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Digitalization and Firm Performance

Are Digitally Mature Firms Outperforming Their Peers?

Written by J. Wroblewski

Paper category

Master Thesis

Subject

Business Administration>Finance

Year

2018

Abstract

Master Thesis: Digital maturity and corporate performance Overall, new digital technologies have developed rapidly and changed the economic landscape. Innovations proposed by small and fast-growing innovative companies have taken over the industry and reshaped the way business is conducted. Traditional companies, which are generally more rigid, are faced with rapidly evolving digital technologies that penetrate industry standards. Digital innovation provides new opportunities, however, only a few companies have gained real benefits. The company's digital innovation level and affinity can be measured by one indicator: digital maturity. Kane et al. (2016) believe that the digital maturity of different organizations stems from common characteristics. Specifically, they identified the following characteristics that drive digital maturity. First, digitally advanced organizations have higher risk tolerance. They accept a certain degree of risk, which is logically related to the implementation of new technologies. Second, more digitally mature organizations are willing to experiment, which is closely related to higher risk tolerance. The introduction of new technologies is troublesome and may disrupt daily business in the first place. Third, digitally mature organizations invest heavily in recruiting talents and leaders with a vision for change. These key employees help shape the digital culture in the organization. It is important that digital innovation, organizational culture, and employees of the organization stay in sync. Bughin et al. (2017) believe that the company's future success in a more digital environment can derive ronment in the early part of its transformation process by analyzing its digital intelligence. Digital intelligence 28 is one of the key drivers of successful digital transformation. In addition, as mentioned earlier, a clear digital vision and appropriate technological improvements (Kane et al., 2015). In addition, Bughin et al. (2017) found that digital intelligence is positively correlated with financial performance. Specifically, after controlling the industry, company size, and location, higher digital intelligence scores have a positive impact on revenue, EBIT, and company growth. Their results are statistically significant, and the correlation applies to various industries, such as business services, manufacturing, and high-tech. In addition, they found that (1) digital intelligence scores are the highest for companies proficient in numbers; (2) the four dimensions (and their sub-dimensions) have roughly the same impact on digital intelligence, which means that the weights of each dimension are roughly the same . Interestingly, the individual scores in the four dimensions are very consistent with the group rankings. In other words, compared to the average group, the digital leader scores higher on all dimensions, as do the average group and laggards. 2.6.1 Digital Maturity: Framework The following is the framework proposed by the MIT Digital Business Center (Westerman et al., 2011). According to this report, digital maturity can be viewed as a combination of two dimensions. On the one hand, digital innovation incorporates technological initiatives, new internal processes and business models. This is captured by digital intensity (DI): processes and new technologies that change the way companies operate. On the other hand, company-wide transformation includes leadership changes, new visions, and missions to promote digital transformation. This can be reflected in the transformation management intensity (TMI): IT business relationships and governance that change the company's future vision. Figure 1 shows the proposed classification of digital maturity. DI and TMI are divided into two parts that reflect the company's development level (Westerman et al., 2011). Companies with low digital capabilities, that is, low levels of DI and TMI, are marked as beginners. Figure 1: DI and TMI frameworks and corresponding categories (Westerman et al., 2012, p. 4). Beginners are either companies that are just starting out or companies that do not understand digital transformation and its advantages. Companies that implement new digital solutions, are willing to try and strive to achieve digital transformation, that is, high DI and low TMI are known as fashionistas. These companies use brute force methods to become digital leaders. However, they often miss key steps to implement proper governance internally, which inhibits the results of digital innovation, because digital efforts cannot be optimally used. Digital conservative companies value slow but steady progress rather than rapid digital reforms, that is, low DI and high TMI. These companies emphasize corporate culture and good management, and they are skeptical of digital innovation. Companies with high DI and high TMI are classified as Digirati. This type of company is believed to fully understand how to use digital innovation and the implementation of such innovations. They are good at driving value through digital transformation. They optimally balance vision and engagement, invest in upcoming technologies, and develop an appropriate digital culture. Generally speaking, companies at the digital forefront have characteristics such as high-speed innovation, task automation, open experimentation, and digital creation. Assets (Manyika et al., 2015). The balance and coordination of technologies that increase digital strength and the digital roadmap that outlines the company's digital future further strengthens their digital competitive advantage (Westerman and McAfee, 2012). Read Less