How Old and New Economy Might Profit More From One Another

Digitalization is important for the German economy’s competitiveness

By Florian Heinemann

Digitalization is “here to stay.” And as with every fundamental change in (economic) history, it offers founders, or rather entrepreneurs the chance to develop new products and business models with which they can challenge even established businesses or potentially whole sectors. Marc Andreessen described this development strikingly in his article „Why Software Is Eating The World“: For one thing an increasing digitalization of the products themselves, or rather the range of products. Also, however, the distribution or rather propagation of products happens increasingly by digital means. And partly these two developments occur in parallel.

But how can established companies deal with these developments and potentially even profit from them? The key for overcoming digitalization in a sustainable successful manner lies in setting up sector- and company-specific digital competencies within the company itself and only then, in the rarest of cases, in elaborating a detailed medium- to long-term digital strategy. This appears to be counter-intuitive upon first glance. But the formulation of such a strategy covering three to five years appears to be less sensible in light of a) the rapid cycles of change in this area and b) the frequently insufficient digital competencies available both within the companies and from their traditional consultants.

Moreover, for established businesses it should be primarily about setting up these competencies as fast as possible and at the highest possible quality level. This is not just true for such companies whose core products or rather value creation is affected by digitalization or companies relying heavily on technology, but also for firms in which “only” supporting value creation chains are becoming increasingly digital. All of these considered together, there may only be very few exceptions.

Hence, there is the possibility for established companies to profit considerably from a growing and ever more professional digital start-up scene, also in Germany: for digital start-ups are by definition an essential breeding ground for the setup of digital competence. And applied in suitable established companies the degree of effectiveness of this competence is often considerably greater than in a tendentially smaller and frequently underfinanced start-up setting.

Only few established companies in Germany have to date implemented systematically functioning basic approaches of cooperation or dealing with digital start-ups, which for one contribute to the setup of specific digital competency in their own organization and for another thing extend the financial scope of the start-ups.

To do so would be a win-win situation for all concerned. And there are numerous examples in pharmaceutical or biotechnology fields where this interplay between start-ups and established companies is successfully practiced. For a long time already, start-ups or rather knowledge generated in start-ups has played an essential part of the innovation pipeline of the established players. And such a “pipeline” way of thinking in relation to a) necessary competences and b) sensible complementary products and/or services forms a very target-oriented and pragmatic frame for how corporates should reflect on their cooperation with digital start-ups.

The implementation of such a “pipeline” way of thinking in the direction of start-ups can be achieved via a) acquisitions, b) direct or indirect participations and c) pure customer-supplier relationships. As a rule, a mixture of these three basic approaches in combination with digital activities performed in house is the most sensible. And even companies such as Google, Facebook or Amazon operate in exactly this manner, despite their undoubted native “digital DNA” and the associated, already prevalent, marked digital competence.

If you regard the indisputably increasing relevance overall of these competences for the ability of companies to compete or even survive, it becomes clear why the cooperation of established companies and start-up companies needs to be more intensive and productive. In this context, the trip to Silicon Valley, meanwhile already obligatory for top management of German companies, only forms a small initiating or accompanying building block.

But for this both sides have to give ground: start-ups should continue further down the tried and tested path of professionalization. In addition, they have to learn to portray their potential contribution to setting up (digital) competencies in established companies in a clearer, more workable fashion for these companies.

Conversely, it is necessary for established companies to think more intensively about competence potential or potential to setup competence. Often the opinion prevails that start-ups are economically active on a negligible scale, and/or largely not in a sustainable fashion. Even if these demonstrably wrong views would apply, the fact that start-ups could improve an established company in a relevant fashion and that this growth of competence can have a much more significant effect on the whole organization than extra turnover, free cash flow or profit, is only recognized so far by few established firms or rather only few firms allow these realisations to enter into their actions with recognisable consequences. This has to change urgently if these companies do not want to fall further back in relation to digital competence, increasingly important for survival. For only then do they have a realistic chance of providing the answer to digitalization which will certainly still be here: “we are not going to walk away.”

Originally posted in The Hundert vol. 5.