What is digital transformation & why is it important?
Digital transformation refers to the process through which businesses adopt technologies to drive change. Examples include a corporation implementing cloud computing software, a government organization utilizing big data analytics, or an entrepreneur embracing artificial intelligence (AI) tools.
Since the COVID-19 pandemic, the rate of change in technology — and its uptake — has accelerated, making the need for agile digital transformation even more pressing. How can you make sure you get it right? Here, we’ll discuss some best practices.
What is digital transformation?
Digital transformation occurs when a company integrates digital technologies into its business operations, adopting them as part of a cohesive strategy and culture. Digital transformation can change how a business operates, engages employers, interacts with suppliers, and delivers value to customers and other stakeholders.
Digital transformation isn’t just a matter of buying new technology. It’s about integrating that technology in a way that considers the whole business strategy. Ideally, digital transformation creates an organization that’s more efficient, adaptive, and responsive to change.
Key components of digital transformation
Digital transformation is rooted in the use of digital technologies. Four main types of technologies commonly drive digital transformation — analytics tools, mobile apps, platforms that support shareable capabilities, and social media.
These categories (which can evolve as technology evolves) cover many different digital tools, such as:
- Cloud computing. Cloud computing is a broad term that refers to the delivery of computing services via the cloud, aka the internet. So, instead of accessing computing services through software downloaded to your computer or other digital devices, you’re accessing it on the web. Examples of cloud computing services include file storage, data backup, disaster recovery, and collaboration tools. For example, a business that uses an online storage tool like Dropbox is using a cloud computing service.
- Big data analytics. Big data analytics is the process of identifying patterns, correlations, and trends in big swaths of raw data — from scientific study results to customer surveys. Data analysis tools use statistics techniques like clustering to make meaning out of this data. For example, a business can use big data to analyze customer information to get a better idea of customer profiles, wants, and needs. This is something a market research agency might do, for instance.
- Internet of Things (IoT). IoT refers to the technologies that allow devices to communicate with one another, creating connected systems that businesses can use to maximize efficiency. Everyday examples of the IoT include smart home devices, like security cameras, lights, and thermostats — as well as wearables like fitness trackers and smartwatches. Businesses can use IoT data to gain insights into how customers use their products. For example, a fitness wearable might use information to upsell customers on products to improve their health, like exercise plans, resulting in a better user experience.
- Artificial intelligence (AI). AI refers to a machine’s simulation of human intelligence processes. AI can be used for various purposes in business, from automation to data analytics and natural language processing (NLP). AI is often used in businesses for customer service tools like chatbots — which are already used in several industries — and from hospitality to e-commerce.
- Automation. Automation refers to the use of technology to perform repetitive tasks, minimizing the need for human intervention. Automation can be applied to various business processes, such as managing employee schedules, payroll, and customer relationships. For example, an e-commerce store can automate sending a follow-up email to customers asking them to review products they ordered.
- Robotics. Robotics is a type of engineering that involves the design and creation of robots for various purposes. Robotics can be applied to all kinds of industries, from health care to fitness. For example, the manufacturing industry uses robotics to perform monotonous, repetitive tasks. And in the agriculture sector, farmers can use tractors and harvesters self-guided by GPS.
Importance of digital transformation in the modern era
If it seems like technological changes are happening faster and faster, it’s because they are! The rate of technological evolution is speeding up. One way to assess this is by the number of patents for new technologies filed. The Atlantic reveals these numbers have gone up significantly in recent years.
AI tools like ChatGPT are the perfect example of how a technology can accelerate: As more people use these technologies, the AI improves and the tool becomes more effective — at an exponential rate.
Businesses that want to remain competitive need to keep up with the pace of change or risk being left behind. Look at companies like Kodak or Blackberry as cautionary tales: Once at the top of their respective industries, these are organizations that failed to keep up and fell behind.
The good news? Digital technology can enhance your business outcomes. Here are some of the possible benefits:
- Improve the customer experience. Digital tools can make it easier for customers to interact with and get information about businesses and even streamline the purchasing process. Starbucks has demonstrated how tech can enhance the customer experience, being an early pioneer of mobile payments and using its mobile app to improve customer engagement and boost loyalty.
- Increase efficiency. Automation is a great way to improve efficiency. Amazon is a fantastic example. The e-commerce giant is already notable for automating many of their warehouse processes — and, with improvements in robotics, is even taking a step toward fully automated warehouses.
- Reduce costs. By increasing efficiency, digital technologies can help cut costs. The right tech tools can reduce overhead in other ways too like minimizing reliance on physical infrastructure. For example, companies with cloud storage services no longer have to rely on large physical data storage centers to safeguard their digital information. The use of cloud-based collaboration tools also enables remote work, eliminating costs like commercial rent. Companies like Airbnb and Spotify are famously remote and have saved money as a result.
- Develop new products or services. Digital business transformation can help companies collect and analyze data to identify new opportunities for innovation. For example, Uber — which lets everyday people be taxi drivers — saw a clear demand for food delivery and adapted its unique ride-share service to the food delivery space, allowing those same people to become food delivery drivers. Enter Uber Eats.
- Enter new markets. Data collected through digital tools can also help pave the way to new markets. For example, companies can use insights to determine market demand and reach new customers. They can also use digital technologies to reduce the costs of international business. Adopting digital payment tools like PayPal or Payoneer makes it easier to hire freelancers abroad, for instance. There’s no stress about international bank accounts.
- Gain a competitive advantage. All of the above benefits can add up to a competitive advantage in terms of efficiency, customer service, productivity, and innovation. Companies can stay ahead of the competition — or even bounce back — using tech. Big names that have embraced modernization to get ahead include American Express, IBM, and Netflix.
What are the examples of digital transformation?
You might think digital transformation is only relevant to high-tech companies. The truth is that successful digital transformation can impact all kinds of fields — really, no industry is immune to the power of modern innovation.
For example, you might think of agriculture as a traditional industry that’s not hugely impacted by tech, but, as we discussed, farmers are using robotics to work with self-governing tractors and harvesters. This is just one example of agricultural tech in action. Cutting-edge tools can also be used for everything from monitoring soil quality to checking weather trends.
Here are some more industries with noteworthy digital transformation efforts, with examples of how modern tools are changing the game in each one.
Retail and e-commerce
Digital technologies have revamped the consumer retail experience with things like e-coupons and digital loyalty cards. Retailers have likewise benefited from innovations like automated inventory management software. The rise of e-commerce exemplifies digital transformation shaking up an entire industry.
Nike and Gucci are more recent examples of companies making the most of digital transformation initiatives in the retail space. Both brands have explored virtual shopping worlds like the metaverse.
Examples of digital transformation abound in financial services. People no longer need to visit a brick-and-mortar bank but can do the bulk of their banking online. Plus, there are new payment platforms like PayPal, not to mention the rise of crypto and blockchain.
American Express (AmEx) is an example of a company adopting tech-driven business transformation to turn things around. The financial services giant has roots dating back to 1850 when it started as an express mail service. It wasn’t until the mid-1900s that AmEx started offering consumer credit — what it’s best known for today.
Health care and telemedicine
The health care field has been impacted by digital technologies. Big data supports drug development, for example, while robotics can expand treatment options and cloud technologies can simplify patient data storage.
The rise of telemedicine is one example of how health care has evolved thanks to tech. COVID-19 helped spur the trend. Mental health services, in particular, have benefitted from the availability of telehealth, with novel platforms like BetterHelp connecting patients with licensed therapists.
Manufacturing and supply chain
The manufacturing and supply chain sector can benefit from many types of digital transformation projects, from robotics to automation, cloud computing, and more. For example, supply chain management can be simplified through end-to-end customer engagement tools.
Take a company like Amazon, for instance. When you order a product, you get an email notification (sent automatically). You’re also notified when your package is out for delivery and when it’s been dropped off. You’re even given delivery time windows, which are based on the Amazon driver’s GPS-tracked location.
Education and e-learning
The COVID-19 pandemic likewise sped up the adoption of digital technologies in the education sector. Jokes about “Zoom University” aside, tech has improved many education and e-learning systems by allowing customizable and adaptive teaching processes.
Immersive technologies like AR/VR can also improve education and training. Already, companies are using AR tools to cut costs on training. This is especially useful in high-risk industries. For example, think of how airline pilots train on a flight simulator.
How to implement digital transformation in your organization?
Ready to adopt digital transformation in your organization? It requires more than simply picking some cool tech and deciding to implement it. Follow these steps for an effective digital transformation strategy.
1. Assess your current digital maturity
Planning your digital transformation starts with assessing your baseline. Evaluate your organization’s current digital strengths and weaknesses.
To identify areas in need of improvement, analyze your existing systems, workflows, and data infrastructure. Finally, consider your business goals and customer expectations.
2. Develop a clear vision and strategy
Based on the above assessment, chart out your digital transformation journey. Identify the opportunities digital technologies can offer and consider how your business can tap into those to achieve your larger vision.
Also, consider the competitive landscape: How can you stand out from the crowd using digital tools? Part one of our guide to digital transformation strategies can help you chart your path.
3. Build a skilled digital workforce
The people in your organization must have the skills to implement digital tools. You may need to form a research and development team for digital transformation systems to start with and then train employees on how to use new tools properly. Part two of our guide to digital transformation strategies provides more tips on knowledge sharing.
4. Invest in the right technology
What are the “right” technologies? It depends on the goals and vision you defined in steps one and two. You might have to invest in new hardware, software, and data analytics tools to achieve your objectives.
Explore different providers, solutions and partners. Identify those that meet your unique needs and have the potential to drive your digital agenda. Together, create a strategic roadmap that underscores your path to adoption to effectively navigate this transformation.
5. Foster a culture of change and innovation
You don’t want digital transformation to take your employees by surprise. Make sure to introduce new digital products transparently, and give everyone time to transition from legacy systems to novel technologies.
Engage employees in the process of implementation, encouraging experimentation and risk-taking to foster a culture of innovation and continuous improvement. Finally, reward innovation!
6. Ensure effective change management
Bringing your business to the digital age won’t be without hurdles. Expect resistance and be prepared to tackle challenges.
Communicating the benefits and reasons for digital transformation can help ensure buy-in. It’s also important to make sure workers feel supported with sufficient training and resources to facilitate change.
Part three of our guide to digital transformation strategies discusses effective communication around change management.
7. Establish strong governance and security
Digital technologies can present security risks if not treated with caution. Implement data governance and cybersecurity practices and train your teams on them. Security aside, make sure that any digital transformation tools are used ethically.
8. Measure and track progress
One of the great things about digital technologies is that their impact can be easily measured. For example, you can assess how chatbots improve customer service by tracking quantitative metrics like the number of customers serviced in a set time frame.
Whatever the tech is, collect and analyze data to measure impact. From a big-picture standpoint, make sure to stay on top of new digital trends.
How to transform your business with digital transformation?
Businesses ranging from young start-ups to established corporations – can all benefit immensely from digital transformation, through greater efficiency, better decision-making and higher profitability. However, this requires more than just integrating the latest technology tools; a holistic digital strategy is pivotal.
Continuous learning is an essential part of this journey. IMD’s digital transformation programs are designed to equip leaders with the skills needed to accelerate technology adoption. With an inventory of over 20 innovative digital programs and a wealth of cutting-edge resources, we aim to empower participants to turn digital disruption into opportunity.
Through these programs, participants gain deep insights into redefining their business models, reshaping their marketing strategies, and creating value. In addition, the focus on leveraging business analytics helps foster a culture of data-driven decision making. In essence, the competencies developed through our offerings prepare executives to succeed in a globally connected environment.