Silicon Valley – Oct. 19, 2020 – By its very nature, technology requires industry players to innovate in order to survive. In fact, technology companies are 12 percent more likely to be disrupted than companies in retail and 25 percent more likely than those in financial services, two other industries that have historically gone through regular disruptions.

To lead the game, technology companies will need to pull on multiple levers such as customer and competitive insight, execution speed, talent, and M&A. These are among the findings of Bain & Company’s inaugural technology report, Technology Report 2020: Taming the Flux, released today. The report examines the value creation in the industry, the key competitive battlefields, and opportunities for operational advantage in the industry sector.

“Tech is not an industry where there are many second chances,” said David Crawford, global head of the Technology practice at Bain & Company and a lead author of the report. “The longer a technology company lags its sector, the less likely it is to recover. This makes it all the more important for tech companies to understand what will make their business different in just a few years.”

Among the key insights highlighted:

Technology value creation requires constant repositioning to win transitions

While many technology company transformations are marketed as building new businesses, most are actually a repositioning of an existing franchise within a new competitive paradigm – whether it be cloud computing or globalization.  While this sounds easier, most technology markets are subject to constant transitions and disruptions that change the competitive landscape. These realities confounds traditional total addressable market (TAM) and market share approaches to competitive strategy – as the market rarely follows traditional definitions for long.  As such, it is critical for technology CEOs to understand and plan to win the transitions occurring within their segment. Combined with the reality that technology companies are easily disrupted and difficult to repair makes technology company management a high-wire act.

Faced with unpredictable events: resilient supply chain are crucial

Technology supply chains were already under pressure from growing trade tensions and now the pandemic pushed them to their limit. Physical lockdowns and the disease’s spread have squeezed factory production and created a logistical nightmare for shippers and suppliers. The pandemic also changed typical buyer demand patterns for technology products in the short term. Some segments saw an uptick, such as work-from-home equipment, while others substantially contracted, technology components for the automotive industry being one of many examples.

The frequency and scale of disruptions to supply chains will only con­tinue to grow. To meet this challenge, a new strategic balance in technology supply chains is needed. Low cost and efficient supply chains are still crucial, but their level of resiliency has become even more important. Leading tech­nology companies are focused on finding ways to build more flexibility into their sourcing and supply chains, recognizing both the downside risk and the upside competitive potential of main­taining product flows for the next inevitable market dislocation.

Bain & Company has identified five common at­tributes of resilient supply chains across the technology sector: an agile network structure, digital and secure operations, real-time visibility, practical analytics and an empowered organization.

Automation goes well beyond lowering costs

In a matter of weeks, automation has gone from low priority to mission-critical for many execu­tives. Companies that invested more in automation before the pandemic are better positioned to weather the crisis better than those that didn’t act. These forward-looking tech companies generated higher revenues, experienced fewer disruptions to their supply chain and saw increased workforce productivity and demand, according to Bain & Company’s automation survey.

Even though most companies surveyed are accelerating their automation initiatives and traditional barriers are shrinking, today’s automation leaders enjoy a significant head start. Before COVID-19 emerged, many leading companies planned to automate 30 percent or more of their manual processes— two to five times more than companies with low automation-adoption rates.

Over the next year, 38 percent of the leaders intend to invest significantly more in automation, compared with just 22 percent of other companies.

Coming out of the pandemic, around 60 percent of technology companies plan to automate more offshore activities, the highest rate of any sector surveyed. On average, technology companies plan to have 38 percent of their employees continue working remotely, even after on-site work resumes, tied with financial services for the highest rate among industries surveyed. Companies are comfortable making that shift in part because they recognize automation can help people work more effectively from home, particularly in minimizing errors in tasks that involve a series of hand-offs among dispersed people, such as the finance team closing the books on the quarter.

US/China decoupling will have a profound impact on corporate strategy

Escalating tensions between the US and China have accelerated the unravelling of globalization more quickly than many predicted. This trend is not likely to reverse. Executive teams at leading technology companies, both within China and around the world, are coming to grips with a new reality that has tangible implications for their businesses: the US and Chinese economies and technology ecosystems are headed toward decoupling.

Geopolitical challenges aside, global technology companies cannot ignore China. China consumption represents up to 25 percent of global demand in server, net­working, PC and smartphone products, and the country’s consumption of most technology products is increasing at least twice as fast as the global average.

Decoupling is forcing technology leadership teams in China, the US and everywhere else to make tough decisions about the future of their supply chains, products, customers, employees and even organizational boundaries.

As the march toward decoupling continues, more technology companies will revisit their US and China strategies, seeking to balance the desire to sell into both the US and China blocs, protect their IP and outgrow competitors. The complexities are high, but the prize is continued access to a large, global technology market.

Tech M&A: both buying and building are critical

Over the past five years, the fundamental thesis for technology mergers and acquisitions has changed. In 2019, 82 percent of technology mergers and acquisitions were scope deals, through which the buyer en­ters faster-growing business segments or acquires new capabilities, intellectual property or talent to generate future growth. The remaining 18 percent were scale deals typically aimed at strengthening the company’s market position and reducing costs.

As recently as five years ago, the split between scope and scale deals in the technology industry was roughly even.

The emphatic swing toward scope deals is one way companies are positioning themselves to keep up with unprecedented rates of technology transitions, shifting boundaries of competition, expanding customer expectations and a fierce talent war.

A secondary reason for the shift toward scope deals is structural. Simply put, there are fewer opportuni­ties for scale acquisitions these days because the technology sector has become highly concentrated. Segments such as semiconductors and software have gone through years of consolidation. Other areas, such as cloud services, are inherently prone to a small number of winners.

This scope M&A bent will likely accelerate. Technology deals came to a standstill in the second quarter of this year, due to the COVID-19 pandemic and tightening credit markets. But the landscape is ripe for renewed M&A activity. Many technology companies’ share prices have been resilient during the recent economic downturn, and they are sitting on large cash reserves that could fund attractive acquisitions.

“There continues to be a seismic upheaval in the technology industry that is showing no signs of slowing down,” said Mr. Crawford. “From core strategy design and supply chain reconfiguration to geopolitical tensions and the growing question of technology’s role in society, technology executives have to think creatively and act quickly if they want to lead their game.”

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For an interview with Mr. Crawford, please contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102.