Managing Innovations Strategically

How to diagnose innovation at Deutsche Bahn, the second-largest transport company in the world

1. Introduction

In this innovation diagnostic article, I will utilize concepts and tools on how to manage innovation strategically to diagnose innovation in one of my previous employers, Deutsche Bahn (DB). I have chosen my previous employer because the German incumbent railway company failed and is now reviving its fortunes by transforming itself into a highly intelligent mobility network — at least its IT subsidiary DB Systel. The key issue is at hand: DB could not innovate its way out of the environmental challenges, yet. In the following I will originally analyse the innovation capabilities of DB Group, supported by evidence from my work. After describing the challenge, I will apply the “Framework For Managing Innovation”¹ to diagnose the innovation capabilities: assess the creativity process (ideation), analyse the selection process (selection), and review the innovation implementation (execution). I will close the innovation diagnostic by applying the “Managing Innovation Requires A System” framework².

2. The challenge of Deutsche Bahn is…

…that it is struggling to innovate. Deutsche Bahn is the German incumbent railway company with only EUR 680 million profit in 2019. It is the world’s second-largest transportation company and Europe’s largest railway operator and infrastructure owner. DB is the world’s largest railway company by revenue (EUR 44.4 billion 2019, 319k employees). With a history of more than 180 years of German railroad, Deutsche Bahn was formed in 1994 from the merger. The Group is divided in long-distance passenger transport DB Fernverkehr, local passenger transport DB Regio and rail freight transport DB Cargo. The Group subsidiary DB Netz also operates large parts of the German rail infrastructure.

The company is facing four major innovation challenges: capacity, complexity, resources, and speed. First, the challenge for railroad companies is to create enough capacity to meet growing demand. Second, the challenge for DB is to scale back the complexity of a system in which technology from up to 120 years of engineering history has to work together. Third, the challenge for Deutsche Bahn is to find enough train drivers and skilled workers in the face of declining numbers of school leavers. Fourth, the company faces the need to implement the necessary changes quickly.

3. The innovation capabilities of DB Group…

…can be first diagnosed by categorising three different types of innovation³.

Deutsche Bahn’s strategic innovation goal is the “Strong Rail” and in the process they are going digital. These digitization processes must be understood and designed as an intelligent overall system — a long-term development in which three core tasks of the “Strong Rail” can be named: complete networking, self-organized development, and easier use of the mobility offering for customers.⁵ When we look at innovation from this digital strategy, objective standpoint and drill down from this strategy, we can see DB is predominantly pursuing the following types of innovation⁶: processes, offerings, and customers.

The two reasons why Deutsche Bahn decided strategically that its ways to innovate are processes (How) and offerings (What) are the following: Innovative digital rail operations make DB more robust — for example, through automated timetabling and dispatching. The Group sees many answers to their rail challenges in AI. For example, rails equipped with sensors could report when trees fall during a storm. This would turn a “dump” system into an intelligent, self-aware one that could contribute to improving its condition itself. Another example is the current tightly scheduled standard train maintenance. An intelligent system would specifically report which part needs to be repaired or replaced in the near future, with non-existent spare parts coming from the 3D printer. In this way, maintenance windows can be reduced, and trains can be used more efficiently.

The key reason why Deutsche Bahn strategically focused on customer innovation (Who) is the following: The new digital customer experience makes the company more modern — for example, through more efficient travel chains and more intuitive booking options. To complete the transportation turnaround, travelers’ journeys would have to be thought further from the train stations to the front door and different modes of transportation would have to be combined with each other.

The company is also pursuing other types of innovation: strategic innovation partnerships across industries. The importance of a fast 5G network along the entire rail infrastructure is a prerequisite for the further digitization of rail operations. DB decided that new paths must be taken, new alliances established, sector boundaries softened.

Second, the innovation capabilities of DB Group can be assessed by applying the “Framework For Managing Innovation”⁷. Managing innovation involves the management of three distinct areas: ideation, selection, and execution. Business strategy shapes the three areas from the internal and is shaped by these in a feedback loop. The environmental challenges force the three areas to adapt.

Firstly, Deutsche Bahn is currently facing several external environmental challenges caused by the competitive industrial environment, technology evolution, and value chain partners and network. First, the desire for ecological solutions and more comfort poses major challenges for the railroads. Because rail capacity is reaching its limits, especially in conurbations, and has not been expanded in recent decades to meet today’s demands, the railroads can only deploy additional ICEs at peak times to a limited extent. Second, there is technical heterogeneity: analog rail technology from up to 120 years of engineering history meets 4.0 technologies. Third, the rail business is personnel-intensive. If, as Federal Transport Minister Andreas Scheuer envisages, twice as many passengers are to be transported in 2030, this will only be possible through automation. Fourth, the challenge the issue of speed. Regulatory processes are dragging out the construction of new rail lines, making it difficult to respond to current challenges.

Secondly, DB wants to address these challenges with its digital innovation strategy (see paragraph “Three different types of innovation”). The company has launched the following six strategic innovation initiatives⁹: Mobility 4.0, Logistics 4.0, Infrastructure 4.0, Production 4.0, Working environments 4.0, and IT 4.0.

Finally, the management of innovation can be divided into three areas: ideation, selection, and execution. Challenges of innovation exist across all three areas and all are critical in delivering the strategic objective of innovating. Below I applied the framework as a diagnostic tool for DB (Fig. 5)¹¹.

4. The creativity process and organizational enablers of innovation in DG AG…

…can be assessed through the “Framework as a Diagnostic Tool”. “Random” ideas generation and sourcing has to be diagnosed across two dimensions, Process and Organization.

At Deutsche Bahn in the dimension Organisation everyone should contribute to ideation because ideas developed in almost all business areas and by giving employees necessary degree of freedom in the Skydeck innovation lab ideas travel around the organization.

DB has organizational networks to generate ideas¹⁴ — but to a lesser extent as innovative companies. It has the ability to source diverse ideas across almost all business areas at DB. The Group has built persons with potential use of combination and slacked resources at multiple places (diverse views of allowing experiments). The company has a process to transfer ideas through wide internal contacts and slack resources and select some common view of direction. DB Systel, for example, has set up a think tank called the Skydeck, where everything revolves around innovative IT solutions for the core rail business. This is where, for example, the AI-supported robot head “SEMMI” was developed, which has been supporting the service staff at Berlin Central Station since June in an initial test. The firm is working with lead users, customers, enhances network connectivity and bandwidth, and tries to establish empathy, diversity, and tolerance for failure. For example, there is a club called “Lateral thinker” or “Do it differently” and the name says it all. In this club, employees and managers at all levels exchange ideas who have drawn attention to themselves through their projects or ideas. It is good to see that innovators are not alone and there is nothing wrong with them — they are on the right side.

Deutsche Bahn has systemised the ideation process through mechanisms, but not to that extend as state-of-the-art innovation companies do. DB has implemented processes similar to the framework “A “Process” for Ideation”¹⁶. It consists of the definition of a concrete problem, decomposition into frameworks, observation of imperatives, and derivation of a concrete solution.

The introduction of user-centered design methods at Deutsche Bahn Operations is based on taking risks, gaining trust and involving employees. For instance, DB Operations made a design thinking sprint with 200 employees and redesigned a service counter DB Info 4.0 as a lighthouse project.

First, a concrete problem is defined through observation, abstraction, analogizing, generation (context). After the design thinking sprint, the new DB Infopoint 4.0 developed into a project team that continued to pursue DB Info 4.0. as a Design Thinking lighthouse project. The starting point was the planned redesign of the service counter. DB decided not to do it the way we did it before: It locks in its architects, they design something beautiful that Deutsche Bahn likes, and then customers and employers say that they cannot use that.

Second the problem is analysed into dimensions through frameworks for decomposition and journey mapping (insight). Hierarchical and analogical thinking is applied to identify sub-problems and ideate around those. The outcome is an abstract description of the challenge. With an open mind about learning what the idea could do, the project team elicited feedback from colleagues and outside contractors during a session at DB Mindbox. They presented two pitches for the design and user experience of the service desk. During exploratory fieldwork, the design team found that many processes were analog, forcing customers to complete paperwork.

Third, the problem is synthesized across dimensions. Imperatives (ideas) are brainstormed through e.g., Lead Users. This involves the observation of the minority of people that solve problems through their own experimentation. With some wild ideas coming back during prototyping, DB Group thought it was premature to experiment on the road with cardboard as a prototype. In their new project space they held workshops with various user groups to learn about their needs and continually test and improve their prototypes: with train passengers, colleagues, various associations and wheelchair users. In the end, they had eight different generations of prototypes — each improved by more thought and feedback.

Fourth, a concrete solution is derived (artifacts). The eighth prototype was unveiled at the “Product Conference,” an annual event where DB presents new product developments to the press and the public. There, the team tested the service switch prototype with customers and employees. Now Prototype #8 is an artifact in the workshop studio and the new DB Info Point is in the process of being launched. The first redesigned counter was built in Nuremberg.

Deutsche Bahn is able to adapt its idea generation and sourcing process to a changing competitive environment…

…but not to that extend as innovator firms can do. One often has the feeling that “the one right answer” has to be found, but that is not the core of DB’s innovation analysis. It is not its claim to find “the one truth”, but to derive concrete strategic recommendations and to initiate a discussion about future innovation topics. DB Group tries to steer its innovation assessments via concrete use cases and enrich them with content. In this way, they make innovations quickly tangible and generate attention. To do this, the firm works closely with its colleagues at Skydeck to bring people together around trends and innovation topics and get them excited. DB then forms communities of practice on these top topics to stay on the ball.

5. Deutsche Bahn places bets among the different ideas for innovation that emerge…

…by using a traditional way to select the “right” initiatives. Innovation management in DB procurement is done through the examination of innovations from all sides across divisions. This means the evaluation of innovations process is done via Scoring Cards.

To evaluate innovations, Deutsche Bahn uses a standardized evaluation system that has already been used successfully in the selection process for the DB Supplier Innovation Award — presented at the leading trade fair for transport technology “InnoTrans”. The focus is on four evaluation criteria: degree of novelty and uniqueness, added value and contribution to results, application potential and integrability, and sustainability and environmental protection. The initial evaluation is carried out by DB Procurement, as it has the necessary technical expertise to the greatest possible extent. After the positive initial assessment of an innovation, cross-functional teams carry out a detailed evaluation. These teams are made up of executives from various internal demand drivers and areas as well as procurement employees.

The pros and cons of the current Score Card approach are…

…defined by the limits of the Multi-Attribute Decision Theory¹⁷. In this innovation evaluation method the interdependence is not considered appropriately. This means that direct interactions are not considered, projects are substitutes in market segments, and projects compete for the same scarce resource pool. There is an inherent political nature of ‘importance weights’. In addition, assumptions of linearity in selection criteria not realistic. In conclusion, innovation portfolio decisions cannot be automated and rest on informational biases: individual or structural. The key for success is to manage the portfolio of projects.

I would improve the selection process…

…by managing innovation portfolios¹⁸. Innovation should be understood as a system of processes. Portfolio tools be used to expose biases instead of hiding them.

By the selection process as an innovation portfolio, a dynamic, circular process of prioritization and selection and capacity assessment becomes key. The results are new products, services, processes, and acquisitions. In prioritization and capacity assessment the following mechanisms can limit the effect of biases: First, scoring models are useful if they are focused on assumptions. Second, “Bubble charts” are useful if they are depicting a tension between dimensions. Third, incentives should be chosen which mitigate the “broken telephone” effects in information channels. Consequently, portfolio tools uncover the “implied” trade-offs. In an iterative process, innovation portfolios can adapt to the changing competitive environment: deliberate strategy and emergent strategy. First, the deliberate strategy helps to fine tuning the intended implementation and therefore offers a better understanding. Second, the emergent strategy responds to unforeseen situations such as new crises and opportunities.

On the organisational side a “conducive” organization for innovation selection is an imperative.²⁰ For innovation selection it is vital that projects are supported by different stakeholder and that selection conflicts get resolved.

Deutsche Bahn and specifically its business unit DB Systel are developing themselves into a “conducive” organization for innovation, but they are not yet at the level of innovative companies. The company combines strategic alignment, incentives and knowledge, with communication protocols. Regarding the strategic alignment via top-down communication, innovation responsibilities in the DB Group are still organized in a traditional way. However, there are other committees for special topics that are organized as “more open management platforms” e.g., Data Board. With regards to communication protocols to get people to embrace innovation, the top management communicates, communicates, communicates²². Specifically, in a time of uncertainty, they stand in front of their people and say that they do not know what the company is going to look like when the innovation process is done, but if employees want to be part of the change, they have a role, and they are welcome to work with the management on this.

6. The organization is good in implementing innovation projects…

…by using traditional ways. It clusters its innovation implementation on the classical Stage-Gate Product Innovation Process including Stage-Gate, Tollgate, and Real/Win/Worth: Gate 1 idea screen, stage 1 scoping, gate 2 second screen, stage 2 build business case, gate 3 go to development, stage 3 development, gate 4 go to testing, stage 4 testing and validation, gate 5 go to launch, and stage 5 launch.

For radical innovation with higher uncertainty, DB Group has different “experimentation culture” approaches: Grassroots Innovation and Corporate “Incubation”. Deutsche Bahn’s start-up program DB Intrapreneurs acts as a Grassroots Innovation and Corporate “Incubation” program²³ to offer professional support from the sparkling idea to market maturity. The DB Intrapreneurs’ aim is to promote innovation within the company. It has set itself the task of bringing entrepreneurial thinking and action as well as innovative working methods such as design thinking to Deutsche Bahn. The program builds on the two pillars of “Intrapreneurship” and “Company Building” and supports employee teams and the DB business units in developing and implementing their digital business model. In the start-up program interested employees learn how to implement and validate their own digital business ideas. In addition, the program offers Corporate “Incubation” in the DB Ecosystem and therefore fills the middle “gap” in the innovation pipelines for adjacencies with 3–4 years. The special feature is that at the end there is the opportunity to enter the market with DB Digital Ventures as an investor and prove themselves as an independent company. Alternatively, the program also offers its participants the opportunity to implement their own digital business model within the Group.

I would improve the capabilities…

…by understanding innovation as a portfolio of processes²⁵. To structure the separated innovation execution processes under one umbrella of a portfolio processes give the advantage to clearly distinguish the approach and management style of incremental and radical innovation. The “protection” of radical innovation helps Deutsche Bahn to account for the higher uncertainty within radical innovations.

Different mechanisms in scoping and deriving of strategic buckets would help DB to limit the effect of biases: The innovation scope is based on vision, the innovation process is iteratives, the incentives are a shared process, and leadership is executive through employee empowerment.

7. Conclusion

In conclusion, Deutsche Bahn is still struggling to innovate out of the environmental challenges but is transforming itself into a highly intelligent mobility network, specifically its IT subsidiary, DB Systel. The application of the “Framework For Managing Innovation”²⁷ showed that DB’s innovation capabilities are existent but fragmented across ideation, selection, and execution.

With the development of DB Group’s digital strategy in 2016, the goals “Strong Rail” and strategy planning are set. The top-down cascading of innovation and digitisation is in general ensured by the Chief Digital Officer, Competence Center Digitisation, and other committees for special topics such as the Data Board with DB’s innovation poster child, DB Systel. But the recent dismissal of the board member for Digitization and Technology because of the lack of development opportunities in innovation and digitization shows the gap. Bottom-up information and idea flow are partially existent through “Intrapreneurship” and “Company Building” for employees. But only DB Group’s driver for innovation and enabler for digitization, DB Systel, has yet applied strategy development programs for its new agile network organization bottom-up. DB is still organized into silos and functions in a classical, tayloristic way. Therefore, horizontal coordination is only partially functioning. Specifically, at DB Systel but also in DB Operations formal and informal networks, shared processes and a culture of openness exist. To sum up, Deutsche Bahn’s fragmented innovation capabilities display that it requires a holistic system to manage innovation²⁹.

8. References

[1] Kavadias S., and Hutchison-Krupat J. (2020) “A Framework for Managing Innovation” INFORMS TutORials

[2] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 4/4

[3] Sawhney, M., Wolcott, R. C. and Arroniz, I. (2006) The 12 Different Ways for Companies to Innovate. Sloan Management Review, Vol. 47, №3

[4] Sawhney, M., Wolcott, R. C. and Arroniz, I. (2006) The 12 Different Ways for Companies to Innovate. Sloan Management Review, Vol. 47, №3

[5] Deutsche Bahn (2019) Integrierter Bericht

[6] Sawhney, M., Wolcott, R. C. and Arroniz, I. (2006) The 12 Different Ways for Companies to Innovate. Sloan Management Review, Vol. 47, №3

[7] Kavadias S., and Hutchison-Krupat J. (2020) “A Framework for Managing Innovation” INFORMS TutORials

[8] Kavadias S., and Hutchison-Krupat J. (2020) “A Framework for Managing Innovation” INFORMS TutORials

[9] Hill, J. (2016) Bei der deutschen Bahn rollt die Digitalisierung bereits. Retrieved from https://www.computerwoche.de/a/bei-der-deutschen-bahn-rollt-die-digitalisierung-bereits,3217918

[10] Hill, J. (2016) Bei der deutschen Bahn rollt die Digitalisierung bereits. Retrieved from https://www.computerwoche.de/a/bei-der-deutschen-bahn-rollt-die-digitalisierung-bereits,3217918

[11] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 1/4

[12] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 1/4

[13] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 2/4

[14] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 2/4

[15] Beckman S. L., and Barry M. (2007) Innovation as a Learning Process. California Management Review

[16] Beckman S. L., and Barry M. (2007) Innovation as a Learning Process. California Management Review

[17] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 3/4

[18] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 3/4

[19] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 3/4

[20] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 4/4

[21] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 4/4

[22] McLemore, M. (2021) A conversation with Christa Koenen, CIO of Deutsche Bahn AG and CEO of DB Systel https://aws.amazon.com/executive-insights/customers/deutsche-bahn-ceo-cio-christa-koenen/?nc1=h_ls

[23] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 3/4

[24] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 3/4

[25] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge 3/4

[26] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 3/4

[27] Kavadias and Hutchison-Krupat. 2020

[28] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 4/4

[29] Kavadias S. (2021) Seminar Managing Innovation Strategically 1–4. Cambridge: University of Cambridge, 4/4

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