The metamorphosis of digital companies

BY JÖRG HENSELEIT

(Published in The Produktkulturmagazin issue 3 2018)

SMEs have a difficult time developing a long-term vision under the auspices of digitalisation. Will anyone still be able to make money in 5 years, and if so, how? How can a supervisory board and senior management approach the task of answering existential questions? Based on practical experience, Jörg Henseleit shows how SMEs should proceed.

The topic of digitalisation evokes fear in many companies, as at first glance finding your way through the jungle of new technologies and concepts is hard, as is identifying how new business opportunities can be realised through digitalisation. The main obstacle is the lack of a clear vision of what the business could look like in five years. Many management bodies continue to negate the digitalisation trend based on the motto “but we have been digitalised for years, this hype doesn’t affect us!”. This attitude is only correct in part, however, as digitalisation has not been taking place for several years, but rather for several decades.

Practically every company uses ERPs nowadays through which they depict their core processes, while also often being able to communicate or exchange data in a digital manner with their customers and suppliers. But the potentials of digitalisation are far from exhausted. The digitalisation of products, marketing channels and the internal cooperation between employees not only harbours the potential of optimising the cost and efficiency of many companies, as in the example of ERP systems. It also enables the development of new offers, improved interaction and knowledge of customers, as well as entirely new forms of internal cooperation which increasingly meet the requirements and skills of the next generation of employees, depending on how long this cooperation continues.

Close cooperation between management, the business units and the ICT department when it comes to the creative process is a prerequisite for the discovery and exploitation of this potential. This presents a new challenge. During the growth phase over the past ten to 20 years, silo-like structures have formed in most companies which were intended to address potential for growth with high levels of efficiency. Each one of these silos therefore highly optimised processes and performance with a strong inward focus. These inward-focused structures now stand in the way of innovative ideas and implementation plans. It is therefore not a rare occurrence for a CEO to say, “my head of IT doesn’t understand me, and I don’t understand them!”. They didn’t learn to work on innovations together, instead they delegated away anything to do with information technology.

The most important step in kickstarting digitalisation in companies is to create the required governance structures in terms of innovation, technology and transformation. Within this governance structure it is essential that the board of directors and the CEO make innovation and digital transformation into their own issues.

A lot of confusion when discussing digitalisation arises from the fact that the term is very generic, and that everyone has a different understanding of the term depending on the initial situation. To begin with, it would be useful to clarify what one means when speaking about digitalisation. In essence, it involves four dimensions: the first dimension refers to digital core processes. This involves the optimisation of company-wide processes that help to increase cost efficiency, integrate supply chains, create new value chains and to manage customer information and employees (ERP, SCM, CRM, HRM).

The second dimension refers to digitalised products. This area of product digitalisation focuses on the physical and digital interaction with the customer. The most important aims are the greatest possible level of automated customer interaction with the same level or improved levels of customer friendliness, increased willingness to provide information, permanent availability and high agility. 

Digital marketing as the third dimension focuses on gathering customer information in order to enable customer retention schemes and digital campaigns in social media. Individual, tailored offers are becoming the new weapon of growth in the consumer goods business. The creation of communities enables the market to be tested before the launch of a new product or service and to be in direct contact with consumers across a broader front. As well as providing an online presence, social media are also increasingly turning into an interactive platform between partner companies and end users in the investment business.

The fourth and final dimension refers to digital collaboration. Nowadays it is common to work with tools such as Microsoft Office, email, messaging and smartphones/tablets. Platforms such as SharePoint facilitate working together through document storage that is easier to structure while allowing users to search for and edit documents that correspond to a specific topic or project. However, this is not all that digitalisation has to offer when it comes to teamwork. The use of Enterprise Social Networks enables an even deeper integration of user-generated contents in work processes. On the one hand, it can be used as a company-wide medium for exchanging information and communication, while on the other hand it can serve as an integration layer for various applications in order to digitally integrate work and decision-making processes in a simple manner.

Based on these four aspects of digitalisation, a company can now assess which of these dimensions are already digitalised and to what extent. The question of which dimension subsequently requires further digitalisation must be addressed individually for each company. Not every company can become the next Google, Amazon, Uber or AirBnB. These examples were designed to be digital companies from the start, whereas “old economy” companies must be transformed and find other solutions. It is vital to determine through a strategy process how today’s core offers and competences can be made and remain marketable in future through digitalisation measures.

Innovation management plays a crucial role in digitalisation. Is it sufficient to develop products and services in the sense of continuous improvement? Is it necessary to gradually innovate offers, or is a radical and disruptive approach required that aims to develop an entirely new business model? These questions often cannot be answered through exclusively internal skill sets. Companies must therefore gain an understanding of the expertise and experience they have in terms of new technologies, strategy development and business transformation. Overestimating these skills entails the risk of treading a familiar route and producing “more of the same”.

In many cases, the development of a digital strategy will take six to twelve months. Implementing all digitalisation plans could extend for a long period of between three to five years. As part of a strategy process it is therefore useful to not only bear in mind the end goal with all its measures, but to also identify and quickly tackle quick wins. The latter are very significant as they document whether the path taken towards digital transformation is the correct one. Sceptics can be shown that the road to digitalisation is successful and irreversible, while supporters receive additional motivation to get involved with the transformation. 

Many companies find it difficult to develop a long-term vision in view of digitalisation. After all, it is especially difficult nowadays to define how a company will make money in five years, for example. Will it continue to be through the sale of goods? Or will agreements on the use of goods be marketed instead of goods? The question of what the company’s value chain will look like by this point is just as difficult to answer. Should the company continue to focus on the same parts of its current value chain in future or will it focus on just a few segments of the chain in order to specialise and consolidate the remaining chains of a joint supply chain with partners?

The situation is similar in the service sector. Should a company expand its offers in future, which becomes increasingly difficult with a shortage of qualified employees, or is it better to act as a service broker and to work together as equals with other service providers in a network group?

Supervisory boards and senior management are required to develop visions that are viable in the long term and which must provide answers to these questions.  Applying creativity methods can be helpful in this situation, as they help separate the company from business operations and old thought patterns. This task cannot be delegated to the ICT department but should incorporate the ICT department as well as all the company’s other departments. Bringing an external view into this thought and development process is also helpful. Keep in mind that it is not external consultants who best understand a company, but rather the company’s own employees in particular who can provide valuable input. External consultants are very helpful in structuring and carrying out processes while ensuring that old thought and behaviour patterns are avoided which lead to “new old solutions”.

Once this vision has been created then a roadmap can be defined with the plans for digital transformation.  It should not be forgotten that this not only involves the development of new digital processes and applications, but also changes to the work environment of the employees. Digitalisation therefore also represents a major change to the company’s culture. Change management takes on a vital role during digital transformation. It is of utmost importance for the supervisory board and management to permanently communicate the vision, progress and success in order to keep employees on board and to unleash creative potential.

There is no reason why SMEs should descend into panic and knee-jerk reactions in light of digitalisation. Alongside transformation planning and change management, it is crucial to success to consider the existing values that made the SMEs strong in combination with the development of a long-term digitalisation vision. Yet it is crucial to not just fold your arms and wait, but instead to initiate the strategy process.

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JÖRG HENSELEIT

Jörg Henseleit advises companies on questions of strategy around digitalisation and digital business models. He has more than 20 years of experience in the field of business transformation as a CEO/top manager. He is trained in computer science, business leadership as well as digital business innovation, IT management, big data analytics, blockchain and digital marketing.

Picture credit © David Arky/Getty Images