A few weeks ago, I took part in a very interesting discussion in Munich on what digitalization means for industry, i.e. industry 4.0. It included around 15 German industry leaders (large “Mittelstand”, industrial companies) grappling with various aspects of digitalization. The debate was open and lively – and it touched on different aspects of what it means for established industry to deal with the global, digital revolution. Here are some takeaways.
Everyone is fully on board with the idea that the digital future is a central part of the future of their industries. They are expecting enormous changes, new business opportunities and new competitors. There appears to be a consensus that this is a new animal that requires an approach that is different. So far, so good. Yet, most are quite unsure about the specific likely implications and the best approach to take moving forward. There is a sense of gambling, a sense that traditional strategy development will not apply.
The starting point, of course, is the digitalization of existing businesses: Adding sensors, gathering and using bigger amounts of data more intelligently and communicating differently, among others. It requires new skills and an evolution of business models (e.g. towards more integration, more customer oriented, more “solution” oriented), perhaps new partnerships, markets and customers. While this is certainly not easy to do, it can be tackled with the existing, known management tools (change management, innovation management, cultural developments, etc.).
However, there is a strong sense that that won’t be enough. Technology changes industries so rapidly, that they become ripe for disruption – and disruption often comes from new players. So how can cash rich but path dependent incumbents limit the risk of being disrupted? How can companies that have been around for decades, building a brand, working continuously to specialize their products and provide highest levels of quality, and giving their owners stable returns now compete with fast growing startups with a radically quicker and more risk-prone approach to bringing products to market, backed by a breed of financiers who focus on revenues or reach rather than profits?
Many of the incumbents set up their own venture capital companies or try to incubate new businesses themselves. The least these new businesses are constrained by the business strategy of the parent company, the more they are effective: Very broad parameters like investing only into B2B ideas, rather than consumer business models seem to make sense, but thinking of new businesses as strategic additions to existing businesses seems to be stifling. Can new businesses cannibalize existing ones? Some agree that, yes, they can. In fact they encourage that. Do new businesses have to earn money or at least have a plan to earn money? The consensus was: no, they don’t. How can the controllers or the CFO then make a decision on them? The answer seems to be: they can’t. Companies might after all have to take an uncalculated risk.
A challenge seems to be the human resource side: how can a company attract the right kind of talent to incubate new businesses itself or build the right VC team? Does that require a different breed of champions? What motivates them? Certainly it’s not a step up the company’s typical career ladder. And inversely, what do the traditional employees think about the attention and extras rolled out for the new ones? And what is the right mix between being proud of the strength and heritage that made a company great and a readiness to change corporate culture? Can it go too far, as it has arguably done in the case of some banks that added the glamour and greed of investment banking to the more prosaic traditional business?
On the whole, the companies at the discussion felt that they could manage this well – in one way or another. Where it became difficult, and competition became even more asymmetric, was with respect to the “moonshots”: big, new ideas turned into big, new businesses that can overturn an existing industry structure as Airbnb, Uber, Skype, Amazon, Google or Tesla are doing.
Can existing businesses take existential risks to reinvent themselves? How can they prepare themselves for a competitive environment that produces radical change? Of course, for every one of the new winners mentioned above, there are many more who have lost large amounts of investor money and not made it (the more well known, perhaps, are AOL or Yahoo, but most are obscure). The hope is that with the digitalization of industry there is a third way between disruption and traditional business, a way that creates predictable investor returns and leverages existing (mostly hardware) skills and brands. But, given the absence of the kind of risk capital that we see in the US and given the skill sets of the incumbents, it is more likely that German companies will develop a solution for autonomous driving rather than reinvent space travel.