3
WHY? THE CLOCK IS TICKING
LEADERSHIP IS NEEDED: Only CEOs can explain to employees the need for digital change, define the scope and direction needed, and overcome the forces of inertia in the company. Only then can the march toward to the digital future begin.
When the Springer publishing house sent the editor-in-chief of its Bild newspaper and the director of marketing to Silicon Valley for nine months in 2012, there was much amusement within German management circles—more so when Bild helmsman Kai Diekmann immediately assimilated and grew a hipster beard and started wearing a hoodie like a true West Coast native. Since then, the publishing house’s example has become the norm—Springer is regarded as one of the pioneers in German business when it comes to digital transformations. CEOs around the world have since started taking study trips to Silicon Valley, often taking their entire executive teams along.
For a long time, the biggest tech companies have been inundated with visitors. Everyone wants to know the secret of the Big Five of Apple, Facebook, Google, Amazon, and Uber. They go in search of stimulation and ideas, hoping to be inspired in this world of innovation. At Google, there is a dinosaur skeleton in the foyer that states: “Big is nothing. You can still die out.” This point must be top of the list when CEOs explain the need for a digital transformation to their employees and try to impart a sense of urgency.
How dangerous is the current situation? How far-reaching are the necessary changes in the company? What is stopping the transformation? What strengths should we build on? And where will the journey take us? Answering the 15 questions on these five topics in the graphic will give you a good sense of where your company stands and how it needs to move forward.
3.1 CREATING A SENSE OF URGENCY: HOW URGENT IS DIGITIZATION?
The observation that change is needed is one thing—but the actual trigger to embark on a transformation often arises in emotionally charged moments following meetings and experiences. Book retailer Michael Busch, CEO of Thalia, had such a moment when he contacted Apple to discuss whether there was any possibility of collaborating on e-books, and was met with complete disinterest. For Busch, the answer was clear: the company needed its own solution. He soon set about bringing together collaboration partners for the Tolino system.
Markus Langes-Swarovski, CEO of crystal emporium Swarovski, shocked his family business partners in 2012 by drawing parallels with the recently bankrupted Kodak, a firm that was founded in 1888, seven years before Swarovski. Both companies were market leaders and successful for decades—until Kodak was felled by digitization. At supervisory board meetings, just as at family meals, family get-togethers, and festive events, Langes-Swarovski always imparted the same message to his relatives: if the company is to remain highly successful, it needs to transform into a technology company. And progress, he cunningly argued, was in the genes of the family and the company that their great-grandfather, a gifted engineer, turned into an unrivaled leader with his ideas on glass processing. Langes-Swarovski convinced the partners, and the company now enjoys successful online sales, and boasts modern production techniques using the latest robotics and 3D printers; it has its own start-up laboratory in the Inn valley, a wealth of innovative products, and much more. Close and professional customer support throughout the customer journey coupled with the ability to also manufacture cost-effectively in small runs have today been shown to be important and effective tools, even against low-cost offerings from China that flood the market.
The alarm bells sounded for Martin Viessmann, CEO of the heating, cooling, and energy systems company of the same name, in 2014 when Google bought the start-up Nest, a developer of smart, self-learning heating and cooling thermostats. “When the world’s biggest Internet company starts looking at a small manufacturer of thermostats, it’s clear where the journey’s headed,” he said. According to Viessmann: “If we don’t want to end up as an extended workbench of U.S. technology giants, we also need to get involved in the battle for platforms, software, and data.” Since then, Viessmann has transformed his company. Instead of continuing to concentrate predominantly on equipment sales, the 100-year-old family business is developing more and more software services, from remote control of heating and air-conditioning systems via a smartphone app to automatic meter reading and self-regulating systems. “Those who don’t take digitization seriously are risking extinction,” says Martin Viessmann. In mid-2016, he stood down from the operational leadership of the business and took a backseat as president of the board of directors. His successor as CEO was the former CDO—the chief digital officer.
Jeffrey Immelt, CEO of General Electric, remembers precisely the day in June 2009 when his developers came to him and presented a new jet turbine full of sensors that could send back a stream of data about any flight. Immelt noticed two things. First, this data could actually be just as valuable as the turbines themselves. Second, GE wouldn’t be able to do anything with it, because the company lacked the software expertise. Immelt poured his energies into bringing about a digital transformation, including in the mind-sets of his employees. Instead of thinking of their primary competitors as companies like Siemens, they needed to start focusing on Amazon or IBM instead. “We act. We learn. We get better” was his interim conclusion in the 2015 annual report.
As the GE example shows, the start of a successful digital transformation requires more than the CEO simply having a eureka moment. The CEO must shape this moment of enlightenment and make it intuitively clear, at least to the top management, that the company needs to take the path toward the digital future.
It is often easier to convince the board members in smaller companies—the most successful of which tend to have an inherent survival instinct—than those of large, listed corporations. The governance structures in these companies often act as a brake; works councils and supervisory boards tend not to welcome profound change, and very few of their members would be classified as digital natives. Following their revelatory moment, the top managers must then act as multipliers to spread the message throughout the company that digital transformation is urgently required. These, then, are the most important tasks that management must perform to motivate the entire workforce and sensitize all employees to the idea of digitization.
Taking Leadership in Hand
The top management must overcome mental barriers in the company such as “not relevant to us” or “we’ve done that for a long time anyway.” To do so, strong arguments are combined with entrepreneurial vision to inform, convince, inspire, and motivate all stakeholders. There will always be resistance and concerns in certain groups. Owners (particularly in family businesses) or active investors, employees, and managers, but also sales partners and suppliers need to get involved from their current starting positions. Each of these groups can either act as a catalyst for the transformation or become an obstacle. It is crucial to capture the heart and mind: the mind through convincing business logic, new best practice examples, tools, and methods; the heart through success stories, tales of heroism, and even personal experience.
Benchmarking to Assess Starting Position
To determine the degree of urgency for digitization, substantive and objective stocktaking is in order. To this end, the management should answer 10 critical questions on the current strategy of the company:
- Are we anticipating the impact of the digital revolution on our business model and revenues?
- Are we actively creating an ecosystem of partners, customers, and suppliers that will last into the digital world?
- Are we allowing room for a digital strategy that may even cannibalize current revenues?
- Are we assessing whether we can use our strengths and the new business model to penetrate completely new industries within the current rules?
- Do we intend to spin off currently valuable areas of the portfolio because they have too little potential for the digital future?
- Does our current strategy reflect the high pace and uncertainty of the digital age?
- Are we taking into consideration the force with which future technological developments may impact our business?
- Are we using our best talent in our digitization teams?
- Are we prioritizing and allocating capital, talent, and management capacity in accordance with our digital strategy?
- Have we defined a feasible time scale and meaningful key performance indicators (KPIs) to reliably measure success or failure?
The answers to these questions, which are drawn from McKinsey’s Digital Quotient (DQ) diagnostics, allow very reliable stocktaking. If you are interested, and would like to know where your own company stands and how a benchmarking can be taken, find out more at: www.mckinsey.com/business-functions/digital-mckinsey/how-we-help-clients/digital-quotient.
Experiencing Digital Live
The Bible states: “Blessed are those that have not seen, and yet have believed.” In the real world, however, only real experiences count. The situation today is a reminder of a time 25 years ago when, once again, there was a key moment. Toyota ran a two-page advertisement: on the left, an S-class Mercedes; on the right, two Lexus S 400s plus a flight ticket to New York on the Concorde—for the same price. In the early 1990s, costs were important. Leading companies around the world promptly made a pilgrimage to Japan, and returned with lean production and Six Sigma. Spurred on by Toyota, Honda, and Sony, they tried to recapture their international competitiveness.
And it’s exactly the same when it comes to digital, as the examples at the beginning of this book show. But it doesn’t always have to be Silicon Valley—a walk through New York’s Silicon Alley and the start-up scene in Austin, London, and Singapore, to name a few, is also insightful. Investments are manageable, and the benefits are huge. For a real eye-opener, though, just pay a visit to the digital scene in China—particularly Shanghai, Hangzhou, and Beijing.
Sampling Digital at a Hackathon
To emphasize the urgency of digital change in the workforce, it can help to borrow a tried-and-tested tool from the digital natives: the hackathon. This portmanteau of hacking and marathon refers to creative sessions where small, cross-functional groups of tech-savvy innovators work locked away together until they find an ingenious solution to a particular problem. Working according to the motto “build, test, refine,” the teams—which largely have a free hand—focus on pace and pragmatism. Facebook, for example, developed its “Like” button in this way. Companies in many industries now use this fast and cost-saving method.
The benefits are clear: long-winded meetings, steering committees, and working groups are no longer necessary to provide smaller, market-ready products and services.
Large companies now even use hackathons to have external experts analyze problems. Consumer goods group Unilever, for example, launched a hackathon competition in which the teams were asked to develop original ideas as to how the company could influence the purchase decision of consumers in favor of its brands before they visit the supermarket. The winning team would win a prize of £30,000 and a long-term partnership with the group.
In 2015, supermarket group Sainsbury’s invited all of its 161,000 employees to submit ideas as to how technology could make the lives of its customers and employees easier. The best six ideas were made into prototypes in just 24 hours in a hackathon in the Sainsbury’s digital laboratory in London. The topic was so important to the executive management that both the CEO and the chairman took part.
To enable companies to tap into the hackathon as a source of innovation, a scene of specialist providers has now emerged: Hacker League, for example, has organized more than 600 of these creative sessions since 2011, and was taken over by Intel in 2013. AngelHack, founded in 2011, boasts a network of 97,000 developers, designers, and entrepreneurs. The Angels organize public hackathon events around the world where thousands of developers take part. However, they also organize private hackathons for customers including Comcast, MasterCard, Hearst, HP, Hasbro, and UBS.
Mobilizing Your Employees to Uncover Weaknesses
Most CEOs, however, rely on their own employees. Bosch CEO Volker Denner, for example, asked his workforce to form “disruption discovery teams.” The teams were to asked consider which digital strategies could be used to attack the Bosch business model—according to the motto: “Better that we find our weaknesses than allow others to.” In just six weeks, employees had submitted 1,800 ideas. Denner and his management team selected the most interesting, and then released those teams from their daily duties for eight weeks. During this time, they were able to work on their ideas, and either develop ideas for new business models or at least highlight the weaknesses of the current models.
As with all projects that fundamentally change a company, the digital transformation must also be triggered and driven forward by the person in charge—either the CEO or the owner. Employees need an example to emulate. Business leaders can find inspiration in the legendary speech of U.S. President John F. Kennedy in September 1962 in which he announced his plans to put a man on the moon before the end of the decade. His justification for setting such an ambitious target was interesting: “We choose to go to the moon not because it is easy, but because it is hard; because that goal will serve to organize and measure the best of our energies and skills.” The attempt to reach the stars brings out the best in teams, and that’s excellent advice for business leaders.
3.2 DETERMINING THE KIND OF CHANGE REQUIRED
All companies need to act, but not necessarily in the same way. First and foremost, it is imperative to understand the urgency of the situation. A glance at the extent of digital penetration in the company’s own industry reveals the first insight—B2C already tends to be more affected by digitization than B2B. Another important aspect is the extent to which assets are utilized. Whereas in retail comparatively few assets are needed (asset light), it is completely different in chemicals and mining (asset heavy).
The position of the company’s own industry determines the nature and pace of the response. For example, industries that so far have barely been affected by digitization such as the oil and gas industry or the chemicals industry are typically able to manage with a few functional interventions. The greater the extent of digital penetration, the more urgent the need for change. And once past the turning point, generally only those companies that completely revise their business model will survive.
Those at the Top Right Need an Entirely New Business Model
An example of this is the former publishing house Axel Springer. CEO Mathias Döpfner realized early on that the revenue base for the newspaper business was breaking up, starting with classified ads for cars, property, and jobs. He anticipated that while digitization would on the one hand change the reading habits of his customers, on the other hand it would also grow into an attractive medium for advertising, thus further eroding the foundations of the old business model of the newspaper and magazine group.
However, the publisher still enjoyed high returns, and as early as the turn of the new millennium, Döpfner began decisively investing this money in digital. Some of this was in the form of acquisitions, including online portals that are now flourishing businesses with real estate advertising (Immowelt) and job boards (StepStone). Continuing with its ambitious plans, Springer also founded its own digital company. Even though the CEO is rarely seen without a tie, he called for a digital culture to be established throughout the group, and ensured that the start-up mentality remained strong in the acquired and recently founded companies, with flat hierarchies and fast decision making.
Döpfner sacrificed tradition in order to usher in the digital transformation of the company. In 2014, he sold a whole range of titles that included not only the TV listings guide Hörzu, which was once the foundation for founder Axel Springer’s fairy-tale rise to becoming the most powerful newspaper mogul in Europe, but also Hamburger Abendblatt, the first daily newspaper that Springer founded. Publishing group Funke Mediengruppe took over the portfolio of print products, which were still entirely profitable. Springer, meanwhile, now makes more money than ever: in the 2015 financial year, around 70 percent of its earnings before interest, taxes, depreciation, and amortization (EBITDA) were generated in digital.
Extensive Interventions in the Existing Business Model
The fashion industry is also high up on the digital penetration curve. Change at the venerable U.S. fashion house Nordstrom—founded in 1901—began with a realization. “In our industry, most growth will be seen in e-commerce in future,” noted Blake Nordstrom, CEO of the family business, back in 2003. “This is the field on which our battle will be won or lost.” As a result, he instigated far-reaching changes to the old business model.
Nordstrom gradually introduced an online store, and right from the outset ensured a consistent crossover of sales channels. Soon, customers were able to collect the goods they had ordered online in the local stores. Conversely, the stores also had an online connection to the warehouse, and if a customer was unable to find an item in the right size or color, the store could immediately check its availability and organize delivery.
It was clear that the customer experience must always be at the heart of the process. For example, it was important that the sales assistant didn’t scuttle off to a back room to check availability on an arcane inventory management system, but instead showed the customer the ordered item on the attractive layout of an iPad.
In the battle with online-only retailers, Nordstrom relies on a solid advantage: the shopping experience in brick-and-mortar stores. Customers are given the red carpet treatment in stores, where they can view, touch, and try on the items. The chain deliberately sets out to ascertain buyers’ needs: for customers uncertain of their fashion choices, they offer the Nordstrom Trunk Club, which uses an online survey to identify preferences, and then suggests and sends suitable items. Nordstrom Rack offers online and offline discount bargains.
All Nordstrom formats run on the same technology, but deliver the customer completely different offerings. The strategy targets attractive multichannel shoppers. According to market research, this group spends three to four times as much money as customers who shop only in-store or online. Delivering a seamless service in both worlds hasn’t come cheaply for Nordstrom: by 2020, the U.S. outfit intends to invest $1.5 billion in its technology platform.
Targeted Innovations in the Value Chain
Unlike Nordstrom, U.S. airlines are not yet ushering in a new business model, but rather making do with a few extensive interventions in their value chain when it comes to digitization. Primarily, these relate to processes governing customer information, bookings, and check-in and boarding. These are areas where digitization has made significant inroads. The airline websites and apps have long taken the place of travel agents. Passengers who don’t already have their boarding card electronically on their smartphone can print it themselves. And the staff aren’t even needed at boarding anymore: a scanner at the gate reads the QR code on the boarding card or smartphone and allows the passenger to pass. Even the reading material has gone digital. The passenger can download the latest newspapers and magazines before takeoff. After this, it’s back to analog. As yet, there’s no transporter that can beam us to our destination. We still need an airplane and pilot.
Targeted Additions to the Existing Business Model
Industries that primarily operate at a B2B level, and for which key assets such as patents, brands, customer relationships, or market understanding are critical to success, currently have relatively stable business models. However, digitization is also generating considerable pressure on the cost position. This is why companies in this position are typically using digitization to further improve their efficiency, as the example of a multinational oil group shows.
The purchasing department awards hundreds of thousands of contracts each year, from procuring parts for drill rigs to servicing work performed on oil fields across every continent. However, it was always impossible for buyers to create price transparency, because there were simply too many variables in too many countries. In one case, for example, costs for drilling into shale varied enormously. The company put together a data team that gathered information from the company’s own finance department, from operational departments, from competitor and investor presentations, and from published reports. A software program then processed the millions of items of data, adapted the data, and looked for price correlations and probabilities. A team of engineers and buyers then analyzed the results, and made suggestions as to how the design of the boring tubes should be adjusted, and how the procurement and selection of the drill crew should change. As a result, the company saved $700,000 per drill hole. With 1,300 drill holes, that’s almost a billion dollars, all thanks to the intelligent evaluation of large data volumes, or big data.
Naturally, there are far simpler examples. Rio Tinto is replacing the drivers in its Australian mines with autonomous wagons. Caterpillar is increasing equipment utilization with predictive maintenance based on the operating data permanently transmitted by its machines. As a result, Caterpillar has increased utilization by 30 to 40 percent: a significant impact with relatively little cost.
Those Who Know the Roadblocks Overcome Them More Easily
Once the company has realized that something needs to change, and once the management has identified the extent of change needed, there is still one more step before the transformation can begin. It is vital to discover as soon as possible which hurdles may cause the digitization project to fail. Three insights reveal the biggest obstacles. Companies that anticipate these stand the best chance of a successful transformation:
- Efficient organizations often slow down the necessary change. When business is going well, the company lacks the sense of urgency; specialization and a strong division of labor are barriers to the necessary cross-functional approach for a digital transformation.
- Ironically, it is often the best and most efficient managers who stand in the way of the project. And it’s hardly any wonder—they’re being asked to give up much of what made them and their company successful. The transformation needs to start with the person at the top, and it’s often those who have grown accustomed to success who find it most difficult to change course.
- Deep-rooted mind-sets and working methods in functional silos are also a barrier. A successful digital transformation focuses the attention of all employees on the customer, the benefits for the customer, and the customer journey. This view extends across all contact points, from first contact through to repairs and spare parts services long after the purchase.
How can the brakes be released? With convincing leadership and communication. John Chambers, executive chairman of Cisco Systems: “At least 40% of all businesses will die in the next 10 years . . . if they don’t figure out how to change their entire company to accommodate new technologies.”1
3.3 IDENTIFYING RELEVANT ASSETS
Where to start? First and foremost, it’s about the core of the business—the benefit to the customer. What are the relevant assets, the company strengths that must be transferred over to the digital world? Which can be left behind? A self-developed technology or technological expertise? Customer relationships or a strong brand? Products? Services? Or detailed customer or product data? What really counts? Once this is clear, the threat becomes an opportunity. After all, established companies do not necessarily have poorer prospects than start-ups or industry outsiders—quite the opposite in fact. On no account does everything suddenly need to be jettisoned. Companies that transfer their strengths to the digital world will retain their lead. It’s about recognizing where the new technology can help the company the most, and how it will help to renew the company.
What it’s not about is a patchwork project—something that many associate with digitization. “We don’t just program apps, but build solutions around our products that our customers should desire,” according to Bosch CEO Volkmar Denner. This is something that the company is increasingly succeeding in doing. Take domestic products, for example: “We are the Apple of the heating systems industry; we’ve turned heaters into design objects.”
Powerful Brand
Markus Lange-Swarovski of Austrian crystal specialists Swarovski is also relying on the greatest strength of his company in the digital future: the radiance of the brand. In addition to a website, he has also set up a sales platform that offers products from other luxury manufacturers that contain Swarovski crystal. The allure of the Swarovski brand draws customers to the website, and if they order something from the Oscar de la Renta, Stuart Weitzman, or Escada collections, Swarovski receives a commission.
Strong Customer Relationship
Even Disney has firmly staked its digital future on its greatest strength: knowing what Disney customers really want, and having the ability to deliver it. As the message of the theme parks states, “Making memories to last a lifetime.” Disney uses digital technology to make everything as easy and pleasant as possible for the customer from initial contact to making memories—from planning the trip and staying at the theme park, right through to departure and beyond. Using the My Disney Experience website and app, customers can plan a trip, make reservations for specific attractions and restaurants, check information, and purchase photos after their visit.
The MagicBand is a waterproof plastic wristband that provides access to all the reservations made in My Disney Experience. It acts as an entrance card for entering the theme park and even as a door key in the Disney Resort Hotel. It stores restaurant reservations, and allows wearers to use the “fast lane” to skip the long lines at popular attractions. At the same time, Disney also collects data about customer behavior, which it uses to offer even more tailored recommendations to further increase customer satisfaction.
Extensive Installed Base
Caterpillar, the world leader in construction machinery and other heavy equipment, wants to tap new revenue sources using a specific advantage that many other machinery manufacturers also have: an installed base of machines in use by customers around the world. Of the three million active Caterpillar vehicles, around 400,000 have numerous sensors built in. These transmit vast amounts of data to Caterpillar’s Vital Information Management System (VIMS) platform, allowing data-driven monitoring (e.g., protection against theft), control (vehicle deployment planning), and optimization (avoiding unplanned downtimes by monitoring vital elements like the gearbox and engine).
Volume of data is the key, which is an advantage for the manufacturer given its large installed base. Older models and even vehicles of other manufacturers can be fitted with cost-effective sensor kits. Caterpillar leases software-as-a-service packages to its customers to manage their vehicle fleets and increase productivity.
Deep Customer Insights
John Deere, the manufacturer of agricultural machinery introduced in Chapter 1, has even gone a step further. Deere not only ensures longer life cyles for its machines—as does Caterpillar—but has also transferred an old strength to the digital world. Deere has always helped its customers achieve greater yield in their fields, but now the farmers are sent sowing and fertilizing recommendations directly to their tractors via a John Deere app. The recommendations are based on the specific soil data and highly detailed weather forecasts.
Emotional Ties
Lego customers often form an emotional relationship with the brand, and Lego uses this to interact with fans across various channels. Lego Ideas allowed children and adults to submit new ideas for building kits. These were assessed by other members of the community, and Lego then brought the most popular ideas to market.
Beer drinkers, too, develop emotional ties to their favorite brands. Heineken relies on this, and thanks to its entertainment offerings and interactive games, the drinks company has managed to acquire more than 20 million likes on Facebook, several times more than its competitors.
Even more successful than Lego and Heineken, however, a 2,000-year-old organization has translated the appeal of its global brand into social media success: the Catholic church. More than 10 million people follow Pope Francis on Twitter, where he posts brief messages to his followers around the world.
3.4 DETERMINING THE ASPIRATION LEVEL FOR THE TRANSFORMATION
Identify and communicate: first, the management needs to be clear about the objective of the transformation, and formulate it articulately. The managers must then consider and describe the scope and impact of the changes. Next comes the difficult part: the aim of the changes must be communicated to the team, while at the same time creating enthusiasm and enjoyment for the upcoming work.
Once again, a specific example may help. In 2009, Mathias Döpfner, CEO of Axel Springer, announced that within the next 10 years, half of the company’s revenues and profit should come from digital. He delivered: in 2015, 62 percent of revenues and 70 percent of EBITDA were generated in digital activities.
Jeffrey Immelt of General Electric, on the other hand, verbalized his aim, albeit a very ambitious one, rather than quantifying it: GE must become the world’s leading digital industrial company. In its business report, the company already describes itself as “The Digital Industrial.”
CONCLUSION: BRING ON THE NEW ECOSYSTEMS
This chapter outlined why companies need to embark on the journey to the digital world. The following chapters explain the new industries and ecosystems in which they can find their future path, how digitization is changing every function in the company, and how the foundations must be built on technology and organization for the new age. New ecosystems are breaking down boundaries across all industries, from automotive to banking, retail to construction, and bringing in competition between competitors that previously had nothing to do with each other.