Why Cost-Driven Businesses Will Fail Digital Transformation

Many family-owned SMBs focus on cost efficiency and trying to get the most out of their business. Operating results and operative returns are key. Don’t misunderstand me; there is nothing wrong with focusing on financial goals and success. After all, that’s what business is for. This is especially true in a shrinking economy and with crisis in our markets. Family owned businesses are usually financially independent. As a result, they cannot increase capital by selling shares. Most of these businesses are successful at finding a balance between cost efficiency and innovation.

SMBs are the backbone of European economy, so when we observe their digital approach, we should not be surprised that their attitudes reflect the above sentiment. It is no by accident that Industry 4.0 was invented in Germany! To me, Industry 4.0 and Digitalization are the cost-driven part of Digital Transformation, like

  • More efficient production using IoT, predictive maintenance, and MES
  • Efficient business processes with digital workflow systems
  • Enterprise Content Management (ECM) systems
  • Streamlined supply-chain on an international level
  • Using robotics and automated tools to become even faster
  • Artificial Intelligence (AI) on the horizon to get more done with fewer people

All of this is great—and necessary. It will allow us to cut costs and lower prices. We will be more competitive in an aggressive global environment. When we examine the past, we can see that we survived because we became increasingly efficient. Markets were stable, as were our products.

Digital Transformation is an Unprecedented Opportunity

Today there’s a new kid on the block: its name is Digital Transformation. It is a game changer! Will our business strategies, which have been successful for many decades, still work facing this new challenge, or better said “opportunity?”

I know this example is a bit overstrained, but I believe it’s a perfect case that perfectly shows the dilemma.

Kodak was one of the first huge and famous victims of Digital Transformation . The tragedy was that Kodak did almost everything right!

  • Because they had highly motivated, curious people within their organization, they developed the first prototype of a digital camera in 1975.
  • Although this was not a focus of business strategy by management, they introduced the first digital SLR in 1989.

What achievement! What innovation! Kodak held cutting edge technology in their hands. But what happened? In The New York Times article entitled Kodak’s First Digital Moment, Steve Sasson, the inventor of the digital camera, explained the reason why the presentation of his game-changing invention to Kodak’s management fell flat. He stated, “Print had been with us for over 100 years, no one was complaining about prints, they were very inexpensive, and so why would anyone want to look at their picture on a television set?” The NYT made up a wonderful story: “Kodak’s First Digital Moment”.

Obviously, Kodak’s bankruptcy was not because of poor cost efficiency or a lack of optimization—it was because of management’s insufficient imagination!  They were simply unable to understand the value of the disruptive character of the invention they had in their hands.

Where are we today?

Because many technologies have come to maturity, a collective tipping point has driven massive innovation .

  • The Internet has matured a lot (although it could be better).
  • Through the internet, Cloud technologies can be used efficiently.
  • Cloud technology allows highly scalable systems. Today, you can scale CPU power or memory (RAM) in the cloud with the click of a mouse.
  • Mobile devices, such as smartphones and tablets, are able to access these systems from any place with an internet connection.
  • Sensors became smaller and are connected today. This is the “Internet of Things,” IoT.

This list is incomplete. It is evident that these technologies interact with and rely on each other, which yields in highly complex systems. At the same time, technology has become less expensive. With the Cloud, startups have access to highly sophisticated systems. “Pay per use” allows them to get going with little financial investment. Traditional businesses used to buy servers and software licenses on premises, but most startups don’t even think of buying their own servers. We now work in a highly disruptive environment.

I was recently at a conference in Berlin called “Industrial IoT Talk” where I was asked to address the group (please find more information here). Day 2 started with the keynote speaker, Filip Geerts, Director General of The European Association of the Machine Tool Industries (CECIMO). His presentation was called “The digitisation of manufacturing: challenges and opportunities for European advanced manufacturing.” In Germany, there is a long tradition of machine tools with the finest mechanics and exceptionally high precision.

What really made me think was that Mr. Geerts didn’t even mention Additive Manufacturing (AM or 3D Printing). I am convinced that AM—in conjunction with the rise of electric cars, where highly complex parts made with the utmost precision, will be superfluous in the near future. An electric car will consist of a mere 20% of the parts that a conventional car has. After his presentation, I asked Mr. Geerts about the disruption in his industry coming from AM and electric cars. His answer amazed me. He expressed that:

  • Additive Manufacturing cannot be done without finishing what the machine tools were used for
  • He doesn’t see a significant rise of electric vehicles in the future. Instead, hybrid cars will be used. And they still use the combustion engine!

The situation reminds me of the old joke where you sit in a car listening to the traffic report: “Attention! There is a driver going the wrong way on Interstate 87,” and you think “One?! Hundreds!”

What to do? It’s all about imagination!

The question is, can it be that there are too many companies “driving” the wrong way? From all of the very honest discussion I have had with executives, peers, and representatives from the IT industry during the last two years, I would say that there are a significant number of executives that don’t feel a sense of urgency for Digital Transformation in this decade.

In a nutshell, I see three things:

  • Disruption in almost all industries through digital technology
  • A lack of understanding of these technologies and their disruptive character
  • Sticking to recipes that worked in the past but will not work in the present or future

This is why it is so important for every executive, CEO, and chairman to understand the challenges of digital technologies and the urgency of Digital Transformation in the first place. Sticking to old recipes that rely on cost savings won’t work anymore. Kodak could have cut 10% or even 25% of their costs, but would have still gone bankrupt. It wasn’t a question of efficiency and costs. It was the business model that failed. And what a tragedy, considering they held such digital innovation in their hands.

It’s time to rethink our business models and what it takes to improve. Knowing the trends and technologies will automatically lead to imagining what these technologies can do for our customers. Digital Transformation is not an end in itself.

Instead of analyzing the costs, we first need to analyze our product and services . Will our customer demand them in the near future? What do we have to change in order to serve our customers best in the future? Then we have to ask ourselves where to improve…where to optimize. Without knowing our future direction, our optimization efforts may lead the wrong way.

Let me know what you think by commenting on this article and sharing it with others. I’d be happy to hear from you!

About Alexander

Alexander Buschek is passionate about Digital Transformation and the opportunities it gives businesses—especially MSEs. He is convinced that every business has to embrace Digital Transformation in one way or another in order to survive. The sooner a business begins its Digital Transformation, the better. Alexander was the CIO / CDO of Braunschweiger Flammenfilter and CIO of Cherry GmbH. Prior to that he was an entrepreneur, consulting MSEs about IT strategies, providing external project management, and overseeing various IT projects (e.g. ERP and CAD implementation and migration). Working with many MSEs gave him a deep understanding of this market. Alexander is now Senior Director, Analyst (MSE) at Gartner.