Lessons from manufacturing's digital transformation

By: Jenny Isabel Menes

ONE of the imperatives that came out of the global pandemic was digital transformation. While many organizations had already begun their digital transformation journeys long before the pandemic, that unprecedented disruption accelerated most everyone's programs and underscored the importance of building resilience through digitalization. The journey is a long and costly one, though, regardless of an organization's size or industry. It takes time and resources to successfully adopt automation, data collection, data visualization and data analytics processes, and to translate those into cost savings and increased profits.

To better understand this journey toward digital maturity, Deloitte analyzed the digital transformation of global manufacturers, first in 2019 and then again in 2023, using a Digital Maturity Index (DMI). The DMI assesses organizations across 90 operational and strategic parameters to determine their digital archetype, which ranges from Digital Laggards to Digital Champions. In 2023, Deloitte surveyed over 800 C-level and business unit leaders from manufacturing companies, asking them about how they are shaping their organization's digital futures. Here are some of the trends our researchers noted from that study.

Significant progression

Four years ago, 78 percent of respondents said they had started transforming digitally; this year, that figure is at 98 percent. In the same period, organizations also increased their digital maturity by an average of 16 percent. In 2019, 24 percent of respondents fell within the Digital Potentials archetype. Just one step below the Digital Champions, this group is focused on developing their digital strategies hand in hand with operational excellence to achieve cost advantages. This year, 55 percent of respondents qualify as Potentials and only 3 percent remain Laggards (down by 15 percent from 2019). Laggards lack both strategic and operational digital skills and do not consistently use digitalization to improve overall efficiency.

Looking at the biggest gainers in terms of digital maturity, Deloitte found that these two key areas are critical to driving progress: (1) the implementation of digital technologies to modernize an organization's product or service architecture, and (2) the adoption of structured decision-making tools. Unlike in 2019, these actions emerged as even more important to achieving digital maturity than having management support digital transition plans.

Higher EBIT and revenue

If management support is taking a backseat in terms of the factors that drive digital maturity, it's probably because leaders have long been convinced of the business case for digitalization. This year's survey mirrors the 2019 results in that digitally mature companies realized more than 5 percent higher earnings before interest and taxes (EBIT) compared to companies that lag. Notably, companies in Japan and the United States saw an average EBIT uplift of 12.5 percent and an average revenue uplift of 21 percent due to investments in digital technologies.

What are these organizations doing right? They are using their digital investments to advance three primary areas: (1) creating digital products/services or adopting new business models quickly and more efficiently; (2) investing in digital platforms and defining clear organizational prerequisites for such investments; and (3) increasing efficiency along their entire value chain. They are also showing no signs of slowing down. Despite disruptive forces such as geopolitical tensions and the global shortage of semiconductors, Digital Champions and Potentials are committing about 10 percent more than the global average on their digital investments in an effort to continue their above-average performance.

An ecosystem approach can help

Along with the progress toward digital maturity, collaboration across corporate networks has also increased by 34 percent since 2019, which shows that organizations continue to lean on strategic relationships as part of their digital transformation plans. This ecosystem approach to digitalization can take on several forms. Many organizations turn to less formal types of collaborations, such as joint cloud initiatives, while others collaborate with other industry participants to create joint ecosystems that can meet the needs of their shared customer bases.

Regardless of the type of ecosystem the organizations pursue, they are focusing on these areas to ensure the effectivity of their circle of collaborators: (1) implementing a governance system that considers the needs of ecosystem participants and supports collaboration; (2) establishing a dynamic, open and flexible approach to cooperation in pursuit of continuous value creation; and (3) distributing joint resources evenly among ecosystem participants so that value is, likewise, evenly felt.

By tracking the digital transformation of these global manufacturers, Deloitte researchers hoped to better understand how long the journey usually takes and what levers business leaders should be pulling to accelerate their digital progress. While these organizations are in a league of their own in terms of size and the complexity of their operations, their experiences still reveal many lessons that other organizations can apply to their own digital transformations, with the most important one being to just get started. The benefits Digital Champions are reaping now and the uncertainty we all experienced during the pandemic should be enough of an impetus to commit to this transformative journey.

As published in The Manila Times on 13 November 2023. The author is an Audit & Assurance Partner at Deloitte Philippines