Digialisation Dragons (Detail from a 15th century miniature in the British Library).
We hear about disruptive technologies and live in a VUCA world (Volatile, Uncertain, Complex, and Ambiguous). New technologies will change business models as they have always done. However the four VUCA factors have varying impacts on business “which defies confident diagnosis and befuddles executives” (Bennett & Lemoine, 2014).They identify four potent weapons to fight digitalisation dragons: agility, information, restructuring, and experimentation.
This blog compares earlier waves of technology with the digitalisation wave. Currently, 40–60 percent of customer value is not created within the focal company but in the supply chain (KPMG, 2016). The same holds for the purchasing-turnover ratio: 20 to 85 cents of every euro sold was purchased from suppliers (Van Weele et al., 2017, p. 35). In current business models B2B sales and procurement play dominant roles.
A first question is how digitalisation dragons will change B2B sales & procurement. Another question is whether the dragons are more relevant for larger organisations or also for SMEs.
NOTE1: For me it is difficult to define SMEs as they differ in behaviour, organisational structure, industry, efficiency in the operations, value propositions, or size. For simplicity, I assume that such organisation have a simpler structure, limited financial resources, are managed by the owner and often have less than50, or 100 and sometimes less than 250 employees. (Synonyms: small company, small business, small firm, SMB).
NOTE2: I write these blogs based on my recent observations and not always on thorough research. I hope to stimulate thinking and discussions, so please be critical and add comments.
Digital economy and procurement
For private consumers and large organisations the digital economy brings clear changes. Wyckoff (2016) at the OECD states:
“…we are just entering a significant period of ICT-induced structural change that will simply transform the economy and society for the better. We have seen nothing yet.”
Digitalisation will change the way in which companies do business and cooperate; the impact on procurement & sales is considered huge. Transactional B2B sales is already disappearing (see my previous blog) and operational procurement has largely been automated. This process will continue. A 2016 KMPG study sees two drivers with four procurement scenarios in 2035. It foresees either a centralisation or a de-centralisation of procurement. It also foresees that either algorithms / digitalisation becomes dominant or we enter an age of human centricity. This then yields 4 procurement scenarios as shown below (KPMG, 2016).
In 3 out of 4 scenarios the procurement function drastically changes. From a German Fraunhofer study (2016) two scenarios appear. One is that industrial procurement will become the pioneering driver to establish digital networks between different companies and advance innovations. In a more cautious scenario procurement is an important enabler but not a driver for collaboration and innovations. Both Fraunhofer scenarios see a strong digitalization trend in industry. An Aberdeen report (2016) on supply chains in 2030 states that frontrunners (best-in class companies) will point the direction based on leadership and adoption of technology and capabilities. And that the rest will follow.
These scenarios and assumptions could or could not all happen together based on situations and future developments. Moreover, SMEs could well take different routes as they have different organisational structures and drivers. After all, SMEs are not miniature versions of large companies (Burns, 2001; Ramsey, 2008; Welsh & White, 1981). Nevertheless, the scenarios give us something to think about.
Digitalisation and SMEs
A confusingly wide variety of definitions and manifestations exist on digitalisation. A 2016 study finds that German SMEs are relatively slow on ‘digitalisation’ due to shortage of IT skills, the lack of IT investments and relatively high costs. The study predicts that supply chains will force such SMEs to more digitalisation. Similarly, a Finnish study (2016) mentions increased use of smart phones, digital marketing, cloud services and social media. However, successful Finnish SMEs do not invest in digitalisation nor investigate new business opportunities. A PWC report (2015) finds that banks are only now offering digital services to their SME clients. A quick search on the Internet reveals more such reports.
Nevertheless, this is not the type of digitalisation that I think will make the distinctive difference in SME business models or B2B sales & procurement. It is not so much about the use of current enabling IT means per se (2013). I see digitalisation in the increased transparency of prices and other commercial and technical data, and in advanced software to analyse and predict patterns from such data. We also recognize digitalisation in various new technologies such as blockchains or additive manufacturing (see Part II).
Instead of merely changing support business functions, digitalisation is a combination of technologies that can significantly impact value chains of primary goods & services and consequently can disrupt supply chains and business models. That raises three questions for this Part I.
- Is digitalisation different from using enterprise systems?
Enterprise systems have been around for several decades; first on specific business functions such as logistics or finance. Since the eighties we have witnessed integration via for example enterprise resource planning software. This was first used in large businesses but increasingly also finds application in SMEs. Such software focuses on increasing internal efficiency which can give competitive advantages, though not sustainable in the VRIO framework thinking of Barney (1991) and the likes (See this link for an example of the VRIO framework). The new digitalisation wave is about reconfiguring business models. So there is a difference.
- Is digitalisation different from using e-commerce or e-procurement systems?
Discussing this question needs more \😊/ of your reading time. Clearly, e-commerce for consumers has changed the face of retail over the last decade. I ordered my first books on Amazon 18 years ago, and now my family could not do without e-tailers for travelling, booking hotels, shoes & clothes, or fresh food. Experts initially reassured brick & mortar retailers: your customers want personal advice on booking their travels; they like to try & feel shoes & clothes; and fresh food chains on the last mile do not work. They proved wrong and high streets & shopping malls are under threat. This development will continue. (See Hagberg (2016) for retail; Smartinsights (2015) for digital marketing).
In a B2B environment, electronic procurement has witnessed similar growth rates. Adoption started with larger companies. Early research already suggested that smaller companies generally lag in e-business adoption rates (NZ: Corner et al., 2002; UK: Quayle, 2003). One decade later Wood et al. (2014) still find leaders and followers in New Zealand logistics firms; the latter category is more cautious in information technology investments and extracts less value from such investments. Glass et al. (2014) find positive relations between the use of Internet and productivity in 5589 New Zealand companies, but witness a shallow use versus an advanced use.
E-procurement is a wide concept and is both used in public procurement and in large companies. It reduces buyer-seller transaction costs and thus increases operational & tactical efficiency within these companies. Additionally, e-commerce on the Internet in a B2C environment and e-procurement in a B2B or G2B environment usually increases competition and can create huge price pressures. Moreover, as mentioned in an earlier blog, digital procurement processes have changed how suppliers and procurement interact. Glas & Kleemann (2016) relate adoption of digitalisation to maturity levels in procurement. Taking this maturity perspective could partially help to explain different adoption rates.
To conclude: Adoption of e-commerce & e-procurement varies in companies, have created different business models, and have increased competition with prices pressures. Where are the differences?
(3) Is it different from global supply chains that replaced local manufacturing?
Globalisation has brought prosperity and goods & services from around the globe. One of the consequences however was that local manufacturing and short (local) supply chains disappeared. Hence local farmers sell their life-stock which is then shipped to another part of the country (or another part of a continent) to be processed into ham, sausages etc. These higher-value products are then shipped back to supermarkets near the original farmers. Low transportation costs and efficient large-scale meat processing plants have replaced local butchers or small slaughter houses. The same holds for agriculture produce. Using a New Zealand example: wood from New Zealand trees is processed in Indonesia and then returns as wood panels or furniture for New Zealand markets.
Recently however, we witness a revival of local or regional food chains (e.g. Fleury et al, 2016, Grando et al, 2015). The retail giant Ahold-Delhaize for example holds pilots on supplier diversity and with innovative products from small local suppliers (site in Dutch). Consumers value such regional products for sustainability, emotional or for quality reasons but may not be willing to pay a high price-premium. In the short run however, large-scale manufacturing and mass-retail will continue to exist although distribution channels will change.
To conclude: Reshoring may create new business models. Both local and regional supply chains need seller-buyer interactions; pricing remains an important aspect. In both cases procurement & sales play a role. So where are the differences?
Part II will continue to discuss the impact of ‘Digitalisation Dragons’ on B2B sales & procurement and on SMEs. Please stay tuned and provide your comments. Enjoy the week.