Surviving in the technology sector requires innovation and ability to adapt, according to the recent findings of a report by Bain & Company
By its very nature, technology requires industry players to innovate in order to survive. This also explains why technology companies are more likely to be disrupted than companies in retail, FMCG, manufacturing or even financial services, which generally go through regular disruptions. The recent findings of a report by Bain & Company’s titled: Technology Report 2020: Taming the Flux reveals that surviving in technology industry requires innovation and ability to adapt. According to the report, to lead the game, technology companies will need to pull on multiple levers such as investing in automation, resilient support chains and M&A deals.
“Tech is not an industry where there are many second chances,” said David Crawford, Global Head of the Technology Practice at Bain & Company and a lead author of the report.
“The longer technology companies lag its sector, the less likely it is to recover. This makes it all the more important for tech companies to understand what will make their business different in just a few years,” he said.
Automation goes beyond lowering costs
In a matter of weeks, automation has gone from low priority to mission-critical for many executives. Companies that invested more in automation before the pandemic are better positioned to weather the crisis better than those that didn’t act. These forward-looking technology companies generated higher revenues, experienced fewer disruptions to their supply chain and saw increased workforce productivity and demand, according to Bain & Company’s automation survey.
Even though most companies surveyed are accelerating their automation initiatives and traditional barriers are shrinking, today’s automation leaders enjoy a significant head start, believes Crawford. As the findings of the study shows, before COVID-19 emerged, many leading companies planned to automate 30% or more of their manual processes— two to five times more than technology companies with low automation-adoption rates.
Over the next year, 38% of the leaders among technology companies intend to invest significantly more in automation, compared with just 22% of other companies.
Coming out of the pandemic, around 60% of technology companies plan to automate more offshore activities. On average, technology companies plan to have 38% of their employees continue working remotely, even after on-site work resumes, tied with financial services for the highest rate among industries surveyed.
“Companies are comfortable making that shift in part because they recognize automation can help people work more effectively from home, particularly in minimizing errors in tasks that involve a series of hand-offs among dispersed people, such as the finance team closing the books on the quarter,” it said.
Resilient supply chain is crucial
Technology supply chains were already under pressure from growing trade tensions and now the pandemic pushed them to their limit. Physical lock-downs and the disease’s spread have squeezed factory production and created a logistical nightmare for shippers and suppliers. The pandemic also changed typical buyer demand patterns for technology products in the short term. Some segments saw an uptick, such as work-from-home equipment, while others substantially contracted, technology components for the automotive industry being one of many examples.
The frequency and scale of disruptions to supply chains will only continue to grow, the report noted. To meet this challenge, a new strategic balance in technology supply chains is needed. As Crawford observes, leading technology companies are focused on finding ways to build more flexibility into their sourcing and supply chains, recognizing both the downside risk and the upside competitive potential of maintaining product flows for the next inevitable market dislocation.
The report has identified five common attributes of resilient supply chains across the technology sector: an agile network structure, digital and secure operations, real-time visibility, practical analytics and an empowered organization.
Tech M&As are becoming vital
Over the past five years, the fundamental thesis for technology mergers and acquisitions has changed. In 2019, 82% of technology M&As were scope deals, through which the buyer enters faster-growing business segments or acquires new capabilities, intellectual property or talent to generate future growth. The remaining 18% were scale deals typically aimed at strengthening the company’s market position and reducing costs.
As recently as five years ago, the split between scope and scale deals among technology companies was roughly even, said Crawford. He added that the emphatic swing toward scope deals is one way companies are positioning themselves to keep up with unprecedented rates of technology transitions, shifting boundaries of competition, expanding customer expectations and a fierce talent war.
Another reason for the shift toward scope deals is structural, as there are fewer opportunities for scale acquisitions these days because the technology sector has become highly concentrated. Segments such as semiconductors and software have gone through years of consolidation. Other areas, such as cloud services, are inherently prone to a small number of winners.
Crawford believes that though technology deals came to a standstill in the second quarter of this year, due to the Covid-19 pandemic and tightening credit markets, the landscape is ripe for renewed M&A activity. Many technology companies share prices have been resilient during the recent economic downturn, and they are sitting on large cash reserves that could fund attractive acquisitions.
“There continues to be a seismic upheaval in the technology industry that is showing no signs of slowing down,” Crawford said.
“From core strategy design and supply chain reconfiguration to geopolitical tensions and the growing question of technology’s role in society, technology executives have to think creatively and act quickly if they want to lead their game,” he summed up.