How much progress has your company made toward digital transformation?
If you’re not quite sure what that means, don’t worry. You’ll have a clearer idea in a moment.
If you think progress in your company has been slower than it should be, you’re not alone.
You’ll see here that relatively few companies across industries have achieved digital transformation.
And many companies, despite their good intentions, are unaware they are not on a path that leads to real transformation.
This is the first in a series of articles about digital transformation. Future posts in the series will address these topics:
Table of contents
What is the digitization of business?
Digitization is the conversion of analog information into digital form. It occurs when you represent images, sounds, signal, or objects by a series of numbers.
Digitalization, if we want to make fine distinctions, is the process of adopting digital technologies. It includes the changes to organizations that result from digitization. Businesses use digital information technology to make their operations more efficient. For simplicity here, we’ll use the word digitization in place of digitalization.
In corporate computing, digitization began with use of mainframes. It then proceeded through new technologies, including minicomputers, personal computers, and mobile devices.
In corporate communications, digitization evolved from analog to digital telephones. Then it went on to include fax, email and EDI, electronic forms (PDFs), the Internet, smartphones, and the Internet of Things.
In each case, waves of increasing digitization made business faster and more efficient.
Use of digital technology improved productivity and sometimes increased revenue from existing sources. Often, it also improved the experience companies provide to their customers.
Digitization optimizes current operations. It doesn’t alter the nature of a company’s transactions or its role within its ecosystem. Business models don’t change.
Digital transformation is radical and intentionally disruptive
In contrast to digitization, digital transformation occurs when companies generate entirely new revenue streams, products, services, and business models. So says Hung LeHong, a Gartner analyst who helps executives judge whether their digital initiatives are transformations or just optimizations. He shared his thoughts in CIO magazine.
The goals of digital transformation are:
“Digital transformation occurs when companies generate entirely new revenue streams, products, services, and business models.”
Newcomers may drive digital transformation in new markets they target. Amazon, Uber, Lyft, Airbnb, and WeWork are good examples.
But Digital transformation isn’t limited to new companies that disrupt an established industry with new business models.
Well-established companies may also pursue digital transformation. They may do so to disrupt their industry or to avoid being disrupted, LeHong notes. Established competitors may also adopt digital transformation as a way to win new customers.
A caterpillar becomes a butterfly
Unlike digitization, digital transformation uses technology to “radically change the performance or reach of an enterprise." That’s the view of George Westerman, principal research scientist at the MIT Sloan Initiative on the Digital Economy.
Leaders transform their company to take advantage of new possibilities.
Companies may redefine how their business functions work and how they interact. They may even redraw the boundaries of their business.
A business may develop a new ecosystem that “blurs the lines between supply chain, partner, customer, crowd, and employee.”
It’s like the transformation of a caterpillar to a butterfly, says Dion Hinchliffe, technology strategist. An organization moves “from one way of working to an entirely new one, replacing corporate body parts and ways of functioning...”
The goal is “to capture far more value than was possible using low-scale, low-leverage legacy business,” he says.
Westerman says companies he calls “digital masters” are 26% more profitable than competitors in their industry.
“Digital masters’ are 26% more profitable than competitors in their industry.”
“Digital masters, he says, are companies that strike an effective balance between technology and the “ability to envision and continuously drive change.”
What are the risks of not transforming fast enough?
Slow progress toward the digital future can hurt incumbent firms in many ways that are hard to foresee. But research suggests a few likely outcomes.
“Companies that try to avoid the risks of digital transformation are unlikely to thrive,” say researchers at MIT Sloan.
They could see revenue growth drop by as much as half if they don’t digitize fast enough. This prediction comes from McKinsey researchers Jacques Boughin and Tanguay Catlin.
“Companies that try to avoid the risks... could see revenue growth drop by as much as half if they don’t digitize fast enough.”
Companies could also lose as much a third of their earnings growth before interest and taxes (EBIT), the McKinsey consultants estimate.
Slow-moving companies will also find it harder to attract and keep top talent, MIT studies suggest.
Employees prefer to work for businesses committed to digital leadership.
“Across age groups from 22 to 60,” MIT found, most survey respondents “want to work for digitally enabled organizations. Employees look for good digital opportunities.”
Most businesses aren’t on a path that leads to transformation
“Most companies still have a long way to go in their digital transformation.” This was among the findings of a 2011 study by MIT Sloan and Capgemini Consulting.
Seven years later, a few notable companies have made newsworthy progress. But most muddle along with half-hearted commitments and weak strategy.
Across industries, only a minority of companies have fully embraced digital transformation. Only 16% had taken steps toward reinvention. That’s the conclusion of the McKinsey authors, based on data they collected in 2016.
By “steps toward reinvention” the authors mean two things:
By mid-2017, the same researchers found that less than 20% of companies had taken the path of “digital reinvention.” The data in that study came from 1,650 firms around the world.
“In mid-2017, less than 20% of companies had taken the path of ‘digital reinvention.’”
The authors conclude that “most incumbent firms are failing to adjust to the digital era.”
Many companies shrink from the commitment
Indeed, digital transformation is a big commitment. It’s not to be undertaken lightly.
It’s not easy to undertake a massive transformation of technology and company culture. It’s even harder to do so when investors expect you to continue driving revenue and profit growth from your current business.
Digital transformation puts CEOs and CIOs smack in the middle of what Clayton Christensen of the Harvard Business School has called the “innovator’s dilemma.”
Forty-seven percent of CEOs told Gartner they are feeling pressure from their board to make progress in building their digital business. These numbers come from Gartner’s 2017 CEO survey.
Twenty percent of CEOs say their corporate posture is now “digital first.” And 22% say they are “digital to the core.”
Even so, more than half of CEOs (53%) couldn’t provide a clear metric for success of their digital transition.
“More than half of CEOs couldn’t provide a clear metric for success of their digital transition.”
The progress is uneven across industries, according to a McKinsey study in 2017.
Investments tend to focus on digitization of products and services or on marketing and distribution. Only 2% of companies are focusing their digital strategies on their supply chains.
Only 2% of companies are focusing their digital strategies on their supply chains.
Companies are making progress, but is it fast enough for the tidal waves of disruption that have yet to hit them? Probably not.
This is the first in a multipart series of articles about digital transformation in the North American aftermarket. Look for the next article soon.
Next up: What progress have companies made in the automotive aftermarket?
Sources and resources
Boulton, Clint. “What is Digital Transformation? A Necessary Disruption.” CIO online. July 31, 2017.
Boughin, Jacques. Catlin, Tanguy. “What Successful Digital Transformations Have in Common.” Harvard Business Review. December 19, 2017.
Boughin, Jacques. LaBerge, Laura. Mellbye, Annette. “The Case for Digital Reinvention.” McKinsey Quarterly. February 2017.
Kane, Gerald C. Palmer, Doug. Philips, Anh Nguyen. Kiron, David. Buckley, Natasha. “Strategy, Not Technology, Drives Digital Transformation: Becoming a Digitally Mature Enterprise.” MIT Sloan Management Review. July 14, 2015.
Khan, Shahyan. Leadership in the Digital Age - a study on the effects of digitalization on top management leadership. Stockholm Business School. June 2, 2017.
MIT Sloan Center for Digital Business. Capgemini Consulting. “Digital Transformation: A Roadmap for Billion-Dollar Organizations.” 2011.
Gartner. “Gartner Survey Shows 42 Percent of CEOs Have Begun Digital Business Transformation.” April 24, 2017.
Westerman, George. Bonnet, Didier. Leading Digital: Turning Technology into Business Transformation. George Westerman. Didier Bonnet. Andrew McAfee. 2014.