Obligation, not choice

Digitization is a form of disruption, in which established industries are undergoing a complete, radical change under the banner of intelligent networking. In this process existing and traditional business models, products, services or technologies are time and again being superseded and usurped by various innovations. This is by no means new; analog machines, for example, have been constantly replaced since the 1960s by numerically controlled machine tools. I’d thus speak of a digital evolution rather than a revolution as existing investments can’t be replaced overnight.

Digitization isn’t just a passing trend but an actual process which has been in full swing for decades. Technological advance is accelerating at an exponential rate; new technologies are hitting the market at ever shorter intervals. For me, we’re only at the start of an era in which our economy will be fundamentally rebuilt. Here, digitization is the determinative success factor for companies in all sectors.

Depending on which statistics you look at, in the ranking of digitized countries Germany is sometimes closer to the top and sometimes not. However, it’s certainly not the ‘digital developing country’ it’s sometimes critically called. While the USA is heralded as being a radical innovator, Germany stands for engineering excellence. From our technological leadership in production we can develop to become a leading supplier of intelligent production systems in the course of digitization. By and large, the speed at which German companies are promoting digitization can still be increased, however. Politicians must also ensure that our country remains competitive by passing the appropriate laws and regulations. On the subject of e-government and IT infrastructure our cities and authorities still have a lot to catch up on.

Consumers feel spoiled by easy-to-operate interfaces, such as Google and Amazon, and as a matter of course they increasingly expect to have similar experiences with other companies, too. Immediate use, mobile functionality and an individual, personal form of address are no longer a bonus but a basic requirement. Intuitive operator concepts and tracking of orders and shipments are also increasingly being used by industrial companies – for example in the processing of the spare parts business. Here, we’re also seeing a recommendation management system based on suitable other products frequently bought – just like on Amazon.

Competition often no longer necessarily comes from your own branch of industry. Totally new players and startups often suddenly appear on the market and unleash a true digital storm. In telecommunications the WhatsApp example shows how quickly players who are new to the sector can shake up an established industry. This also applies in the business sector with messaging platforms such as Yammer or Slack which enable fast, agile communication within a company. One good example for an SME is Viessmann. The traditional heating engineer felt forced to act after its competitor Thermondo penetrated the market with its online configuration system. With Wattx Viessmann then created its own company builder which successfully develops and thinks up new business ideas based on hardware and the Internet of Things (IoT).

In the maintenance sector especially many new innovative opportunities present themselves which must be exploited due to falling margins in the new machine business. Good examples here are aircraft engine manufacturers MTU and Rolls Royce who offer fly-by-hour contracts with a kind of insurance character to them: for each hour an engine has flown customers pay a fixed fee to MTU Maintenance. In return the maintenance com­pany makes sure that engine repairs are covered by both scheduled and unscheduled shop visits.

Traditionally, machine and systems manufacturers are pioneers in the use of modern technologies, for example of production planning and ERP* systems. Digitization will change the sector further and present companies with various challenges. In establishing intelligent links machine manufacturers can create software platforms which network machines, devices and products. By using sensors and networking them and through big data analytics formerly consecutive processes, such as production, control and recalibration of machines, can take place simultaneously in the future and be better coordinated with one another, for instance. This opens up new options for the maintenance and servicing of machines or for adapting orders during on-going production down to a batch size of one: in other words, individual manufacture for the price of serial production. The analysis and evaluation of real-time data permits data-based business models which in the future will make a sizeable contribution to sales. In the long term the use of 3D printers will also prevail for models and the production of small series and spare and wear parts made of plastic or metal. This drastically lowers production and delivery times. Agility – that is, the ability to be able to react quickly to change – will soon be a decisive competitive factor.

* ERP = enterprise re­source planning: the corporate task of planning and controlling resources, such as capital, personnel, operating and auxiliary materials, information and communication technology and IT systems, in the interests of and for the purpose of the com­pany – on time and as required.

The answers to these questions yield a number of different individual procedures. Companies can set up a digital advisory body with internal and external experts, for example, or appoint a chief digital officer or CDO. This person must be part of the management, however, and have the necessary expertise. Another often successful solution is venture building, that is the founding of or participation in one or several independent startups which can produce and realize ideas faster than the company itself.

Digitization is definitely a matter for the boss and must be pushed by the company management. They must ask themselves the following questions: How do we position ourselves as a company in view of dramatically changing customer requirements? How great is the potential threat from changes within and outside our own branch of industry? With what can we distinguish ourselves as a company in the future? How can we digitize our business model? What digital skills and core areas of expertise do we have at our disposal within our company – and which ones do we need? How can we ensure a consistent positive customer experience across all channels? How can we cooperate with digital startups? Which ­value propositions can we offer our customers in the future? Which partnerships will be important to us in the future? And which of our assets can we use for new business models?

Management thinker Peter Drucker once said that the biggest danger in times of change is not change itself but in approaching this with old-fashioned logic. I agree with him. Especially from an internal point of view, there are many risks. In companies digital change is often only initiated on the basis of existing structures. This results in an internal view being adopted which can be dangerously deceptive in its self-assessment. If you want to react to disruptive changes on the market and in cus­tomer requirements, it is imperative that you regularly think outside the box in order to keep an eye on both the developments of the competition and new players to the sector and on customer demand. In this context it’s also necessary to make a concrete assessment of the entire value chain. Particularly regarding the external risks posed a knowledgeable appraisal or evaluation from outside the company can be very useful, helping to make your own digital status quo transparent.

In the consumer goods sector CEWE is a very obvious example. Once Germany’s biggest photo laboratory, since 1997 over €350 million has been invested in turning the analog company into a digital full-service photo pro­vider. Once CEWE began offering the first online order service in the whole of Europe in 1998, the successive disappearance of film and film development could be more than compensated for by its business with supplementary products, such as calendars and photo books. Or think of BMW and Daimler who are totally redefining the concept of car ownership with their DriveNow and Car2go car-sharing options. Millions of drivers are flexibly sharing a few thousand vehicles regardless of the location. A mobile app takes them to the nearest car and they pay by the minute. In the stationary retail trade Carrefour springs to mind with its virtual shopping list. The French supermarket chain guides consumers through the store with a mobile app called C-Où. The app shows them where the goods they need are and provides information designed to trigger further purchases.

We’re also seeing similar applications in industry more often where machines communicate with one another, consumption and wear data are transferred to mobile devices and system operation is becoming visibly more intuitive and simpler, for example thanks to gesture control or the swiping motion we’re familiar with from our smartphones.

What these examples have in common is that they focus on convenience for the customer or target group. Corporate leaders must therefore study the development in market demand very closely and find new, direct and simple ways of approaching their customers in order to assert themselves in an increasingly digital world.

The interview was conducted by KHS competence editor Stuart J. Nessbach.