Digital Transformation and Corporate Management

We already know that as income levels rise consumer demand tends to shift from products to services. Food is the first necessity of survival. When we have got clothing and found a place to live, the next thing we want is a range of services ... This is something we can understand intuitively. As circumstances change, what services are packaged with products becomes increasingly important for consumers.

In Japan, these days, communication, medical and nursing care, culture and entertainment are fields where demand is growing at a higher rate. Essentially, these are all service providers. The nature of service delivery is changing dramatically amid the Fourth Industrial Revolution, which is often described by keywords such as artificial intelligence (AI) and Big Data, or the Internet of Things (IoT). We are in the middle of the trend of digital transformation (DX).

Under DX, building a platform is one of the typical models for service businesses and consumers are more likely than ever to use a single framework. Different companies compete and, occasionally, cooperate on such shared frameworks to generate services that are a good fit with the rich variety of consumer preferences. The more firms participate in the framework, the more ideas overlap each other, generating new businesses.

During this process, the most profitable firm is the one that provides the platform that outlasts the others. The sufficient conditions for success are not crystal clear as coincidence also plays a role as to which firm wins and which one loses. A high quality of service is a must, but as history has shown, this is not the only key to victory or defeat. Cumulative and proportionate investment is needed to become the provider of the surviving platform. Meanwhile, the firms that drop out are only left with a huge cost burden.

Because of this kind of winner-takes-all aspect of doing business in a DX environment, there are significant differences in how well firms perform in their businesses. Consequently, workers may see fairly substantial income gaps depending on which firm they work for. If these trends are taken to their extreme across society, the contrast between the winners and the losers will become clearer. It cannot be denied that there is the potential for major divisions in society.

In this environment, corporate management has a choice between being a provider of platforms, or a player on platforms. As a result, the evaluation of the risks and returns for the business will vary greatly. To be a provider of a platform is riskier than in the past, while the return for a player on a platform is potentially not as high as might be expected in the past.

Meanwhile, society is taking an increasingly stern view of firm actions that seem to promote social divisions as disparity becomes clearer. A good example is that investments focused on the environmental, social, and governance (ESG) perspectives are rising in the financial markets.

Firms have to perform an increasingly complicated balancing act in the DX environment going forward. They have to evaluate their business models with a cool head and take risks depending on such evaluation in order to survive long into the future. They must also take a stand for a sustainable society and contribute to it to the best of their ability. Global firms in particular must skillfully handle this balancing act. DX is not just a new wave of technological innovation.