By now, life almost feels normal again. (Most) Corona restrictions have expired, restaurant visits, parties, festivals are taking place as before. The masks of fellow travelers on public transportation are slowly but surely peeking away. Emotionally, we seem to be returning to the reality of life in pre-pandemic times.
But as far as some things are concerned, it would be more desirable not to end up back at the starting position after Corona. In addition to better preparation for the next virus and the promised reform of the healthcare system, it is also to be hoped that Corona has finally led to progress (albeit forced by circumstances) in digitalization in Germany. To get to the bottom of how the Corona pandemic has affected the digitalization of the German economy, we collected and analyzed relevant academic papers. Here are the key findings:
Corona and digitalization: How are the topics related?
Digitalization is our favorite topic here at IOTIQ. In our recent articles, for example, we've explored in detail why Germany is still lagging behind in the field, how we can close this gap, and why it's important to try to do so in the first place.
Of course, it's a bit difficult to try to take something positive away from negative events, such as the pandemic. Especially when the supposed 'profiteer' is supposed to be such an abstract and elusive construct. In the following, we will therefore first explain why digitalization plays (or played) such a key role - both for companies already during the pandemic and now for the recovery of the economy as a whole.
Digitalization protects against the consequences of Corona
With the first lockdown, a great deal changed abruptly for all of us. Not only each individual, but also companies had to adapt to the new circumstances and first learn to deal with the situation. And for both individuals and companies, some found it more difficult than others.
Most companies experienced a drop in sales during the pandemic. However, research has shown that some were immune to overly large drops. Three factors in particular have been identified as critical to business performance during the lockdown: the ability to maintain distance; the ability to respond flexibly to declines in demand and supply shortages or to adjust supply; and the option to remain visible to customers and partners. All these factors are favored by a high degree of digitalization in the company. Distance between employees can be enabled by home office options and video communication or the use of robotics. Delivery bottlenecks can be identified more quickly through better data exchange. And you can still be visible to potential customers if everyone has to stay at home, ideally via the Internet.
The same picture emerged for the self-employed. At the time of the survey, only 28% of the highly digitized solo self-employed said they would no longer be able to perform their jobs due to the corona measures. By contrast, among respondents with a low level of digitization, the figure was a full 73%.
However, it is also important to remember that not all companies have the same opportunities when it comes to digitalization. The decisive factor for the digitization capability of a company and its tasks is the industry in which it is located. Work that absolutely requires proximity to people can only be digitized with difficulty or not at all. Of course, an Internet presence is also worthwhile for providers of body-related services, for example. It helps them to remain visible, to keep up to date with the latest news and, ideally, to attract new customers. An online tool for booking appointments can also reduce the workload and make it more convenient for customers to use the service. For restaurants, hair salons, beauty salons and all others that have to work with people, it remains the case that contact is ultimately unavoidable for the provision of the actual service. Digitalization can only make it easier to organize and simplify the process.
For all those whose field of activity allows digitalization, however, this means that the investment is worthwhile. Well-executed digitalization in the company can simplify processes and better organize collaboration. In addition, the success of advertising measures can be better monitored and the strategy can be adjusted accordingly. (Read more about the benefits of digitalization for SMEs in this blog article).
And now Corona times have shown that digitalization can also significantly reduce sensitivity to crises. Closely related to this is companies' willingness to innovate, as well as their own research and development. Here, studies show that companies that developed steady processes for developing and introducing innovations were less vulnerable during the crisis and were able to leave negative effects behind more quickly. A flexible, forward-looking mindset is therefore a key success factor for corporate performance.
Now the question arises: has everyone else realized this as well?
Digitalization and innovation in times of crisis: Corona as both a driver and a brake
The crisis has left its mark, but it is not easy to say exactly what it is. What is striking is that there was a surge in digitalization and innovation activities at the beginning of the crisis. In the case of digitalization in particular, this was also sorely needed by numerous companies to ensure their ability to act despite the more difficult conditions (by investing in the expansion of home offices and telecommunications, for example).
But things already looked somewhat different at the beginning of the second year of the crisis. By January 2021, 14% of the companies surveyed had scaled back their digitization activities, and only 23% had expanded them further. This development becomes even clearer if the pandemic lasts longer on the basis of innovation activities. At the same time, 25% of the companies had already scaled back their innovation activities, and only 10% were still expanding them. This also makes sense in that digitalization was presumably still more relevant for day-to-day business at that moment, while innovation is often more of an investment in the future than an acute necessity.
Overall, companies with their own research and development were significantly more often able to expand or at least maintain their activities. By contrast, companies that suffered revenue losses were less often able to continue their digitalization and innovation activities.
The pandemic certainly seems to have had a weak positive impact on digitalization, even if the overall trend is mixed. For innovations, things looked rather bleak. In particular, financial constraints due to the crisis are likely to have hampered the necessary investments here.
Digitalization light
According to a report by the Scientific Advisory Board at the BMWi (German Federal Ministry for Economic Affairs and Energy. now: German Federal Ministry for Economic Affairs and Climate Protection), technical obstacles could often be overcome by ad hoc investments and hardware and software. Operational processes and communication could often be adapted quickly and relatively unproblematically. In addition, companies have found that more activities can be performed in the home office than was assumed in pre-pandemic times.
In summary, it was primarily acutely necessary measures that could be implemented quickly and were immediately required to safeguard the ability to act. However, this alone does not make it possible to speak of the great digital revolution. The crisis was therefore not a major 'game changer' in terms of digitalization. Rather, existing trends were simply reinforced. Longer-term digitization projects also tended to be put on hold. So it seems that many companies simply got to where they were already headed more quickly.
This modestly optimistic conclusion finds its counterpart in a study conducted by the Fraunhofer IAO in collaboration with the management consultancy Rochus Mummert. Here, the question of how the digital transformation is being led in Germany was examined in depth. The result: unsatisfactory.
According to the study, there is a lack of focus, strategy, consistency and commitment on the part of top executives for successful digitalization. Here, the pressure to change is not high enough because the companies surveyed were (still) doing well at the time of the survey. And when something has worked well in the past, there is usually little incentive to make sweeping changes. (This fits in with the fact that in another study by the management consultancy etventure, 46% of the decision-makers surveyed believed that their company would be able to maintain its previous level of revenue over the next three years, even without digital transformation measures).
There is also criticism that the measures taken are often only aimed at incremental improvements. However, genuine transformations in business models and markets are not achieved. It is therefore more often a matter of improving what already exists instead of creating something better and new.
Corona and digitalization: companies in distress
Because of their field of activity and their ability to adapt (and yes, their level of digitization), some companies were able to emerge from the crisis relatively unscathed. Others have had to suffer sales losses due to contact restrictions, supply bottlenecks and / or a drop in demand. In this case, however, the realization that digitalization may be crucial for future competitiveness is no longer sufficient for large-scale measures. Just when it is particularly necessary to catch up and take digitization measures, their financing becomes a problem due to the tight financial situation. If you don't think measures are necessary and therefore oversleep until it is too late to act, you have fallen victim to the 'tragedy of horizons'. The term is mainly used in research on how companies deal with climate change. It is striking that many companies see climate change as a general risk with a medium to high probability, but underestimate their own impact. As a result, no measures are taken to avert impending risks. By the time the threat finally becomes abundantly clear, however, it is then almost certainly too late for effective action. Corona also seems to have put some companies in this situation, which considered digitalization to be irrelevant to them.
Lessons from the Corona crisis
Drive digitalization further ahead
The good news: According to studies, most companies are now planning to expand their investments in digitalization based on the lessons learned from the crisis. 77% of SMEs as well as large companies wanted to invest in the digitalization of business processes, for example. Based on the thoroughly positive experiences with home office, many employers are also not averse to keeping the option open and enabling their employees to work in a more flexible location. In addition, around 63% of SMEs and 49% of large companies see investment potential in the development of new business models. Companies also want to invest in AI, web-based platforms and business analytics. (Interesting here: larger companies are more likely to want to invest in better use of data, while smaller ones focus on data sourcing first. This suggests that large companies already have their data needs better covered due to more advanced digitalization).
For now, the data makes us hopeful. All that remains now is to hope that these good intentions will remain once the initial shock of the crisis wears off and financing problems can be overcome.
Resilience of the German economy
Above all, the Corona crisis has highlighted how vulnerable the German economy is to deviations from the norm. In the manufacturing sector, supply bottlenecks in the Asian region combined with so-called just-in-time production caused production stoppages and thus, of course, economic damage. In a survey of German business associations in 2021, 45% of respondents were severely affected by international supply bottlenecks in the short term. 25% also anticipated being severely affected in the medium term.
In view of these consequences of the Corona pandemic, there is often talk of the need for the economy to become more resilient. Resilience is defined somewhat differently depending on the context (biology, engineering, etc.). Basically, it's about how resilient a system (a company, an economic entity) is to external influences. That is, first, how long it can continue to operate normally in the face of changes in its environment, and second, how quickly it can recover after a recession and slump in demand.
The Corona crisis showed that this resilience was not sufficiently present in some companies. The reason for this is usually assumed to be a strong focus on increasing efficiency. One example of this is that just-in-time production can save warehousing costs because required raw materials and precursors are only delivered when they are needed. However, this also means that the company is extremely dependent on suppliers and thus on a long international supply chain. The response time to disruptions in the supply chain is then quite short.
In order to better manage risks and respond in a timely manner to emerging problems, it is essential for companies to know as much as possible about their own supply chain. However, studies have shown that many companies have too little knowledge about their own supply chains. While data sharing has increased in the wake of the Corona crisis, too few are still able to meet their information needs. Yet digitalization is making data sharing easier than ever before. The key here then is to focus strategic decisions on resilience, rather than efficiency.
Resilience and efficiency are two goals that are often in tension with each other in the corporate context (at least in the short term). Key concepts here are exploitation and exploration. Exploitation means that companies further optimize existing business models for efficiency within their existing business models. This often means that other characteristics suffer, e.g. product quality, but also production reliability and crisis resistance. On the other hand, exploration means the search for new markets, business areas and business fields, which is basically exactly what is often hoped for through digitalization, but which has not yet happened in practice. Instead, in most cases, efforts are made to get the best out of the current situation. People would rather not set out for new shores.
German companies are not capable enough of transformation
Resilience requires being prepared for a crisis and / or being able to adapt quickly in the event of a crisis. The ability to avoid undesirable changes during a crisis is closely related to the ability to consciously force desired changes. In this respect, a pronounced transformation capability of companies is extremely beneficial to their resilience and thus crisis resistance.
Transformation capability, in turn, presupposes that companies can generate innovations and (at least as importantly) also implement them themselves. In addition, the right personnel must be in place at both operational and all management levels. The last important factor is strategic foresight. This involves anticipating future risks in a strategic process in order to be able to react at an early stage. It turns out that foresight activities can be associated with more innovation and greater responsiveness. In this respect, it is unfavorable that most companies do too little foresight in quantitative terms and also do not necessarily use the most productive methods.
Subsequently, with regard to transformation capability, many still have quite a bit of work ahead of them. At the very least, according to a study by the Bertelsmann Stiftung and IW Consult, only a quarter of German companies had sufficient innovation competence to secure their competitive position in the long term. Perhaps the Corona crisis could act as a wake-up call here.
Conclusion
So what about the thesis that the pandemic could have given Germany a digitalization boost? Here, the conclusion must be mixed. On the positive side, important issues have (involuntarily) come into focus. Shortcomings in the digitalization of companies have become visible. The home office situation has also temporarily drawn attention to the lagging fiber optic expansion. And problems in supply chains have shown that economic resilience should perhaps be given higher priority than efficiency and cost optimization.
Unfortunately, these important insights come at a time when acting on them is exceedingly difficult for many. Due to the impact of the pandemic, there is often a lack of funding to expand digitalization beyond what is immediately necessary. True innovation and digital revolution have largely failed to materialize. The end of the corona crisis was followed by the next challenges. In this respect, it is doubly understandable if companies are not now focusing on making investments (in resilience, digitalization, sustainability) that will only pay off in the medium to long term.
In summary, we can perhaps say that the pandemic has brought about a small surge of digitization in the collective mind, but has often made it more difficult to take corresponding action.