7 Findings where German family-owned Hidden Champions are with their Digital Transformation Strategy

Table 1: Case study results related to company specifics

Finding 1: No digital transformation strategy and being digital followers

Freimark et al. (2018) asked the question, whether hidden champions are also champions of digital transformation and did a survey in Germany. The results show that only 28,4% of the hidden champions have a detailed digitalization strategy, 48,1% have a rough digitalization strategy (cf. Figure 1). Only 17%, i.e. 1 out of the 6 cases, have a detailed digitalization strategy (Case 4). Case 2, 5 and maybe 3 have rough digitalization strategies, that is 33-50%.

Figure 1: Digitalization strategies in Germany, translated and adopted from (Freimark, et al. 2018, 9)

Case 4 has a detailed and released digitalization strategy, but I would not consider it a digital transformation strategy (cf. Digital Transformation Definitions) as it is technology driven and only make use of the digital technologies for productions and customer relations.   

In the international comparison (Geissbauer, et al. 2018), 5% in EMEA are digital champions, 20% digital innovators, 45% digital followers and 30% digital novices (cf. Figure 2). Among the cases studied there is no digital champion, 16% digital innovators (Case 1), 67% digital followers (Case 2,3,4 and 5) and 16% digital novices.

Figure 2: Levels of digital maturity by geographic region, adopted from  (Geissbauer, et al. 2018, 15)

Case 1 has not a released digital strategy, but I rate them as digital innovators, because digitalization is for them integral part of their innovation driven corporate strategy. “Digital strategy is for us, how to setup the different organization units. We opened a digital lab. We hired 50 people with skills we had not before, like UX, scrum, agile topics, data scientists etc. […] It must pay into the direction of the consumer or research. Speed up Time-to-Market or make it smarter.” (Case 1)

Geissbauer et al. (2018, 14f.) say that ”among industries, automotive and electronics had the largest share of Digital Champions, at 20% and 14%. Consumer good, industrial manufacturing, and process industry lag significantly behind”.

Case 1 and 4 belong to the process industry, Pharmaceuticals and Chemicals, whereas Manufacturing & Industrial Products and Automotive & Assembly are staying behind.

All companies show a constant revenue growth and Germany is the third largest export nation after China and the USA and the export account for nearly 50% of the GDP) in Germany (Wikipedia, List of Countries by Export 2019). Mensch (1982) found out that during times of economic prosperity, companies are not willing to take high risks. On top of this family-owned businesses are conservative, risk-averse, show a lack of openness and readiness to change (Cassia, Massis and Pizzurno 2012).

Therefor it is not a surprise, that these companies show no active motivation to formulate and implement a digital transformation strategy. They only deal with the topic of digitalization and they see no need for a business transformation due to digitalization, as it is usually characterized by a high level of uncertainty as this affects not only products and processes but transforms key business operations as well as organizational structures and management concepts. (Matt, Hess and Benlian 2015)

Finding 2: Lack of Innovation

Only Case 2 reports a KPI related to innovation. The company “measures the effectiveness of Research and Development activities using the share of new products. These are products younger than four years in percentage of sales. This is 33,6%.” (Case 2)

Surprisingly Case 2 invests more into capital expenditure (6% of revenue) than into R&D (4% of revenue). As there is no definition for a new product, it might not be clear, whether these are product updating measures to extend the lifecycle of existing products or real innovations. But Simon (2012) reports: “It is always impressive to see what the hidden champions produce with relatively small R&D budgets”.

Like Case 2 also has Case 6 a balanced ratio between capital expenditure and R&D investments.

Case 1 is the only company, which invests significantly more into R&D (18% of revenues) than into CAPEX (5% of revenue). This company is a researching pharmaceutical company, where the development of new pharmaceutical products and research in this field is very expensive (DiMasi, Grabowski and Hansen 2016), but also very much depending on innovations.

Case 3 and 4 show a significant unbalanced ratio between investments into property, plants and equipment (CAPEX) and R&D. The difference with Case 3 is 9 percent points (CAPEX 14% of revenue to R&D 5% of revenue) and 6 percent point with Case 4 (CAPEX 9% of revenue, R&D 3% of revenue). This can be interpreted in two ways. First, that developing new products can be done very easily, but demand later high investments into production capacities to manufacture and distribute the innovations into the market. Second, that these companies have the focus on existing products and producing higher volumes. Companies with innovations in a growing stage show increasing sales and profit due to the benefits from economics of scale (Luna 2019). But except Case 1 all cases show growing revenues and declining EBIT margins, which is more an indicator, that they lack real innovations.

Another explanation for the lack of innovations, can be cash-flow problems. Innovations have an uncertain future, whether these investments will bring any return, but companies need to fulfill the capital needs to be able to afford the investments. May (2012) says “the most contribution to the financing is profit”. Family businesses prefer financial independence. Except Cases 6 and 5, where I did not get the information, all companies have an equity ratio above 40%. But the only company who is fulfilling the capital needs is Case 1 with a constant increasing EBIT margin of actual 18% which they invest into innovation. This might be another reason for the lower investments into R&D as they have the need to finance further growth. On top Case 3 and 6 have much higher capital expenditures than EBIT, which most probably mean, that they need to finance their investments with debts.

Finding 3: Possible Disruption

All cases show a constant revenue growth (CAGR) over the last 4 business years, but except Case 1 they report a declining EBIT margin (CAGR) over the same period.

The loss of profitability can be interpreted from the companies in two ways:

First, internal costs are too high, because of e.g. a low degree of automation. Except Case 1, all other companies choose more defensive strategic approaches like seeking cost efficiency or improving selling expenses (Bughin and Zeebroeck 2017). Under this assumption it makes sense that the companies have no digital transformation, but only a digitalization strategy, i.e. IT enabled transformation, which pays into giving back a competitive advantage, cf. Digital Transformation Definitions (Venkatraman 1994) (Porter and Millar 1985), but does not prevent disruption.

Second, as revenues are growing and profitability is shrinking another explanation can be, that the products have reached a stage of maturity and sales growth is only coming by focusing on the product and the production of higher volumes with the need to do this at a lower cost (Luna 2019). Disruption is possible when at the time of a product-focused stage of maturity a new technology is in the growing phase offering a similar customer value to a lower price or even make the products redundant (Christensen 1992).

Table 2: Case study results related to digital transformation strategy

Finding 4: Drivers of the digital transformation strategy

In Why do Companies Digitally Transform I gave a summary of drivers of the digital transformation strategy retrieved from the current state of research. Internal motivations should be efficiency increase or pressure coming from tech savvy employees as well as corporate social responsibility and sustainability. External triggers the exponentially accelerating emerging technologies, tech savvy and pro-activeness demanding customers as well as pressure coming from society and government regulations.

But our cases in general only confirm the statement of Arnold (2018), that the typical European and German digital strategy approach is to be technological driven focused on traditional European skills.

Cases 2 and 4 clearly confirm that, but the dimension “Technology & Security” is the only building block of the digital transformation strategy that had been confirmed by all companies. The declining EBIT margin shows, that the companies want to achieve cost savings due to digitalization to improve the situation.

Cases 1 and 5 report product innovation as a driver of the digital transformation strategy, but they make use of technology to come to new products and services. Case 1 for example said the motivation for them to do the digital transformation is to come to “new products, where the product is not a pill anymore, but a hardware-software device, which we develop in our digital labs” (Case 1).

That is at least according to Burghin and Zeebroeck (2017) a sign for an offensive strategy, where top performing companies could achieve more than 80 percent higher revenues than the industry average and achieve a digital return on investment (ROI) that is 10 times higher than the low performing companies.

Finding 5: Dimension of the digital transformation strategy

Gouillart, Kelly and Gemini Consulting (1999) say that the business models originate from the industrial age and are influenced by mechanical engineering. In the digital age these business models come to a limit. Business transformation means a fundamental change, where a company needs to redefine all dimensions.

Only Case 1 and 3 consider all dimension in their digital transformation strategy, followed by Case 6 which do not consider new ways of working. Table 3 shows the counts of dimensions considered in the digital transformation strategies of the cases in comparison to the order critical to success (cf. Digital Transformation Content).

Table 3: Comparison counts of digital strategy dimensions of the cases

Although it is least important for success, all cases have the focus on technology, for Cases 2 and 4 this is also the main driver for the digital transformation strategy. On the other side, the dimension business model innovation, which is most critical to success, has the least counts among the six cases.

Business model innovation is the main pillar to make strategic decisions towards the future of the company. Kaltenecker, Hess and Huesing (2015) say that this is necessary to overcome the dilemma of possible disruptions by shifting from product selling to service offering (product-as-a-service). An enabler for business model innovation is “Platform Play” as an offensive strategy approach (Bughin and Zeebroeck 2017) and Berman (2012) show in relation to today’s business model the path of transformation.

Asked why they do not consider business model innovation, Case 2 answered “it is quite clear that the business groups, first have to have a certain critical size, b) must have a certain brainpower, both in management and IT, as well as in other functions, because they are on a completely different level than smaller business groups, which also quite frankly say that they have neither the capacity nor the imagination at all.” (Case 2)

When generalizing this statement, it justifies that a digital transformation strategy cannot be separated from the dimensions of culture, leadership, HR & skills and why technology is least critical to success, as the existence of a technology does not help to overcome the lack of imagination to change to new business models.

The main motivation for cases 1 and 5 is product innovation, where the rank in counts matches with the criticality related to success. Case 3 has more an organizational motivation with “Transparency, Speed and Collaboration” which is reflected in the dimensions culture, leadership and ways of working. Case 5 reports first results in production with their strategy, but do not consider production as part of the dimensions. Case 4 do not consider the most critical dimensions and Case 3 has only a focus on technological advancements. 

This overall incomprehensive picture across the cases shows the high level of uncertainty connected with the digital transformation. This is consistent through the different structures of family-owned businesses, whether they are family-controlled or family-managed, sibling partnerships, cousin consortiums or focused businesses (cf. Family Businesses). 

Table 4: Case study results, comparison corporate strategy vs. digital transformation strategy

Finding 6: Missing goals for the digital transformation strategy

The first of six principles of strategic positioning formulated by Porter (2001, 71) is: Start with the right goal: long-term return on investment. Ismael, Khater and Zaki (2017) summarized in their synthesized framework for “Digital Transformation Strategy Content” as the first out of seven key areas: long-term objectives, business scope and revenue streams from digitally enhanced products. Kane, Palmer et al. (2015) conclude that rather focusing on technological opportunities, companies should focus to use technologies to achieve strategic goals.

In all cases, the strategic direction of the companies is given by a vision and goals. While you can argue, whether the visions motivate the employees to change, the goals help to prioritize activities and can be measured. Only with targets the financing and investments needed to fulfill these goals can be determined and prioritized to keep the cash-flow under control.

Case 1, 3, 5 and 6 have given the information that they have no specified goals for a digital transformation and no target to explicit change the value proposition and break this down in which regards these influences and changes the value chain. So far, the elements do not fit together. Case 2 have at least a revenue target for revenues done over the e-commerce channel, but this does not change the value proposition and pays into a defense strategy (cf. Digital Transformation Process, Table 5). Case 4 has (defensive) goals which pay into a positive effect of the corporate targets and can be determined for the financing and investments of the digital transformation. “We have also described certain expectations related to savings. The responsible for this goal and its achievement is not the digital program, but the core business, which had confirmed them. So, we’re talking about larger double-digit million amounts that are the committed [for the digital transformation, note from the author]” (Case 4)

Finding 7: Lack of a systematic approach for the formulation and implementation of a digital transformation strategy

All cases seem to have a corporate strategy following a mature proven approach for strategy formulation inside the companies. Table 4 shows the comparison of the corporate strategy with the digital strategy of each case.

In all cases the corporate strategy process includes a clearly defined responsibility, a communication of the strategy inside of the organization, a strategy cycle, a release date and a regular revision of the results measured by KPIs, which are mainly financial figures. All cases have a strategic vision. 

Although a systematic approach is crucial for success (Matt, Hess and Benlian 2015), none of the cases follows neither the procedure of the corporate strategy nor any existing frameworks like described in the Digital Transformation Process. Only in Case 1 and 4 the digital transformation is coupled with the corporate strategy and alongside the functional strategies. Case 3, 5 and 6 reports that they have a self-developed framework to formulate and implement their digital transformation strategy. Case 2 and 4 report, that they are not using any methodology to formulate and implement a digital transformation strategy, but surprisingly say that the digital strategy have been officially released. Case 5 has already 2016 released their strategy, while Case 3 is about to release it.

The drivers of digital transformation are the exponentially growing emerging technologies and the technological change will accelerate with such speed that “society will spend less and less time at any particular technological level” (Lee 2013). The more it is surprising that except Case 4, none of the cases consider a strategy cycle to renew the digital strategy or even only 2 out of 6 cases consider a regular revision of the strategy (Case 4 and 6). Case 5 said “we have a digital strategy; do we need another one?”.

A digital transformation strategy makes it mandatory to align, coordinate and prioritize the many independent dimensions across all other strategies. It these tasks are executed half-heartedly; the formulation and implementation might lose the scope with possible serious effects on operations (Matt, Hess and Benlian 2015). While the responsibility for the corporate strategy is with the CEO or the executive board, only Case 4 and 5 have dedicated roles in their company, where CDOs are officially empowered to formulate and implement a digital transformation strategy. Case 4 is at the same time also the CIO of the company, which gives the topic a more technological driven aspect, where the other dimensions might step into the background. Analog case 1, where the CFO is the former CIO and takes over an equivalent function as a CDO. Regarding to the information retrieved all the above functions serve as a coordinating function. Case 3 is with their digital transformation strategy in an early stage and has a work group dealing with the topic, which can be successful, when it follows a cross-organizational setup and will serve later as a coordinating board. Case 2 and 3 have not clarified the clear responsibility inside the organization and has not assigned the task to a specific role. Managers inside these companies appoint themselves as being entrepreneurial or play the role of a digital evangelist to create awareness related to the digital transformation. “The former head of marketing […] did it in a marketing manner, tore down a firework […] and wanted to draw everyone into digital enthusiasm. And of course, he wanted to appoint himself to drive it forward.” (Case 2).

The formulation of a digital transformation strategy can be aligned into three phases (Feichtinger 2018), the “why”, the “what” and the “how”. The implementation follows the basic principles of change management described by Lewin (1947, 34): “Unfreezing, Moving, and Freezing of Group Standards”.

The “why” should be described by the drivers of the digital transformation strategy, the “what” with the dimensions. Regarding the “how” and the change management measures, Cases 3 and 6 report that they are at an early stage, Case 2 have just completed the formulation, Cases 1 and 4 say they are in the implementation and have achieved first results, Case 5 have achieved first results in production.

Implementation and change management demand a lot of communication to inform everyone and to move them into the new direction. While the corporate strategy will be communicated throughout the organization, mainly by the CEO and the board and with a top-down approach, it seems that the digital transformation strategy will not be communicated at all in half of the cases. The others are in preparation or follow the top-down approach. Only Case 4 has a planned communication: “There is a corresponding intranet and we are regular guests in corresponding townhall meetings. We are now in our second year on a digital roadshow. This means that they have visited all the major locations and presented the program and content accordingly, and in a certain way try to take each employee with them in their specific challenge” (Case 4).

Work Cited

Arnold, Heinrich. The European Path to Digital Transformation. 10 21, 2018. https://www.theglobalist.com/europe-germany-digitalization-technology-data/ (accessed 08 11, 2019).

Berman, Saul J. “Digital Transformation: opportunities to create new business models .” Strategy & Leadership, 40 (2), 2012: 16-24.

Bughin, Jacques, and Nicholas Van Zeebroeck. 6 Digital Strategies, and Why Some Work Better than Others. 07 31, 2017. https://hbr.org/2017/07/6-digital-strategies-and-why-some-work-better-than-others (accessed 08 19, 2019).

Cassia, Lucio, Alfredo de Massis, and Emanuele Pizzurno. “Strategic innovation and new product development in family firms.” International Journal of Entrepreneural Behaviour & Research, Vol. 18 (2), 03 2012: 198-232.

Christensen, Clayton M. “Exploring the limits of the Technology S-Curve. Part I and II.” Production and Operations Management, Vol 1 (4), Fall 1992: 334-366.

DiMasi, Joseph A., Henry G. Grabowski, and Ronald W. Hansen. “Innovation in the pharmaceutical industry: New estimates of R&D costs.” Journal of Health Economics, Vol 47, 2016: 20-33.

Feichtinger, Gudula. “Digitalization in SME : a framework to get from strategy to action.” 2018. http://repositum.tuwien.ac.at/urn:nbn:at:at-ubtuw:1-115120 (accessed 08 09, 2018).

Freimark, Alexander Jake, Johannes Habel, Simon Huelsboemer, Bianca Schmitz, and Matthias Teichmann. Hidden Champions- Champions der digitalen Transformation? München: IDG, 2018.

Geissbauer, Reinhard, Evelyn Lübben, Stefan Schrauf, and Steve Pillsbury. Global Digital Operations Study 2018. Digital Champions. How industry leaders build integrated operations ecosystems to deliver end-to-end customer solutions. Study, PWC, 2018.

Gouillart, Francis J., James N. Kelly, and Consulting Gemini. Transforming the organization <dt.>. Wien: Ueberreuter, 1999.

Ismael, Mariam H., Mohamed Khater, and Mohamed Zaki. “Digital Business Transformation: What Do We Know So Far?” University of Cambridge. 11 2017. https://cambridgeservicealliance.eng.cam.ac.uk/resources/Downloads/Monthly%20Papers/2017NovPaper_Mariam.pdf (accessed 07 26, 2019).

Kaltenecker, Natalie, Thomas Hess, and Stefan Huesig. “Managing potentially disruptive innovations in software companies: Transforming from On-premise to the On-demand.” The Journal of Strategic Information Systems, Vol. 24 (4), 12 2015: 234-250.

Kane, Gerald C., Doug Palmer, Anh Nguyen Philipps, David Kiron, and Natasha Buckley. Strategy, not Technology, Drives Digital Transformation. Research Report, MIT Sloan Management Review and Deloitte University Press, 2015.

Lee, Mike. Meeting aliens will be nothing like Star Trek – fact. 05 08, 2013. https://phys.org/news/2013-05-aliens-star-trekfact.html (accessed 07 31, 2019).

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Luna, David C. Why Companies Need to Eat Their Children: A Comprehensive Guide to Disruption. Article, Berlin: Gamma Digital & Beyond, 2019.

Matt, Christian, Thomas Hess, and Alexander Benlian. “Digital Transformation Strategies.” Business & Information Systems Engineering, 05 14, 2015: 339-343.

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Mensch, Gerhard. Das technologische Patt: Innovation überwinden die Depression. Frankfurt am Mein: Umschau , 1982.

Porter, Michael E. “Strategy and the Internet.” Harvard Business Review, March 2001: 62-78.

Porter, Michael E., and Victor E. Millar. “How Information Gives You Competitive Advantage.” Harvard Business Review, July-August 1985: 85-103.

Simon, Hermann. Hidden Champions – Aufbruch nach Globalia. Die Erfolgsstrategien unbekannter Weltmarktführer. Frankfurt am Main: Campus Verlag, 2012.

Venkatraman, N. “IT enabled business transformation: From Automation to Business Scope Redefinition.” Sloan Management Review, Winter 1994: 73-87.

Wikipedia, List of Countries by Export. 07 15, 2019. https://en.wikipedia.org/wiki/List_of_countries_by_exports (accessed 07 15, 2019).

Digital Transformation, Change Management and Family Businesses

One of the inherent system risks for family-owned businesses is the lifecycle (May 2012). Schumpeter (1939) explained why doing business in capitalistic markets is a cycle of economic growth and recession. Especially for companies with the aspiration to sustain over many generations this is a huge challenge. May (2012) suggests family businesses to outwit the lifecycle by following a few simple rules: (1) operate in long-lasting markets, i.e. chose a product portfolio which is independent from short-term trends, (2) introduce a lifecycle radar, a combination of strategic tools and KPIs, (3) continuous adjustments to such an extent to constantly eliminate products which are at the end of the lifecycle and to invest into innovation, (4) make bold decisions, e.g. radical changes like cannibalizing the current revenue and jumping onto new technologies to overcome the innovators dilemma (Christensen 1997).

Bartels, von Hochberg and May (2017) interviewed 50 owners of large family businesses among others related to disruptive trends. They identified that companies that had already survived several generations and had been faced with the downfall of their original business areas have developed strategies to diversify their business and change the business models. Some do not operate in their original business area any more, but others had been able to adopt their business model from selling their product to offer their product-as-a-service (cf. Digital Transformation Process). The common challenge today is the increasing dynamic and speed of change. These changes are not only of technical nature, but especially a question of changing the culture. A possible success factor might be the opportunity of succession as the following generations are already digital natives (cf. Digital Transformation Context).

These considerations demand transformation capabilities in family-owned businesses. Cassia, Massis and Pizzurno (2012) researched “strategic innovation and new product development in family firms” due to the fact that little is known about leading and managing complex transformations in family businesses and with the aim to offer a better understanding of the influence of “familiness” (cf. Family Businesses) in particular the strength and weaknesses. They found out that the advantages are long-term orientation, human resources and dedication to “progression”, tendency to be close to their customers and being focused. Their disadvantages are being conservative and risk averse, a lack of openness, readiness to change, conflicts within the family and the economic rationality of decision-making processes.

Gouillart, Kelly and Gemini Consulting (1999) say that the business models originate from the industrial age and are influenced by mechanical engineering. In the digital age these business models come to a limit. Business transformation means a fundamental change, where a company needs to redefine all dimensions (cf. Digital Transformation Content). Gouillart et al. (1999) researched how companies in industries like chemistry, electronics, pharmacy, automotive etc. managed the change and synthesized these approaches into the “four R of transformation” that need to be achieved:

  • Reframing, i.e. change of attitude by achieving mobilization of the employees, creating a vision and setting the goals and KPIs;
  • Restructuring by constructing a value adding business model, aligning the necessary infrastructure and redesigning the business processes;
  • Revitalizing by becoming customer centric, inventing new business and changing the rules with the help of emerging technologies;
  • Renewing by creating a reward structure, encouraging individual learning and renewal of the organization.

This business transformation approach follows the basic principle of change management described by Lewin (1947, 34): “Unfreezing, Moving, and Freezing of Group Standards”.

The most prominent model underlying the research of Lewin are Kotter´s “8 step process for leading change” (Kotter 1995), summarized here only on headline level: (1) establish a sense of urgency, (2) form a powerful guiding coalition, (3) create a vision, (4) communicate the vision, (5) empower others to act on the vision, (6) plan for and create short-term wins, (7) consolidate improvements and produce more change, (8) institutionalize new approaches.

Kotter never claimed to have developed this model, he captured it by observing more than 100 companies going through transformational change (Farell 2017). One prominent example is the digital transformation of IBM after the company lost more than US$ 16bn and needed to change their business model from selling and running mainframe computers to an e-business company (Farrell 2017).

Although evidently successful for many large enterprises, Oxley (2017) claims that “Kotter’s change framework doesn’t work for large family businesses”. He argues that on the one hand, steps 1 to 5 of Kotter’s model are based on the assumption that no individual leader can enforce change and followers must be convinced to change. On the other hand, the underlying message of steps 5 to 8 is that those who do not comply with the change must leave the organization. Oxley (Oxley 2017) says that this is contradictory to the “familiness” and therefor special characteristics of a family business: (A) dominant ownership, often combined with the existence of a figure who is followed unquestioned by the organization and (B) individual loyalty, i.e. a very strong commitment to the employees and the sense of obligation to take care of them (cf. Family Businesses).

Figure 1: Success Factors of Digital Transformation, adopted and translated from (Müller-Seitz and Weiss 2019, 51)

An alternative approach for family business and hidden champions will be provided by Müller-Seitz and Weiss (2019) who describe five success factors for cultural and structural change to manage digital transformation, cf. Figure 1:

  • Self-organization:
    Change to agile ways of working as the central guiding principle to give space for innovative thinking due to interdisciplinary teams and flexible work environments. Self-organization demands a respectful understanding of people, in which employees are fully trusted.
  • Dealing with uncertainty:
    “Across many industries, a rising tide of volatility, uncertainty, and business complexity is roiling markets and changing the nature of competition” (Doheny, Nagali and Weig 2012). VUCA as an acronym referring to volatility, uncertainty, complexity, and ambiguity has recently found its way into business lexicons (Bennet and Lemoine 2014). To deal in a VUCA world demands curiosity and the attitude of “fail early and fail often”.
  • Work, organization and communication:
    A customer and innovation centric company culture as the basis for success and strengthen the strength of the people as a guiding principle for HR.
  • Add value with cooperation partners:
    Valuable partnerships create the basis for common success as well as building of intercompany networks and linking of work.
  • Organizational learning and knowledge management:
    Implicit knowledge is difficult to handle, but worthwhile to transfer within the organization. Knowledge platforms inside the intranet are possible solutions.

Work Cited

Bartels, Peter, Peter von Hochberg, and Peter May. Strategien erfolgreicher Familienunternehmen 2017. Report, PWC, 2017.

Bennet, Nathan, and G. James Lemoine. “What VUCA really means for you.” Harvard Business Review, Vol 92. (1/2), 01 15, 2014: 27-29.

Cassia, Lucio, Alfredo de Massis, and Emanuele Pizzurno. “Strategic innovation and new product development in family firms.” International Journal of Entrepreneural Behaviour & Research, Vol. 18 (2), 03 2012: 198-232.

Christensen, Clayton M. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Boston: Harvard Business School Press, 1997.

Doheny, M., V. Nagali, and F. Weig. “Agile operations for volatile times.” McKinsey Quarterly. 05 2012. https://www.mckinsey.com/business-functions/operations/our-insights/agile-operations-for-volatile-times (accessed 09 20, 2019).

Farell, Adrian. John Kotter – Leading Change Guru. 04 28, 2017. http://candowisdom.com/change/change-management/john-kotter-leading-change-guru (accessed 09 01, 2019).

Farrell, Adrian. Lou Gerstner – IBM’s Digital Transformation Change Master. 05 21, 2017. https://candowisdom.com/change/change-management/lou-gerstner-ibm-digital-transformation (accessed 09 01, 2019).

Gouillart, Francis J., James N. Kelly, and Consulting Gemini. Transforming the organization <dt.>. Wien: Ueberreuter, 1999.

Kotter, John P. “Leading Change: Why Transformation Efforts Fail.” Harvard Business Review, May-June 1995: 59-67.

Lewin, Kurt. “Frontiers in Group Dynamics: .” Human Relations, Vol 1 (1), 1947: 5-41.

May, Peter. Erfolgsmodell Familienunternehmen. Das Strategie Buch. Hamburg: Murrmann, 2012.

Müller-Seitz, Gordon, and Werner Weiss. Strategien zum Umgang mit der digitalen Transformation … aus der Sicht eines mittelständigen “Hidden Champions”. München: Vahlen, 2019.

Oxley, David R. Why Kotter’s Change Framework Doesn’t Work for Large Family Businesses. 07 11, 2017. http://www.davidroxley.com/kotters-change-framework-doesnt-work-large-family-businesses/ (accessed 09 01, 2019).

Schumpeter, Joseph A. Business Cycles – A Theoretical, Historical and Statistical Analysis of the Capitalist Process . New York, Toronto, London: McGraw-Hill Book Company, 1939.

How do companies formulate and implement digital transformation strategies?

“Born-digital companies”, i.e. companies that are founded on digital platforms and exploiting digital technologies as core components of their business models, have no need for a digital transformation. Unlike “pre-digital” organizations, which are established companies belonging to traditional industries that have been financially successful without digital technologies and capabilities (Tumbas, Berente and Brocke 2017) (Ross, et al. 2016) (Chanais, Myers and Hess 2019). In recent years, these companies have started digital initiatives to explore and exploit the benefits of emerging technologies. The first steps entering digital business models are usually characterized by a high level of uncertainty as this affects products and processes and transforms key business operations as well as organizational structures and management concepts. The digital transformation is very complex and has company-wide impact. The formulation and implementation of a digital transformation strategy has therefor become a key concern for many pre-digital companies and a systematic approach is crucial for success. (Matt, Hess and Benlian 2015) (Hess, et al. 2016).

Getting to a digital transformation strategy has two perspectives. First, the process: how to develop, implement and evaluate the digital transformation strategy considering the new aspects digitalization brings to the organization. Because digital transformation is a continuous effort of high complexity that can reshape a company and its operation, it is important to clearly define and assign roles and responsibilities for the formulation and implementation of a digital transformation strategy. Second, the process of defining a strategy along the dimensions and building blocks of a digital transformation strategy, but this also includes decisions on the necessary resources to be able to execute the strategy and achieve the company goals. (Matt, Hess and Benlian 2015)

Chanais, Mayers and Hess (2019) describe in a case study research 7 main phases of digital transformation formulation and implementation:

  • Phase 0: Recognizing the need for digital transformation
  • Phase 1: Setting the state
  • Phase 2: Initially formulating the digital transformation strategy
  • Phase 3: Preparing for the digital transformation strategy implementation
  • Phase 4: Starting the digital transformation strategy implementation
  • Phase 5: Finding a working mode
  • Phase 6: Enhancing the digital transformation strategy

Barann et al. (2019) did a structured literature review of articles from the databases EBSCOHost, ScienceDirect, AISNet and Scopus resulting from the search of keywords in the area of business model innovation, digital transformation, digital innovation, data-driven innovation for SME. They identified requirements for a procedural approach and synthesized these findings into a procedure model for digital transformation in SME, cf. Figure 1.

The following requirements have been the basis for the procedure model: (R1) Integration of external supporter like innovation labs, research institutes and consultancies, (R2) provision of practical orientation based on best-practices, real-life examples and incorporating domain-specific knowledge, (R3) creation of a supportive environment like the awareness of the need for digital transformation which needs to be ensured before any implementation starts, (R4) consideration of tangible goals, i.e. clearly defined and measurable goals, (R5) provision of an individual roadmap, (R6) enabling a stepwise implementation, (R7) identification of opportunities, (R8) assisting reflection & measurement, (R9) balancing strategy and operation, (R10) supporting all levels of digital and data-driven innovation, (R11) consideration of open innovation, i.e. ideas and resources should be shared between internal and external entities, e.g. start-ups. (Barann, et al. 2019)

Figure 1: A Procedure Model for Digital Transformation in SME, adopted from (Barann, et al. 2019, 4981)

The synthesized procedure model from Barann et al. (2019) consists of two phases. Phase I is about the formulation of the digital transformation strategy, while phase II is about the implementation.

Phase I, Orientation, has two steps:

  • Position company: (a) establish a planning team, (b) understand the business model, (c) analyze the as-is-situation, (d) reviewing digitalization topics, and (e) analyze digital maturity.
  • Create digitalization roadmap: (a) generation of ideas, (b) alignment of the ideas with the strategic goals, (c) evaluation of the ideas, and (d) development of a digitalization roadmap.

Phase II, iterative transformation, has three steps:

  • Create supportive environment: (a) create awareness, (b) involve employees, and (c) create digitalization culture.
  • Prepare digitalization project: (a) select digitalization goal, (b) identify opportunity, (c) select opportunity, (d) perform resource and project planning, and (e) build expertise.
  • Implement solution: (a) design solution, (b) refine solution, (c) realize solution, and (d) monitor solution.

Terstegen et al. (2019) researched between July and October 2018 various articles about procedural approaches for the formulation and implementation of a digital transformation strategy with the focus on Industry 4.0 and the manufacturing industry, automotive, electrical engineering, medical devices. They synthesized the identified procedural models into five phases:

  • Information Phase, transparency and creation of a common understanding
  • Strategy Phase, as-is-analysis, digital vision and strategic direction
  • Tactical Phase, determination of targets and deduction of projects
  • Operative Phase, implementation of projects
  • Controlling, measurement of target achievement

The focus of these procedure models are in three phases of “why” (strategy phase), “what” (tactical phase) and “how” (operative phase), cf. Figure 2.

A detailed overview of the identified procedure models can be found online www.arbeitswissenschaft.net/vorgehensmodelle-digitalisierung (2019).

Figure 2: Overview and categorization of identified procedure models, adopted from (Terstegen, Hennegriff, et al. 2019, 4)

Feichtinger (2018) also compared various models and identified that they can be aligned into these three major phases:

  • Phase 1 (Analysis) asks the question “why” and contains the current status and the analysis phase. The starting points could be a digital maturity assessment (DMA), an evaluation of customer requirements, emerging technologies and industry/market trends.
  • Phase 2 (Definition) starts with the question “what”. Here the vision and goals will be defined, the design of the digitalization determined, and the necessary changes deducted.
  • Phase 3 (Planning) answers the question “how”. Feichtinger (2018) found out that the third phase is not consistent in the literature. It is not clear whether it is still the planning of the digital transformation or already the implementation as for example this phase had been summarized under operative tasks by Terstegen et al. (2019).
Table 1: Comparison of strategic process phases, adopted from (Feichtinger 2018, 43)

Digital Transformation Strategy has different perspectives and each perspective tries to reach different goals. Matt, Hess and Benlian (2015) speak of four perspectives: use of technologies, changes in value creation, structural changes, and financial aspects. Von Leipzig, et. al. (2017) add to the perspective that the ability to digitally change the value creation is not all about the technology and structural changes, but rather about a radical strategic and cultural change in the organization. The purpose of a digital transformation strategy is to exploit the benefits of emerging technologies to improve productivity, decrease costs and come to innovative products, services and business models. But there is still no coherent alignment in the research where a digital transformation strategy should be allocated (Hess, et al. 2016) (Matt, Hess and Benlian 2015). In analogy to the manufacturing strategy Mills, Platts and Gregory (1995) have given a classification of “strategy” in the business context:

  • Corporate Strategy: What set of businesses should we be in?
    • Business Strategy: How should we compete in XYZ business?
    • Functional Strategy: How can this function contribute to the competitive advantage of the business?

Some argue that a company’s IT strategy can evolve from a functional strategy to a corporate strategy. But IT strategy is about the efficient management of IT infrastructure and applications, where digital transformation strategy incorporates all areas of the organization (Hess, et al. 2016). Sebastian et al. (2017) brings the business strategy and the functional strategy in relation:

  • Digital Transformation Strategy: How can we integrate existing business capabilities with new capabilities made possible by emerging technologies?

The characteristic of integrating corporate, business and functional strategies makes it mandatory to align, coordinate and prioritize the many independent dimensions of digital transformation across all other strategies. If these tasks are executed half-heartedly, the formulation and implementation of the digital transformation might lose the scope with possible serious effects on operations. Therefor it is necessary that the person responsible for the digital transformation strategy has enough experience in business transformation and is aligned with the strategy´s targets (Matt, Hess and Benlian 2015).

Singh and Hess (2017) compare the new role of a Chief Digital Officer (CDO), as one option being responsible for the digital transformation, with other existing roles for different levels of strategy within the company, cf. Table 2.

Table 2: Comparison of CDO and other CxO Positions, adopted from (Singh and Hess 2017, 34)

Being responsible for the digital transformation strategy Singh and Hess (2017) identified five skills and competencies necessary: (1) IT Competency, (2) Change Management Skills, (3) Inspiration Skills, (4) Digital Pioneer Skills, and (5) Resilience, which is in “traditional” companies even more important as digital transformation requires profound organizational-wide changes.

Singh and Hess (2017) also identified in their research three different types of roles, Chief Digital Officers play:

  • The Entrepreneural Role, with a strong customer focus, exploring IT-enabled innovation and pointing towards a fast-paced technological environment sometimes even with the adoption of whole business models.
  • The Digital Evangelist Role, with the focus on inspiring and training people in the organization to prepare them to deal with the challenges and corporate changes in the process of digital transformation.
  • The Coordinator Role, with the focus to initiate and design the controlled organizational shift from decoupled silo functions to cross-functional cooperation, which affects many stakeholders of the company on functional (IT, HR), business (marketing & sales, production) and corporate level (executive/advisory board).

It is important to understand that being responsible for the digital transformation strategy does not mean to replace all other strategies and the ones being responsible for them. The company should experiment with emerging technologies and explore the related opportunities across all functional and organizational borders. Therefor being responsible more means acting like a coordinator to ensure collaboration between the different strategic disciplines and that the targets of the digital transformation strategy can be reached with a strong focus on business transformation. (Singh and Hess 2017) (Matt, Hess and Benlian 2015) (Hess, et al. 2016) (Sebastian, et al. 2017)

Also, Westermann et al. (2011) come to the conclusion after studying 157 executive-level interviews in 50 companies in 15 countries that the lead for the change need to come from the top, but top level visions seldom leads to bottom-level actions when not supported by top-down communication and governance backed-up by incentives and measurable targets and coordination. They see four different coordination models for digital transformation, cf. Figure 3:

  • Silo: No coordination effort as each business unit runs their own digital strategy
  • Digital hub: Digital strategy defined by a central digital unit. Each business unit can have their own strategy but must coordinate with the central digital unit to use their solutions and resources.
  • Central coordination: Digital strategy defined, funded and coordinated at enterprise level, digital operations developed and managed on business unit level
  • Global: Digital strategy allocated to a central digital unit which coordinates strategy and budget. Digital operations are developed and managed on business unit level, but must use solutions and resources coming from the central digital unit  
Figure 3: Coordination models for digital transformation, adopted from (Westermann, et al. 2011, 54)

Knowing the procedural aspects and the key participants in the digital transformation strategy, there are several starting points for the transformation journey.

Berman (2012) proposed three different strategic approaches to transformation:

  • The “what”: Reshaping the customer value proposition
  • The “how”: Reshaping the business model
  • Combining both approaches by transforming operating model and customer value proposition at the same time

No organization, even “pre-digital” companies, will start their digital transformation from “zero”. Usually providing information digitally or digital sales channels like e-commerce are existing. Berman (2012) says that “from this starting point, a company’s strategic approach to transformation typically follows one of the three paths”, cf Figure 28.

The paths depend on strategic objectives, industry type, competitive pressure and customer expectations. Companies, who has the business model “Business-to-Business” (B2B), usually start with reshaping operations and then address the customer value proposition to achieve full transformation (Path 1). Companies with the business model “Business-to-Consumer” (B2C), where the focus on the customer value proposition provide immediate benefit, will first focus here and then integrate digital operations (Path 2). Companies seeking industry leadership or companies adding the customer value perspective to their operations (going from B2B to B2B2C) will try to do both at the same time (Path 3). (Berman 2012)

Figure 4: Paths to digital transformation, adopted from (Berman 2012, 18)

Sebastian et al. (2017) identified in their empirical studies two different types of digital transformation strategies: a customer engagement strategy and a digitized solutions strategy.

“A customer engagement strategy typically aims to create a seamless, omnichannel experience that makes it easy for customers to order, inquire, pay and receive support in a consistent way from any channel at any time” (Sebastian, et al. 2017, 199). It focuses on personalized, innovative and integrative customer experiences. This kind of a strategy is based on collecting customer data and the use of data analytics to better understand and anticipate customer demands.

“A digitized solutions strategy aims to reformulate a company’s value proposition by integrating a combination of products, services and data” (Sebastian, et al. 2017, 199). It is driven by R&D to create digital products and services by combining existing capabilities with digital capabilities. This may result in the shift from selling a product to offering services with the effect of recurring revenues like Porter describes it in “how smart connected products are transforming competition”. (Porter and Heppelmann 2014)

Kaltenecker, Hess and Huesig (2015) researched the effect of shifting from product-selling to service offerings on the example of the software industry changing from selling licences for on-premise usage to offering their software on-demand out of the cloud. Their assumptions are based on the “Innovator’s Dilemma” (Christensen 1997), as well-established companies are facing this dilemma when they hold on to their technologies, even though emerging technologies with a potential of disruption are already available in the market. Kaltenecker, Hess and Huesing (2015) summarized different management strategies adopted by the software industry to prevent potential disruption using the example of shifting towards offering software-as-a-service out of the cloud, cf Table 3.

Table 3: Nine management strategies, adopted from (Kaltenecker, Hess and Huesig 2015, 247)

The media industry faced already the digital disruption as the digital change is undeniable when the customers shift from buying a newspaper to opening a news app, from renting a DVD to online streaming, from buying a cookbook to getting customized recipes onto the smartphone (World Economic Forum 2019). Hess et al. (2016) researched media companies and their digital transformation strategies. As a result, they suggested guidelines for formulating a digital transformation strategy based on four aspects where key strategic decisions have to be made, cf Table 4 : (1) use of technology, (2) changes in value creation, (3) structural changes, and (4) financial aspects.

Table 4: Key Decisions for a Digital Transformation Strategy, adopted from (Hess, et al. 2016, 138)

While the use of technology, structural changes and financial aspects are not necessarily industry specific, the value creation is different in each industry. To get also to an industry specific formulation of the value creation, Porter proposed to define the strategy along the value chain (Porter and Millar 1985) (Porter 2001).

Bughin and Zeebroeck (2017) identified besides disruption a second challenge in the transformation of the value creation: Based on their survey of 2000 incumbent companies across all major industries and countries, they see that for the majority digital initiatives show only little effect. On the other side top-performing companies could achieve up to 80 percent higher revenues than the industry average and achieve a digital return on investment (ROI) that is 10 times higher than the above mentioned low-performing companies in their survey. The outperformer usually had offensive strategies, i.e. commitment to radical changes, e.g. willingness to cannibalize their current revenues and to invest into digital technology. Bughin and Zeebroeck (2017) classified the digital strategies found into six types, where the first three are primarily offensive and the second three defensive, i.e. meant only to improve the existing operating models, cf. Table 5.

Table 5: The six types of digital strategy, adopted from (Bughin and Zeebroeck 2017)

As a summary, the formulation and implementation of a digital transformation strategy demand huge efforts as all strategic areas of the company are related and it takes a revolutionary approach for fundamentally changes. The leading must come from top, but the difficulty is to bring the visions and goals to the bottom. Therefore being responsible for the digital transformation is the role of a coordinator across the organization with experiences in business transformation. The formulation of the strategy has four aspects: use of technology, structural changes, financial aspects and especially changes in the value creation. There are differences in the transformation journey, type and management of the digital transformation strategy depending on industry type, business model and boldness of the company, i.e. whether to choose an offensive or defensive strategy. To answer the question how to formulate and implement the digital transformation strategy, there are at least three core phases: Analysis, Definition and Planning.

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