What Is Digital Transformation

Introduction to digital transformation

Digital Transformation (DX) refers to implementing digital technologies to unlock the full value of technology investments by either creating new or modifying existing business processes. DX can also lead to new business models and revenue streams for companies.

Executive summary of digital transformation (video)

Short on time? Check out this video to get a basic understanding of digital transformation. For a more in-depth analysis, including theory and strategy, keep reading.

What is digital transformation?

The driver for digital transformation

Digital adoption and innovation are driven by customer experience. Customers want faster, more responsive, and increasingly interactive experiences, but they also want accessibility and availability.

DX helps your organization provide a consistent, efficient, consumer-centered experience throughout the customer journey.

Customer-Facing Digital Transformation

Digital transformation strategy

Typically, the digital transformation projects are initiated by the CEO and led in partnership with CIOs and other senior leaders. It requires collaboration across departments to align business objectives and application development models.

In a report by Constellation Research surveying 100 Fortune 500 CIOs, 77% of the respondents named digital transformation as their top priority for 2021.

A Digital Transformation strategy involves innovation, changing operation and business models, and taking advantage of emerging technologies. It’s more than finding and adopting new technology to help your business become more efficient – it is the reshaping of a business as a whole.

According to Richard Rumelt (who McKinsey calls “Strategy’s Strategist”), Emeritus Professor of Business and Society at UCLA Anderson School of Management, a good transformation strategy contains the following:

  • Diagnosis. The definition or explanation of the nature of the challenge. A good diagnosis helps simplify the problem by identifying certain pieces of the situation as critical.
  • Guiding policy. A policy for dealing with the challenge. This is the overall approach that will be taken to overcome the obstacles defined in the diagnosis.
  • Coherent actions. This set of actions are designed to carry out the guiding policy. They are steps that are coordinated with one another to collaborate in accomplishing the guiding policy.

Without a diagnosis, teams might take unnecessary actions that result in mayhem and uncertainty. It can likely lead to disjointed projects and random tech infusions that don’t add value or make sense.

The guiding policy answers the question: How do you want to do that, exactly?

If the guiding policy can be applied to any organization at any time, it won’t be very helpful in guiding your business’ digital transformation. And of course, nothing is accomplished without a set of coherent actions. If there isn’t a clear path with specific actions to take, resources will be wasted.

Simply having a to-do list is not a strategy, though. Data enables companies to find new opportunities easily. Leveraging new technologies and launching new opportunities requires a transformed way of working.

In developing your digital transformation strategy, consider the 5 Building Blocks of Digital Transformation:

  1. Operational backbone – A set of integrated, standardized systems, processes, and data that support a company’s core operations.
  2. Shared Customer Insights – Organizational-wide knowledge of what customers will pay for and how digital tech can meet their demands.
  3. Digital Platform – A repository of business, technology, and data aspects that facilitate fast innovation of new offerings and improvements.
  4. Accountability Framework – Clear distribution and ownership of a growing set of digital offerings and components, balancing autonomy and alignment.
  5. External Developer Platform – A repository of digital components that’s open to external partners who can contribute to and use the platform.

Ultimately, understanding both what you can do and what customers want will help evolve your strategy.

4 types of digital business transformation

So how does digital transformation come into play in business? It’s not just about adding technology. In fact, it’s more about organizational change and learning how to use technology to improve performance. The use of AMPs (analytical, mobile tools and applications, and platforms) has exploded and is completely changing business as well as competitive dynamics within many industries.

When it comes to digital business transformation, there are 4 types:

  • Process Transformation – This involves reworking processes, using APIs, data, analytics, machine learning, and other technologies to reinvent corporate processes. The goals being: lower costs, reduced cycle times, and increased quality. Consider Domino’s Pizza and their AnyWare ordering; this innovation of making ordering available from every device increased customer convenience so much that it overtook Pizza Hut in sales. Other companies are utilizing robotic process automation to streamline back-office processes such as accounting and legal.
  • Business Model Transformation – As mentioned, the available technology allows companies to pivot on their traditional business models. This type of transformation is aimed at the basic building blocks of how value is created and delivered in a given industry. Think again of Netflix and how they delivered video content in an entirely new way, or Uber’s reinvention of taxi service. Insurance companies are using data and analytics to unbundle services and charge customers solely for what they actually use. By rethinking business models and how value is provided, there’s a whole world of opportunity.
  • Domain Transformation – While there’s not much focus here, there’s abundant opportunity. Evolving technologies are redefining services and products, blurring boundaries between industries, and creating new non-traditional competitors. Take Amazon for example; they started AWS and entered an entirely new domain for them that had been previously dominated by Microsoft, IBM, and other giants. A huge part of their ability to enter this market was their digital technology and capabilities. AWS is unique from Amazon. It’s not unobtainable either—today’s digital world no longer consists of technology gaps as a barrier for businesses.
  • Cultural/Organizational Transformation – Complete, long-term digital transformation requires reworking organizational mindsets, processes, talent, and capabilities. Digital culture requires agile workflows, more testing and learning, decentralized decision-making, and more dependency on business ecosystems. Consumer credit agency, Experian, is a success story for digital transformation. They adopted agile workflows, development, and collaboration and changed the employee focus from equipment to data. While consumers and tech might be the driving forces behind digital transformation, company culture and organizational change is a fundamental requirement for long-term digital business transformation success.

Digital transformation by industry

Digital transformation in banking

Digital transformation in banking has been slow to evolve due to a combination of factors, namely security concerns and a deep integration of systems. However, this is changing thanks to the abundance of cloud-based technologies and accompanying innovations. Banking will continue to transform, albeit at a slower pace than some other industries.

Digital transformation in professional services

The progress of digital transformation in the professional services industry has been slow to evolve. An old-fashioned industry, professional services places a high emphasis on personal expertise, billable hours, and personal business relationships. However, no industry is immune to the demand for digital transformation. In the areas of auditing, accounting, tax, and advisory, technology has, and is continuing to, evolve. However, those who don’t implement it into their business operations will be harming customer experience – and their bottom line.

Digital transformation in insurance

Like banking and professional services, insurance is a more traditional industry and is slow to adopt change. That means that digital transformation is a rather new venture for the insurance companies, having only kicked off in the past couple of years. According to Gartner, CIOs in the insurance industry invest 56% of their budgets on modernizing legacy applications, reflecting the industry’s preference for upgrading rather than replacing legacy systems.

Digital transformation in healthcare

Digital transformation in healthcare has revolutionized hospitals and patient care alike, from AI-based and VR-enabled technologies to the ability to receive healthcare from anywhere. It has also created commercial opportunities for the wearable devices market which has skyrocketed in recent years.

Examples of enterprise digital transformation

When it comes to scaling digital transformation efforts across an enterprise, we have learned that a holistic approach works best. The full value of digital transformation cannot be realized if it touches only a few mission-critical applications, since such a limited scope makes it impossible to measure impact across workflows.

Mega enterprises, including Comcast, Netflix, Nestle, Spotify, Sephora, and UPS, have achieved successful digital transformation through large-scale projects that centered around crafting exceptional experiences for both employees and customers based on actionable data.

Technology for Digital Transformation

A diverse range of people and disciplines is necessary for the digital transformation journey.

Big data & real-time analytics

Collecting and analyzing data is critical to digital transformation. Big Data includes structured and unstructured data in large quantities, as well as the processing methods that make it easy to distribute and analyze data. The ability to produce reports in real-time, as well as the ability to organize effort and teamwork, is crucial.

Artificial intelligence (AI) & machine learning (ML)

AI will take part in the digital transformation of both small and large industries due to its ability to automate and streamline business processes. AI, along with the current computing power and ML tech, can also provide analytics at unprecedented levels such as it already is in the fields of IT, finance, car manufacturing, healthcare, and more.

Cloud technologies

The cloud can drastically transform existing business models by:

  • Increasing flexibility
  • Making access to resources easier
  • Storing and processing data on demand
  • Reducing hardware and infrastructure expenses
  • Ensuring efficient work by remote teams
  • Storing large amounts of data

Augmented reality (AR)

AR offers seamless connectivity between physical and digital, skyrocketing the idea of the human-machine interface to another level entirely. Already fully implemented in automotive, medical, and marketing fields, expenditures on AR continue to rise in the commercial sector.

IoT (Internet of Things)

The Internet of Things is a system of connected devices capable of transmitting and exchanging data without human intervention. There are so many things we use on a daily basis that are equipped with sensors and exchange data with other devices to facilitate the best user experience.

Robotic process automation (RPA)

Robots are spreading into analytics and decision-making, and RPA’s role in digital transformation includes accelerating tasks while ensuring greater accuracy and operational efficiency. Overall, it frees up human resources for higher-level jobs.

Frequently asked questions

  • What are the 4 main areas of digital transformation?
    Empowering employees, Engaging customers, Optimize operations & innovating services and products
  • What are the top 3 trends of digital transformation?
    According to a research done by WalkMe in 2022 the 3 trends of digital transformation are: Democratization of Innovation, The Expanded Cloud & Real-Time Data Processing

Updated: December 21, 2022

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