What is digital transformation?

Digital transformation is a buzzword that has been thrown around a lot in recent years, but what exactly does it mean? With the rapid advancements in technology, companies of all sizes and industries are being forced to adapt and transform in order to stay competitive. But what does this transformation entail, and how can organizations effectively navigate this process? In this blog article, we will unpack the concept of digital transformation and break down its key components. By gaining a deeper understanding of this important topic, businesses can better position themselves for success in the ever-evolving digital landscape.

The importance of digital technology can be considered the same as the invention of language, writing and printing (Baecker, 2018). The challenges posed by these inventions could only be overcome by a profound cultural and structural change in society as a whole. In the same way, the current era of digital media is also influencing our society. Like the previous media epochs, it creates new challenges for our form of society and at the same time offers new opportunities to solve old problems.

This environment also influences companies and forces them to rethink their role in society and adapt to digital technology. One of these effects is, for example, the replacement of human muscle power by the use of robots. Rapid developments of technology are facilitating increasingly cheaper and better performing hardware as Moore et al. already predicted in 1965 (Moore & others, 1965). As a consequence, manual work is now carried out increasingly by machines. As an example, German industry used 309 robots per 1000 employees in 2018 and thus was Europe’s most automated country, ranking third worldwide (International Federation of Robotics, 2018).

Definition of digital transformation

Overall, while there may be differences in the way experts define digital transformation, the key concepts and themes are generally consistent across the different definitions. There seems to be agreement that digital transformation is more than the adaptation of technologies and can be understood as a transformation of a company driven by digital technologies and accompanied by profound organizational change (see Bloomberg, 2018; Gimpel et al., 2018; Schwertner, 2017). Digital transformation involves the use of digital technologies to “radically improve performance or reach of enterprises” (Westerman et al., 2014).

This means that digital transformation is the process of integrating digital technologies into all areas of a business. This includes, for example, cloud computing, big data analytics, the Internet of Things (IoT), artificial intelligence (AI), and machine learning. The goal of digital transformation is to fundamentally change the way an organization operates and delivers value to its customers. But why would the management of a company want to take on the task of changing the way its own company functions?

Importance of digital transformation in today's business landscape

• Digital transformation can significantly impact business performance: According to a study by MIT Sloan Management Review and Deloitte, companies that have undergone digital transformation are 26% more profitable than their industry peers [8].

• Digital transformation can improve employee productivity and engagement: A study by McKinsey & Company found that digital transformation can lead to a 20-30% increase in employee productivity, as digital tools and processes can automate routine tasks, reduce errors, and enable remote work. Digital transformation can also improve employee engagement by providing opportunities for learning, collaboration, and innovation [9].

• Digital transformation can lead to increased innovation and business agility. A study by the Harvard Business Review found that companies that embrace digital transformation are more likely to develop new products and services, enter new markets, and respond to market changes quickly [10].

Brief overview of the key components of digital transformation

The terms digitization and digitalization are commonly used to further narrow down the definition of digital transformation. While a digital transformation is directly related to a business model, it is possible to initiate this transformation in the form of digitalization projects, even though such projects are not sufficient on their own to accomplish a successful transformation (Bloomberg, 2018). However digitalization describes the broad application of technology and its effects in the context of social life and organizational aspects (Legner et al., 2017).

In contrast digitization is commonly used to describe the technical process in which analog quantities are mapped onto the digital level and thus are dematerialized (Govindarajan & Immelt, 2019). Hence digitization is only one characteristic of digital transformation.

The individual definitions can also be compared on the basis of their granularity with the terms micro and macro (Schumacher et al., 2016). By combining these terms with the model from Lang (Lang, 2021) it is possible to derive Figure 1 which is also a visualization of Bloomberg’s (Bloomberg, 2018) summary:

"we digitize information, we digitalize processes and roles that make up the operations of a business, and we digitally transform the business and its strategy. Each one is necessary but not sufficient for the next, and most importantly, digitization and digitalization are essentially about technology, but digital transformation is not. Digital transformation is about the customer." (Bloomberg, 2018, p. 6)

It is important to keep in mind that all these definitions must be seen in context of a business, as digital transformation, digitalization and digitization can also be applied to social life [16] as well as the economy of entire states (European Commission, 2020) and have to be redefined in such contexts.

Key components of digital transformation

To successfully undertake a digital transformation journey, businesses need to understand the key components of digital transformation and how they can leverage them to drive growth and improve business outcomes. In this section, these key components and their importance in driving business success will be presented.

Technology: Examples of digital technologies that are transforming businesses

While there are many digital technologies that are driving digital transformation, some stand out in particular.

• Artificial Intelligence (AI): AI is transforming businesses by enabling them to automate tasks, improve decision-making, and enhance the customer experience. For example, AI-driven chatbots can handle customer support and service, while AI algorithms can analyze large amounts of data to provide insights and predictions. According to an Accenture report, AI could double annual economic growth by 2035 by changing the nature of work and creating new business models [18].

• Cloud computing: Cloud computing is transforming businesses by enabling them to scale and adapt more quickly and cost-effectively. Cloud computing allows businesses to access computing resources and applications on-demand, without the need for on-premises infrastructure. This flexibility allows businesses to respond more quickly to changing market demands and customer needs. According to a report by Gartner, the global public cloud services market is expected to grow by 23.1% in 2021 [19].

• Internet of Things (IoT): IoT is transforming businesses by enabling them to collect and analyze data from connected devices, sensors, and machines. This data can be used to optimize processes, reduce costs, and improve customer experiences. For example, IoT can be used in supply chain management to track and monitor inventory levels and delivery times. According to a report by IDC, global spending on IoT is expected to reach $1.1 trillion in 2023 [20].

• Blockchain: Blockchain is transforming businesses by enabling them to securely and transparently record and verify transactions. Blockchain technology is being used in industries such as finance, supply chain management, and healthcare to improve efficiency, reduce fraud, and increase transparency. According to a report by Market Research Future, the global blockchain market is expected to grow at a CAGR of 67.3% between 2019 and 2025 [21].

The relation of these technologies can also be linked to Figure 1 resulting in a visualization which is depicted in Figure 2. In addition to the technological factors, however, it is also important to emphasize the role of a business model in a digital transformation.

Business model: Why a digital transformation requires a rethinking of traditional business models

A well-designed business model can enable an organization to leverage digital technologies to create new products and services, reach new customers, and improve operational efficiency. While digital technologies do affect every aspect of a business model [22], they can

• enable an organization to create new revenue streams by offering innovative products and services or by leveraging new distribution channels
• provide a better customer experience by offering personalized products and services, improving the ease of use of their digital platforms, and enhancing customer engagement
• help organizations streamline their operations, automate processes, and reduce costs
• collaborate with partners and suppliers, creating new business models and value propositions

A term that often goes hand in hand with digital transformation and business models is disruptive innovation. Christensen coined this term as he identified, that certain technologies have the power to drive established companies out of the market (Christensen, 1997/2013). Furthermore he figured out, that those companies have business models which rely on sustaining technologies. Hence they are likely unable to adapt to new, disruptive innovations as this would destroy their current business. Paradoxically in such a case these companies will be crowded out by much smaller companies, because they are perfectly managed.

I have often observed people succumbing to the misconception that disruptive technologies are superior to sustainable technologies. In contrast they are not necessarily superior or inferior to each other, as they serve different purposes and target different customer needs. Sustainable innovations improve existing products or services and target existing customers, while disruptive innovations create new markets and target non-consumers or underserved customers. Disruptive innovations are often characterized by lower performance and lower profit margins than existing products or services, but have the potential to transform industries and create new sources of value.

Culture: How a culture of innovation and collaboration can enable digital transformation

A culture of innovation and collaboration can enable digital transformation by fostering a mindset of experimentation, risk-taking, and continuous improvement. Evidence shows that technology enables, but does not cause, business change [24]. Studies have shown that companies with a strong culture of innovation are more likely to successfully execute digital transformation initiatives and derive business value from new digital technologies [25]. BCG, for example, analyzed around 40 companies undergoing digital transformation. The proportion of companies that reported strong financial results or breakthroughs was measured. The proportion of those that promoted a strong corporate culture was five times higher than those that neglected the culture [26].

The importance of corporate culture is shown above all by the contrast between traditionally operating companies and software companies. The latter follow short product development cycles, have fast sales cycles and are therefore flexible. They develop software willingly in partnership with other firms and earn money by offering software as a service in addition to selling products. Their products are shorter-lived than manufacturers' products and the cost of failure is lower [13].

Customer experience: How digital technology can enhance the customer experience

Another impact of digital transformation has been the creation of new channels for customer engagement. Social media, mobile apps, and chatbots have all become important channels for businesses to engage with their customers. This has led to the creation of new marketing and advertising strategies that focus on engaging customers through these channels. A study by Salesforce found that 80% of customers are now more concerned with the experience they receive from a company than the product or service itself. This demonstrates the importance of digital transformation in creating a positive customer experience.

Furthermore, digital technology enables companies to collect data and use it to create personalized experiences for customers. This can include personalized product recommendations, tailored marketing messages, and customized service offerings. A study by Accenture found that 91% of consumers are more likely to shop with brands that provide personalized offers and recommendations[27].

Conclusion

Digital transformation refers to the integration of digital technology into all aspects of business and society, fundamentally changing how organizations operate and deliver value to customers.

It is no longer a question of if organizations should embark on digital transformation, but rather a matter of when and how. Firms can initiate this transformation in the form of digitalization projects, even though such projects are not sufficient on their own to accomplish a successful transformation. Therefore paying attention to the key components can significantly increase the chances of a successful adaptation of digital technologies.

In addition to integrating new cutting-edge technologies, the top priority is to revise the business model, corporate culture and develop new customer channels. Digital transformation can help your business increase efficiency, improve customer experience, and drive revenue growth. It can also provide valuable insights into your operations and help you make data-driven decisions that lead to business success.

So, don't get left behind! It's time to take action and embrace digital transformation. Invest in new technologies, leverage data analytics, and develop a digital strategy that aligns with your business goals. The future is digital, and your business can't afford to be left behind.

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