Definition of Digital Strategy
What is digital strategy when it comes to manufacturing? Digital Strategy is a sweeping term that describes the use of digital technology to drive value for an organization. The implementation of a digital strategy might include new technology such as artificial intelligence, automation, ecommerce, and other digital tools to accelerate innovation, streamline business processes, and improve customer experience.
When it comes to digital strategy, the bottom line is that in order achieve differentiation in today’s digital world, business leaders in manufacturing must back up any business strategy with a winning digital strategy.
My guest today is an expert in digital disruption. Magnus Ellstrom was the founder of Visma Proceedo, the first end-to-end digital procurement solution. Today, he consults with EY-Parthenon and he is a globally renowned expert in the digital transformation of manufacturing. Magnus Ellstrom, welcome to the podcast.
Magnus Ellstrom: Thanks a lot, Leah. Very nice to be here with you.
Leah Archibald: Let’s say I’m a manufacturer and my current business is making discreet industrial products. Why do I need a digital strategy? Can’t I just buy a software here and a software there? Why do I have to come up with a whole strategy for digitization?
Magnus Ellstrom: That’s actually a really good question, Leah. The reason you need to come up with a digital strategy is to safeguard your long-term competitiveness. Your current operating models might work in the short-term, but without a digital strategy you will may out on new opportunities as startups built on digital business models eat away at your market share.
To give a concrete example, many manufacturing companies today are pressured by increasing time-to-market requirements. Digital initiatives help speed up time-to-market by aligning stakeholders up and down the value chain.
(Note: McKinsey’s data on the acceleration of business practices post-pandemic backs up the importance of having a digital strategy to compete in the current business ecosystem.)
Case Studies in Digital Strategy
Magnus Ellstrom: Consider some case studies in digital strategy. We actually have analyzed all publicly traded American & European manufacturing companies to understand which ones have been the most successful in digital transformations in the eyes of the capital markets. After much discussion in the team internally, we set four criteria.
One would be the sales multiple over a long period of time. We said that should be at least 3x. Number two would be high in increasing earnings. Thirdly, and this was a quite difficult bar to meet, at least 10% of the total sales would come from software. And finally, you should have all that as a consistent strategy.
4 Criteria for a Successful Digital Strategy:
- Sales Multiplier = 3x
- Increasing Earnings at High End of Market
- Software = 10% of Sales
- Consistent Strategy for Digital Transformation
Magnus Ellstrom: When we run this analysis, can you guess how many companies met these criteria?
Leah Archibald: I actually am very afraid that it’s going to be very few companies. I would guess maybe 5% or 10% of manufacturing companies. What’s the real number?
Magnus Ellstrom: You should have stuck to 5-10 in actual numbers.
Leah Archibald: 5-10 in actual numbers, not percentages? So you can count on two hands the companies that are actually doing this.
Magnus Ellstrom: Exactly. There are actually only four companies: three American ones, and one European. After some research on the differentiation of these companies compared to others in the manufacturing ecosystem, we found several commonalities on the things that winning digital strategy does well.
One interesting takeaway is the ability of companies with a winning digital strategy to communicate targets to the capital markets. They have a roadmap for the profitability they plan to drive by improving the customer experience, reducing pricing, or process optimization. These analyses further emphasize the benefits of having your CIO align with other stakeholders to fully embrace a well thought out digital strategy.
Leah Archibald: How would you define digital strategy in manufacturing?
Do You Need a Digital Strategy?
Magnus Ellstrom: In a sense, a digital strategy is similar to any normal business strategy. You have a picture of where you want to go. You analyze the market and your competitors. And you develop a roadmap to move from where you are today to where you want to go. So a good question is: Do you need a separate digital strategy? Ideally the answer would be no. But time and again, we see that digital opportunities and risks are being overlooked in strategy work. So in this case, you do need to think about digital initiatives within the scope of your strategy setting.
You could argue that most discreet manufacturers can survive the short-term — the next three to five years — without a good digital strategy. But the trend is crystal clear. The longer you wait for a good comprehensive digital strategy, the more expensive and difficult it will be to play a catch-up game later. Putting together a digital strategy now allows you sufficient time to fully analyze the implications of your digital initiatives and what that means for your business.
Leah Archibald: This is exactly the predicament that many CEOs, or even CIOs find themselves in. They say, “Well we’ve invested in a certain digital platforms. We have a PLM system. We have CAD models of all our products. We have digital twins. But then when we get them to our suppliers, we have to export them into 2D models. We have to mark up the 2D models.” So there are digital assets that the company has in place, but there’s not a whole digital strategy that could actually deliver value to the organization. I think what you’re saying from your research is that not a lot of manufacturing companies are truly leveraging all the digital assets they have.
Magnus Ellstrom: Having that comprehensiveness is not something that we see too often. If you ask 100 companies, 99 will say that they have a digital strategy in some shape or form. But it’s usually isolated. They’ve contracted with a few digital providers. But there’s no cohesive strategy throughout the value chain.
Leah Archibald: What I love in your methodology is that you’ve really turned digital strategy into a numerical evaluation for the enterprise. You’re really asking: What does this deliver in dollar and cents value to the enterprise?
Magnus Ellstrom: I think it’s important to start with business strategy: What do we want to achieve? It sounds ridiculously basic, doesn’t it? But it’s exactly that. If the competition is beating you on on-time deliveries and that’s critical, then you need to solve that problem. Digital technology will be part of that strategy.
Leah Archibald: Start with the pain point. What operating models aren’t working? Where is my current business falling short? Start with digital platforms or digital services to solve those problems, and branch out from there. In the end, you can get to the digital transformation of the whole business, but it doesn’t start from there.
Magnus Ellstrom: That’s exactly right. The highest value will be improvements in internal efficiency — automation, or pricing improvements, for example. Once you have these new operating models in place, then you can go looking for new opportunities. How can you find new revenue streams from your digital differentiation?
Leah Archibald: So you plan your digital strategy, you implement to get efficiency, and then the third step is you capitalize on that. We’ll have to talk about that one in a later podcast. It just goes to show that there are real quantifiable results to pursuing a digital strategy. Magnus Ellstrom, thank you so much for joining me on the podcast today.
Magnus Ellstrom: Thanks a lot, Leah, for having me. It’s been a pleasure.