In the past few years, executives and managers often had success in the market with traditional business models and strategies, making digital transformation seem less urgent.
At the same time, however, there has been another development. Many executives fly to Silicon Valley in business casual attire to learn about digitalization. Once they’re home again, they create digital labs, organize meetings with start-ups, appoint CDOs and make every project agile.
Is it that easy, though?
Silicon Valley is known for innovative ideas and digital transformation. Companies in other parts of the world and especially in Europe struggle to emulate its digital culture. That’s because companies of the old economy are faced with opposing challenges.
On the one hand, their stock price will likely decrease if they invest in new digital business models, which has a negative impact on their shareholder value. On the other hand, especially CIOs are expected to deliver new ideas and fresh innovation.
Trying to make everyone happy doesn’t work with digital transformation. Companies have to take risks in order to stay competitive.
Digital transformation and shareholder value
In an article of FAZ (Frankfurter Allgemeine Zeitung, German), Carlos Ghosn, CEO of Renault, gave an interesting insight into why companies of the old economy struggle with these opposing challenges so much.
The older the company, the more important the quarterly figures, said Ghosn. Young companies apparently aren’t held to the same standard in this regard. This is especially true for companies who have created a digital product or service and are experiencing a stock market hype.
For example, Snapchat was worth 30 billion euros on the stock market in 2017. This is roughly the market capitalization of Munich Re or Adidas.
Facebook, Zalando, Amazon and Netflix were all once drowning in debt and red figures – now, they’re all either profitable or highly profitable.
What does all of this mean for companies from the old economy, though?
Digital transformation often means process optimization
According to a Luenendonk survey, companies often have trouble finding a balance between core business and new digital innovation. Only 20 percent of respondents said their companies were able to dynamically adapt to market changes like globalization or digital transformation.
Especially managing the complexity of digital transformation as well as the prioritization of necessary measures present obstacles for companies.
However, this is not because companies don’t want to change. On the contrary: 90 percent of respondents said that they have already implemented a digital business model or are planning to do so. How successful these models were or are going to be is another story, though.
Nothing ventured, nothing gained
Companies have to adopt a trial-and-error principle. They have to create more new digital business models and innovations and try them out in the market. It can help them get to know the structures and methods of digital companies.
This presents another challenge, however. Many companies are dealing with outdated IT structures and are not able to release new software in so little time. Short release cycles are crucial for digital market success, however.
Consequently, companies are trying to digitalize core processes and modernize IT. Some even pursue a “Cloud First” strategy. Applications are migrated to the cloud or companies deploy a hybrid model.
Digital transformation vs. traditional business models
Even though companies are trying to further digital transformation, many of them are struggling with integrating new digital solutions (e.g. SaaS). 79 percent of respondents stated that they are having problems with integrating digital solutions in the backend.
According to the Luenendonk study, companies have more success with digital transformation projects in specific silos or departments. For example, progress with automation has increased significantly.
Digital transformation makes core processes suffer
Traditional products are the only ones not benefitting from digital transformation. Furthermore, digital business models require completely new processes and organizational structures, the integration of technology partners, the creation of digital platforms and customer-oriented business.
These are the main reasons many digital transformation projects fail. To make these changes is often not the problem, but rather the mindset of executives thinking that digital transformation only requires automated processes and some digital services.
There’s a German insurance company that still sends offers out via letters, not e-mails. Furthermore, the customer hotline cannot respond to general queries, but an expert from the specific department has to be consulted – not to mention the lack of AI chatbots.
Another example would be a German fashion store where customers can order online and pick up their items in a brick-and-mortar store but can only pay for and return them online.
These are only two examples of a lack of digital efforts in major companies of the old economy. They highlight the findings of the Luenendonk survey that many companies still struggle to gain real competitive advantages from digital transformation.