Digitization starts with processes

Whenever you want to digitize something, you need to start with designing processes. Digitization usually requires some piece of technology, and you need to “tell” the machine/software what it is supposed to do, i.e. which actions to take under which circumstances – and this means designing processes.

Also, digitization often means automating at least some of the actions, so that, ideally, they can be scaled quickly. After all, that is one of the main advantages of digitization. And automation, of course, requires predesigned processes (otherwise you cannot automate).

Even in a broader sense, when, for instance, designing a platform business model, you need to carefully think about your process design. Which processes do you want the platform to support and how exactly are these processes supposed to work? Well, it all starts with processes.

Digitization is not about technology

The naive digital mind might think that digitization is all about technology. So some companies  start hiring technical consultants and are putting their head of IT in charge of the firm’s digitization. But this approach has some flaws. While digitization may be driven by technological developments, it is at its core not about technology. At some point in time companies need to introduce some new technology, that’s right. However, the much more important tasks are the development of new processes and, above all, the development of a working business model. Digitization has profound effects on your business, and technology alone cannot address them properly. The first flaw, therefore, is to think that introducing some new technology (maybe this app for your customers) will already transform your company into a digital one.

The second flaw is putting IT in charge of digitization. IT can – and has to – take care of the technological components of your digital transformation. But is IT really the one with profound knowledge on business process reengineering, change management, digital economy, strategic management and business model development? Usually not – unless you have hired an economist or a business manager as your head of IT (the question then being, what do they know about systems architecture, software development etc.).

Conversational Commerce as another challenge in e-commerce businesses

The challenge for e-commerce businesses is, how to incorporate Conversational Commerce (or Voice Commerce). It is still in a preliminary stage, and it requires Artificial Intelligence. It can be used along the customer journey, but can only work with corresponding conversation capabilities and an adjustment of several business processes (a search with Alexa works very differently than a search on Google, for instance).

Conversational Commerce is also a multi-sided platform. As platform owner your challenge currently is the business model.

Challenges in e-commerce businesses

For teaching advanced courses on e-commerce businesses I identified five major challenges:

  • Development of a (real) value proposition: There are so many e-commerce sites nowadays, why (and how) add another one? The answer lies in a convincing value proposition. The best theory to apply here is Christensen’s „Jobs to be done“.
  • Selection of the right business model: The main decision is whether to build a (multi-sided) platform or to go for the reseller model. Most executives think the platform model is the only reasonable choice in the huge e-commerce market. However, platforms do have some disadvantages and the reseller model with its better focus on customer experience may be the better option.
  • Usage of Artificial Intelligence (AI): AI is more and more used by the big players in e-commerce. How and where does AI really make sense and what does it mean for the business model?
  • Creation of new markets: In digital business, innovations are often disruptive. But there are also non-disruptive ways of creating markets and innovations; the Blue-Ocean Strategy can show you how.
  • Learning from Amazon’s strategies: Amazon is the dominant player in e-commerce globally – and it is successful. So what can you learn from it?

Usage of Artificial Intelligence

When discussing Artificial Intelligence (AI) and its potential areas of usage, several authors use a classification of known and unknown events. Known knowns present an area in which AI can be widely used. With known unknowns and unknown unknowns (e.g. „black swan“), however, AI cannot help at all.

While this classification certainly is useful to further analyze AI usage, it is attributed to Donald Rumsfeld. Interestingly, the authors do not recollect that there is a scientific source as well: the Johari Window (see figure).

Johari Window

A framework for the digital economy

For teaching my students I like to work with a framework to structure and summarize the course. So, here is one for the digital economy.

In digital business we usually deal with goods (or services) that are fully or partly digital. In order to understand the digital economy you, therefore, have to know the specifics of digital goods. What characteristics do digital goods have? How do the resulting cost structures look like? And what follows from that for developing pricing strategies for digital goods?

Having laid this groundwork, we can further analyze how digital goods are offered or used in markets. In these systems we have to deal with several characteristics as well. Very often network effects play a prominent role as well as switching costs and compatibility in developing a sound strategy for a digital business.

On top of all that, we see more and more platforms in digital business. For some businesses the market does not only consist of two parties (seller and buyer), but of three or more parties, i.e. they are multi-sided platforms. Multi-sided platforms not only combine all topics discussed with digital goods and digital markets, they present some further challenges (e.g. chicken-and-egg problem) for building and managing them successfully.

From substitutes to complements

We are used to think in terms of substitutes (one product/service replaces another). So our competitors are those with similar products and our pricing needs to be lower than our competitors’ (or our quality needs to be better).

In the digital world, however, complements (products/services which complement each other) play a much more important role. This has significant consequences on who our „competitors“ are, how to form our relationship to these „competitors“ (or partners) and how to set prices (complements influence each other).

“Platformed” world

Business is more and more becoming a “platformed” world. More and more of the largest companies (based on market capitalization) are platforms. For an economist, of course, this development is not surprising. Platforms exhibit massive economies of scale (supply-side and demand-side economies of scale/network effects) and, thus, are inherently driven towards fast growth.

Many business leaders are now confronted with competition from platforms and soon realize that it is very hard to fight against platforms. So some of them are thinking about becoming a platform themselves. But be well aware, that platforms need a much different management than conventional businesses.

Digital Business defined

What makes a business a “digital business”? In order to justify a new category of businesses, such a category needs to be substantially different from the existing ones (otherwise what value would a new category have?). And in fact, I claim that digital businesses have two economic characteristics which make them profoundly different from “traditional” businesses:

  1. All digital businesses work with near-zero marginal costs in an important part of their business.
  2. Very often digital businesses are exposed to network effects, indirect and/or direct network effects.

Digital businesses deal with goods or services that are completely or partially digital. Even an online shop wich sells physical products operates on a digital platform. And the main feature of digital goods is that they have near-zero marginal costs. Zero marginal costs have a very profound and far-reaching impact on many business decisions.

Digital goods or services are offered in digital markets. Very often such markets show network effects, wich often play a crucial role for the business. More and more digital markets are not only built by two parties (buyer and seller), but by multiple parties. These multi-sided platforms require a significantly different management and represent definitvely a new type of business.

Social platforms and failures

Are social platforms an adequate solution for social failures? 

When Prof. Ralf Wagner and I started to plan the course “Social Media Management” at the RFH Köln, Ralf introduced me to the ideas of Prof. Mikolaj “Misiek” Piskorski (former  Harvard University, now IMD Lausanne). Prof. Piskorski developed the systematic of “social failures” which occur in the offline world and which social platforms try to solve (see: Piskorski, 2011, 2014).

“There are many interactions in the offline world that we would like to undertake but cannot. These missing interactions represent unmet social needs, or social failures. In some cases, these social failures relate to inability to meet new people – I will refer to these as ‘meet’ failures. In other cases, they pertain to the inability to share private information or social support within the context of existing relationships – I will refer to them as ‘friend’ failures. These failures lie at the heart of why people are attracted to social platforms.” (Piskorski, 2014)

Piskorski’s premises are based upon the idea that social deficits can be solved by social platforms (social solutions) – the main challenge for a platform is to do it appropriately considering the intended target group. The author introduces a four-dimension framework which represents main reasons creating social failures: breadth, display, search, and communication.

Let’s illustrate this with two examples (see: Piskorski, 2014): eHarmony solves (or at least tries to do so) the abovementioned four reasons for social failures by attracting many members to their website (breadth), knowing a lot of personal information (especially marriage-related issues) about these members by using a comprehensive questionnaire (display), connects them with other members who are, based upon the compiled information, probably a good “match” (search) and helps them to communicate, either via a feature called “Guided Communication” or alternatively via an open chat function (communication).

Another example may be Tinder: This service attracts a huge amount of members (breadth), allowing members to present themselves by creating an account (and using their Facebook profile respectively, display), presenting other members in the nearby area (search) and offering the possibility to get in touch with these members after matching (communication).

Some platforms solve these issues better than others, obviously. While I have to admit that Piskorski’s concept is really profound – actually by far the best we have found so far – and his four dimensions are covering numerous reasons for social failures, he admits that social plattforms can also increase or create new types of social failures. He calls these “derivative costs”. Considering these derivative costs there is still a lot of potential for academic research. In this context, there are two questions that are in my mind:

  1. Do situations exist when social platforms are increasing social failures (thus failing to solve failures, even worsening them or creating new problems)?
  2. Are social platforms per se able to solve every kind of social failure?

I, therefore, argue that there are two issues:

A. Social platforms can increase or create (new) social problems 

There is evidence that social platforms have the potential to create envy and jealousy in a romantic relationship or among friends as well as cybermobbing (examples for research in relation to these topics  include Krasnova, Wenninger, Widjaja, & Buxmann, 2013; Muise, Christofides, & Desmarais, 2009). Thus, do social platforms make more couple split because they can “stalk” each other, thus arousing more envy? Do they offer more possibilities for bullies? What about the enhanced anonymity in this context? Web 2.0 probably offers a “mouthpiece” for hate speeches and opinions which should not find its way into the public.

Wilson, Graham, & Gosling (2012) as well as Anderson, Fagan, Woodnutt, & Chamorro-Premuzic (2012) already collected an impressing amount of scientific reasearch covering these topics, but there is still some research needed in this field, especially in combination with Piskorski’s framework.

B. Psychological, personal problems that social platforms cannot solve 

Considering social relationships life knows countless ways to break our hearts, both from a friendship and of course from a romantic perspective. In my opinion, there exist psychological, personal problems that are creating social failures which no machines, algorithms and platforms can solve, as the human mind of each individual personality is (too?) complex.

An example: A social platform helps two people, who have just split up from a previous relationship, to get to know each other. After having some really nice conversations on- and maybe also offline, one of them realizes the experiences of the previous relationship still hurt too much and he or she is not yet ready to open up. The tragic result is (new) heartbreak for at least one of them.

This example actually kind of covers both abovementioned issues (A and B): Do social platforms increase or create social failures by not being able to overcome psychological, personal problems? Well, actually, you can’t blame the platform on offering additional opportunities to get to know new people and probable love affairs. This kind of heartbreak could also have happened the same way if these people got in contact first in the offline world, e.g. in a public space like a bar. The personal problems that one of these persons has and which create the (romantic) interaction between both of them not to happen is not the fault of the social platform. But you have to admit it does not help in solving the mentioned personal problems that occur in the offline world either. Yet, the following, rather philosophical question remains: Would these two people have been better off, if their (in the end failed) social interaction, that has been initiated by the social platform, would not have happened in the first place?

As mentioned before, there do already exist several studies analyzing both negative and positive influences of social platforms on social interactions but there surely is more space for academic research here. It would be especially interesting to see if these studies (or new aspects) can be linked to Piskorki’s framework in order to see, how well the four dimensions are actually able to solve social failures.


Anderson, B., Fagan, P., Woodnutt, T., & Chamorro-Premuzic, T. (2012). Facebook psychology: Popular questions answered by research. Psychology of Popular Media Culture, 1(1), 23–37.

Krasnova, H., Wenninger, H., Widjaja, T., & Buxmann, P. (2013). Envy on Facebook: A Hidden Threat to Users’ Life Satisfaction? Wirtschaftsinformatik Proceedings 2013.

Muise, A., Christofides, E., & Desmarais, S. (2009). More Information than You Ever Wanted: Does Facebook Bring Out the Green-Eyed Monster of Jealousy? CyberPsychology & Behavior CyberPsychology & Behavior, 12(4), 441–444.

Piskorski, M. (2011). Social Strategies That Work. Retrieved March 25, 2016, from https://hbr.org/2011/11/social-strategies-that-work.

Piskorski, M. (2014). A social strategy: How we profit from social media. Princeton u. Oxford: Princeton University Press.

Wilson, R., Graham, L., & Gosling, S. (2012). A Review of Facebook Research in the Social Sciences. Perspectives on Psychological Science, 7(3), 203–220.