German Innovation Insider: Holding the Brakes on Digital Innovation

German innovation gets trapped in the very mentality focusing on building quality products ‘Made in Germany’ that the country got well known for. Holding on to vertical product improvement, however, obstructs crossing industry barriers, convergence, developing game-changing business models, and coming up with breakthrough innovations with potential for exponential growth and returns.

Germany – Land of the ‘Hidden Champions’

A recent research study of the Centre for European Economic Research confirmed Germany leading by far with 1,550 hidden champions.  Companies are commonly considered a hidden champion if they are no. 1 or 2 on the world market, make less than EUR 1.5b revenue and their name is not overly well unknown in the general public.

Note that mid-size companies make up 80%(!) of German industry and resemble the backbone of the German economy altogether. According to the Berlin School of Economics and Law, 90% are focused on B2B.

germany-celebrates_(latintimes.com)
Champions not only in world football (image: latintimes.com)

See if you recognize a few examples for hidden champions that are leading global players:

  • Dixi / ToiToi (portable toilets)
  • Spennheiser (headphones)
  • EBM-Papst (motor and fan manufacturer)
  • Enercon (wind energy)
  • Krones (bottling machines)
  • Recaro (car and airplane seats)
  • Trumpf (laser cutters)

Inside the Vertical Tunnel View

Among the 1.500+ market leaders only two German companies are leading software companies (Software AG and SAP).  The vast majority focuses on more tangible product innovation leaving this digital industry somewhat isolated, underdeveloped and vulnerable like an economy’s Achilles’ Heel.

You get a good sense for a vertical bias in product innovation, when you read German open job postings for innovation lead position of sorts:  As an innovator in an automotive company, you require a solid background in engine engineering, for example, or as an innovation leader in a chemical consumer goods company, you will not be hired without in-depth knowledge of adhesives, for example.  It becomes painfully obvious how the vertical product innovation fosters a mindset of inbred solutions and can miss out on transformative opportunities beyond the own domain, bridging and converging industries.

3D-printed-German-car(partsolutions.com)
3D-printed car (image: carpartsolutions.com)

Point being: Innovators are usually hired from within a vertical industry. This leaves little room for creative influx from the outside.  Since meaningful innovation ‘happens’ at the cross-roads of disciplines in a horizontal cross- pollination of different industries and domains. This inflexible German practice lends itself to incremental improvement of products rather than disruptive transformation of businesses, entire industries or even across industry arenas.  Within a vertical mindset, ecosystem cross-pollination withers and innovators are less suited, prepared, capable, or enabled to disrupt.

Digital Transformation “Made in Silicon Valley”

When it comes to digital transformation, German companies got disrupted and steamrolled mostly by large-scale digital disruptors coming out of the United States from either California or the East coast technology ecosystems with huge global impact and a different approach:

  • The world’s largest taxi service owns no taxis (Uber)
  • The most popular media owner creates no content (Facebook)
  • The largest movie house owns no cinemas (Netflix)
  • The largest accommodation provider owns no real-estate (Airbnb)
  • The largest software vendors don’t write apps (Apple, Google) and so on.

The above examples differ from traditional products not only by bold out-of-the-box thinking but also by paying close attention to the customer.  Their business models rest firmly in the digital world with a software business and an internet backbone.

Uber and Airbnb offer digital platforms – that’s it, no tangible goods.  Nonetheless, they shake up the established industries of transportation and hospitality in ways unheard of.  They also reap exponential returns by creating new digital arenas that generate highest recurring revenue in the digital space.

Digital Industry (telecitygroup.com)
Digital business has arrived (image: telecitygroup.com)

Missing the Digital Train?

Back in Germany, its 1,500+ hidden champions flourish in a robust economy, so Germany must be doing something right overall with a vertical focus set on tangible quality products within industries.  Good money is still made in Germany by holding a steady course of vertical product improvement.

This practice also goes hand-in-hand in hand with protecting and not challenging enough the traditional sales-driven business models to avoid cannibalizing the status quo for next generation innovations.  It reminds of the Kodak-Eastman story having invented the first digital camera but rejecting the technology in order to protect the business around the existing analog film products – and we all know what happened to Kodak.

A Digital Transformation Divide

Truly putting the customer in the center and embracing digital business requires a radical transformation of the existing business and its operations.  The critical interface between IT and Marketing, for example, often is not well developed in Germany, where traditional companies lack understanding of the digital potential and struggle with developing new, digital business models in time.

It is not a question but painfully obvious that -with the current mindset and strategy- Germany misses the train on digital transformation.  While the world moves online, many companies in Germany failed or simply ignored the emerging technological opportunities to develop digital business models consequently, in a structured fashion and timely.

Failure_to_Innovate(bobmaconbusiness_com)
Germany is missing the digital innovation train. (image: bobmaconbusiness.com)

In fact, German companies practically ‘gave up’ across entire industries including media, travel and retail.  In a recent wake-up call, the German government asked companies and industries to focus on digital transformation in a widely proclaimed initiative called “Industrie 4.0” ‑ a race to catch up internationally.  And catching up is much needed: the narrow German ‘inside focus’ presents a vulnerability to be exploited by foreign disruptive players.  The gap widens steadily as the competitors advance fast, build up huge resources and become increasingly experienced to develop and apply digital transformation with new business models.

pessimism_quote(notable-quotes.com)
(image: notable-quotes.com)

Pessimism with an Insurance Mindset

The high level of disruption and uncertainty does not come easy to less flexible German mindset:  Having experienced hardship many times during the not-all-that-distant history, Germans tend to seek and value predictability and safety.  Anxiety and fear of the unknown forms an undercurrent in the mindset of German society, which is expressed by seeking refuge in insurance policies to prepare for any unknown future events.

As an example, not only do Germans over-insure their daily lives with a myriad of insurances, Germany also holds on to one of the largest amounts of hospital beds and bunkers per capita. You find more hospital capacity in the Berlin-area alone than in all of their neighboring country, The Netherlands!

In general, start-up funding is not as easy to come by as in the U.S., for example, where venture funding is a more common practice.  When I arrived in Germany a year ago, I came across a serious government program that ‘supported’ a new start-up or entrepreneurs with grants tied to a projected positive return-on-investment (ROI) within the first year.  Now, building a profitable business from scratch within in year is an unrealistic goal.  Consequently, the desperate entrepreneur in need of funding would have to submit a bogus business plan right of the bat, which is a set-up for disappointment down the road.  So, either the government program is not meant serious (unlikely) or is designed by people not knowing the first thing about starting a business (likely).

senior-woman-confused-by-tablet-computer(sheknows.com)
Reluctance to embrace technology? (image: sheknows.com)

Techno-Fear and Over-regulation

Overall, the German mindset tends to be more critical regarding new and unfamiliar technology.  Seeking to avoid risk comes with a tendency to ‘over-regulate’ in the sense of applying regulations just because it is possible to regulate rather than because it is necessary to come up with regulation.

Since a long time, Germany has the strictest data privacy laws.  Domestic law protects the individual by granting them the right to control their personal data online and offline.  These regulations are rooted in the country’s dark experiences during its Nazi-past but is also is a reflection of the outspoken suspicion among the broader population towards digital data technologies and their application.  Thus, Germans tend to be more reluctant to share personal data on social media out of fear of exposure and losing control.

The protective (domestic) legislation means well but can only be effective in a closed system, which the (global) internet is not.  In a digital world international boundaries are artificial.  Given the nature and proliferation of digital technology and interconnectivity of people around the globe, keeping up the aspired high standards proves increasingly cumbersome if not impossible.

The German island can hardly be defended effectively over time.  It may protect the citizens from some harm locally but in return also isolates them and denies them access to the benefits of a technology that ever progresses globally.

Losing the Entrepreneurial Spirit

Given a rather pessimistic Germany mindset that is reluctant to fully immerse in the digital world, digital-resistant citizens appear poorly prepared for ‘moonshot’ visions, embracing the opportunities of Big Data Analytics or the vast potential of the Internet-of-Things (IoT).

German innovation death(deskmag_com)
Reluctant to start up a business (image: deskmag.com)

The present German ‘generation of heirs’ inherits the wealth created by their parents’ generation during the famous post-WWII decades known as the economic “Wirtschaftswunder” boom.  Very much in contrast to the U.S. or Asia, many Germans do not share the venturing spirit anymore.  They show reluctance to trying out something new such as building a business as an entrepreneur for several reasons:

  • Firstly, Germans tend to prefer a detailed plan before actively exploring an opportunity and strictly sticking to the plan during implementation. Besides the favorable element of thorough planning, this approach also reflects a deeper fear of failure and seeking a sense of security and predictability.  Deviating from the plan is often interpreted as a failure.
    But then, which plan ever is perfect and stands the test of a dynamic reality? Sadly, the debate then quickly tends to turn to finding a culprit when things go sour rather than making adjustments to keep moving on.
  • Secondly, German hesitation and even a good amount of pessimism roots in stigma of a business failure, which seems to stick more in German society than in the United States. More than 9 out of 10 start-ups fail, but when a startup fails in the U.S this does not automatically translate into personal failure of the leader.  It is much more seen as a learning experience, while a German CEO gets easily branded loser.
    Surrounded by the ‘insurance thinking’ mentioned earlier it will be hard for the former CEO finding support for a future business or even employment in Germany after a venture failed. In consequence the German CEO is more motivated to beat a dead horse rather than cutting the losses and move on.

Summary – Brakes on Digital Innovation in Germany

For all these reasons, visions tend to be smaller in Germany.  They are more designed to control risk than seizing exponential business opportunities.  Thinking too small, not disruptive enough and too focused within an industry prohibits to compete with the digital global players that emerged with exponential business models, such as the Googles, Apples, Amazons, Airbnbs, Ubers, and so on out there.

Brake-damage(dba.com.au)
Brake damage ahead! (image: dba.com.au)

What keeps the brakes on the German innovation machine is the in-bred mindset and vertical tunnel vision with a focus more on products instead of customers, and the risk-avoidance and fear of applying digital technology to its full potential.  It traps many German companies in a self-limiting disadvantage compared to American or Asian competitors, which prove more venturous, flexible and generally optimistic.

The U.S., in particular, entrepreneurs come not only with a more flexible and optimistic mindset, but can also tap into unique startup eco-systems in place (Silicon Valley, Boston and NYC areas primarily) with easy access to bright minds, cross-pollination and venture capital.

Outlook

There remains demand for physical, quality products in the future, such as the machinery, tools or cars we value today as Made in Germany, so the 1,500+ hidden champions look into a bright future.  Their reluctance to embrace the digital age, however, and transform to embrace new digital business models, however, may steadily push them to the sidelines as industries and arenas change beyond their input or control.

Author: Stephan Klaschka

Stephan Klaschka is an awarded innovation executive, C-level consultant, Intrapreneur, and serial entrepreneur with over 25 years of international work experience. He held various senior business operations, strategy, regulatory compliance and innovation roles with Boehringer Ingelheim, leaving as Director of Global Innovation Management and Strategy. In this first-of-its-kind position, Stephan's work was central to the new growth rejuvenation strategy as a catalyst to initiate and drive pivotal innovations, leadership development, and disruptive and digital transformation across the Boehringer Ingelheim group worldwide. He has recently served as CEO interim of the "German Institute for Telemedicine and Health Promotion" (DITG). Stephan holds Masters Degrees in Computer Science, Management, and Business Administration as well as advanced degrees in Strategy, Innovation, and Leadership from leading schools in Europe and the United States. PMP certified. He has published extensively and created award-winning workshops on topics including intrapreneurship, healthcare, pharma, and new technologies. Stephan currently consults independently out of New York.

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