2
DIGITIZATION REQUIRES FUNDAMENTAL RENEWAL: DIGITAL@SCALE
WHY? WHAT? HOW? The concept for a successful transformation into a digital company is based on the answers to these three questions.
For a hundred years, Henry Ford defined our image of business: highly specialized assembly line production with a clear division of labor producing mass scale products (“You can have the Ford Model T in any color as long as it’s black”). The Taylorist system that focuses entirely on specialization and efficiency has given us affordable cars, washing machines, and holiday travel.
And it is this very model of success from the twentieth century that has now become the obstacle to the successful digital transformation of companies. Indeed, organizations that are built for efficiency fear that change brings disorder, and instead tend toward incremental adoption of innovation in tightly defined niche projects so as not to halt the well-oiled corporate machine. All economists know the S curve concept that defines the performance of a technology as a function of the funds invested for research and development. As such, the transition to a new superior technology—the leap to the next S curve—is initially always met with a loss in efficiency.
Unfortunately, those who hesitate to take this leap will lose in the long term. Although efficiency increases only slowly in the lower curve of the new S, the curve suddenly rises very sharply and is ultimately catapulted far beyond the level of the old technology. But this doesn’t help us: those who want to successfully lead their companies into the new digital age need to rethink all structures, processes, and products at scale across the board—that is, Digital@Scale.
It’s easy to build an app. A digital transformation is a much harder task. To ensure that the transformation doesn’t founder on good intentions and unfinished business, digitization needs to follow a clearly defined concept. To start, we need to leave aside catchphrases like Industry 4.0 in order to prepare for fundamental renewal. Three simple questions point the way forward: Why? What? How?
2.1 WHY? THINGS ARE GOING WELL, SO WHY DO WE NEED TO CHANGE?
Companies that are doing good business find it very difficult to suddenly reinvent themselves in order to ensure sales and profit tomorrow. Early indicators of change are often overlooked or seen as unimportant. Even today we still see experiences with the digital revolution like that of Blockbuster, Inc.
In 2004, Blockbuster was the largest video rental company in the United States with 8,000 stores and revenues of $6 billion. No one on the board of the powerful market leader took Netflix seriously, the rival company formed just a few years before where customers could rent DVDs online and receive them in the mail, with attractive subscription models. With no sense of urgency, the Blockbuster engineers worked on a system for online orders. In 2007, Netflix took a huge leap forward by offering video on demand—movies that could be streamed directly via the Internet. The DVD was obsolete. Customers swarmed to Netflix in droves thanks to its attractive offering: no waiting times for mail delivery, no returns to mail, immediate enjoyment.
Only then did Blockbuster react, and developed its own video-on-demand system, but it was too late and of poor quality. Netflix had already gained significant market share, and Blockbuster did not offer any innovative new features that might have won customers back—and to top it all, Blockbuster’s level of service and delivery was worse than that of Netflix. Netflix had immediately won over the Internet-savvy, mostly young customer base. And in just a few years, the vast majority of movie fans discovered just how easy it was to enjoy a pleasant evening with Netflix. Today, Netflix is the market leader, while Blockbuster filed for bankruptcy in 2010.
The lesson from this example is clear: regardless of how well positioned a company is, if the management underestimates the potential for change that digitization poses to its business model, it runs the ultimate risk. And those who see the change but delay their response so as not to jeopardize their current revenues are taking a virtually suicidal stance.
Creating a Sense of Urgency: The Key Challenge
Fundamental renewal demands strength, conviction, and, in most cases, a trigger. A little fear—even existential fear—is a good thing. Fear spurs you on. In established companies, it creates the pressure to act and the willingness to embrace innovation—crucial for digitization. After all, it’s about developing new products, services, and processes that enable attractive prices—in short, a completely new value proposition. Those who fail to implement the transformation across the board (@Scale) will fall behind. It is simply fatal to underestimate the extent of the impending change.
Bosch CEO Volkmar Denner put it like this: “There are many things that just make it easier to order a pizza or call a taxi. But don’t underestimate the influence of such solutions on society; people are changing their consumer behavior. Suddenly others are earning the money.” Without a sense of urgency, nothing is possible; we are only too happy to look the other way.
Determining the Nature of the Change Requirements
We’ve already discovered that digitization affects everyone, just not necessarily to the same degree. The question that CEOs should ask themselves is: is our current business model obsolete, or will targeted changes suffice?
Usually, if the change requirements are high, the business model will look completely different post-transformation. As Jeffrey Immelt, CEO of industry giant General Electric, put it in the summer of 2016: “We need to become a software company in all divisions of GE.” In addition to selling machines and equipment as well as maintaining them, software for the networked world of the Internet of Things (IoT) is to become a new business area for the company.
Radical change is also underway. For example, the Chinese iron and steel giant Baosteel has established an open online marketplace called Ouyeel. While initial versions of the e-commerce website allowed Baosteel to offer its products on a new channel, it has since expanded significantly to include competitor products and adjacent offerings such as financing, logistics, data, and technical services. Ouyeel is also supported by a massive analytics engine that provides pricing and analytics insights. Between 2013 and 2015, revenue from digital activities for Baosteel grew at more than 300 percent per annum. By the end of 2015, Baosteel’s digital activities contributed more than $800 million to the top line.1
Digitization has also reached manual trades. For example, at elevator maker Schindler, over 50 percent of the staff work in field services. This staff performs activities that are largely manual and heavily reliant on expertise. In the past, the time to resolve an issue was often impacted by the fact that the field service staff had limited information on the issue prior to the site visit, and therefore might not have the required tools and/or parts on hand. Finally, part reorders created extra costs and revisits. Schindler was able to simplify this whole process by automating diagnostics, applying predictive analytics to preemptively address issues and order parts in advance, and the company enabled field services staff with iPhones and supporting apps to help simplify in-field activities. All this has helped significantly improve service efficiency, as well as customer and employee satisfaction.2
Identifying Barriers to Change Early
Traditional organizations have high levels of inertia. When business is going well, managers and employees generally only pay lip service to change requirements. Any manager who still wants the company to change therefore needs to analyze and eliminate the barriers.
Efficient organizations in particular tend to prove especially resistant to change. They follow their own logic: any change to the existing system would create efficiency costs and must therefore be avoided. The most successful managers often slow down transformation efforts behind the scenes. They calculate that they have little to win personally, but much to lose. They are often the opinion leaders and belong to the inner circle—making change twice as difficult. After all, doesn’t the team still need these managers? Perhaps not.
Identifying Relevant Assets and Setting the Aspiration Level
Those who want to propel their company from the analog present to the digital future should first focus on the strengths: What sets the company apart from the competition? The technology in the product or service? The strong customer loyalty? The attractiveness of the brand? All of these strengths also count in the digital world. And while they may count differently, whoever retains them will have an advantage.
Without a clearly defined objective, the journey into the digital world can easily become an odyssey. The company management should therefore formulate its quantitative or qualitative objective, and communicate this to the employees. Interim goals—depending on whether and how they are achieved—are also helpful in determining whether the project is on track.
In all of these points, from generating awareness of the need for action, determining the change requirements, and identifying the greatest obstacles and the greatest strengths, through to formulating objectives, responsibility rests with the company management. Chapter 3 deals with how to respond to employees who ask why change is necessary, and how to respond in such a way that they are happy to embark on the digital transformation.
2.2 WHAT? WHAT DOES DIGITIZATION MEAN FOR MY COMPANY, AND WHAT PRIORITIES ARE DERIVED?
Digitization means different things to different people. We need a structure and a plan. To answer the “What?” question, it is helpful to build a three-stage structure that can be used to prioritize the strategic and operational tasks.
Building New Ecosystems
At the first level, New Ecosystems, strategic thinking is needed. Innovations arise at industry boundaries. This is all about the new markets that emerge as a result of the technological possibilities. In this book, we select nine of the most important new ecosystems. In Chapter 4, we discuss how digitization is changing mobility, how smart our homes will become, what will happen to commerce, what banks need to focus on, what will change in public administration, what digital health care will look like, the threats to telecommunications groups, how drastically logistics is changing, and how even old technologies like electricity grids are being revolutionized by digitization.
These are the strategic questions all managers need to ask themselves: are competitors attacking our business with new technologies? Are we grasping the opportunities of digitization and actively developing new value propositions? Are new profit pools emerging at the boundaries between traditional industries? The more unsettling the answers, the greater the willingness to revise the current business model and to accept cannibalization of revenues. A new vision for the company is needed with a convincing value proposition that takes into account the disruptive force of change.
Developing Business Architecture
The second level, Business Architecture, deals with operational questions: Are we using the opportunities of the digital world and reaching our customers at all contact points—both traditional and new? Are we leveraging all the advantages that digitization and new analysis methods offer? And how is digitization changing our management and administrative processes?
In Chapter 5, we describe how digitization is changing the business architecture, focusing on three areas: the customer experience, product innovation, and value added. The challenge is significant: digital attackers are strongest when it comes to the customer experience. With simple and reliable processes, they seamlessly shape the entire journey from first contact to completed order, often making traditional companies appear outdated. Many new players also benefit from open platforms for developments, thus increasing the innovation pace of their products. Billing, support, data analysis—the best attackers have digitized the entire value chain. However, digitization doesn’t just affect production areas; it also fundamentally changes management and administrative functions. These new players set the example for all companies that intend to take up the challenge.
Strengthening the Foundation
The third level, Foundation, deals with the technological and organizational frameworks. Typical questions include: are we employing state-of-the-art technology in our company? How can we make our company agile without taking on too many risks? How can we attract digital talent and build targeted partnerships?
In Chapter 6, we discuss the challenges for the foundation, and focus on two areas: technology as well as culture and organization. We start with a practical problem: an existing IT system cannot be replaced overnight if completely new skills are required for digital projects. Thus the company also needs a second pillar, an agile and fast separate IT system. To operate it, the best new digital talent may need to be hired—talent that expects flat hierarchies and cross-functional working. In short, both the culture and the organization need to be overhauled.
2.3 HOW? HOW DO I MANAGE THE TASKS RESULTING FROM A DIGITAL TRANSFORMATION?
The answers to the What question resulted in a list of priorities to be addressed on the road to the digital transformation. Now it’s time for the How. Successful transformations require profound changes to structures, processes, management instruments, and IT. Again, a three-stage structure is needed, which sorts the relevant points by priority.
Create a Plan
At the top of the list is a road map to the digital future: calibrate people and processes for the digital world. Second, it’s always about the customer—digitize all contact points that customers have with the company according to importance. And to ensure we find the digital solutions, we radically abolish the functional silos in the company, and form overarching teams supplemented with digital talent.
The plan outlines the direction and priority, and is often the cornerstone of a transformation program that almost always lasts years. Chapter 7 describes how companies can meet the requirements of the plan.
Ramping Up the Digital Company
The next level down defines the elements of the digital company. This is where companies need to optimize their development according to the motto “Pace before perfection” in a culture of testing and learning.
New products and services are quickly tested in the market; the results are measured, and then further optimized if necessary. Budgets are tied to the achievement of interim targets, progress is analyzed in fixed cycles, and projects are immediately canceled if necessary—in short, the digital operating system. Chapter 8 explains how this works.
Consistent Scaling
The third level deals with consistent implementation, focusing on scaling and rolling out the transformation process to the entire company and its ecosystem. A twin-track IT structure is needed: day-to-day business where all the sensitive data is handled in the stable structures as usual, and agile IT systems for the fast-developing new projects. The biggest challenge at this level, however, is the rapid, company-wide installation of solutions tested in pilots—Digital@Scale, as explained in Chapter 9.
Digitization begins with the strengths of the company. Companies that build their business models on outstanding customer service need to consider which new service offerings are made possible by digital technology. Companies that process large volumes of data each day should first look for big data solutions that allow them to offer new services to their customer base. For example, a networked health care model combines tried-and-tested communications technologies with new IT concepts. It’s a combination that’s already demonstrating its potentials. Thanks to big data, treatment paths can be personalized, while the smart evaluation of data enables predictive diagnostics, benefiting both physicians and patients.
And companies such as discount retailers that focus on the efficiency of their processes have much to gain from the digitization of the supply chain. For example, sensors can be fitted to transported goods, and the generated data can be analyzed to help develop improved routes and more efficient supply chains.
2.4 CARGO CULTS DON’T WORK
The considerations sound simple. However, treacherous traps lurk in practice that are best illustrated using the example of the “cargo cult.” The term was coined by the recipient of the 1965 Nobel Prize for physics, Richard Feynman, to describe poor scientific method. He told his students an anecdote from the island of Samoa.
During World War II, US aircraft regularly landed in Samoa, and the airmen would often share with the indigenous locals the glorious gifts of western civilization: Coca-Cola, Camel cigarettes, and Cadbury chocolates. Following the end of the war, the flights stopped, and the disappointed Samoans called for the return of the flights and their beloved cargo in what quickly developed into a cult. They built wooden aircraft and wore bamboo headphones to simulate radio traffic. However, it was all in vain, as Coca-Cola and the rest of the treasured cargo never returned. Although the islanders had recognized the phenomenon—the aircraft brought their coveted products—they had drawn the wrong conclusions.
Many companies respond to the digital challenge in a similar way. They recognize the phenomenon, but react wrongly. These are our top three cargo cults of the digital world:
- Digital start-ups: Cosmetic exercises such as these are seen quite often. A digital start-up is founded a long way from the company’s head offices with a small budget and a couple of young employees. However, these halfhearted efforts are rarely able to have any influence on the established business model. This isn’t to say that we shouldn’t still learn and actively employ such structures. Just don’t expect start-ups like these to solve your digitization challenges for you.
- Digital sugar-coating: Another unsuitable method is to bolt a digital process onto any opportunity that seems to appear. There are plenty of examples of teams of interns being asked to look after social media communications. Another example is that companies often understand the value of their data, be it data about customers, suppliers, or the value chain, and they begin to collect this data systematically. However, the will to use this collected knowledge in all processes is often lacking, and big-data islands emerge.
- Efficiency traps: Another trap emerges from the legacy of Taylorist efficiency methods. For example, when it comes to digitization, management concentrates entirely on automation, rather than thinking at scale and looking for opportunities to increase value across all processes.
The CEO Must Take the Lead
And once again, everything depends on the CEO. Only if change is demonstrated and exemplified by the top management will the necessary changes to structures, processes, and management instruments, as well as the establishment of new skills and new IT systems, be successful. No one is saying that this is easy. “We don’t go to bed one night and say: when we wake up, we don’t want to be an industrial company anymore; we want to work like Oracle or Microsoft instead,” says Jeffrey Immelt, the CEO of General Electric.
Six years ago, Immelt ushered in a digital transformation at the 120-year-old industrial corporation. It was a laborious process during which GE studied elements of the digital economy—for example, abolishing hierarchies and bureaucracy—while at the same time reactivating proven methods such as lean production and streamlined development. Immelt also hired digital talent in the thousands, and with Predix now offers an open platform for controlling Industry 4.0 processes on which not only GE apps can run, but also those of external developers. Software has now become its own division at GE, and yet the digital transformation is far from over—this is a journey that never ends.
Thus, the fate of traditional companies depends on the attitude of the CEO. Will he or she recognize the signs, and plot an early course toward digitization like Jeffrey Immelt? Or will the CEO read events like the last German kaiser read the emergence of the automobile—as a passing trend (“I believe in the horse,” said Wilhelm II).