How digitalization can ruin your business model

Everyone says we have to digitize. The herd mentality is unmistakable and unmistakable. But there is a huge lack of differentiation. After all, what exactly is meant by digitalization? And does digitalization in itself really lead to success? Or are there particular factors that are critical to success that need to be considered – and if so, which ones? An attempt to approach these complex questions. 

Everyone is talking about the need to digitize our business models and processes. In the wake of the COVID crisis, this issue has become so acute that some managers reported that there was hardly any talk about anything else. For example, we have seen an enormous spread of so-called collaborative technologies in companies and society. Tools such as Microsoft Teams or Zoom and many web-based technologies are now being used by companies without any major reservations and their use is being promoted. 

But some questions are often overlooked: what exactly does digitization actually mean? And why should we do it? Finally, the not insignificant question: what does all this actually have to do with me?

Understanding the Basics 

First of all, the meaning: as is so often the case, the origin lies in the Anglo-Saxon world. The term digitization was first used here in 1954. Initially only as the verb digitize. The term digitization was then derived and used in Germany from the mid-1980s at the latest. In technology, we speak of analog and digital signals. The conversion from an analogue to a digital signal is called digitization. The most vivid way to understand this is to look at the development in music: the analog sound signal on a vinyl record was first converted into a digital signal on a CD and nowadays in the form of a digital file. Some companies distinguish the term digitalization from the above-mentioned term digitization in such a way that digitalization now refers to the transformation of business processes or even entire business models. In this respect, we are talking about a broadening of the term: whereas before it was exclusively about converting analog technology into digital technology (a huge achievement!), now it is about completely transforming entire business processes and entire business models on the basis of digital information technology. It is about re-imagining, re-constructing and re-evaluating how we do business. An analogous argument can be made for society as a whole, which is already happening extensively. 

The best way to explain this is with an example: SAP News explains it like this: you would digitize a document or a report, but you would digitize your organization’s data collection process and workflows. This makes it clear that whenever we talk about digitalization, technologies must always be digitized as a basis.  The latter topic is a debate all of its own: just think about the fact that digital technologies must not only be developed, but should also productively improve the work processes of people and organizations. There is still a long way to go here, just think of the many online web conferences, training sessions and meetings that are sometimes barely audible or even interrupted due to poor internet connections. Nevertheless, great progress has already been made in these areas: the use of Microsoft Teams, for example, has increased more than sixfold in just one year.  

But digitalization obviously means much more than just digital technologies. It is about transforming entire workflows, entire business processes and even entire business models into a digital form based on digital technology.  

Two worlds really are colliding here. On the one hand, developments are foreseeable that will really turn our world upside down: globally active digital players such as Amazon, Alphabet (the parent company of Google) and Tesla have applied and are applying digital technologies in business processes and business models that are new to them, creating what is known as disruption and marketing these new business processes and models very successfully or it is foreseeable that they will achieve this.  

 Think, for example, of Amazon Care, which makes online doctor’s appointments possible, or the Microsoft Mesh initiative, which will enable business initiatives, processes and products discussed on shared server platforms and via applications such as Microsoft Teams to be discussed together in augmented reality, for example as a hologram. It is different when one manager shows another a recently developed report as a shared document on Teams, or when both look together at a virtual hologram in which the columns of a diagram, for example, now protrude from the floor of a virtual room in 3D technology – and perhaps they themselves do too. Attentive viewers of science fiction films will be reminded.  

All these developments will undoubtedly open up great opportunities for collaboration regardless of time and place. Similar to the development of smartphones, I am sure that we will see these developments in our everyday working lives much sooner than expected.  

The crucial question for companies, however, is what impact these new opportunities have and will have on specialists and managers. After all, any external impact, e.g. new service and sales processes and procedures, first requires “buy-in” so that they can understand and are convinced of what is new and what it brings. So that they can take their departments and teams with them on the journey.  

 

Now that we have clarified what digitization actually is, the question arises as to why we want to digitize. Many may consider this question to be superfluous or even ridiculous. But that is precisely why it is so important: the “reason why” is crucial for acceptance.  

The answer certainly lies on the one hand in the aforementioned threat from new players who are already very experienced in digitalization and are now threatening to conquer their own territory. In coaching, we always talk about two basic motivations: one is the so-called “towards” motivation and the other is the “away from” motivation.  

 

We know from investment and monetary theory that people always find it much harder to bear losses than to miss out on potential gains. We all find it very difficult to cope with loss and, in a fascinating way, we always go through the change curve that has already been developed in connection with the loss of people and grief. Therefore, my thesis is that organizations only move when the people in the organization move. Above all, people move when they want to get away from something. We want to move away from negative influences and the threat of loss: of our own company, of literal (P&L) loss, of our own (power) position or influence, possibly even of our own job in the form in which it currently exists. A strong digital competitor can certainly be perceived as a risk that needs to be limited, if not avoided.  

 

At the same time, there are also people who tend to think in terms of opportunities, possibly two or three steps into the future. This is a “towards” motivation. But towards what exactly? On the one hand, there is the possibility of constantly optimizing what already exists. The question of when we have reached the point where the existing should possibly be replaced by something completely new calls entire thought paradigms into question. You only have to consider that Volkswagen, for example, was only recently on the verge of becoming the leading player for electric cars.  

 

The question of how this situation came about should also be asked. If, at the same time, the threat of disruption from the competition and a comprehensive change in the social, political and legal framework conditions are favoring developments such as “away from the combustion engine and towards alternative drives”, then there is often no choice but to move forward. And this can be extremely successful!  

 

Difficulties often arise when the question of acceptance by the people concerned is neglected or even ignored when new technologies are used and processes and business models are converted to these new technologies.  

 

For example, when introducing self-service systems based on digital technology, such as the use of payment and credit cards, not only for payment but also in healthcare, it is crucial to first clearly formulate what vision is being pursued with the use of these new technologies, what goals are being pursued with what resources (time, manpower, budget) and what the implementation plan looks like.  

 

In Kotter’s change management model, we have already seen that every strategic management step has a parallel step in the management area: for example, it is absolutely critical to provide employees and managers with appropriate orientation during the management phase of planning and to take them along on the journey. If, for example, I am relying on digital payment models, then it is crucial to identify the important axes and interfaces in the person of the relevant specialists and managers in advance when setting up a corresponding pilot and to proactively involve them. However, involvement does not only mean communicating, but also deciding on proposed changes and implementing the accepted changes.  

 

In contrast, in my opinion, the opportunities for digitalization in terms of digital business processes and business models in the form of top-down planning – i.e. initiated by the company management and then further specified by all other units “according to specifications” – are extremely limited. Too often, however, when a business case is introduced, only a little feedback is obtained from the people involved and then the implementation is still driven forward top-down, from “top to bottom”, by project management.  

 

Countercurrent planning with feedback from the relevant people “further down” in the hierarchy would not only allow experience in the operational (implementation) area to flow in at an early stage, but would also proactively promote acceptance and commitment at the same time.  Furthermore, it is still too often a case of simply improving what already exists, i.e. constantly optimizing it, similar to the examples above. Of course, I can use digital technologies to set up a self-service for retailers in the area of credit card acceptance, for example. I can also support this by using technologies that automatically recognize the keywords and questions mentioned by the customer and suggest appropriate solutions.  

 

But the crucial thing is that the basic processes are the same. Of course, the processes are varied in terms of the extent to which parts of the processes can be automated or converted to self-service. This is already happening very successfully. But if you think about the path of digitalization to the end, a very crucial question arises: will retailers, for example, still want to accept credit card payments from their customers in the future as they did in the past – or will completely different transaction options already play a role here? Just a year ago, hardly anyone could have predicted how strong the position of cryptocurrencies such as Bitcoin would become. Without being able to go into the current economic drivers of this development here, the use of cryptocurrencies in payment transactions, as already practiced or planned by providers such as PayPal or even financial institutions such as Morgan Stanley, may well open up or actively promote other payment options for end customers. And what about the issues surrounding the Money Laundering Act when payments are made anonymously using cryptocurrency?  

 

The reason why I am explaining these lines of thought here is not to go into them in depth. It is about the mindset needed to find viable solutions to major challenges. It can make sense not only to think about optimizing the existing situation, but also to first consider what requirements customers and your own specialists and managers have for digital business models, processes and technologies. And then to consider how these needs can be met. This requires a mindset in which we first think about the output, i.e. what is to be achieved. Agreement should be reached on this in a coordination process. And only afterwards, how will we achieve the goal, i.e. the input: what we have to do for it, what resources we need for it, etc.? Back in 1988, William Samuelson and Richard Zeckhauser published a real milestone with their article Status Quo Bias in Decision Making. In a nutshell, they found in a study that we humans have a strong tendency to view our status quo as the basis for evaluating the opportunities and risks of innovations. What has also been described by many other studies as leaving the comfort zone – in terms of opportunities and risks – goes even further: when in doubt, we prefer the status quo.  

 

This is often reflected in the fact that the status quo is often not even presented as an alternative in decision papers for board members and managing directors or department heads of consulting companies. However, the status quo is always an alternative: the opportunities and risks offered by the current situation should always be evaluated for every decision. It often offers so few opportunities and such high risks that there should be no question of choosing a completely new option. But this is precisely where the bias mentioned above comes into play. The current state, which is missing from the decision template, is then often seen as “the better choice”. The status quo is then simply optimized further. This is much easier and more convenient from the decision-maker’s point of view than first considering which future solution should be compared with these requirements on the basis of requirements – from customers and legislators, for example. After all, this solution may no longer have anything to do with the current status quo. It may not even be a further development of the current status quo. Thinking backwards from the goal would often be much more effective.  

 

This significantly increases the risk that digitalization, which we are only pursuing in order to further optimize what already exists, could ruin our entire business model. Because our business model may have already done itself in. It is from a time when a different technology base was available. If, for example, I want to achieve truly virtual sales in the insurance sector and place sellers and buyers in a virtual space, then it is not enough to provide both sides with endless written documents with complex general terms and conditions and legal conditions for them to decide on. Rather, this virtual space could be used much better to visualize existing risks for the buyer, to make complex diagrams much more quickly comprehensible as a hologram in 3D format and to record joint options for covering the identified risks in virtual form.  

 

If I want to improve virtual collaboration through digitalization, is it enough to “digitize” the previous analogue meeting processes using digital technologies, i.e. just convert the technology to digital? This is currently done by one person explaining their individually developed results to the other not in the meeting room on the video beam, but via file sharing using a collaboration app such as Teams, Zoom or similar. Or would it be better to take the opportunity to digitalize the entire idea development process, in this case as “digitalization”? For example, through new methods for the company? This could, for example, lead to the idea of calling in a moderator for an important meeting on demand. Or instead of “presenting” columns of figures, sending them in advance in graphic form and getting straight into a creative solution-finding mode in the meeting. Or to develop solutions using management techniques such as mind mapping or root cause analysis (Ishikawa diagram or similar) together on a corresponding online tool in a web session. Or information about who to ask in which cases and on which topics and how the processes work should not be “hidden” in overly complex help menus, but should instead provide graphical representations of responsibilities and editorially structured “information trees”, for example through component content management systems (CCMS) based on flexible components. All of this may already be under development, but that is not the point here: it is about proactively involving specialists and managers in organizations. It’s about designing work with new technologies in such a way that people can make the most of their core competencies: their intelligence and creativity. The pandemic has often been used to catch up on urgently needed steps that have been missed, such as equipping employees with laptops (although even here, employees sometimes have to use their own PCs, which can create data protection risks), VPN connections (which are still often far too slow and do not really replace web-based technologies) or the collaboration tools described above, such as chat software. But: we have only caught up and not yet taken a step forward. The initial euphoria quickly gives way to a new routine, motivation wanes again, specialists and managers complain about the constant video conferences. In which, just as an aside, the old work processes are often repeated exactly as described. And even better: in addition to the huge increase in the number and duration of video conferences, traditional meetings and conferences on site have returned after the pandemic.  

 

How much more effective would it be for all of us to really think 2-4 steps ahead and, in the example above, to consider how we can adapt the entire creative process, for example in strategy meetings, workshops, etc., to the new requirements? I don’t mean introducing Scrum, Six Sigma, Agile etc. in online workshops, because these techniques are not digital per se, even if they are used to develop software; these techniques already existed before the requirements of digitalization.  

 

As a payment service provider, for example, we could consider whether and, if so, how we can integrate cryptocurrencies. We could use digital technologies to experiment with how we can automatically transcribe what is said in a meeting in order to include colleagues who were unable to attend – and still comply with data protection requirements. By involving employees in customer contact, we could give them the opportunity to voluntarily (!) obtain feedback on their conversations from on-demand trainers in order to significantly improve their results and satisfaction.  

 

We believe that restrictions such as data protection, customer acceptance or technical equipment would block us. But this is precisely where the opportunities often lie to improve these aspects: the supposed blockades can become our guard rails to give our solutions the necessary quality: Promoting creativity in the home office instead of the need for control due to uncertainty about performance in the workplace. More involvement for employees, which allows for more effective leadership. Faster introduction of innovations through a creative process on demand and more market success. The list of possibilities is endless.  

 

The key to successful digitalization is to think backwards, so to speak: first of all, to think about what is required by market forces in the future, not today. Then to derive what needs to be done today. In order to counter these requirements with a solution. The management and implementation levels should then be closely involved in finding a solution as part of counter-current planning and their feedback should also be reviewed and implemented if necessary.  

My question to you, dear reader, is: what is your opinion on the extent to which this thinking is present today among specialists and managers in terms of possible requirements? To what extent is it promoted by companies?  Is your company actively fostering it? Share your thoughts with me; let’s continue this conversation. Feel free to reach out via email at info@jmoellerconsulting.com or give me a call at +49 881 39464046. Together, we can shape a future where digitalization isn’t just a strategy; it’s a mindset.  

 

Yours sincerely, 

Jens Möller 

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