Replacing Scholz Is Not Enough: Germany Needs To Reinvent Business

Reinvent German Business

On Monday, the German Chancellor was defeated in parliament and will soon lose his job. Olaf Scholz has been a mediocre leader and Germany can probably do better. However, more than a political change, Germany needs reinvent business to embrace new businesses and business models. That means making a serious commitment to investing in innovation, far beyond the traditional R&D-led model beloved by so many of the country’s most famous companies.

Germany is a center of global innovation. Its engineering prowess is second to none. Companies like Siemens, BMW, Bosch, and SAP have a commitment to technical innovation that has put them at the forefront of the global economy for over fifty years.

However, today they struggle to embrace fundamental shifts in their markets. It has taken the German automotive industry a decade to take electric vehicles seriously; as a result, they are struggling to respond to the inflow of cheaper Chinese rivals. And despite SAP’s impressive position in enterprise software, the German software industry is puny in comparison with those in the U.S. or China. In a digital world, this is not good enough.

Reinvent Governance Boards

Change though comes hard. German corporations are premised on consensus in decision-making. This means that many decisions are made to maximize comfort in a group, rather than embrace the discomfort of change.

At the center of this story is the governance structure of a German corporation. Its Supervisory Board is equivalent to the American Board of Directors and the Management Board is like the executive team. What’s different is that the Supervisory Board members tend to be retired executives, rather than active managers as is more common in the U.S. Management Board members also have individual contracts with the Board, making the CEO more of a coordinator of aligned activities, rather than a single point of accountability.

There are lots of advantages to this system. It tends to support long-term thinking and avoids the “cult of the CEO,” that bedevils many US corporations. However, it also puts a big emphasis on the status quo. The key tenets are order and stability, not response to change or agility. Long-term thinking, yes, but within the current business model. Make collective decisions, but only in tightly defined areas of commonality. Otherwise, you never interfere with how a colleague runs their business.

Reinvention, not Dynamic Conservatism

However, as the Canadian Premier, Justin Trudeau, says, “The pace of change has never been faster and yet it will never be so slow again.” German leaders need to wake up to the reality that the crisis is bigger and that it poses much greater risks than it is comfortable for them to comprehend.

Unfortunately, German firms are entrenching, cutting back on innovation budgets, cancelling exploration into new businesses and market areas. As recession has hit the German economy, many corporate innovation units were either scaled-back or closed altogether. And all this at the exact moment when Germany needs an answer to its long-term innovation problems. insisting that “brand” and “quality” is an eternal defense against disruption.

This is the phenomenon of “dynamic conservatism.” Corporations say they are committed to innovation and change, but in reality they work very hard to stay the same. Kodak, Blockbuster, Nokia mobile phones, and so many others did the same. Most firms, German and American, when faced with the potentially devastating impact of technological and business model shifts fail to change. This inertia starts in the Supervisory and Management Board.

Ambidextrous Reinvention

A new book by Dr. Julia Duwe (Aufsichtsrat 2030 – Ambidextrie im Aufsichtsrat) is the first I have seen to raise the question of whether the German corporate governance system is fit for purpose of managing innovation.

This is a vital question. The German governance system reinforces stability and therefore increases the risk of a rapid disruption. There is lots of talk about innovation and risk-taking in German corporations, but only within safe zones that do not challenge the status quo in the Management Board. There is a fear of doing anything that disturbs today’s business.

Duwe’s book has assembled data from across German corporations to offer insights and real-world examples of how supervisory boards drive innovation and facilitate change within companies. This is incredibly timely.

She outlines the advantages of an ambidextrous organization. This is a way of structuring corporations so that they can focus on both sustaining the core business and exploring new market areas. The rewards of the ambidextrous organization approach were shown to be significant to those that commit themselves to the path. Companies most associated with this approach, NEC and AGC in Japan, IBM and Analog Devices in the USA, have demonstrated impressive positive outcomes. AGC, for example, has transformed from the “Ashai Glass Corporation” into a completely new company that now derives 25% of its profits from ventures launched since 2015.

The challenge with having both a core and explore business in the same unit is that there will always be tension between the teams. They have different modes of operation and timeframes. One is steady and certain in the short-term, but potentially risky long-term. The other is volatile and never certain. You cannot avoid this tension. It is the work of Management Boards to embrace and manage through it, making the trade-offs that serve a larger ambition.

Supervisory Boards need lead reinvention

As the custodians of the future, Supervisory Boards have a special role to play. Do the CEOs and the Management Boards that they appoint have an ambition that is equal to the scale of the opportunity or the threat of the disruption they face? Are they willing to deal with the necessary tension that the existence of both core and explore creates in the organization? Does the organization have a serious plan for scaling innovation or are they just putting on a show?

Supervisory Boards need to engage with this tension and demand that Management Boards back reinvent to open up new markets for Germany’s extraordinary talents before it is too late. Reinvent now, don’t let Olaf Scholz be a role model.