Digitalization: challenges and how companies overcome them

Wolfgang Schnober

Wolfgang Schnober

June 30, 2017

The potential associated with the digitalization of internal company and economic processes is huge. Increases in efficiency, product innovations and sales growth are made possible through the use of digital technologies. In Germany, 21,000 new jobs will be created in the digital economy by the end of 2017, according to a Forecast by the industry association Bitkom. However, digitalization also presents companies and employees with major challenges that need to be overcome if they want to emerge from this process as winners.

Challenge 1: Know-how

Bitkom sees a great need for the development of digital skills. Digital and media skills should already be taught in schools, training and further education. Otherwise, digitization will be slowed down by the increasing shortage of skilled workers: there are already 51,000 vacancies in the IT sector today, and the trend is rising.

The older generation in particular views digitalization with great scepticism. According to a Survey commissioned by the Federal Ministry of Education and Research 81 percent of Germans are afraid of being left behind professionally, 84 percent believe that salary differences will increase as a result of digitalization and a full 42 percent believe that digitalization will have mainly negative effects.

It is therefore the task of politicians, employers and employees to make employees and managers fit for the digital transformation, e.g. by

  • Further training opportunities that are taken up by employees and management (!)
  • Use of management methods that promote creativity and innovation
  • Targeted approach to the individual employee, their personality, their potential

Successfully managing the extremely complex digitization process requires not only technical expertise, but above all the right attitude. Because even if it is not possible in the long term without the introduction of digital structures, investments and possibly painful transformation processes are required first.

Challenge 2: Necessary investments without immediate return on investment

Consultants, restructuring, technical equipment and a technological infrastructure cost money - and often without an immediate return on investment. This can be a problem for SMEs in particular. They face a dilemma: if they invest in digital infrastructure, the funds will be lacking elsewhere. If they don't, they will lose sales opportunities and market share in the long term. Three quarters of SMEs consider digitalization to be an important or even very important topic. Despite this, only 20 percent of SMEs have started networking products and services. Another 20 percent have a digitalization strategy. Small companies in particular (under ten employees) invest less than 10,000 euros per year in digital transformation, according to a Study commissioned by KfW Bankengruppe.

But even large companies are late to the game: according to a McKinsey study on Industry 4.0, many companies are only now, when digitalization is already in full swing, looking at specific technologies and innovations such as Big Data or the Internet of Things (IoT). They only invest 14 percent of their annual research budget in topics relevant to Industry 4.0 - even though they are hoping for average sales growth of 20 percent, according to the study. Even in an international comparison, German companies still have a lot of catching up to do here: US companies invest more than twice as much in the implementation of digitalization.

According to the KfW study cited above, most German companies do not consider the financing itself, but rather its value in relation to the expected benefits for employees, business partners and customers. There is still a great deal of skepticism here, which can only be overcome through increased education and information.

Challenge 3: Data security

Networked products and machines collect and store large amounts of data. 62% of SMEs see data security as a problem. This is where politics comes into play: regulation and requirements in relation to data protection and data security can create clarity here, as can legal requirements regarding liability risks.

Companies must also take measures to develop skills in the area of risk. Entrepreneurs and politicians must also work together and invest in training and further education in the IT sector.

Challenge 4: Digitalization is a question of attitude

Scepticism and disinformation at management level are the biggest obstacles to digitalization. A company does not become a digital pioneer by introducing individual digital elements. An overall strategy that incorporates all areas of the company and departments is essential. Many large companies such as TUI, McDonalds and L'Oréal have already developed a Chief Digital Officer (CDO), who is also a member of the Management Board. He is in charge of the cross-company digitalization strategy.

Companies must examine whether a CDO is actually necessary. However, it is crucial that an overall strategy is in place that the management level consistently pursues and sets a good example in the process. After all, digitalization is an attitude that must be anchored in the corporate culture. Digitalization can only succeed with an open and transparent transformation process that involves everyone.

Challenge 5: Leadership culture

Digitalization means networking - which is at odds with the corporate culture in many companies. This is because leadership still all too often means a top-down structure of giving and carrying out orders. Digital networking, on the other hand, requires

  • flat hierarchies: Strict hierarchies weaken the innovation potential of companies. Because when it comes to product innovations, time is money. Especially in the networked digital world, speed counts if you want to gain market share.
  • Openness and transparency of information: Employees can only participate in the strategic development of the company if information is disclosed.
  • Error and criticism culture: An open culture of mistakes and criticism helps employees to openly address failures and grievances so that they and others can learn from them. (The consequences of a cover-up culture are shown by the example of VW in the article What internal corporate communication says about management style and corporate culture - and what consequences this has).
  • Trust: When employees use digital technologies such as social media to act as a mouthpiece for the company, this removes the so-called boss filter: Their statements are public and contribute to the company's image. Managers must therefore trust their employees - and ensure that they are satisfied.

The introduction and implementation of a cultural change process is possibly the most painful and time-consuming part of the digitalization process, which sometimes also requires external support. However, establishing a modern, transparent and open corporate culture will not only contribute to a successful digitalization process, but also to the sustainable success of the company as a whole.

(Source cover image: © Konstantin Herrmann / fotolia.com)

About the author

Wolfgang Schnober

Wolfgang Schnober

Wolfgang Schnober is the founder and partner of TCI Transformation Consulting International GmbH and is responsible for the ICT Transformation practice.

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