Digitalisation: opportunities and challenges for entrepreneurs

Germany is one of the wealthiest countries in the world and the economy enjoys nearly full employment. The public finances have long been in surplus and are able to repay debts. In particular the German medium-sized companies with international operations with their hidden champions continue to allow the economy to grow.

Chancen und Herausforderungen durch Digitalisierung

At the same time digitalisation is an intensive subject for entrepreneurs, social partners and politicians. We expect digitalisation to have a fundamental and lasting effect on society which is comparable to the invention of the steam engine, the introduction of assembly line production or the globalisation of the business. The media frequently limits digitalisation as an IT or high-tech subject. In fact digitalisation is not a current IT trend or hype. It is a development which gives entrepreneurs enormous opportunities, but which also comes with a number of challenges.

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Source: Gartner: Digital Leadership – CIO & IT – Executive Summit, page 4.

Digitalisation affects all sectors and company sizes

The digital transformation firstly affected the TIME sectors (telecommunications, information technology, media, and entertainment). The publishing houses have in particular dramatically lost market share and only a few such as the Axel-Springer Verlag have been able to develop a real perspective with digital strategy for their company.

In the meantime the digital transformation has come to affect all business sectors. A current example from the field of system gastronomy shows that no sector is immune. The Eatsa company combines fast food, sustainability and digitalisation and in this way is able to take market share from larger organisations such as McDonald's or Subway.

Use the opportunities provided by digitalisation to minimise the risks

When entrepreneurs address digitalisation, they pursue 2 strategic objectives:

1.	They want to exploit entrepreneurial opportunities to open up new markets, acquire new customers and develop new products and services.
2.	They want to minimise risks which may arise due to disruptive new technology, new business models and new competitors in the digital world.

German companies are very successful in exploiting entrepreneurial opportunities with a policy of small steps, i.e. evolution instead of revolution. This successful approach based on evolution also functions with digitalisation. Accordingly, in the automotive market which is important for Germany the first vehicles have already been successfully fitted with networked telematics services. Daimler has used this functionality and has been able to increase the running time of its trucks by 6 percent and reduce the repair costs for customers by 20 percent. In the fiercely competitive truck market this represents a considerable competitive advantage.

On the other hand it is much more difficult to estimate how the digitalisation will develop and which risks can be successfully countered.

Digitalisation generates disruptive competition

In the digital world there are:

Competitors which are often new to the sector, either as new start-ups which grow dynamically or established companies which were previously in completely different markets
Competitors which have access to vast capital resources either as equity such as Apple, Google and Microsoft or venture capital such as Uber or Zalando
Competitors which fully implement a digital business model and therefore do not have to bear burdens from traditional business models such as an existing sales structure

In this way the relatively young company booking.com with sales of 2 billion euros was able to achieve an EBIT which is just as high as a traditional travel business. As a result, booking.com (58.2 billion euros) is valued higher than TUI, Thomas Cook, Lufthansa, Expedia and the Accor hotel group together with a total value of 42.7 billion euros.
(Source: Manager magazine)

In the USA disruptive new products are generated systematically

In silicon valley companies are continuously founded which attack established business models with innovative concepts. This process combines high technology with almost unlimited venture capital and an ambitious corporate culture which embraces errors.

Digitalisierung und disruptive Innovationen.

In all three of these disciplines, the US economy is superior to the rest of the world. The successful business models from the digital world are a serious challenge for the German economy. We must find our own answers and solutions so that we can continue to enjoy strong competitive positions in the global economy.

The digital transformation is an entrepreneurial challenge

Firstly, entrepreneurs absorb the fundamental mechanisms of digitalisation and then develop their own strategy. In this process they have to answer a number of basic entrepreneurial questions:

1.	How does the transformation affect the structure and borders of our sector?
2.	How is the creation of the value chain and its associated competitive activities influenced?
3.	What new strategic decisions do companies have to make in order to secure a competitive advantage?
4.	What organisational effects does the new product type have and what challenges are associated with the product?

(Source: Harvard Business Manager)

The question of how sectors and value chains will change particularly requires an understanding of digital business models.

In the past, during their creation by software and data, products and services were primarily monitored, analysed and controlled. Now digital models require more with the complete generation and use of data during the use of the product and up to the end of the product lifecycle. For this process all resources in the value chain are fitted with sensors which collect and analyse data.

The networked data gained generate knowledge and allow fully automated new business models, e.g. use and pay instead of pay and use.

Successful companies in particular are faced with the following challenge. They have to manage efficient daily operations which are enjoying growth and at the same time be creative and find energy to develop digital business models and master the changes which are associated with this. The characteristics and success factors of established business models are fundamentally different to digital business models as follows:

Traditional organisations		Digital organisation
Stability	Characteristic	Flexibility
Resources and processes	Targets	Customer experiences
Cost/piece	Control variables	Customer basis and motivation
Waterfall, V model	Procedure models	Agile, creative
Top-down on basis of planning and approvals	Responsibility	Bottom-up through continuous learning and improvement
A lot in-house, a few main suppliers, long-term partnerships	Sourcing	Networks, partnerships, spontaneous short-term co-operation
Long-term (months and years)	Timescale	Short-term (days and weeks), "24 hr/48 hr/72 hr"

In addition to the further development or new orientation of basic entrepreneurial business models, digitalisation requires the build-up of a bi-modal organisation structure and an IT infrastructure where, for example, the existing ERP system can be developed to become the core of a digital platform. The challenge is to correctly weigh up the momentum and measures and to continually readjust.

Rödl & Partner provides holistic support for companies on their path towards digitalisation

At Rödl & Partner selected experts are continually addressing the opportunities and challenges of digitalisation. In this process the client is the focus of our activities and we form individual interdisciplinary teams for his special needs.

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Jens Hinkelmann

Head of service line Management and IT consulting

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