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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
A blueprint for reinventing the core of your business Value in the next phase of the digital era will go to those companies that don't just try digital but also scale it. Digital@Scale examines what it takes for companies to break through the gravitational pull of their legacy organizations and capture the full value of digital. Digging into more than fifty detailed case studies and years of McKinsey experience and data, the authors, along with a group of expert contributors, show how companies can move beyond incremental change to transform the business where the greatest value is generated--at its core. The authors provide practical insights into the three pillars of digital transformations that successfully scale: reinventing the business model, building out a business architecture from the customer back into the organization, and establishing an 'amoeba' IT and organizational foundation that learns and evolves. This is the ideal guide for all leaders who recognize the power and promise of a digital transformation.
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Veröffentlichungsjahr: 2017
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DIGITAL @ SCALE
The Playbook You Need to Transform Your Company
ANAND SWAMINATHANJÜRGEN MEFFERT
Cover Design: Lisa Campabadal and Paolo Donato
Copyright © 2017 by McKinsey & Company, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data
Names: Swaminathan, Anand, author. | Meffert, Jürgen, author.Title: Digital @ scale : The Playbook You Need to Transform Your Company / Anand Swaminathan, Jürgen Meffert.Other titles: Digital at scaleDescription: Hoboken, New Jersey : John Wiley & Sons, Inc., [2017] | Includes bibliographical references and index. |Identifiers: LCCN 2017020935 (print) | LCCN 2017027250 (ebook) | ISBN 9781119433767 (pdf) | ISBN 9781119433774 (epub) | ISBN 9781119433743 (cloth : alk. paper)Subjects: LCSH: Information technology–Management. | Technological innovations–Management. | Organizational change. | Strategic planning.Classification: LCC HD30.2 (ebook) | LCC HD30.2 .S9185 2017 (print) | DDC 658.4/0380285–dc23LC record available at https://lccn.loc.gov/2017020935
CONTENTS
Preamble: Thinking Digital
Why, What, and How? The Key Questions Before Any Digital Transformation
Tolino Is Now Present in More Than 1,800 German Bookstores
1 Digital Is Changing Our World, Quickly and Irreversibly
1.1 What Is a Digital Transformation?
1.2 Established Market Definitions Don’t Apply Anymore
1.3 The Pace of Change Is Increasing Exponentially
1.4 Those Who Turn a Blind Eye to Digital Risk Failure and Extinction
2 Digitization Requires Fundamental Renewal: Digital@Scale
2.1 Why? Things Are Going Well, So Why Do We Need to Change?
2.2 What? What Does Digitization Mean for My Company, and What Priorities Are Derived?
2.3 How? How Do I Manage the Tasks Resulting from a Digital Transformation?
2.4 Cargo Cults Don’t Work
Notes
3 Why? The Clock Is Ticking
3.1 Creating a Sense of Urgency: How Urgent Is Digitization?
3.2 Determining the Kind of Change Required
3.3 Identifying Relevant Assets
3.4 Determining the Aspiration Level for the Transformation
Conclusion: Bring on the New Ecosystems
Notes
4 What? Doing the Right Things Intelligently
4.1 Always Online, Gladly Electric, Often on Autopilot: Mobility in the Digital Age
4.2 Digital Commerce: One Channel Is No Longer Enough—Today’s Mobile Customer Blithely Switches between the Real and Virtual Worlds
4.3 Who Still Needs Banks? Fintechs Threaten the Established Business Model
4.4 Digital Health: the First Innovation in Health Care That Can Reduce Costs in the Long Term
4.5 Connected Buildings
4.6 The Digital Revolution Has Reached Electricity Utilities
4.7 Telecom Giants under Pressure: Who Will Be at the Heart of the Emerging Communications Ecosystems?
4.8 Digital Logistics: The Drone Always Rings Twice
4.9 E-Government: Public Administration Goes Online
Conclusion: Opportunities in the Emerging Ecosystems
Notes
5 What? Developing Business Architecture
5.1 Omnichannel: A Presence across All Channels
5.2 Dynamic Pricing: Up-to-the-Minute Prices
5.3 Digital Marketing: Tailored Messages across All Channels
5.4 Digital Product Development and Open Innovation: Rethinking Product Development
5.5 Product Design: Learning from Software Development
5.6 Faster, More Flexible, More Efficient: Supply Chain 4.0
5.7 Digital Lean: The Digitization of Production
5.8 Digitization in the Office: Bots Take the Reins
Conclusion: Digitization Is Changing Every Function in the Company
Note
6 What? Strengthening the Foundation
6.1 Two-Speed IT: Accelerating the Pace for the Digital Age
6.2 Big Data and Advanced Analytics
6.3 Cyber Security: The Art of the Secure Digital Economy
6.4 Embedded Software: Machines and Equipment Go Digital
6.5 The Chief Digital Officer: A Steve Jobs for Every Company
6.6 The Digital Organization: All Power to the Multifunctional Teams
6.7 Talent Management: Everyone Wants Digital Natives
6.8 Partner Management: Stronger Together
Notes
7 How? Decisive, Holistic, and Rapid Implementation
7.1 Creating a Plan
7.2 Think Big: Digitizing the Entire Enterprise
7.3 Surprise! It’s about the Customer
7.4 Breaking Up Functional Silos
8 How? Ramping Up the Digital Company
8.1 Switching to the Digital Operating System
8.2 Anchoring the Culture Change
8.3 Steering Change
8.4 Encouraging Leadership at All Levels
9 How? Scaling Forcefully
9.1 It’s about the Whole
9.2 How to Turn IT into a Weapon
9.3 Collaborating Closely with Start-Ups
9.4 Speed as a Guiding Principle
9.5 Rapid Scaling: Digitizing the Entire Enterprise
Conclusion: The Digital World Demands a New Way of Thinking
Notes
10 Are We in Good Shape for the Transformation?
About the Authors
Special Thanks
Index
EULA
Guide
Cover
Table of Contents
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PREAMBLE: THINKING DIGITAL
THE DIGITAL REVOLUTIONis here, and no industry is immune from its impact. The good news: all companies—big or small—can benefit. German booksellers have grasped their opportunity against a seemingly unassailable opponent.
For 550 years, everything was fine: Ever since Johannes Gutenberg founded printing with movable letters in 1450, the retail book industry largely remained unchanged. The print shop produced the books and delivered them to the store; customers visited the store, browsed through the selection, and bought their reading material. With the dawn of the new millennium, however, a new upstart turned all the rules upside down. It wasn’t enough that the online retailer Amazon grew to become the largest bookseller around the world; with its Kindle device, it introduced a reader for electronic books that quickly became popular.
Pure fear gripped booksellers and the management of big bookstore chains throughout the world. They were faced with a disruptive technology and revolutionary change that was upending the old business model. Digitization had reached their industry, and if they weren’t to be ejected from the market like photography specialist Kodak years earlier, or like mail-order catalog retailers, as well as several travel agencies and newspapers, then something had to be done. Large bookstore chains like Borders in the United States and Waterstones in England had already fallen victim to the Amazon infiltration: they ignored the threat for too long, and then reacted too slowly and halfheartedly.
But it was a crisis with a happy ending for German booksellers. Faced with the pressure of rapid change, the bookstore chains Thalia with Michael Busch, Hugendubel with Maximilian Hugendubel, and Weltbild with Carel Halff, as well as the book clubs of media giant Bertelsmann with Niklas Darijtschuk, had a meeting. According to coinitiator Michael Busch, CEO of Thalia: “We needed to establish strong marketing power in the German-speaking area.” And since Thalia as well as Hugendubel and Weltbild had been unable to successfully market their own electronic readers in previous attempts, the book retailers now sought the services of Deutsche Telekom as a technology partner. “We wanted to build a value chain in which all partners were playing at Champions League level,” according to Busch. Together, they developed the Tolino e-reader as a rival to Amazon’s Kindle, created a Tolino app for mobile devices, and invested in an Internet campaign to market the electronic offering.
WHY, WHAT, AND HOW? THE KEY QUESTIONS BEFORE ANY DIGITAL TRANSFORMATION
The book retailers and Deutsche Telekom followed a strict strategy based on the overriding sense of urgency that the retailers needed to understand precisely why they needed to act. That is, if they didn’t tackle the challenge of digitization, their core business would be threatened. “Fear spurs you on,” as Michael Busch puts it.
So what was to be done? The partners needed a concept to conquer the e-reader and e-book market with the ambitious aim of becoming market leaders. And since customers in the digital world wanted stable and above all, simple processes, Tolino needed to offer a customer experience similar to Apple: that is, intuitive to grasp and with an animated and captivating customer journey across all contact points from first contact to purchase.
How could Tolino meet these ambitious targets? The way not to do it quickly became clear: with existing corporate structures, large committees, and elaborate meeting agendas. Instead, a small core team was given extensive authority and decision-making powers. The most important developments were started at the same time and were based on a two-speed information technology (IT) architecture. A traditional IT structure ensured the stability of all the usual processes and the integrity of important data, while another group was organized in the manner of a start-up company, allowing fast and flexible processing of the many tests, learning steps, and corrections that digital product innovations inevitably entail. Deutsche Telekom, meanwhile, designed the hardware, the actual e-reader. At the market launch in 2013, an advertising campaign ran across all digital channels, focusing on television and social media.
Who would have bet on the success of Tolino? In one corner, a group of traditional medium-sized companies and a former state-owned company, and in the other corner, one of the leading global success stories of the digital age. Everything pointed to Amazon. However, the smart approach of the latecomers paid off. In 2015, Tolino pulled level with Amazon in Germany with a market share of between 40 and 45 percent, depending on the counting method.
The key to its success was a specific advantage that traditional retailers have: bricks and mortar. They were able to combine their high-street stores and their online business into an omnichannel concept with 60 million people in Germany visiting a bookstore each year. And since the Tolino partners consistently aligned their marketing mix across all channels, they secured a structural competitive advantage over Amazon: the Americans still had no physical presence in Germany. The Tolino campaign also brought new customers into the brick-and-mortar stores. “Naturally, we sold most of our e-readers in our bookstores,” says Michael Busch. This was a major success, but not grounds for relaxing. The battle for superiority is far from decided: market and customer needs are still developing, placing high demands on agility and innovation.
At the beginning of 2017, Deutsche Telekom sold its share in Tolino to the Japanese-Canadian group Kobo, the third-largest online retailer in the world after Amazon and Alibaba. The move further strengthens the Tolino alliance because Kobo has its own generation of e-readers and e-books. Unlike Deutsche Telekom, Kobo, a subsidiary of Rakuten, has global reach, and is therefore an ideal partner for the Tolino alliance in its rivalry with Amazon’s Kindle.
TOLINO IS NOW PRESENT IN MORE THAN 1,800 GERMAN BOOKSTORES
The success has not helped all Tolino partners. Weltbild applied for insolvency, and Bertelsmann ended its book clubs in late 2015. However, the media group is still on board with Tolino Media, the wholesaler for e-books, and new partners have joined. For example, the wholesaler Libri brought with it 1,300 bookstores, and with two strong regional groups, a further 70. Today, the Tolino can be bought in more than 1,800 out of a total of 6,000 German bookstores, and the open system has even expanded to Belgium, Italy, Holland, Austria, and Switzerland.
Furthermore, the success of Tolino and the associated prospects for booksellers is likely to have contributed to Thalia being sold for a nine-figure sum in 2016. One of the new owners is CEO Michael Busch. He expects further double-digit growth in e-book commerce with nine million Germans using e-readers by 2020. The Thalia boss sees them as good customers. If they like an e-book, they often also buy the print copy because they still want to flip through an actual book.
The Tolino adventure has taught Busch something: “It doesn’t matter where you come from or how big or small your company is. If you have enough imagination and strong willpower, you can achieve just as much with digitization as the giants in Silicon Valley.”
The Tolino success can therefore serve as a blueprint for all those companies whose business models are threatened by digitization. The answers to three questions provide a model for digital transformations—including for your company:
Why
does a company need to change in light of the digital challenge, and how critical is the topic of digital for the company’s business?
What
precisely needs to change—from the overall business model and the central elements of value creation such as product development, marketing, and the supply chain, through to basic functions such as technology, organization, and corporate culture?
How
will the company organize the digital transformation and change structures, processes, IT, and management instruments?
This book provides concrete answers to these questions, and includes numerous success stories, putting you and your business on the path to a successful digital future.
1DIGITAL IS CHANGING OUR WORLD, QUICKLY AND IRREVERSIBLY
FROM CUSTOMER RELATIONSHIPSand production control to communication with suppliers: In the digital age, companies need to rethink their entire business models. Those who don’t risk failure and extinction.
The successful battle of the traditional booksellers and their Tolino e-reader with the Internet giant Amazon and its Kindle device not only inspires courage, but is also rich in lessons. Even the most cursory of analyses is enough to dispel a widely held belief that, contrary to popular opinion, digitization is not primarily an information technology (IT) issue. Effective IT is just the foundation on which the digitization of the entire company is built. It’s about far more than simply implementing digital technologies—the ultimate goal is to develop completely new business models. This takes us to the heart of the issue: digitization starts with the CEO.
1.1 WHAT IS A DIGITAL TRANSFORMATION?
A digital transformation leverages the opportunities presented by technology—from IT to advanced analytics, sensors, robotics, and 3D printing—to drive business forward. The entire ecosystem of the company is affected, including employees, customers, suppliers, and partners. Companies that want to digitize successfully can either improve their current business model and processes, add new sources of revenue to their business model, or replace their old business model with a new superior model. In doing so, companies realize new customer experiences, generate new value propositions, and raise the organization to new levels of effectiveness and efficiency. Digitization thus changes structures, processes, and IT, as well as the people who live and work in this new reality.
Digital Players Conquer and Disrupt All Industries
However, this wonderful new world has a dark side: those who refuse to change, lose. Digitization triggers creative destruction, a term popularized by economist Joseph Schumpeter. The new combination of production factors ousts and destroys old structures and traditional business models.
Digitization claimed its first prominent victim when the Internet was still in its infancy, when smartphones belonged to the realm of science fiction and apps were still unheard-of: Compaq was the undisputed global leader in personal computer (PC) and server sales in 1996, with a market share of more than 50 percent in the business customer segment. Compaq built its computers in the old-fashioned way, and delivered them to distribution partners for sale in their stores. That same year, the then 31-year-old Michael Dell launched direct sales of his Dell PCs via the Internet without the need for brick-and-mortar stores. And it wasn’t just the order process that was revolutionary: Dell’s customers were able to assemble their own customized PCs using a kit on the website. Thus, computers were no longer built according to the Compaq principle of “build to stock,” but rather “build to order,” and were tailored to the needs of the individual customer.
Although not immediately apparent to its competitors, Dell’s business model was superior to the business model of Compaq and the rest of the industry. Online sales and lean mass production according to the build-to-order principle made the difference between earning and losing money in this hard-fought market with tight margins. Compaq didn’t dare to change its business model because it feared a channel conflict, and ultimately stayed true to its existing model. In 1997, Compaq was acquired by Hewlett-Packard, and Dell rose to become the world market leader.
Since Dell’s digital revolution of the PC industry, many industries have had their foundations shaken. Video libraries, CD stores, travel agents, and local banks are just some of the endangered species in a world where we now stream our movies and music via Netflix and Spotify, book our flights and accommodations via portals like Expedia and Airbnb, manage our bank accounts online, and can even secure classic banking services like loans via crowdfunding sites like Prosper.
Digitization Is Relevant for All Industries—Only Scale and Speed Will Vary
Anyone who hopes one’s own industry will not be affected by digitization and chooses to continue along as before in blissful oblivion is making a risky assumption. Essentially, all sectors are affected; the only difference is the severity and length of time until the old business model is rendered obsolete.
Companies face dramatic challenges in many industries. Who is to say that tomorrow’s driverless cars will still be built by Ford, BMW, Toyota, and the like, and not by Tesla, Google, or Apple? And in a few years, who will equip our smart homes with Internet-connected robot vacuum cleaners and ovens? Who will deliver the groceries that our smart refrigerators automatically order online? Kroger or Amazon?
Naturally, the topic of digitization is on the agenda of most companies. Many companies have started digital initiatives, for example in customer communications, in production, or in supplier interaction. However, most CEOs currently admit they do not have an overarching digital strategy. Their ideal transformation toward becoming a digital company often lacks definition, and all too often they have too narrow an understanding of the term digitization. It is not just IT and technology. These are only the foundation. Rather, it is about transforming the entire company—redefining customer value propositions, value-added processes, and people’s working methods.
It has radically changed consumer behavior and expectations, destroyed traditional business models, and redefined industries. It revolutionizes production—think Industry 4.0—and rocks entire business sectors. Retail faces challenges from digital competitors like Amazon and Alibaba, the banking industry is threatened by lucrative fintech segments, travel portals like Expedia and Priceline are shaking up the tourism industry, and the traditional business models of the advertising industry are being rocked by a variety of digital channels. Digitization is even creating new markets, for example the so-called sharing economy where urban hipsters dispense with owning a car in favor of Uber or Zipcar.
Companies operating in the analog world must not let it get too late before they join the digital mix. Start-ups that tap into a customer need sometimes experience explosive growth. In China, for example, Tencent, whose WhatsApp-equivalent QQ is used by 900 million Chinese customers, saw its revenues increase a hundredfold in 10 years to around €14 billion in 2015. Tencent states that one in two employees works in research and development. And Chinese Uber rival Didi Chuxing, which dominates the taxi and limousine market in the country, more than tripled its company value in 18 months from around $6 billion in 2015 to some $20 billion.
New Business Models Follow a Classic Pattern
The business ideas triggered by digitization can be grouped across two dimensions depending on whether they are driven by the supply side or the demand side and whether they lead to extended or improved or even completely new business models. An example of a new offering leading to an extended business model is Kayak. The company has digitized the classic travel agency business, allowing users to search for flights, hotels, and rental cars online. The business model itself is still based on a classic system where providers pay a commission to Kayak.
Other digital companies’ offerings tap into a demand that it was previously not possible to service. One example of this is Spotify, whose streaming service provides customers with access to its entire library of music. Rather than paying to listen to individual songs, users pay a subscription. This completely new business model revolutionized the music market and fundamentally turned the industry on its head. By comparison, Apple’s iTunes music store appears conventional.
An example of a demand-driven revolution is the Dollar Shave Club. The company, which was recently bought by Unilever for $1 billion, offers razors and shaving accessories for men in return for a membership fee. By subscribing, members receive a monthly package containing the necessary blades and shaving foam, which saves a trip to the drugstore.
Nike iD is a demand-driven extension of a business model. Customers can individually design their sports shoes online, customizing the shape, material, and color, and even add a monogram.
Consumer Behavior Has Dramatically Changed in Recent Years
The McKinsey long-term study “TMT Digital Insights” tracks changes in consumer behavior in the most important global markets and segments, and has revealed dramatic changes in US consumer behavior. Here are two examples:
Consumers want everything, anywhere, anytime: In 2016, 83 percent of consumers possessed a smartphone—the same number as those who own a home PC. Even tablets, which first became a mass phenomenon in 2010 with Apple’s iPad, are now owned by two-thirds of consumers. This has key consequences for user behavior: US consumers now spend more time on their smartphones and tablets than they do on the PC. Mobile consumers expect answers immediately when researching products and prices on the move or when they want to order something. Smartphones and tablets have become personal command centers. Companies that do not adjust their online presence to service the mobile “anytime, anywhere” mentality may lose ground to their competitors.
Increasing relevance of visual media: The medium of video has become significantly more important. Consumers now spend more time watching videos than before—often at the same time as other (often also digital) activities. So-called over-the-top (OTT) video content published directly online is threatening traditional linear TV and pay-per-view models. To remain attractive to customers, companies need to supplement their traditional text-intensive communications with videos. For a long time now, consumer fascination with the virtual world has impacted the real world economy: advertising budgets have shifted dramatically—from TV and print to mobile providers. And now video content is conquering the small screen: series are now optimized for smartphone screens in terms of time and image composition.
Retailers, service providers, and consumer goods companies are also feeling the pressure to digitize their processes and offerings, driven by customers whose research and buying behavior has drastically changed in the past decade. Consumers browse online forums to find out about a product’s quality, they check value for money on comparison sites, and they use Twitter, Instagram, and the like to post their opinions. And even when shopping in a store, they’re happy to check their smartphones to see if a product they like is available for a lower price from an online retailer or a local rival.
1.2 ESTABLISHED MARKET DEFINITIONS DON’T APPLY ANYMORE
At the same time, managers find that the established definitions of their markets no longer apply—new challenges lurk everywhere. The networking of previously unconnected devices with online data sources—the Internet of Things—has dissolved traditional industry boundaries. Take the health care sector as an example: suddenly, technology firms with their apps and fitness bands have entered their industry, using the data leveraged from their customers to develop completely new business models. Even the old classification of companies that sell to business customers (B2B), and those that deliver to end customers (B2C) is becoming blurred—suddenly we see the term B2B2C. Even an industrial company like Alcoa might now like to know what the end customer does with its aluminum.
Naturally, as digital pushes through, the frequency of channel conflicts that need to be managed increases. The accumulated data needs to be professionally analyzed, which requires new talent in the company. The result of all these factors is increased pressure on management.
Innovations Arise at Industry Boundaries
Previously, the business world was transparent: everyone knew who their competitors were, and surprises from outside the industry were rare. This fine sense of certainty has gone; digitization has made transgressions easy. For example, Amazon with its Amazon Web Services (AWS) is now the world’s leading provider of cloud services. Microsoft and IBM, which might have been expected to occupy this position as the top dogs in the IT industry, are positioned on the next rung down by some distance—they never reckoned with this competitor. Originally, Amazon had only intended to better utilize the capacities of its huge data centers. In the meantime, IT companies yet again find themselves wrangling with another intruder: General Electric (GE), whose subsidiary Predix offers a cloud-based platform for analyzing data sent from industrial machines—a cornerstone of Industry 4.0 applications.
Even traditional machinery manufacturers are now crossing industrial boundaries. John Deere, for example, one of the giants in agricultural machinery and tractor manufacturing, offers software and data-based services. These services process highly detailed weather forecasts with data on soil conditions, the specific properties of the seed used, and a wide range of additional information to provide recommendations to farmers to help them increase their yields. It also helps save fuel, reduce repair cycles, and ensure optimum use of the vehicle fleet. Sensors installed in the vehicles send on-site data to the Deere data center, and farmers can access their information via the MyJohnDeere.com platform or view it on their smartphone or tablet via the Mobile Farm Manager app.
The chemicals group Monsanto is pushing into the agricultural world from a different direction. In 2012, the seed specialist bought Precision Planting, a manufacturer of hardware and software, whose products help farmers during sowing to optimize seed depth, distances, and conditions to ensure the best roots. It’s the same customer base as Monsanto’s core business and the same value proposition—more yield in the field—and yet a completely different technical approach. Monsanto has harmoniously expanded its business model, while at the same time breaking down industry boundaries.
Blurring Boundaries between B2B and B2C: B2B Becomes B2B2C
Previously, these worlds were strictly separated. When addressing end consumers, the pitch focused on emotion, enjoyment, and, above all, simplicity: the choice had to be made simple for consumers. Business customers, on the other hand, wanted to know the details; they demanded facts and rationality.
This distinction, however, is now obsolete due to digitization. Once business clients experienced how easy orders were with Amazon or Google as private consumers, how simple it was to search for products, and how quickly items could be delivered, they naturally transferred these expectations to the B2B segment. Why should an order for machine spare parts be more complicated than ordering a book from Amazon? Why does the delivery take weeks instead of one day? Why is the manual written in technical jargon and not simple to understand? Why is the supplier’s website so difficult to search? And why doesn’t the supplier respond immediately to a complaint?
And it’s not just customer relationships in the B2B segment that are increasingly mirroring those in the consumer sector. Thanks to digitization, many B2B providers are expanding their business model and also addressing end customers: B2B2C. Take Craftzilla as an example: the Indian e-commerce platform connects small-scale home decor manufacturers and artisans, who previously sold their products through specialty retailers, directly to the end customers. Craftzilla doesn’t hold any inventory—the company connects sellers with customers and takes a commission from sales made on its website.
Fitness band manufacturer Fitbit applies the B2B2C concept by establishing company fitness programs with companies like BP and Adobe to promote employee health: the contract partner is the company—B2B—and the employees are the consumers—B2B2C. Panasonic and Allianz also collaborate in the same manner to make houses and apartments more secure. Panasonic installs its monitoring and control systems at the customer’s home, while Allianz Global Assistance, a subsidiary service provider of Allianz, is alerted in the event of a serious incident so that emergency services are dispatched.
Managing Channel Conflicts
Digitization is revolutionizing customer contact, and not just in the end consumer segment. New rules also apply in B2B, often based on the B2C model. German heating system manufacturers, for example, previously marketed their products primarily via the installers. Companies such as Buderus, Viessmann, Vaillant, Wolf, and Junkers all cultivated their heating installers, who in turn brought in customers.
A Berlin-based start-up, Thermondo, however, disrupted this model by creating a platform to connect the various decentralized service and installation teams that supply customers with heating systems across Germany. The portal was founded in 2012. As early as 2015, the company was achieving an annual growth rate of 864 percent. A customer searching the portal can choose from numerous brands, and is given a tailored fixed price that includes installation. Thermondo even gives advice on applying for funding.
Manufacturers and tradespeople now have a problem: their old business model is under threat. The problem sounds familiar—think back to the Compaq example. And just like in the Compaq case, the problem doesn’t simply go away. An approach now needs to be developed governing how, for example, heating system manufacturers, installers, Thermondo, and the other market players work together in the new ecosystem. What is needed is omnichannel management.
Software and Analytics Competencies Becoming Increasingly Important
“Data is the new oil” is a popular saying. Data forms the raw material for any digitization initiative. According to a McKinsey study, in 2015 international flows of data contributed more to global economic growth than classic trading of goods. Companies receive or procure huge amounts of data that can be translated into large sums of money with smart analytics.
Thus, online retailers like Amazon or Overstock use dynamic pricing systems that allow them to make second-specific price adjustments for the several million items in their ranges. To this end, they constantly retrieve information about competitors’ prices, and process this along with data about current sales promotions. Using time series and big data analyses, they then calculate new inverse demand curves for all their items in hourly cycles.
The Battle for Digital Talent
Although digitization opens up countless opportunities, large companies with a traditional structure and strong division of labor from production through to sales find it difficult to grasp them. The fact that they don’t have enough digital talent on board and therefore have to compete in the labor market for the scarce resources of new IT and software experts is just part of the problem. Even if these companies already had such talent, they could not achieve much as an isolated department. There needs to be a basic understanding throughout management of the possibilities and limitations of digitization.
This includes the observation that nothing is to be gained with classic departmental thinking, and that cross-functional teams need to take control of projects. Whoever wants to win the battle for digital talent needs to start here. This is particularly difficult for traditional companies: after all, specialization and a strong division of labor were for a long time considered factors of success.
1.3 THE PACE OF CHANGE IS INCREASING EXPONENTIALLY
A further obstacle on the path toward becoming a digital company lies in a deeply human weakness: we are accustomed to thinking linearly, and highly disruptive change makes us uneasy. According to the futurist and Google director of engineering, Ray Kurzweil, this is why we tend to smooth exponential functions back toward a linear curve by mapping them on a logarithmic scale. However, this is fatal when it comes to mental processing of the changes involved in digitization, because they develop according to an exponential function and at an increasingly rapid pace.
In his essay The Law of Accelerating Returns Kurzweil impressively describes the exponential dynamics of technological progress throughout human history when correctly mapped on a linear scale, and not on a distorting logarithmic scale. He surmises that people intuitively gravitate to this distorting perspective, and thus—against their better judgment—significantly underestimate the speed and extent of future developments. He predicts rapid progress for the twenty-first century because we are currently in the advanced section of the exponential curve.
In an interview, he explained the fundamental dynamics of exponential growth: “If I take 30 steps in a linear manner—1, 2, 3, 4, 5—I get to 30. If I take 30 steps in an exponential manner, I go 2, 4, 8, 16, and get to a billion.” It’s fascinating logic and one that can’t be refuted—and yet it’s so hard to believe, the mind blocks it out. “Today, everyone expects continuous, linear development in technical advances, but the future will surprise us far more dramatically than most observers believe,” Kurzweil says. “Very few understand what it will mean for the pace of change to accelerate even faster.”
Progress and Moore’s Law
Two examples corroborate Kurzweil’s theory of the logarithmic development of progress. The best-known is Moore’s law. Gordon Moore, cofounder of Intel, formulated his theory in 1965 in the journal Electronics. He noted that the number of circuit components in an integrated circuit doubles each year, and predicted that this will continue. To this day, he has been proved right—processing power has doubled every year. Chips have become smaller and smaller. Today, a standard smartphone has 120 times the processing power of the control computer of NASA’s Apollo moon program, and is four times that of an IBM mainframe from 1998—which was the size of a refrigerator. And an iPad 2 would have been one of the world’s fastest supercomputers in 1994.
Further support for Kurzweil’s theory is the fact that new technologies are adopted increasingly quickly. Following the invention of the radio, it was another 38 years before 50 million devices were in use around the world. The TV needed 13 years to be welcomed into 50 million living rooms. The Internet boasted that many users after just three years. Facebook needed one year to reach this figure, and Twitter just nine months. In 2016, the hype surrounding Pokémon Go heralded a new record: the game was downloaded to the smartphones of 50 million fans in just 19 days. New products and services are being developed and distributed at an unprecedented pace. Managers around the world still struggle to anticipate such rapid change.
1.4 THOSE WHO TURN A BLIND EYE TO DIGITAL RISK FAILURE AND EXTINCTION
Even though no one expects managers to develop psychic powers, the example of the erstwhile global brand Kodak shows what happens when the company’s management refuses to accept digital change. Blessed with creative developers, Kodak Labs presented the world’s first digital camera as far back as 1975. However, the management put the brakes on the project, fearing that this novelty might adversely affect the highly profitable business with Kodak films. Instead, rivals from Japan did so in the 1980s. When Kodak finally started making digital cameras, it was too late and their early advantage was lost. By 2012, Kodak was bankrupt and its market value of $35 billion was gone.
In the meantime, even the market for digital cameras has become a niche market, but who knows, had Kodak taken the bold step into the digital age in 1975, maybe a learning curve like that of Apple would have been possible. Perhaps then the first iPhone would have been built by camera manufacturer Kodak and not by the computer manufacturer Apple.
QUESTIONS MANAGERS SHOULD ASK THEMSELVES: WHERE ARE YOU?
What is the phase and degree of digitization in your industry?
Where is your business model most vulnerable?
How quickly do changes take place, and how big are they?
How do you react to these changes—with a lot of small, short-term initiatives or with larger, long-term initiatives?
Do you know which digital investment(s) deliver the greatest benefit in your industry?
How much change do you need to survive?
What are you doing yourself? Where do you need partners or acquisitions?
2DIGITIZATION 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.
