What digitalization means for companies?

Digitalization has long become an intimate part of our daily routines outside the workplace. More than 80% of Germans use their smartphones to communicate with Whatsapp, to shop or use streaming services. Companies are having a much more difficult time adapting to digitalization. Many may get lost in the shuffle if they don’t get on the bandwagon early enough or choose the wrong path.

Kodak is the poster-boy for missing the boat. The world’s market leader in the field of photography, the company filed for bankruptcy in 2012, although they invented the first digital camera in 1975. Kodak failed because they did not choose to consistently pursue the digital technology for fear of endangering its business with analog products. Kodak underestimated the impact of disruptive change.

What defines digitalization?

Uber, Airbnb or the multitude of new FinTechs demonstrate what digitalization is all about: New technologies have the potential to completely alter entire branches and force traditional companies and their business models out of the market. The disruptive change results from the potential of digital data and the resultant new business models. Physical products or processes are being replaced by digital solutions with the aid of information technology, business models are being revolutionized and corporate structures altered. The focus is increasingly on networking and exchange of information between companies and the customers.

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Illustration: Bitkom 75 percent of companies are open to digitalization. Only 2 percent still reject it.

Virtual (VR) and augmented reality technologies (AR) will create fundamental change in products, business models and production processes between 2020 und 2040, according to a study by the TU Munich. (Technical University of Munich, „Impact of Virtual, Mixed, and Augmented Reality on Industries“ (2018))

”The percentage of services in the value-added chain has been increasing constantly for years. The digitalization and the accompanying technologies available for it are driving the service orientation of companies dramatically forward,” say the authors Manfred Bruhn and Karsten Hadwich about the disruptive change within businesses and industries. Services are becoming ever more important, because goods in many fields are becoming more and more homogenous and similar and therefore, easily exchanged. “Companies are finding new sales and profit potential by setting up or expanding their services in that they develop and market new offers, service new markets and customers and establish new business models,” say the authors. (Manfred Bruhn und Karsten Hadwich (Hrsg.), Service Business Development (2018))

Innovation through new technologies

Digitalization is being driven by new technologies. ”Cloud computing has arrived, artificial intelligence has not.“ Consequently, cloud computing is the most important digital technology being used, followed by big data analytics. Future growth will be determined by the Internet of Things, 3D printing, virtual/augmented reality and even by blockchain, even if at a low level. The percentage of companies that use artificial intelligence has, by contrast, only grown from 6 to 7 percent. (Bitkom Research, Trendstudie “Unterwegs zu digitalen Welten“ (2018), vgl. auch die Deloitte-Studie: „Zukunft der Consumer Technology“ (2018))

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KPMG, Cloud Monitor 2018 66 % of companies in Germany use cloud computing, only 13 percent don’t deal with the cloud in any way.

The analysts at Gartner go a step further: “The future will be characterized by intelligent devices offering ever more extensive digital service everywhere,” said David Cearley, Gartner Vice President. Gartner names technologies like blockchain, quantum computers, extended analytics and artificial intelligence that could cause disruptions and new business models in the future. “We call it intelligent digital network.“  (Gartner Top 10 Strategic Technology Trends for 2019 (2018)) The digital and physical world will merge into one immersive world. AI will be imbedded in every existing technology and generate completely new categories. Machine learning and artificial intelligence will provide one quarter of the digital added value as early as 2022. “Digital decisionmakers, CEOs, CIOs and production managers have to act now to stay competitive in the future.” (Crisp Research, Studienreport „Machine Learning in deutschen Unternehmen“ (2018))

Companies are having difficulties keeping up with the volume and tempo of changes. Even the analysts at Gartner admit that the rate of change exceeds the ability of a company to keep up. Companies should use the forecasts for strategic planning and to improve their vision of the future. “Companies can profit from continuous change when they focus their vision to see the future before the change,” said Daryl Plummer, Gartner Distinguished Vice President.

Why do so many companies have trouble with the digital transformation

The good news: The rate of digitalization in Germany has increased noticeably. Two-thirds of the companies that offer goods and services primarily via physical channels (so-called non-online companies) have begun with the digital transformation. “Six factors seem to determine the successful results of projects for digital transformation: Leadership, people, agility, business integration, ecosystem and value of data – skills that can be seen as the digital muscles of a company.“ (Fujitsu, Global Digital Transformation Survey Report (2018)) Companies whose digitalization projects were successful display significantly higher capacities in all six fields than companies with modest or to date no success. The difference is particularly large in agility and employees, i.e. the fields in which traditional companies are especially weak. “They focus on internal processes and hardly think about setting up platforms or ecosystems and have difficulties in making their organizations agile.“  (Fujitsu, Global Digital Transformation Survey Report (2018))

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Change Management: Reaction phases in change processes (Illustration: Bitkom)

The less good news: The digital transformation is occurring at quite different rates depending on the company sector and field. A gap is developing primarily between large and small companies. (Bitkom, Digital Office Index (2018))

“As consumers we have long become accustomed to dealing with digital offers and our desire for innovation remains unbroken. But real implementation as managers or employees is more difficult. We want to implement the digital transformation, but we can’t readily find the right way. …Whoever wants to successfully navigate the digital transformation, must not only have a plan in mind, not only control the technology, processes and tools – but also be willing to take on a whole new culture. A culture in which change is routine and consequently speed, innovative power and learning from mistakes is a prerequisite for success,” according to the BearingPoiint analysis “Lost in Digitalization“ (BearingPoint, Lost in Digitalization, Die Kluft zwischen Plan und Umsetzung (2018))

A digital strategy is lacking

A majority of employees therefore feel that they have not been sufficiently informed about their company’s digital strategy. More than a third are of the opinion that their company does not have a digital strategy. There is a (perceived) information gap between managers and employees without management responsibility. Employees without management responsibility are much more likely than managers to miss the necessary orientation as to where the company wants to develop, what the benefits are and what implications this has for the employee personally.

More than a third of companies have completed or are about to complete the transformation towards innovative, demand-driven business models, frequently organized in networks. However, just under a third of companies are still at the very beginning. There has also been little progress in the digitalization of products and services. Users’ openness towards digital products/services is not being transferred to their own work or the development of corresponding products and services. There is a lack of know-how and the necessary structures. “Unfortunately, it is not only the corporate structure that is slowing down, but also IT. It continues to lag behind modern requirements with almost unchanged data silos and rigid legacy systems.“ (Fujitsu, Global Digital Transformation Survey Report (2018))

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Bitkom, Digital worlds Agiles Management ist weiterhin kaum anzutreffen: Nur 18 Prozent setzen agile Methoden regelmäßig ein; 61 Prozent verzichten darauf. Illustration Bitkom

Agile management is still underdeveloped

With digitalization companies are counting on more efficient operational processes and this reducing costs. Seventy-six percent work with corresponding analyses to be able to affect operational decisions on the basis of current data. “Agile management, one of the key factors for the quick reaction to changing market conditions, is hardly to be found: Only 18 percent use agile management regularly, 61 percent avoid it altogether.“ (Bitkom Research, Trendstudie “Unterwegs zu digitalen Welten“ (2018))

The percentage of companies that see great potential in the development of new business models is, by contrast only 12, whereas 44 percent see an impact of digitalization on their own business model. For the majority of companies this goal remains irrelevant, although the primary shifts in the digital economy over the course of the last two decades has been initiated mostly from new business models according to the “On the Way to Digital Worlds” trend study by Bitkom Research.