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      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.

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      DIGITIZATION 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,

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