Digital Transformation
Most companies nowadays want to become digital leaders. Digital transformation is another one of those buzzwords that often gets thrown around. In theory, it is simple and straightforward: accelerate and improve business activities, processes, and models by fully leveraging on available digital technology. In actual practice, however, it gets a bit trickier.
Ambiguities Aside
To make sure we are talking about the same things, let’s try to define some confusing terminologies firsts. “What is the difference between digitization and digitalization?” Digitization is the process of converting information into digits. These are the information that can come in forms like hard copy print outs, vinyl record, VCR cassette, etc. Digitization is simply converting these into a digital format, that is, to ones and zeros.
Digitalization (or digital transformation) is the structuring of many and diverse domains of social life around digital infrastructures brought about by digitization.
(Note: Some literature refer to digitalization as “the process of tech-induced digitization in industries” and digital transformation to be “the societal effect of digitization”, but I feel that these definitions overlap quite a bit).
Why?
Simply put, to stay relevant. Comparing the Fortune 500 firms listed in 1955 with 2015, only 12% of the original firms remain. That means nearly 88% have either gone bankrupt, merged with or were acquired, or still exist but are almost unrecognizable. Moreover, corporations in the S&P 500 Index in 1958 stayed in the index for an average of 61 years. By 1980, the average tenure in the S&P 500 had fallen to about 25 years, and in 2012 it was just 18 years. At the current rate, 75% of today’s S&P 500 companies will be replaced by 2027. Not keeping up with the innovative and hyper-competitive economy is almost tantamount to conceding the company’s imminent failure.
One simple explanation on why digital transformation is so crucial to the survival of firms is the customer’s expectations have already evolved unto digital platforms. And (of course) customers are key to revenue. In 2016, a US study has shown that organizations who were able to move to digital have higher revenue, are more profitable, and are more valuable. Comparing data platform maturity with business performance across 340+ firms, the study shows that the firms that are most advanced in their digital transformation journey generated an average of USD 100 million more in operating income each year. Similarly, an MIT study with over 400 global firms identified that those with stronger digital intensity derive 9% more revenue from their physical assets, are 26% more profitable, and achieve a 12% higher market valuation than the average of their competitors.
Sustainable Transformation
In 2011, a three-year study conducted by the MIT Center for Digital Business and Capgemini Consulting concluded that only one-third of companies globally have an effective digital transformation program in place.
Many companies experiment with startup practices. If you trawl through the news, you may notice innovation hubs and incubation units of big corporation popping-up everywhere. But despite an increasing trend, it’s not very often that the startup mindset assimilates to the whole company. The corporate norm is still ‘business as usual’.
Having an entrepreneurial mindset and adopting startup methodologies is an important success factor for sustainable transformation. These practices include applying customer-centric thinking, working in small valuable increments the — MVP (minimum viable product), fail-fast fail-often mindset, exploring highly advanced technologies, etc. Sporadic practices of such have led to several successful initiatives. However, the widespread adoption is still the exception rather than the rule.
Transformation Needs the Right Mindset
When a company’s goals are “to be considered agile”, “minimize the expenses at all costs”, “to get certifications”, “to meet KPIs”, it is a caution that further goal-setting needs to happen. A 2015 report by MIT and Deloitte found that “maturing digital businesses are focused on integrating digital technologies, such as social, mobile, analytics and cloud, in the service of transforming how their businesses work. Less-mature digital businesses are focused on solving discrete business problems with individual digital technologies.”
Transformation Starts with the Right Leader
Uncompromised sponsorship and digital leadership is one of the most important driver for transformation, but it’s no surprise that its no easy task. Companies may have the right intentions, but many usually encounter challenges like conflicting profit goals and finding and developing leaders that can combine deep industry insights and hands-on digital experience. A strong CEO taking ownership, having a clear transformation agenda and taking active part in driving and securing the progress of digital transformation initiatives — both personally and through dedicated, next-level leaders with deep digital competencies, is a crucial ingredient to the success.
Sources:
http://qvartz.com/wp-content/uploads/DigitalTransformationReport.pdf
