using previously unused data.

Planning and Commitment is Critical to Success

In spite of the widely acknowledged benefits of Industry 4.0 and the digital transformation of the value chain, over 80% of digital projects fail (3). Too many companies think of their digital technology investments as add-ons to an existing process in the value chain and fail to recognize the disruptive nature of their investments to both their employees and customers. Digitizing the value chain can be a make or break it decision for any sized company, but especially for small businesses. A decision of this magnitude cannot be delegated and must be made by the CEO; they must be personally involved and committed to the decision.

But once the decision has been made, the CEO needs a team of senior leaders who can execute the decision and drive the necessary day-to-day decisions that are required to realize the CEO’s vision.  This team needs to be carefully selected with complimentary skills.  Digitization affects almost every aspect of the value chain, which means that the senior leadership team must be interdisciplinary by design.  Building a digital frame of reference similar to one shown in Figure 2 will be useful in designing this senior leadership team.

Figure 2

Thinking back to the high rate of digitization failures, one of the characteristics of failure is that digitization is viewed as a technology or engineering problem and thus managed by the engineering or the IT department. The team doesn’t need to be large.  In fact, some of the more successful teams have only had two or three members. More important than size is their commitment to the digital vision, understanding of how a digital corporate culture relates to customer-centric values, and a realistic understanding of the risks involved.

Just as important as the digital transformation commitment and leadership is a carefully designed holistic plan. Unlike typical project plans, the digital transformation plan needs to recognize the organizational and cultural challenges that accompany transformation.  For example, obviously the plan needs an honest assessment of projected benefits, time lines, investments, resources, sequences, dependencies, and off-ramps.

The plan also needs designed-in quick-hits that can maintain employee and stakeholder momentum and support while producing income and cost savings that can be reinvested in the transformation. The building blocks of digital transformation will be integrated into the value chain on an incremental basis. Digital transformation does not have to be a huge single investment; a series of well-planned incremental steps can be just as effective. Many of the individual hardware pieces are technologically mature enough for integration today, whereas end-to-end management systems are still in their infancy. This incremental characteristic is why an overarching plan is so important to guide the incremental investments towards a long-term vision.

It’s Still About People

Frequently lost in the technological excitement of Industry 4.0 is the fact that humans still make businesses run, from the back offices to the manufacturing floor and on to the front line sales offices. Revolutions always produce winners and losers. And, in the small business environment, those winners and losers have names and faces. Industry 4.0 will make some jobs obsolete, it will create new jobs that don’t exist today, and it will transform other jobs, both de-skilling as well as up-skilling. It will also place increased demands on employers to find employees with skills that either don’t exist today or are in limited supply.

For example, it is generally conceded that Industry 4.0 will replace low-skilled laborers who perform simple, repetitive tasks; much like the first wave of factory automation did in the 1960s. What is not well understood though is how advances in cognitive robotics and human-machine interfaces driven by AI will transform high-skilled machine operators’ jobs.  For example, will those individuals only be required until they are fully replaced by robotics or will their jobs transform into new skills required to maintain the robots?  Similarly, when Industry 4.0 is pushed to its end point and directly interfaces with the customer, what becomes of the traditional white-collar sales office functions. Do they simply disappear, replaced by customer-customized online ordering, or are they transformed into a different high-value customer service function. Similarly, what becomes of the traditional supply chain functions when machines with predictive maintenance sensors can directly contact the vendor and order a replacement part. Do traditional purchasing agents become quality assurance specialists, or do their jobs simply disappear.

The fact that nobody yet knows the answer to these questions makes it imperative that businesses develop strategic workforce plans that are fully integrated with their digital strategies. This plan must be based on a thorough analysis of the long-term impacts on the workforce, across the entire value chain, not just selected portions that are easy to implement.  It must also recognize and identify those positions that will be transformed as well as created along with supporting recruiting and vocational training.

Many advocates of Industry 4.0 like to talk about how digital transformation will make companies more attractive employers, better able to retain their workers through improved working conditions, and increase overall employment.  These are speculative assertions at this point. There is no question that Industry 4.0 will alienate a big sector of the work force economy. And, even the most ardent advocates of retraining and new forms of worker education have not addressed the question of the retraining investments required or the trade-offs that companies make when deciding to retrain older workers. At the macro level, the long-term impact of Industry 4.0 is probably a net positive for workers. But small businesses do not operate at a macro level and must find a way of navigating the workforce factors at the micro level to make their digital transformation investments successful.


World Economic Forum founder Klaus Schwab said, “Contrary to the previous industrial revolutions, this one [Industry 4.0] is evolving at an exponential rather than linear pace…It is not only changing the ‘what’ and the ‘how’ of doing things, but also ‘who’ we are. (4)” There is no question that Industry 4.0 is a revolutionary approach to both manufacturing techniques and redefining the value chain. The concept will push companies to a new level of optimization and productivity. Customers will also enjoy a new level of personally customized products that may have never been available before.

It’s not a far-fetched statement to say that digital is the defining challenge for today’s CEOs. The decisions made today to address this challenge will determine whether their companies are the beneficiaries or victims of the Industry 4.0 revolution. But the challenges to realizing the benefits of Industry 4.0 are real and should not be minimized. Hopefully, the thoughts offered in this paper will serve as a starting point for being the beneficiary of a digital transformation.

By Pradeep K. Wahi with Philip R. Egert, PhD:

Pradeep Wahi
Pradeep K. Wahi

Mr. Pradeep K. Wahi is a founding member of Strategy and Technology Advisors to Management 21, (STAM21).  STAM21 provides management and advisory support to executives in the areas of mergers & acquisition, acquisition support, technology investment recommendations, and program management.  He is also Chairman of the Board of Antenna Research Associates, Inc. (ARA), a technology and manufacturing company with facilities in Maryland, Massachusetts and Europe. Mr. Wahi was initially trained as an engineer at India’s prestigious Indian Institute of Technology (ITT) in Kanpur, and has an MBA from the Wharton School of Business. He was recognized as a Distinguished Alumnus of IIT Kanpur in the Greater Washington Area, and was awarded the Joseph Wharton Award by the University of Pennsylvania Wharton Club of Washington DC in 2008. Email: pwahi@ara-inc.com.

Philip Egert
Philip R. Egert

Dr. Philip R. Egert is a Member and General Manager of Strategy and Technology Advisors to Management 21, (STAM21). Dr. Egert has over 35 years of experience as both a corporate executive and small business entrepreneur. He has a PhD and MS in Science and Technology Studies from Virginia Tech, an MBA in Marketing from Old Dominion University, and a BA in History from the University of Virginia, Charlottesville, VA.  Email: pegert@stam21.com.