• By Marianne D'Aquila, Greg Gorbach, Michael Guilfoyle, Mark Sen Gupta
  • Digital Transformation

The ARC Industrial Digital Transformation Top 25 report identifies global industrial digital transformation leaders and what others can learn from them.

Figure 1. ARC Industrial Digital Transformation Top 25

Digital transformation provides the pathway to success for industrial and infrastructure organizations. Yet, success is uneven across many industries, and mistakes, false starts, and dead-end investments are common. Companies continue to push forward, however, driven by market disruption, digital economies, and customer demand, with the pandemic accelerating the adoption of new technologies and work models. Leaders are emerging, supported by business cultures that embrace change as a competitive advantage. Who are the real leaders in digital transformation and why?

It is not straightforward to identify leaders in such a complex space, but ARC Advisory Group developed a rigorous process based on financial performance, a community intelligence–based ranking system, and software and sustainability data. Publicly available financial information, ARC primary and secondary research, data from ARC’s market database, and the opinions of members of ARC’s community of end users were factored into the determination of the Top 25 Industrial Companies in Digital Transformation. The result is an analysis and listing of the top 25 companies together with their scores in various categories, profiles of each of the leading companies, details about the research methodology, and more. The industrial companies on this year’s list are shown in figure 1.

The prevailing philosophy behind digital transformation has been that this transformation naturally translates to success. Although the notion shows some truth on the surface, a closer look reveals much more complexity. For this research, digital transformation is defined as: “The integration of digital technology into all areas of business, fundamentally changing the way companies operate and deliver value to customers. The organization is typically charged to innovate and improve across multiple dimensions such as: digital/disruptive technologies, culture and leadership, operational agility, workforce engagement, customer experience, environmental, social and governance, and competitive performance.”

Software as a strategy. One important indicator of success is the accelerating adoption of software by industrial companies. This metric is captured within ARC’s digital transformation index score. While it is true that these companies have been purchasing software for many years, their objectives for doing so (as well as what they purchase) continues to evolve. Leaders see software-as-a-strategy as a pathway to attain competitive advantage, with digital technologies allowing new levels of innovation, speed, and accuracy. From a shareholder perspective, that analysis holds true, as an increasing amount of evidence directly links the relationship between software purchases and industrial company valuation.

Market signals and competitive excellence. For most companies—and this includes innovators when they started—determining an effective starting point is overwhelming. Without better ideas about how to develop strong digital competencies, what ARC refers to as “digital wisdom,” companies often experience the collapse of their pilots and projects, leading to the internal perception of wasted investment. So, what do leaders seem to be doing differently?

The common thread is clarity around a starting point. Effective digital transformation does not occur unless the organization connects the change to some external market or customer signals. That starting point is crucial. Innovation leaders focus externally on the market signals shaping their industries, whether specific to customers, competitors, or some new disruption. As a result, it leads them to ask different questions about what motivates the organization to change. Digital transformation occurs when it supports competitive differentiation relative to those signals.

Culture change enabled by machines and data. Regardless of how compelling a market signal is, innovators also understand that nothing changes unless company culture is reinvented. The most forward-thinking transformation leaders clearly understand both the importance and challenges of reshaping their cultures, which avoid both risk and change.

Because of these deeply ingrained challenges, these companies emphasize culture change at the executive level, establishing a digital champion leadership empowered to identify and implement change. This change is almost always considered drastic at first, and then it becomes commonly accepted as a standard and the best way of securing the company’s ability to compete in digital economies.

As mentioned, these digital transformation leaders begin by identifying critical market signals that compel them to change. They use those signals as a basis for identifying what must change within the organization, how it will change, and what incentives exist for doing so. These include:

  • Emphasis on business outcomes that differentiate: The company defines ideal outcomes that emphasize the speed and accuracy of how the company recognizes and reacts to these external market signals. This provides vision for what needs to change.
  • Transparency of objectives: Armed with an externally based vision for change, leaders are transparent by communicating what transformation will look like and how it will affect people.
  • Aligned incentives: By realigning incentives with the vision, transformation leaders can reward transformative behavior. This becomes the lynchpin step for realigning the work culture.

Using this step-by-step process, the people, processes, and data involved become evident. This process also clarifies what digital transformation technologies can best be applied to support change.

Learning from others. Engaging in anything transformational requires learning new things and experimentation. Those requirements present overwhelming challenges for industrial companies that are hardwired by controlled and stable operations and transactions. Leaders in transformation understand that inherent contradiction, and they look outward for better ideas. As a result, another consistent characteristic of digital transformation is the presence of strong digital peer groups outside their traditional industrial ecosystems.

At almost all the companies ARC interviewed, employees noted that when they began their journeys, they quickly recognized they did not have all the answers, either within their own walls or in their market footprints. In fact, their digital champions began by aggressively expanding their sources of wisdom beyond their historic and current resources.

These expanded peer groups always brought return value. For example, one company was able to make extraordinary leaps in data management and security. In return, it provided a wealth of leading-edge knowledge on transformational ways of managing highly distributed infrastructure.

Establishing new competencies. Despite considerable progress, a dose of reality is helpful, particularly for those companies still trying to find a foothold. Apart from businesses that began with transformation as part of the mission statement, no comprehensively transformed company exists.

For most industrial companies, transforming to an organization where constant change and adjustment define normal operations is still very conceptual. Considering that, leaders focus on identifying and growing those initial digital transformation core competencies that will clearly support clear competitive excellence.

As a result, these companies typically have established some specific competencies that are well ahead of their peers. At the same time, they still struggle in many areas of the business and operations. In fact, they might still have certain aspects of their operations that look relatively primitive when compared to others. That is the nature of digital transformation now, where pockets of innovation occur with new digital competencies that will aggregate to establish fully transformed organizations. Even the leaders will be on this journey for some time.

A look at the top five

The top companies stand out for showing substantial progress in transforming their cultures, adopting technologies, and embracing digital transformation to enable business outcomes. There is no universal recipe for success, and no single company has everything figured out. These companies, while not perfect, are pushing full steam ahead. The top five companies are Tesla, Intel, BMW, Johnson & Johnson, and 3M (figure 2). This partial list and a profile of the top company, Tesla, show how all these companies exemplify characteristics of leaders in digital transformation.

Company Rank Profitability as % of
YoY Revenue Growth Return on Assets Profit per Employee ($USD) Community View ARC Analysts View ESG Score Digital Transformation Index Score
Tesla 1 2.2% 28.3% 3.8% 9,752 1,231 485 57 44 689
Intel 2 26.8% 8.2% 15.5% 188,960 822 487 90 37 676
BMW 3 4.1% –6.7% 2.5% 36,577 1,051 573 85 44 656
Johnson & Johnson 4 17.8% 0.6% 9.5% 109,398 829 289 91 59 594
3M 5 16.7% 0.1% 15.3% 56,681 924 261 92 30 578

 Figure 2. Sample from the ARC Industrial Digital Transformation Top 25 table

The scoring comprises three main components: financial indicators, transformation indicators, and collective intelligence. The financial indicators come from publicly available data, and their significance is as follows: Profitability and growth are positive business outcomes of some companies that are well down the digital transformation path. Year-over-year revenue growth and profitability were chosen as metrics because they are widely seen as strong indicators of digital transformation outcomes. Most of the successful companies have stated their revenue growth and profitability would suffer in the future if they did not digitally transform quickly enough. Ultimately industrial companies must extract value from assets, so this metric was selected. A major purpose of digital transformation is to create value by enabling employees to work more efficiently. Profit per employee was selected as a metric because it measures the efficiency in which a company is using its workforce.

The transformation indicators correlate as follows: Environmental, social, and governance (ESG) factors are a strong indicator for digital transformation. There is an increasing push across global industries to incorporate ethics and sustainability into business practices. Environmental, social, and corporate governance is a business outcome resulting from a successful transformative process. The ESG scores reflect an ARC assessment based on available company data and multiple publicly available ESG indexes.

For industrial companies, there is a correlation between investment in software and other transformational technologies and a company’s valuation. Appropriate software and technology research study data—including historical and forecast data for areas such as manufacturing execution systems, enterprise resource planning, cloud platforms, and analytics—were used to generate a digital transformation index derived from ARC’s proprietary research database.

The results also rely on the collective intelligence of ARC’s community. The collective intelligence component scores reflect the progress companies are making as demonstrated by the level of awareness and visibility in the knowledgeable industrial community and among ARC analysts.

An example: Tesla hits the mark on many fronts. Some may argue that Tesla started out as a transformative company and is not one that has recently transformed, given that its intent was to disrupt the automotive industry. The company’s growth has been fueled by several bold digital strategies. Founded in 2003, the company’s message from day one was not that an electric car could be good but that it could be better.

Tesla’s fundamental philosophy, internally and externally, is to move perception. Before Tesla, the market perception of an electric vehicle was a slow, ugly, juiced-up car with little range. Tesla shifted this perception to a sleek, high-performance, and faster-accelerating mode of transportation. This same strategy is used inside the organization to gain buy-in for digital initiatives and processes. For example, when Tesla sets out to automate its internal processes, it tries to build better from the start rather than start a clunky project and hope to get better on revision four or five. This orientation is fundamental in determining what key performance indicators the company values, as many of them are far different from metrics managed by manufacturers relying on traditional views of success.

By showing value from the start and having internal stakeholders support initiatives, internal employee resistance is minimized. As ARC sees it, this is an example of a company that is comfortable with digital transformation and adapts to business challenges with greater ease quickly. Tesla’s digital connectivity has allowed the company to deliver more value to consumers. Its business model is built on the tenet that the vehicles are more like interactive computers with wheels. This led the company to create an intelligent data platform and connected ecosystem, enabling Tesla to learn from and serve its customers.

In the third quarter of 2021, Tesla publicly stated it plans to grow manufacturing capacity as quickly as possible. Over a multiyear horizon, Tesla expects 50 percent average annual growth in vehicle deliveries. This rate of growth will depend on Tesla’s equipment capacity, operational efficiency, and the capacity and stability of the supply chain.

Digital transformation in every industry

Digital transformation leaders across many different industries share common traits and visions, helping them overcome complex challenges to innovate and stay agile. Some industries experience a greater resistance to change centered around their manufacturing processes, which can make transformation slower, more difficult, or less obvious. Regardless, ARC has witnessed digital transformation occurring in these industries as well. The final digital transformation top 25 list comprises companies from a varied set of industries. Industrial innovation continues to accelerate, and leading companies have their transformation initiatives well underway. For those who succeed, the result is a competitive advantage, even during the most difficult global times.

For the complete list and profiles of the top 25 companies, download the full report.

All images courtesy of ARC Advisory Group



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About The Authors

Marianne D'Aquila is director of research, ARC.

Greg Gorbach chairs the Digital Transformation Council of the ARC Advisory Group and is VP and manager of the digitization and IoT Group for ARC. He is based in Suffolk County, Mass.

Michael Guilfoyle is vice president, ARC.

Mark Sen Gupta is director of research, ARC.