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The Digital SME

What we have learned from five years of BDC research on digital transformation

6-minute read

At BDC, we are committed to the success of Canadian small and medium-sized enterprises (SMEs) and strive to keep abreast of the latest trends that are changing the business landscape.

One of these trends is undoubtedly the digital revolution that has been disrupting all sectors of the economy for some years now. As such, BDC has conducted several studies to understand the benefits of the digital revolution and how SMEs can benefit from it.

Here are the key takeaways that we’ve learned over the past 5 years:

1. Too few SMEs have taken the digital turn

Our studies reveal that few SMEs have taken the digital turn. Overall, we estimate that only one in five Canadian businesses has achieved a high level of digital maturity, while more than half show low levels of maturity. Businesses in the B2B space are more likely to have integrated digital technologies in their day-to-day activities, while businesses in construction and natural resources are less so.

Size also matters. We found that larger companies—those with 20 employees or more—are overrepresented among digitally mature businesses. Larger companies tend to have bigger and more complex operations that require more technology to run effectively. They also have more developed governance structures that are better able to manage technological change.

2. Investment in digital technology has improved in the last few years, but SMEs still invest too little

Another key takeaway from our studies is that the last few years were marked by a shift in investment away from tangible assets, such as equipment and machinery, toward intangible assets, such as software, training and intellectual property. In 2015, 20 percent of business owners intended to invest in intangible assets. By 2019, the proportion had more than doubled to reach 47 percent.

Yet, SMEs investment in technology remains too small. For 2019, we estimated that the average investment in ICT was $12,875, compared to $90,700 for machinery and equipment.

3. Investing in digital technology boost sales, but a culture of change is necessary to drive profits

We found that companies with a higher level of digital maturity (i.e., those that scored high in both digital intensity and digital culture) enjoy higher sales and profit growth than their peers. They are also more likely to export and innovate.

Moreover, it increases operational efficiency. In the manufacturing sector, 60% of businesses that adopted digital technologies had their productivity boom. Half of them also reported saving operating costs, due to higher automation and predictive maintenance, and 42 percent said digital technologies improved the overall quality of the product they sell.

Even though investing in digital technology boosts sales, companies doing so without a clear strategy and vision, training for employees, and an environment that promotes a culture of continuous improvement, have a harder time driving profits. That’s because digital transformative technologies require a new way of doing things. Often companies spend thousands of dollars on a new widget without reflecting on how it changes their day-to-day activities. They end up losing money.

These results show that Canadian small and mid-sized businesses need to embrace digital technologies to keep up with the competition. More fundamentally, they also need to establish a digital culture that favors continuous improvement and manage the transition to a digital business.

Businesses that do not adapt could soon become obsolete. Our research indicates that a majority of businesses with low digital maturity have performed poorly over the last three years and their revenue is expected to decline over the next three years.

4. The availability of qualified employees is the main obstacle to digitization

Adopting new technologies can be hard for a business, especially when change affects the core of its operations. About a third of businesses face roadblocks when implementing digital technology, with talent consistently a top obstacle reported in our studies.

This is not surprising, since digitization is primarily about employees. It is about giving them tools and resources to do more and create value for the business. It is about establishing a true culture of continuous improvement that can drive both revenues and profits.

When it comes to talent, business owners reported that the most common challenges were finding and keeping qualified personnel, providing training to adapt to new processes, and convincing reluctant employees to adopt technology. Since not all employees have the skills needed to prosper in the digital age, it’s essential that businesses find—and retain—the right employees in their business. This is even more difficult in the current context of Canada’s acute labour shortage.

5. There is no evidence of a Canada-US digital gap, at least among small businesses

This is perhaps the most shocking finding of our research, as we found no statistical difference between the digital maturity of Canadian and American SMEs. The digital divide between Canada and the United States has long been the subject of debate. For instance, the Centre for the Study of Living Standards estimates that the ICT investment gap between Canada and the United States reached 43.7 percentage points in 2016. Part of this gap can be explained by differences in industry structure: Canada has a higher proportion of smaller firms. Canada also has a greater focus on resources, with fewer businesses in ICT-intensive industries. But ultimately, the reason Canada lags behind is that Canadian companies are not investing enough in digital technologies.

That’s why the absence of a Canada-US digital gap among small businesses is so surprising. But there is a good explanation for this: The gap is likely due to large corporations with 500 or more employees. Canadian large corporations are behind American technology giants such as Google, Apple, Facebook, Amazon, and Microsoft. But when comparing a ramen shop on Bay Street with one on Wall Street, one can more easily understand why we did not find any statistical difference between American and Canadian SMEs. Small businesses are not so different south of the border.

6. Tips and advice to make the digital shift

Our studies propose several tips and give advice on how to integrate digital technologies, whether it is to launch an e-commerce platform, adopt a digital culture or implement smart manufacturing. For more details on how your company can go digital, please consult the following studies:

  • Expand Online: Strategies to Boost Sales, Profits and Exports. Study (July 2019)
  • Digitize Now: How to Make the Digital Shift in Your Business. Study (October 2018)
  • Future-Proof Your Business: Adapting to technology and demographic trends. Study (October 2017)
  • Industry 4.0: The new industrial revolution. Study (May 2017)
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