Proactively getting to grips with change always requires an ability to cope with uncertainty and risk
Our economy is transforming. For some years now, statements like this have been widely used – some might say over-used – in the press and by trade unions, government and industry. However, there isn’t always a consensus about exactly what this transformation is and which established models really need to be replaced – and these questions are not properly discussed by public actors either. All too often, they resort to solutions that have been around for years and are essentially multipurpose remedies or panaceas, since they are used as a response to a multitude of problems. In this article, Dr.-Ing. Jürgen Jähnert, Managing Director of bwcon research, shares his views on the nature and challenges of transformation.
At this moment in time, there is a broad consensus in society that we need to rethink “everything”. But a closer examination of these calls soon reveals that what people are actually saying – often almost in the same breath – is that “someone else” should start making these changes. When businesses and trade unions make demands of government, they seldom say anything about their own contribution to the transformation. From a system perspective, a unilateral demand for change made to one actor in a system (that is still in equilibrium) is doomed to fail. This is because you’ll never change anything if you don’t change yourself!
There’s no denying that change processes are the most painful processes in society and will always initially meet with opposition. However, human evolution teaches us that change is at the heart of our species’ ongoing development, and those who are too slow to adapt end up being weeded out by natural selection. A characteristic of transformation processes is that the system requires rapid change from all the actors – the main challenge in a transformation process is coping with how fast things change.
The transportation system: from horse-drawn carriages to cars
Let’s look at the development of the automotive industry through this lens. 130 years ago, horse-drawn carriages were the “state-of-the-art” mode of transportation. Then an alternative came along in the shape of the motor car. Comparing early motor cars with the carriages of the day, it becomes apparent that, initially, only the means of propulsion was replaced – the bodies of horse-drawn carriages and the first cars were actually very similar. In other words, carriage makers already had half a car sitting in the yard. Yet almost none of them became motor car manufacturers.
If we compare the former horse-powered economy with today’s system of a car-centered economy, we can see that new systems were developed in many areas: car mechanics, gas stations (that mutated into supermarkets), oil refineries, the spare parts industry, Formula 1 racing, car tuning, driving schools, traffic management systems, roadbuilding and much more besides. Cars were also endowed with emotions. This new system was enabled by technological change. And the “top dogs” in the old system were no longer technology leaders in the new one. As far as businesses were concerned, this meant that those who could keep up with the pace of change were, in the best-case scenario, strong enough to shape the new system and were thus the ones to profit from the change of technology. On the other hand, as usually happens with evolution, those who were too slow to adapt were left behind by the change process.
Now we’re changing the motor car’s means of propulsion again. The internal combustion engine is being replaced by electric motors with new characteristics and opportunities. But this new propulsion method is still being discussed in the context of the old system, while all the established system’s other parameters remain in place. This is the most comfortable way forward for the existing actors, since it means they only have to change very slowly.
Resilient businesses actively contribute to shaping the transformation
One example from years gone by of a completed digital transformation is the change from vinyl records to CDs (digitization) and then to Napster and ultimately Spotify (transformation). A technology (pulse code modulation) that was already 30 years old when the transformation began was used to digitize the information on analog records. The benefit of this was that with vinyl you had to decide which tracks were going to be pressed on the record prior to its production, whereas with CDs you could do this after buying the blank disks. The value creation model continued to focus on counting the number of disks sold and still used this as the benchmark of success. But then, just a few years after CDs came in, the system was fundamentally disrupted when pirate copies shattered the record labels’ nice little business. The online file-sharing application Napster acted as a disruptor. All efforts to put a stop to it ultimately failed and the system transformed into today’s Spotify. Spotify’s core competency no longer has to do with a better way of producing music. Instead, it is the ability to offer users personalized, individual content and provide them with information for a monthly charge. Meanwhile, the prices of live concerts in the system have risen dramatically. A convergence of different technologies (including the cloud, image and speech coding, the Internet and data analytics) led to a new system where the value-added focus shifted from the product to personalized data.
A few further examples of companies that resisted a transformation process illustrate the consequences that this attitude can have:
- 1997: Kodak declares digital photography to be irrelevant.
- 1999: Alcatel’s research center says that Internet telephony will never be as good as the conventional phone network
- 2003: McKinsey advises that a search engine doesn’t have a business model, isn’t an asset for a media company and can be sold off. As a result, Bertelsmann sells its stake in AOL Europe for 16 billion euros.
- 2007: Microsoft says the iPhone has no chance against Nokia.
- 2010: The German automotive industry declares electric cars to be irrelevant.
Let’s briefly stay with the example of the smartphone. When smartphones first came onto the market, they were judged by the same criteria as a mobile phone. But today, the verbal communication function of these devices is more of a legacy feature from the past.
Smartphones have now mutated into a device of choice for using apps, an identification tool and a digital personal assistant, and have given rise to an entirely new system based on these applications. This system change occurs in every transformation: a new system is created with new opportunities to add value that often emerge on the fringes of the old system. In the case of the motor car, this means they occur in areas other than the propulsion system, which is no longer as central to the new system as it was to the old one.
If we follow this line of reasoning, future resilient businesses will need to have developed the ability to proactively shape the transformation process so they can seize the opportunities in the emerging new system. It also means they will initially need to forgo the margins offered by the old system. In addition, businesses will need to ensure that their employees have the skills to develop the content of the new technologies in the new system. A skills shortage could hinder this process. Businesses will also require an organization that is willing to embrace change, where the opponents of the transformation process are unable to prevail.
Clinging to the past always holds back evolution
As part of the process, policymakers must create a regulatory framework that facilitates and ideally supports the system change. It is absolutely vital to ensure that the top dogs in the old system don’t prevent the system from changing – the people who previously profited from a system will typically try to influence the regulatory conditions as part of a strategy to defend their position in a transformation process. During transformations that feel like crises, policymakers – especially in Europe – have a tendency to almost exclusively consult those who profited from the old system, while the new system’s actors and shapers are ignored. Clandestine competition for subsidies and market foreclosures emerges alongside the competition for markets. But an economy can only create value if it is prepared to shape the future by enabling systems to evolve. Joseph Schumpeter described this evolution of systems as “creative destruction”.
Actors who wish to proactively shape change must necessarily possess the ability to navigate uncertainty and be willing to risk making mistakes – and in fact, this has already been a way of describing entrepreneurial thinking and behavior for several decades. In order to promote more resilient future businesses and entrepreneurs, these qualities could be established as a learning goal in primary education, for example. But at a time when everything taught in schools is carefully planned out and students are just expected to sit there quietly, tomorrow’s business leaders have to look elsewhere to acquire these skills.
Technology is just the enabler, but there’s more than that to the transformation process
When it comes to innovation, in Germany the main focus tends to be on the technology, which is then used in the old system. We are less proactive at systematically creating new systems than our North American counterparts, who often build them with European technology.
During transformation phases, future entrepreneurs will need to open-mindedly examine the technologies in a convergence process (including those that have been around for several years) and find ways of adding new value. Technology is thus just an enabler rather than an essential requirement. To negotiate a transformation, the key is to recognize that things are changing fast, see this proactively as an opportunity, have employees with the technological and methodological expertise to create new systems, and proactively counter internal and external resistance rather than underestimating it. These “soft” issues are the real challenges in a transformation process. In short, the businesses that succeed in the future will be the ones led by entrepreneurs, since entrepreneurs know that you’ll never change anything if you don’t change yourself, there’s no reward without risk, and you can’t have risk without uncertainty. This is hardly a new message, but it may be helpful to remember it in the times we live in today.
Contact
Dr.-Ing. Jürgen Jähnert (author)
Managing Director
bwcon research gGmbH (Stuttgart)
www.bwcon-research.org