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[22]A.2 The Fourth Industrial Revolution as a Strategic Narrative for Board-Level Discussions on Digitalization

Author

Dr. William Lee Howell has been a member of the Managing Board at the World Economic Forum (WEF) in Geneva, Switzerland since 2011. As Head of Global Programming, Lee is responsible for the design and development of the WEF flagship Annual Meeting in Davos, Switzerland; the Annual Meeting of New Champions in China (“Summer Davos”); and the Annual Meeting of the Global Future Councils in the United Arab Emirates. He was Editor-in-Chief of the Global Risks Report (2012 and 2013 editions) and also served as Senior Director for Asia (2004–2009) at the WEF. Dr. Howell is also affiliated with the International Center for Corporate Governance at the University of St. Gallen, Switzerland, where he completed a doctoral dissertation on the topic of uncontrollable risks and the role of the board of directors.

Abstract

Digitalization requires boards of directors to develop a strategic narrative about existing and emerging technologies that will drive both innovation and disruption across their industry. In this regard, the Fourth Industrial Revolution is a compelling framework for boards to begin crafting their own narrative about their company’s future digital ambitions and business model.

[23]1 Digitalization as a New Phenomenon

The digitalization phenomenon of the twenty-first century differs significantly from the digitization process of the last century, in which data was converted from analog to digital format, i.e. Digitalization 1.0. Digitalization 2.0 entails adopting digital technologies (and the accompanying mindset) to change a business model rapidly or to create new value at scale. Companies that master digital technologies “have two advantages when it comes to speed: they are often light weight in terms of assets and people—and they are exponential in approach” (Hagemann-Snabe, 2016, p. 12). Uber Technologies Inc. (Uber), operating in over 70 countries, exemplifies digitalization as a transportation network company that does not own any vehicles. Mobile technologies allow Uber to serve as a digital platform by connecting a network of drivers to a network of travelers. A well-executed digital platform can essentially reduce marginal costs to zero while enabling exponential growth: “[I]n fact, today more than 60 % of the market value of the 10 most valuable companies in the world are young IT companies with a strong digital platform” (Hagemann-Snabe, 2016, p. 12). Facebook and Google took only five and six years, respectively, to reach revenues of $1 billion. How then should a board of directors approach digitalization in a global context? If a digital technology operates worldwide, then “globalization means that firms must confront themselves with increasingly complex competitiveness requirements regardless of their size” (Hilb, 2008, p. 65).

Acquiring contextual intelligence and maintaining situational awareness are both critical attributes for boards in this regard. Contextual intelligence is “the ability to understand the limits of our knowledge and to adapt that knowledge to an environment different from the one in which it was developed” (Khanna, 2014, p. 58). Situational awareness refers to “developing an understanding of what is happening around one at present and thinking ahead as to what is likely to happen in the near future, while continuously updating one’s knowledge of both” (Endsley, 1995, p. 50). It is possible, but not probable, that a board could acquire and develop both attributes concurrently given the speed and scale of digitalization globally. Instead, boards should focus on developing a conceptual framework or a strategic narrative in response to the digital technologies that already connect billions of people, devices, and machines to unlock new value (see Figure A.2.1). The World Economic Forum (WEF) estimates that “it could deliver around $100 trillion in value to business and society over the next decade,” and “if stakeholders are incentivized correctly, the majority of that value should accrue to society” (WEF, 2017, para 6).

[24]

Figure A.2.1: The Value of Digitalization Across Industries (Source: WEF 2017)

A strategic narrative is anchored to a shared purpose but, more importantly, it also invites a company’s stakeholders (including its board) to play a role in its fulfillment. Unlike a branding exercise, the “context of the narrative must be a human, not an institutional, relationship” that conveys the “company’s vision, communicates the strategy, and embodies the culture” (Bonchek, 2016, para 9). An emerging global narrative based on the Fourth Industrial Revolution may provide an answer for not only companies looking to reinvent themselves through digital technologies, but also for the boards responsible for their governance.

2 A Strategic Narrative for the Fourth Industrial Revolution

Klaus Schwab, founder and Executive Chairman of the WEF, posits that a range of emerging technologies from the physical, digital, and biological worlds are combining to create innovations at a speed and scale unparalleled in human history. Schwab (2016, p. 3) highlights three observations supporting his conviction that a Fourth Industrial Revolution is underway distinct from the prior three (see Figure A.2.2).

[25]Velocity: Contrary to previous industrial revolutions, this one is evolving at an exponential rather than linear pace. This is the result of the multifaceted, deeply interconnected world we live in and the fact that new technology begets newer and evermore capable technology.

Breadth and depth: It builds on the digital revolution and combines multiple technologies that are leading to unprecedented paradigm shifts in the economy, business, society and individually. It is not only changing “what” and the “how” of doing things but also “who” we are.

Systems impact: It involves the transformation of entire systems across (and within) countries, companies, industries and society as a whole.

Figure A.2.2: Arrival of the Fourth Industrial Revolution (Source: Schwab 2016)

A possible fourth consideration may be that “scarcity of a skilled workforce, rather than the availability of capital is more likely to be the crippling limit to innovation, competiveness and growth” (Schwab, 2016, p. 45). This observation hints at the potential destructive effect of automation, combined with artificial intelligence, substituting capital for labor. Routine and repetitive work that currently provides middle-class, white-collar jobs such as telemarketing or tax preparation could be at risk. Therefore, a strategic narrative that emerges from the Fourth Industrial Revolution is that the purpose of technology should be to empower people rather than replace them and to serve society rather than disrupt it. And such a purpose requires innovators to collaborate with a wider array of stakeholders to develop moral and ethical parameters for future growth that complement well with technological advancement.

If a board of directors can develop its own strategic narrative about the Fourth Industrial Revolution, it will find the process complementing related [26](and vital) governance functions such as promoting the company’s digital culture and setting its risk appetite in terms of adopting new technologies. As with these governance functions, it requires the board to ask management the right questions to ensure that their strategic narrative is aligned with the management’s objectives.

Innovation and management expert John Hagel (2013, para 3) highlights five distinct advantages that a narrative provides for a company:

1.	“A powerful narrative can differentiate – it can help a company to stand out from the crowd in a powerful and sustainable way.
2.	A narrative can mobilize resources from a broad array of participants that can amplify the efforts of the company.
3.	A powerful narrative can focus a much broader community on an exciting opportunity that can spur innovation in very unexpected directions.
4.	Narratives frame long-term opportunities that require sustained relationships to achieve.
5.	Narratives help us to overcome cognitive biases that tend to take hold in times of growing uncertainty and turbulence.”

Governing digitalization within a global context requires boards of directors to develop to a strategic narrative about existing and future technologies that will drive both innovation and disruption across their industry. The Fourth Industrial Revolution is a compelling framework for boards to begin crafting their narrative to ensure that management is focusing on “fast moving startups, challenging assumptions and strategic innovation projects and partnerships necessary for the company’s future innovation and growth” (Hagemann-Snabe, 2016, p. 16).

References

Bonchek, M. (2016, March 25). How to build a strategic narrative. Harvard Business Review. Retrieved from https://hbr.org/2016/03/how-to-build-a-strategic-narrative

Endsley, M. (1995). Toward a theory of situation awareness in dynamic systems. Human Factors, 37(1), 32–64.

Hagel, J. (2013, October 7). The untapped potential of corporate narratives [Blog post]. Retrieved from http://edgeperspectives.typepad.com/edge_perspectives/2013/10/the-untapped-potential-of-corporate-narratives.html

Hagemann-Snabe, J. (2016, November). Leading continuous re-invention. Lecture at the Copenhagen Business School, Copenhagen, Denmark.

[27]Hilb, M. (2008). New corporate governance (3rd ed.). Berlin: Springer.

Khanna, T. (2014, September). Contextual intelligence. Harvard Business Review. Retrieved from https://hbr.org/2014/09/contextual-intelligence

Schwab, K. (2016). The fourth industrial revolution. New York, NY: Crown Business.

World Economic Forum (WEF). (2017). Digital transformation initiative. Retrieved from http://reports.weforum.org/digital-transformation/introducing-the-digital-transformation-initiative