Digital Rebirth
How Smart Companies Recreate Themselves in the Digital Era
By Marius Leibold and Sven C. Voelpel
ISBN 978-3-89578-736-2 (EPUB)
Complete EPUB edition of Marius Leibold and Sven C. Voelpel, Digital Rebirth
ISBN 978-3-89578-477-4 (Print edition)
Publicis Publishing, Erlangen, Germany
www.publicis-books.de
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Marius Leibold has wide experience in top-level executive counseling sessions and workshops in the U.S., Europe, China, Australasia and Africa, and is regarded as a leading-edge business rebirth counselor in the digital-augmented society. He is visiting professor at the University of North Carolina, Business School Netherlands, and Massey University, New Zealand, and professor emeritus at Stellenbosch University, South Africa. He has also been a Case Study Associate at Harvard Business School.
Sven C. Voelpel is Professor of Business Administration at the Jacobs University Bremen, Germany, as well as founding president of the WISE Group and the WDN – WISE Demographic Network. He has been guest and honorary professor at INSEAD, Tsinghua and St. Gallen as well as a Visiting Fellow at Harvard University. He is an internationally renowned keynote speaker and teacher of executive workshops.
Figure 1 The ‘valley of death’ experience 9
In summary, there is much hype about company digital transformation, digital business model transformation and company digital roadmaps. Most legacy companies are still ‘business model captives’, and their digitalization efforts will prove to be inadequate for survival, due both to myopic executive mindsets and constrained company processes. Without a real Digital Rebirth, most legacy companies are facing a ‘valley of death’ experience.
This book provides evidence that companies have to “break free” from their legacy business models, and make a radical move away from business model thinking into digital platform and ecosystem thinking, understanding and doing. Digital roadmaps without clear digital-era mindsets, purpose and digital capability “compasses” are dangerously inadequate.
Daniel Cohen, VP, Adobe Systems, puts it this way: “While our initial digital strategy was to run our traditional model and a new subscription model in parallel, we came to adopt a “burn the boats” strategy to accelerate our transition to the new model; we needed our employees to understand there was no going back to the old way of doing business.” 10
“Where is knowledge we have lost in data? Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information?”
“Life belongs to the living, and he who lives must be prepared for changes.”
Digital Rebirth of companies is a reality whose moment has arrived with sound reason, momentum and validity, relevant for the new digital era. The evidence is now becoming irrefutable that most legacy companies’ efforts in ‘digital transformation’ and ‘digitalizing business models’ are failing. What is urgently needed is a rebirth of executive mindsets and approaches to doing business in new ways in a digital world—and it is a matter of life or death for many companies.
This is a challenging requirement, as the existing industrial and competitive mindsets are strong, even in most consultants, academicians and leaders. Moreover, there is a huge clutter of myths, confusion and misunderstandings in the media about the real, holistic nature and impacts of digitalization. Fortunately, there are far-sighted, courageous CEOs and their fellow C-Suite executives that have embarked on fruitful Digital Rebirth journeys, as we have practically illustrated in this book.
From the evidence of some leading companies, and their executives, we have distilled a logical and comprehensive approach to Digital Rebirth, as well as a framework of five drivers for a successful Digital Rebirth process.
Digitization, artificial intelligence, new technologies, materials and processes, together with the tremendous advances in life sciences, are advancing and combining with one another to redefine what companies do and where industry boundaries reside. We’re not just being invaded by a number of technologies, but rather are experiencing a combinatorial technology and cognitive explosion, impacting on all types of business and organizational leadership approaches.
Consumers are reaping many of the new rewards, as notions of real-time customer engagement, value creation and value delivery are changing rapidly. In many ways, B2C (business to consumer) is becoming C2B (consumer to business), as customers enjoy mobile-network enabled goods and services, exercise abilities to co-create, and extend personalization and variety beyond the mere physical products and services.
Moreover, the terms of competition are changing: as interconnected networks of partners, platforms, customers, and suppliers become essential, we are experiencing a business ecosystems revolution, making many industry boundaries obsolete, as has been illustrated in this book. When we say industry disruption is accelerating, we mean that in many sectors, critical foundations of industry structure—the economic fundamentals, the power balance between buyers and sellers, the role of assets, the types of competitors, even the borders of industries—are rapidly shifting and rearranging.
While the degree of change can be uncomfortable or even destructive, it can also contain the seeds of opportunity. What we have attempted to illustrate, is that new types of company opportunities arise in the digital economy, and Digital Rebirth approaches are necessary to explore and benefit from them in radically different ways than just digitizing an existing business model, or just transforming an existing business with digital technologies.
The effects of new combinatory technologies, like IoT, AI and cognitive-interactive technological innovations, go beyond the traditional notion of an enterprise providing products and/or services, to alter the very definition of what a company does—its purpose and meaning in society. The automotive industry, for example, isn’t just about building cars anymore. As artificial intelligence and computational power merge with advanced automobiles and consumer products, companies are thinking about how they can provide “mobility solutions,” or even utility solutions, given self-drive automobiles, sharing of transport requirements, reducing the size of batteries in electric cars, reinventing traffic flows, driver safety, and even city and town landscapes with possible new uses of parking areas/spots. This is radical disruption. And everything is accelerating, with consumer involvement and demand driving much of new technology applications. Digital combinatorial effects are compounding the impact of Moore’s law, creating more scope to innovate and to conceive new types of businesses, beyond tech startups and tech hubs.
Leaders with imagination and foresight who can keep up with the pace of change, and are able to digitally rebirth their companies, have unprecedented opportunities. They face an array of possibilities: build a company platform, develop an ecosystem, leverage other companies’ platforms, orchestrate innovation in ecosystems, co-shape new experimental platforms, or fashion some effective combination of the above. Navigating this crucible ultimately comes down to asking hard, truthful questions about a company’s purpose, role(s) in emerging ecosystems, sources of differentiation, networking capabilities and positional advantage, and placing all options on the table, even if that means disrupting or cannibalizing one’s own traditional business model. Survival and creating, capturing and delivering new value in a digital era is at stake.
This means courage, conviction and persistence by CEOs and other executives in Digital Rebirth efforts of their companies. The challenges are illustrated in the recent history of companies such as General Electric and Cisco Systems, who have embarked on Digital Rebirth journeys, with indifferent results when measured in the short term. See the box below, for an illustration of Cisco Systems.
Why Cisco’s Rebirth into a Software Company is Slower than Some Expected 118
Predicting another loss for the period ending July 2017, Cisco Systems Inc.’s endeavor to rebirth into a company less dependent on hardware within the changing networking industry does not seem to be going well, even though its machines are the backbone of the Internet.
Its rebirthing is harming its overall growth, while the software and services businesses that its CEO Chuck Robbins is focusing on, are not yet a success. Cisco has not had an annual revenue gain of more than 10 percent since 2010. The industry’s shift to cheaper, software-based networking has harmed Cisco’s revenue, which is still mostly derived from high-priced hardware.
Further, the shift to computing in the Cloud—remote data centers providing services via the Internet—is obstructing Robbins’s effort to trigger sales, because Amazon Web Services and others offering Cloud services are building their own hardware. Cisco cannot easily rebirth into a software company, because its customers have always paid upfront for its hardware. Robbins hopes to speed up the shift and increase its revenue growth by offering flexible switches and routers with software-as-a-service subscriptions. He mentions that the company will be offering more innovative products in due course.
Another light at the end of the tunnel for Cisco is that its software and subscription deferred-revenue business is 50% more now (2017)—already reaching a total of $5 billion—than for the same period a year earlier. According to Robbins, he feels confident about where they are, looking at building a new basis for the future, which takes time—hopefully not too long.
From the above illustration several questions arise, such as:
These are valid questions and should be answered in the context of inevitability of the death of traditional industries and the necessity of fundamentally changing companies’ ways of doing business:
Leadership Bardo in the Digital Era
The term ‘Bardo’ appertains to a transitory period between one major situation and the new one following it. The term is often translated as an “intermediate state”, indicating a transitional or liminal state between death and rebirth.119
‘Leadership Bardo’ refers to the activities and challenges that a company faces in the transitional state between its old business model—and its likely temporary remnants and/or phase-out—, and a state of effectively being digitally rebirthed. In a sense, ‘Bardo’ also refers to an experience of liberation from the old, or previous state, through engaging, sensing and responding appropriately during the intermediate state.
Throughout this book it has been motivated that traditional industries and their relatively fixed industry boundaries are dying, being transcended by new types of business and industry configurations that are now called platforms and ecosystems, aligned through clear organizational purpose and coherence guidelines. In this context, the well-known ‘business model’ paradigm, still much in use across the business landscape, is in process of dying. Business models, with its relatively fixed configurations and optimization of business value chains, are unable to deal with connective digital platforms and fast-moving creativity and innovation now coming from all stakeholders, especially those outside the company. This remains valid, even if some scholars and practitioners argue that the business model concept has significant dynamics inherent to it, which is not being contested.
What is clearly evident, however, is that business models are rooted in mechanistic industry, product and value chain thinking, which are ‘strait-jackets’ in the digital economy. Real Digital Rebirth of a company starts with the rebirth of its leadership, after accepting that the old paradigms of doing business in the industrial economy are now fast becoming obsolete. The major challenge for leadership in legacy companies is to astutely handle the transitional state from its traditional business models to fully-fledged Digital Rebirthed enterprises.
This process is fraught with difficulties, as a company like GE has recently experienced: while the success of its Predix platform has been stunning, the company as a whole has been suffering recent setbacks in performance, due to over-ambitious initiatives, lack of corporate focus, and cultural change (e.g. moving away from silo mindsets) taking more time than expected. Since October 2017 with the appointment of its new CEO, John Flannery, it has been decided to focus on three divisions, i.e. Aviation, Healthcare and Power/Energy, with the Appliances division sold to Haier. The digital platform business of GE is viewed as having great potential, especially in healthcare and aviation. GE is still very methodical and process-oriented, while Digital Rebirth requires the opposite: speed, experimentation, real-time insights, co-creation and agility on its Predix platform. GE focused in the past few years more on digital enablement of its divisions, rather than a concerted Digital Rebirth. With more attention to a digital purpose and culture in this ‘Bardo’ phase, it may still realize the vision of its previous CEO Geoffrey Immelt, calling GE “a 125-year old startup … a digital company that is defining the future of the Internet of Things.” 120
The major issue here is that Digital Rebirth is a liberating, ‘breaking-free’ transitory state (Bardo), away from the confines of traditional industry and business model ‘strait-jackets’. The necessity in the digital era of moving from ‘systems of record’ of doing business to ‘systems of insight’ due to real-time consumer and other stakeholder information and co-creativity on digital platforms in ecosystems, is a powerful illustration of Leadership Bardo. The challenge for leadership is significant, and with the right approaches and digital compass tools, as detailed in this book, it is very doable, coupled with foresight and persistence; in fact, there is little choice for effective Leadership Bardo of traditional incumbent firms, to pursue Digital Rebirth in the digital era, moving from a dying to the old to a rebirth into the new.
Beyond the broader context of Digital Rebirth actions, CEOs have to provide regular concrete evidence of Digital Rebirth progress and success, such as in the above box where Cisco’s CEO indicates “a gain of 50% in software and subscription deferred revenue from the same period a year earlier … now more than $5 billion.”
To re-emphasize, this book provides a systemic way of looking at the digital era (“What is really happening?”) and a company’s Digital Rebirth journey: from acquiring the right mindsets and questions about digitalization, then moving into establishing digital company platforms as the core of Digital Rebirth, then widening its scope and depth in leveraging digital ecosystems and utilizing Cloud-based services, and embedding Digital Rebirth capabilities across the company and its ecosystem(s). All of this leads to a repurposing of the ‘raison d’etre’ (reason for being in existence) and nature (especially its culture and capabilities) of a company, while implementing five drivers of successful Digital Rebirth that result in clear ecosystem role options for a company, each with clear digital-strategic and implementation challenges.
It is undoubtedly a dynamic, exciting era we are living in. We believe that Digital Rebirth will unlock new value creation possibilities for companies, based on a confidence in operating innovative platforms in ecosystems for shared new innovations. This is a ‘break’ from ‘command-and-control’ operations that have been evident for many decades in staid industries and mechanistic business models, into collaborative activities with consumers, communities, and other ecosystem participants.
Those company leaders that grasp these new realities, with courage and conviction, will make their companies the new champions of the future. Our wish is that you be among them.
“When we started out, we compared ourselves with emerging Fintechs and the startup world and concluded that we have to digitalize completely, not just by putting on digital lipstick.” 11
This book contends that Digital Rebirth, not mere digital transformation, is essential for company survival in the digital era. The reasons for this phenomenon are:
We clearly illustrate in this book that digitalization should not be seen as a technological add-on to existing business models, but that the digital era is changing the entire nature of companies—and also entire industries. In addition, it has profound impacts on leaders and all company employees. We describe and motivate in this book how companies can envision and implement Digital Rebirth, not merely digital transformation. We show how company executives are often misled by asking the wrong questions about digitalization, and we illustrate the right questions to ask. For example, a wrong question is “How do we create new value for our company in the digital economy?”, while the right question is “How do we enable others to co-create value with our company, and for themselves, in the digital-networked economy?”
The myriad of new connective-intelligence is depicted for example in the ‘smart city’ concept (Figure 2) or in the concept of ‘smart insurance’.
Figure 2 Smart concepts: smart city and smart insurance 12
Smart insurance means
The digital economy is a network-intelligence economy, which understands that company outsiders—connected with own staff—are now collectively coming into a position of having more creativity, resources and innovation than only own (internal) company staff and resources. The leveraging of outsider and insider ‘digital network effects’ influence the nature, purpose, goals, processes and innovative capabilities of companies, as well as the growth and benefits for all stakeholders involved. In short, traditional companies and business models cannot just be ‘digitally transformed’, but have to be ‘rebirthed’ by establishing a reinvented purpose and basis, that effectively leverages the intelligence of consumers, suppliers, partners, distributors, research agencies and other stakeholders in real-time. The following vignette illustrates how the company Under Armour achieves this.
Under Armour Rebirths Itself into the World’s Largest Digital Fitness Platform 13
Under Armour (UA) is often thought of as a sports apparel company, with particular products for athletes and other sport codes. Today, in a digital-connected era, this is incorrect. UA has become a platform for fitness communities around the world whose purpose it is to make all people fitter and healthier, in essence to change how people live to enable fitter and healthier communities and people. Under Armour now has more than 200 million registered users worldwide, and its community numbers continue to expand. It has gained direct relationships with these users, as well as hundreds of suppliers and service collaborators, all digitally connected and leveraged on its company platform. Kurt Kendall, a VP at UA, mentioned that when they started the company, physical products such as shirts, shoes, and other apparel were the sole focus. Currently, it is more about the digital platform from which many related products are branded through the company’s ecosystem-connected digital orchestration of participants, including customers’ innovative ideas.
After first putting a connected fitness platform in place, it began to incorporate fitness and apparel products into what is now called a digital experience, utilizing fitness products and services. For Under Armour, the shoe, shirt, cap, towel, and health vitamins are a result of its digital platform, which is used to enhance the overall user fitness experience. In a real sense, the physical product and the digital product are not distinguishable outside the company; inside the company, the purpose and focus are on a digitally-integrated user experience, which continually evolves and innovates through a myriad of digitalized networked interactions. Across all of its digital platforms globally, UA already enables more than 10 billion interactions a year, all focused on improving the user experience.
How does this approach differ from the current digital transformation initiatives of many companies? Most companies are still locked into a mindset of their existing business model, with target markets, products, and configured value chains, just adding digitalization as an efficiency mechanism. That is still a ‘one-way pipeline’ product orientation, with company at one end and customer at the other end. With UA’s Digital Rebirth, there has been a clear move away from the mechanistic, one-way business model to a holistic, platform-driven network of value creation, value capture, and value delivery, using the orchestration of many participants’ innovation power. If UA had gone for ‘business model digitalization’, it would have remained part of the traditional fitness ‘industry’ and its processes. Now it has opened up a dynamic new way of business activity, based on a wider purpose and platform that moves away from the ‘fitness industry’ towards enhancing the well-being and ‘health ecosystem’ of communities.
The larger issue here is that the world and its companies are moving from the industrial-value era to the digital-value era, which requires a new leadership mindset, besides new company capabilities and processes. In his recent book, ‘World Order’, Henry Kissinger argues that the world is at its greatest peril when the international order is moving from one system to another. “Traditional restraints disappear, and the field is open to the most expansive claims and the most implacable actors,” he writes. “Chaos follows until a new system of stability is established.” It is a sobering warning: although this statement is mentioned in political context, moving from an industrial era to a digital era means upheaval of traditional mechanistic, linear management practices to dynamic, non-linear, combined outside-inside connective processes, with new mindsets, guidelines and restraints. Those companies making sense of what is happening, and realizing that corporate rebirth is required—in mindsets and processes—will survive and prosper. However, mindsets take time to change, and it is little wonder that many executives are apprehensive, resistant and even confused in their approaches to digitalization.
We hear regularly how companies worldwide are excited about their digital transformation initiatives. Some are developing their own applications, digitizing their business models, analyzing and engaging with their customers’ ‘journeys’, or executing a new digital commerce strategy. Others decide to deploy new ‘Big Data’ and ‘Analytics’ tools. The investment is often huge, and there seems to be always great hope for success, e.g. with digital ‘hubs’, ‘accelerators’ and ‘startups’. Yet, they often fall short in their efforts, because the focus is typically on how technology will transform the traditional business model—not how the enterprise should digitally rebirth to fully embrace the digital innovation impact of technology.
All too often, traditional companies are focused on creating a type of digital ‘façade’ where it appears to be a digital experience for the customer, but, in reality, the traditional business model is merely transformed and not rebirthed. True Digital Rebirth requires that companies have to decisively change their mindsets, company purpose and organizational processes with a keen focus on collaborative outcomes, not just more efficient or agile infrastructure and technologies.
For example, a bank, through its interactive mobile ‘app’ (digital connective application), may receive information from the consumer faster than ever before, but no real benefit is achieved if it still takes weeks to approve or decline a loan request due to administrative processes still being unchanged. For a digital world where everything is supposed to be automatic, responsive and immediate, a customer will inevitably turn to a competitor that engages individual needs and approves a customized loan in ‘real-time’. Thereby it establishes a longer-term relationship and positive experiences with the customer.
Over the past 10 years, the exponential growth and power of digital-enabled technology have enabled some fascinating, if not mind-bending, opportunities. Machines talk to one another through computer algorithms, with digitally connected humans on the other end observing, analyzing, and acting on the explosion of Big Data that is being generated. Doctors use algorithms that utilize patient history and genetic information in real-time to detect symptoms and make diagnoses, with recommended treatments and preventative actions. Cars are programmed with data-driven precision to direct drivers to the best-possible route, and alternative route options, to their destinations. And even ‘digital libraries’ for 3D parts are growing rapidly—possibly to the point where we can soon print whatever we need, now evolving into 4D printers that can replicate themselves.
With the fast-evolving range and speed of new digital technologies and connectivity, it is a common fallacy to believe that productivity would also rise over the same span of time. However, according to a report released by the Organization for Economic Co-operation and Development (OECD) in 2017, this is, sadly, not the case.14 In fact, most advanced and emerging countries are experiencing declining growth that is cutting across nearly all sectors and affecting both large and small firms. But more interesting is the OECD’s observation that this trend does not exclude areas where digital innovation is expected to improve information sharing, communication, and finance.
Although nearly 5 billion people on our planet have a computer (i.e. an internet-enabled mobile device, like a ‘smart-phone’) in their possession at any moment of the day, our digital ways have evidently not translated into productivity gains for the enterprise. The reason? Businesses are not changing their mindsets, approaches and processes to allow that technology to reach its full potential, mistaking digital ‘business model transformation’ initiatives as adequate, while digital company rebirth is really required. To connect wider and faster is one thing, but to utilize that in more purposeful, effective outcomes in society is another.
The following vignette provides a clearer picture of how to separate linear-thinking digital transformation from exponential-thinking Digital Rebirth.
Separating Digital Rebirth from Digital Transformation 15
Is it feasible that another type of economic revolution could have a greater impact than the agricultural and industrial revolutions did? Not everybody is convinced of the latter two’s lasting impact: Douglas Engelbard, who pioneered the computer mouse, went as far as to predict that the digital revolution would ultimately be far more significant than writing or printing, or automated farming and production.
Jonathan Becher, the Chief Digital Officer at SAP, maintains that the digital revolution is indeed a revolution and not a transformation. While the agricultural revolution changed the way people lived and the industrial revolution changed how they worked, the digital evolution is changing how they live and work simultaneously. Examples are driverless cars, drones, 3D printing, artificial intelligence obviating many jobs, and virtual reality applied in, for example, building, clothing and living environments.
In the past, given few disruptions, economies of scale were usually the result of a successful business model structure, company strategy, repeatable processes, top-down planning and hierarchical-controlled activities. The nature of the digital revolution is, however, different from that of previous revolutions, i.e. digital-network-enabled, faster, but more importantly, also exponential and creativity-leveraging. BioTechnology’s advances exemplify this: Mendel’s book on genetics was published in 1866 and now, less than 200 years later, CRISPR—a genome editing tool—is about to make a huge difference to people with genetic disorders.
Reactionary and pro-active companies emerge from every revolution. According to Engelbard it is almost impossible to keep abreast with exponential growth in the new digital era, although one could catch up with revolutionaries in a linear world. Evangelos Simoudis, founder of Synapse Partners, believes that big companies should learn to act like startups by giving a part of their incubation ideas to employees outside their R&D structures. This does not mean that startups are more stable than larger companies, but that turbulence in digital evolution of companies is inevitable—and should be embraced with Digital Rebirth mindsets and processes.
Even ‘digital natives’, such as digital startups, need to anticipate and explore future changes, because innovating just once is not the ultimate or enduring solution. Engelbard warns: “Revolutions and the changes associated with it can be scary, but the the single worst decision is to do nothing.”
Many executives think of companies competing over, or with, physical products and services in an industry context—the typical “build a better mousetrap than competitors”—and owning (or controlling) the resources to enable them doing that with consistency and efficiency. In today’s network-connectivity era, competition is fundamentally changing to being increasingly over company and ecosystem platforms, not over discrete products in particular industries. For example, think of a smart mousetrap with sensors that are digitally connected to a Cloud-based ‘mouse-catching’ service: the home-owner, suppliers of equipment, rodent-exterminators and insurance providers are all stakeholders that could influence and monitor the status of the mouse-catching service on their digitally-connected smart devices, e.g. smartphones, via a platform ‘app’, receiving messages and enabling responses when necessary.
The fundamental move from competing with physical products to competition with platforms is valid for any company, in any industry, and not only for the well-known ‘sharing-economy’ platform companies such as Uber, Lyft, Airbnb, Google and Amazon. The shift from products to platforms focuses on co-shaping the products and services that enable stakeholders—either selected and/or open stakeholders that are empowered with app-related tools to operate on particular digital platforms—to connect, build and communicate, in real-time, with these smart platforms, with particular consumers in mind, who now also become co-shapers of products and services through their real-time engagement on the digital platforms.
Every business executive today has to deal with the basic question of how to enable others (external stakeholders, including consumers) and themselves (internal staff, including co-workers) to collaboratively create new value—for the company and its shareholders, and in the process also for the various stakeholders and their shareholders. The major implication is that, while it is difficult to divorce executive minds from physical products only, e.g. an automobile, or services, e.g. GP (General Practitioner)health services, it is essential to adopt a new mindset for digitally ‘rebirthing’ your company, and not to get trapped into partial and inadequate digital ‘transformation’. In fact, the automobile industry and the GP industry are in danger of ‘dying’, as ‘software eats the world’, i.e. the physical products and services become relatively less important than the non-physical ‘digital connective intelligence’ that determines the network-collaborative use of these physical and service objects. Digital Rebirth is evidently not a choice, but an urgent necessity for all existing companies, the so-called incumbent, traditional or legacy companies, and also their traditional industries.
To embrace Digital Rebirth is not easy: the following vignette of automakers illustrates this.
Why are Automobile Manufacturers still Focusing on the ‘Auto Industry’ 16
Cars filled with electronics that give their drivers traffic information are enough to fill the average driver with awe. It seems that manufacturers of luxury cars are ahead of the game in every way.
However, Andrew Shipilov, a professor of strategy and an Akzo Nobel Fellow at INSEAD, begs to differ. He notes that manufacturers of physical products are not approaching the digital ‘rebirthing’ of their business models carefully or creatively. They still need to understand that “[t]he physical asset itself is just the beginning; the real value is in the connective intelligence possibilities of a wider array of value to consumers.”
As an example, he mentions BMW, whose cars contain a platform (Connected Drive) that allows owners to buy apps that will allow them to gain information on the traffic, to message, and start the engine remotely. However, the owner has to pay €360 just to be allowed to download the apps on this platform.
Similarly, a car’s electronics allow its owner to experience various driving modes. Although all of BMW’s Series-3 vehicles use the same 4-cylinder engine, the less expensive model’s electronics don’t allow it to achieve the higher horse-power levels of the others. Shipilov asks himself why carmakers don’t allow car owners to rent engine capacity, or even upgrade their engine’s capacity, which would give them a different driving experience when this is needed. His experience has taught him that the main reason is that these companies want people to sell their old cars and buy better new ones. Shipilov notes that although this would make sense in the traditional business model, these companies are currently not only missing out on new customers, but also on new revenue opportunities.
He also mentions Tesla as an example of a company that allows a mode upgrade that allows a car’s acceleration time to be reduced by 10% without having to buy a new model. However, the upgrade can’t be rented, even though this is feasible, and buying it costs about $10,000.
Shipilov contrasts this business model to that of Apple, which earns money with complementary products and whose apps are rather cheap, or even free. He believes that the lesson is to always give customers free entry into a digital store, but to afterwards charge small amounts for the products they buy.
Clearly, the makers of physical products (like vehicles, refrigerators or stoves) understand that digital convergence is the future. Nevertheless, the ‘digitally-transformed’ business models required for this are often inadequately viewed, or certainly not creatively examined for insightful ‘Digital Rebirth’. The physical asset itself is just the beginning; the real value is in the connective intelligence possibilities of a wider array of value to consumers, with new value creative processes, new value capture mechanisms, and new value delivery methods.
From the above vignette of the automobile industry, a number of corporate ‘barriers’ to digital business rebirth are clear. These include:
The critical issue is that these ‘barriers’ cannot be overcome by digital business model transformation efforts, as that would remain incremental, linear, partial and mechanistic, not to mention often slow. What is really needed is a decisive departure—a company rebirth—from the traditional business model and its practices, which is possible without significantly disrupting the company’s current revenue streams in the short term.
Companies struggle with Digital Rebirth, on the one hand because of the barriers of traditional paradigms and mindsets of the industrial era, and on the other hand simply due to myopic advice coming from consultants and academics rooted in those old mindsets. This is often called ‘path dependencies’, i.e. relying on the past methodological paths that worked well, or are still working, but rapidly declining in effectiveness.
In this chapter it has been motivated that industries and companies are facing dramatic changes due to the rise of the digital era, not only because of astonishing technological advances, but especially because of its revolutionary impact on business practices and leadership. Company Digital Rebirth is essential, not merely digital transformation.
The following chapters illustrate, in sharp relief, the ‘legacy’ company barriers and challenges, and how to practically overcome them and move decisively to Digital Rebirth, before it is too late. The ‘windows of opportunity’ for company rebirth will be closing rapidly in the next few years, with many digital native startups (or ‘upstarts’) already entering and positioning themselves strongly in the marketplace. To merely collaborate with startups, or to establish your own startup hubs or technological accelerators, are not enough—that would be perpetuation of existing business models and its deficiencies, not leading to urgently needed company Digital Rebirth.
Workshop 1 (Case Illustration)
Digital Insurance Startups (‘Insurtechs’) and the Challenges for Industry Incumbents 17
Thinking back, most people would agree that buying insurance has not changed during their own lifespans, or those of their parents and even their grandparents.
According to Rakesh Shetty, Head of Marketing for Strategic Industries at SAP, not everything in the insurance industry has petrified. The business models of half of all insurers are being disrupted by new, very nimble competitors. Further, Fintech disrupters (e.g. MoneySuperMarket and Lemonade) and new technologies (e.g. smart sensors and medical-grade wearables) are making classic face-to-face meetings between insurance brokers and clients superfluous. Insurers can apply digital tools and data derived from their clients to provide services that enhance and fit these clients’ digital lifestyles. Digital Lifestyle Insurer and the Connected Insurer are two emerging insurance models.
The Digital Lifestyle model focuses on an individual client at a time, subsequently leveraging the customer knowledge, anticipating the customer needs and, at the right moment, supports the customer by offering appropriate, highly personalized services and products throughout the various insurance lifecycle phases. By investing in social media, contextual marketing and interactive needs analyses, it addresses young insurance buyers.
Shetty explains that, by means of the Connected Insurer model, insurers, their business network and technology partners co-innovate on platforms by creating new products and services, as well as generating new and increased revenue streams. Insurers’ ability to agilely adapt these platforms can change the way they regard their partners and are regarded in turn. Shetty mentions that a vertical network that serves single markets, such as those of travel and labor, is valuable, but that a vertical network connected to other vertical networks in real-time is revolutionary. Cloud-based services are required to connect the numerous partners and to process the data in real-time.
Lemonade offers an insurance product that is “instantaneous, un-conflicted and downright delightful,” and related to the founding of fire protection societies. As in these societies, small policy holders groups pay their premiums into a claims pool and are refunded if there is money left at the end of policy period. There are similar companies in Germany, the UK, and China, but only Lemonade has been a registered operating carrier at the end of 2016. Daniel Schreiber, the CEO of Lemonade believes that the rebirth of insurance is still in the future.
Figure 3 Lemonade offers an “instantaneous, un-conflicted and downright delightful” product 18
One would think that faced with millenniums with only a few prized possessions, limited money, devoted to online buying, using apps, and no desire for one-to-one meetings, most insurers would simply give up.
In a blog post, Jordan Crook (a well-known writer and editor) agrees, especially because classic insurance carriers generally do not insure specific devices, or offer insurance for just a limited time, both of which young people want.
But help is at hand, as Trov, an on-demand insurance platform, gives them what they want. It only needs the make and model of the item to be insured to generate the required metadata for insurance. When it is given the insurance buyer’s information, Trov generates a to-the-second price. The insurance on this buyer’s various items is then turned on or off by a simple swipe.
Buyers file their premium payments and claims by means of the Trov app, but Trov also partners an insurance carrier in a specific region, which then provides a balance sheet and carries the regulatory risk.
Crook believes that the right partnerships, tools, and infrastructure are essential for insurance innovation, because the right foundations ensure that insurers do not struggle in a time characterized by exponential change. This foundation also requires “formal strategies, dedicated budgets, clear objectives, and metrics,” which will allow partnerships to meet current and future demand by means of the right products and services.
QUESTIONS
1. Why is ‘digital transformation’ of legacy companies often unsuccessful in the digital economy?
2. What forces have caused new insurance companies/startups to arise?
3. Will the traditional insurance industry ‘die’, or will it survive, or be rebirthed in another form?
4. “Insurers will struggle to compete in this era of exponential change.”
Why?
What barriers?
5. How does “the connected insurer” differ from traditional practice and connections?
6. Does your company—and industry—have similar challenges than those of the insurance world?
“The future is already here, it is just not evenly distributed.” 19
The digital era, for the first time in history, enables real-time—‘live’, happening right now—data, information and insights from wide-spread sources, for fast analyses, predictions and agile responses. Ubiquitous connectivity and in-memory computing cause this to happen, which in turn are caused by mobile devices, computing power—from ‘Cloud’ connectivity, sensors, social media, artificial intelligence (AI), 3D/4D printing, and related technological connectivity advances, especially since mid-2015. This ubiquitous connectivity and exponential computing power now enable the real-time engaging of consumers during their consumer ‘journeys’, interacting with a myriad of ‘intelligent’ products, processes and stakeholders via the ‘Internet of Things’ (IoT), i.e. the automated connectivity of products, people, services and objects through the internet.
What is radically different in the ‘smart’ digital age is the empowerment and engagement of consumers and ‘partners’ (or stakeholders) through the software embedded in smart devices. This enables the spread of real-time knowledge and proactive networking capabilities of many stakeholders through Social, Mobile, Analytics and Cloud (SMAC) dynamics. Innovation, creativity, processes, capabilities and organizational structures of companies are now moving beyond their traditional organizational boundaries, with new product and service value, and new revenue streams and profits, being co-created and co-developed, even co-owned, by customers and stakeholders. For the first time in history, creative power is being distributed to many societal stakeholders, away from a few ‘suppliers’ or ‘resource controllers’. This is a ‘game-changer’ for the way in which companies are conceived, purposed, structured, operated, monetized and measured.