We got together with Dr. Carsten Linz, author of “Radical Business Model Transformation”, to discuss:
How businesses are evolving, pushed to become more digital by Covid?
Why in many successful examples they re-imagined their business model, not just transformed themselves partially?
Carsten Linz is one the experts in the World Economic Forum and a top thinker on ecosystem business models and how business models are reimagining for the future. He also likes to say:
“Don't digitize the past, but innovate and transform for the future”. 🚀
During his almost 20 years in executive roles focused on software, data, and digitally enabled growth, he has built several €100 M businesses and led company-wide transformations affecting 60K+ employees. His recent roles include Group Digital Officer at BASF, Business Development Officer at SAP and Global Head of the Center for Digital Leadership.
Businesses are pushed to become more digital by Covid, how do they evolve?
The Covid 19 pandemic is definitely the greatest and fastest human behavior change at scale that we have seen ever in mankind's history. So that's quite amazing. And that also has an impact, we see a substantial acceleration of digital transformation initiatives, because every company evidently is now pushing the needle, no doubt about it. Only in the second quarter of last year, the IT cloud, IT infrastructure investments soared by nearly 40%. So it shows that also traditional cloud infrastructure investments are now going through the roof.
It's really not about applying digital technologies for what we have always been doing only faster and more efficient. It's really about changing the game. And it's about redefining how we create value, how we deliver value to our customers and other stakeholders, and how we capture the value for our organization.
Now you can ask the question: is moving from an email server to the cloud, is that digital transformation? I would say no, it's not digital transformation. So there's eminently more to that. But it's good that even critical CFOs also accept the Office365 project now, in these times of the pandemic, as the relevant one with the business case behind, which has not always been the case. But there's evidently more to that.
It's really not about applying digital technologies for what we have always been doing only faster and more efficient. It's really about changing the game. And it's about redefining how we create value, how we deliver value to our customers and other stakeholders, and how we capture the value for our organization.
From transformation to business model re-imagination
In your recent article for the World Economic Forum you mentioned that it's not enough to do digital transformation. Businesses need to reimagine themselves. What did you mean and what do you think about it?
It's interesting that despite that reset on the horizon, a lot of firms are doing very traditional stuff still, and they base their business models often on yesterday's logic.
A recent study from the World Economic Forum shows that 80% of the global executives say that their business model might be at risk, even at risk of being disrupted. And what's interesting for me is that 60% of them who have gone through a digital transformation, they have also transformed into new business models. We see that we have to look at the intersection between digital transformation and business model transformation.
I’ll give you some numbers here. In our book Radical Business Model Transformation we looked into 380 transformations at grand scale around the world. And if you now see where it's actually the focus of these initiatives, that's quite interesting.
So I would say the majority still sits on the process automation side. It's actually you taking the process and making more digital. Nothing against that, but it's not changing the rules of the game quite obviously.
The second one I would call it process re-imagination. And we see more and more initiatives on that level. So I would call it level two. To give an example would be predictive maintenance in an engineering department. This is I would say process re-imagination - you’re putting your business process at test before you re-implement them digitally.
The third would be driving a transformation of the operating model. You’re fundamentally changing the way of how you create value. And it's really about making digital technologies an integral part of the value creation system of your organization. Now putting digital icing on the cake and making that an integral part. And that would mean for example, Adidas with their Speedfactory approach - mass customization approach with the agile approach applied to a physical factory. But also if you look at the financial services industry, for example, you'll see that many banks are building API hubs. Basically, they're exposing from a platform the financial services, so that they can be embedded in end-to-end processes of others. That could be smaller banks that could also be business customers. That's really interesting.
But the most comprehensive level of digital transformation is really the digital transformation, which is driven with the help of a business model transformation. So the business model transformation is the means to drive your digital transformation. And that leads to an orchestration, a very coherent orchestration of all the digital initiatives across your organization or your line of business at least, if you're a conglomerate or multi business company. And that leads to a much more competitive edge.
Why is not everyone doing business model transformation? Why it's not everyone a level four? Because it's hard, no doubt about it. Because digital per se is a horizontal fenomenon, and it cuts across industries and leads to a blurring of the traditional industry lines. But it also cuts across vertically integrated organizational entities in organizations. So you need strong horizontal orchestration in your company and you typically require backing from the executive board, from the supervisory board, from your board of directors. But if you can achieve that, it's definitely the way to go. And I always say, don't digitize the past, but innovate and transform for the future. And I think business model transformation is a very nice means to that end.
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Examples of business re-imaginations
This is a really great motto! Talking about examples of businesses re-imagining business models, we see here that startups compared to large companies operate in dramatically different modes. Startups are typically very agile, they think differently, from the ground up. But for big companies it's much more difficult to change due to a lot of legacy stuff. What are examples of businesses reimagining themselves that are worthwhile highlighting?
Startups have the unfair advantage of starting greenfield, which is really great. In the corporates you always have to start in brownfield so to speak, because you have a legacy, some history, but you also have potentially domain specific knowledge that others don't have. It's more about the combination. When we see that also in the financial service industry, it's more complementing each other. Startups working with large corporates and vice versa. They're tons of examples also.
I quite like the Klöckner example, because it is a very traditional industry recently moved from being a steel distributor to the digital marketplace. They first built a digital store, global price points and so on with Kloeckner.i and then moved into what's a two sided open digital marketplace, an open platform approach. And the idea is that Klöckner owns only a minority going forward. Today in Kloeckner, and we're talking steel business here, we're not talking B2C, we're talking B2B hardcore, this is 40% its revenues.
Also Nike from running shoes to the Nike Plus platform is another nice platform example. But I also like to mention the transformations towards holistic solution provider models. If you look into Xerox for example, from hardware products to BP also provider in document related processes.
Knorr-Bremse, the leading provider of braking systems, really escaped from commoditization and price pressure and moved parts of their business into a holistic solution provider for end-to-end maintenance processes for trains. So, you can bring an entire train to Knorr-Bremse and they do the entire maintenance from top to bottom, from start to end, which is quite amazing, but requires the build up of specific competencies. Also the productization transformations play an important role these days.
Many professional service companies are trying to productize their business moving away from time and material into productization of intellectual property. And basically building in many ways software tools not only for internal purposes, but really to bring them towards their customers. Infosys is one of these examples I like a lot and also mentioned in our book, moved from time and material into being a product company with Finacle in the financial service industry. One of the quite impressive transformations, because always to drive transformation in a single line of business, in a business unit, in a division is difficult, but even more difficult is to drive it at a grand scale across an entire organization.
I think Microsoft, for example, has done a nice job, especially after Satya Nadella. I'm not sure if you still remember what Satya Nadella said in his first speech, as a new CEO. Remember that no one wanted to be the CEO of Microsoft on that very day, because it was not a company we know today. It is about cloud first, mobile first. And everyone said, “yeah, that's true”, but the interesting thing was, he didn't mention Windows. So he omitted it, basically the flagship product of the company.
Microsoft became much more empathy driven, more partner friendly, not only with partners, but with direct competitors. It entered into more coopetition constellations, being partners with competitors. At the same point in time, it also exited from an ecosystem,
Microsoft became much more empathy driven, more partner friendly, not only with partners, but with direct competitors. It entered into more coopetition constellations, being partners with competitors. At the same point in time, it also exited from an ecosystem, that's also important to remember. So Microsoft phones were at the edge of the ecosystem. It was evident that iOS and Android became the winner in that game, and that it was very difficult for Microsoft to catch up. That was a wise decision potentially, ex post you can always say that, to exit from that hard ecosystem competition. Because you know that platform games have that slight tendency towards winners taking it all, or some taking it all. And that was wise I think. So what's adding new ecosystems, because we're talking about ecosystems in this videocast today, with LinkedIn, and GitHub, I think Microsoft has also done a nice move into very open ecosystems. Especially with GitHub, but also with the business community and LinkedIn.
And last but not least, because we're talking about business model transformation here, I mean, it's really a nice transformation, which proves how successful you can be if you drive a digital transformation with the help of a business model transformation. Because the guiding principle was to move away from upfront licenses to a subscription-based model, recurring revenue streams. And I think it's not always easy to match that against the expectations of the capital market, but I think Microsoft has really done a nice job in that regard. So I think Satya Nadella can be proud of what he has achieved in that regard.
I completely agree with you. He has done a tremendous job. And nowadays Microsoft is drastically different from where it was just a few years ago in this journey of reimagining itself.
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