Digitization Strategies

 

strategyDigitization, industrial internet, industry 4.0 and the entire transformation of business, production, service and associated processes are main topics in the current discussion on industrial development. The manner in which businesses develop and implement their digital strategy plays a deciding role in future sustainability. Lean management methods make this process safe, manageable and successful.

European industries may appear behind in terms of digitization in comparison with the USA. Nevertheless, conditions are not as bad as they seem, and gaps can be closed in a short period time. The key factor is strategy, not technology. Any figure on technological issues, i.e. low usage of big data analysis, are irrelevant as long as it is unclear which value and benefit can be created by using it.

Industry 4.0 . key topic at Hannover fair 2015
Industrial internet (Industry 4.0) - Key topic at Hannover Fair 2015

Building on strengths: European industry is better prepared than it may seem

Only by applying technologies such as big data to improve or create products and services, and thus a digital yield, will it turn into a success rather than a cost factor. This requires a distinct strategy. Many European companies - especially midsized - are well prepared. They have clearly defined brands and market profiles, as well as experience in managing new technologies so that they result in long term profitability. Over decades, manufacturers have developed reliable routines of process management and optimization. Principles of lean management - avoiding waste, customer orientation and a process of continuous improvement - are integral parts of doing business. These principles can help manage digital transformation. LEAN DIGITIZATION ℠ leads to a safe and successful management of digital strategies and business models.

Systematically create your own digital strategy

The following illustration of digital business development areas offers a framework for strategic decisions. Let's look at digitization from two independent points of view. The first dimension represents customers and customer segments; the second products and services. Customers can be differentiated into 'core segment', and 'contiguous segments', which are similar to existing customers, and 'new customer segments'. Products and services are distinguished in categories 'existing products and services', 'new feature in products and services' and 'new products and services'.

Lean digitization -  Spaces for digital business development strategies

Spaces for digital business development strategies
Uwe Weinreich, licensed under Creative Commons BY-SA v 3.0)

This illustration portrays development strategies in 5 categories - each containing different conditions, advantages and risks.

Space A: digitization of production: industry 4.0Space A: More efficiency and higher product maturity through digital optimization

In some cases, digitization can be limited to optimization of production processes on one hand, and addressing solely existing customers on the other. Examples are CRM activities, digital service offerings and means of increasing efficiency and quality within the production itself. Digitization in these areas has a long tradition, starting with CAM and CIM in production or EDI in commercial transactions. Nearly every company is experienced in digitization of production processes to a certain degree. That provides a strong basis, and well-established firms often feel safe and secure in space A. Sometimes too safe. This is, as well, the space that can be shattered most by disruptive market transformations. The music industry had been intensifying auditory experiences, optimizing sales channels and perfecting recording media over decades. No music manager had even considered the disruptive power of music downloads and streaming before it actually occurred.

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Space B: organic growth by digitizationSpace B: New offerings and segments of customers

It is almost inevitable that digitization of manufacturing, logistics, service and market channels creates new business opportunities. Flexibilization of production, for instance, can open a way to mass-customization at acceptable costs. This is one of the fundamental ideas of industry 4.0. The extent to which it can be realized depends on the underlying processes, i.e whether the whole process can be steered digitally.

In most cases it is more advisable to collect initial practical experience with complementary product features and services, not within core processes. Many industrial companies have reached this state. At least technical data sheets or customer self-service platforms are already a standard. Many companies are thus experienced in digitization of offerings or customer interaction.

In addition, applying new technology can expand the variety of offers. Sensors, for instance, are available in such high quality and low cost that the costs of manufacturing systems are not significantly increased. The implementation of sensors can help manufacturers access data from real operating situations. These data are a treasure for further development. Products can be improved and complementary services developed such as remote maintenance or optimization of product use.

Digitization and e-business concepts can be a good way to get easy market access to customer segments which are similar to existing customers. Automated sales processes - i.e. online configuration tools - can enable doing business with customers who previously would never have been addressed because they were looking for very affordable solutions which could not be offered through classical, human based sales channels.

In most cases, both directions of development go hand in hand. New product features and service result in offerings to new customer segments which had not been addressed before. When this development succeeds, organic growth is the consequence.

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Space C: new customer segmentsSpace C: The leap into unknown customer segments

There are some cases of companies managing to address completely new customer segments with unaltered products. This requires a product which carries an unidentified benefit. It doesn't happen often, but these cases contain enormous economic potential. Can you recall the early days of mobile telephony? Huge, heavy and expensive devices. Target customers: top business people. Devices became smaller, but calls themselves remained expensive. By using text messaging - actually only invented for service reasons - a completely new sector of customers became acquainted with a cheap mode of mobile communication. A multi-billion dollar market was born.

More often, new customer segments react to digital enhancements of products and services. Recent years have witnessed a dramatic change in the printing industry through digitalizing of the whole printing process. Nowadays, many people are able to produce master documents of highly acceptable quality. Online printing agencies provide sophisticated online ordering systems. Therefore, they can enter into direct commercial contact with customers who never would have done profitable business prior to digitalization. The ongoing digitization of businesses, offices, homes and new communication channels change markets radically.

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Space D: new offerings through digitizationSpace D: Preserving core business and inspiring with innovation

Well-established companies know their markets and customers well, cultivating close and trustful relationships. That is true especially for b2b companies. Due to their high customer retention, deep customer insight can be achieved with little effort. Customer problems can be identified, enabling products and services to be adapted to their needs. European companies are broadly experienced in discovering customer needs and creating well adapted solutions.

Establishing the required competency within the company or finding it in cooperation with an outside agency may pose a challenge. Nevertheless it can be worth the effort. In most cases it is still easier to find experienced developers for digital solutions than to find a new market.

Space E: new business model by digitization (start-up)Space E: Startup with neither safety net nor double bottom

Entering new, unknown markets with completely new products is the greatest leap a company can take. Demands, effort and risk are much higher than in the previously described strategic spaces. However it can pay off when you have the right product. An excellent example - at least until its downfall - was Nokia. The firm achieved a complete series of leaps: from producer of tires and wellingtons to manufacturer of electronic components to world market leader of mobile phones. Maybe the downfall could have been avoided if Nokia had prepared for the next leap in time.

By the way, space E perfectly describes the situation of start-up companies: new products, no customer relations, often only marginal knowledge of the market and a high risk of failing. This is exactly the target group for which Eric Ries wrote his famous book 'Lean Startup'. The methods and processes he describes fit the requirements of established companies entering new markets with new products as well.

How to find the right strategy

Which strategy fits bests depends on the business model of the company. Even within the same branch different strategies can be successful. The two home marketing agencies Ströer and WallDecaux, for instance, follow completely different strategies. While WallDecaux clearly focuses on its core business by mainly digitizing internal processes (space A), Ströer extends and pivots its business digitally by acquiring other media companies (space D to E). Time will tell which strategy will be more successful in the long run.

 

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published: December 10, 2018, © Uwe Weinreich

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