Governance of digitalization is top on the agenda for many corporate decision makers. The GEAR framework introduced in this article aims to offer guidance by spelling out the key dimensions of digitalization, that is, governing, enabling, amplifying and realizing digital value creation, and providing option spaces for corporate decision makers along each of these dimensions, allowing them to develop realistic expectations about the impact of digitalization on existing or new businesses.
The Case for an Integrated Perspective on Governance of Digitaliztion
In the ongoing debate on the impact of digitalization on business, the history of this phenomenon is often overlooked. Digitalization goes back to the 1950s, when the binary nature of coding started to change the approach to information storing, sharing, and computing. It was not until the 1990s that the first wave of the digital revolution arrived in the mainstream economy, leading up to the infamous dot-com bubble that burst in the early 2000s. Fifteen years later, we have observed what can be called the second phase of digitalization. Its impact goes beyond the IT and communication industry, which was mainly affected in the first wave, with the emergence of many new companies disrupting entire industries.
To better understand the implications for corporate governance, the distinction between what we call Digitalization 1.0 and 2.0 is important for the following reasons: First, history always holds valuable lessons that should not be ignored. Second, deriving the appropriate lessons to be learned is pivotal to understanding the common and distinct aspects of a phenomenon. And third, the exuberance of the first wave should serve as a strong reminder to link expectations with reality.
This all calls for an integrated perspective on the governance of digitalization:
Taking into account the impact of both Digitalization 1.0 and 2.0
Viewing governance as an inclusive process involving various decision and execution bodies both inside and outside the organization
Linking the key business questions (i.e., why, what and how) to address the expectation reality gap
This Time is Different … Really?
At first glance, Digitalization 1.0 and 2.0 look very similar: a high degree of expectations for a new technology that is said to change everything, leading to skyrocketing valuations of new companies and hyped expectations of gains in productivity and economic value creation, which, in turn, led to an economic bubble that burst at the end of the first digitalization wave. At the same time, Digitalization 1.0 has profoundly changed how companies operate and how consumers behave, with version 2.0 likely to have an even more profound impact. So how do they differ?
Digitalization 1.0 was based on the simple assumption that analog content and ways of communication can be digitized (Negroponte, 1995). As a result, content-driven industries, such as media, entertainment, or communications, and transaction-heavy sectors, such as commerce or trading, have changed dramatically; digitized transactions and interactions led to gains in efficiency and effectiveness, resulting in optimized processes and product innovations. However, data security and safety were the major risks companies were forced to deal with.
Digitalization 2.0, or as other frame it Industrialization 4.0 (Schwab, 2015), goes beyond simple digitization and entails the automation of many cognitive tasks (Brynjolfsson & McAfee, 2014). In that context, the business activities impacted by digitalization are not limited to transactions and interactions but extend to core management activities. For instance, coordination or steering business decisions are driven through machine learning and artificial intelligence, potentially leading to the substitution of human capital from low-skilled jobs to managerial professions. The result is likely to be a substantial transformation and disruptions of entire industries, leading to a new risk environment in which companies must push for cyber-resilience. Some even see in Digitalization 2.0 the beginning of a new Renaissance (Golding & Kutarna, 2016).
The GEAR Framework for Governance of Digitalization
The proposed framework for governance of digitalization builds on the promises and risks offered by Digitalization 1.0 and 2.0 and integrates four key dimensions as seamlessly and interdependently as the function of gears: They can only deliver the desired result if all gears are in motion and optimally tuned to each other. The speed is determined by the slowest moving gear, and a significant level of experience in engineering is needed to construct the engine; oil and good care are also required to maintain it. In the end, all activities are geared toward one objective, i.e. digital value creation.
The four GEAR dimensions are as follows:
Govern digital value creation process: Who is involved (and in which capacity) in the direction setting, development, decision, and deployment process when it comes to strategic moves related to digitalization?
Enable digital value creation lever: Why do companies want to get involved in digital business activities? What do they expect from this move?
Amplify digital value creation impact: What is the impact of such a move on the business and industry logic? Does it fundamentally change the underlying logic, or does digitalization simply add another opportunity?
Realize digital value creation strategy: How do companies execute on a defined direction from ideation to implementation? What are some of the pitfalls to overcome along the way?
Govern Digital Value Creation Process
Governance, the first GEAR, describes who is involved at what stage in the strategic move to embrace digitalization. In that context, we distinguish between four parties involved, that is, the board of directors, the executive team, the organization, and external business partners, in five key governance activities that can be seen as a continuous process:
Direction: Provide strategic guidance for how the company should embrace the challenge and opportunity of digitalization.
Development: Design the digital strategy that fits the company requirements and is in tune with the directions given.
Decision: Formally approve a given strategy to allow for the allocation of the resources needed.
Deployment: Implement a formally approved digital strategy or decision.
Detection: Monitor whether the implementation of a digital strategy advances as planned, and take corrective measures as needed, i.e. adjust the given direction, which takes us back to the first activity of direction setting.
In any normal business setting, the board of directors sets the direction, decides on the strategy and monitors its implementation, while the executive board, supported by the organization, comes up with the strategy and manages its implementation. In the case of the digital strategizing and execution processes, we can identify three deviations to the usual process:
Bottom-up initiation: In many cases, digital initiatives emerge from the periphery of an organization as compared to the headquarters, be it a certain market or a business, which observes certain trends and developments and comes up with a digital solution. As the board of directors may be too far from the local business realities or technological trends, bottom-up initiation often fill the void.
Iterative strategizing: Given the dynamic nature of technological developments related to digitalization and the inherent uncertainty as to how these will impact the business, digital strategies are often the result of an iterative process of trial and error in which the strength lies in the ability to act with agility and adaptability.
Externalizing innovation: Given the disruptive nature of digital strategies, many companies turn to external business partners for innovation, whether in form of corporate venture capital, strategic partnerships, or outsourcing of innovation activities. The company leadership hopes that the partners can act faster and with fewer restrictions to beat competitors, which often are start-ups.
Enable Digital Value Creation Lever
Digitalization can bring many benefits to a company. It is pivotal to be clear about the intention of a digital strategy before embarking on a long and often costly journey. Four major digital enablers can be distinguished:
Interactions: Digitalization can bring great value in facilitating interactions between different economic players. Digital interaction channels may not only offer a cheaper method of communications, but also a richer avenue of engagement and experience. With the Internet of Things and wearable technology on the horizon, the notion of interaction will gain a whole new meaning.
Insights: A second rationale for defining a digital strategy is to gain data insights by becoming capable of collecting considerable data and of automating data analytics. As data has become the equivalent of oil (of the industrial age) in the digital age—highly valuable for understanding and steering consumer behavior as well as managing industrial activities—generating data insights is a common objective for many companies embarking on a digital journey (Rogers, 2016). Data are also at the core of more recent organizational models such as holacracy, which envisions organization as a self-managing organism.
Intermediation: Since the emergence of online commerce, one of the key enablers has consisted of the power of digital businesses to be an effective and efficient intermediary between parties who want to close a deal. Whereas earlier models focused on traditional trading platforms for exchanging goods and capital, the significant disrupters these days are creating a new sharing or gig economy, allowing the populace to take control and make everything tradable and sharable, be it information, physical assets or services (Marchi & Parekh, 2015).
Intelligence: Companies see increasing value in using digital technology based on artificial intelligence and machine learning to automate key decision processes that are needed to steer economic activities in a smart way (Porter & Heppelmann, 2015). Although there are legitimate questions on the true potential of these technologies against the background of unmet expectations in the past (Ford, 2015), we can observe an increasing number of managerial activities being automated, with more to come (Davenport & Kirby, 2016).
Amplify Digital Value Creation Impact
The next step in defining the appropriate digital strategy and related resource needs is to clarify the impact of digitalization on the organization or industry as this will help us determine how to approach digitalization. We can distinguish four levels of impact:
Process optimization: The chosen approach may lead to more efficient processes through automatization and data insights. This approach will not affect the underlying logic of the business but, rather, leads to efficiency gains within the current business logic.
Product innovation: A digital strategy may result in a new product or service that helps create a new market or improve the overall positioning of the company in a given market. The company will be able to capture a new opportunity that may eventually cannibalize an existing offering, but it is unlikely to change the underlying business logic.
Pipeline transformation: A digital strategic move may lead to a reconfiguration of the value chain (i.e., the pipeline as defined by Evans & Schmalensee, 2016) and the position of the company within it. Hence, as the whole value chain is transforming due to digitalization, a manufacturer may suddenly become a service provider. In that case, the company will undergo a true transformation that will likely lead to a change in the underlying business model.
Platform disruption: Digitalization may lead to the true disruption of a company or even an industry (Raskind & Waller, 2016). In that case, a new digital business, which provides a novel platform connecting different economic players with much lower transaction costs than those offered by the existing market structure, may eventually disrupt existing market structures by offering a superior product or service, meeting basic needs in a more convenient and efficient way (Evans & Schmalensee, 2016).
Realize Digital Value Creation Strategy
The best strategy is worthless without diligent execution. Successful implementation of a digital strategy requires a specific set of capabilities (Westermann, Bonnet, & McAffe, 2016). Given the novelty aspects of digital strategies, they are prone to the following specific challenges that need to be overcome:
Creativity: Often, the easiest challenge to overcome is the creativity challenge: that is, finding the right digital innovation idea. As many great ideas already exist in the market, the critical capability lies in selecting feasible and economically sustainable ideas.
Community: Since the success of many digital ideas depends on user acceptance, popularizing a digital business concept is a crucial step to business success (Rogers, 2016). Popularization also provides instant feedback on the feasibility of ideas as it indicates what needs to be improved to make a digital idea successful.
Commerciality: Even digitalization cannot change the basic economic concept of making a profit and generating cash to survive and grow, which is essential for every digital business. Becoming a profit generator in order to survive is often the biggest challenge faced by new digital companies, and it underlines the importance of managing expectations.
Continuity: Any digital business must become sustainable as either a well-functioning independent company or a well-integrated part of an existing business organization. This transition involves additional pitfalls, such as establishing proper control and governance mechanisms, that every business needs to overcome to survive in the long run.
Governance of Digitalization Geared Toward the Future: Robo-Boards and Robo-Managers?
Mastering governance is one of the most challenging tasks of modern management. Applying principles of good governance to highly-complex and fast-moving areas such as digitalization is even more challenging. The GEAR framework presented in this article may offer some orientation and navigation in this endeavor. This framework can serve as a guide toward sensible outcomes in the fascinating world of digitalization.
At the same time, such a framework can substitute neither for inspiration nor for the intellectual rigidity and integrity of the board of directors and top management teams in anticipating trends, deriving the best conclusions, making the right decisions in times of uncertainty, and following through diligently in strategy execution. The day may come when robo-boards and robo-managers play a part in complementing human governance boards in driving decisions and executing digital strategies. However, if there is anything to be learned from history, humankind has always found a way to make use of technology rather than the reverse (Hariri, 2017).
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This article was published as a chapter in the book Governance of Digitalization in June 2017.