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FUTURE LEGENDS

Janka Krings-Klebe Joachim Heinz Jörg Schreiner

FUTURE LEGENDS

Business in

Hyper-Dynamic

Markets

Praise for FUTURE LEGENDS

“This great book offers a bold vision for leaders how to transform their corporates into platforms, ready for innovation at scale in the digital age.”

Gisbert Rühl

CEO Klöckner & Co SE

“Inspiring – and true in many ways! Future Legends invites you to change the way you think about your own environment and take a look at the social consequences of rapid change through new technologies. And most important: Each company’s corporate culture plays a widely underestimated yet decisive role in the transformation of institutions.”

Uta-Micaela Dürig

CEO Robert Bosch Stiftung

“Explains in a highly readable form how to resolve the contradictions arising from simultaneous management of substantial established business and innovations.”

Dr. Ingo Luge

CEO E.ON Germany

Content

Introduction

Become the Change

Chapter 1

Welcome to the Connected Age

The Change of Markets – An Introduction

From Horse to Car

From Compact Disc to MP3

From Taxi Service to Uber

Force 1: Falling Cost of Digital Infrastructure

Force 2: The Digital Skin

Force 3: The Exponential Growth of Digital Opportunities

Force 4: Falling Transaction Costs

Force 5: Substitution of Gatekeepers and Intermediaries

Hyper-Dynamic Markets – The New Normal

The Challenge for Existing Business

Chapter Takeaways

Notes

Chapter 2

Organization Matters

Observing Innovation at Scale

The Operating Stack of a Business

The Two Tasks: Exploitation and Exploration

The Market Journey Cycle

Emergent Phase

Expansion Phase

Differentiation Phase

Commoditization Phase

The Market Journey of a Business

Opposing Cultures

Big Org Goes Start-up

Culture of Exploitation

Culture of Exploration

Design for Horizontal Connectivity

Accelerate Learning and Value Creation

Develop Adaptive Organizational Structures

Develop Entrepreneurial Business Teams

Establish Cooperative Value Frameworks

Common Ground

Chapter Takeaways

Notes

Chapter 3

The Connected Business

Preparing for a Hyper-Dynamic Market

Protecting the Business Outlook

Adapting the Business System

Business Skills for the Hyper-Dynamic

The Shift in Excellence

Dealing With the Known and Unknown at Scale

How a Connected Business Acts

How to Start a Business in the Future

Back from the Future

The New Logic of a Connected Business

Business Teams Run Their Business

Supporting Services Provide Capabilities

The Core Provides the Connectivity Framework

How a Connected Business Deals with the Dynamic

Business on a New Level

Chapter Takeaways

Notes

Chapter 4

Management in the Connected Business

Management for the Connected Age

Industrial Case Study: Haier

Why Haier Is a Connected Business

Management at Work in the Business Stack

Lessons to Learn from Haier

Consequences for Change Management

Consequences for Business Management

Taking the Leap into a Connected Business

The Core Strategy of Transformation

The Five Skills as Guiding Tools

Example: New Business Incubators

Example: Mindset Change

Example: Ramping up Information Technology

The Role of Top Leadership in Business Transformation

Chapter Takeaways

Notes

Chapter 5

A New Contract

Business and Society

Connected Business Unlocks Hidden Potential

Benefits for Aspiring Entrepreneurs

Benefits for Owners of a Connected Business

Benefits for Society

How to Proceed

Finding a New Balance

Notes

Introduction

Become the Change

What this book is about and why we think it matters to business leaders.

In January 2016 the three of us, colleagues at a multinational enterprise, were brainstorming ideas for an ongoing corporate initiative to prepare the company for the digital age. We were convinced that this would mean a big change for the company – and we were determined to guide the change towards a broader entrepreneurial set-up of the enterprise with our ideas and know-how. Little did we know at this point how fast the change would find us and turn our safe corporate world upside down. The more we thought about entrepreneurship, the more we realized that it would need to start with ourselves. Only eight months later we decided to quit our contracts and start our own venture. In January 2017 we found ourselves again brainstorming, yet this time it was for our own company.

Change happens very fast in the digital age. In our private lives we are still amazed by the possibilities offered by the digital world and we are enjoying the richness of the experiences it provides to us: Google delivers the world’s knowledge to us, Twitter inspires us with new ideas, Facebook, Instant messaging, and Google Hangouts keep us connected to friends and co-workers around the globe, Amazon delivers just about every kind of good to our doorstep within days, TripAdvisor shows us great places to be, AirBnB makes our stays affordable, and Uber provides us with rides instantly. Novel services are constantly jumping onto the scene, offering us new and cleverly individualized choices at a dizzying pace.

Curiously enough, we mostly lacked this experience in our professional lives. Planning travels and paying for goods and services was somehow not so easy, not so fast. We did not have the richness of individualized choices and lacked possibilities to instantly connect with others and to spontaneously collaborate on ideas. Policies designed to protect corporate property greatly limited our ability to connect with others and to share our ideas and knowledge. Things in general moved slowly and in a highly controlled fashion. In our attempts to move faster or to do things differently we felt like trying to sprint through quicksand, often unable to make any meaningful progress.

And we were not the only ones who experienced this huge gap in opportunity. During our research we talked to countless leaders from various businesses. Whether seasoned project managers, corporate leaders, or members of supervisory boards, everybody had the same set of questions:

How can we transfer the positive digital experience of our private lives into our business?

What keeps us from running and managing our businesses in a different way?

Why is it that we keep loosing our focus on the customer in daily operations?

Why does it often feel like our choices and ideas do not make a difference?

How can our business become as fast and flexible as start-ups?

How much time is left until the digital world affects our business?

How will I earn my money in 10 years?

How can I effectively lead necessary changes and make a real difference for my business?

Digging deeper into the issue, we also felt the need to expand our scope beyond established businesses. Looking at the starting point of innovation, we found people who worked in new and young businesses. While their perspective might have been different, their questions revealed the same sense of unease. They were worried about how they could secure timely support to turn their ideas into business operations. They were concerned that scaling their innovative business would reduce their flexibility and speed. And they wondered how best to protect their autonomy in collaborations with larger enterprises and investors.

It was at this point that we realized that we also had to include questions concerning larger socio-economic challenges of the digital age because they turned out to be connected to it all:

What responsibility do digital entrepreneurs and innovators have for the development of society?

How could digitalization contribute to solve income and opportunity disparities?

Researching these challenges led us to some surprising insights and to the development of useful and novel approaches to those issues. What if the digital age also offered new ways to combine the particular strengths of large corporations and the strengths of start-ups? What if this could be done at scale? What would be needed to guide this change into a favorable direction? What would this mean to businesses of any size?

We have collected our insights and answers in this book in the hope that it will provide inspiration and hands-on guidance to business leaders and policy makers. We challenge business leaders to read this book with an open mind because it will most certainly put into question some if not many processes within their own companies. We challenge them to critically reflect on our ideas and consider applying some of them in their own business. Throughout the book we deliberately stay clear of technical jargon because, more often than not, we have found that technical terms are burdened with theory and in fact distract from key concepts and novel ideas.

In our first chapter, we lay some foundation that helps us to fully understand the impact and inner-workings of digitalization. The main question we ask is:

What exactly makes digitalization such a powerful force in the markets?

In our second chapter we analyze why some companies thrive while others struggle to adapt to the waves of changes that are brought along by digitalization. Our guiding question is:

What are the principles that make companies highly adaptive and innovative in the digital age?

The third chapter discusses how only a connected business is prepared for the digital age. This outline will help to answer the crucial question of:

How to combine the innovativeness of start-ups with the scale of large organizations?

In the fourth chapter we show in detail how becoming a connected business plays out practically and ask:

How would the practices of management need to change in a connected business?

In the fifth chapter we finally look at the overall impact that this kind of shift in business could have on society and ask:

What could connected businesses contribute to solve income and opportunity disparities?

Coming from the practitioners' side, we are very much aware that our insights run counter to conventional theories and practices of business management. Yet, our discoveries are not random. They are based on thorough explorative work in a large number of businesses; on extensive reading and researching of this field; and on in-depth analyses of approaches that we have seen to work in practice and barriers that we have found to stand in the way of change. We have shared many ideas and insights with business leaders all around the world. And time and again we saw that our ideas and suggestions filled a gap that many felt was left empty. We have received an enormous amount of positive feedback from leaders who felt that we have provided them with much-needed orientation, clear direction, and fresh ideas to try. We want to thank these entrepreneurs because they kept coming back to us, asked for more guidance, posed more questions, and challenged us with their own insights. Their feedback not only helped us further learn and develop our theory, but also encouraged us to make our practical insights available to a wider audience by writing this book. Starting our own company provided us with a much better first-hand understanding of the challenges and opportunities that business leaders face. We hope our insights can inspire them to turn their business into a future legend.

April 2017

Janka Krings-Klebe, Joachim Heinz, and Jörg Schreiner

Chapter 1

Welcome to the Connected Age

The world is in a permanent state of change at a scale never experienced before. Digital technology connects people, products, businesses, and markets in near real-time creating new kinds of opportunities and destroying established value chains. Businesses need to adapt to this connected age in order to stay relevant.

The Change of Markets – An Introduction

Markets have always changed over time. But today this seems to happen at an unprecedented pace, with a global reach and a different level of impact on established businesses. No market seems to be immune and businesses struggle to keep up with the accelerating dynamic. As a result, many business leaders feel an increasing pressure to adjust to this change. They sense, and rightfully so, that their business is under threat, or at least that soon it will be. They don’t know which direction to turn and how to effectively prepare for a new kind of competition. Becoming faster, lowering prices, increasing efficiency, protecting key know-how – these were the keys to success in the past. Yet, suddenly this doesn’t seem to be the case anymore. To better understand the forces behind the dynamic of market changes, the nature of its challenges, and effective responses, a brief look into history is insightful.

From Horse to Car

Less than a hundred and fifty years ago, most of the transportation in our cities and rural areas was still done by horse-powered carriers. There certainly were some challenges that came with horses, including their waste and their need for breaks. But the horse was altogether a good and reliable mode of transportation and hauling.

Then, a young engineer invented a motor-driven coach. In the first following years people did not understand what the advantage of the motor could be. The coach was still slow, the fuel and vehicle was expensive, it stank to the heavens, and it was loud as hell.

But over time mass production – another invention of the modern era – turned expensive motor-coaches into affordable items, fuel became cheaper, and people understood that a car needs less care than a horse. Thus, cars and trucks replaced horses on the streets over time. A new technology was eating away the existing structures and habits, leaving horse-coach companies in the dust (with some very rare examples still being in existence).

What is curious and important to note is a special pattern that lies behind that change: It was not a single technology that caused the shift from horse to car. A single technology does not change a market just because it exists. It has to converge with other developments into new fields of usage to gain a wider acceptance.1 The combustion engine of the motor-coach was used not only in cars but also in a growing number of industrial plants and other applications, which helped to build the necessary gasoline infrastructure and make it more widely available. This convergence created a new market and raised acceptance for all involved technology.

From Compact Disc to MP3

Another example of technology changing markets, their structures, and their participants is the evolution from Compact Disc to MP3. Let’s unravel this case and understand the necessary prerequisites for the market change. The Compact Disc was invented as successor of the music cassette. This ended the mess with tangled tapes, made it possible to jump directly to the next music title, and also consumed less space in the car or at home. Moreover, the CD could be used thousands of times – and there was no loss of quality due to the digital signal processing. The convenience and quality of music playback soon made the CD widely popular. One disadvantage, however, always remained: It was still necessary to shop for music in a local store or to wait for the delivery of a phone order.

Interestingly enough, Compact Discs were not only a hit in the music market. They were also a “big thing” in the computer industry. They made storing and securing digital data less expensive, soon replacing the formerly used floppy discs and digital tape recorders. The CD was eating away at previous technologies because it was able to carry a lot more data and was easier to handle. The music industry, with some success, developed and enforced technology in CD reading devices to prevent unauthorized replication of their Compact Discs. But they were not able to prevent what happened next: Two new technologies emerged and made it possible to entirely sidestep the elaborately erected gates protecting their business.

The Internet grew into a global network able to deliver all kinds of digital content instantly to any computer connected to it. And the MP3 format made it possible to dramatically reduce the size of digitally stored music, so that the contents from many CDs would fit into affordable memory chips. This not only further reduced the size of music players, it also made specialized hardware protecting unauthorized replication of music completely optional. Any computer at that time could be used as a device to store, record, convert, play, and transfer music.

The combination of Internet technology and MP3 technology fundamentally changed the way music could be consumed: Customers could buy single music titles on demand. A music title could now be shipped over the Internet immediately, it did not require physical storage space, and a loss in quality was virtually impossible. Copyprotection mechanisms were unable to keep up, making MP3 music titles distributed over the Internet hugely popular. Consumers were increasingly unwilling to pay the price for music in the gated formats offered by the music industry. The profit margins of the music industry eroded while they focused on legal actions to protect their existing business. The combination of new technologies converged into solutions so attractive that they generated enough power to flip the music market entirely – creating new, big winners but also many losers and crashed companies.

From Taxi Service to Uber

The next example will bring us to a change of market that is happening right now in front of our eyes. It is maybe a small facet in the change of markets, but it is a remarkable one: the shift from taxi service to Uber.

A taxi service is a transportation service. You call an operator on a phone, tell him where you are and where you want to go, and, after some time waiting, a car – including the driver – arrives and drives you from A to B. For a long time this was the cheapest and fastest way to access and use the taxi service. Once again, new technologies changed that.

Nowadays, you can book a ride in a second by pressing one button on your smartphone. Instead of a conversation with a call center, you receive an instant confirmation of your booking including an exact arrival time of the car. Most of the time, the service is even cheaper than a taxi.

Uber offers us two crucial insights. First, it reminds us about the sheer speed of market change. While most market changes in the past were decades in the making, the Uberpowered market change of the taxi business happened in only a few years, heading quickly towards the disruption of adjacent businesses such as food delivery.

Secondly, Uber reminds us of the actual drivers behind the market change. Uber virtuously uses a complex set of forces to build their business. A closer examination of those forces shows that all markets are affected by them and that they can create a huge dynamic of change. Understanding them is key to building businesses that are prepared for the digital age. Let us dig more deeply into these forces to understand their impact on all businesses.

Questions for Leaders

What makes your market vulnerable to pressure from digital players?

What is protecting your market from digital players?

Force 1: Falling Cost of Digital Infrastructure

Apart from many other factors of market change (e.g. legislation, geopolitical developments), advancements in technology have created the strongest and most lasting forces for change. The combustion engine, the internet, and the smartphone show that new technology enables new services and creates new customer demands. The current period of change in the markets is largely propelled by digital technology. The digital technology is evolving exceedingly fast, constantly driving costs for its use down and its performance level up. Three examples show how quickly this is happening, and what it means.

The first example is processing power. Every digital device today is based on a kind of processor, the core unit of any computing machine. Processor technology advances on behalf of Moore’s Law, which states that the number of integrated circuits doubles every 24 months.2 This means an exponential growth in processing power. Put into practice: The 2015 version of the Apple Watch has double the amount of processing power that the “Cray-2” had in 1985, then the most advanced supercomputer of its time.3 In other words: A supercomputer now fits on your wrist.

The second example is about digital networks, another large technological component that is changing markets. The ability of a digital network to transfer large amounts of data in a given time frame is measured in bandwidth. The larger the bandwidth, the more data a network can transfer. The more data it can transfer, the more useful it becomes for end users, because it then enables more sophisticated, datahungry applications. The growth of bandwidth in networks follows a similar pattern as the growth of processing power. The bandwidth available to end users grows at a rate of 50% a year, which is called Nielsens law.4 Not long ago, users where happy if they could text-message each other on their mobile phones. Today the increased bandwidth of networks enables consumers to watch video streams during their commutes and to have video chats while in a park.

The third example is about digital storage capacity. Computers in essence are number-crunching machines. They are most useful if they can chew through large amounts of digital data. All this data has to come from somewhere, it needs to be collected and stored until it’s time to process them, and the processing results have to be stored as well. The storage places for digital data have doubled their capacity every two years – again a result of Moore’s law. Storing and retrieving data in 1965 was a very expensive and slow process. Think of storage buildings housing specialists and delicate equipment instead of USB sticks that fit into the palm of your hand. Today the cost to store digital data is very low. The processes to store and retrieve data are something that most users aren’t even aware of anymore. More storage capacity can be instantly rented by literally hitting one button on a computer. It is far easier to simply add more storage than learning to produce less data.

It is this combination of powerful processors, networks, and digital storage capacity which allows for very efficient data transportation and processing worldwide – and it is cheaper than ever before. For at least two more decades, declining costs and increasing performance of digital components will continue to fuel what is really important in business: creating new opportunities and exploiting them. Uber relies entirely on digital technology in their real world transportation business. They could not compete or even have a business without digital technology. If today’s technology makes Uber possible – what can be done with digital technology in ten years from now?

Questions for Leaders

Would you like to know how the story ends?

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