Defining digital transformation

5 September 2016

David A. Smith

David A. Smith

CEO & Founder - Global Futures and Foresight

Guest author David A. Smith, CEO and Founder of Global Futures and Foresight, gives an expert view on how your organisation can embrace change and prepare for a successful transformation. 

Digital transformation is a much used and often misunderstood phrase. It is often incorrectly interpreted as a transplanting of new technologies onto existing processes, yielding perhaps greater access but little in the way of innovation. Digital is also sometimes seen as an adjunct department, yet this vastly underplays the role digital transformation can play at every layer of business practice and process†.

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The process of digital transformation is complex, and far more holistic than simple plug and play technology, as it entails a complete rethinking of organisational and business models. This can flow from many concurrent desires; from more effectively engaging both customers and employees, improving corporate processes and operations or forming collaborative teams from multiple business units†. This need not mean the abandonment of a given core competency, but does entail redesigning the processes that help produce it and augmenting it with new technologies and ultimately new forms of value†.

At its core, digital transformation offers an ongoing strategy for identifying, understanding and responding effectively to change. Digital transformation ‘...speaks to the potential need for a different operating paradigm—and the fact that traditionally siloed functions (for example, marketing, product development, or IT) could obstruct a dynamic approach to digital business that requires speed and flexibility to create the most value. Also required is a new approach to managing talent by utilizing flexible team structures, engaging outside collaborators, and increasing corporate tolerance for failure†,’ says McKinsey.

Tech platforms

Digital transformation is often in its most disruptive form as a 'platform' where parties are encouraged to collaborate and engage to meet the needs of the target cohort in an open system. Boston Consulting Group notes that ‘…advances in technology platforms rank as the most important factor driving innovation†.’

The shift from pipelines to platforms is well documented – most notably with Apple, but also with GE and Philips. The latter established its’ HealthSuite digital platform in an attempt to break down the silos between home, hospital and personal devices. The resultant market of more personalised consumer offers and better data access for clinicians has created what some estimate to be a $100 billion market†. As with all platforms this shift emphasises the skills of orchestration, external interaction and a focus on ecosystem value†. Whether enacted by traditional companies or start-ups, platforms enable rapid scaling at low-to-no cost.

Network effects

One of the key mechanisms for platform success lies in the process of ‘network effects.’ This can be defined as when two parties mutually generate value for each other. Networked models are often demand-side driven, allowing companies to create value by tapping into resources and capacity that they don’t have to own†. Network effects, notes MIT Sloan, ‘…increasingly determine innovation opportunity, value creation, and growth in digital markets,’ whether it be Netflix, Alibaba or any organisation looking into the Internet of Things as source of competitive edge†.

The scope of digital transformation: forecasts of impacts

The value of digital transformation could total greater than $100 trillion over the next 10 years, according to the World Economic Forum. This figures focuses on the combined impact of many digital technologies such as mobile, cloud, artificial intelligence, sensors and analytics†. Indeed, the impact of these technologies at the organisational level are already visible; the time for a Fortune 500 company to reach a billion dollar valuation traditionally averages around twenty years, yet numerous digitally-built start-ups are achieving this in as little as four years†. This could lessen further, as executives predict that 47 percent of all revenue will be influenced by digital by 2020†. 

This statistic only partially informs the reader of digital’s inherent disruptive potential. The larger portion lies with incumbents’ inadequate preparation for digital disruption; whilst close to 90 percent of executives anticipate digital disruption within their industry to a great or moderate extent, only 44 percent suggest their organisation is adequately prepared for it†. If there is a cognition gap, there can also be said to be an execution gap. Whilst 80 percent cite digital transformation as a priority, only 35 percent admit to having a clearly defined strategy†, indicating a preponderance for piecemeal, ad-hoc or even lip service transformations.

Such an approach is understandable given the size, complexity and cost of digital transformation. Theorising, initiating and guiding change on the level necessary is simply beyond the limit of executives tasked with mounting operational worries. Perhaps a good place to start is where there is clear overlap between the strategic and operational – customers. There is a strong case for suggesting that customers are the biggest source of disruption – both short and long-term. Indeed, executives believe that changing customer behaviour and expectations are a bigger source of disruption than technology† – and a key driver of the logic underpinning digital transformation. 

In his next instalment, “Every company is digital”, David discusses the state of digital transformation in existing companies and newcomers to the market.

 

Sources in order of appearance: 
† Source: Adobe, 2015† Source: Congizant, 2015† Source: Fortune, 2014† Source: McKinsey, 2012† Source: BCG Perspectives, 2015† Source: Digital 2020, 2016† Source: Harvard Business Review, 2016† Source: Accenture, 2016† Source: MIT Sloan Management Review, 2016† Source: WEF, via Times of India, 2016† Source: WEF, via Times of India, 2016† Source: Forrester, 2016† Source: MIT Sloan Management Review, 2016† Source: CIO, 2016† Source: Ernst & Young, 2016  

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About the author

David A. Smith

CEO & Founder - Global Futures and Foresight