breaking down industry boundaries.
Previously, these worlds were strictly separated. When addressing end consumers, the pitch focused on emotion, enjoyment, and, above all, simplicity: the choice had to be made simple for consumers. Business customers, on the other hand, wanted to know the details; they demanded facts and rationality.
This distinction, however, is now obsolete due to digitization. Once business clients experienced how easy orders were with Amazon or Google as private consumers, how simple it was to search for products, and how quickly items could be delivered, they naturally transferred these expectations to the B2B segment. Why should an order for machine spare parts be more complicated than ordering a book from Amazon? Why does the delivery take weeks instead of one day? Why is the manual written in technical jargon and not simple to understand? Why is the supplier’s website so difficult to search? And why doesn’t the supplier respond immediately to a complaint?
And it’s not just customer relationships in the B2B segment that are increasingly mirroring those in the consumer sector. Thanks to digitization, many B2B providers are expanding their business model and also addressing end customers: B2B2C. Take Craftzilla as an example: the Indian e-commerce platform connects small-scale home decor manufacturers and artisans, who previously sold their products through specialty retailers, directly to the end customers. Craftzilla doesn’t hold any inventory – the company connects sellers with customers and takes a commission from sales made on its website.
Fitness band manufacturer Fitbit applies the B2B2C concept by establishing company fitness programs with companies like BP and Adobe to promote employee health: the contract partner is the company – B2B – and the employees are the consumers – B2B2C. Panasonic and Allianz also collaborate in the same manner to make houses and apartments more secure. Panasonic installs its monitoring and control systems at the customer’s home, while Allianz Global Assistance, a subsidiary service provider of Allianz, is alerted in the event of a serious incident so that emergency services are dispatched.
Digitization is revolutionizing customer contact, and not just in the end consumer segment. New rules also apply in B2B, often based on the B2C model. German heating system manufacturers, for example, previously marketed their products primarily via the installers. Companies such as Buderus, Viessmann, Vaillant, Wolf, and Junkers all cultivated their heating installers, who in turn brought in customers.
A Berlin-based start-up, Thermondo, however, disrupted this model by creating a platform to connect the various decentralized service and installation teams that supply customers with heating systems across Germany. The portal was founded in 2012. As early as 2015, the company was achieving an annual growth rate of 864 percent. A customer searching the portal can choose from numerous brands, and is given a tailored fixed price that includes installation. Thermondo even gives advice on applying for funding.
Manufacturers and tradespeople now have a problem: their old business model is under threat. The problem sounds familiar – think back to the Compaq example. And just like in the Compaq case, the problem doesn’t simply go away. An approach now needs to be developed governing how, for example, heating system manufacturers, installers, Thermondo, and the other market players work together in the new ecosystem. What is needed is omnichannel management.
“Data is the new oil” is a popular saying. Data forms the raw material for any digitization initiative. According to a McKinsey study, in 2015 international flows of data contributed more to global economic growth than classic trading of goods. Companies receive or procure huge amounts of data that can be translated into large sums of money with smart analytics.
Thus, online retailers like Amazon or Overstock use dynamic pricing systems that allow them to make second-specific price adjustments for the several million items in their ranges. To this end, they constantly retrieve information about competitors’ prices, and process this along with data about current sales promotions. Using time series and big data analyses, they then calculate new inverse demand curves for all their items in hourly cycles.
Although digitization opens up countless opportunities, large companies with a traditional structure and strong division of labor from production through to sales find it difficult to grasp them. The fact that they don’t have enough digital talent on board and therefore have to compete in the labor market for the scarce resources of new IT and software experts is just part of the problem. Even if these companies already had such talent, they could not achieve much as an isolated department. There needs to be a basic understanding throughout management of the possibilities and limitations of digitization.
This includes the observation that nothing is to be gained with classic departmental thinking, and that cross-functional teams need to take control of projects. Whoever wants to win the battle for digital talent needs to start here. This is particularly difficult for traditional companies: after all, specialization and a strong division of labor were for a long time considered factors of success.
1.3 THE PACE OF CHANGE IS INCREASING EXPONENTIALLY
A further obstacle on the path toward becoming a digital company lies in a deeply human weakness: we are accustomed to thinking linearly, and highly disruptive change makes us uneasy. According to the futurist and Google director of engineering, Ray Kurzweil, this is why we tend to smooth exponential functions back toward a linear curve by mapping them on a logarithmic scale. However, this is fatal when it comes to mental processing of the changes involved in digitization, because they develop according to an exponential function and at an increasingly rapid pace.
In his essay The Law of Accelerating Returns Kurzweil impressively describes the exponential dynamics of technological progress throughout human history when correctly mapped on a linear scale, and not on a distorting logarithmic scale. He surmises that people intuitively gravitate to this distorting perspective, and thus – against their better judgment – significantly underestimate the speed and extent of future developments. He predicts rapid progress for the twenty-first century because we are currently in the advanced section of the exponential curve.
In an interview, he explained the fundamental dynamics of exponential growth: “If I take 30 steps in a linear manner – 1, 2, 3, 4, 5 – I get to 30. If I take 30 steps in an exponential manner, I go 2, 4, 8, 16, and get to a billion.” It’s fascinating logic and one that can’t be refuted – and yet it’s so hard to believe, the mind blocks it out. “Today, everyone expects continuous, linear development in technical advances, but the future will surprise us far more dramatically than most observers believe,” Kurzweil says. “Very few understand what it will mean for the pace of change to accelerate even faster.”
Two examples corroborate Kurzweil’s theory of the logarithmic development of progress. The best-known is Moore’s law. Gordon Moore, cofounder of Intel, formulated his theory in 1965 in the journal Electronics. He noted that the number of circuit components in an integrated circuit doubles each year, and predicted that this will continue. To this day, he has been proved right – processing power has doubled every year. Chips have become smaller and smaller. Today, a standard smartphone has 120 times the processing power of the control computer of NASA’s Apollo moon program, and is four times that of an IBM mainframe from 1998 – which was the size of a refrigerator. And an iPad 2 would have been one of the world’s fastest supercomputers in 1994.
Further support for Kurzweil’s theory is the fact that new technologies are adopted increasingly quickly. Following the invention of the radio, it was another 38 years before 50 million devices were in use around the world. The TV needed 13 years to be welcomed into 50 million living rooms.