Impact of Industry 4.0 on Business Models of SMEs: Lessons From Germany

by Kevin Madden

If you are a small-to-medium enterprise (SME), you have likely heard the phrase “Industry 4.0”. You may not, however, be convinced that it is relevant to your business. Many SMEs understand Industry 4.0 as an initiative that large corporations with exorbitant capital budgets, like Siemens or Boeing, are undertaking. However, regardless of company size, those who possess this viewpoint run the risk of missing out on the opportunities to innovate and increase competitiveness which can come from Industry 4.0. For SMEs especially, it is best not to think of Industry 4.0 as an end goal, but merely a direction which every company can move toward in some degree.

A recent paper written by three German business professors presents precisely how Industry 4.0 is affecting the business models of SMEs in Germany. The paper, coauthored by Julian Marius Müller, Oana Buliaga, and Kai-Ingo Voigt, is titled Fortune favors the prepared: How SMEs approach business model innovations in Industry 4.0 and was published in the peer-reviewed journal: Technological Processing and Social Change in January 2018.

The authors conducted interviews with executives from 68 German SMEs and asked questions about how aware they were of Industry 4.0 and whether it was causing them to innovate their business models. In compiling this data, the authors came to some interesting conclusions. To understand the paper in further detail and see the numerous findings, we recommend taking a look yourself, but it is worth highlighting two interesting findings in particular which are relevant to Ontario manufacturing SMEs.

First, they argue that there is significant opportunity for manufacturing SMEs to add value for customers by incorporating more services into their business models. In other words, on a continuum with product-oriented businesses on one end and service-oriented businesses on the other, manufacturing firms can enhance their business models by moving toward the services-oriented end. Such services include things like repair and maintenance, technological training, real-time product co-development and data analysis. While some of these services, like repair and maintenance, have traditionally been offered by manufacturers and are being improved by Industry 4.0, others are completely new. These offerings are enabled by Industry 4.0 when companies leverage technologies and processes like interconnected machinery, predictive failing mechanisms, sensors, big data, digital simulation, and robotics. The authors argue that adding such services enable manufacturers to take a more customer-focused approach, saving their customers time, effort and investments. If SMEs can increase their value-added in this way, the result will be closer customer relationships and a more flexible business model.

The second interesting finding is that due to the large number of companies interested in Industry 4.0 but unsure of where to start, there is ample opportunity for companies to partner both with educational institutions and other companies. The authors suggest that manufacturers can reduce the risk of adopting Industry 4.0 technologies by creating information-sharing platforms where SMEs can discuss different strategies for implementation. Furthermore, early-adopters of Industry 4.0 can become leaders for other SMEs looking to head in the same direction. There are at least two ways in which early-adopters can benefit from bringing others up to speed. First, they can monetize their advice by offering a variety of consulting services. Second, and more importantly, the more stakeholders leveraging Industry 4.0 in a company’s supply chain, the greater the benefit is for everyone involved. Industry 4.0 works best when companies are inter-connected and able to efficiently manage production across the entire supply chain.

While Ontario manufacturers should make note of the lessons learned from Germany, it is important to realize that the lessons from the paper should not be over-generalized. The authors only interviewed 68 companies and of those only 42 said Industry 4.0 had significant implications for their business model. The findings presented come from the lessons those 42 provided. Furthermore, there are significant economic and demographic differences between Germany and Ontario which could make lessons learned in Germany not directly applicable to Ontario.

However, Ontario manufacturing SMEs would still be wise to understand the experiences of those in Germany. The paper provides evidence that Industry 4.0 is a concept poised to significantly impact SMEs. In fact, many SMEs in Germany are already recognizing the immense benefits Industry 4.0 can have for their business models. With Industry 4.0 coming rapidly to Canada, our SMEs should take some time to evaluate whether they are truly ready for the road ahead.

Link to paper: https://www.sciencedirect.com/science/article/pii/S0040162517312039

(Image credit: https://www.ibm.com/blogs/internet-of-things/manufacturing-industry-4-0/)

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