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The effect of digitalization on the value chain of products

Interview with Professor Dr. Arnd Huchzermeier

Digitalization can affect all steps of the value chain of products: Primary activities like inbound logistics, production, distribution and marketing & sales can be digitalized as well as secondary activities like procurement and human resource management. For every of those areas the question is: What does digitalization exactly mean and how can firms benefit? We asked Professor Dr. Arnd Huchzermeier to provide a few case examples and to share his view on where the German industry stands in terms of digitalization.

Professor Dr. Arnd Huchzermeier:
Let me provide two interesting and current benchmarks. The first one is about digitalized manufacturing, the second one about customer retention.

In an online-offline world, every retailer faces high turnover in its customer base: the next shop is just one click away. With the help of Artificial Intelligence, companies can zoom in on their most loyal customers or customers that are about to defect. A lapsed customer is quite costly for firms to reactivate and may never come back. In retail, it is common practice to use relatively inexpensive give-aways for all of the company’s customers, but this is rather an in-effective means of driving retailer loyalty. The response rates of such blind action, as one would have guessed, are close to zero. Consequently, we have helped a major German hypermarket retailer to identify their most valuable shoppers and target only those indicating a behavior typical of a churner for a series of valuable coupons.

Brown-field manufacturing plants are all exposed to high demands on product customization and product innovation. This is a direct consequence of a customer-focused and enabled value chain. For example, the Daimler plant in Bremen with an annual output of more than 430k vehicles will also produce the new e-vehicle EQ as of 2019. The fixed tact assembly lines needs to be adjusted to cope with higher work demands and high volatility in customer orders for that matter. Building a greenfield factory is not an option, when assembly systems can easily cost up to 1B € due to software installations. We found that it is possible to conceptually modify such lines to effectively cope with both types of requirements for enhanced worker flexibility.

WHU Executive Education:
In the Industrial Excellence Award, you get deep insights how companies deploy and execute their digital strategy. How is the German industry prepared to tackle this challenge?

Professor Dr. Arnd Huchzermeir:
No question, there are numerous excellent and leading-edge companies in Germany that are really pushing for highly automated and flexible production systems. This does often come with the opening of newly designed plants though which is not an option for, e.g., small and medium-sized enterprises. Based on this insight, we conducted interviews on company’s shop floor and tested the subjective and objective strategy understanding of employees. “Subjective” in this context means that employees feel being “informed” about the operating unit’s key objectives, whereas “objective” refers to being able to explain it in words and to identify key actions taken to achieve the goals. On the positive side, most employees feel that they understand their business unit’s strategic objectives; on the negative side, the large majority cannot report on any existing action plan to achieve these objectives. Of course, the latter also strongly correlates with inaction regarding continuous improvement activities by many. This impediment to productivity through digital strategy deployment is highly regrettable; however, it can easily be fixed.

WHU Executive Education:
Professor Huchzermeier, you are teaching in our Digital at Scale Program. Will you cover some of this in the program?

Professor Dr. Arnd Huchzermeir:
Certainly. I am very eager to discuss these management issues with our participants.

What is the Digital at Scale Program?

WHU and McKinsey & Company offer the “Digital at Scale - Steering Your Business Into a Digital World Program” which is designed for managers and executives in digital roles or executives with roles in commercial, operations, or HR functions who want to transform their business unit/function. The 4-day program addresses why, how and in which areas companies should digitally transform.

The Executive Education Program will take place in April and May 2018.

Learn more about the Program