Although large companies have progressed in digital transformation (DT) of factories using Internet of Things (IoT) and artificial intelligence (AI), small and medium-sized enterprises (SMEs) have not progressed enough. However, considering the efficiency and value creation of the entire supply chain, it is important to promote a smart factory in not only large companies but also SMEs. This study examines the success factors and mechanisms based on the case studies of Japanese SMEs that have successfully implemented smart factories. Then, its characteristics are compared with those of large companies. Specifically, in SMEs, where the top management and the factory floor are in close proximity, if the purposes and vision of DT are clear and the top management understands its possibilities and limitations, successful experiences can spread throughout the company through trial and error using an in-house system optimized for the factory floor. This study reveals that the success mechanism makes it easier for SMEs to promote DX than for large companies under certain conditions, which is a new finding and a theoretical contribution. The practical contribution of this study is that it guides SMEs to promote DT in factories in SMEs based on this mechanism.

1. TEMSCON-ASPAC2022
Naoshi Uchihira
Japan Advanced Institute of Science and Technology
Success Mechanisms of Smart Factories
in Small and Medium-Sized Enterprises

2. 2
Contents
1. Background: Smart Factories in SMEs
2. Literature Review
3. Values and Difficulties of Smart Factories in SMEs
4. Case Studies
5. Success Mechanism
6. Discussion
SMEs: Small and Medium-Sized Enterprises
DT: Digital Transformation

3. 3
Contents
1. Background: Smart Factories in SMEs
2. Literature Review
3. Values and Difficulties of Smart Factories in SMEs
4. Case Studies
5. Success Mechanism
6. Discussion

4. 4
Digital Transformation Market (IDC 2022)
https://www.idc.com/getdoc.jsp?containerId=prUS49114722
Worldwide Digital Transformation Investments are
reaching to $1.8 Trillion in 2022.
29.1%
Smart
Factory
Industry 4.0

5. 5
Smart Factories in SMEs
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
07Q1
07Q3
08Q1
08Q3
09Q1
09Q3
10Q1
10Q3
11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
14Q1
14Q3
15Q1
15Q3
16Q1
16Q3
17Q1
17Q3
18Q1
18Q3
19Q1
19Q3
20Q1
20Q3
SMEs Large Enterprises
SMEs have not sufficiently progressed in DT due to
lack of various resources (human, budget, technology, etc.).
Software investment ratio in Japan
(software investment/total investment)

6. 6
Contents
1. Background: Smart Factories in SMEs
2. Literature Review
3. Values and Difficulties of Smart Factories in SMEs
4. Case Studies
5. Success Mechanism
6. Discussion

7. 7
Literature Review and Research Gap
• Failure factors of DT in companies (Davenport & Westerman 2018,
Saldanha 2019, Tabrizi et al. 2019, Uhlmann et al. 2017).
• Success and failure factors in smart factories of SMEs
– Jung et al. (2021) found that SMEs have more challenges than large companies,
such as lack of budget, technology, and data.
– Müller et al. (2018) surveyed 68 manufacturing SMEs in Germany and classified
the effect of Industry.
– Moeuf et al. (2020) identified critical success factors of Industry 4.0 in SMEs,
– Shukla et al. (2021) surveyed Indian SMEs and extracted 19 critical success
factors.
•These studies have organized success factors and shown
their macro-causal relationships.
•None has clarified the micro-mechanism that explains how
SMEs succeed in DT.

8. 8
Contents
1. Background: Smart Factories in SMEs
2. Literature Review
3. Values and Difficulties of Smart Factories in SMEs
4. Case Studies
5. Success Mechanism
6. Discussion

9. 9
Values of Smart Factories
•Defensive DT: Problem-solving Type
Productivity and quality improvements in factory production
lines
•Offensive DT: New Value Creation Type
– Factory DT Solution
Remote maintenance of factory equipment
– Stakeholder Experience Transformation
Flexible response to sudden orders and specification
changes by customers

10. 10
Values of Smart Factories
Values of Defensive DT Values of Offensive DT
Problem-solving of Own
Factory
Factory DT Solution Stakeholder Experience
Transformation
- Improved productivity
- Improved product quality
- Energy savings
- Easy access to manufacturing data
- Machine health monitoring
- Easier maintenance
- Inventory reduction
- Load balancing
- Visualization of production status
- Improved utilization of production
facilities
- Failure recognition support
- Alleviation of labor shortages
- Training support
- Knowledge transfer from veteran
to newcomer
- Remote Maintenance
- Condition-based
maintenance
- Integrating production data
with production control
systems
- Improved human interface of
production machinery
- Customization for customers
- Increased flexibility of
production machinery
- Retrofitting services
- Data analysis services
- Manufacturing Simulation
- Manufacturing Line
Engineering Services
- Reliability and flexibility in
delivery time
- Facilitation of customer
contact and communication
through digitalization
- Collaborative design and
engineering
- Cost transparency
- Customer value chain
integration and supplier
transparency
- Electronic and automated
contracts and payments
- New billing methods
(subscription, pay-per-use,
function-based billing, etc.)

11. 11
Difficulties Faced by Smart Factories
Difficulties of
DT
Difficulty of
Sustainable Revenue
Scalability
IoT Device Management
Quality Assurance of AI Model
Interoperability
Various Regulations
Security and
Privacy
Various Standards
Insufficient Market Size
Following
Technological Change
Data Collection and Quality Issues
Cost of Devices
and Infrastructure
Stakeholder
Management
Trouble Liability
Issues
Application
Management
Assurance for
unexpected cases
Profit and loss
allocation
issues
Resistance to Change
Insufficient
Collaboration
Technology
Technology Management
Operation
Difficulties of
Market and
Customer
Unfit for Customer Real Needs
User Experience Problem
Siloed Solutions
Insufficient social acceptability
Difficulties of
Own Business
and Ecosystem
Management
Lack of Speed
and Agility
Difficulties of
Human and
Organization
Lack of synergy with
existing businesses
Service Continuity
On-site
Cooperation
Unclear Return on Investment
Difficulties of Technology, Management, and Operation
Trial-and-
error Project
Management
AI Model
Maintenance
Lack of Vision
Insufficient
Human Resources
and Knowledge
Prejudice based
on Experiences
Difficulties in factory
DT are enclosed by a
bold square

12. 12
Difficulties Faced by Smart Factories
• Data Collection and Quality Issues
• Security and Privacy
• On-site Cooperation
• Trial-and-error Project Management
• Unclear Return on Investment
• Lack of Vision
• Insufficient Human Resources and Knowledge
• Resistance to Change
• Prejudice based on successful/failed experiences
• Lack of Speed and Agility
• Insufficient Collaboration among Organizations
I will explain how SMEs can overcome these difficulties.

13. 13
Contents
1. Background: Smart Factories in SMEs
2. Literature Review
3. Values and Difficulties of Smart Factories in SMEs
4. Case Studies
5. Success Mechanism
6. Discussion

14. 14
Case Study: Method
•Qualitative research method (case studies) is
adopted to investigate the micro-success
mechanism of SMEs.
•Ishikawa Prefecture, Japan, has several successful
SMEs, and the prefectural government is strongly
promoting DT.
•Through consultations with relevant people in
Ishikawa Prefectural government, seven SMEs were
selected as case studies, that are successfully
promoting DT and representative and appropriate as
case studies.

15. 15
Case Study: Seven SMEs
1. Koei Corporation (Approx. 30 employees)
Supplier of sheet metal parts for construction machinery
2. Asahi Welding Technology Co., Ltd. (Approx. 30 employees)
Production from material cutting to welding and machining
3. Kobayashi Manufacture Co., Ltd. (Approx. 150 employees)
Sheet metal coating
4. Budoonoki Co., Ltd. (Approx. 300 employees)
Confectionery, restaurant, and bridal business
5. Akashi Gohdoh Inc. (Approx. 230 employees)
Copper alloy sand castings and bimetallic products
6. Betsukawa Corporation (Approx. 500 employees)
Switchboards, distribution boards, control panels.
7. Hokuryo Denko Co., Ltd. (Approx. 350 employees)
Factory automation, heating, cooling, housing, and building systems

16. 16
Contents
1. Background: Smart Factories in SMEs
2. Literature Review
3. Values and Difficulties of Smart Factories in SMEs
4. Case Studies
5. Success Mechanism
6. Discussion

17. 17
Success Factors
1. Purpose and vision clarification.
2. Top manager’s proper understanding of digital
technologies and strong leadership
3. Trial and error by in-house optimized system
4. Factory floor involvement with successful
experiences
5. Corporate culture accepting DT
6. External Deployment and Growing Together

18. 18
Success Mechanism
Purpose and Vision
Clarification
Trial and Error by
In-house
Optimized System
Proper
Understanding of
Digital Technologies
and Strong
Leadership
External Deployment
and Growing
Together
Corporate Culture Accepting
Digital Transformation
Factory Floor
Involvement in
Successful Experiences
Top Management
Factory Floor
A
B
C D
E
F

19. 19
Contents
1. Background: Smart Factories in SMEs
2. Literature Review
3. Values and Difficulties of Smart Factories in SMEs
4. Case Studies
5. Success Mechanism
6. Discussion: Comparison with Large Companies

20. 20
Comparison between Large Companies and SMEs
Success Factors Large Companies SMEs
Purpose and Vision
Clarification
Although many large companies have
DT visions, it is difficult for these to
permeate throughout the entire
company.
Not many SMEs are able to define DT
vision, but when they do, it is easy to
spread them throughout the company.
Proper Understanding
of Digital
Technologies and
Strong Leadership
There are DT experts, but there is a
perception gap with the field.
Not many SMEs have top management that
understands DT, but under such top
management there is little gap with the
field (factory floor members).
Trial and Error by
In-house
Optimized
System
Since corporate IT systems are
large-scale, it is often
outsourced to an IT vendor,
making trial and error difficult.
The small scale of the system
makes it possible to create one's
own system, allowing for trial and
error and a fast PDCA cycle.
Factory Floor
Involvement
It takes time for the field to feel the
effects.
It is easy to gain successful experience
through trial and error in the field and to
make it one's own.
Corporate Culture
Accepting DT
It takes a long time to change a
company's corporate culture.
Top management leadership can change
the corporate culture directly.
External Deployment
and Growing Together
Large companies with IT departments
can sell their own successful tools
externally.
The systems are simple and fit the needs
of SMEs. But maintenance personnel are
not enough.

21. 21
SME Cases and Difficulties of Smart Factories
Difficulties Successful SME Cases
Data Collection and Quality
Issues
Currently, visualization is the main focus and data quality is not a
critical issue.
Security and Privacy The existing solutions of security and privacy are enough for SMEs.
On-site Cooperation Top management and factory floor are in close and
easy to cooperate.
Trial-and-error Project
Management
Top management can get direct feedback from factory floor.
Unclear Return on
Investment
Top managers (company owners) can decide investment based on
their will.
Lack of Vision Top management has clear vision in the successful SME cases.
Insufficient Human
Resources and Knowledge
Top management understands possibilities and limitations of digital
technologies.
Resistance to Change Factory floor understand DT through successful experiences.
Prejudice based on
Experiences
It depends on top management. Top managers learn success cases
outside.
Lack of Speed and Agility Speed and agility are strong points of SMEs.
Insufficient Collaboration In a small organization, collaboration among members is not difficult.

22. 22
Conclusion
•Based on the case studies of
seven SMEs, we extracted
success factors and modeled
the success mechanism and
clarified the characteristics
in comparison with large
companies.
•New finding: SMEs are more likely than large companies to
successfully promote DT under some conditions.
•Practical contribution: the guiding principles, including
education for top management for promoting DT in SME
factories based on the proposed mechanism.
Purpose and Vision
Clarification
Trial and Error by
In-house
Optimized System
Proper
Understanding of
Digital Technologies
and Strong
Leadership
External Deployment
and Growing
Together
Corporate Culture Accepting
Digital Transformation
Factory Floor
Involvement in
Successful Experiences
Top Management
Factory Floor
A
B
C D
E
F

23. 23
Limitation and Future Works
•Limitation:
This study is that the survey was based on
interviews and observations with few SMEs in a
specific region (Ishikawa Prefecture in Japan)
where many SMEs are globally active.
•Future Works:
We will expand the scope of the survey and prove
the generality and validity of this mechanism.