The Internet of Things and the VUCA Challenge.
The business world has become VUCA (volatile, uncertain, complex, ambiguous) in an unprecedented way. The drivers of this trend: globalization, acceleration of change, and commoditization of knowledge. Companies need more innovation than ever to cope with the current VUCA business environment. But is the European chemical industry up to the challenge? Or are they sitting ducks hoping to wait out the storm?
Let’s go to lunch with Dr. A, a typical executive working in the chemical industry, and engineer Z, an innovation consultant. Let’s listen to their (fictitious) lunch conversation and see how they think about this challenge.
A: Hi Z, great to see you again. I wanted to take you out for lunch and pick your brain on all this talk about Industry 4.0, the Internet of Things and the need to step up the pace of innovation.
Z: Great to be with you, and thanks for the invitation. Well, how do you see it?
A: I’m not sure I should be overly concerned about this. The world needs chemicals and materials now and in the future. Thousands of tons of them, and from time to time a new one. Most of our current assets are in the three P’s (pots, pumps and pipes), mortar and bricks and inventories. And so are the assets of the competition. This anchors the chemical industry solidly in the present. It cannot do sharp turns like a speedboat. Just think of safety! So change has to be slow and innovation incremental. That gives me enough time to react to a threat when I see it coming. We should not panic about all these trends. But we need to analyze carefully what, if anything, we should adopt in the chemical industry.
Z: I can sympathize with how you see the world. This perspective has served the chemical industry well for decades. However, in the VUCA business world of today, this may create a dangerous vulnerability. Many well-established and stable industry sectors are being challenged by new competitors created by globalization, acceleration of pace of change and commoditization of knowledge. The Internet of Things everybody is talking about is just another manifestation of these trends. Think of Walmart being challenged by Amazon or Mercedes by Google. What happened to Kodak and Nokia, once industry stalwarts based on superior technology? And if anything, the pace of change will continue to pick up.
A: Yes, these Internet companies can trouble you. But what’s wrong with sound management leading to steady progress and growth? Thoroughness and care at their best to create and grow a strong company with a rock-solid balance sheet and predictable returns? That’s what our shareholders love!
Z: Do they really? Let’s look at the retail industry – a well-established sector, right? The leader in the retail world is Walmart. Investors value Walmart at about the value of its total assets (about $ 200 billion). Now let’s compare this to the developing online retail business, which is growing like crazy (about 15 % in the US in 2015). The leader in this new retail world is Amazon. And Amazon is valued at about $ 360 billion. That is more than five times its current total assets!
A: That is the retail world, not the chemical industry!
Z: The picture could be similar in the chemical industry in the future. The industry leader BASF is valued at about € 65 billion, about the value of its current assets. Could you imagine a chemical company challenging BASF in the way Amazon challenges Walmart? What would it take? Or what would BASF have to do differently to have a market capitalization of € 300 billion?
A: Maybe they should behave more like a start-up, becoming more agile and driving change rather than reacting to it. But hold it – a company like BASF is not an SME. They have to take care of current business, partners, employees, and stakeholders. They can’t forget about the past and present in order to focus on the future. Just one reminder: pension commitments! How to resolve this dilemma?
Z: If you can’t beat them, join them! Today’s large companies need to learn to create the new, future businesses that may disrupt their current businesses, while continuing to run and progress their current businesses with excellence. They need to simultaneously create the future AND manage the present.
”If you can’t beat them, join them!“
Z: Let me give you a picture to illustrate this mode of operation. Think of a band and its drummer. This is like the drummer beating one rhythm with his right hand and another completely different one with his left hand – simultaneously. Some people call this capability ambidexterity. Companies have to acquire this capability too – manage the present and create the future ambidextrously.
A: But how?
Z: Let’s look at an ambidextrous organization in more detail. How would we describe it? Such an organization needs to be able to operate in two different worlds simultaneously – the world of today and that of tomorrow. I brought you a chart to summarize this. Have a look at Figure 1, please.
A: But these are quite different organizations! Some of those properties are very contradictory, they are virtually incompatible!
Z: I never promised you a rose garden! Becoming an ambidextrous organization forces management to rethink its values, missions and strategies and requires new behaviors, processes, tools and organizational structures. In the end, in many cases, this may require a culture change.
A: Culture change? What’s that supposed to mean? What is the culture of an organization, and how can you measure that kind of change?
Z: What is culture? This is quite a complex question. Before diving into this, let’s quickly check whether culture is really important for business. Have you ever seen a KPI about culture?
A: No, not really.
Z: Indeed, there are not many of them around. So many executives think that culture may not be important for business. But a true management guru, the late Peter Drucker, wrote about culture: “Culture eats strategy for breakfast.” In other words: your strategy may be as smart and perfect as possible, but if your culture does not support it, you’ll fail.
But what is culture? Culture captures what is really important for an organization and how things are really done there. It describes the spirit of an organization, the smell of the place. Irrespective of mission statements, purpose and value declarations, or process guidelines. My favorite definition: Culture drives decisions when the boss is notaround. And that means most of the time.
A: Okay, but how do you measure culture? If it is so important, you must be able to measure it in order to be able to manage it.
Z: Absolutely! But culture has many facets, so you need to pick the ones which are really important for your business strategy to succeed. Let’s take quality as an example. If your strategy calls for superior quality all of the time as a competitive edge, your culture needs to embrace quality as an important vector of how your company does business. So you measure not only the typical quality KPIs like failure rate, customer complaints, etc., but also the behavior of your employees concerning quality and the importance they give it in view of their behavior compared to other aspects like cost.
A: Okay, I get it. But why don’t more executives take on this important challenge? Why don’t they work on the culture of their organizations more often?
Z: Implementing a culture change is a tall order and hard work. It’s also risky, and failure is very visible. That’s why many executives shy away from it or pay lip service to it. But the price of not addressing company culture in regard to the growing challenges of the interconnected, highpaced, VUCA business world is losing the leadership position. Remember Kodak, Nokia and other fallen giants.
And the chemical industry is more vulnerable than many of its executives perceive. The steady and long-lasting technical progress and business growth in the chemical industry have lulled them into a false sense of security. Just think of the Internet of Things and related opportunities and threats. In a recent survey, 60 % of executives in the chemical industry see cyber security as the biggest threat. Only 15 % see the opportunity to create a breakthrough in their businesses. But the true biggest threat to the traditional business of the chemical industry resides exactly there: new business models and related technologies enabled by the Internet of Things which make the current productcentered business models obsolete. What about renting out a C atom to your customer to do the job rather than selling it? Remember Kodak …
A: I need to think about this a bit more and a lot deeper. Now I need some immediate gratification – luckily, here comes desert!
Z: Sure – enjoy, but do not postpone thinking about it because you are too busy with managing the present. In a recent study, Innosight – a well-known innovation consulting firm – forecast that within the next 10 years, about half of the current SP500 companies will be replaced. Remember, it’s not the big catch the small, but the fast eat the slow! Let me know how and when I can help.