We are increasingly experiencing the failure of an established organizational model that made us winners in the industrial era." My contribution at the Gipfeltreffen der Weltmarktführer in Schwäbisch Hall. In the first weeks of the new year 2020, I again had the opportunity to exchange views with numerous medium-sized companies and learn from their perspectives. At events such as the Gipfeltreffen der Weltmarktführer in Schwäbisch Hall or the HTPC in Bonn, I was impressed by how different the perspectives on digitization and possible answers to them still are. This made me think again. And I came to the realization that the actual fronts of digitalization and its significance for medium-sized businesses have still not been fully recognized and understood.
Some insights from the discussions with entrepreneurs of the German Mittelstand
Underestimated dimension: Digitalized products and productions are only a fraction of what makes digitalization a relevant threat.
In the context of digitalization, there seem to be a few barely discussed blind spots that might seem to be the real challenge for Germany's industrialized world market leaders. "Our product cannot be digitalized any further and our production and supply chains are already fully digitally networked" – this is not the first time I have heard this. This is what the manufacturers of industrial adhesives, chemical components, or industrial hinge constructions, which form the very backbone of the German economy, always talk about. "Digitalization must create added value, which means more sales or more efficiency". I consider both of these statements to be statements that often come from an exclusively product-oriented perspective and through the narrow slit of vision of very industrial organizations. In strong contrast to this are some pioneers of digitalization, who do not first define economic added value by turnover or efficiency. Added value for them is above all when customers can find, evaluate, experience, buy, use and adapt better products and services faster, easier and cheaper. Turnover is then the success that follows, and efficiency is a necessary hygiene factor on the way there. What one has to admit is that this may initially require large investments and years of experimentation, in which efficiency and safety often have to be sacrificed in favor of effectiveness and competitiveness. Digitalization is only partly a question of digital technologies. Technology is just another catalyst that is causing market complexity, speed and the power of customers to grow rapidly.
The actual fronts of digitalization and its significance for small and medium-sized businesses
Once this understanding is achieved, the actual fronts of digitalization can be tackled: employees, direct customer relations, as well as adaptability and speed.
Looking at the number of vacancies and the average age of the workforce, it is clear that Germany's Mittelstand has a problem with skilled workers and young talent. There are various reasons for this. However, even here, there is often no differentiated discussion of symptoms and causes. Certainly, the spread of our hidden champions in rural regions is not only an advantage of the business location, but also a challenge when it comes to attracting young and above all international talent. In this context, modern working environments and more flexible regulations can contribute to the attractiveness of an employer. However, location and office equipment are related to competitiveness as an employer, just as digital technologies are related to the real challenges of digitalization. They are not unimportant, but they are also far from being the decisive fields of action. Companies such as Google, Amazon, Flixbus or Spotify are not primarily so disruptive and sustainably successful because of their technological innovations, but because they have produced organizational innovations. These companies have understood that the promotion and optimization of human, non-repetitive work has become the last true competitive advantage of our time.
These companies see themselves as platforms whose role is to attract talent and provide them with the best conditions for human collaboration and innovation. Autonomy and entrepreneurial freedom, continuous development and meaningfulness in a larger mission. These principles of open platform organization will take hold of all industries and companies without exception as automation increases. And since the above-mentioned framework conditions for organizational competitiveness in the digital age increasingly go hand in hand with the principles that make human work attractive, young talents no longer accept traditional, closed and rigidly hierarchical organizational models. So even if digitalization has still not brought about any relevant change in a company's market environment or its own portfolio appears only partially digitalizable – what about your attractiveness as an employer and what kind of organization do you offer the talents of today and tomorrow?
2) Customer relationship and control of the entire value chain
Even though digital products such as the iPhone and new software solutions have become an almost natural part of our lives over the past decade, digitalization is changing the way customers discover and use them much more than the products and services themselves. Accordingly, value creation is increasingly shifting to the designers and owners of the distribution channels, who know how to maintain, analyze and optimize direct customer relationships and customer data in the best possible way. Films, music and books are still in a similar form to 30 years ago. However, the central capitalization of these markets has fundamentally shifted from TV stations to Netflix, from record companies to Spotify and from booksellers and publishers to Amazon. This shift from product-focused to service-focused value creation flows – with a direct, data-driven customer relationship at the heart – has long since begun to take hold in the B2B markets relevant to Germany's small and medium-sized businesses.
Hardly any book describes this development better than Tien Tzuos “Subscribed”. Tzuo explains why, in the foreseeable future, even customers of industrial products will often only pay for the result and the utility value of products they have bought so far. He gives examples of excavator manufacturers who no longer sell machines. Instead, they charge their customers a regular service fee depending on the earth mass of their machines. He describes dealers of home tools who no longer sell products. Instead, they focus on providing their customers with only the most up-to-date tools they need at any given time. These developments offer gigantic potential, but also demand profound changes.
Why is this relevant for medium-sized companies?
Conspicuously many of the medium-sized companies I talk to are highly specialized suppliers, world market-leading producers of individual components of complex industrial products. Often they lack the decisive core of this emerging economy: direct access and a direct, ongoing relationship with the customer, which can be evaluated, maintained and optimized on a daily basis and according to requirements. They sell their products through other companies that control the customer relationship. Through manufacturers, which are often less innovative than they are themselves, or through traditional retailers who have come under pressure anyway in the competition against new digital trading platforms.Many manufacturers such as Viessmann or Otto have already recognized this and are trying to develop themselves into platforms with direct customer relations – but so far mostly without success. However, these efforts rarely fail due to a lack of resources or lack of access to technology.
The digital expert and Handelsblatt columnist Christoph Bornschein quoted Conway’s Law on this subject in the last Workpath Quarterly in Berlin: "Organizations, which design systems are constrained to produce designs, which are copies of the communication structures of these organizations.”Organizations, which design systems are constrained to produce designs, which are copies of the communication structures and processes of these organizations. Here lies the real problem. Germany's medium-sized companies are not only world champions in the production of industrial machinery. They have also built its organizations for decades to be world champions and efficient machines. Centrally controlled, with every gear, every area maximally trimmed for functionality and cost control. This avoids uncertainty and optimizes quality for the product. However, the supposedly necessary division of tasks and centralization also creates silos and a closed customer experience with a direct relationship between supplier and customer is far from the focus. The industrial product organization therefore often prevents exactly those principles that decide on success and failure in the platform economy. This new form of economy demands a completely new way of thinking, controlling and working. From which a different culture of value creation and cooperation then emerges. In the future,economic competition will no longer be decided by closed systems and perfected products, but rather by the overall experience and result for the customer, in networked, well-integrated value-added processes. What does that mean for the way we should think organization?
3) Adaptability and speed
The topic I encounter again and again through many of my conversations over the past week is the search for more speed and adaptability. Regardless of strained trend terms, such as agility, and largely unbiased with regard to different forms of work and organization, almost everyone agrees that the speed of change is increasing. And to such an extent that it is presenting companies with new challenges. Even though many companies are dealing with agile management models such as the OKR framework, it is important in my view to recognize a connection. Namely, to pragmatically recognize, independent of methods or organizational models, that the life cycles of products, markets and companies are getting shorter and shorter. And accordingly, the requirements for cooperation, organization and leadership are changing ever faster. Executives in all industries must evaluate much more regularly whether the balance between stability and adaptability, effectiveness and efficiency, tight management with a high degree of control and decentralization with increased autonomy and uncertainty is sensibly adapted to the current demands on the value creation of the organization.
This brings me to an initial conclusion
The key to digitalization lies much more in one's own organization and management than in the market environment or in questions of technology. This challenges not only companies, but also employees and our society as a whole, with many of its traditionally grown institutions and values. Even faster learning, adaptation and continuous development is becoming a crucial skill for people, teams and organizations. In many respects, adaptability is again becoming more relevant than pure efficiency and controllability. Organizational and process-related innovations, which also accompany a corresponding cultural change, therefore probably offer much greater leverage and potential than pure product innovation and German perfection.
What makes sustainable organizations and why medium-sized businesses are in a good starting position if they act now
Conveying meaning, vision and values: We live in an age where people-driven innovation and collaboration are becoming the last true competitive advantage. The ability to attract, empower and, above all, retain talent is thus becoming the most important task of an organization.In working environments in which long-term strategies and stable relationships can be less and less effective because requirements change faster and faster, conveying a timeless sense (purpose), vision and values becomes all the more important. Families such as the Otto dynasty in Hamburg or the Viessmanns in Hesse offer just that. And in a pleasantly authentic way. Something that digital pioneers can only create with a lot of effort, and in the face of rapid growth often have little authenticity to preserve and communicate. For example, Google's motto "Don't be evil", which has since been abolished. Germany's small and medium-sized businesses, on the other hand, have a strong sense of responsibility and values which goes far beyond pure capital market orientation and the short-term focus on quarterly figures. This identity and long-term orientation, often developed over generations, has an enormous potential to attract and retain people from all over the world.
Organizational models and structures: The necessary changes in our working world require foresight, conviction and leadership. It requires courageous, independent decision-makers who do not primarily work in the system rather than the system for their companies or who prioritize short-term optimization at the expense of long-term success. Rather, with perseverance and patience, friction, costs and loss of efficiency must first be accepted. As an investment in the medium and long-term performance of your own organization. At the same time, humane, sustainable framework conditions must be created for employees to continuously develop and adapt to new requirements. Especially Germany's family-run medium-sized companies show these characteristics. Irrespective of capital markets or short-term trends, these entrepreneurs often have the freedom to shape their own organizations, but also the foresight and the ambition to hand them over to the next generation in good health.
Processes and technologies: One topic that is particularly close to my heart as the founder of Workpath is the question of how new, necessary principles can be established in everyday work. Too often, the discussions about digital transformation and the efforts to bring about the cultural change required in the process remain on a superficial level. One of my favorite quotes for this context comes from the systems theoretician Buckminster Fuller: "If you want to teach people a new way of thinking, don't bother trying to teach them. Instead, give them a tool, the use of which will lead to new ways of thinking." We should not even try to teach our employees a new way of thinking and working. Instead, we have to manage to provide ourselves, our teams and our companies with new tools and processes that meet the requirements described above and offer added value that can be quickly experienced by everyone. We need new tools that offer easy communication and collaboration, create transparency, involve employees and customers, enable clear goals and fluid structures, and allow more responsibility to be given to the teams themselves. Only in this way, I am convinced 3 years after the foundation of Workpath, culture and organization can be developed sustainably. It is a misconception that more adaptability (often referred to as agility and associated with the larger New Work movement) means allowing chaos and giving teams unlimited freedom. On the contrary: more decentralization, autonomy and fluid, networked structures also require more discipline, communication, system awareness and process clarity than in traditional, static organizational models. And if there is one thing we can trust in the companies of the German Mittelstand, it is discipline, perseverance and clear processes.