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Seeking for a better life: An economist’s view on Digital Transformation

As engineers, we are fascinated by the new possibilities of digital connectivity, platforms, and apps, of big data and artificial intelligence. But ultimately, it’s always about competitive advantages and customer benefits. Are we positioned correctly for that? An interview with Professor Lars Fend, Business School of the Technical University of Ingolstadt (THI).

If digitalization and Industrie 4.0 are the answer – what is your question?

Prof. Lars Fend LF

In a larger context, my question is: How can we promote the progress of societies? Here, digitalization or perhaps artificial intelligence can make a major contribution in this decade. You could even go so far as to say that humans have the opportunity to be more human than ever before. 

Digitalization will advance society, believes Professor Lars Fend.

But that's the really big picture. Can it be scaled down a bit?

Prof. Lars Fend LF

I believe we should think about the digital transformation in this big context. Take autonomous driving. If we succeed in the comprehensive introduction, this will lead to less stress, a lower environmental impact, and, for example, in rural areas, also to a higher quality of life in old age. No one would be forced to move away from home, just because you can no longer go to the grocery store or the doctor yourself. Or let’s have a look at the working world. Here, repetitive administrative and routine activities are reduced or eliminated, so that people have more time to being in and develop their personal strengths: More creativity, more intensive analytical problem solving, more networking with other people, and much more.

But alright, let’s move on to the business perspective. Here, the answer is simple: Digitalization is currently one of the most important steps for higher productivity. More output with less factor input. At the same time, this is often the basis for social progress and our prosperity. Incidentally, this can absolutely go hand in hand with ecological sustainability – and often only becomes possible through it.

What, then, do you recommend to a company that, virtually overnight, is confronted with a new competitor that – using digital technologies – can deliver greater benefits at lower costs? Do we need a digital regulation here, for example, to protect the taxi businesses?

Prof. Lars Fend LF

That reminds me of the phrase: “America innovates, China duplicates, and Europe regulates.” For a long time, Europe and Germany have sealed themselves off against Uber by their regulations. This is typically German: We often protect ourselves and our profits by regulations. If an innovative competitor is at the doorstep and not kept out by regulations, as an established company, I would consider how to pick up the core idea and differentiate myself at the same time. There are always possibilities to differentiate, if you look closely. So, it’s about understanding the others, and then making it better to be more customer-oriented. Or you look for another playing field, if you cannot think of anything. Staying put in hopes of a turnaround is probably the worst solution.

I’ve been observing for years that German companies often try to maintain the existing system with its profits instead of offering clearly superior solutions. Only when the previous offer no longer works and is no longer protected by regulations, do they begin to open up and look at how to pick up or market an innovation. Of course, this carries the great danger of falling behind. And winning back customers is becoming increasingly complex if it succeeds at all. In addition, top management also often has a big gap in understanding what digitalization means for their own business. On the other hand, not every digital native is automatically a great entrepreneur – both must come together, and that’s what we try to convey here at the THI.

The task of universities is to bring digital natives and entrepreneurial thinking together.

What are digital business models all about? Are the rules of the game changing in the markets?

Prof. Lars Fend LF

Well, digitalization doesn’t necessarily mean a change to the basic structure of the established business models. It’s first of all about how digital technologies can help increase customer value and reduce costs. For example, by accelerating, omitting, integrating, or automating process steps and decisions. So the usual suspects, but which now can be implemented much faster, easier, and more mobile.

However, this doesn’t mean that individual companies don’t have to further review their own business model and adjust it if necessary. An example: Companies that have mainly profited from the sale of products are often required to develop their business model toward the (also established) business model of “Product as a Service.” This naturally has far-reaching consequences: For instance, data-based services need to be developed, and pricing models and distribution methods be adapted.

If you want to go beyond that, you can also look at innovative technologies and tackle the question of how this can result in a new type of customer benefit, or an innovated business model. There are basically two approaches, both of which have their place in business administration and management theory. Simply put, one says, I’m going to look in the fridge and then think about what tasty dish I can prepare from what’s in there. The other one already has the recipe and then gets the necessary ingredients. The right path also depends on the size of the company and the type of business: A conglomerate with fields of activity in long-term industries will rather choose the planning approach and procure the resources necessary; an SME may be more likely to look at which resources and technologies are readily available or at hand, and how they can be used to put together something for existing or new customers.

Something else, of course, are the digital platforms…

…how do they work differently? What happens from an economic perspective?

Prof. Lars Fend LF

The platforms are a key driver of growth. Economically, platforms are changing the demand curve. In other words, often I will only be able to sell products, systems, and equipment if there are digital platforms behind them, in particular data-centric platforms. Only if I offer content such as smart services in combination with products (which provide the data) and thus generate added value for the customer, can I even think of successfully marketing my systems. Or, because you have a very good digital platform with services, solutions, etc., I’m able as a vendor to shift the demand curve to the right, that is, demand a higher price for hardware, just because it is based on the right, customer-oriented platform. This leads to a higher gross margin and, depending on development expenditure, to higher profits. Apple couldn’t sell its smartphones for that much if the App Store didn’t exist.

But that doesn’t mean that everyone has to establish their own platform, because becoming established in the market is very resource-intensive. That’s why platform providers are emerging, especially for small and medium-sized enterprises, that everyone can use for their apps. Possibility two: Partnering with one of the major providers – such as Siemens and its MindSphere IoT platform.

What makes a big difference to B2C markets is, of course, the complexity, connectivity, and capital intensity of the hardware, systems, and equipment. I need such an installed base if I want to comprehensively tackle big issues like energy, infrastructure, health, or Industrie 4.0. Smartphones and digital services are not enough. Nevertheless, digital components make it possible to greatly increase the value of these systems via a data platform. Ultimately, this creates substantial added value for the individual, the companies, and also for the society as a whole. Companies like Siemens – with a large installed base – have a clear advantage here, especially if they provide suitable connectivity mechanisms in the brownfield as well.

Platforms moves the prize-piececount-relations towards higher cross margins

So everything is sunshine and roses?

Prof. Lars Fend LF

Not necessarily. There are industries where the equation will not hold true. To generate outstanding, data-centric services, you need a lot of knowledge, a lot of data, and exceptional data-processing skills. This cannot be achieved overnight. And here we come to an essential principle that also applies to industrial platforms: The winner takes it all.  Whether you can catch up with the core capabilities that I’ve mentioned with respect to the “Big Five” (Apple, Amazon, Alphabet/Google, Microsoft, and Facebook), is open to debate. After all, these companies also continue to develop. In that sense, the race is extremely difficult, and – generally speaking – partnering can make sense, albeit with the risk that the “bit” of hardware will be swallowed as part of a forward integration or becomes a commodity. I believe you can protect yourself from that by continuously developing your own digital capabilities in concert with a consistent customer orientation – based on a sound understanding of the customer and their future (digital) business issues.

I’m firmly convinced of what I said at the beginning – digitalization helps society. When breaking that down to individual industries, though, we face some major challenges. You shouldn’t overestimate your own premium position in the market – the short history of digitalization offers enough examples of once proud market leaders (e.g., Kodak, Nokia) being swept away by new providers; but there are also success stories of companies that have evolved successfully (e.g., Apple, Microsoft).

Prof. Dr. Lars Fend is Professor of International Retail Management, Marketing, and Quantitative Methods at the Business School of the Technische Hochschule Ingolstadt (THI – Technical University of Ingolstadt). He also assists international companies on the topics of digital marketing and digital innovation as well as leadership and management in the digital economy.