At Atmosphere, we’ve been working at the forefront of digital transformation for over 10 years. So as we all regroup following what are hopefully the worst impacts of COVID19, we ask what is digital transformation? And what does it mean as we look towards a better future amidst the recovery and reset rendered we’re all looking forward to.
Digital transformation is a broad term that describes the transformation an organisation undergoes to equip itself in order to benefit from digitally-enabled value creation and exchange.
~ We Are Atmosphere
Many attempts have been made to define digital transformation and the above is the best we’ve come up with over many years working in the field. Throughout this article, we explore and expand what digital transformation really is across a range of dynamics, examples, and principles.
Many variables fit the bill when seeking to define digital transformation. For example, by adopting and benefitting from digitally-enabled business models, new technologies, ways of working, and customer engagement digitally native businesses increase their competitive advantage and defensibility. To do so they seek the means to benefit from technology and the business processes, culture, and leadership shifts all required in order to create more value for people.
As such, digital transformations encompass the steps companies undertake to get there given the technology-led interfaces and enablers that have radically changed the way people connect and interact. And how we go about contemporary business in a digitally enabled world.
As a catch-all term akin to modernization, it further encapsulates the strategies, plans, and actions to transition from a lack of digital advantage or low digital maturity to a digitally enabled and digitally-functioning organization.
We live in an age of globalization and digital enablement. An era where information, capital, services and the means of production flow across national, cultural, and corporate borders with ease.
We all know and recognize the vast shifts towards digital we’ve undergone as a society in recent years. Of course, the internet is the foundational technology that has enabled us to do everything from ordering pretty much anything online with a few clicks, to using social media to keep in touch with family, friends and connect with brands, products and customer service.
New technologies have reduced industrial barriers built by regulations, capital needs, and patents and, in many cases, crushed them completely. The flow of value regardless of traditional borders occurs at volume enabled by digitization. And provokes the need for incumbent organisations to undergo digital transformations to keep pace with the speed of technology-enabled shifts.
And perhaps more critically, in a democratized digitally enabled world, any brand, product or service can appeal and acquire customers internationally, should they choose, via digital technology, platforms, apps and global online storefronts.
“There are no boundaries or borders in the digital age”
- Karim Rashid
The key effect of globalization and the march to undertake digital transformations revolves around the concept of “Value creation” – how organizations create value and meet newly heightened customer expectations of digital experience.
New players will succeed if they can create more value than traditional players to disturb or disrupt the market equilibrium. While existing players who may not have yet made sufficient steps to reinvent their customer experience have the stark choice of accelerating their digital transformation or risk being left behind.
“Digital is the main reason just over half of the companies on the Fortune 500 have disappeared since 2000.”
- Pierre Nanterme
Someone with 40 years of work experience in a company yet to realise the benefits of digital transformation will have a different view on digitization than a 20-year-old digital native who has never experienced life without digital technology. Who is correct? Probably both from their different perspectives.
Different cultures, backgrounds, and interests also have a bearing. The fact is that we all have some general idea of what digitization means without any firm definition. Here is a definition I like:
Definition: digitization is the integration of digital technologies into everyday life by the digitization of everything that can be digitized (technical evolution and customer behaviour).(businessdictionary.com, 2020)
This definition implies that digitization is a megatrend influencing and changing our everyday life as the introduction of new digital technologies continue unabated.
Digitization has already made massive inroads. For example, recently, the forced migration to homeworking due to covid19 has digitalized the meeting and how we work in a way many thought would never happen. This shift alone has surprised many IT leaders regarding how well their workforce has taken to online working - showing, despite the negative impacts of COVID, quite how quickly digitization becomes normal.
Whereas the now-ubiquitous zoom meeting replacing face to face contact may decline a little as we return to the office, the fundamental shifts are here to stay.
Meanwhile, most people seek a customer service response digitally instead of waiting on the phone by default. And merely a few years ago, filing tax returns online would have seemed a pipe dream. At the same time, our mobile phones enable near-instant taxis rides, always-on connectivity with feeds full of all the info we might ever need, and a bunch we don’t, and more.
If there’s one thing true of digital technology, the next horizon is just around the corner. Technologies such as artificial intelligence and machine learning may well drive our cars for us. While technology already helps sell us everything from ads to product bundles behind the scenes, at least in part driving eCommerce success.
Today, we see digital natives (growing up in a technology-enabled digital landscape) questioning the importance of banks, travel, information, democracy and our relationship to media – driving change that will impact businesses and society for many years.
These four trends affect the characteristics of the future-ready business and their interfaces with customers and society.
But why are some businesses more successful than others when it comes to undertaking digital transformation? Is it a matter of perspective or luck? Let us explore these areas more in detail to understand the response business leaders must seek to take.
“What turns me on about the digital age, what excites me personally, is that you have closed the gap between dreaming and doing. You see, it used to be that if you wanted to make a record or a song, you needed a studio and a producer. Now, you need a laptop”
- Bono
To master our understanding of digital transformation, we need to understand the implications of digital on the market, industry or sector in which we operate. What can business leaders expect when moving into a more digital market? What business problems can we solve? What does the transformation need to address to respond to market shifts or competitor moves? And how can digital transformation help us meet our business goals?
Here are some observations we have from organizations already on the digital transformation journey.
The rapid development in technology, disruptive trends, changing customer behaviours and regulations create an unpredictable business environment. The CEO, frankly, does not know how the business climate will look like in the next year, let alone 3-5 years. Meanwhile, IT leaders are still often-times responsible for the technology-led enablers on 3-year roadmaps. In more IT-intensive industries, predictability is reduced to 3-6 months.
Not only is there a tsunami of technology-led change, but also a slew of data, the migration of reputation to social media and user-generated endorsement and a plethora of new tools available pitched to solve a range of business problems. But, critically, it’s all happening faster than ever before.
Digital technology reduces and, in some cases, removes the protective barrier to a sector or market entirely. (Due to capital intensity, infrastructure, regulations, intellectual property, or competence).
Smaller firms can now develop software products using cloud services to solve customer problems for far less cost. And the more agile can get solutions to market, iteratively improve through the process of acquiring and acting on data and feedback, and deliver tools and services faster while the incumbent is still reviewing their annual report.
The CEO, IT leaders and executives of many larger organizations have been caught sleeping on their watch, with one or two well-funded startups going largely unnoticed during their early growth stages.
However, for example, dozens of neo-banks have proven to the customer there’s a better, more digital, more mobile way to bank. Summed, the big banks have lost millions of customers and accelerated their own digital transformation in response. No one is protected in the digital market. Disruption can come from the least expected places.
Digital Natives are reshaping the markets with new behaviours. Interfaces have moved to the mobile screen.
Amazon’s Alexa has now been with us since 2014. What initially was perceived as something of a gimmick has proved a stroke of genius, offering easier access to weather and same-day delivery than screen-based mediums.
Furthermore, the digitally native generation expects everything to work as well as their go-to social media platforms, when and where they want it. They require customer service to be as responsive. Digital consumers seek personal value and relevance. They show no loyalty yet seek the highest value exchange in response to their needs and a customer experience to match the best.
Whereas sometimes bemoaned, the vast majority of us receive a huge amount of value from our regular exchanges with friends on Facebook, showing off our holiday photos on Instagram, or professionally building a reputation on Linkedin.
Over time these technology platforms have evolved to reward our interactions. A like, a comment, a stream of personalised updates with algorithms and artificial intelligence working tirelessly behind the scenes to ensure we stay and occasionally click an ad.
Meanwhile, social media networks collect a vast amount of data to provide granular targeting to advertisers. Yet, due to their massive reach, social media allows businesses to reach a global audience, tailor, engage and build communities. Meanwhile, the thread that hangs these together is the digital transformation of our social connectivity. As a result, our trust is based on the opinion of our peers and not on corporate marketing.
Societies core functions such as education, health and community too are undergoing transformations. Whereas before the digital transformation of these industries, we’d typically interface with them physically local to our home, they too are moving online. Innovators and leaders in the space have enabled solutions to access the best education in the world for anyone anywhere in the world, often at a considerable cost advantage to traditional physical attendance.
At the same time, technology enablement in healthcare now allows us to diagnose online, track conditions with our mobiles and talk to our GP via video from the comfort of our home. Societies central provisions are moving to the periphery, and this trend looks set to continue at a pace.
New technologies underpin “the what” of digital transformation. Whereas often the technology may not in itself be new, the implication of technology adoption changes the way people, society, and business operate and interconnect. It challenges how companies relate to their customers and society – and changes their processes and governance.
Different industries are impacted by digitization in different ways and orders of magnitude. For example, traditional manufacturing businesses view the role of digital transformation differently than those in the media sector. The changes wrought by digital impact in different ways considering the five “implications” above.
Peter Hinssen (“The New Normal – Exploring the Limits of the Digital World”) expressed the consequences of accelerating digital changes in five basic rules of the digital landscape. The rules apply both for the internal and external customer:
These basic observations create a feeling for the nature of the digital industry and the change in competitiveness. In turn, they indicate the degree of pressure for those existing businesses within the market to accelerate their digital transformation in response to the threats of new entrants. Or, for that matter, their competitors stealing the march.
The Digital Transformation Diagram captures the essence of digital impact and its correlation with digital transformation. Two primary dimensions define market competitiveness and corporate capabilities.
An organizations competitiveness is based on its ability to manage the market (people) pre-requisites and expectations.
Traditional competition (pre-digital) operates within predictable and protected industries (due to political regulations, capital requirements and patents), offering value exchanges to create customer loyalty. The effect of digitization (based on the observations above) is a shift to the right as the more digital competition enters the market.
The transformation from a traditional market to a digital market requires digital transformation to embrace an unpredictable and unprotected industry. Non-loyal customers expect value and experience. As a general trend, we see businesses moving right due to increased IT intensity in the industry – from a traditional industry to a digital industry with completely different pre-requisites.
Corporate Capabilities define how to create value within the market (for example, organisation, leadership, governance, skills, technology, services, business processes and offerings). Traditional Capabilities are based on the principle of stability where all capabilities are considered static, focusing on stability and productivity, ‘command and control’ leadership and culture (operational excellence) as their primary source for competitive advantage.
On the other hand, digital companies view capabilities from another perspective as something dynamic that continuously change and follow the market trends. These companies focus on speed/agility, innovation and ‘trust and motivation’ to cope with the pre-requisites of digital competition. Data is their fuel, agile their process of choice, and responsiveness defines their competitive advantage!
Leadership plays a massive role, and the CEO without an appetite for moving into new technology-enabled areas or adopt the tools of digital transformation success can quickly appear dinosaur-like to those who understand the risks of inaction. Businesses that fail to undertake digital transformation and adjust themselves to the new digital pre-requisites will be phased out.
Those seeking to undertake the digital transformation journey seek to acquire, replicate or create these capabilities in order to retain or advance their market competitiveness.
“The more complex the environment (digitization), and the ‘tighter’ the targets (performance), the more flexibility the control system (governance) must have: ‘only variety can absorb variety’. Failure to provide ‘requisite variety’ will result in instability (boom and bust) and ultimately system failure.”
- Ross Ashby’s Law of Requisite Variety, WR Ashby, "An introduction to cybernetics", London, Chapman & Hall,1956.
When further exploring digital transformation, we find a clear correlation between market competitiveness and corporate capabilities. The more dynamic the market (digital), the more dynamic capabilities are required to manage its fast-moving pre-requisites. A shift to the right also requires a shift upward in the model! The four different corporate positions in the digital transformation journey are:
Traditional businesses operate in a traditional market with their roots in a matured industrial era of manufacturing. These businesses operate with levels of high predictability, barriers of entry and customer loyalty. Most compete on efficient operations supported by a “command and control” leadership and culture. Their IT leaders promote low IT intensity and low change awareness! There is limited awareness of the requirement for digital transformation, and some early moves.
Yet, in aggregate, organizations in this bucket lack the capability or processes for transformation into a digital business, most often as either a lack of foresight across their leadership and/or little motivation for their teams to change. IT Leaders prove blockers, and no apparent burning platform requires the prioritization of transformation efforts. Here we find large corporations in manufacturing, automotive and public industry.
Here we find businesses in the midst of digital transformation operating in a rapidly changing market environment characterized by increased IT intensity, innovation, and a failure to meet or exceed customer expectations (reduced loyalty). However, typically they recognize a reduction in barriers to entry and have begun to notice startups with new software products or digital technologies entering the market.
Businesses undergoing digital transformation desperately need to change their business model and structure to compete in the new market conditions – to create value for their customers. This may look like adopting wider digital best practice, adopting digital customer service and honing their work processes to allow them to innovate across the customer journey with new ideas and innovations for customer value creation. Typically a strong leader has been recruited or stepped forward to lead the digital transformation march.
It is a brutal awakening for Traditional Businesses where governance, processes, leadership and culture require adjustment to the pre-requisites of the digital market. The organisations that fail to respond quickly enough to new trends are often phased out.
Further, we recognize here a marked difference between successful transformations and the equivalent of digital transformation lip service. Moving website hosting to amazon web services or rolling out collaborative working technologies may all play a role, yet are tactics rather than transformations. Leaders who successfully propel forward the digital transformation of their organizations recognize the need for holistic change efforts that focus on the people the business serves and the processes required to accelerate changes in and out of the organizational structure.
Here, IT leaders often have become enablers, building the technology-led capability of the organization to move forward faster and benefit from data. The CEO backs the change and champions the tools.
Here we find large corporations in Bank & Finance, insurance, Telecom, Travel, Automotive, Logistics.
Digital Businesses have successfully undertaken the digital transformation journey from traditional Business. Or come to the market new and already digitally enabled. These companies live in hyper-IT markets where business models, innovation processes and governance are all digital-first. IT leaders no longer exist; rather, all of the organization’s roles are equipped with the tools to accelerate digital advantage. These companies have adapted to the new rules of the digital arena and have successfully set up more agile, innovative processes and value-focused governance, leadership and cultures.
These companies are built to manage unpredictability and uncertainty and equipped to undergo future changes in response to the next set of technology-led best practices. These businesses will challenge and disrupt traditional industries. Here we find small and medium-sized companies in Gaming, Media, Publishing and Telecom. Successful start-up companies!
Business Disruptors are traditional organizations that capture the opportunities in digital transformation and new ways of working. They are driving the digital development of their industry, working with new technologies, data and defining industry best practices for customer value creation.
These organizations have progressed their digital transformation strategy from inception through to maturity. Their efforts are now focused on transformations to the end customer experience to maximise value creation, defining disruption rather than at risk of it.
It is a risky journey where brave companies and leaders challenge themselves, their CEO and their own existence. It is a temporary position. These companies have a higher chance of surviving their industries ongoing digitally-led transformations as new technologies mature to benefit the customer experience. Organizations in this sector no longer ponder what is digital transformation, the need for digital tools or the benefit of data? Instead,We see today their IT leaders seek to accelerate their transformation efforts to realize their business goals. Here we find companies in all industries.
It is important to understand that the “right-ward” shift is often dictated by industry forces, whereas the “upward” shift is driven in response. This is what we call a “digital transformation”. We need to understand that fast-moving digital organisations operate in the Digital Business quadrant waiting for new industries to shift right. Business predators ready to disrupt yet another industry.
Meanwhile, the roles of institutions such as banks and government agencies come into question, given the increased demand for customer centricity and value-driven interaction.
Companies such as Airbnb, Uber and Spotify are a few examples of data-centric players that have successfully challenged traditions and opened the door to a new digital rivalry. There are many factors and trends throughout the digital transformation process that have made these positions possible.
But why have they been so successful?
The question is very complex and includes many perspectives – such as culture, leadership, and governance. For example, we know that digital-first organizations have a higher degree of people in motivating and engaged roles, respond faster to changing trends or market conditions, and view digital capabilities (for example, technology and information) differently.
The process of maintaining competitiveness is based on quickly understanding, analyzing data and behaviour trends and acting (applying digital & data capabilities) – with a focus on transforming the customer experience into something better than the rest. Or, in other words, creating differentiated and defensible value creation.
When we further explore the answer to the question “what is digital transformation?” we quickly find that the business model plays a decisive factor in how the digital companies compete and acts as a basis for their success (or otherwise) in the market.
“A business model describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts.”
- Wikipedia 2018
The business model takes its starting point from the organization’s assets and capabilities. Here we see a difference between traditional and digital organizations in how they view their assets. Traditional companies rely on physical assets (buildings, machinery, labour, and distribution) to build their business model. In contrast, digital companies rely more on digital assets (information, data, business intelligence and digital tools and platforms).
For example, traditional hotels rely on the availability of physical buildings and rooms as the basis for their revenue. While Airbnb (and other digital companies) focus on creating the optimal customer experience through digital services and data analysis (consumer habits and needs), leaving the physical building or room to someone else to provide.
Traditional taxi companies rely on physical cars, while Uber focuses on the customer experience of transportation without cars. We see this scenario in industry after industry, where a new business model focuses on customer experience based on digital assets. This is the new normal.
If we take a step closer, we see that the digital business model includes a number of digital capabilities that support customer experience and value creation. The digital companies excel in customer interaction (digital channels & data-led optimisation), digital service development/innovation, IT and data analytics, (edge) competence and structure (including value chain and ecosystem) – all on a platform of motivating and empowering culture and leaders equipped for change.
It is interesting to see how these capabilities work effectively together (never in silos) toward a shared customer-centric vision and value proposition. These factors are a natural part of digital DNA, making it easy (digital readiness) to compete in the new digital environment.
In the end, it is about mindset. Inevitably there’s a great deal the incumbent business looking to undertake digital transformations can observe, learn and adapt by assessing how these digital businesses have risen as fast as they have to market dominance.
An interesting aspect of the digital and traditional business model comparison is how they perform. During the last couple of years, we have seen increased business growth by those exhibiting a digital business model. Why is that? Digital companies deliver higher value-adding tools and services (what customers are willing to pay for) than traditional companies by capturing and managing their expectations in an effective way. They live and die on their ability to process data and translate insights into customer value.
For example, are customers willing to pay extra for a car mortgage to cover the bank’s high infrastructure cost? No, they could not care less. In the digital landscape, the customer wants to pay for the capabilities and services in relation to the value and experience they provide. Low value = low revenues!
Furthermore, there is a dependency between digital and physical business models. For example, a digital business model (for example, Uber, Airbnb or Spotify) relies on another organization or private persons with a physical business model. Digital business models cannot exist on their own. For example, what would Airbnb be if nobody provided rooms for hire, or what would Uber be if nobody provided cars and drivers for rental?
What we see today is that companies on the digital transformation journey are evolving traditional business models into hybrid business models. These include elements of both physical and digital models (sometimes in two different operating structures or units) to optimize the cost/quality (better use of data) and the customer experience across the complete customer journey. Building the evolution into a hybrid business model into the digital transformation strategy allows them to continue to use digitization to reduce cost (improving the productivity of current ways of working) and increase revenues (providing new digital services, tools, and experiences).
My view is that all organizations need to understand the new digital prerequisites of business – and how they deliver value to their customers (business model). Today, business performance depends on how well we deliver value to customers at every moment.
Further, we see new digital entrants challenge any value gap/deficit and business models automatically as the industry becomes more and more data acquisitive and IT-intensive. It is an unstoppable mega-trend that we all need to relate to.
The question we need to ask ourselves is what our role is in the new digital business landscape – continued traditional or upgraded digitally. What do we concretely do when that moment comes? Are we ready for digital transformation? A digital transformation will take years to complete (addressing culture, leadership, capabilities, data and governance) while disruption comes quickly – from nowhere.
A key challenge is how to be successful and make money in the digital era. During the last couple of years, we have seen players at the pinnacle of the digital tsunami struggling to make money and are frankly fighting for survival. The digital transformation journey has been (and still is) very painful and questions the core reason for existence in the market.
For example, we see newspapers and media companies, all in the midst of some level of digital transformation, constantly struggling with how to make their readers and consumers pay for their product and services. Shouldn’t the digital transformation journey improve revenue streams and result in profit? Why is it so difficult to be successful in the digital arena? Well, let us examine why digital transformation is challenging to master and why some companies are more successful than others.
Undertaking a successful digital transformation process is all about creating temporary monopolies with new services that competitors cannot address. A few months ago, I had a discussion with a traditional telco about how long it took them to react to a new digital trend or threat (for Google). After a bit of calculation, they agreed the reaction time was around 18-24 months. That is how long it would take for them to respond to a digital trend (new service or product) in their market.
The result of the pace of their reaction enables a competitor to create a temporary monopoly. During this time, the competitor has the possibility to redefine the market (setting new norms of the market), attract customers and revenues and start to acquire the data necessary for ongoing improvement. All the while, the incumbent remains stuck in its own governance processes.
The situation is more severe than that! What if the digital competitor launched a new service or product every six months? It would create a constant monopoly, and the traditional company would sooner or later be forced out of business.
By failing to undertake digital transformation soon enough in order to equip to react fast enough with agile and efficient governance and leadership – they create temporary monopolies for their competitors.
Even those who invest millions in new technology and actionable data to digitize customer service, connection or deliver an optimal user experience can fall short of the pace the digital business achieves. In short, they end up held back as a result of their governance and leadership, which determine whether temporary monopolies will occur or not.
I think you all can identify a dozen digital companies that have successfully disrupted industries by creating temporary monopolies. Worth thinking about!
It is important to understand that all corporate functions and units are part of a game of optimizing customer value and experience – and responsible for eliminating digital waste. A digital transformation strategy that enables organizations to maximise points in the game also promotes tomorrows market leaders.
The creation of temporary monopolies does not tell the whole truth. It is important to recognize that successful digital businesses (or those undertaking a successful transformation) focus on creating an optimal experience and value for their customers.
I visited a business that was struggling to harmonize their IT landscape. My question was simple – “is the consumer on the street willing to pay extra for your service/product because you haven’t harmonized your IT”? In other words, is the consumer ready to pay 1 EUR extra for a magazine because you have your own customer service desk in a native language? The answer was clear – “no”.
We could then harmonize the IT organization and cut 30-40 % of the IT budget – boosting digital initiatives and data centricity that would create more experience and value for the customer. It is important to understand that all corporate functions have important roles within digital transformation. They are part of a game to optimize customer value and experience.
Crucially, this is not the sole remit of the marketing or sales team. Rather digital transformation takes a holistic approach to business evolution; it can prove even more critical for IT, logistics and production roles to be on the field. When realizing a successful digital transformation strategy, functions and processes that do not create value or experience will emerge as pure waste and need to be eliminated.
“People don't buy what you do; they buy why you do it. And what you do simply proves what you believe.”
- Simon Sinek
My point of view is that digital revenue is the effect of mastering digital transformation and adjusting the whole company to its pre-requisites. It is based on an in-depth understanding of the mechanics of the market and how to react fast to threats – eliminating temporary monopolies – and transformations focusing on technologies that enable customer experience and value.
To be honest, most businesses (70%) I see do not address the true challenges of digitization but rather follow what others are doing, or I see doing nothing at all. That is not good enough in the digital era! Without the right approach and mindset, these companies will soon disappear from the market.
When interviewing corporate management, we often get diverging answers of what digital transformation means. It usually ranges from “automation of core processes” to “e-platforms for customer engagement” and “robotics and artificial intelligence”.
The concept of digital transformation remains a topic that invites different views as opposed to a cohesive business crucial driver for future transformation efforts. And there are few definitions that most employees and leaders would buy. But when we study the answers of the interviews, we can conclude that all the answers are right – from their specific perspective.
However, we analysed recurring, important and therefore common purposes of digital transformation when undertaking our own research across corporate management. The five purposes help us dive deeper as into our answer to “what is digital transformation?” They highlight the complexity leaders need to grapple with to undertake transformations and the different strategies, competencies and capabilities required during the journey.
There are mainly two primary purposes of initiating a digital transformation. First, to improve the way of working with an aim to reduce the cost of operations. This is mainly done by automating processes with digital technology (for example, Robotic Process Automation).
The second purpose is to create new businesses, products or services to increase revenues and market share – through investments in innovation, new business models and an expanded ecosystem. Or transform existing business units and enable each digital team to create solutions to customer needs.
These two dimensions depend on each other because no business can build sustainable digital competitiveness by focusing only on one dimension – both dimensions need to be in focus. Therefore, one is the prerequisite of the other.
| Cost-Reduction Dimension | New-Business Dimension |
|---|---|
| Digital transformation to reduce complexity and risk, and hence productivity of a businesses operations. • Digital Technology • Process Automation • Internet of Things • IT Platforms and Processes | Digital transformation to increase revenues and market shares by adjusting to customer need. • Innovation • Business Model Development • Market Sensing • Expanding Ecosystem |
There is also an internal-external perspective to the cost reduction/new business dimension. The internal perspective means that they focus on addressing internal challenges and inefficiencies to improve productivity, governance, and information management. The external perspective takes a starting point from the change in market pre-requisites with new customer behaviours. In this case, the focus lies on innovation, customer interaction, ecosystem and market sensing.
Also, here it is necessary to have both an internal and external focus to succeed with digital transformation. A heavy focus on the external perspective will be hindered by inefficient governance and information management – limiting the ability to improve revenues and market share.
| Internal Perspective | External Perspective |
|---|---|
| Digital transformation to address the opportunities and threats in internal operational (efficiency) • Governance • Information Management • Value-Chain and Organization • Competence | Digital transformation to address the opportunities and threats in the market and ecosystem (effectiveness) • Innovation • Business Model Development • Market Sensing • Expanding Ecosystem |
The model displays four separate purposes of digital transformation that all need to be in focus for the digital transformation to be successful. Companies with a heavy focus on technology and automation will fail to achieve the expected benefits as the more business-oriented dimensions are avoided (digital paradox).
| Internal Cost-Reduction Strategy | External Cost-Reduction Strategy |
|---|---|
| The strategy aims to improve the efficiency of internal business processes with the use of smart digital technology • Process Automation • IT Development & Delivery | The strategy aims to improve the collaboration with external partners in the business ecosystem. • Sharing of information • Integration of processes and IT systems in ecosystem |
| Internal New-Business Strategy | External New-Business Strategy |
|---|---|
| The strategy aims to improve governance to improve corporate agility and decision-making. • Governance • Information Management • Organization & Value-Chain • Competence | The strategy aims to improve the effectiveness of the company and improve revenues and market shares. • Innovation • Market sensing and awareness • Expanding ecosystem • New business model |
In the last couple of years, we have seen an interesting trend relating to the model. A couple of years ago, the focus was very much on an internal-cost reduction strategy with investments in automation, technology and IT processes.
As such, the purpose of Digital Transformation was mainly to reduce the cost levels of business operations with digital technology. It worked quite well, and many organisations succeeded to reduce operational cost significantly.
Then leaders realized that digital transformation must also make new money with new products and services. The reason for this change in direction proves a moot point. Yet, overall many businesses experienced lower profit margins and market shares – and needed to redirect that trend with new sources of income.
The focus shifted to an external-new business strategy with investments in innovation. Innovation enabling collaborative software was purchased and installed, and new partnerships explored with start-ups with few benefits. The focus of digital transformation quickly shifted back to an internal cost reduction strategy with investments in RPA and IoT.
Digital transformation needs to adapt all our digital strategies with a heavy focus on culture and change. Only then can the steps companies take towards digital transformation result in success
The challenge is to understand where to start and how to proceed. No two digital transformations are the same, nor are any two starting points. Every business has a unique business strategy. There are multiple variables to consider from size to market sector or relevant customer service channels, through the appetite of leaders to invest in technology and the program and progress at pace.
Those with strong productivity challenges might start their digital transformation strategy with a focus on internal cost reduction and then move to other areas when cost levels have reached satisfactory levels. But it is important to have a plan to address all four areas to achieve sustainable digital competitiveness and success.
One final dimension of the model is “culture and change” placed in the middle of the matrix. Culture and change (in people and leadership) are essential for achieving improvements in any area (digital strategy). As stated before, the greatest obstacle for digital transformation is culture and leadership, and therefore it needs to be integrated into a strategy and journey.
Leaders must rally behind the purpose of digital transformation. Their role is critical to ensure the digital transformation has backing and momentum. Furthermore, leaders must directly involve themselves in the business’s steps to achieve digital transformation. It is not sufficient for leaders to delegate this into a department or role and expect a holistic approach to business-wide cultural and governance transformation.
The key purpose of Digital Transformation translates the current capabilities, leadership and governance in alignment.
Definition: A Digital Company is positioned in an unpredictable and IT intense market – that creates sustainable digital competitiveness by continuously optimising its digital capabilities (dynamic) over time. A Digital Company is not defined by technology or at a single moment of time - but its continuous adaptation of the digital market pre-requisites through adjusted leadership, governance and capabilities.
In this context, it is interesting to consider the Manifesto for the Agile Company that gives inspirational hints of the pre-requisites for a Digital Company. The Manifesto takes its starting point of an unpredictable business environment with highly competent and qualified employees. And helps to indicate the outcomes of digital transformation.
The principles above capture the essence of the Digital Company. However, it is interesting that it defines how to manage the digital capabilities to master the digital business environment.
What these principles have in common is that they jointly are based on three digital components: digital leadership, digital governance and digital capabilities. Digital Leadership is needed to achieve, for example, trust and motivation!
Is an active leadership and management to motivate and inspire people to live and breathe the digital journey and challenges together with high cognitive abilities, creativity and commitment. Removing the fear of failure and stress of change.
Is the organization’s ability to control change (adjusting digital capabilities in alignment to industry pre-requisites) and hence optimize customer experience over time (unpredictability). No periods of stability!
Is fast responsiveness to digital opportunities and threats (below six months) by an accurate view of the world (information), decision-making, execution and learning. Ensuring the right investment in technology and people at the right time, optimal value focus – mastering business unpredictability.
What is interesting about these principles and components is that new technology itself is not a principle but rather a digital capability (among others). In other words, digital transformation is not about implementing new technology but rather enhancing leadership, governance and capabilities to accelerate business competitiveness. Digital Transformation is about people and not technology!
Definition: A value capability creates or enhances value creation (exceeding expectations - experience) to the end customer in the digital society – directly or indirectly. The required value capabilities in any digital market will change quickly over time due to business unpredictability. Value Capabilities can be categorized into six Value Domains: Customer Engagement, Offerings, IT/Technology & Information, Skills and Competencies, Value Chain and Management Structure, and Business Model and Strategy.
Definition: Digital Transformation is the company’s ability to adapt to adaptive leadership, value capabilities and responsive governance in becoming a Digital Company – in accordance with its definition and aligned to the Manifesto of the Agile Company.
Unfortunately, those with digital ambitions that invest heavily in business technology are not driving a digital transformation but rather a technical transformation – because they do not focus on its right components: leadership, change management and governance. These companies fail to start with the right question: why? Hence, these companies will not create sustainable competitiveness in the digital market.
It is now possible to reflect on the definition and implication of digitization – and digital transformation in our daily context. I have therefore gathered a number of questions to be discussed to get a more profound understanding of digitization as you begin to explore your digital transformation journey:
1. What does digitization mean? Is it a threat or opportunity? How well are you prepared for these to accelerate?
2. Why have you initiated a digital transformation? What is the meaning and purpose of that journey? What are you attempting to achieve?
3. How is the market your company or organization operating in affected by digital? Use the Digital Five Forces to describe the forces that impact your industry.
4. What is the basis for your business model (physical or digital assets)? How do your competitors create value for their customers? Is there room for digital disruptors in the industry with a new business model?
5. How vulnerable is the industry for temporary monopolies (with a rapid business development process)?
