SMEs, sustainability, and digitalisation | #24
SMEs, sustainability, and digitalisation | #24
A study of an interesting part of the European commissions report on digital transformation and sustainability within business.
👋 Hey, this is one of the more serious posts where every Tuesday and Friday you get something about product management, tech, or sustainability, and how they fit together. If that sounds interesting and you haven’t already, sign up😊. This post is a study of a report by the European Commission from page 71 onwards🔬
The European Commission (EC) released their ‘ANNUAL REPORT ON EUROPEAN SMEs 2020/2021’ in July. I got my hands on it and found it very interesting. In the spirit of openness I thought it might also be interesting for you. This is a write up of the sections regarding SME digitalisation and their journey towards sustainability, specifically looking at the challenges SMEs face, the benefits they could receive from the changes, and the motivation to make it happen.
The journey starts with digitisation (digit-isation, the conversion of analog to digital), which enables digitalisation (digital-isation, applying digitisation to functions and processes), which then leads to digital transformation (DX) over time. They are distinctly different things.
DX is defined by the EC as advanced technologies that integrate physical and digital systems, and when combined with business models and processes, lead to the development of smart products, services, and improvement of productivity.
Digital transformation challenges
The report splits the challenges between internal and external, each with overarching categories that the challenges fall into.
Internal challenges
A lack of awareness and availability of digital technology and the tools needed for DX due to a lack of connectivity, and education around digital tools and services
A lack of resources to engage in DX in terms of time and funding
A lack of ability to combine digital strategy with a concrete business model (including inability to integrate with existing technology and or migrate from old technologies).
External challenges
A lack of clearly defined and agreed international standards and regulatory barriers
A lack of affordable and accessible digital infrastructure
A lack of interoperability
Cyber-attacks
A lack of availability and access to public data and digital platforms.
I would say each of these challenges, internal and external, speak to the fact that SMEs simply are not, or at least have not been, the target audience for transformative technologies. My experience in tech so far is such that B2C tech focuses on the individual and B2B technologies focus on the highest margin targets, enterprise customers. Despite the size of the SME market it doesn’t seem to be the target of technology, perhaps because of the variety, but also perhaps because no one seems to have attacked it yet? Or maybe I’m wrong.
Benefits of digital transformation
There are of course benefits for SMEs to conduct DX. They are clear to see in the organisations that have already taken the initiative, have the skills internally to carve their own path, and have done it. The EC cites the major benefits of DX as:
Improved financial performance through optimising revenue channels and reducing costs
Productivity gains leading to greater efficiency using digital technologies
Access to new customers through expanded geographical reach
Better access to information and to more productive processes which foster innovation.
This isn’t an extensive list, I’m sure you can think of more yourself. But they are only the ‘benefits’ of adopting digital technologies. While there is a correlation, benefits do not equate to the reasons that SMEs actually have for making the change. The EUs most cited reasons are:
Connectivity
Online presence
Digitalisation and automation of business processes
Use of cloud-based services, collaborations and communication.
In terms of connectivity and online presence, when fixed and/or mobile broadband is used as the key enabler, the most common use cases are:
Connectivity and online presence
Online communication and collaboration
E-commerce
Internet-based solutions for reducing customer interactions
Contactless payments
Adoption of QR codes for direct ordering.
It’s perhaps not surprising that the benefits that the EC cite are almost all about process improvements and automation, but the actual reasons SMEs cite for making the move predominantly are about reaching more customers/expanding their business. The fact that they go hand in hand is a good thing, since the underlying processes are necessary to sustain the growth that SMEs are looking for, but it’s interesting from a communication perspective that the SME itself likely puts more weight behind bringing in new customers than being able to manage their growth.
Digital transformation and sustainable development goals (SDGs)
When talking about sustainable development goals (SDGs), or really sustainability in general, there is often talk about scenarios. The ‘what ifs’ that try to deal with the uncertainties around climate change and the action we are, or are not, taking. As such the EC looked at a more or less ‘ideal’ scenario, and then countered itself with the potentially negative impacts that result from a less than ideal scenario.
Their ideal scenario is a fourth industrial revolution (4IR) setting in combination with a ‘Circular Economy’. This effectively means that the best technology is available to everyone and everything associated with that technology (hardware, and software alike) are reused and recycled within the industry. In this scenario it is likely that sustainable solutions will be found such as:
Clean power
Sustainable production and consumption
Smart cities and homes
Smart transport systems
Sustainable land use
As well as offering climate solutions related to energy, underpinning a net zero emissions economy.
However, even within this ideal scenario there are still certain issues that need to be considered:
Automation-related job losses.
Data privacy infringements.
Cyber and biological attacks.
But at an SME level the EC notes that adopting a customer-centric approach to DX and building a culture that embraces the use of digital technologies exerts a positive influence on companies’ quest to achieve sustainability.
The negative side effects in a non-ideal scenario though are certainly worth consideration:
Data centers, digital devices, digital infrastructures, IoT and supercomputing are all responsible for high levels of energy and resource consumption.
A lot of e-waste is created by the ICT sector (e.g. discarded digital devices and hazardous earth materials, among others).
Privacy
Security
Job prospects and growing inequalities as the non-diverse hire the non-diverse
All of which hamper the sustainability of DX. However, as moves are made toward circularity measures and more accessible technologies, negative externalities can be turned into opportunities to contribute to sustainability when combined with government interventions and policies in the form of:
Cross-collaborations
Business incentives
Economic, social, and environmental impact analyses
Education
Data monitoring and reporting
Challenges implementing sustainable solutions
Of course, this is all well and good, but the problem precedes the solution. It doesn’t matter how great it is if no one adopts or can even do it. The EC report also addresses this. The evolving field of ESG reporting, which is voluntary for SMEs, poses additional challenges in gathering the right data for reporting alone, never mind solution implementation. The specific challenges for SMEs aiming to implement sustainable solutions are:
A lack of access to finance for implementing sustainable solution
A lack of knowledge
Skills and capacity, particularly with regard to business development
Insufficient marketing and strategic management skills
A lack of time.
Perhaps not surprisingly, these challenges map well to the internal challenges SMEs face with DX in general. In my opinion, this is good because it indicates that you could deal with both at the same time, integrating means of DX at a fundamental level with sustainability. Of course on the other hand this could easily mean twice the work, if we’re not careful.
Benefits of sustainable digital transformation
Now we get to the section that perhaps should have come first. What are the benefits, and the drivers for SMEs to optimise for sustainability solutions in their DX:
The benefits:
An increase in stakeholder loyalty and brand strength
Improvements in staff motivation
An enhancement of financial indicators and sales.
The drivers:
To become a valuable investment target of investors and/or large firms
The ability to create a network of sustainable SMEs across the value chain to gain a competitive advantage
The opportunity to become a highly efficient supplier to global supply chains by implementing sustainable practises.
An interesting point here is that the benefits and drivers are flipped compared to that of ‘standard’ DX. I.e the drivers for sustainability are business focused, investments, efficiency, competitive advantage, where as the benefits are then customer focused. This seems to indicate that SMEs are not feeling the pressure from customers for sustainability as much as they’re feeling pressure from larger organisations or the market. Pressure which is only really applicable to SMEs that exist in the markets larger supply chain.
With that said, the EC made the distinction that innovative (whatever that means here) SMEs view the integration of Environmental, Social and Governance (ESG) objectives into their business models as an opportunity for brand enhancement, attracting both talent and customers. And that naturally SMEs that are already leading in DX are so far the leaders in the adoption of environmental practises
Conclusion
All in all if we assume the ECs research is sound, which we must, the report provides valuable insights into the challenges SMEs face in digital transformation and in making changes to be more sustainable. Digital transformation is something which SMEs see a lot of value in for customers and as a result improve their business processes. Whereas sustainability is seen as something to tick the business boxes and the benefit is then of value to customers.
Logically this implies that in order to drive DX we should communicate in a customer centric way, and in order to drive sustainable change we should communicate in a business centric way.
But I would postulate that the SMEs polled in the study are not in the business of sustainability, it is not their product. A successful product is one that solves the customers problems, development should take a customer centric approach. DX is driven by customers so it is more common, there is more research and documentation around it, and it’s doable. I think we (as in all of us) need to establish an association between customers and sustainability in order to get anywhere. More research should be done to understand what consumers and customers want out of SMEs in terms of sustainability.
If the customer drives the change it will happen. If we assume public opinion will change such that we can tackle climate change (and again I think we must because if not we’re fucked anyway), SMEs should not wait for directives and policies to drive their change, they should be listening to their customers now, to tie their DX with becoming more sustainable.
Thanks for reading. The best way to support this newsletter is to sign up ✍️ share it 🤝 and get your friends to sign up too 😎 That’s what this lovely purple button is for 👀