Strategy and Technology Fundamentals
by Martin Kuppinger | Last Update: June 23, 2022
Digital Transformation is the integration of digital technologies into all products, services, processes, and strategies to enable the business to succeed in the digital age.
Digital Transformation (DX) is aimed at enabling organizations to succeed in the digital age by gaining or maintaining a competitive edge. This is achieved by improving engagement with and services for employees and customers, and driving productivity and efficiency through the application of digital technologies.
The most common objectives of DX are to streamline operations, improve employee productivity, improve customer experiences, improve responsiveness to customer requests, address compliance or security requirements, accelerate time to market, and improve customer insights. In short, DX enables organizations to better serve customers, employees, partners, and other stakeholders.
Organizations of just about every size in every sector around the world are at various stages in DX projects because of the widely held belief that failure to embrace digital technology will inevitably result in the loss of market share. The fear is that market share will be lost to long-standing companies that successfully manage their DX or to new market entrants that are typically digitally enabled from inception.
Digital Transformation is about more than just moving current operations into the cloud. It requires an examination of all facets of an organization, including workflows, processes, employee skill sets, customer interactions, products, and services to see how these may all be improved through the application of digital technologies.
The main driver of DX is technology’s ability to collect, generate, analyze, and transmit data. Therefore, DX initiatives typically include the adoption and application of technologies like machine learning and other artificial intelligence technologies, cloud computing, mobile technologies, social media platforms, internet connected smart devices making up the Internet of Things (IOT), edge computing, robotic process automation (RPA), and distributed ledger technologies like blockchain.
The opportunity of DX lies in the fact that digital technology can now be applied to almost every aspect of business to enable greater speed and efficiency, but that is also the source of many of the most significant challenges because business leaders typically struggle to understand which opportunities to pursue and prioritize for their particular organization.
DX, therefore, means different things to different organizations. For some it may mean huge investments in new technologies and even acquiring digital technology startups, while for others it will mean strategic application of select digital technologies in key areas of the business. For all organizations, however, DX should include establishing a culture in which continual improvement is the goal and all stakeholders are open to ongoing change and embracing new ways of doing things.
Digital Transformation has been driving business strategies for several years, but the pandemic crisis has accelerated the evolution of business, forcing many organizations to transform their business models rapidly and become more “digital” just to survive.
Digital Transformation is not new. Bookstores have been affected by the transformation of book selling to a digital business for more than 20 years. The music business has transformed fundamentally over the past two decades, with streaming being the new normal and most shops for vinyl records and even CDs and DVDs disappearing. However, the pandemic crisis has mandated change in many other industries, from healthcare to arts and entertainment, where streaming has become essential for many.
Beyond that, most other industries have changed or are in a process of change, having been forced by the Covid-19 pandemic to limit or abandon in-person interactions with customers, partners, and suppliers. People are shifting from buying cars to carsharing or pay-as-you-go models, impacting traditional business models of the automotive industry. Service and maintenance in manufacturing is changing with machines becoming connected. Logistics has been redefined based on Distributed Ledger Technologies (DLT) such as Blockchain, reducing the number of intermediaries and thus cost.
The pandemic crisis has also accelerated the adoption of self-service apps, advanced e-commerce platforms, and AI-supported analytics for e-commerce.
Few, if any, businesses will remain unaffected by DX. Most are already in the full swing of DX, which must be understood as a continuous evolution of businesses in the Digital Age. It is not just transformation, but continuous innovation utilizing the opportunities technologies provide for improving competitive positions.
DX delivers ongoing business benefits because digital technologies and processes enable organizations to respond quickly to changing employee and customer requirements. DX also builds the infrastructure and skills required to take advantage of fast-evolving technologies to enable competitive advantage. In other words, a digital transformation strategy enables organizations to adapt quickly in an era in which technology is a key economic driver.
While the benefits of DX are clear, achieving those benefits is challenging and should not be underestimated. Without adopting the correct approach, finding the right mix of skills, and careful preparation and planning, organizations could find themselves among those that have invested heavily in high-profile DX initiatives, but failed to achieve the desired outcomes or return on investment. For more information on this topic, see this Advisory Note on Why high profile digital transformation projects fail.
Digital Business, like Digital Transformation, is a somewhat vague and imprecise term. Many businesses aren’t fully digital, and will never become so.
As long as a business is producing physical goods such as vehicles, smartwatches, or TVs, and as long as there is still direct interaction with the “customer”, such as in medicine, the business keeps one foot in the analog world. In essence, the business is a hybrid of analog and digital features.
Thus, the Digital Business is hybrid in nature, but pursues digitalization not only to achieve a competitive edge, but also to survive.
Digitalization impacts the business by opening the doors to new horizons and providing new opportunities. However, businesses will ultimately fail if they do not embrace technology to do digitally all that can be done digitally. Thus, Digital Business is about delivering Digital Services to the customers and consumers, building the Digital Service Enterprise.
Digital Service Enterprises are recognized by their:
Experience has shown that there are opportunities for both market entrants that don’t carry the burden of a long legacy in traditional business, as well as for traditional businesses that are willing to reinvent themselves.
The essence of successfully becoming a Digital Service Enterprise is consistency and focus: Any business that tries to preserve the past, and that ignores the facts and trends, will fail. Unfortunately, most businesses still focus on a digital disguise instead of becoming a truly Digital Service Enterprise. Having a website and an online shop does not make a Digital Service Enterprise out of a traditional enterprise. Everything, from business model to processes, products, and services must become digital.
The biggest single success factor in the Digital Transformation is the willingness to transform and disrupt. Winning enterprises have focused on consistent transformation and even disruption, by cutting off parts of the enterprise or retiring still successful products.
Transformation is the ability to become an online retailer instead of sending out printed catalogs or the ability to change a publishing business from producing newspaper to providing digital services, for example. In Germany, few of the large mail-order firms survived, but one did: Otto, the one that first started with its Digital Transformation, and newspaper publishers that have switched to digital services are now more profitable than ever before.
Transformation typically requires the willingness to change business models. Despite selling software licenses for decades, Microsoft was willing to shift to selling subscriptions. Today, Microsoft earns much more than before, based on cloud services and software subscriptions.
Disruption is the tougher part. Transformation is about doing the same, but with different business models, with services complementing products. Disruption is about a bigger change. Building motor vehicles instead of horse-drawn carriages is a classic example. Disruption is about utilizing knowledge and experience to deliver new types of products and services using new technology and different business models.
The simple question for every business leader is: Does the business just need transformation, or does it need disruption?
Creating long-term business success in the Digital Age is based on action in four areas:
Only by taking a holistic approach that covers all four domains, will businesses be able to transform or disrupt towards becoming a driving force in the competition instead of a dinosaur in a dying market.
Technical innovation is driving the Digital Transformation. To date, seven fundamental areas of technology have evolved, not counting deployment models.
#1 Digital Identity: Digital Identities of everyone and everything is at the very core of DX. Every human (employees, partners, and customers); every device (thing); and every service: They all have a digital identity in the Digital Business.
#2 Cognitive & AI: Cognitive technologies, Artificial Intelligence (AI), and Machine Learning (ML) have become real. They augment humans and enable new and better solutions.
#3 Blockchain & Distributed Ledger Technologies (DLT): Beyond cryptocurrencies, the underlying concepts of DLTs such as Blockchains enable new types of solutions that build on an immutable ledger. DLTs are the foundation for sharing and collaboration, keeping track of what happens to digital assets and the digital representations of physical assets.
#4: Ubiquitous sensors: Sensors are everywhere, creating unimaginable amounts of data every second. They are on the shop floor, in fitness watches, in vehicles, in buildings, everywhere. They deliver the data that powers new services and business models, the fuel for AI & ML.
#5 Robotics: Thinking of robots just as android-like creations or robots in manufacturing does not reflect today’s reality. Most robots are software-only, from the bot as part of the customer experience to the software robot replacing manual labor.
#6: Security & Privacy: Cyber-attacks are today amongst the biggest risk for every organization, but even for entire economies. Cybersecurity as well as regulatory compliance around privacy have become essential to successful business. Cybersecurity & Privacy are not only essential, but have become competitive differentiators in building trust with the digital customer.
#7 Data & Analytics: Data powers automation and new business models, and analytics utilizes the data for delivering value. Businesses in the Digital Age are data-driven.
In addition to these seven areas, the way services are architected and deployed has changed fundamentally. Modern architectures building on microservices, container-based deployments, and delivery in the Cloud or via Edge Computing are the foundation for digital services. Agile development and DevOps (Development & Operations in a fully integrated approach), with continuous delivery of new services and service capabilities, is essential for succeeding in the ever-changing, rapidly innovating digital business.
Data is everything. Whether you call it the “new gold” or the “new oil”: Data is what is produced in massive amounts in the Digital Business. Data is what powers the Digital Business. Customer Experience builds on data about customers. Robotics builds on data and AI, and ML is powered by huge amounts of data.
Organizations must put data at the center of their journey into the Digital Age:
Becoming a data-driven enterprise mandates that the ability to access and utilize data becomes common knowledge across the workforce, shifting from specialized expertise to common practice across the organization.
While there still is debate about what qualifies as AI or ML, the reality is that AI and ML are already broadly used. It is not only about android-style robots or self-driving vehicles. AI powers countless elements in our daily lives, such as the chatbots on various websites and postal sorting systems around the world. AI is already ubiquitous.
Organizations must understand the realistic potential of AI & ML, and how to leverage this potential. Today, AI is used in focused solutions, for single purposes. But by combining these, more powerful solutions can develop.
The primary benefit of AI in the digital transformation is in two areas: Leveraging the value of data and augmenting users. Without AI and ML, business will fail in the quest for Digital Transformation.
Just 15 years ago, there was no such thing as a smartphone. There were no wearables, no smartwatches. Cars weren’t connected. But this has changed. Connected things are the new normal, and the coming 5G networks will further power this evolution, allowing all the things to communicate at high-speed, whether for traffic management in smart cities or for communication between sensors, ICS (Industrial Control Systems), and SCADA devices (Supervisory Control and Data Acquisition) in smart manufacturing.
Many of the new services in the Digital Age build on utilizing the power of IoT. Tracking shipments along global supply chains builds on IoT and sensors on containers and pallets. Modern carsharing builds on IoT and smartphones for unlocking the vehicles, and DLTs for tracking the payment.
Everything and everyone is connected. Understanding, managing, and utilizing these relationships and the data behind them, powers the Digital Business.
Another foundation for success in the digital journey is in leveraging the potential of DLTs. Distributed Ledger Technologies are about immutable ledgers that can be used by multiple parties. The most prominent example is the Blockchain behind the Bitcoin cryptocurrency. But there are many more DLT approaches out there today, from Ethereum that is widely used for executing smart contracts to IOTA Tangle, a non-blockchain based structure that is primarily used for machine-to-machine use cases in manufacturing and for connected things.
DLTs allow for having trusted ledgers where information about states or activities can be stored and shared, such as who owns which bitcoins and which transactions have been executed. DLTs can also be used to track the information of sensors in the shipping of goods, for example, including temperatures and other data, to have a continuously updated status of global supply chains, without humans checking the state at every harbor.
As Bitcoin has proven, DLTs have massive potential for disruption. Improvements in global supply chain financing, land registers, registries for diamonds, and many other use cases demonstrate the potential of these technologies in a connected, sharing economy.
Digital Identities are the glue of the Digital Economy. Everyone and everything has an identity. Relationships such as the ownership of a smartphone by an organization and the assignment of the smartphone to an employee are represented by relationships between digital identities. Data ownership is about the relationship of digital identities and data records.
Digital identities are also at the core of positive digital experience. The entire process of Identity Vetting (the verification and registration), as well as the hopefully passwordless recurring access to accounts are the start of every interaction between organizations and humans. Digital experience starts at the website, but digital success starts with the digital identity and the experience of the customers and consumers.
There is also a dark side of digital identities: Digital identities are what attackers are after. They are often the entry point of attacks. Thus, trustworthy and well-protected digital identities with a good level of assurance (LoA), are essential in the Digital Economy. This, notably, is where DLTs and Digital Identities converge: Decentralized Identities, also referred to as Self-Sovereign Identities (SSI) deliver reusable, trustworthy digital identities based on DLTs.
The Digital Economy never sleeps. Organizations can’t rest on their achievements. Therefore, it is not about a single Digital Transformation, but an ongoing journey towards success in the Digital Business.
This requires solutions that are dynamic, not static. Continuous delivery and agile development are cornerstones of the software that powers the Digital Business. The saying that “every business is a software business” depicts this evolution: Software is at the core, and continuous evolution of services is what brings the competitive advantage.
However, agile development strategies for the digital services are no longer sufficient. The term Citizen Development refers to the evolution within organizations: Employees must become enabled to create solutions, based on no-code or low-code approaches. The utilization of data by everyone for the daily business activities builds on no-code approaches in data analytics. It is not just that every business should understand the role of software in its services, but also everyone should become something of a software developer, but without the need of coding – a solution creator.
When it comes to DX, it is often difficult to ascertain whether it is more appropriate to talk about an evolution or revolution, transformation or disruption, project or journey.
Are we talking about an evolution or a revolution? It really depends on the state of an organization, the industry, and the innovations. Sometimes it is evolutionary, sometimes revolutionary, and sometimes both, depending on the perspective.
Tesla appeared as the company that wanted to revolutionize the automotive industry – and accelerated the evolution of the legacy automotive vendors. The smartphone, on the other hand, revolutionized the mobile phone business and inserted itself into consumer-facing business and the daily life of individuals.
Are we talking about transformation or disruption? Again, it is a matter of perspective. However, one thing is certain: Digital Transformation is not a single transformation to a new, digital state. It is, at its best, continuous transformation, as in evolution. However, sometimes it is not evolutionary, but disruptive. Digital cameras, for example, were disruptive to the manufacturers of photography film.
Are we talking about projects or journeys? There are projects on the DX journey, many of them. But much of the activity is agile and continuous, not a defined project anymore. Digital Transformation is not a project, but a journey of businesses to becoming digital businesses that not only succeed in the Digital Age but also drive innovation.
Digital Business is faster than business has been ever before in terms of changes in the competitive landscape, in business partnerships, and in technical innovation.
Continuous innovation and change thus are at the very core and at the heart of every successful business in the Digital Age. Technologies foster innovation and change, but success starts with an organization that is agile and built for change.
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