By Karl-Heinz Streibich, CEO of Software AG

Last year, the market research company Gartner predicted that by the year 2017, around 20 percent of current market leaders would have lost their position to companies founded after 2000. The reason for this is insufficient digital competence.

Today, digital companies make up four of the five most valuable brands, and we are experiencing how new digital actors are challenging traditional business models. Everything that can be digitised will be digitised. Companies can use agility and the power of innovation to become global leaders within just a few years. So why are digital companies often such superior competitors to traditional businesses?

There are a variety of factors why digital companies are so efficient, and consequently so successful.
Digitisation encourages a sharing economy, which serves as the basis for many digital companies today. In a broad sense, we all share the internet. An economy based on common standards and more or less voluntary sharing is a central driver of digital business models.

Another significant external factor is the power of standardisation. Smartphones and other mobile devices use the same transmission systems and medium, and they can take advantage of more or less the same offers and services.

Digitisation promotes real-time transparency. Thanks to ever-multiplying quantities of data from online services, smartphones, and online retailers, companies differentiate themselves from the competition by real-time marketing.

Google can access an exact profile of every single one of its users. They can also use data from around the world to recognise the beginning of an epidemic (or another far-reaching event) in real time.  Every wireless service provider can use its customers’ digital fingerprints to generate individualised offers and suggestions. Yet another advantage: Digitisation makes rapid transformations possible. Compared to traditional IT projects, processes can be designed and digitised in a fraction of the time and at a fraction of the cost.

Above all, digitisation significantly reduces costs. When important assets can be standardised and shared; when process times can be shortened by a factor of ten and decisions automated within nanoseconds; when an IP software signal can replace gigantic hardware systems and machines reach 100-percent reliability thanks to proactive maintenance– it will be obvious to everyone that nothing will stay like it was before.

Digital companies will offer services and systems that are significantly more cost-effective than the proprietary, non-transferable systems at traditional companies.

Digital companies are software companies. To generalise broadly, these can be divided into two categories:
• Companies that create new markets, like Google, Facebook, and Twitter. They can create new ad space as if from thin air, and they can generate mountains of valuable data about their users and their behavior.
• Other digital actors, including Uber, Airbnb, and Alibaba, challenge existing markets. These upstart digital companies are completely reinventing classic business models, making established models seem old-fashioned.

Both groups share two common features. First, their business models are based on software platforms – a decisive advantage over established competitors. With the help of the internet, software platforms are infinitely scalable, allowing for exponential growth.  This explains their often sky-high market value and the astounding sales prices for largely-unknown start-ups.  Second, the new participants in the market typically do not possess traditional assets.

Traditional companies, by contrast, typically invest a lot of money in traditional economic goods, which are essential for their business. Paradoxically, these companies’ value is often less than the sum total of their assets. Their IT infrastructure is usually an antiquated application environment, comprised of information silos that are inflexible and unscalable.

By concentrating on just a few traditional distribution channels, they overlook the modern digital consumer, who has long engaged with digital companies on a variety of platforms. What is the deciding factor? Efficiency. It’s what makes digital companies so threatening, successful, or forward-looking (depending on your perspective).

Positively stated, unlimited digital opportunities grant us the freedom to create something new and realise our potential. Anyone can ride the wave. The means and resources are already there. There are no limits on creativity. Most business leaders are well aware of this, and they see the opportunities of the new digital era. Unfortunately, few have developed a concrete plan for moving forward.

Despite (or precisely because of) this need, traditional business models must be put to the test. It’s high time that big data is used effectively, to increase productivity and analyse customer behavior. Companies need agile software platforms, flexible digital procedures, as well as intelligent customer management across all relevant channels.

To achieve these goals, traditional businesses must rebuild their digital (software) competence from the ground up. The great challenge for traditional companies is to act as boldly as start-ups in the digital world, using existing knowledge and customer relationships more efficiently, and also reinventing themselves in a more creative way.

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