We Are in the Midst of a Revolution

from style in progress 4/2015 – English Edition

Times Two

“WE ARE IN THE MIDST OF A REVOLUTION!”

The increasing digitalisation goes hand in hand with profound change, thus not only challenging traditional business models. Carsten Bange, a renowned market analyst, sat down with style in progress to discuss the big changes caused by digitalisation and what opportunities these changes offer. Text: Nicoletta Schaper. Photos: Peter Schaffrath

Mr Bange, you predict that digitalisation will lead to revolutionary changes within all industries. We ar in the midst of the technological revolution, primarily in terms of data and its analysis. How can data improve processes? To what extent can data act as a basis for completely new business models? One of the buzz words is “Industry 4.0”, which means nothing else than the digitalisation of the manufacturing field. Another slogan is that software is becoming more important than hardware. In many cases, the buyer doesn’t really want to buy the machine itself, but what it produces. Many manufacturers are in the process of changing their business models and provide their customers with machines in combination with a commitment regarding certain production volumes - for which the customer then pays. For example, the compressor manufacturer Kaeser does not only supply compressors, but it also offers a billing model for the amount of compressed air used. Another example is Schwäbische Werkzeugmaschinen, which calculates on the basis of the units its machines actually produce. And let’s not forget car sharing, which is now also an integral part of the strategies of carmakers. It’s no longer about the product price, but about the service. This business model has enormous potential, especially in Germany. Our hardware is, compared to international levels, usually high-priced. So software is a competitive advantage of the future? So is the control of the machine that comes with it, which makes the profit controllable. Maintenance costs are crucial for machinery manufacturers. So far, this was the customers’ problem, but now it’s the machinery manufacturers’ responsibility. When the latter have data-driven, more intelligent maintenance methods, it’s an important lever for their profitability. Regular measurements of sensor data allow a more precise prediction of when parts need to be replaced. This means that unplanned outages, which cause huge costs, are much rarer. Even robots are becoming more intelligent due to new software. Today, one no longer utilises fixed programming to ensure that a robot identifies parts; now the robot is, instead, capable of autonomous action by means of software. Google’s self-propelled car and corresponding announcements of German carmakers at the IAA prove that the future is all about software and controlling, respectively. The car itself is turning into a mere accessory. Do carmakers understand the seriousness of the situ ation? I think they have finally realised the urgency; there are many initiatives, even from German carmakers. However, the race is still wide open. IT companies, especially Google, are setting the pace, not Mercedes or BMW. What about the other industries? I think the strategic importance of data has been recognised. The problem is implementation. Many companies hesitate due to a lack of know-how in terms of technology and application. Technology has already progressed much further than many imagine. As early as 2011, Facebook processed 500 terabytes of data every day! To be able to utilise that data, Facebook further developed technologies in co-operation with suppliers and can now place targeted advertisements. This has transformed Facebook into a highly attractive space for advertising. What does digitalisation mean for the retail industry? Currently, e-commerce is the growth sector. It is still unclear what effects this will have on the stationary retail industry. There are, in fact, products that I don’t need to see and touch physically. In a subway station in Seoul, one can - for quite a few years now - view a supermarket shelf on a screen and scan the codes of the products on display. The shelf and the milk carton are purely imaginary. Do I really need to touch a milk carton? After all, I only want information. When is the expiration date? How high is

„We will have to get used to the fact that software competence will become more important than hardware“, says software specialist Carsten Bange.

the fat content? Is the milk really organic? You can communicate much more information via a smart phone than you could ever print on a carton. Why has this not asserted itself across the board yet? The food industry is exceptionally slow. The margins are extremely low and the investments are high. Amazon recently announced its intention to enter the food trade and this will, as always, speed up the development process. At present, retail groups such as Rewe and Edeka are investing heavily in data analysis. Fresh goods that have not been sold by Saturday evening are thrown away. The more data is available, the easier it is to plan ahead. Internal data sources are not the only help in this respect, but the season and weather conditions have a major impact too. DHL, for instance, managed to optimise its driver management significantly on the basis of weather information. People order more online if it rains on Sunday. This means that more parcels need to delivered on Tuesday. Furthermore, data about the competition can be equally helpful. Which measures have the competitors taken? In addition, there is demographic data. It is nothing new that the product range is defined by this aspect. However, the prediction - and therefore the control of goods flow and offers - is becoming much more accurate. The sticking point could still be the delivery aspect. The problem of fast delivery can be solved. Where retailers identify a lack of speed, they take action themselves. The ultimate goal is same-day delivery. If the logistics companies cannot offer that, then Amazon will simply decide to build its own drones. Speed is absolutely critical. But there is also still sufficient room for data-driven disruption on the ground. For example, Uber is currently experimenting with a courier model in New York City. The parcel is picked up and delivered very swiftly. And why should one not also take a passenger along too? The aim of such “crowd sourced” models is that deliveries within an hour become cheaper than the usual overnight deliveries.

Despite the online boom, you still believe that the station ary fashion retailers have enormous future potential. I strongly believe that the tactile experience remains important. As a consumer, I want to see the material and experience how it feels. I want to try on the clothes too. Even if someone develops technology that allows fitting via electronic imagery, I nevertheless

“We will have to get used to the fact that software competence will become more important than hardware” Carsten Bange, CEO Barc GmbH

believe that stationary retailers will have a right to exist in the future. The big opportunity is to provide a shopping experience. This experience should not only be focused on the process of selling, but also on the fun element. As a modern consumer, I want to combine the benefits of online purchases with the experience of shopping in a store. The Hudson Yards in Manhattan, which are currently still under development, provide a huge sales area without adjoining warehouses. Here, the fashion store transforms into a showroom. Every item is only available once, in each colour and size, which means that the selection on offer can be larger than ever. The purchase itself takes place in the store. However, the consumers don’t take the chosen products home; the items are delivered to the consumers from a central warehouse on the same day. What does digitalisation mean in terms of service at the point of sale? After all, advice is one of the main strengths of the stationary retail industry. Even advice can be automated to a large extent. Data can be utilised to create a detailed profile and to determine which networks an individual customer frequents. I can filter out how fashion develops and I can identify data-driven trendsetters who will be followed by many other consumers. A salesperson has to be very good to achieve something comparable based on experience and intuition. However, even stationary retailers can take advantage of data to create product ranges that are much more relevant to their respective target groups. It’s already possible to identify individuals that pass - or even stop in front of - shop windows. The next step would be to adapt the shop window display to passing trade. Likewise, iPads in the shop window and Click & Collect systems are already a reality. In many cases, however, only large retailers can afford the necessary technological investments. Smaller retailers still have two options. Either they decide to serve a niche market, or they team up with others. The latter is similar to the classic concept of a co-operative. Specialisation can be particularly advantageous for smaller retailers. How critical do you see the digitalisation process? First of all, everybody needs to be aware that digitalisation is happening. The opportunities for obtaining a vast amount of information about individuals already exist and they are being utilised to an increasing extent. It has already become apparent that the definition and understanding of privacy will change. Many people will soon understand the “data for service” deal and the awareness that nothing comes for free is on the rise. It is important that we retain the power to choose what we want to reveal and what not. My Facebook profile, for example, has been deserted for years, but I don’t feel like I have an economic or social disadvantage because of it. Digitalisation affords opportunities that need to be seized, especially for the industry as a whole and for retailers. In Germany, we often lack the willingness to try something new and to take risks - our mentality hampers us in that respect. Therefore, I call upon companies to be more open for experiments; there are areas where you can achieve success with comparably small investments in data and technology. It all starts with the understanding that data is a highly valuable asset. The speed in which I offer new, innovative services is becoming increasingly important. And the time I have to implement them is becoming shorter.

In addition, jobs are becoming redundant. So far, every technological revolution has created more jobs than were lost. However, some researchers question whether the same will happen this time. We can definitely expect to have more free time in the future. The latest developments in robotics have led to a massive relief in terms of physical work. Even our more demanding mental abilities can be reproduced by machines with artificial intelligence. This is no longer science fiction. Our focus can be shifted to the cultural areas over the next 50 to 100 years. If we have more time, we also have more time for shopping. This takes us right back to the aforementioned shopping experience. We can only create theme worlds in stationary retailers. Online cannot keep up in that respect.

Carsten Bange is the founder and managing director of Barc GmbH in Würzburg. The institute specialises primarily in data management and data analysis. With 18 analysts on its books, it has the largest team in Europe in this niche market. Together with the analysis specialists CXP and PAC, Barc forms the leading European analysis group focused on corporate software and IT services, with a presence in eight countries.