What is digital transformation really?
Everyone seems to “kind of know” what digital transformation is and everyone seems to “kind of know” that it is important, but there seems to be a lack of shared understanding and clarity about the term.
Being an educator and innovation trainer, as well as a software engineer, I often times hear the term digital transformation. It is everywhere. In conferences, consultancy articles, in executive meetings, in client briefs…
It is so widespread as “something important” that one would think it would be very clear what one means by it, yet, somehow when I ask people what they understand digital transformation to be, more often than not I get confused looks and half baked replies.
Everyone seems to “kind of know” what digital transformation is and everyone seems to “kind of know” that it is important, but there seems to be a lack of shared understanding and clarity about the term.
A friend and colleague of mine, Floyd Weintraub, a business developer from New York with whom I had the pleasure to work with once told me: “You know Joao, as I get older I need to simplify everything to a max of 3 bullet points. I simply cannot afford to remember more than that”.
Although he meant it as a joke at the time, and as a way to force me to condense what I was trying to tell him to its core, this idea has stuck with me so in this article I will do my best effort to simplify and clarify this term.
We will break this in 3 parts:
Part 1 — What do we mean by digital?
Part 2 — What is digital disruption?
Part 3 — What is digital transformation?
Part 1 — What is digital?
Digital: The possibilities that emerge from the convergence of multiple technological innovations and business models enabled by connectivity
The definition above is a mix between my own take on it (by adding “the possibilities that emerge”) and IMD business school’s Michael Wade’s definition (whom I recommend following).
This definition clearly states that digital is a set of possibilities (business and technological), that are made available by the convergence of distinct technological advancements united by widespread connectivity.
Part 2 — What is digital disruption?
Digital Disruption: The positive or negative effect of digital on a company’s current business and operating models
Before we dive into digital transformation it is important to go through disruption first. Digital transformation as we will see in Part 3 is a possible response to digital disruption (or the risk of it).
In this definition taken directly from IMD business school, if we replace the word digital with the definition in part 1 we get:
Digital Disruption: The positive or negative effect of digital (the possibilities that emerge from the convergence of multiple technological innovations and business models enabled by connectivity) on a company’s current business and operating models
Example
To illustrate digital disruption let’s take the company “Established Transportation Company — EstaTransport” as an example.
EstaTransport has been doing heavy load transportation of goods for over 40 years. During all this time, digital has opened many new technological possibilities (real time tracking of goods; optimized routing; etc.) and with these new business model possibilities (dynamic insurance policies; on demand service upgrades, etc.). EstaTransport has picked up and incorporated some of these along the years and things were looking good.
Meanwhile, in a small dot in the USA called Silicon Valley, a couple of young entrepreneurs look at the transportation of goods industry and see an opportunity to leverage all these digital possibilities from the ground up.
They start a new company called “Brand new transportation company”, NewTransport, which is entirely built on the new business models and has low operating costs because it adopts the most modern technology stack. Not only that, it offers its customers touchpoints (support, software, etc.) that look and feel like everyday use consumer products (like facebook, instagram, etc.).
NewTransport is growing, gets 50M USD of VC capital, and EstaTransport starts losing customers to NewTransport.
In this case, EstaTransport is going through disruptive stress (the negative effect of digital disruption), while NewTransport is going through disruptive opportunity (the positive effect of digital disruption).
What can EstaTransport do?
This takes us nicely into part 3.
Part 3 — What is digital transformation?
Digital transformation: Organisational change that enables the adoption of digital into an established company’s current operating model, in order to embrace new business opportunities and/or to respond to threats brought by digital disruption.
Again, this definition starts from IMD’s definition and I expand it with the motivation of the company to digitally transform itself: embrace new business opportunities and/or to respond to threats brought by digital disruption.
First of all, digital transformation is organisational change! This means it often demands deep changes in the organisation at all levels and not just on technology and business models but also in people, processes and culture (things can go very wrong when the only focus is on technology as shown in the BBC case below).
This type of change is hard to do, and in reality it is more of a continuous gradual process than an overnight transformation.
Secondly, digital transformation is also only ONE of the many responses an established company can take when faced with digital disruption.
Following up on our EstaTransport company example from part 2, the company may decide to transform itself as a response to the disruptive stress it is experiencing due to NewTransport’s market uptake, or it may just decide for example that it should focus on milking its current business model (accepting that it will eventually close its business).
It could invest in new transportation startups and become a financial investor in companies of the same generation as NewTransport. Or it could reduce its scope and focus on a niche transportation market retreating into an area of expertise where NewTransport cannot reach (yet!).
The reality is that very often the strategic responses from established companies are a mix of several strategies (e.g. milk part of business + retreat to niche and restructure + digitally transform in the niche);
Bringing it all together
If we take the definitions from PARTS 1, 2 and 3 and merge them, then we get that:
Digital transformation: Organisational change that enables the adoption of digital* into an established company’s current operating model, in order to embrace new business opportunities and/or to respond to threats brought by digital disruption**
*The possibilities that emerge from the convergence of multiple technological innovations and business models enabled by connectivity
** The positive or negative effect of digital on a company’s current business and operating models
This clarification has been incredibly helpful for me and I hope it proves useful for you as well!
Dedication
This article is dedicated to Floyd Weintraub!
May you rest in peace my friend,
Joao
