Although digital business development can be very difficult to manage in a busy working environment, leaders and boards should force themselves and their organisations to come up with answers to the complex digital questions. The first step towards finding a solution is having a strategic focus. This would allow the company to experiment, organise itself in new ways and recruit competences from unexpected quarters.
"Although there is value to be gained in the first level of digital transformation, the greatest value is found in the second level. This, however, is the level that Danish companies find the most challenging"
Børge Obel, professor
There was a time when Vestas was only selling windmills.
There was also a time when experiments were dangerous and business secrets were vital for ensuring companies’ success.
And then there was a time when strategies were developed for 5 to 10 years at a time and took 6 to 12 months to implement.
All this is in the past now, but although disruption, agility and digital transformation have long been everyday terms, the majority of Danish SMEs are still stuck on an analogue freight train, while the digital high speed train is zooming past them heading for an unknown destination and with an ever-changing time table.
Often the day-to-day operations of the company will engulf the organisation, and operations and continuous damage control take up so much time that the SMEs end up in a digital slump in which digital transformation is limited to digitising a few paper flows. It goes without saying that companies need to change in order to run and develop their businesses and to meet the customers’ demands in terms of digitalisation.
“Generally speaking, many SMEs don’t have an overview of the new digital technologies and of how these may contribute to the company’s growth and help increase the company’s efficiency. Should the company invest in robot technology? Should it digitally transform of the company’s products? Or should it digitise the customer journey? Companies are simply staring into the eyes of this massive digitalisation monster thinking: “We cannot handle this transformation.” Instead, companies will opt for a more manageable solution. Often this is something that just appears and that the companies proceed to act on. But we are moving beyond isolated digital initiatives. Today, companies need a strategic approach to digital transformation, says Mette Neville, director of the Centre for Small and Medium-Sized Enterprises at Aarhus BSS. She is responsible for Aarhus University’s Executive board programme for SMEs, and her research includes the study of boards’ value creation.
The same challenge is emphasised by Professor Børge Obel, director of ICOA at the Department of Management at Aarhus BSS. His research includes the study of digital business models.
He explains the challenge by describing two levels of digital transformation:
On one level, you find digitising. This concept describes how a company digitises its processes in the shape of emails, video conferences, robots, etc. Here, all that happens is that normal everyday processes are digitised with the aim of increasing efficiency and lowering costs. One example is when hospitals replace paper journals with electronic journals.
The other level is digitalisation. This concept describes how a company may use digital processes etc. to enter into completely new markets or business areas - in other words when the digital aspect is incorporated into the company’s strategic positioning.
Obel mentions Vestas as an example.
Vestas used to sell windmills, but now this has actually changed. Today, the company is selling energy. This means that when Vestas sells a windmill, the employees do not just sell it, erect it and leave as they did in the old days. They erect the windmill and at the same time, they draw up a 25-year maintenance contract which guarantees that the buyer will get a certain amount of energy each year. In this way, what Vestas earns on each windmill is no longer based on the production costs, but on what the company is able to make on the maintenance contracts.
Thus it is not just a question of producing well-functioning windmills, but also a question of placing the windmills correctly, servicing them, maintaining the network, keeping track of the weather, etc. This kind of business development is possible because the windmills contain hundreds of censors that allow the mills to be monitored at all times. This example shows how Vestas is using digitalisation to move the company into another field - and how digitalisation is at the very heart of the new business model. Here, the company bases its income not on one-off payments, but on 25-year contracts with running payments that offer the company a far better income security.
“Although there is value to be gained in the first level of digital transformation, the greatest value is found in the second level. This, however, is the level that Danish companies find the most challenging,” says Børge Obel.
Digitalisation is the means, not the end
Michael Gram is an example of someone who has been up to his neck in challenges. He is the CEO of the IT company MapsPeople, which is based in Northern Jutland. During the past three years, the company has grown by 255 per cent and has hired 20 new employees. In December, the company entered into an agreement with the state investment fund, which invested DKK 15 million in the business to help it digitally conquer the American market in particular.
The success has been achieved by the core product MapsIndoors. This is a digital navigation tool, which helps people find their way around large buildings such as airports or hospitals, but also around small buildings such as supermarkets or DYI shops. In this way, users can find their own way to the Worcestershire sauce or the gasket.
But things were not always this good.
Originally, the company manufactured physical paper maps to be used in telephone books. However, already in 1997, the company started producing web map solutions, and since then, the company has disrupted itself many times to adapt to the technological development. However, in 2013, the management team was close to shutting up shop.
“We still had reminiscences of the printed map, and it all went downhill fast, but we were too slow to react. We were sticking to what used to be a cash cow, and our turnovers were low. But we were unable to see that we could turn things around,” says Michael Gram, who had to let go of five out of 12 employees - two of whom had been his colleagues for 16 and 23 years respectively.
Until then, the company had made several minor attempts to develop the business, but Michael Gram and his colleague Jonas Berntsen realised that in order to survive, the company needed to exploit the scaling potential on a global level. The company’s main shareholders at the time were getting tired of experimenting and did not believe in either the global horizon or in the major digital investments - both financially and time-wise - that were necessary to fulfil the company’s long-term growth strategies. Thus, Gram and Berntsen bought out the former owners in 2015.
“Our long-term vision has always been to be market leader in our niche. This has been the beacon that we have been aiming towards and which has been the foundation for the important choices we have made on our journey,” says Gram.
Since then, they have ensured a digital flow throughout the company in terms of customer management, development, project management and finance. All in all, this saves time, increases employee satisfaction and improves customer experiences. Yet, digital transformation is not an end in itself, but a central means to transforming the business from a consultancy company into a subscription company.
If our employees were to mention one thing when they are woken up in the middle of the night, I would want it to be recurring revenue. And that’s what you get with subscriptions. Last year, we had a turnover of DKK 45 million. Out of this, DKK 42 million came from subscriptions, and since we know that we will lose just under 10 per cent, we are guaranteed a turnover of DKK 39 million in 2017-2018,” says Gram, who believes that a lot of other companies - manufacturing companies included - may benefit greatly from transforming from a consultancy or trade company into a subscription company. And digitalisation is a decisive parameter in this kind of transformation.
“It’s not enough for the owners or the board to say ‘ Great, go ahead and spend a week on that’, because it takes a lot longer to get the digital processes into position and ensure that you are in fact taking the right digital steps,” says Gram. He believes that digital success starts in the management team, who must make the board and the owners understand that the company needs to devote the necessary time towards strategic digital development in order to survive. In return, the board and the owners must support this work, because successful digital transformation requires that you experiment and develop while running the company on a day-to-day basis.
”If our employees were to mention one thing when they are woken up in the middle of the night, I would want it to be recurring revenue"
CEO Michael Gram, MapsPeople
The boards lack digital competences
Unfortunately, according to Mette Neville, SME leaders typically focus on the day-to-day running of the company performing damage control and working long hours. They find it very hard to take a strategic “helicopter” view on the company. And once they do, they often don’t know what to do or where to start. There are simply such an abundance of digital opportunities, and they lack both the knowledge and competences that would allow them to make any decisions. Often they end up not doing anything on a strategic level, and overall this lack of digital investments means that SMEs are losing their competitiveness.
“The challenge facing the SMEs is that they have to service the existing business model while exploring and assessing the many new digital opportunities. This is difficult as the companies often have limited financial and organisational resources. For this reason, it is imperative that SMEs make the right strategic investments and do not jump from one thing to another,” Neville explains.
In terms of getting SMEs to take a helicopter view and work strategically with the company’s growth potential, research shows that the board often plays a decisive role.
The problem is, however, that the boards are also challenged in terms of digital competences.
“Our research shows that board members feel challenged when it comes to working strategically with new digital technology. They lack insight and competences, and the great complexity coupled with a lack of technological insight mean that it is often difficult for boards to make decisions. Ultimately, this can be extremely detrimental for companies,” says Neville, who in a new major research project will be preparing the boards of Danish SMEs to work strategically with digital technology.
The project “The SME board as a digital catalyst for growth” is supported by the Danish Industry Foundation and is carried out in a collaboration between the Centre for Small and Medium-Sized Enterprises, Aarhus BSS, DTU Business at the Technical University of Denmark, the digital transformation agency Gejst/Studie and the Business Development Centre Central Denmark. In the project, specific tools are developed for the board as well as an open source training programme. In addition, the project will explore how the competences of the board should be developed. 45 companies will be involved in a one-year programme. The companies will be divided into three equal-sized groups. The first group is allowed to hire consultants to help them with the digital business development. The second group will get new board members in the shape of unconventional digital talents, who can disrupt the boards and challenge their traditional ways of thinking. The last group will take part in a continuing education programme focusing on how to work strategically with digital technology.
“We won’t find out what is most effective until we’ve completed the study, but we already know that the exponential development of digital technologies such as the internet, social media, IoT, artificial intelligence, robot technology and 3D printing means that companies can no longer develop a five-year strategy with a plan of how to get from A to B. Due to the rapid development of digital technologies companies need to constantly pay attention to new technologies and threats from new digital technologies. For this reason, it is absolutely vital to be flexible and agile, and company boards are required to be more up to speed than ever,” says Neville.
For this reason, board members must continuously stay abreast with the latest knowledge. No one is expecting them to be able to give a detailed account of complicated digital concepts, but they should know enough to be able to see how the digital development affects the company’s business model and the opportunity it brings. It is also important that board continuously brings in the right competences, and not least that the entire company embraces the organisational structures and work procedures that digitalisation calls for. In addition, the digital development also increases the need for partnerships. SMEs are not able to have everything in-house, and thus it is important to engage in partnerships in which knowledge and experiences are exchanged.
”Ultimately, we are gambling with our welfare and prosperity if the SMEs, which make up the vast majority of Danish companies, fail to get up to speed in this area”
Mette Neville, professor
Digitalisation also a question of culture
Consequently, a successful digital business model will consist of a technical as well as a cultural aspect. Because it is one thing that the managerial challenge goes from being able to develop your technology and your product to being good at predicting the requirements of the future. For example when the user of a Windows-based phone will change their phone because the app for the local bus company only works on an Apple iPhone.
It is quite another thing to have a corporate culture that is aligned with the strategy.
“There is a saying that ‘culture eats strategy for lunch’. As a corporate leader, you might have a well-developed digitalisation strategy, but if the corporate culture doesn’t follow suit, it’s no good,” says Obel.
The cultural infrastructure stands on more legs. One of them deals with mindset. A company that is used to selling windmills and not consider the customers until they call and complain about the windmill not working, suddenly needs to build up a culture in which the overriding purpose is to satisfy the customers 24/7.
The company also needs to develop an efficient digital safety culture in which you never put an unknown USB stick into your own computer. This is a small specific example of the great threat posed by a lack of cyber security. Last August, this cost Maersk DKK 1.9 billion. Shortly before, the Ukrainian banking system crashed due to a cyber attack, and recently, the IT service management company Cambridge Analytica got away with stealing the personal profiles of 87 million Facebook users.
Finally, it will also be absolutely crucial that companies are able to organise themselves in new ways and enter into partnerships with companies from other industries to allow for experiments and new solutions.
“When it comes to digitalisation, one of the greatest risks is not to take any risks. Threats can arise from all over the place at a much greater speed and on a much greater scale than ever before. At the same time, we are witnessing the collapse of many traditional industries and value chains. The main task for companies is to adapt their management, culture, organisation and business models in good time,” says Obel.
Successful digital transformation calls for completely new ways of thinking because many Danish companies are used to thinking of development as something linear. In fact it is happening exponentially, which means that it is no longer just an option for companies, but rather a necessity, to constantly have one foot in the future. However, the exponential development is often overlooked because new initiative are initially unable to compete with the existing solutions. For example, Facebook was free of charge for the first year, and LinkedIn did not start charging until the company reached 10 million users. Then all of a sudden, the new solutions overtake the old ones and then it will be too late if you have failed to jump on board.
“Companies have to move from the traditional ways of doing things to being more explorative. Naturally, the board and the management team must focus on which digital technologies will create the greatest value for the business, but digitalisation is just as much about culture, organisation and work processes. The entire company must work to ensure that the digitalisation process succeeds,” says Neville and adds:
“Ultimately, we are gambling with our welfare and prosperity if the SMEs, which make up the vast majority of Danish companies, fail to get up to speed in this area.”