Protectionist trade policies and traditional governance can create barriers for digitalization and have severe consequences for businesses, but market participants can circumvent or overcome such barriers through innovation, particularly leap‐frogging ones.
Prof. Dr Jürgen Weigand, Professor of Economics, shares his view on how to break traditional barriers in a digitally disruptive world with innovation and strategic thinking.
Digitalization in a restrictive trade regime
Q: While digital disruption is actually helping lower traditional trade barriers, recent developments like America First have threatened open markets and globalization. In the event of a more restrictive trade regime, what sectors of industry would be impacted and how will organizations make the most of digitalization? What does this portend for companies like Infosys that have significant international operations and revenues?
Prof. Weigand: Digital disruption impacts business organizations in at least two dimensions:
- Infrastructure and eco‐system of a business: Digitalization of the vertical and horizontal value chain is primarily concerned with connectivity and decentralization of organizations. Data and intelligent systems are enabling mass‐customization and innovations for a competitive edge. Industry 4.0 is a great example of unlocking digital capabilities in a manufacturing environment offering holistic end-to-end connectivity and flexibility
- Purpose of a business: A company’s offerings to the market, be it physical, digital, or hybrid, where the boundaries between physical and digital products and services are blurring fast with offerings like smartphones, wearables, self-driven cars etc.
Protectionism affects advances in digitalization in two ways:
- Physical barriers, such as trade barriers and regulations
- Digital barriers, for example digital filtering, censorship, regulations on digital rights etc.
While physical barriers can harm the infrastructure and eco-system of a business, digital barriers can have severe consequences for an entire business because they expose its core idea and purpose to risk.
Trade barriers, such as quotas, tariffs, subsidies or bans, put significant pressure on a company’s value chain encouraging it to “produce where it is consumed”. Historical experience tells us that protectionist trade policies target physical products and manufacturing industries, repudiating Ricardo’s paradigm of comparative advantage of nations and thus lowering overall economic welfare. However, this protectionist approach may induce market participants to circumvent or overcome such barriers through innovation, particularly leap‐frogging ones.
Digital filtering, censorship and data regulations are lethal to digital products or services, such as social networks, news services, web searches, photo and video products, digital finance, analytics services, and digital offshoring industries.
Why does protectionism happen at all?
Over the past decades the world has moved from a bipolar power structure between the United States and the Soviet Union, to a unipolar power structure dominated by the United States in the 1990s and early 2000s, and further to today’s fragmenting, multipolar structure, with China as a new power house, and unexpected alliances being formed, tested, and reformed on a case by case basis. In this race for power, protectionism and nationalism are going hand in hand.
Put differently, the lack of a “world leadership” is one cause for protectionism.
These political developments are threatening the core businesses of companies operating globally, such as Infosys. Novel laws and regulations have been initiated in some countries to define domestic data and services as part of a country’s sovereign territory and disallow their processing and delivery in or to a foreign country (e.g., European privacy law forces companies to physically store data in the EU). Therefore, a countermeasure would be risk diversification across multiple countries, building deep trustworthy relationships with customers and abiding by their cultural and economic needs.
Traditional Governance in a Digital Era
Q: In a digital environment, organizations function differently ‐ their business cycles are faster, operations don’t work in siloes but are integrated, with social media playing a key role; they no longer have complete control over their branding. Last but not the least, protecting personal data and meeting regulatory requirements are a major responsibility. Given these, what are the challenges for traditional governance mechanisms as organizations adopt digital technologies?
Prof. Weigand: What you refer to is the typical VUCA (volatile, uncertain, complex, and ambiguous) environment described by Bennett and Lemoine (2014), where markets become more volatile, competitors and societies become more uncertain, businesses operate in a more complex environment, and stakeholders’ interests and business objectives are more ambiguous. For example, Infosys as a multinational company must adhere to dozens of unique regulatory environments and cultures.
Start-ups and increasing speed of change
Start‐ups are disrupting the digital economy at an accelerating pace, compelling large corporates to respond by either acquiring these challengers, exposing the corporate’s core business to dilution, or risk losing market share to the newcomers. Continuing territorial conflicts over resources (Middle East), diverging political interests (EU), or hyped technologies like Bitcoins induce unpredictable market movements such as large price fluctuations. Unforeseen technological disruptions or protectionism can make complete business models obsolete. This is accompanied by the overall theme of the digital economy and an exponentially increasing speed of change.
It’s a great time to leap-frog
From a systems theory perspective, this means that from top to bottom, from the high‐level societal perspective through the firm level perspective down to the individual level, relationships and environments are increasingly complex dynamic systems. A complex dynamic system cannot be adequately controlled, and thus traditional management tools will become less useful, or might even be replaced by intelligent artificial systems. In my opinion, the focus needs to shift from traditional leadership in the world of linear business models to strategic leadership in the era of the digital economy, supporting and guiding people to deal with exponential growth and changes.
VUCA in the context of the digital economy induces changes for management and leadership positions. Following Mack et al. (2016), management must implement more flexible work frameworks, emphasizing agile project management and workflows, self‐regulating mini‐organizations, collaboration, profound risk‐management, and a digital mindset and culture. Specifically, corporate leaders need to plant in the minds of their employees ‐ with mindfulness and appreciation ‐ the corporate seed of vision, mission, and strategy and nurture it to let it grow. There is no single point of communication anymore between the firm as an organization and its external environment (cf. the traditional public relations unit). Due to ubiquitous connectivity and its implicit global reach, every employee is a “press speaker” of his/her company. Hence there is the necessity and need for a profound all -encompassing cyber‐security strategy, which shouldn’t just be considered as a hygiene factor, but, much more than that, as a value proposition to the customer.
In this digital challenge, leadership needs to provide clarity of vision and a sense of direction, filter the VUCA noise, and empower and encourage employees to experiment in order to drive the business. As Johansen and Euchner (2013) highlight, for some companies “It’s too late to keep up. You can’t keep up. But it’s a great time to leapfrog.”
Get curious. Get inspired. Get innovative.
Effective leadership sparks the curiosity to seek novel ways of doing things, of creating innovative products and services to gain and sustain competitive advantages instead of perpetuating the boredom of known daily routines. Digital‐savvy leaders focus on establishing a co‐existence of educated humans and intelligent machines and educating their workforce to foster knowledge creation, rather than simply substituting labor by capital for cost‐effectiveness. Because, as Peter Drucker (2001) emphasized, knowledge, or meaningful information from data, will be the crucial new resource, and knowledge workers will be the dominant group in a company’s workforce.
Leading in a digitally disruptive world
Q: In the era of the Fourth Industrial revolution, what lessons can countries and companies derive from the preceding three? What are the key elements that will differentiate the front‐runners from others? What should growth nations like India, with its favorable demographics, be doing to ensure that they capitalize on this wave for inclusive development and global competitiveness?
Prof. Weigand: Industrial revolutions are characterized by an inherent, inevitable and irreversible state of change. Once novel technologies are in place and penetrate all layers of an economy, they can only be superseded by more advanced technologies. The Fourth Industrial revolution, which may be described as smart or advanced manufacturing, focuses on the digitalization of vertical and horizontal value chains using cyber‐physical, intelligent, and autonomous systems. This is not an entirely new scenario. In the 1990s computer integrated manufacturing (CIM) was a promising paradigm, but failed due to human resistance, lack of understanding, lack of technical standards, and organizational incompatibility (McGaughey and Snyder, 1994). Firms just tried to substitute legacy technology by a revolutionary one and, therefore, put the integrity of the organization at risk.
To win, transform data into knowledge
To push the Fourth Industrial Revolution, holistic strategies governed by sovereign authorities are vital to foster a digital economy with coherent and consistent technological advances. The previous industrial revolutions were originating from a few technical breakthroughs which changed society for ever. Just remember the geographical effects of the first and second industrial revolution: steam power fostered the formation of industry hubs and urbanization. With electricity and the advent of affordable mobility, companies could exploit locational advantages. The key driver of the Fourth Industrial Revolution is digitalization in combination with intelligent systems which transform data into knowledge. From a societal vantage point, we should carefully observe this transition and start to understand the consequences. According to Brynjolfsson and McAfee (2014), in this fourth wave of transformation, a growing economy (regarding GDP) may face increasing unemployment rates due to automation and the use of machines and robots. The fundamental difference that will distinguish forerunners from others will be the strategic foresight of leaders and the managerial skills to capitalize on knowledge and data. Knowledge and data are fragile resources, without borders. Companies with a highly educated workforce and a digital culture will be more likely to reap the benefits from the knowledge resource than others.
India must reform its education system
For India, this could mean pushing harder on advancing the education system. Similar to the mobile network coverage where India leapfrogged by just bypassing traditional cable landlines and pushed mobile communication, it can now jump ahead in the international competition for talent if educational strategies and resources are in place and materialize.
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