Now or Never: Digital Transformation towards the ‘Next Normal’

By Lorenzo Veronesi, Research Manager, IDC Manufacturing Insights - EMEA

Lorenzo Veronesi, Research Manager, IDC Manufacturing Insights - EMEA
Lorenzo Veronesi, Research Manager, IDC Manufacturing Insights – EMEA

The COVID-19 pandemic has created – literally – an unprecedented disruption. We say “literally” because economists agree now that we are living through the deepest economic crisis in the industrial age. As matter of quantification, consensus economic forecasts (July 2020) converge to a 5.3% and an 8.1% decrease in Y-o-Y GPD by 2020 for the US and Euro Area respectively. (Source: Consensus Forecasts, July 2020).

In this scathing scenario, the question many companies in the manufacturing industry may be asking themselves is “why and how should we continue with digital transformation and relevant investments, when we risk running out of business due to coronavirus crisis?”

Thankfully, even though manufacturers are dealing with accelerated disruption, our research shows that they haven’t lost their focus on innovation and technology. In fact, at this point in time, we can confidently say that COVID-19 will not stop digitization. The contrary is actually the case, as an unexpected crisis – call it black swan – such as this, will provide a new sense of urgency for manufacturers to strengthen their businesses through digitization.

From our recent recurring surveys tracking the impact of COVID-19 on IT strategies, we can see that there is certainly no inertia in decision-making. Inflamed by the crisis, companies are in competitive overdrive. For example, in Europe, nearly 70% of manufacturers declare that they are now willing to take advantage of their competitors’ weaknesses and capture market share. At the same time, manufacturers are aware that they cannot stick to the old ways of working and are aggressively seeking out emerging technology to create advantage even if it means some projects may sometimes fail. Therefore, nearly 50% report that they plan to be leaders and early adopters of new technology, and even willing to take a few risks.

So, business and digital transformation is key to success today. But what are the implications on manufacturers’ IT strategies? IDC identifies three main stages that manufacturers must consider:

1) The “Quick Reaction”. Many companies went through this phase already. Companies were forced to focus on short-term, actionable initiatives to cope with the first wave of the disruption. As we gathered from our conversations with manufacturing companies, initiatives of this kind entailed for example restructuring the processes to make them fit for purpose in a socially-distanced world, trying to decentralize work enabling UC&C (Unified Communications and Collaboration), assessing the risk of their more strategic suppliers and investing in extra resources to model the cash flow impact of the crisis.

2) The “Resilient Organization”. But as for the present moment, the industry is facing having to go through a very bumpy ride for the next 4-10 months. Companies have to re-build new capabilities to change their way of working in accordance to the new market requirements that will arise. For example, the need to rapidly adapt to a mutating demand, and to buffer the consequent bullwhip effect, to maintain a viable level of production considering social distancing. In this scenario, where we expect the pandemic to heavily disrupt both the demand behavior as well as the supply and capability of companies to deliver goods to the market, success will entail a complete new set of skills which are all centered around having higher operational agility, and leveraging real-time demand intelligence and process visibility. It is important to note that in this critical time, companies can’t afford to spend money without seeing immediate ROI. So, ideally, any money spent must bring a direct contribution to increasing productivity – in other words – enabling companies to do more with less and improve their decision-making processes.

3) The “Next Normal”. After this period, markets will eventually settle to a new, post-pandemic normal, which will only partially resemble the world we are used to now. Manufacturing will possibly be based on smaller market pockets and shorter value chains. In this environment, companies will have to reconsider their supply chain footprint and transform their operations to make them fit for purpose and ready for the next disruption. Successful companies will be those that will be able to embed new digital skills in their processes in order to cope with the unprecedented challenges this time is posing. IDC identifies the following key transformational drivers:

• New realities and customer expectations will redefine product and service expectations.
• Economies of scale will be challenged by the need for mass customization and social distancing.
• Products, services and relationships will shift from face-to-face to digital.
• Work-from-home, scalability, security, throughput and redefining internal processes for remote access and communications require immediate attention but will have lasting effects.
• Resiliency in supply will be balanced against efficiencies as automation is applied to operations.
• Adaptability will take greater importance in business and operating strategies.

At this point, an important consideration must be made. Before this crisis unfolded, a significant digital gap between highest and lowest digital performers was already unfolding, and this is expected to further widen up. To measure the impact of digital transformation on companies’ performance in terms of revenue and gross profit, IDC used two indexes: the revenue performance index (RPI) and the profit performance index (PPI). Both indexes measure how the revenue and profit performances of non-digital companies has declined since 2013. Revenue and profit of digital companies, on the other hand, have both improved since 2013 and accelerated in 2018 as the ROI of their digital investment materialized. As a result, by the end of 2019, digitally-mature companies were outperforming their non-digital competitors, and the divide only seems to widen as the business value of digital investments translates into (further) competitive advantage.

So, this is the time for digital transformation, now or never. Necessity is the mother of invention, and companies will have to adapt and transform. Technology awareness is the compass to navigate this crisis and any others to come. And today change is possible, because tech supply ecosystems have evolved rapidly and are keen to push relevant solutions on the market.

In this transformation journey, manufacturers will have to establish information-based processes to enable dynamic business models. In particular, they will have to reconsider their traditional, global, cost-optimized value chains and put in place more agile, connected, and far reaching value networks that are capable to buffer the sudden disruptions, from “just-in-time” to ”just-in-case”. As business rules are heading towards this new direction, companies will need to stretch their capabilities in areas that internal business habits, resistance to change, and generally lack of lateral thinking prevented investing into in the past. Survival of the fittest is linked not to size or strength but to resilience and the ability to change — to move quickly, adapt, seize opportunities, and be ready for the next disruption.