Understanding Digital Transformation

Digital Transformation is the latest buzz word and rightly so.

Often it is deemed to be an Information technology role in any organization. Moreover, at times it is difficult to understand difference between Digital Transformation, Industry 4.0 or AI applications in industry. This article aims to discuss what is Digital Transformation and related concepts.

Digital Transformation is more about strategy than product or process Transformation. It helps in finding shorter route to consumer & more touch points (consumer engagement). Its purpose is providing better value proposition to the existing or prospective consumers. Role of technology is mainly in implementing the Digital Transformation Strategy of the Firm.

Industry 4.0 vs. Digital Transformation

Both are about equipping Firms with means to improve value to the consumers. Industry 4.0 refers to a set of technologies aimed at improving existing operations using Internet of Things and machine learning tools to process huge amount of data. Digital Transformation refers to the strategy of transforming and the actions thereafter.

Example – Installing Smart electric meter in a household is a means of energy efficiency for the electric company and possibly for consumer too. This is what Industry 4.0 will bring about. But for an Electric company the Digital Transformation process will begin when it identifies the need to install smart meters based on data of electric usage, wastage and possible savings through Smart meters.

Data is the starting point for both concepts. Better understanding of possible value enhancement being common objective here.

Where does AI come into equation?

Role of AI is mostly in processing huge amount of data to arrive at meaningful interpretations and facilitate in decision making. Often AI needs support of machine learning to process huge amount of data or Big data.

Given below are 10 statements around value to the consumer, data and operations. If you do not agree to any one of them, you will appreciate the need for Digital Transformation.

1.      Taking your business online is Digital Transformation.

2.      It is possible to follow particular models to transform business digitally.

3.      Digital transformation requires changing all processes.

4.      Technology is key factor of Digital Transformation.

5.      Data is industry specific.

6.      Competitive environment means product or services in same industry.

7.      It is possible to map optimal customer value.

8.      It is more important to protect organization structure than protect consumer base.

9.      Industry 4.0 is going to evolve over time my company can wait for right time.

10.  My organization has optimized consumer value proposition.

Being online is merely adopting a new channel, Digital Transformation is aimed at better value creation. But there is no fixed model to transform business because situations are highly variable between industries. Process of Business transformation has to start with those strategic assets which will create maximum value to ensure ROI is maintained or improved. It is very much possible that part of existing business will become redundant in the process. Transformation is a phased process. Technology is only means of implementing the process of transformation, key factors are objective of transformation and strategy behind transformation. Data is usually consumer specific and not industry specific. It is possible to collect data from sources not directly related to business.

Best example is data collected from browsing history of a person who is looking for air fare from Mumbai to Delhi can be used by a Travel Agent to offer Air route tariff, by an insurance agent to offer air-travel-insurance, by a taxi service to offer pick-up or drop facilities.

Therefore, it is highly possible to get customer traffic from users of other industries. Here the competition is not at product or service level but in determining who can get share of consumer spending by offering something meaningful to the consumer. This changes the competitive dynamics where competition is not always direct in nature.

Conventional industry boundaries are going to merge in future and instead of industry it is likely to be a network competition. This calls for radical changes in the way companies have operated historically and hence need for business transformation. Needless to say this will also mean existing functions, departments and roles will get redefined. I am yet to understand how the future organization structures will evolve due to such changes.

Change in consumer value requires transformation. There are two possible ways a Firm can face change.

1)     Change initiated by the firm.

2)     Change initiated by someone else who has developed a better value proposition for the consumer, not necessarily from the same industry.

Example: ‘Over The Top Media’ platforms have posed a threat to TV Soap Operas simply by providing consumers an option to see series of choice at their own convenience and time. Competition is now between TV series vs. Amazon Prime vs. Netflix vs. any other OTT.

Similarly, Bollywood always thought threat would be from piracy and other good movies being released at the same time. However, the need to change operations arose from Apps like Hotstar. In future probably ‘Short films’ will pose another major challenge to the conventional Bollywood business model.

The conventional entertainment industry is evolving in more ways than one to improve upon consumer value and industry will be forced to adopt. If the Firm doesn’t evolve consumer value, someone else certainly will.

Firms may respond in three ways to transformation

1)     Ignoring the change as long as revenue from existing operations is good. It is definitely a way to operate albeit with strong future repercussions. Example: Kodak tried to remain in its core business in the face of changing consumer value propositions.

2)     Follow the change or adopt to changes brought-in by someone else to ensure that no further damage is possible to Firm's customer base and business volume. Example: Philips which was originally launched as a lighting company in 1891 had to struggle to get back at a leadership position after invention of LED lamps (better value proposition than conventional lamps), which it eventually did by divesting non-core businesses and repositioning the company under Signify brand.

3)     Initiate change. Not to target business of other companies but to explore how can the Firm improve upon consumer value irrespective of industry type or conventional offerings.

1)     Firms that resist change

A well-defined company structure usually has high inertia and such firms at times fail to go beyond first type of response unless top management drives the change or creates atmosphere to "be the change." Existing structure of such firms would typically resist change out of fear of losing job on the part of employees and fear of losing short term profits on the part of share-holders.

2)     Firms that adopt change

Firms which decide to adopt to the disruptions brought to the industry by others face the extreme challenge of changing organizational culture. Usually the quest is to transform the existing structure. Hence CEO needs to convince board to take risk and set in a cultural transformation of the company so that employees play active role in transformation.

3)     Firms that become THE CHANGE

A Firm which aim to continuously improve upon consumer value is often also called “Disruptor” simply because it disrupts the existing practices or operations of other firms. Data driven value creation is far more effective in creating Disruptive Firms than the conventional route of innovation on technological improvements making Digital Transformation a potent tool for future industry. Use case of an innovation is better understood in data driven route than technology driven route to innovation.

Agile structure

Key difference between old structured operations and new value maximizing operation is “Agility.” Agile means being able to change and do so quickly. China was able to increase its exports from US$266M to US$2.5 Trillion in last 20 years mainly on account of being agile in its manufacturing among other things. Globally consumers found what they needed, at a price they needed from China, hence they obliged with business.

So, an agile operation aimed at consumer value maximization using information from various sources is the core of Digital Transformation.

Concern

As is the case usually, nothing comes without a cost. Consumer of future will get higher and higher value at the cost of privacy. Successful Firms of future will get consumer money by being agile and creating disruptive value propositions. Privacy concerns of consumers will also become a stumbling block to the Firms in the form of law-suites if data collected is misused.

Digital Transformation is fast paced value creation through strategy involving “Customer, Competition, Data & Innovation.”

Customers: Instead of trying to reach maximum number of relevant consumers (SEC Profile, Age, income etc) it is better to aim at networks. Consumers are usually part of a cohesive network post Social Media revolution. It would be far more pragmatic to target a network instead of individual consumer.

This calls for creating several touch points. It’s like a famous Vodafone advertisement where a Pug follows a person in unlikely places and the tagline says “Wherever you go, our network follows.” Firms need to follow consumer like Vodafone Pug to ensure trust and bonding over time.

Example: Amazon has touched upon consumer lives in Grocery, Entertainment, Games, Music, Books etc. they do not need to earn consumer trust for each and every product or service now, making it easier for them to market so many consumer goods in their own brand without advertising their features, whether it’s a towel or a refrigerator.

But working on consumer networks has one challenge which conventional marketing didn’t have to face. Consumers can now talk back. They are not dependent upon Firms to listen to complaints anymore. Hence Firms need to adopt to 360 degree communications and resolve issues as soon as they arise.

If a Firm chooses not to be part of network, they run the risk of not being visible enough or trusted enough even if they offer best value to the consumer.

Co-opetition: Conventional competitors will need to co-opt to survive competition from new disruptors on various platforms. Mantra is ‘If you can’t beat them, work with them.” Examples: Toyota has often worked with competitive models of cars like Atlas Ford F-150 Hybrid (with Ford in 2013) or Toyota Urban cruiser (With Maruti in 2020). Apple and Microsoft had to similarly team up for OS features. Even mighty Firms have to ensure conventional rivalry doesn’t come in the way of creating value consumers want them to.

As the speed of data driven innovation and resulting market disruptions picks-up in Digital era, need for Co-opetition will too.

Several giant brands of erstwhile retail industry survived Retail Apocalypse of 2010. Stores like Target rallied business upwards by being value driven online as well as offline.

4. Data is not optional anymore: Industry 4.0 innovations are mostly led by sensor based data collection, data availability is increasing exponentially. Firms have to decide whether to learn to use the data or face unwanted disruption from new challengers. Learning to use data brings in ‘Internet of Things’ and ‘Artificial Intelligence’ in forefront. Assets of a Firm need to be data based, data driven and collaborative. The relevance of asset Collaboration is that with so much of data in play, it would be impossible to function unless Assets are able to communicate as per pre-defined role without human intervention.

5. Innovate to implement well: Agility requires experimenting. But innovations are based on assumed use case. Assumptions need to be validated for successful implementation. Unless the working models have been fully thought out well in advance, Firm may have to roll-back at the cost of disgruntle consumers. Example: Nike has often successfully experimented with wonderful tech for Active consumers like RFID tag enabled jerseys for NBA or self-lacing sneakers. However, it launched Nike-Apple FuelBand in 2012 and withdrew the product after brief period of 3 years even after getting about 10% market share of the category. The reasons for roll-back were not fully clear to consumers but the offerings of competitors like Fitbit were with more features and probably easier to operate.

To conclude: Digital Transformation is a process of changing from old practices to new agile working process through data led innovation, where companies need to manage consumer and asset networks with an objective of improving upon the value proposition continuously. At the end of the day it is a process of business transformation. ‘Digital’ age working norms serve as an impetus.

Sources of information used in the article: Wikipedia, Websites of various firms, Blogs & interviews freely available in public domain on google.

Disclosure: Views and opinions in this article are personal and do not represent people, institutions or organizations that the writer of the article may be associated with in personal or professional capacity. Any views represented in this article are not intended to take sides.

Special thanks to:

Prof Kotler whose statement “Unlearn and Relearn” made me think about how consumer value proposition is going to change in future.

My faculties and fellow students at IIM Indore EDPT who have always provided me with valuable views on all topics.

Finally, a note of thanks to Google & LinkedIn for the treasure of information and views about industry and changing trends.