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Strategies for Digitalization in Manufacturing Firms

by Joakim Björkdahl

Strategies for Digitalization in Manufacturing Firms
Many manufacturing firms has have seen digitalization as a means of increasing efficiency. But too few consider growth.


How should established manufacturing firms embrace digitalization? Digital transformation is more than the simple implementation of new technology. Instead, manufacturers should begin thinking of digitalization as an opportunity to revise practices, capabilities, and strategies at the firm level.

Paradigm Shift

Leading manufacturing firms have been relatively sheltered from the disruptive effects of digital transformation. They are highly vertically integrated, and compete with one another mostly on the basis of output quality and production efficiency. As a result, digitalization has so far enabled manufacturing firms to make further incremental improvements to internal processes.

But unlike technological developments of the past, digitalization holds much larger long-range implications - a paradigm shift that will affect firms across all sectors.



Instead of viewing digital transformation as a technological issue, manufacturing firms should begin to view the process as an opportunity to reassess core practices, strategies, and organizational forms.

Operational Efficiency

Under the current model, manufacturing firms are using digital technology in a wide variety of ways to improve internal efficiency.

For example, computer visualization systems that use machine learning algorithms can identify defects in the manufacturing process without the need for manual inspection. New sensors can collect data about the performance of machines - logging breakdowns and identifying abnormalities.

Additionally, products and services themselves are becoming more sophisticated as a result of new technology. Because of the falling cost of microchips and networking hardware, many products around the home have become “smart” nodes as part of the growing “Internet of Things” (IoT). Digitalization has also enabled manufacturers to bypass older distribution models, allowing them to sell to customers directly. Finally, digitalization has enabled more integration across value chains - many firms have invested in software that integrates with suppliers for streamlined materials procurement and inventory management, enhanced by machine learning.

Long-term Growth

In order to best position themselves for the future, however, manufacturing firms must extend their focus from efficiency to growth.

Driving growth can be difficult. Investment in growth strategy is inherently uncertain, and often requires firms to evaluate directions of development that are still emerging and might be poorly understood.

Firms must resolve several issues for their investments in growth to succeed.

The first involves agility. Few manufacturers have previous direct experience with emerging concepts - like manufacturing automation - and lack defined protocols for addressing those kinds of disruptive change. As a result, they’ll need to cultivate a pattern of broad observation and preference for agile experimentation.

Next, firms need to leverage data. In many cases, firms lack fine control of their data - meaning that it is difficult to share data. In cutting edge domains, internal and external collaboration is imperative. One potential solution (currently in use at Volvo) involves the creation of a “data lake,” a single centralized storage for all of the firm’s data that enables open-ended analysis and pattern-finding.

Attention to governance is also important. The firm’s governance structures need to be amended to allow for coordination of newly developed processes and capabilities.

Implications

Digitalization alone will not drive profitable growth. In the near-term, manufacturing firms should seek to make changes that are complementary to the core business and consistent with existing strategies. But to refocus on long-term growth, substantial investment in new processes, structures, and strategies will be necessary. Parallel to the near-term strategy, firms must leverage cooperative arrangements, effective analysis of data, and agile internal reconfiguration to focus on the long-range investments that are most likely to influence the development of the industry as a whole.

To find out more, please read the full article in California Management Review, Volume 62, Issue 4.


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California Management Review

Berkeley-Haas's Premier Management Journal

Published at Berkeley Haas for more than sixty years, California Management Review seeks to share knowledge that challenges convention and shows a better way of doing business.

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