The State of Digital Transformation

For decades, many businesses have experienced a race to incorporate the newest and best technologies in their organizations. Professor of Information Systems and David J. McGrath Jr. Professor in Management Venkat Venkatraman sits down with Insights@Questrom to answer our questions on what businesses need to know about the digital transformation in the 2020’s and beyond.

How long has the digital transformation been a consideration for businesses?

The phrase ‘digital transformation’ may be more in vogue during the last ten years but the ideas of digital (information and communication) technologies driving business change has been around for nearly three decades. In fact, I wrote an article on IT-enabled business transformation in MIT Sloan Management Review back in 1994.  In the 1990s, companies needed to respond to the availability of enterprise resource planning (ERP) and customer relationship management (CRM) by redesigning their internal processes and restructure their relationships with customers and suppliers in extended value chains. In the early 21^st century, the focus shifted to e-commerce and then mobile apps with the arrival of smartphones in 2007-8. Now, companies are recognizing and responding to a wide range of technologies such as cloud computing, voice computing, artificial intelligence (AI) and machine learning (ML) as well as robotics, additive manufacturing (3D printing), augmented and virtual realities (AR/VR). The set of technologies have changed and expanded over the decades, but the fundamental management question still remains – how best to leverage the power of digital technologies to win? In that sense, this is very relevant and important for companies in all sectors and all over the world.

Broadly, how have companies had to adapt their business models to keep up with digitization?

In my view, companies can either treat digitization as tailwind or headwind. The headwind mindset is when we see leaders allocating just enough resources to get them through the current crisis, do just what’s necessary to adjust and respond to the technologies to preserve status quo. In contrast, select companies recognize and treat digitization as tailwind; leaders in these companies see and comprehend a future where digitization is central to the design of products, processes and services and their business models. They perceive how digital could impact their bottom-line profits and top-line revenue. The biggest challenge, however, is not betting on the right set of technologies or deploying the right suite of applications. The leadership challenge is to redesign the organization – and adapting the culture – to fully take advantage of the power of such technologies. This includes reallocation of key resources – financial, technological and human capital – to initiatives that are central to the future business models than incrementally enhance the current ones. Look at the automotive industry as an example – the leading automakers have to shift from being excellent at designing and manufacturing automobiles based on industrial combustion engines to delivering and orchestrating transportation and mobility as service with automobiles that are driven by electric transportation and supported by powerful software and cloud connectivity. Here, the traditional industry incumbents are facing formidable challenges from born-digital entrepreneurs (Tesla and Uber) and digital giants (Google’s Waymo and Baidu in China).  

Are there certain industries that are more sensitive to changes in technology than others?

When I look at the impact of digitization on the different sectors, I see one clear trend. The first wave focused on digital transformation of asset-light, information-rich sectors where the analog business models became digital – prominent examples are in sectors such as books and publishing, music, movies and entertainment, and financial services. Several born-digital companies lead the innovation and transformation charge, winning out over traditional leaders. Incumbent leaders simply failed to recognize the significance of digital discontinuities and couldn’t adequately respond in a timely fashion.  In my view, this decade, the 2020s, will see the digitization of a much broader cross-section of sectors such as manufacturing, transportation, logistics, hospitality, entertainment, healthcare, retail, and others. These are asset-heavy and information-rich sectors.  The COVID-19 pandemic has sharply accentuated the importance of digital technologies in business, and no part of the global economy will be untouched by this wave of digital transformation. For example, we now see companies embracing video conferencing and virtual events at levels that would have been unprecedented just 18 months ago. We also see in many business and consumer arenas, which long assumed to be more fit for in-person engagement (e.g., education and industry conferences as well as healthcare) readily accepting and adopting digital services and virtual interactions. Inevitably, this will impact and influence every business sector.

Is there a competitive advantage anymore to utilizing new technology, or is now just considered necessary to keep up?

In my view, we should move away from looking for competitive advantage from individual technologies or even a set of technologies. Companies must assess and prioritize when to be first-mover and when to be fast-mover. In certain cases, it pays to be the first-mover (e.g., Amazon with cloud computing or voice computing with Alexa or Google’s Waymo with robotaxis) while in other cases companies may find it financially more prudent to be fast-mover once the cost-benefits are known and the customer acceptance can be gauged. Moreover, in many cases, digital technologies per se rapidly become competitive parity. Companies find themselves at a competitive disadvantage if they do not embrace and exploit the power of technologies such as mobile apps or social networks or cloud computing today. It’s more prudent to understand how best to solve pressing customer problems by leveraging technologies that are most relevant rather than force fit technologies and find that customers reject them.

Where do you see the digital transformation moving in the future?

Let me highlight five key trends:

1. As I mentioned earlier, digital transformation is steadily shifting from digital-heavy sectors to asset-heavy sectors. This is because of the possibilities to design digital industrial products – think cars as computers on wheels connected to the cloud; design tractors as machines that are autonomously operated over the 5G networks and connected to the cloud. 
   1. More and more recognition of business value from data. As the saying goes, “data is the new oil and AI is the new electricity.” Companies of all types, not just the born-digital companies, but the traditional industrials such as GM, Caterpillar, Unilever and Wal-Mart will start to focus on elevating analytics to be more important and differentiated competency. Data and analytics become more mainstream and not delegated as specialist functions.
   1. The next-generation leaders will put digital at the top of their agenda and develop the requisite mindset and skill set to win. Otherwise, they will be left behind, disrupted by those that understand the power of technology.
   1. Automation through robotics, AI and ML are here and now. So, companies must look to design processes at the nexus of smart human and powerful machines rather than resist automation.
   1. Companies will embrace disciplined experimentation as ways to mitigate risks and progressively adapt their business models, finetune their resource allocations to align with competitive actions and customer expectations.  

Is there anything else you feel people should know about this topic?

Everyone should recognize that every industry, sooner or later, will be digitized. Future is not linear extrapolation of the past. So, companies should embrace digital technologies and transform themselves as they compete against born-digital companies. As I wrote in my book, The Digital Matrix: New Rules for Business Transformation through Technology, digital business transformation is a leadership challenge, not a technology one. Look at your future competitive landscape where you will compete against not only your familiar competitors but also against ambitious entrepreneurs (funded by venture capitalists) and digital giants (with their outsized market capitalization). Recognize that successful companies fail because they overinvest in what they are good at today and under-invest in what they need to be good at tomorrow. Are you proactively investing to build internal capabilities and external partnerships to win in an increasingly digitized world or are you using digital technologies to preserve the status quo? No one should shy away from understanding the business impacts of digitization. Every manager either manages digital technologies or manages with digital technologies. Ignore digital technologies at your peril.

About Our Expert

N. VENKATRAMAN
David J. McGrath, Jr. Professor in Management
Professory, Information Systems

I research how established companies recognize and respond to digital technologies. We have seen the first-wave of transformation in asset-light settings such as software, music, media and entertainment and we are likely to see asset-heavy, information-rich sectors such as automotive, logistics, healthcare. agriculture and logistics go through significant shifts. How could today’s industry leaders defend their business models while adapting to the digital future? I am working on extending the work that has been published in my 2016 book, The Digital Matrix: New Rules for Business Transformation through technology into a new book focused specifically on asset-heavy sectors.