Industry 4.0 describes how companies will stay competitive in the digital era

How will companies stay competitive in the new digital era? In our latest Nordea On Your Mind report, Viktor Sonebäck, associate at Nordea Thematics, met with the expert on industrial transformation and the role of banking and payments, Niklas Arvidsson, Associate Professor in Industrial Economics and Management at Stockholm's KTH Royal Institute of Technology, to find out.

 

Niklas Arvidsson, Associate Professor in Industrial Economics and Management at Stockholm’s KTH Royal Institute of Technology

In the latest Nordea On Your Mind, “Industry 4.0“, we explore how companies will stay competitive in the digital era. We interview Niklas Arvidsson, Associate Professor in Industrial Economics and Management at Stockholm’s KTH Royal Institute of Technology, an expert on industrial transformation and the role of banking and payments.

He says that, while digitalisation has the potential to drive economic growth, we must aim for sustainable growth that’s measured by more than just the value of goods and services. Digitalisation, in combination with more sustainable behaviour, could deliver big benefits, including reduced costs, saved time and new value.

Could you tell us a bit about your areas of expertise at KTH, what made you interested in pursuing a field within academia generally, and within these areas specifically?

NA: My area of expertise lies in understanding industrial transformation with a particular focus on banking and payment services. I have since childhood had an interest in money – both to have and use it but also to understand what money is and how it affects our society – which has guided my life choices since then. I focused my high school education on business administration and took jobs in banks during summer vacations, learnt how to invest in financial markets and, in particular, started to study at the Stockholm School of Economics (SSE) where I received a world-class education in business administration and financial economics.

This led me to continue working in the academic world at SSE by starting a doctorate education which led to Ph.D. in International Business with a focus on knowledge management in multinational enterprises in 1999. Curious to know more about how companies work to be innovative, I started to work at the consulting company Service Management Group which, based on founder Professor Richard Normann’s conceptual thinking, empowered companies to grow and innovate through value-creation strategies. Aiming to get back to academia, I joined a research project at the National Institute of Working Life on how projectification changed organisations and then started to work at the Center for Banking and Finance at KTH. Here I in 2008 focused on how banking and payments were transformed due to new technologies, change in customer demand, entrepreneurial initiatives, societal interests, demographics and other factors. This led to projects on the possibility of a cashless society, growth of mobile payments, transformation of retailing, start-ups in the field of payments, and transformation of banking, which is a line of research that has been further developed in my current work at the Department of Industrial Economics and Management at KTH Royal Institute of Technology.

Payments are the aorta of a market economy.

Niklas Arvidsson, Associate Professor in Industrial Economics and Management at Stockholm's KTH Royal Institute of Technology

My driver is and has always been a curiosity to understand industrial transformation – or lack thereof! – in industries and societies. This starts from the challenge to understand how and why organisations and humans learn and change behaviour, or why they do not even if they should. In this work, financial systems are particularly interesting since they on the one hand deal with a completely standardised product – money and financial return – that is transparent and where outcomes are easy to see, while on the other hand being very complex with a global reach and advanced, non-transparent business networks, services and solutions. In this area, payments are particularly interesting since they are critical for a market economy – the aorta of the economy – in which everyone – states, organisations, and persons – make financial transactions on a daily basis.

One of the courses you run is called ‘Industrial and Technical Transformation’. Would you briefly describe the contents, the key topics you discuss, and the general purpose of the course?

NA: The course aims at providing knowledge and understanding of the mechanisms and dynamics behind industrial and technological transformation, or, in other words, processes that impact and drive change. The course teaches industrial dynamics, the academic discipline within industrial management that focuses on the processes of industrial and technical transformation. This includes both a macro perspective in the form of, for instance, institutions and legal systems, and a meso perspective in the form of, for instance, industries, companies, markets, technologies, business networks, and other organisations. It also focuses on a micro-level in the form of entrepreneurs and innovation. In addition to this overarching focus on industrial transformation, the course provides insight into how innovation efforts are managed by decision-makers in companies with a focus on how to apply theories, models and concepts to realise innovation aiming to improve strategies and competitive power in companies.

 

What is your view on industry 4.0? How does it compare to previous industrial revolutions? Is it primarily a technology-driven transformation, or is it driven by changing business models? What does the current research in academia look like?

We have a saying in Swedish that goes: “kärt barn har många namn”, which literally means that a loved child has many names, and essentially means that everyone will name something they like in their own way. Industry 4.0 is such a concept, which means that everyone seems to have their own interpretation and use of the concept. Depending on who you ask, you will get a different answer as to what Industry 4.0 is and what it leads to. The concept therefore has a strength in its multi-faceted use but a weakness in its vagueness.

To understand progress and development of our economy and its enterprises, I would rather start from three distinctly different eras: the agrarian society, the industrial and the – let us call it – digital society. These are distinctly different but there are aspects of all three in each of them. So, what we see today and have seen during the last decades, is a transition from the industrial society in which physical products were in focus to a digital society in which value in use is in focus. The transition is enabled by technologies like the Internet, smartphones, computers, digitisation and others, but the most important difference from this transition relates to digitalisation and behavioural changes. The way we start companies, innovate, learn, access information, work, make decisions, communicate, socialise and even find partners has all changed during the transition to a digital society. It is not an easy transition since we must learn to overcome difficulties and new challenges, but there is great potential in this transition.

We are in the midst of a shift from the industrial society to a digital society, with a shift in focus from physical products to the value in use.

To me, Industry 4.0 is a concept aiming to describe how companies must adapt in order to stay competitive in a digital era. And, it is a revolutionary change in some ways – like how Chinese companies compete in the global market as well as how American companies are challenging countries in terms of having access to information that no country has. But, since humans are rather slow to change behaviour and values – which often – not always! – is a good thing, there are also aspects of evolutionary character.

Given this, research in academia focuses on very different aspects of Industry 4.0, including, for instance, sustainability and the notion of a circular economy, digitalisation and inter-operable digital platforms, open innovation and co-creation in value-creating systems, mobile systems and how to achieve value-in-use instead of superior products.

Industry 4.0 is a concept aiming to describe how companies need to adapt to stay competitive in a digital era.

In the last two decades, productivity growth has been declining in most developed economies.

Have we reached a phase of technological maturity where there is simply not much more productivity to be gained? Can we expect Industry 4.0 to contribute to increased growth, or have we simply reached an era of smaller, more continuous technological improvements rather than major, revolutionary ones?

We should expect economic development to develop in different phases over time where some are relatively slow and others fast. But we must remember that we should not use the economic growth during the post-WW2 period as some kind of ideal. The strong growth in that period happened because continental Europe, Japan and other parts of the world were destroyed by bombs and then had to be re-built. This was of course fortunate for Sweden since we had the ability to supply goods and services to Europe in this phase. But let us hope that this type of economic growth does not happen again. So, it is not automatically a problem if productivity during the 21st century is lower than it was in the post-WW2 period.

Another reason for this perception of a decline in economic growth is that growth in the industrial era was over-estimated since we did not take negative effects like pollution into the equation. The growth numbers only considered the positive effects – GDP, profits, consumption, etc. – while excluding the negative effects – pollution, inequality, work-related injuries, poverty caused by industrialisation, etc. If we are now starting to also acknowledge negative side-effects – something we should have done from the start – the numbers will automatically be lower, but also more realistic. So, this is another positive effect from a more enlightened approach to growth.

More sustainable behaviour could allow big benefits from digitalisation, such as reduced costs, saved time and new value.

Having said this, I do believe we have a potentially booming economy ahead. Digitalisation has the potential to lead to increased growth, but what we must consider is not just growth – we must aim to create long-term sustainable growth that is measured by other indicators besides value of goods and services. And, when our behaviour changes in a way so that we can realise all the benefits from digitalisation, I believe we will see reduced costs, saved time and new value. So, all in all, revolutionary innovation is yet to come.

 

Do you see any specific catalysts prompting an increased industrial adoption of Industry 4.0? What, in your opinion, are some key considerations or prerequisites needed in the industry for a fourth industrial revolution to take place?

If I am to be extremely short, I would point to four different necessary transformations: mindsets, business models, value-creation systems and institutions that enable this. The most challenging is probably the first. The industry needs owners and decision-makers that understand the new era and that are also willing and able to run companies that deploy new technologies and focus on solving critical problems our societies are facing. To achieve this, companies need business models that incentivise both the companies and its customers to act in a way that leads to sustainability related to economic, environmental and social dimensions of our society. And, today everyone must co-create innovation as well as products and services with others, which means that the ability to organise and bring value to business systems is a critical success factor for adoption of the potential benefits from Industry 4.0. Last, institutions in our societies – like democracy, tax systems, education and global agreements on fairness and open economies – must be the foundation for this transformation.

Adoption of Industry 4.0 will require changed mindsets, business models, value-creation systems and institutions.

 

Johan Trocmé and Viktor Sonebäck

If you are a corporate client and want to access the full Nordea On Your Mind report, please contact Viktor Sonebäck.

And don’t miss the related podcast with Johan and Viktor.

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