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Digitalization May Be Making Business More Innovative But Less Dynamic

Digital businesses are transforming markets and being valued at levels unlike anything seen since the early 20th century, but scrutiny is increasing along with all this digital-fueled growth

The $2.7 billion fine levied against Google by EU antitrust officials in June is just the most recent instance of a broader investigation into the practices of digital businesses. Senior EU figures have taken similar interest in Amazon, Facebook, and Apple, and there may well be further examinations to come.

The growing number of digital antitrust cases shows how regulators in Europe and beyond are becoming more than a little worried about the “winner-takes-all” characteristic of some digital businesses. While the EU cases have so far made the most headlines, digital businesses are contributing to a puzzling set of market dynamics throughout the world.

Indeed, regulators and market analysts can be forgiven if they feel cognitive dissonance – the psychological discomfort produced by the combined presence of two thoughts that don’t follow from one another – as they try to reconcile two empirically informed but polar opposite market dynamics at work across the US and Europe:

  1. Business innovation and transformation accelerating: The business and consulting press is full of stories about how business is going through a period of profound change largely fueled by “digitalization,” which Gartner defines as the use of digital technologies (e.g. computing, storage, artificial intelligence) to change a business model and provide new revenue and value-producing opportunities.

    New, dynamic, and fast-growing digital businesses are upending incumbents across broad swathes of the economy – retailing, media, transportation, and financial services, to name a few – and the pace and depth of “digital transformation” by most accounts is poised to grow.

  2. Business dynamism on a multi-year decline: On average, incumbent firms are growing older, larger, and more profitable despite tepid revenue growth. New business formation has declined so drastically since the 1970s that in recent years more firms are dying than are being created (pdf).

    Turnover in the S&P 500 and the Fortune 500 (pdf) is now at the lower ends of their historical ranges indicative of more, not less incumbent resilience. The percentage of the workforce toiling at large, aging firms is growing as labor mobility has decreased over time (pdf). Productivity improvements have stalled economy-wide despite growing investments by firms in technology and automation.

Dissonant Growth

A conference at the University of Chicago earlier this year spent two days trying to understand why business seems to be more transformative and less dynamic at the same time, and the implications this has for the future of competition.

Deepening digitalization is emerging as a factor behind both greater market transformation and the decline of business dynamism The Booth conference in Chicago, for example, devoted significant agenda time to questions of “winner-take-all digital platforms” and “big data and competition” suggesting possible links between how digitalization underpins business innovation and transformation on the one hand but also produces dominating firms on the other. Along a similar line, The Economist also recently pointed out the structural difference between businesses based on information and networks and those “selling lumps of stuff.”

In fact, digital “network effects” of all sorts have been evident since the launch of the first e-commerce pioneers like eBay and Amazon over 20 years ago. Firms that successfully harnessed the unique attributes of digital capability have simultaneously disrupted big sectors of the economy and achieved market scale and valuations unlike anything seen since perhaps the industrial giants of the early 20th century.

How many social media spaces for friends and family will the market support? How many alternative search algorithms? Or autonomous vehicle providers? There are reasons to think not that many. And it is extraordinarily difficult to displace a digital platform or ecosystem once it has been firmly established and grown dominant. Hence the scrutiny by antitrust authorities.

Implications for Managers

While academics, managers, commentators, consultants, and many others try to parse quite what digitalization means for global business and the economies they operate in, firms will certainly need to stay vigilant on the antitrust front; regulators are still working out how to respond to the growth and new competitive dynamics of digital businesses.

But managers must also scrutinize what decisions are within their control in the short term and whether they have the right sense of urgency and focus on digital transformation in the long run. Firms need to move with greater strategic agility and purpose if they hope to find a sustainable home in an economy that is already being shaped by “winner takes (at least a lot)” digital business models. To do that, they need to address the aspects of their operating models that slow them down and hold them back.

Some firms, for example, have sought “enterprise agility” and adaptability by decentralizing decision making deeper into the organization. But that can lead to decisions disconnected from broader enterprise strategy. To enjoy the agility of distributed decision making while ensuring local decisions are consistent with corporate strategy, firms need to put in place new operating mechanisms.

A good place to start is setting a clear and concise corporate narrative. A corporate narrative is a short summary that links what the company is, what it stands for, and where it’s going. A clear corporate narrative is crucial not only to motivate and guide employees to act in the interest of corporate strategy (so distributed decision making doesn’t produce chaotic and disconnected decisions) but to communicate the direction of the firm to important external audiences as well.

 

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