The Economics of Digital

Transformation
The Disruption of Markets, Production,
Consumption, and Work

Katarzyna Śledziewska
and Renata Włoch

First published 2021

ISBN: 978-​0-​367-​70042-​3 (hbk)

ISBN: 978-​0-​367-​70044-​7 (pbk)
ISBN: 978-​1-​003-​14435-​9 (ebk)

3 How is production changing?

CC BY-NC-ND 4.0

DOI: 10.4324/9781003144359-3

The funder for this chapter is University of Warsaw.

3 How is production changing?

Abstract
In this chapter we trace the progress of digital transformation in the production
of goods, describing the emergence of Industry 4.0, aka smart or intelligent
manufacturing. We start with a concise description of the key digital technolo-
gies that are revolutionising production: the Industrial Internet of Things
(a network of connected data-generating devices), a new generation of mobile,
flexible and AI-operated robots, and advanced tools for integrating physical
and virtual reality such as digital twins. Asserting that Industry 4.0 is based on
the efficient use of data and intelligent algorithms throughout the produc-
tion process, we show how datafication translates into how companies organise
and operate themselves, adding to the vertical and horizontal integration of
processes. Datafication of the product life-cycle contributes to the emergence
of new business models based on personalisation and servitisation. Turning
then to platformisation, we address the budding role of industrial platforms
in coordinating relations within supply chains/networks and the rapidly
growing imminence of e-commerce platforms in distribution. We conclude
by indicating the fundamental similarities between the processes and outcomes
of digital transformation in manufacturing and in service sectors, using the
example of the digital transformation of banking.

Industry 4.0
The Volkswagen factory in Poznan, Poland, is a smart factory in the making.
At the assembly line for vans, digitally skilled humans work alongside cobots
(collaborative robots) equipped with screwdrivers. The cobots are able to sense
people around them, so there is no need to keep them in safety cages, as is the
case with large industrial robots of yore. The production line, on the other
hand, is fully automated. The functioning of 30 robots is monitored by one
human worker – the information about sudden breakdown is sent to his or
her smartwatch. The factory removed large screens presenting the data, because
human workers preferred mobile devices.The parts for the vans are transported
by automated mobile trolleys, which will stop when a human gets in their way.
The production uses 3D printing (additive printing) for building prototypes
DOI: 10.4324/9781003144359-3
78 How is production changing?

Figure 3.1 How is production changing? (scheme).

Source: Own elaboration.

or production of personalised parts for the vans. While designing new parts,
the engineers can use HoloLens – a version of Mixed Reality smartglasses
developed by Microsoft – to check their functionality and prepare visualisation
for the production team.
But even more sublime changes are on the way. The machine maintenance
is still monitored by humans case by case, but the managers are planning to
introduce predictive maintenance based on data already collected from all 1200
robots working in the factory. ‘We are looking for algorithms that will inform
us about the precise wear of the parts of machinery, so we are able to change
them just before breakdown, but not too early’, says one of the factory managers
responsible for introduction of technological innovations.The ultimate goal is to
integrate and analyse data from all the sources: from more than 400 IT systems
in all the departments, from production to logistics; from robots and 650 systems
controlling the groups of the machines and production line; from the remaining
 How is production changing? 79
700 devices equipped with sensors, such as screwdrivers, and, finally, numerous
separate sensors installed throughout the factory. Integration of data within the
company (so called vertical integration) will allow for automated monitoring of
processes and their optimisation, making full use of intelligent algorithms.1
The decisive stage will include creating a cloud-based, datafied network
connecting the factory with suppliers and consumers (based on the horizontal
integration of data). This will allow personalisation of production. ‘This is espe-
cially important today, when people expect that a vehicle in a given configur-
ation ordered today will be ready tomorrow.’ In Europe this novel approach to
building digital technologies into manufacturing was first came to the attention
of industry in Europe in 2011 during the Hanover Messe international trade
fair, one of the largest of the world, when members of the business, science,
and political worlds presented the concept of Industry 4.0. The idea caught
on in Germany, and a vision of German economic policy based on the use of
new technologies seduced the federal government as well, leading it to include
the concept in an initiative called ‘High-Tech Strategy 2020 for Germany’. In
2013 a special working group developed a list of assumptions for Industry 4.0
in order to spur German economic development, developing a bold vision
of enterprises operating in connected networks encompassing entire factories,
machines, storage systems, and production equipment. The concept rapidly
caught on elsewhere in Europe, most speedily in the Nordic countries.2
Meanwhile, in the United States, the equivalent concept is ‘Smart
Manufacturing’, and in Asia ‘Smart Factories’. Everywhere, however, it is the
same phenomenon: a shift from automated manufacturing toward intel-
ligent manufacturing.3 Automated manufacturing emerged in the late 1970s
thanks to the move from analogue electronics to microelectronics. Smaller
and cheaper computers entered the factories, equipped with a revolutionary
software for data acquisition and analysis (such as SCADA) and connected by
internal, physically isolated networks (i.e., Ethernet). Communication between
information technology systems (IT) and operational technology systems (OT)
laid the ground for the automation of most production processes.4
Intelligent manufacturing, also known as hyper-automation, is contin-
gent on the growing datafication of production: the change in the way data
is acquired, processed, and used in order to optimise production, logistics, and
sales. This process would have been impossible without an array of innovative
technologies, but much of the credit goes to a dramatic fall in the price of
sensors (from $22 in 1992 to $1.4 in 2014, and $0.38 in 2020).5 Their com-
puting power increased radically, partly because of their integration with the
cloud.6 They also became smaller and more energy-efficient, which made it
possible to integrate them into existing machinery. Increasingly, multiple
sensors, connected through the network of the Internet of Things, started to
produce abundant data, which in turn can be quickly and efficiently processed
by intelligent algorithms.
Many students of digital transformation are familiar with Marc Andreessen’s
witticism that ‘software is eating the world’.7 And many of them are convinced
80 How is production changing?
that this relates more to the intrinsically digital industries whose main product
is data or information, rather than to the physical industries, manufacturing and
handling material goods.Take Michael Mandel, an economist at the Progressive
Policy Institute, writing in 2018:

Software has devoured any industry where the final output can be easily
reduced to bits.These are the digital industries – including communications,
entertainment, finance, and even professional services. The full content of
a daily newspaper can be put into a small digital file. But so far software
has not been able to eat the physical world. Data is important for physical
industries like manufacturing, construction, agriculture, and healthcare, but
it is not the main story.The construction of a building requires huge cranes,
not just a digital twin of a crane.8

Admittedly, digitalisation in physical industries such as manufacturing is much

more complicated as it relies upon multiple feedback loops between constant
datafication of physical processes, and the translation of data-based decisions
into those physical processes. In the case of manufacturing and other ‘physical
industries’, digital transformation results not only from the fact that ‘software is
eating the world’, but more specifically from the fact that ‘artificial intelligence
is eating software’.9 Industry 4.0 would have been impossible without the intro-
duction of intelligent algorithms grinding the data with unprecedented speed,
often in the cloud.
The adoption of digital technologies is the necessary, yet insufficient, con-
dition for digital transformation. It needs to be supported by wide-ranging
changes in the organisation of a company (and particularly in the organisa-
tion of work). The comprehensive integration of data from sensors, connected
devices, and information and operating systems, underpins the transform-
ation of the linear value and supply chains into networks. Every stage
of a product’s life cycle, from design to maintenance, can be turned into a crit-
ical node of a network, which will connect suppliers, contractors, the factory
machinery and workers, as well as customers. Manufactured goods are increas-
ingly datafied and complemented by digitally provided services, which enhance
their primary functionality. This, in turn, contributes to the growing person-
alisation of goods and services en masse in response to the individual needs
of customers. As a result, manufacturing companies inevitably adopt ‘data-first,
AI-first’ business model.

New technologies in manufacturing

As we emphasised in Chapter 1, intelligent algorithms need to be fed with
abundant data. This is why the development of Industry 4.0 is predicated on
the Industrial Internet of Things (IIoT).10 That concept can be defined as
a dynamic network of connected physical objects equipped with detectors,
autonomous sensors, a platform, and applications capable of collecting data and
 How is production changing? 81

Cloud compu ng 46%

Warehouse automa on 45%
Predic ve analy cs 43%
AI 40%
Internet of Things 36%
Blockchain 21%
Machine learning 17%
Fulfillment robots 13%
Autonomous vehicles 12%
Drones 6%
Augmented reality 5%
VR and digital twins 3%
Delivery robots 3%
3D prin ng 3%

Figure 3.2 Percentage of companies investing in certain technologies (worldwide, 2020).

Source: Own work based on Statista. 2020. What technologies are you currently investing
in?. Chart. In Statista. www.statista.com/statistics/780763/inventory-management-
investments-retailers-manufacturers/ (accessed 21 December 2020); n = 601 (industry
professionals).

sharing it amongst themselves and with their surroundings.11 In other words,

machines and devices become part of autonomous networks that communicate
and interact with each other in a variety of ways. The linear, point-based pro-
cess of obtaining and processing information, and then applying it to decisions
on physical processes (which was characteristic of Industry 3.0) is now being
replaced by an uninterrupted, cyclical, and networked process of collecting,
analysing, and acting on data, which takes place almost in real-time.12 Data
points are gathered throughout and beyond the production process, including
storage systems and supplier networks, and the use of intelligent algorithms
allows the data to be ordered, integrated, analysed, and used efficiently.13
The sensors that collect the data may be integrated into:

• The factory, encompassing the factory floor, storage spaces, buildings,

vehicles, and the surrounding grounds), gathering all kinds of data about
the movements of physical objects and environmental conditions such as
temperature and humidity.
• Wearable devices and equipment used by workers. A worker may wear
a hard hat equipped with multiple sensors and camera; an intelligent
vest collecting data on her movements and vital parameters; or at least a
smartband which not only collects data but also vibrates if the deviation
from the procedure of movement is detected.14
• Manufactured goods, which allows for monitoring their use throughout
their whole life-cycle. In result, ‘Manufacturing goes beyond production
82 How is production changing?
of the physical object, because operating a smart, connected product
requires a supporting cloud-based system’, said Michael Porter and John
Heppleman in an article discussing the role of smart connected products in
the functioning of a company.15
• Autonomous vehicles or drones, which are able to work in a collision-
free environment thanks to advanced sensors, their ability to communicate
with other devices, fast data processing (e.g., thanks to nebular processing)
and intelligent algorithms.16 In the United States, one in ten of large and
middle-sized manufacturing companies has already adopted autonomous
or semi-autonomous mobile devices, citing cost advantage as their pri-
mary motive.17 Trendsetting, in 2012 Amazon decided to buy a company
which developed mobile robots (called Kiva Systems). As of 2020 more
than 200,000 mobile robots carried products inside its warehouses.18
• Autonomous mobile devices are one type of a wide range of program-
mable machines capable of autonomous tasks and manipulation of objects
that increasingly mushroom in the factories all over the world – robots.
The spread of robots and the automation of production were typical of the
third industrial revolution. In 1962, the first ‘robotic arm’ was installed at a
General Motors factory; it could perform one type of repetitive operation
(in this case diecasting).19 In the late 1960s, scientists at Stanford University
built an arm that could move in six axes; by the 1980s, however, they
were still far from being mobile devices and were unable to sense their
surroundings. Currently, the smaller, more efficient and cheaper sensors
collect all kinds of data on their surroundings; the data is quickly processed
and analysed in the cloud with the help of intelligent algorithms, increas-
ingly with machine and deep learning; and then the decision is put into
action by the advanced actuators (components that carry out movements,
such as motors, hydraulic systems, signal amplifiers, and hydraulic/pneu-
matic cylinders).20

As a result, robots have become more and more autonomous, able to per-
ceive their environment better, to manipulate objects with greater dexterity
and flexibility, and to interact and cooperate ever better with people.21 A rising
number of collaborative robots (cobots) support workers in industrial pro-
duction, as well as food production and health care.22 The advances in com-
puter vision and 3-D depth sensors allow for safer cooperation between human
workers and large-scale robots, which up to now worked in safety cages and
performed limited movements. In 2020 there were 250 different kinds of
cobots available, most of them working in the life sciences and pharmaceutical
industries. Nearly half of them were used in packaging or picking and placing.23
Cobots can be operated by an employee with little experience in program-
ming, easily reconfigured in half a day or redeployed from one department to
another.24 They utilise machine learning algorithms (e.g., image recognition,
remembering routes or room layouts), and so teaching them can be extremely
quick and simple. For example, Lynx, manufactured by Omron Adept, a robotics
 How is production changing? 83
company based in California, can memorise the layout of rooms and work out
the shortest routes after a single human-guided tour around a building. As a
self-navigating transport robot, it has proved its mettle in warehouses, but it is
also employed by hospitals, as it can carry loads up to 60 kg. And then there
is Panda Powertool, developed by the German company Frank Emik. It is a
robotic arm with exceptional precision and flexibility and is able to perform
relatively complex manual work. This cobot’s unique selling point is its small
size (it fits on a tabletop) and its low price, which makes it affordable for small
and medium-sized enterprises.25
The deployment of cobots is an example of a Reconfigurable
Manufacturing System, which allows the functionality and efficiency of the
production infrastructure to be optimised. These systems consist of modules
that, thanks to operational and IT integration, can be easily combined, separated
or added to, while an integrated measuring system assesses the condition of the
entire system. Mobile and flexible robots, operating on intelligent algorithms,
make it easier to reconfigure production lines quickly and cheaply in order to
produce small batches and respond to the changing preferences of recipients.26
This way, the technological processes that are shaping Industry 4.0 will enable
advanced personalisation of the final product, resembling of crafts manufac-
turing, but employing mass production.27
The developments in robotics are supported by the deployment of other
innovative solutions, e.g., additive (incremental) production using fast design
(based, for example, on data obtained from sensors and processed by AI) together

30

25

20 + 182%
(in bln USD)

15 31

10 19

5 11

0
2020 2024 2028

Figure 3.3 Projected global additive manufacturing market size (in billion USD,
2020–2028).
Source: Own work based on PwC, Strategy&. 2019. Projected global additive manufac-
turing market size between 2020 and 2028 (in billion U.S. dollars). Chart. In Statista. www.
statista.com/statistics/284863/additive-manufacturing-projected-global-market-size/
(accessed 21 December 2020).
84 How is production changing?
with 3D printing (see Figure 3.2).28 The basic raw material for 3D printing is
plastic, but other innovative applications include metal object printing using a
bidirectional printing technology which involves spreading metal powder and
binding it during each machine pass. This results in the creation of durable
metal elements at a rate that is as much as 100 times faster than in traditional
production.29
3D printing is also finding more and more innovative applications in
healthcare. By 2026 the market for medical, surgical and pharmaceutical
applications will have increased in value from $973 million in 2018 to $3.7
billion.30 In addition to creating surgical tools, the technology is also useful for
building models of organs due to undergo surgery, allowing doctors to prepare
better for an intervention in the patient’s body. A separate medical application is
bioprinting, i.e., applying layer upon layer of a bioink composed of living cells
to create an organ. 3D printing also allows personalised implants and prostheses
to be constructed.31 This will allow for true personalisation of healthcare.
The number of robots in production facilities is growing steadily, rising from
1.8 million in 2016 to reach over 2.7 million in 2019.32 In 2019 70% of them
were used in the automotive, electrical/electronic, metal, or machine sectors,
although more and more applications in other industries are being found,
including in smaller enterprises. Robots are doing handling, welding, assembling,
cleaning, dispensing, and processing. Three out of four new industrial robots are
being installed in just five countries: the largest share is in China (36% of new
installations), followed by Japan, the United States, South Korea and Germany.33
The design and production of robots is becoming easier and cheaper, too.
Smart facilities, be they factories or offices, are equipped with ubiquitous
hyperconnected devices, which makes them a perfect aim for cyberattacks.
The number of malicious attacks ramped up in recent years: in 2016 each IoT
device was attacked 6,000 times a year. In 2017 this number grew to 50,000.34
Moreover, 40% of security breaches are indirect and come from supply chains
or business ecosystems of a company.35 In response digital companies increas-
ingly invest in cybersecurity solutions based on intelligent algorithms, such
as SOARs (Security Orchestration, Automation, and Response) or SIEM
(Security Information and Event Management). They collect and analyse data
on security threats, automatically respond to low-level security breaches and
allow for optimisation of security measure.
Another technology which offers high level of data security is blockchain.36
Blockchain technology is an innovative combination of a number of well-
known technologies: cryptographic tools, providing data integrity, and access
control; decentralised computing; and software, which acts as a ledger for the
blockchain.37 Each node in the network keeps complete copy of the data-
base, identical to all the other copies thanks to blockchain consensus algorithm.
New records are being incrementally added in blocks of data, each such add-
ition invoking a network-wide security- and integrity-assuring procedure.This
guarantees that the alteration of historical records is virtually impossible. In a
nutshell, it is a constantly updating distributed database. To put it even more
 How is production changing? 85

a)
4.0
4
3.6

3.2
3
2.7
2.4
(in mln)

2.1
2 1.8
1.6
1.5
1.3
1.2 1.2
1.0 1.1
1

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

b) Cobots
100% Tradional robots
16% 21% 24%

50% 94% 89% 84% 79% 76%

0%
2017 2018 2019 2020 2021

Figure 3.4 (a) Operational stock of industrial robots (in million units, worldwide, 2009–
2022); (b) share of traditional and collaborative robot unit sales (in %, world-
wide, 2017–2021).
Source: Own work based on IFR. 2019. Worldwide operational stock of industrial robots from
2009 to 2022 (in 1,000 units). Chart. In Statista. www.statista.com/statistics/947017/
industrial-robots-global-operational-stock/ (accessed 21 December 2020); IFR. 2020.
Operational stock of multipurpose industrial robots worldwide from 2015 to 2019 (in 1,000
units). Chart. In Statista. www.statista.com/statistics/281380/estimated-operational-
stock-of-industrial-robots-worldwide/ (accessed 21 December 2020); Statista. 2019.
Share of traditional and collaborative robot unit sales worldwide from 2017 to 2021. Chart.
In Statista. www.statista.com/statistics/1018935/traditional-and-collaborative-robotics-
share-worldwide/ (accessed 21 December 2020).

simply, imagine blockchain as a record of transactions kept in a Google spread-

sheet shared by many users. Each user can see entries in the registry and can
add information to it. However, they cannot change the entries on their own.
Initially, blockchains were mainly used to create cryptocurrencies. However,
it quickly became clear that the new technology – characterised by its safety,
speedy transactions, and the ability to eliminate intermediaries – offered much
greater opportunities. Blockchains can either be public and accessible to any
86 How is production changing?

Singapore 918
South Korea 855
Japan 364
Germany 346
Sweden 277
Denmark 243
Hong Kong 242
Taiwan 234
United States 228
Italy 212

Figure 3.5 Robot density in manufacturing sector (in units per 10,000 employees,
selected countries, 2019).
Source: Own work based on: IFR. 2020. Manufacturing industry-related robot density
in selected countries worldwide in 2019 (in units per 10,000 employees). Chart. In Statista.
www.statista.com/statistics/911938/industrial-robot-density-by-country/ (accessed 21
December 2020).

user (such as Bitcoin, for example) or private and closed, only accessible to a
specific group working, e.g., in a specific industry or supply chain. Blockchain
solutions ensure high security of data within the organisation. However, their
introduction and maintenance is expensive and in the nearest future will be
limited to large companies.

Datafication of production
The changing functions of robots illustrate the growing convergence
between information technology systems (IT) and operational tech-
nology systems (OT), enabling intelligent automation of all production
processes.38 In the past, IT and OT functioned separately: IT was used in man-
agement, OT was used to control and monitor machinery and resources.
The Industrial Internet of Things (IIoT) used in factories enables the con-
tinuous monitoring of production processes and the adjustment of the mainten-
ance and service plan, thus preventing failures from causing downtime. Integrated
with Enterprise Resource Planning (ERP) systems, it manages energy resources
and power consumption, as well as optimising production processes more
generally.39 In turn, the integration of the IIoT with Customer Relationship
Management (CRM) systems allows companies to tailor automated customer
service in real-time, to the profile of a specific customer.40 Better integration of
data enables efficient and seamless integration of the systems, and this, in turn, is
reflected in comprehensive organisational and processual transformation.
a) b)
30
65% 25
51%
+ 7 p.p.
20
57% 15
34%

15% 10
56%
23% 5
0 19% 26%
45%
42% 48% 11% 2014 2018
22%
40% c)
25% 26%
21%
Buy e-mail 18%
23% 18%
19%
31% 10% Buy storage of files 18%
23% 8% 15%
18% 8% Buy office so ware 14%
25% 22% Buy hos ng for the
13% 13%
10% database
Buy finance
so ware
10%

Figure 3.6 Cloud computing services used over the internet (% of enterprises): (a) by country (2018);
(b) EU28 (2014–2018); (c) EU8 (by type, 2018).
Source: Own work based on Eurostat data [isoc_cicce_use].
How is production changing? 87
88 How is production changing?

110

100

90
+ 79%
80

70
(in bln USD)

60
111
50 103
96
89
40 83
77
67 72
30 62

20

10
0
2017 2018 2019 2020 2021 2022 2023 2024 2025

Figure 3.7 Industrial Internet of Things (IIoT) market size (in billion USD, worldwide,
2017–2025).
Source: Own work based on Statista. 2020. Industrial Internet of Things market size
worldwide from 2017 to 2025* (in billion U.S. dollars). Chart. In Statista. www.statista.
com/statistics/611004/global-industrial-internet-of-things-market-size/ (accessed 21
December 2020).

This convergence of IT and OT is manifested in the development of cyber-

physical systems (CPS), such as digital twins, i.e., digital replicas of physical
objects and processes based data that is continuously supplied from a multitude
of sensors and processed in the cloud in real-time, using intelligent algorithms.41
Every physical product or production process can be given its own digital
‘model’ that allows it, among other things, to be experimented with safely in
a virtual world. You can make a digital twin of a machine to test and adjust
its design on the basis of the real-world data (this is what Airbus does with its
engines);42 you can build a digital twin of a whole production process to tweak
its parameters if need arises (a pharmaceutical company Takeda created a replica
of its manufacturing process to experiment and model new chemical and bio-
logical reactions);43 or even of a whole city (as is the case with Singapore, where
digital twin allows for flexible response in case of disasters).44 Digital twin is
more useful the greater its precision, which in turn depends on the quality
of all the data on the product (or production line) parameters and the speed
at which it is transmitted. Unlike Computer Aided Design (CAD) systems,
which enable simulations to be carried out in the design phase, ‘digital twins’
cover the entire product life cycle.45 They are also much more interactive and
even immersive, especially when used with virtual or augmented reality, e.g.,
experienced via special goggles, helmets, interactive display walls (powerwalls) or
Cave Automatic Virtual Environments (immersive virtual reality environment),
 How is production changing? 89
enabling a whole team of designers and engineers to work simultaneously on
a joint project.46
Digital twin technology gives an insight into the specifics of how complex
machine components operate and allows their functioning to be tested in a var-
iety of conditions. It also makes it possible to optimise the repair and mainten-
ance schedule based on real-time diagnosis of wear and tear affecting machine
parts. Simulated factory layouts and systems allow production to be organised
better, and then for physical changes to be carried out with the aid of modules
and actuators. Digital twins are especially useful for large and complex machines,
such as jet engines, whose rotors are subjected to extreme temperatures that
reach as high as 1600°C (higher than most metals’ melting points). They require
constant maintenance, but the schedule is different for each unit, depending
on various factors that cause degradation, such as conditions at airports, the
number of people on board, the pilot’s flying style.47 That is why aircraft engines
constructed by General Electric are equipped with over 100 sensors that con-
tinuously collect operational data.48 In addition, Boeing has found that the use
of digital twins has led to a 40% improvement in the quality of aircraft parts
and systems. The company’s CEO declared in 2018 that CPS technology would
be the company’s biggest driver of development over the coming decade.49
Digital twins are also employed by Germany’s ThyssenKrupp, which fits out its
elevators with intelligent sensors connected to the cloud. Algorithms process
the collected data in real-time, flagging potential problems in the functioning
of devices and highlighting the need for maintenance. The service is supported
by HoloLens – wireless mixed-reality glasses produced by Microsoft, thanks to
which specialists can keep track of repair work performed by technical staff.50
The French rail equipment company Alstom has built a digital twin of a whole
rail route between London, Glasgow, and Edinburgh, including every train in
the fleet, operating timetables and maintenance regimes.51 Several companies,
with Phillips and Siemens among them, are currently working on the digital
twin of a heart, up to millimetres mirroring the heart of an individual patient
based on 3D scanning and using real-time data from wearables to prevent health
problems.52 Now, this is a kind of predictive maintenance which may revolu-
tionise healthcare.
Integrating sensors into every part of factory equipment allows for the
application of the digital twin model across whole enterprises. The workings
of an ‘intelligent factory’, along with its supply chain/network, can be
recreated virtually based on abundant data points, and management decisions
can be made in a highly automated manner, based on data that is continu-
ously connected and processed in the cloud by artificial intelligence.53 One
example of the transformation of traditional production methods into a smart
factory is the Hugo Boss factory in Izmir, Turkey. Employing 4,000 workers,
the enterprise – in addition to robotisation and automation – is introducing
AI systems that analyze data collected from 1,600 tablets located around the
factory in order to improve machine- and resource-management processes in
real-time. Customers can make changes to the collections they have ordered by
90 How is production changing?
using digital twins. Speedy and precise communication and collaboration with
customers, taking into account their preferences, has allowed product turn-
around times to plummet from six months to six weeks.54 Another example
is a Siemens factory in Amberg, Germany, where industrial computer control
systems are manufactured.

For there is another factory, a virtual version of the physical facility that
resides within a computer system. This digital twin is identical in every
respect and is used to design the control units, test them, simulate how
to make them and program production machines. Once everything is
humming along nicely, the digital twin hands over to the physical factory
to begin making things for real.55

The convergence of IT and OT systems via the IIoT, the automation of

processes, together with the growing use of intelligent algorithms, have all
led to upheavals in companies. Intelligent factories are seeing unprecedented
vertical integration of processes, i.e., the combination of technologic-
ally separate phases of production, sales and distribution.56 Hitherto separate
levels – of devices and sensors, control equipment, the processing line or the
actual production process, and planning and management – are being brought
together by an uninterrupted flow of data. Linked-up systems and machines
can autonomously respond to changes in production needs and communicate
with each other in order to detect defective parts. This ensures greater flexi-
bility and operational efficiency, especially if a company has implemented a
modern ‘Manufacturing Execution System’ (or MES) to manage production.57
At the same time, the digitalisation of systems and processes from end to end,
throughout all the activities aimed at delivering the product to the end-user,
is allowing the industry to reach a new level of horizontal integration. As a
result, a manufacturer’s internal processes (demand planning, public procure-
ment, logistics, and after-sales services) are becoming linked to processes that
take place where suppliers, business partners, and even consumers themselves
are located. The result is a transparent network in which all partners coordinate
and optimise not only their processes but also tasks and decisions throughout
the entire value chain.58
Efficient integration and analysis of data – from both vertical and horizontal
operations – is increasingly carried through a cloud-based working environ-
ment which reduces the need to develop complex and expensive IT systems
on site. These so-called Platform-as-a-Service or Infrastructure-as-a-Service
solutions connect devices, systems, applications, and business services, enabling
data analysis and access to information in real-time, with minimal involvement
of human workers. In simpler terms, they provide for the smooth functioning
of the Industrial Internet of Things. A good example of PaaS is MindSphere,
developed by Siemens, and available as part of Amazon Web Services, along
with an open API. It collects data from sensors, machines, and systems, allows
for monitoring of the processes, application of digital twin solution, and
 How is production changing? 91
advanced analytics with the use of intelligent algorithms. Company resources
are connected to the cloud, which allows for monitoring their performance,
performing analyses and predictive maintenance, as well as building personalised
applications for internal use.59 Predix, developed by General Electric, performs
similar functions by connecting industrial devices to the cloud, and enabling
data analysis and access to information in real-time.60

Intelligent product
Not only are many aspects of design and production becoming digitalised: so is
the lifecycle of products.The spread of ‘digital twins’ is revolutionising product
life cycle management – from conceptualisation, to ordering, development,
production, distribution, use, service, and even to withdrawal from the market
and perhaps recycling.61 Digital twins shorten the design cycle and allow to
respond more quickly to customer needs. In 2015 the engineers at Maserati
used them to shorten the time to design a new Ghibli model from 30 to
16 months.62

With the digital copy, the company was able to generate a virtual copy in
parallel to the physical development of the car – 100 percent true to the
original, down to the last screw. In the development process, the Maserati
developers used data from the real and the virtual models simultaneously,
utilized that information in parallel for continuous optimization, and were
able to reduce both the costs and the time required for development by an
astonishing 30 percent.63

All this contributes to the creation of a personalised product and facilitates the
construction of prototypes, reducing their cost through virtual, fast, and scaled
tests. As a consequence, it also optimises decision-making processes, not only
in production but also in logistics, sales and related services.64 In Airbus digital
twin is used to coordinate 12,000 suppliers that provide 3 million parts for one
of the engines.65
An important factor in the creation of new business models has been the
increase in the number of intelligent products equipped with sensors to collect
data on how they are used throughout their life cycle.66 Thanks to these, com-
panies can improve their products and services and create a more attractive
offering, thereby building a competitive advantage in the market. Technology
commentators may have mocked the idea of a smart toothbrush with integrated
sensors, which gather data on how scrupulously the user cleans each area in her
mouth, but it does give the consumer useful information on mouth hygiene.67
Acquiring and processing data from each stage of the customer’s use of the
product, in real-time, opens up – for instance – the possibility of creating a
digital representation of the product, one which the client can reconfigure
using intuitive design tools (such as Configure One software),68 or even by
using a digital twin.
92 How is production changing?
Intelligent products also allow companies to create a range of complemen-
tary products and services related to a product’s use, thus expanding opportun-
ities for servitisation (we write more about this in Chapter 5).69 A precursor to
servitisation was Rolls Royce, which in 1962 began to offer customers a ‘power-
per-hour’ package: the purchase of an aircraft engine could be supplemented by
paying a fixed price to have the engine serviced and parts replaced. In 2002, the
company’s ‘CorporateCare’ package even included hardware monitoring, made
possible by built-in sensors and faster servicing in authorised centres scattered
around the world. As part of the company’s current ‘TotalCare’ service package,
it now rents engines and collects data from them on an ongoing basis, allowing
the company to plan maintenance. Elsewhere, Caterpillar, a manufacturer of
construction machinery, offers a remote tracking and monitoring service in
order to provide updates and ‘preventive maintenance’.70 Another example of
successful servitisation is changes introduced by IBM: in the 1990s the company
began moving away from the production of computers in favour of providing
consulting services for enterprises, and then to focus on creating specialised and
advanced software.71
Servitisation adds to business models that involve subscribing to, or renting, a
product without transferring ownership to the user.72 Ultimately, it boils down
to ‘building revenue streams for manufacturers from services’.73

Rather than simply selling a piece of industrial hardware, manufacturers

can sell customers a contract to provide highly streamlined, AI-powered
maintenance and repair services for that specific product. The upside for
customers? Less downtime due to machine failure and fewer burdensome
repair costs. The upside for manufacturers? They’re now able to leverage
the data generated by IoT sensors placed within their devices into revenue
that’s generated over the lifecycle of their product.74

To balance this enthusiastic approach, it is worth noting that servitisation in

facts entails growing and constant dependence of the customers to the provider
of the services built around the product. All physical products can be turned
into a kind of connected hardware, useless without the software provided by the
producer (we return to this thread in Chapter 5).

Platformisation of production
The digital transformation of a production company not only changes its
internal structure but may also result in a radically new business model.75 The
changes here come down to the use of data’s potential to break down established
value chains and at the same time open up new sources of income. Traditional
companies were based on linear value chains, which often transcended national
borders. The dominant model was called a pipeline as it offered a straightfor-
ward way of value creation and delivery from the supplier of raw materials
 How is production changing? 93
through the producer to the customer. Traditionally, a company designs a
product, a good or service; then it is manufactured or produced, and, finally,
it is offered for sale to individual and business customers. The ideal process of
production was lean – a concept based on the principles and tools of the Toyota
Production System (TPS). The TPS streamlined the use of the resources and
the time devoted to developing new products by developing timely delivery
systems, standardisation, and improvements in how staff worked.76
Currently, the growing abundance of data on each stage of value cre-
ation allows for building new connections between suppliers, producers,
and customers. A simple pipeline transforms into a complex network of
dynamic relations between all the participants in the production process. It is
supplemented by a transition from centralised to decentralised production. The
former entails carrying out complete production tasks within a single plant or
in a multi-facility organisation with a central plant and a network of organ-
isationally related entities. Decentralisation, on the other hand, is the creation
of networks of autonomous, intelligent units that exchange information and
configure themselves in order to optimise the production process and achieve
an efficient result. Lean manufacturing is being replaced by agile manufac-
turing, based on a flexible, data-driven organisational approach and reconfig-
urable manufacturing systems. Focusing on smaller batch sizes or even single
products, reducing time to market, and maintaining direct contact with the
consumer allows companies to respond speedily to changes. It is then pos-
sible to meet individual customer needs while controlling costs and quality, and
while keeping prices down.
This is the idea behind production platforms. Platforms can be built
around one or several of the nodes in the value chain; platforms may grow out
of a product via servitisation. The integration of processes and data in the not
too distant future will allow entities to operate in a distributed system, i.e., in a
network.This will affect all actors in the production process, starting with those
managing and controlling the production process, to those creating systems and
managing suppliers and subcontractors with the aid of those systems, to those
supplying materials and semi-finished products, to engaging subcontractors and
employees, to customer outreach and maintenance/servicing. In this system,
production platforms will end up as a kind of intermediary, an integrator of all
the above-mentioned actors. As Michael Mandel writes:

industrial companies now have the capability to create manufacturing

platforms, both open and proprietary. These platforms would be analogous
to today’s multi-sided internet platforms, like app stores, social media, or
advertising networks. Platforms are built upon a ceaseless flow of small
packets of data that are rapidly routed to the desired destination. By con-
trast, these new manufacturing platforms would be mixed cyber-physical
systems consisting of functions such as design, production, and distribution
running as separate services on top of an advanced distribution network of
94 How is production changing?
goods. By analogy with the digital world, it is useful to think of this new
physical network of goods as being ‘packet-switched’, indicating greater
flexibility and lower costs than the previous generation of distribution.77

While production platformisation is taking place, the organisation of the value-

added chain is also changing. The development of technology in the 20th cen-
tury allowed it to fragment and paved the way for linear collaboration. On
the other hand, digital technologies make it possible to rip the chain apart
and distribute work across many levels. The very production process itself may
soon be treated as a special service that will be available to companies and
even retail customers (Manufacturing-as-a-service). For example, Dassault
Systemes’ 3DExperience Marketplace connects potential customers digit-
ally with producers. Customers send their projects to producers who quickly
deliver a precise quotation, reducing bureaucracy and costs. The platform then
passes the order to an available manufacturer that best meets the technical and
location requirements.78 Another platform called Xometry, operating since
2014, provides access to 3D printing technology and metalworking. Xometry
supplies clients with a geometric analyser (called 3D Hubs) that allows the
order’s parameters to be tweaked, and it also comes up with almost instant order
quotes based on AI analysis.79
Platforms such as Xometry give companies a fast and effective way to use
another firm’s production capacity to obtain the parts or devices they need.
As a result, they can reduce inventory, but above all they gain access to a wide
number of potential suppliers. A report released in 2017 on Digitizing European
Industry, prepared for the European Commission by a working group that deals
with industrial platforms, emphasised that the creation of platforms is crucial
to the way that smart factories operate. The report argued that the platforms
would acquire data from machines – not only to allow them to monitor and
control applications but also to provide it to external entities that could use
it to create new applications. The next step would be the creation of an eco-
system connecting multi-sided markets, enabling the production of new and
innovative products and services. New global standards will also emerge as a
consequence. The report’s authors argue that platforms present a solution to
many challenges facing the manufacturing industry: they enable agile and more
flexible approaches to production, based, among other things, on the use of
automation and robots, mass personalisation, and servitisation of the product
(building the product up with additional services), and finally, they increase
energy and resource efficiency.80 Industrial platforms open up completely new
opportunities for companies (including small and medium-sized ones) to reach
global markets. By participating in network-related value creation and by lever-
aging the results of this network, they can strengthen their competencies and
compete more effectively with larger players. Their role is no longer restricted
to that defined in the linear model of the value creation chain; instead, it may
change depending on the project and the partnership that has been created
within the network.The development of Industry 4.0 – i.e., the combination of
 How is production changing? 95
human contextual decision-making skills and the precision and regular input of
automated cyber-physical systems driven by intelligent algorithms – may give
rise to rapid growth in productivity and speed up economic develop-
ment. However, this will only happen if enterprises manage to change tack and
follow a path of intensive digital transformation.

Datafied distribution
One of the key manifestations of the internet revolution has been the emer-
gence of a brand new sales channel: e-commerce. Initially, most distance-
based purchasing of goods and services took place over the telephone, via
fax and even via television, but the increasing availability of computers for
individual users, a decrease in hardware prices, the popularity of the internet,
and user-friendly graphic browsers, all created a new paradigm. The internet
became fashionable, and the number of users grew rapidly. From the mid-
1990s to 2001, everything to do with the net seemed to have a golden
future: a huge variety of online stores, auction platforms, and various forms of
e-enterprises, often devoid of realistic plans, sprang up like mushrooms after
a downpour. The bursting of the dot-com bubble in 2001, however, swept
away a large number of new companies. Those that survived – especially
Amazon and eBay – have achieved impressive financial results as the growth
of the e-commerce market has resumed.81 For businesses wading through the
digital transformation, this sales channel has created unprecedented oppor-
tunities. By analysing increasingly large data sets from various online sources,
the seller or advertiser can learn more and more about the consumer. Website
visits, social media activity, individual clicks, comments, likes: all of these allow
companies to create profiles of customers and contact them with personalised
offers. The data are useful for dividing up the market and creating a variety of
pricing policies, as well as for tailoring personalised, interactive and content-
rich advertising copy and content.82 The data also allow for multi-pronged
analysis of the competition.83
The further growth of e-commerce will depend on developments in logis-
tics – fast shipping goods from the seller to the customer. Companies that
can quickly provide customers with tailor-made products will gain a competi-
tive edge. This is what Jeff Bezos understood better than anybody: ‘They want
fast delivery; they want vast selection.’84 The key challenge will be the ‘last
mile’ problem, i.e., the final, most unpredictable stage of delivering goods
to the consumer. Smaller companies make use of external delivery companies,
which increasingly develop and adjust the existing infrastructure. For example,
in Poland the growing e-commerce sector uses not only face-to-face delivery
by the couriers and thickening network of parcel lockers, but also includes the
local shops and groceries as last-mile delivery points.
Reflecting the trend characteristic to other areas of the digital economy, dis-
tribution will be increasingly dominated by online platforms. E-commerce giants
develop their own delivery platforms based on large logistics centres with myriad
96 How is production changing?

45 44
43
42 42 43
40 40
40 39
37 Large enterprises (250+)

35 35

30
(%)

25 All enterprises

20 20 20
20 20
18
17 19 19
15 17
15 16 16 SMEs
14 15
10
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Figure 3.8 Enterprises with e-commerce sales (% of EU28 enterprises, 2010–2019).

Source: Own work based on Eurostat data [isoc_ec_eseln2].

delivery points closer to the consumer: this is the model adopted by Amazon. In
2019 the company operated 500 logistics facilities in the United States and 1100
around the world.85 In 2012 it paid $775 million for Kiva Systems, a producer
of logistics robots, thus kick starting a new branch of development – Amazon
Robotics. The corporation then introduced robots to warehouses and service
centers around the world, cutting the time needed to prepare an online order
for shipment (click-to-ship) to a mere quarter of an hour. It took, on average,
four to five times longer for a person to do the same task. Currently, Amazon
has an army of over 100,000 robots and plans to add many more.86 Some of
Amazon’s warehouses also use an internal automatic transport system, made up
of roller conveyors and forklifts equipped with sensors which let them man-
oeuvre in warehouses with narrow aisles, and which also display information
about the load status, the tilting angle of the drive wheel, hours worked and
lifting height.The changes that have been introduced have tripled the number of
orders handled annually – to over one and a half million currently. Additionally,
since 2014 the company has invested $39 billion to build an extensive delivery
network. In 2019 Amazon delivered nearly half of its 2.5 billion international
packages using its network instead of external delivery companies, and according
to the Bank of America Global Research it is ‘approaching a truly vertically
integrated logistics network on par with the largest delivery companies in the
world’.87 Amazon aims at widening the base of customers in its Prime model,
introduced in 2015, promising them the next day delivery.88
The Chinese Alibaba also boasts that it can deliver anywhere in China in
24 hours, although it does not define itself as a logistics company. ‘We partner
 How is production changing? 97

Taobao 524
Alibaba Group
Tmall 496

Amazon 339

JD.com 230

eBay 90

Shopify 61

Vipshop 23

Etsy 5

Figure 3.9 E-commerce platforms’ gross merchandise volume (GMV) (in billion USD,
fiscal year 2019/2020).
Source: Own work based on Alibaba Group. 2020. Fiscal Year 2020 Annual Report.
https://doc.irasia.com/listco/hk/alibabagroup/annual/2020/ar2020.pdf (accessed 28
January 2021); eBay Inc. 2020. Form 10-K. Annual Report for the fiscal year ended 31
December 2019. http://d18rn0p25nwr6d.cloudfront.net/CIK-0001065088/d33d35e7-
32e8-4a9c-ad67-12baec291433.pdf (accessed 29 January 2021); Fareeha Ali. 2020. What
are the top online marketplaces?. Digital Commerce 360. www.digitalcommerce360.com/
article/infographic-top-online-marketplaces/ (accessed 29 January 2021); Etsy. 2020.
2019 Integrated Annual Report. https://s22.q4cdn.com/941741262/files/doc_financials/
annual/2019/Etsy-Annual-Report.pdf (accessed 29 January 2021); Vipshop Holdings
Limited. 2020. Form 20-F. Annual report for the fiscal year ended 31 December 2019. https://
ir.vip.com/static-files/1765e7ba-b345-471b-b20e-435957118261 (accessed 29 January
2021); JD.com, Inc. 2020. Form 20-F. Annual report for the fiscal year ended 31 December
2019 . https:// ir.jd.com/ static- files/ fc93d5dd- 9437- 4141- 9191- f960ba46874b
(accessed 29 January 2021); Shopify Inc. 2020. Form 40-F. Annual report for the fiscal
year ended 31 December 2019. https://s23.q4cdn.com/550512644/files/doc_financials/
2019/ar/0efb0f8e-be6a-47d9-b0d6-11a92482dbd3.pdf (accessed 29 January 2021).

with others for this’, emphasised Jack Ma in 2017.89 The logistics arm of
Alibaba, called Cainiao Network Technology is an open platform streamlining
collaboration between merchants and 3,000 logistics partners and 3 million
couriers from 15 top delivery Chinese companies and 100 international ones.90
In May 2020 Cainiao introduced a three-year initiative to deliver packages
within 24 hours in China (for 3 cents) and 72 hours globally (for $5).91 Time
correspondent Charlie Cambell, writing in November 2020 from Hangzhou,
observed that the company endeavours to create

a single ecosystem for all logistics firms across the world to plug into,
allowing for the seamless transfer of goods between companies and
jurisdictions. Just as myriad smartphone makers all operate on Google’s
98 How is production changing?
Android, Cainiao envisages thousands of independent logistics firms can
operate within its system, sharing everything from labelling standards to
customs information.92

Cainiao has already put to use a small automated vehicle called Xiao G to dis-
tribute packages nearby its depot in Hangzhou. Both the American and the
Chinese e-commerce giant are toying with the idea of drone delivery but it is
still in its infancy. In 2017, Flytrex, an Israeli startup, experimented with drones
to deliver goods in the suburbs of Reykjavik. To begin with, drones carried
goods dispatched by a local e-commerce store across a bay and left them at
a designated place where a courier picked them up. In the summer of 2018,
Flytrex drones moved on to attacking the ‘last mile’ and began delivering to
suburban customers’ doors (naturally, those living in places that were relatively
easy to navigate).93 In 2020 the drones were tested by Walmart to deliver gro-
ceries in Fayetteville, North Carolina.94
Most importantly, both e-commerce behemoths know how to crunch data
efficiently to ensure data-driven predictions of customer demand. Sangeet
Choudhary emphasises that ‘data is the reason Amazon gets this right’.95 For
example, data insights collected from the deliverers allow for matching the
quickest routes of delivery; comprehensive datafication of warehouses allows
for predictive ordering of the lacking products.
Platforms are also widely used in long-distance logistics. In 2019 nearly
half of the shippers surveyed by Transport Intelligence, a British consultancy,
used an online forwarding platform.96 Digital platforms connect and match
shippers (manufacturing and retail companies) and service providers (logistics
services, freight forwarders). One of such platforms, Flexport, connects more
than 10,000 clients and suppliers around the world, offering them logistics
services (ocean, air, truck and rail freight, transport of containers, and ware-
housing), trade services such as customs brokerage, as well as financing and
insurance.97 An intuitive dashboard allows for introducing data analytics and
making adjustments along the value chain. Another such platform, TradeLens,
developed by a logistics company called Maersk in cooperation with IBM, uses
blockchain to record the stages of the shipping process. Documentation and
procedures are completed automatically and without delays.98
Admittedly, the use of information and communication technologies in
logistics is nothing new: satellites began tracking sea and rail cargo several
decades ago, and truck drivers have been using electronic logs for over two
decades. Logistics 4.0, however, is characterised by ever more datafication: the
growing volume of data obtained from an increasing number of connected
sensors or devices is being more efficiently processed in the cloud by intelli-
gent algorithms. The result is growing automation and a streamlining of the
delivery process: goods can be prepared for shipment with the aid of robots,99
and thanks to the integration of processes, their shipping becomes faster and
more flexible. New technologies of track-and-trace also allow for better
quality control in the supply chain: Hyperledger Sawtooth monitors sensors
used to tag each fish caught, and catch data is then entered into a blockchain,
 How is production changing? 99
allowing consumers to find out a detailed history of a dish when they order
it in a restaurant.100 Sensors and blockchains are used similarly by de Boer,
one of the largest diamond producers in the world.101 Firms can manage their
relationships with suppliers more efficiently – data analysis improves auditing,
affects timeliness, and allows companies quickly to spot problems with the
creditworthiness of a business partner. Datafication of the supply chain/net-
work means better resource planning (human, material, and equipment), and
this, in turn, improves process optimisation and enables faster reactions to
changing market conditions.

The digital company

In this chapter, we focused on the dimensions of digital transformation in
manufacturing. But the production is changing in each and every sector of the
digitalising economy, be it production of material goods or services. As Jack Ma
of Alibaba puts it. ‘In the next ten years all industries will change due to AI, big
data and cloud. Industries will be turned on their head.’102 Everywhere adoption
of digital technologies results in more efficient use of ever more abundant data,
achieved with the help of ever more intelligent algorithms. Companies can
optimise their operations, manage their supply chains/networks, and satisfy their
customers’ needs, producing personalised goods complemented with an array
of digital services. Traditional market advantage, built within a given sector, can
vanish in the face of digital disruption brought about by the datafied companies,
producing material goods. Here, a virtuous circle emerges: the more datafied
companies can make ever more efficient use of data and network effects. Linear
value and supply chains can be easily transformed into networks overcoming
the sectoral divisions – until each stage of production, each part of the company,
starts to resemble a Lego block which can be easily joined with other, external
blocks to build new and unexpected synergies. The internal structure of the
‘data-first, AI-first’ companies becomes more flat, slim, and agile.103
The developments described above have been happening already in every
sector that deals with services. Digitalisation allows for scaling those services
that can be delivered to large groups of people without losing their quality
and specificity because they are inherently built on data. Take financial services,
which are a vanguard of imminent transformation. Financial institutions have
always had great access to abundant data on their customers.Yet these data were
used inefficiently, because of slow and selective absorption of technologies of
datafication and attachment to traditional forms of providing services. Banks
focused on the development of digital banking and did not appreciate the fact
that the widespread adoption of connected mobile devices opened the way for
innovation in the area of contactless payments. People wanted to bank every-
where and at all times, not just in the evenings at their PCs.104 Soon banks
were faced with the growing competition from fintechs – financial startups that
knew how to crunch data with ever faster and more efficient analytics based
on intelligent algorithms, and how to leverage their impact through platforms
accessed via mobile applications.105
100 How is production changing?

3584
Manufacturing
21%
2212
Retail/WH
13%
2074
Financial Services 12%
1555
Infrastructure*
9%
1296
Media and Entertainment
8%
1218
Healthcare
7%
717
Transporta on 4%
280
Resource** 2%

Figure 3.10 Size of the enterprise datasphere (in exabytes, worldwide, 2018).
Note: Sums up to 75%, the remaining 25% covers other industries; * – includes utilities
and telecommunication, ** – includes oil and gas (mining), transportation of oil and gas
through pipelines or shipping, resource industries, petroleum and coal.
Source: Own work based on Seagate. 2018. Size of the enterprise datasphere worldwide in
2018, by industry (in exabytes). Chart. In Statista. www.statista.com/statistics/948851/
worldwide-enterprise-datasphere-total-size-by-industry/ (accessed 19 January 2021).

Digital disruption in the financial sector was somewhat slowed down by the
weight of legal regulations guarding many of the traditional functions.Traditional
financial institutions gained time to learn their lesson and to seriously engage
in digital transformation. But Brett King, the author of Bank 4.0, believes that
the disruption will continue until banking becomes a ubiquitous experience
delivered seamlessly in real-time: ‘the bank account of tomorrow is primarily
an activated, cloud-based value store that reacts through technology where you
are using your money. It’s not an app, a website or a branch.’106 Traditional
banks, built around departments providing different types of products, usually
offered through physical branches, will not survive, because they will be not
able to offer personalisation in the shape of frictionless payments, value storage,
and access to credit, backed up by intelligent recommendations. Accordingly,
the banks will have to change their internal organisation, transforming into
platforms built around a ‘data-first, AI-first’ rule. ‘AI will likely eliminate whole
swathes of the org chart as it stands today, but AI and data mining and mod-
elling will power elements of almost every interaction’, says Brett King. Such
platformised banks, with a digitally standardised structure, will be able to nego-
tiate flexible partnerships with fintechs, technological companies offering a
range of complementing services, and, more importantly, with techfins, large
technological companies supplying a digital layer to every kind of human
experience. One such area of collaboration is online and mobile payments,
with Chinese companies such as Alibaba and Tencent showing the way. Alipay
developed by Alibaba can boast of 1 billion users (as of 2020), and advertises
 How is production changing? 101
to ‘remove barriers between different aspects of life’ so their customers ‘can
enjoy a streamlined way of living, empowered by technology’.107 The Alipay
app enables frictionless online as well as in-store payment (through QR codes)
as well as management of bank account and credit card bills.
Digital technologies have also changed the mode of delivery for non-
scalable services, which may be offered to a limited number of people at a given
time. Many of such services are based on personal, physical, and geographic-
ally localised contact between the provider and the receiver, for example, a
hairdresser and the client, or a taxi driver and a passenger. They are intrinsic-
ally not amenable to digitalisation, but some stages of their provision can be
datafied. This goldmine was first discovered by platforms such as Uber and
Airbnb, which offered a simple solution to the problem of matching supply and
demand for some kinds of services, and provided it via applications embedded
in a mobile device. Now platformisation is beginning to expand into more
traditional service sectors, such as education. Particularly at the university,
datafication will devour all the passive modes of knowledge dissemination, such
as lectures, which will be easily scalable through digital channels. The teaching
of practical skills and competencies will still, predominantly, require personal
interaction, but the process of searching for competent and efficient teachers
will be increasingly mediated via platforms such as Coursera or Udemy and
their recommendation algorithms.
To sum up, the production of material goods and services will be increas-
ingly datafied, and distributed via digital or digitally enhanced channels of

Figure 3.11 What is a digital company?

Source: Own elaboration.
102 How is production changing?
distribution. If the service is scalable, companies will aim at creating their own
digital platforms. If it is not, then companies will increasingly use external B2B
or B2C platforms to reach potential customers.Value chains will become more
fragmented, as small technological companies take over some of their segments.
In other words, as Pascal Bornet, the author of Intelligent Automation (2020) puts
it, ‘All businesses are going digital: the winners will be those who do so the
quickest and to the greatest extent.’108
In the next chapter, we will take a look at the prerequisite of the successful
digital transformation – digitally skilled workers. The key factor for enterprises
is finding or training up appropriately qualified employees who can work
alongside intelligent robots and systems that incorporate AI.

Key takeaways
• The rules of digital transformation apply to all sectors of the economy,
from the manufacturing of goods to the production of services.
• In manufacturing digital transformation boils down to efficient collection,
analysis and use of abundant data to optimise design, production, sales,
and distribution. Data is flowing from all entities engaged in design, pro-
duction, sales and distribution: i.e., digital devices and machines, vast array
of robots and cobots equipped with sensors, suppliers, and contractors
along the supply chain/network, and intelligent products. This is the value
provided by the key technologies that feature in Industry 4.0 (such as
intelligent algorithms, the Industrial Internet of Things, a new gener-
ation of robots, and digital twins).
• The push to datafy all phases of production and distribution is resulting in
organisational changes: the incessant flow of data and its analysis by intel-
ligent algorithms supports vertical (within the company) and horizontal
integration (within the product life-cycle, i.e., supply chain/network). All
companies aiming to achieve competitive advantage will have to adopt a
business model based on the rule of ‘data-first, AI-first’.
• Digital transformation is propelled by the drive to personalise offerings
in response to the growing expectations of customers, who want tailored
and yet readily available goods and services. Personalisation will require
the flexible reconfiguration of manufacturing systems, based on
advanced simulation of a product via digital twins, fed with specific data
on customer’s needs and expectations. Personalisation is also increasingly
provided through servitisation, where a physical good is complemented
by a range of services that boost its basic usefulness.
• Datafication in all sectors of the economy, including manufacturing and
services, supports platformisation, particularly in sales, distribution and
logistics. Platforms use abundant data and intelligent algorithms to efficiently
match producers with suppliers, contractors, deliverers, and customers. Large
companies will tend to build their own platform ecosystems, while smaller
firms will use the infrastructure provided by tech companies.
 How is production changing? 103
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