November 5, 2019

Design and Management of Digital Transformation

How does disruption work? In principle, every disruptive process can be divided into three phases:

  • Invention
  • Innovation
  • Transformation

Invention: In the first phase, digital pioneers start developing new technologies. Companies that may be affected by this new technology – both in positive and negative ways – either do not have this development on their radar or lack the imagination and foresight to realise that this technology can and will be relevant, thinking that it perhaps represents no danger (Christensen 1997).

Innovation: This stage is characterised by innovators and start-ups recognising the relevance of new technology. They embrace this technology and develop their first applications and products, as well as new, mostly disruptive, business models. Non-innovation driven companies do not realise the risk posed to their own business model by the new company. The existing company’s blindness or rejection of new innovations also means that they do not take advantage of opportunities that arise for them.

Transformation: In this phase, new products and business models have reached a high market penetration and initiated a displacement process for the formerly established and successful market providers. Companies who do not adjust to these new technologies and new industry players then experience negative effects on their business models and often cease to exist.

These three phases of disruption in the respective company then meet the five phases of the corporate crisis, (Crone and Werner 2013) defined by the Institute for Chartered Accountants in the Standard Requirements for the Preparation of Restructuring Concepts (IDWS 6):

  • Stakeholder Crisis
  • Strategy Crisis
  • Product and sales crisis
  • Success crisis
  • Liquidity crisis

During a stakeholder crisis, the company is still doing very well. However, there is no single strategy and consensus regarding the future direction of the business. Important decisions are not made or are delayed.

In the strategy crisis, business models and product portfolios cease being further developed in a future-oriented way. In this phase, the speed-to-market is extremely slow, there is little or no product innovation and no market or customer-oriented evolution of sales and marketing strategies.

By the product and sales crisis, the crisis is felt for the first time. Sales decline, competitors gain market share, investors are starting to get nervous. In many cases, however, even this stage is not taken seriously. Wishful thinking and suppression of reality, for example, thoughts of the issue being only a temporary decline in sales and earnings, dominate at the management level.

At the success crisis stage, the company is experiencing a significant drop in sales and profits. Companies respond with cost savings programs and job cuts. Due to the lack of a product and market strategy, sales fall and market shares continue to decline.

The last stage, the liquidity crisis, is characterised by reactive management, mostly in the form of chaos management. There is no plan, no direction, no focus. Financial gaps are filled by generating new gaps. Investors and banks reduce or stop financing. Without a watertight turnaround strategy and a clear commitment from investors, the consequence is usually the bankruptcy of the company.

Companies that are aware of the disruption and crisis stages, who develop answers and measures for them, and who subject them to permanent control and iterative development in the sense of the control loop (see control loop theory Simon et al., 1954), are well prepared. Part of this process, not least with regard to disruption phases 1 and 2, is also the examination of important future trends; businesses need to know the mega and macro trends of digitisation. By focusing on consumers and their needs, and by using data and trend analysis to continually improve product development, marketing and sales processes for an ideal customer journey, companies are in the position to increase conversion rates, customer retention and brand loyalty that are critical to business success.

To read more by purchasing the book (in German) please click here: https://bit.ly/2INGbta

If you are interested in reading it in English, please get in touch with us directly.

Review of the book by Bernd Hake, Executive Board Hugo Boss AG: “This book shows how companies can prepare their business models for the digital future and how this can create competitive advantages and better meet customer requirements. The theoretical foundation combined with many concrete, practical hints and case studies makes the book equally worth reading and useful for scientists and practitioners from a wide variety of industries”.

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