Everybody talks about Digitization – which rather should be Digitalization – and Digital transformation nowadays. I started to ask myself, do we just see another bubble growing?
Originally I tried to sort things out for myself. Reading some publications I realized there might be others who find it useful to put things right.
Is Digitalization a brand new thing?
Not at all. Since we have computers enterprises use computer systems and applications to improve their business processes. They optimize manufacturing through automation, speed up warehousing with computer systems, streamline administrative activities through ERP systems. It’s all about digitalization.
Companies who started to digitalize early stayed ahead of competition for quite a while. However step by step improvements often resulted in complex, fragmented application landscapes. Legacy systems became difficult and costly to maintain. This way new and late–comers often managed to set up a more efficient digital “hinterland”. Therefore many companies decided (or were forced) to start major IT projects. They started to reshape and simplify their application landscape (see the golden era of enterprise SAP implementations, SOA projects etc).
Is digital transformation the major change of the application landscape then?
Not really. Digital transformation describes a radical change of the business process through digital solutions. Like when a company skips some steps of the value chain through an app (like Uber or Transferwise). Or if it starts to follow a new business model with the help of a digital solution (e.g. Netflix vs DVD rentals, LinkedIn vs headhunters).
Even digital transformation is not brand new. One of the most influential projects in my carrier was my first project at GE Lighting. At the end of the 90’s we created a daily planning system to make manufacturing more flexible. Later on we created a system to speed up warehousing. Other projects allowed the sales organization to utilize this flexibility. Shorter lead times, improved inventory turns but increased efforts for production. (I still admire those manufacturing guys who initiated it…) It was a major shift from manufacturing stability towards customer centricity. Clearly this was an early example of digital transformation.
Where does digitalization end, where does digital transformation begin?
That’s a tough one… There are easy ones, like if employees look up the lunch menu on the web it is digitization, if a company processes accounts payable in Dynamics or SAP it is digitalization but if a company outsources its accounting services and redesigns its ERP system landscape to enable it, it is a digital transformation.
Digitalization makes business processes more efficient, digital transformation changes the rule of the game.
I admit not every case is that easy to label, the rule of thumb for me is: is there a significant business transformation of more business functions next to introducing a tool or not?
So why does everybody talk about digital transformation now?
Because the entry barrier is much lower today. Due to new technology solutions and development practices startups turn good old business practices upside down in months, with little investment. They can easily reach a much larger customer base through the internet. Fintech’s threaten the income of established banks, AI fueled apps endanger the market of medical diagnostics equipment, even IT companies cannot lean back, just think about Robotic Process Automation… 20 years ago it took more than a year to create our daily planning system. Agile teams can deliver new functionality on a daily basis nowadays.
Surely, you always had to have an eye on competition but 20 years ago a bank had some time to prepare before another financial institute could pose risk on its market position and for a DVD shop it was enough to watch the competition in the neighbouring streets.
Naturally not all products or services can be replaced through digital solutions. Apps will never replace fuel or spur gears (other disruptive technologies will endanger their market). Nevertheless there is no company that could ignore opportunities for digitalization without consequences. There are many digital solutions that substantially change the way how business is done. Creating a web shop itself is a digitalization project. If it is followed by skipping distributors and selling directly to customers than it is a digital transformation. And creating a web shop (with a limited number of items) can be done in a few days…
Ok, got it. But should we aim for digitalization or digital transformation?
Once an experienced manager in Philips told me, the right answer is always it depends. But all jokes aside different situations require different tools:
If you want to stay in the game, keep looking for digitalization opportunities. If you want to leap ahead of the competition start the digital transformation.
Digitalization is a precondition for digital transformation but company culture is an even more important one. If looking and introducing (radically) new and preferably digital solutions is not part of the company DNA you can still be fairly successful – at least for a while – but you will be prone to disruptive innovations. So the answer for the question above is another question:
Do you want to follow or lead?