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【Smart Factory 2.0 series】Swim, not just float

Driving innovation and new business models through Industry 4.0

Recent events related to the pandemic have resulted in significant shifts to the global economic environment. In situations like these, many companies may choose to stay put and try to protect their positions in the status quo. However, this approach can leave companies exposed to the risk of being disrupted, as those companies that are lagging in their digital journeys may be more likely to fall prey to competitive pressures. It thus more important now than ever before for companies to focus on innovation in existing/new products and services and build new business models to enable them to thrive in the fast-evolving economic environment.

Industry 4.0 creates many opportunities for organizations to use advanced technologies across their entire value chains, driving operational excellence and business growth in multiple areas from products and services to supply chains and key stakeholders such as employees, partners, and customers.

In a recent global study of C-level executives, 56 percent of leaders noted that they prioritize investments in Industry 4.0 to protect their organizations from disruption by competitors, while just 26 percent prioritize Industry 4.0 investments with an eye toward disrupting competition with new ways of doing business. Further, 40 percent—fewer than half of respondents—noted that their investments prioritize developing innovative and differentiated products and services that could generate new sources of revenue. We have seen this sort of pattern play out in other studies, where leaders have reported prioritizing protection against external disruption over actively disrupting their own existing business models by margins of two-to-one more.

But why should this happen, given the myriad transformational opportunities that Industry 4.0 and digital transformation can offer business? From a behavioral economics standpoint, this aversion to disruption makes at least some sense, as individuals are driven more by a desire to protect themselves from loss rather than to risk what they have by seeking something wholly new. However, focusing solely on protection may turn out to be the greater risk.

Thus what is protection and disruption? Leveraging technology for protection involves using it to optimize existing processes—in other words, to do the same things better, faster, more safely, or more efficiently. Protection is often associated with defending or improving bottom lines through cost reduction and efficiency gains, and with operational excellence. On the other hand, using technology for disruption involves doing something wholly new—either to drive new processes, recognize new efficiencies, to grow revenue by developing new or innovative products and services, or to drive new business models.

Deloitte's research shows that, when done right, digital transformation has the potential to increase an organization’s revenue by up to 22 percent and EBIT by up to 19 percent. That's the key motivation for organizations to move forward transformative innovation. Further, organizations driven by innovation are nearly as likely to recognize significant return on investment (ROI) from transformative digital transformations as those that are driven by operational and production goals. Moreover, returns from investment focused on transformational innovation could be faster: Research shows that typically two years are enough to observe initial financial impacts, in terms of revenue and EBIT uplifts, from digital initiatives related to developing new products, services, and business models. At the same time, it could take up to five years to see the same results from more protective measures such as internal optimization.

Given that the benefits of digital transformation seem obvious, what are the barriers to prevent companies and leaders from pursuing transformative innovation? The answer involves multiple considerations: having the right strategic mindset, the right mix of people and culture, along with having a clear plan of action, including timing and focus of investments. These considerations include a more focused set of questions: Do leaders know what they want from technology, and do they have a clear strategy for what they are trying to achieve with it?

As companies evaluate the transition from protective strategies toward transformational innovation, they are likely to encounter an array of multidimensional challenges, including choice overload, lack of vision and short-term thinking, a strategic plan, right talent and skills and diverse perspectives.

In order to transit from operational excellence to transformational innovation, companies may start with leveraging advanced technologies for protection and process optimization, building a firm foundation of operational excellence. Or, they may play in multiple spaces simultaneously, following a protective strategy in one area while pursuing transformational innovation in another.

Operational activities drive the core of digital investments and tend to focus on streamlining and improving business processes, use of technology, and the flow of information to make organizations smarter about what they do—in other words, activities that might be classified as “protection” or, perhaps more accurately, an important foundational step toward a fuller transformation road map for innovation and growth. From a strategic perspective, leaders can pursue not only new technological capabilities to drive digital and physical connectivity but also use the resulting flows of data and information to identify new business opportunities, improve or build new products and services, and adapt more quickly to change.

Finally, companies need to build comprehensive approach to realize transformational innovation. Industry 4.0 provides a spectrum of opportunities, each with differentiated value and complexity and with impacts along the value chain. Depending on the organization, its goals, or even its industry, the pathways to operational excellence, growth, and innovation may differ tremendously—but leaders have a real opportunity to create a holistic, transformational approach to leveraging Industry 4.0 capabilities to drive a smarter, more flexible organization.

At the same time, however, companies still predominantly prioritize protection over disruption when making investments and executing their digital transformation efforts, leaving opportunities for more profound transformational change on the table. By shifting their mindset to recognize that the choice is not “either-or,” companies can build a firm foundation of operational excellence and technological infrastructure and capability that positions them to explore opportunities for innovation and transformational change.

Organizations can consider making technology investments as part of a long-term approach that is dynamic and ongoing: Think about investments that will have a short- term ROI impact and operational activities, but that will also enable the organization to build toward its long-term, transformational vision. It is also essential for organizations to foster a culture of cross- functional teaming and use external partners throughout their ecosystem, harnessing the end-to- end possibility of Industry 4.0 across the network.

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