Innovation: Parting With Traditional Industry Trends

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Traditional business models are under pressure across all industries. Companies such as Knorr-Bremse, Daimler, and ARRI have already undergone a business transformation. According to Carsten Linz, head of SAP’s Center for Digital Leadership, it’s a question of keeping up, or falling behind.

Q: In your book “Radical Business Model Transformation: Gaining the Competitive Edge in a Disruptive World,” you closely analyzed 380 different companies. What is the distinguishing factor for a company’s success?

A: Successful companies show a willingness to learn and adapt. They seize new opportunities and take calculated, strategic risks with their minds set on creating a sustainable future, rather than simply reacting to changes in the market. When it comes to digitalization initiatives, the overwhelming majority of companies today are still focused on automation and increasing efficiency. Yet a small number of pioneer companies have realized that the real improvement potential lies in transforming their sales model or even their entire business model. This allows them to create game-changing innovations and new digital revenue streams instead of merely digitalizing long-standing processes and consolidating past achievements.

Successful companies show a willingness to learn and adapt

Can you give us an example of a company that achieved greater success by reinventing itself?

Absolutely. But it’s important not to mistake digital transformation with business model transformation. They are two separate topics. For example, ARRI, a global company in the motion picture media industry, transformed its product offerings from analog to digital video cameras, which put it back up to global leader in the market. No changes to its well-structured business model were necessary – all ARRI needed was to digitalize its products.

Yet this is the exception. Most companies do require a more comprehensive transformation of their business. In this case, our Business Transformation Board differentiates four different types of business models, which include the product, platform, project, and solution business models. They are differentiated based on the dimensions “completeness of transaction” and “product customization,” and there are predefined approaches for transformations between these business model types. These include recommended procedures for front-end (value proposition, customer interaction), back-end (value activities not perceived by customer), and revenue mechanism transformations. Structuring the process in this way will not only lend more control over the transformation, but also enables the leadership team to use a clear common language. We also published an article on our approach in the Harvard Business Manager.

What exactly is the platform business model?

Let’s look at Daimler to illustrate this business model. The car company created a mobility platform called moovel, which in addition to its own car-sharing service Car2Go, incorporates public transportation, the mytaxi platform, bicycle rentals, and Deutsche Bahn — none of which are related to Daimler in any way. The reason for this was to create a comprehensive mobility solution on a single platform, and due to the network effect, not many alternative platforms are still out there. The winner takes it all.

We are all familiar with this effect, like when Google completely took over the search engine market, or how hotel portals are dominated by booking.com. We can therefore assume that Daimler’s aim behind launching this platform is to become number one in the market. At the same time, Daimler is reinventing itself – not by changing everything all at once, but by making successive, small changes, starting with the outer borders of the company and the boundaries of their market, which are gradually disintegrating.

Becoming a solution provider isn’t exactly easy. Doesn’t that make transforming the entire business model as a first step seem like a crazy decision?

Depending on the starting point, some companies even require a two-phase transformation. For example, Knorr-Bremse, the world’s largest provider of rail vehicle braking systems, began by shifting from a product business model for rail braking systems to a platform business that offers multiple braking systems. From this point, it went on to offer customized sub-system solutions for rail and commercial vehicles.

This two-phase transformation is a huge challenge, especially for small and midsize businesses. Yet isn’t it remarkable that we still managed to find many hidden champions who dared to take this strategic risk, and implement a full transformation despite the challenges and uncertainties? It takes a lot of courage and conviction to follow this path, but it could end up paying off better than following general industry trends, especially considering the “winner takes it all” phenomenon across the platform world.

So as companies take a completely different course from their original business, the lines between industries are blurring?

Which means that digitalization involves breaking away from traditional industry perspectives. The basic business model types will remain, but the traditional boundaries that defined them will disappear. For example, if I spontaneously decide to go skiing in Switzerland for half a day during a business trip, I can book a skiing pass and an accident insurance daily using my smartphone or car ID, and will receive an additional assistance service in the event of a skiing accident. This allows insurance companies to offer entirely new service packages.

Innovation takes place predominantly at the borders where different industries intersect, and business model transformation requires companies to think from a business perspective, not just an industry perspective.

Innovation takes place at the borders where industries intersect

Everyone’s talking about digital transformation and trying to understand it and keep up with the changes.
Will the hype be over in 10 to 15 years?

It’s true that the term “digital transformation” is overused these days. Yet considering that only a small group of company managers have managed to achieve a higher level of digital maturity so far, the topic will most likely remain relevant for a long time—see the latest SAP Digital Transformation Executive Study.

More importantly though, we must learn to recognize digitalization as a potential driver for business model transformations. Our customers’ CEOs often ask me to help them define a blockchain strategy. What they don’t realize is that it’s not a blockchain or a digitalization strategy the need, but a transformation strategy. Digitalization is only the tool used to achieve this. Use cases are the main focus. The various technologies merely help companies realize them. Use cases often require a combination of several different technologies to solve a problem more efficiently.

After all, digital transformation itself is not an end in itself; it is a means to drive innovation and create new revenue streams and added value for the corporation. The technologies will change, but this core function will remain.

In the end, transformation must benefit mankind. Do you have a recent personal example of this?

As I am often away on business, I decided to use a mobility platform that integrates several different means of transport to plan my latest trip. The platform booked a car-sharing service for my journey to the airport and, at the same time, reserved a parking spot right by my terminal. This saved me the taxi fare, and the effort of finding a parking spot by myself, and it was all organized through a single app with hardly any effort on my part.

Which topic should CEOs add to their next executive board meeting agenda?

I would broach the topic with a question: “When was the last time you did something for the first time?”

More information

Dr. Carsten Linz is head of SAP’s Center for Digital Leadership, which helps SAP customers’ executive boards successfully overcome the leadership challenges of this digital era. Together with co-authors Günter Müller-Stewens and Alexander Zimmermann from the University of St. Gallen, Switzerland, Linz explains in his book “Radical Business Model Transformation” how companies can successfully transform their business model to gain a competitive advantage.

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