KfW Research: A digitalisation strategy leads to more and broader digitalisation activities in SMEs

• It also means more use of advanced technologies such as AI and big data
• SMEs with a digitalisation strategy spend around one and a half times more on digitalisation than those without
• But so far only 20% of small and medium-sized enterprises approach digitalisation strategically

In an international comparison, Germany’s progress in digitalisation is average at best. A special analysis undertaken on the basis of the representative KfW SME Panel shows that much of this is likely due to the fact that many enterprises adopt a piecemeal and sporadic approach to digitalisation while ignoring the strategic perspective. KfW Research has conducted a regression analysis to identify the actual correlations between the existence of a digitalisation strategy and the observed digitalisation activities in the SME sector. The findings clearly confirm that businesses with a digitalisation strategy pursue more digitalisation projects and more ambitious ones.

Today only one in five of the 3.8 million SMEs in Germany have a digitalisation strategy. In particular, only 16% of businesses with fewer than five employees thus far have such a strategy, a proportion that is much lower than in large SMEs with 50 and more employees, 45% of which have one. The KfW analysis reveals that a typical SME with a digitalisation strategy is more likely to carry out all of the possible types of projects surveyed than SMEs without one. In regard to the renewal of IT structures and introduction of new applications, the difference in frequency is around one eighth, which is moderate. With respect to digitalising interactions with the business environment, which should be regarded as a type of project with a relatively low level of difficulty, businesses with a digitalisation strategy are somewhat – one and one fourth times – more likely to outperform peers without such a strategy. Enterprises that have a digitalisation strategy are particularly active in ambitious projects such as digitalising products and services, reorganising workflows with the aid of digitalisation measures and interconnecting the business as a whole by digitally integrating functional areas. In these types of projects, a typical SME that has a digitalisation strategy exceeds a peer with no strategy by a good one and a third to almost one and a half times.

Other key findings of the analysis:

• Enterprises with a digitalisation strategy outperform peers with no strategy not just in the frequency but in the thematic range of simultaneously implemented digitalisation projects (with an average of 3.0 different types of projects vs. an average of 2.4).
• SMEs with a digitalisation strategy are more likely to make use of demanding digital applications such as cloud computing, big data and artificial intelligence.
• The more comprehensive and ambitious activities of enterprises with a digitalisation strategy also go hand in hand with significantly higher digitalisation expenditure. A typical SME with a digitalisation strategy spends a good one and a half times more on digitalisation (just under EUR 29,000) than a peer without a strategy (EUR 18,000).

“We need to further strengthen digitalisation among German SMEs, which also means anchoring its strategic importance more firmly in those businesses”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Approaches therefore include bringing down digitalisation barriers such as poor Internet connectivity or financing problems as well as stepping up efforts to raise awareness among SMEs of the strategic importance of digitalisation. Positioning in markets, tapping into new customer groups and further developing existing business models are key areas here. In particular, small and regionally operating businesses as well as those that do not innovate rarely have a digitalisation strategy. Thus, by specifically addressing these groups of businesses we should be able to address the threat of the SME sector splitting into one group of usually large businesses that have a strategy and play a very active pioneer role in digitalisation and another group of businesses left behind that have no such strategy”.

The current analysis by KfW Research can be retrieved from
www.kfw.de/fokus.