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In our previous article we defined the concept of digital transformation beginning with digitization. We also described other concepts and strategies frequently associated with digital transformation. In this article, we aim to present some of the rewards to be earned by organizations embracing this emergent strategy and aim to answer relevant questions about it.
Digital transformation involves optimizing and automating processes through digital technologies. Once business transactions are digitized, algorithms rather than people make decisions using provided data. The benefits of algorithms making decisions rather than people are many and far-reaching.
For starters, algorithms are computer programs; they never get tired or need breaks. Rooted in artificial intelligence, they work at the most detailed level. They learn and adapt quickly and can make millions of decisions per second. This not only allows users to accelerate and improve processes in current business models (e.g. the decision to issue a loan can be made in a fraction of a second that might otherwise take weeks if handled by a loan officer) but also to create new ones, such as digital ecosystems and platform businesses.
A striking example is aggregators (i.e., algorithms which collect and organize data from multiple sources making it more available for further processing and analytics) in a competitive market. Newer models that evolve through algorithms and data analytics offer decision makers more options, better chances for customization, greater speed and efficiency, and increased affordability on a scale not available to traditional firms. It’s no wonder then, that no matter the industry, companies today strive to implement a digital transformation strategy into their daily operations.
But how specifically are technology and emergent models changing the way business is conducted today? A few examples will help illustrate.
Ten years ago, Best Buy was widely regarded as a doomed enterprise. Its own staff doubted their firm’s ability to compete with Amazon. The arrival of a new CEO saw the implementation of a far-reaching digital strategy that helped Best Buy transition from the traditional “brick-and-mortar” big-box electronics store to the more modern “click-and mortar” retailer with an expanded focus, not just on selling consumer electronics and peripherals, but also taking a more wholistic approach to improving customers’ lives through technology.
The firm sought to reduce delivery times and introduced a price-matching program. They moved from simply selling goods to also advising customers as well as providing auxiliary support services like Geek Squad and installation assistance done by trained experts. As a subsidiary of Best Buy, the Geek Squad provides personalized support and advice to a customer’s home for a fixed annual fee. The firm also pivoted from an email marketing model to an almost entirely digital strategy by aggregating users’ data to build customer profiles aimed at constantly improving recommendations and service offerings.
Home Depot is as synonymous with “home improvement” as Kleenex is to “tissues”. Today Home Depot depends on its technology department employing information technology in all their day-to-day operations. They invest constantly in improving their in-store as well as online sales through data analytics. Through online purchase processing and the provision options to deliver goods directly to contractors, they decrease holding times of inventories and logistical expense. They also added visual and voice search to its app making it easier for customers to use. By embracing a company-wide strategy of digital transformation Home Depot smooths operations across all channels and increases customer satisfaction.
The most common mistake on the path towards digital transformation is to confuse it with the digitalization of a business. Digitalizing a business describes the modernization of specific IT components while digital transformation describes the modernization of firm practices and its organization in a more wholistic sense. Put another way, Digital transformation is a more broad-reaching nomenclature that describes a macroscopic approach where a company shifts gears from traditional business models to ones based in data analytics and user customization.
Importantly, new technologies do not pay for investment directly; projects often run aground leaving management disappointed when digital architecture is not successfully implemented. For this reason, new positions such as Chief Digital Officer (CDO) and “data scientists” have emerged as firms seek to effect their own digital transformations. A central challenge for any firm making this pivot is changing the hearts and minds of its employees, as this switch entails changing company cultures and values as well as institutional awareness of the changing market landscape that is increasingly predominated by computer expertise and database management. By understanding and successfully implementing a strategy of digital transformation, time is freed up and value is created for both internal and external users.
Industry 4.0 is a technological paradigm that involves harnessing various technologies including the Internet of Things (IoT): It is a roadmap for digitally transforming a business. IoT is often understood as a specific technology that enables users to digitize only a certain part of a business process, e.g., the remote control of an enterprise. However, a successful digital transformation entails not just a single part or business process but rather implementing strategies of digitalization throughout the firm’s business processes. This happens not just internally but also in interaction with the outside world, i.e. customers, partners, etc. In most cases, companies not only need to change their own internal practices but also those of their partners and contractors as well.
As previously mentioned, digital transformation for a company is reflected in the optimization of business processes. On the other hand, Industry 4.0 describes the set of tools necessary for that transformation to happen. Digitalization – or the digitizing of operations to apply the full range of these tools is central. That is, processes are first digitized with the help of data capture technologies (e.g., text/image/video recognition/sensor and service logs, user activity data, etc.), and then Industry 4.0 tools help firms optimize them for their own needs (digitalization). The essence of digital transformation then, is moving from digitization to digitalization using Industry 4.0 as the toolset to make that transition.
Digital transformation is the introduction of modern technologies into the business processes of an enterprise and implies making fundamental changes to management approach, corporate culture, and external communication. Digitalization, industry 4.0 and the IoT can all be described as components of digital transformation.
In summary, digital transformation embodies a change to traditional management paradigms concerning decision-making; user decisions made previously are replaced by algorithmic decision-making thus removing potential for human error and increasing efficiency. Algorithms not only allow businesses to quickly improve processes in existing models, but also to identify and create opportunities for new ones through machine learning and pattern recognition. Traditional companies failing to implement these new technologies run the risk of losing market share to more agile competitors as they fail to quickly grasp changing consumer demands and the specific areas in which they might invest/divest company resources. Key to successful digital transformation is following customers in the process of digitalizing their lifestyle. It’s not about using just one technology or digitizing a single business process but rather using a comprehensive approach to information technology in all company processes; that means considering not just internal processes but expanding to include the input of the outside world through better understanding of both customer and supplier requirements.