Trapped by Success – A Path Dependence Perspective on the Digital Transformation of Mittelstand Enterprises
Linus Lischke
This study investigates why German Mittelstand enterprises (MEs), or mid-sized companies, often implement incremental rather than radical digital transformation. Using path dependence theory and a multiple-case study methodology, the research explores how historical success anchors strategic decisions in established business models, limiting the pursuit of new digital opportunities.
Problem
Successful mid-sized companies are often cautious when it comes to digital transformation, preferring minor upgrades over fundamental changes. This creates a research gap in understanding why these firms remain on a slow, incremental path, even when faced with significant digital opportunities that could drive growth.
Outcome
- Successful business models create a 'functional lock-in,' where companies become trapped by their own success, reinforcing existing strategies and discouraging radical digital change. - This lock-in manifests in three ways: ingrained routines (normative), deeply held assumptions about the business (cognitive), and investment priorities that favor existing operations (resource-based). - MEs tend to adopt digital technologies primarily to optimize current processes and enhance existing products, rather than to create new digital business models. - As a result, even promising digital innovations are often rejected if they do not seamlessly align with the company's traditional operations and core products.
Host: Welcome to A.I.S. Insights, the podcast at the intersection of business and technology, powered by Living Knowledge. I’m your host, Anna Ivy Summers. Host: Today, we’re diving into a fascinating study titled “Trapped by Success – A Path Dependence Perspective on the Digital Transformation of Mittelstand Enterprises.” Host: It explores a paradox: why are some of the most successful and stable mid-sized companies, particularly in Germany, so slow to make big, bold moves in their digital transformation? It turns out, their history of success might be the very thing holding them back. Host: To help us unpack this, we have our expert analyst, Alex Ian Sutherland. Alex, welcome to the show. Expert: Thanks for having me, Anna. It’s a really important topic. Host: Let’s start with the big problem. We’re talking about successful, profitable companies. Why should we be concerned if they prefer small, steady upgrades over radical digital change? Expert: That's the core of the issue. These companies aren't in trouble. They are leaders in their niche markets, often for generations. But the study highlights a critical risk. They tend to use digital technology to optimize what they already do—making a process 5% more efficient or adding a minor digital feature to a physical product. Host: So, they're improving, but not necessarily innovating? Expert: Exactly. They are on an incremental path. This caution means they risk being blindsided by a competitor who uses technology to create an entirely new, digital-first business model. They're optimizing the present at the potential cost of their future. Host: So how did the researchers get to the bottom of this cautious behavior? What was their approach? Expert: They used a powerful concept called 'path dependence theory'. The idea is that the choices a company makes today are heavily influenced by the 'path' created by its past decisions and successes. Expert: To see this in action, they conducted an in-depth multiple-case study, interviewing leaders and managers at three distinct mid-sized industrial machinery companies. This let them see the decision-making patterns up close, right where they happen. Host: And by looking so closely, what did they find? What were the key takeaways? Expert: The biggest finding is a concept they call 'functional lock-in'. These companies are essentially trapped by their own success. Their entire organization—their processes, their culture, their budget—is so perfectly optimized for their current successful business model that it actively resists fundamental change. Host: ‘Lock-in’ sounds quite restrictive. How does this actually manifest in a company day-to-day? Expert: The study found it shows up in three main ways. First is 'normative lock-in', which is about ingrained routines. The "this is how we've always done it" mindset. Expert: Second is 'cognitive lock-in'. This is about the deeply held assumptions of the leaders. One CEO literally said, "We still think in terms of mechanical engineering." They see themselves as a machine builder, not a software company, which limits the kind of digital opportunities they can even imagine. Expert: And finally, there's 'resource-based lock-in'. They invest their money and people into refining existing products and operations because that’s where the guaranteed returns are, rather than funding riskier, purely digital projects. Host: Can you give us a real-world example from the study? Expert: Absolutely. One company, Beta, developed a platform-based digital product. But despite the great hopes, they couldn't get enough users to pay for it and eventually had to pull back. Expert: Another company rejected using smart glasses for remote service. In theory, it sounded great. In reality, employees just used their phones to call for help because it was faster and fit their existing workflow. The new tech didn’t seamlessly integrate, so it was abandoned. Host: This is incredibly insightful. It feels like a real cautionary tale. This brings us to the most important question, Alex. What does this mean for business leaders listening right now? What are the practical takeaways? Expert: This is the critical part. The first takeaway is awareness. Leaders need to consciously recognize this 'success trap'. You have to ask the hard question: "Is our current success blinding us to future disruption?" Host: So, step one is admitting you might have a problem. What’s next? Expert: The second takeaway is to actively challenge the 'cognitive lock-in'. Leaders must question their own assumptions. A powerful question to ask your team is, "Are we using digital for efficiency, just to do the same things better? Or are we using it for renewal, to find completely new ways to create value?" Host: That’s a fundamental shift in perspective. But how do you do that when the main business needs to keep running efficiently? Expert: That's the third and final takeaway: you have to create protected space for innovation. The study suggests solutions like creating dedicated teams, forging external partnerships, or pursuing what’s called 'dual transformation'. You run your core business, but you also build a separate engine for exploring radical new ideas, shielded from the powerful inertia of the main organization. Host: So it's not about abandoning what works, but about building something new alongside it to prepare for the future. Expert: Precisely. It’s about achieving what we call digital ambidexterity—being excellent at optimizing today's business while simultaneously exploring tomorrow's. Host: Fantastic. So, to summarize, this study reveals that many successful mid-sized companies get stuck on a slow digital path due to a 'functional lock-in' created by their own success. Host: This lock-in is driven by established routines, leadership mindsets, and investment habits. For business leaders, the key is to recognize this trap, challenge core assumptions, and intentionally create space for true, radical innovation. Host: Alex, this has been incredibly clarifying. Thank you for breaking it down for us. Expert: My pleasure, Anna. Host: And thank you to our audience for tuning in to A.I.S. Insights — powered by Living Knowledge. We’ll see you next time.
Digital Transformation, Path Dependence, Mittelstand Enterprises
