What is „Digital Transformation“​? – A short and comprehensible definition

What do „the meaning of life“ and „digital transformation“ have in common? Well, everybody talks about it, but only a few people really understand what it means. One of the reasons for this lack of understanding may be the confusion of interconnected terms such as „digitization“, „digitalization“, „digital transformation“ or „digital disruption“.

Purpose of this professional article is, to giving a brief overview what „digital transformation“ means – and what not.

Let’s start with the latter. For some decades enterprises and economies have been influenced and shaped by the introduction and further development of information and communication technology, such as:

• mainframe computers, client-server-systems, cloud-based solutions or (most recently) blockchains
• software solutions for Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Supply Chain Management (SCM), Product Lifecycle Management (PLM) and Management&Support Processes (e.g. Finance, Accounting, Human Resources, Purchasing, …)
• mainframe terminals followed/substituted by personal computers (from the mid 1980s onwards) or laptops/notebooks (from the beginning of 1990s onwards) and some years later (after the release of the iPhone in 2007) by smartphones and tablets
• telex and fax machines are today widely substituted by email systems, short messaging services or „Messengers“ and mechanical typewriters have almost completely been substituted at first by electric typewrites and later by Office software on Personal Computers
• traditional time-division-multiplex (TDM) based telephone systems have step by step been substituted by Voice-over-IP based communication systems
• the internet – particularly the mobile internet – gained more and more importance for enterprises depending on availability of access lines and networks with higher speed and bandwidth (ISDN, DSL, ADSL, VDSL, SDSL and 2G, 3G, 4G, 5G, …)
• storage and transmission technologies and capacities became more and more powerful, so that it was possible to store, transfer and process kilobytes, megabytes, gigabytes, terabytes or petabytes instead of just single bytes
• the eBusiness hype around 1999/2000 already marked a fundamental change of some industries/branches with the rise of dotcom-enterprises such as Amazon, Ebay, Facebook, Google or the rebirth of Apple (note: all these companies belong today to the most valuable global brands)
• factories and productions lines have been more and more automated from shop floor over Process Control Systems (PCS) to Manufacturing Execution Systems (MES) utilizing e.g. automation systems (e.g. SIMATIC from Siemens) or robots

Most of the aforementioned information and communication technologies can nowadays be considered as commodity. More or less every enterprise is able to introduce and handle them and they neither provide essential value add for the customers and suppliers of an enterprise, nor do they significantly differentiate the enterprise from its competitors. In other words: „digital transformation“ is not the introduction of the next Enterprise Resource Planning system version or the digitization of another business process, which has been executed so far mainly on a manual basis. Likewise the standardization, harmonization or consolidation of an enterprise’s IT landscape might be a reasonable step into the right direction for the enterprise, however it should not be considered and classified as „digital transformation“

But what is „digital transformation“?

Definition: Digital transformation means creating new business models by substituting traditional existing eco systems through digital eco systems preferably under control of your own enterprise. As part of digital transformation enterprises utilize data from various sources of the value creation chain as basis for the provision of value adding services. Digital transformation disruptively changes the character of the value creation chain including a reallocation of the balance of power between the suppliers.

Under consideration of this definition digital transformation can mainly be characterized by the following patterns:

• information and communication technology is being leveraged not only for internal purposes, but as well (or even primarily) for external (customer-facing) purposes – it becomes a core production factor for the entire business
• data-driven services with value add for the customer are provided and disposed – instead of manufacturing, selling and maintaining products, systems or solutions (i.e. the customer pays for higher crop yield and not for a more powerful harvester)
• taking advantage of innovative sensor technologies and cyber-physical systems for measuring, gathering and distributing data from various segments of the value chain (e.g. What is the best distance for grain seeds to be planted to ensuring an optimum crop yield? In which segment of the production process is a certain product located at the moment?)
• Connecting various devices (e.g. car and building networks), setting up remote steering and controlling functionalities for devices (e.g. switch on the heating unit in your apartment while still sitting in the car) or predictive maintenance functionalities for devices/systems via remote service (e.g elevators, computer tomographs)
• analyzing data (customer, supplier, product, process related) in real-time not only for internal purposes, but for providing value add for the customer (e.g. by taking immediate corrective actions for maintenance tasks, while the truck is still on the road or the aircraft is still in the air) and for differentiating your enterprise from its competitors
• intelligent and flexible (re)assembling of existing assets (data, services, technologies) can be equally important than providing groundbreaking inventions (think e.g. of the iPhone, which combined existing technology with an easy to use user-interface)
• the focus of your business (model) development goes beyond the borders of your enterprise and integrates customers, suppliers or even competitors into one eco system
• eliminating middlemen, broker, realtors and distributors by e.g. directly connecting end users between each other or directly connecting end users with suppliers (which is currently a big thread for the banking, financial services and insurance industry as well as for travel agencies and taxi companies)
• the owner/controller of the data and the overall digital (eco) system gains as „spider in the net“ more importance than the provider of discrete elements of the value chain
• global operating range, customer-friendly user interfaces, short response times, and agile and flexible reactions to specific customer requirements are routine (and the one-man billion dollar enterprise will soon become reality)
• effective protection of intellectual property as well as of customer and supplier related data (e.g. by effective authentication or encryption) becomes a matter of survival for the enterprise

Reflect for a second: Uber as the world’s largest taxi company owns no vehicles, Facebook as the world’s most popular media owner creates no own content, Alibaba as the world’s most valuable retailer has no inventory and Airbnb as the world’s largest accommodation provider owns no real estate. Most of these companies have achieved a market capitalization of two to or even three digit billion USD within only a few years – which is probably the most impressive evidence for the power of digital transformation.

Closing remarks:

At first, the availability of adequate resources (people, budget) is a fundamental prerequisite for a successful digital transformation – here as well as in other areas of strategic importance the basic principle „no risk, no fun“ applies. From a micro-economic perspective easy access to venture capital is probably the most important prerequisite to fostering the foundation and growth of „digital startups“ in a country or region. Silicon Valley’s biggest competitive advantage is the availability of huge amounts of venture capital and the readiness of the investors to take risks.

At second, be aware, that you cannot delegate the responsibility for digital transformation, neither to a person (e.g. a „Chief Digital Officer“), nor to a department (e.g. your Chief Information Office) – doesn’t matter how smart these people are and how good they perform. Succesful digital transformation requires adequate und continuous management attention of the entire board, a close cooperation of all enterprise functions (not only the IT department) and an essentially changed mindset of the entire staff from the board member down to the ordinary blue-collar worker. You cannot just be „a little pregnant“ – either you are, or you are not.

At third (and maybe most important): Please never forget, that the welfare of our society ultimately depends on generating real goods and services for real people – and not on fancy digital bric-a-brac or financial engineering. Beyond this, be always aware, that digitalizing a crappy process leads to nothing more than a digitalized crappy process. Digitalization neither solves the problem of lacking innovation capability, nor problems in organization or cooperation of your company.

Somehow or other, if you are not willing to include digital transformation as integral element into the genes and culture of your enterprise, you better do not waste your precious shareholder’s money for a useless „digital transformation offensive“. Let instead die off your enterprise with dignity and decency.

Constructive criticism for improving the aforementioned definition is always welcome.