Technical University of Munich research shows medium-sized enterprises show lack a digitalization strategy
Almost two thirds of small and medium-sized enterprises (SMEs) in the Heilbronn-Franken region have not yet developed a strategy for the digital transformation. More than half of them have no plans to develop such a strategy in the future. This was revealed in a major survey conducted by researchers at the TUM Campus Heilbronn. The biggest obstacles mentioned by the companies in this sector – known as the Mittelstand – were an inadequate digital infrastructure, skills shortages and too much bureaucracy. The region is seen as typical of the German Mittelstand.
The Mittelstand is often seen as the backbone of the German economy. This makes it all the more important to understand how well these companies are handling the digitalization transition. To study this question, a team of researchers at the Technical University of Munich (TUM) surveyed around 370 SMEs in the services, manufacturing, retail and wholesale sectors in Heilbronn-Franken. The manufacturing sector was represented by companies involved in vehicle and machinery manufacturing, metal processing, chemicals, construction and food, among others. Around two thirds of the surveyed companies are family owned.
The region has a strong Mittelstand presence, including many so-called hidden champions. These are highly innovative companies characterized by low debt-to-equity ratios, high export quotas and long traditions. Consequently, the region can be seen as a model for the German Mittelstand as a whole.
Majority of companies perceive digitalization as a one-off project
The study shows: nearly two thirds (62%) of the companies do not yet have a digital transformation strategy. More than half of them also have no plans to strategically address the issue in the future. Even among the strategically well-positioned enterprises, around half see digitalization only as a one-off project and not as an ongoing process.
The bigger the company, the more likely it is to have a concept in place. But even among those with more than 250 employees, nearly one third have no strategy.
Only 2 percent using AI
Most companies taking a strategic approach to digitalization are doing so with the goal of reducing costs, for example by automating processes. Only one in four is trying to use digital technologies to develop innovations, adopt new business models or gain access to further markets. However, one third of the companies with a strategic outlook plan to pursue such objectives in order to increase sales in the coming years.
Consequently, the Mittelstand companies are mostly using established technologies that offer immediate benefits, such as cloud computing and connectivity. Only one quarter of those surveyed regard artificial intelligence (AI) as important for their own operations and just 2 percent are using it.
“More than a new wave of automation”
“The pragmatism of many Mittelstand firms is certainly justified,” says Jens Förderer, professor of innovation and digitalization at the TUM Campus Heilbronn. “Digitalization does not offer equally large benefits regardless of when and where it is implemented. But it is a mistake to treat it as a new automation wave and focus on a few adjustments with a short-term impact. It involves a fundamental transformation of business models and markets affecting companies of all sizes. Without clear objectives and good planning, companies risk a loss of competitiveness.”
External obstacles bigger than internal ones
The companies without strategies listed specific problems preventing them from taking action. Around 50% mentioned an inadequate digital infrastructure and 40% the unavailability of skilled personnel. One-third cited excessive bureaucracy and a lack of skills in their own workforce. The companies already managing the digital transformation present a similar picture: More than half of them cited skills shortages, bureaucracy and poor infrastructure as the key impediments.
“It is alarming to note that barriers over which companies have no control play a much bigger role than internal factors. This further discourages laggards from actively tackling the digital transformation,” says Dr. Christoph Geier, Director Digital Transformation at the TUM Campus Heilbronn. “Policy makers, public administration and associations need to create the conditions so that even small companies can make a successful transformation. This will be essential for retaining global market leaders and hidden champions in the region.”
Transformation is in the hands of senior management
The research team also asked the SMEs to state who is responsible for the digital transformation within the company and which partners they wanted to work with. In more than 70% of the respondent companies, the top management was directly responsible for the operational implementation. Very few SMEs are cooperating with other companies. Just 13% are using cloud platforms, 10% strategic sales partners and 7% online marketplaces. Only about one third of the companies see it as important to draw on external expertise, for example through consultancies or universities.
“Managing digitalization from the boss’s desk – it sounds good in principle,” says Michaela Lindenmayr, a researcher at the Professorship for Innovation and Digitalization. “The top management must ensure a strategic approach to the digital transformation. In some cases, however, it is fair to ask whether senior executives can invest enough time and whether the company is making good use of the skills in the functional units. The specialized knowledge and skills of possible partners also harbor enormous potential that companies should not do without.”