Our digitization framework for practicioners and the 5 aspects of digital transformation
Our digitization framework for practicioners
“Digitization” seems to be the master keyword to unlock just about any business conversation these days, it’s literally omnipresent. And yet there is no established definition. The original meaning of the term was converting analogue signals into binary ones. The prime example of that meaning was digitizing music to CDs. However, this narrow definition does not do justice to the widespread implications of the ongoing transformation in business and society alike. Of course both academics and consultants came up with attempts for definitions but those are, well, theoretic.
This is why we think a framework is needed to sort out the relevant dimensions and aspects of digitization in order to manage them. We have developed the following framework based on many digital ventures that we’ve built, many projects that we’ve run and many organizations with which we’ve worked on those topics. Feel free to download and use it but we appreciate quotation… and feedback.
Digital transformation: Doing things differently
We propose to talk about Digital Transformation if the primary goal of an initiative is efficiency. We are aware that the term is also used for the overall change process in society and business, but we’ll come to that a bit later. On a corporate level however it means in the first place to digitize the business that is there already, just as music was digitized to CDs back in the 1980ies. Contemporary examples include most artificial intelligence applications, robots, process automation but also internal awareness and agilization programs aiming at increasing innovation capabilities within organizations.
Although it’s often not always openly declared, efficiency is the most common goal of digital initiatives. Lowering cost is the easiest business case of them all, so every manager will buy into it. For that to happen all you need to change is the way you are doing things by digitizing processes and products alike. It’s about transforming the existing operations. This already is not easy but it really is the easiest part of digitization from our experience.
Those kinds of transformation initiatives usually lead to incremental improvements, which we call “doing the homework” because they are mandatory. However, there is little empirical evidence that they ever lead to fundamental change.
There are two distinct aspects of digital transformation in the above outlined meaning:
A digital transformation can either focus on technology, in which case we are talking about process & systems transformation.
Or it can focus on the people within an organization, in which case we are talking about a transformation of culture.
Digital transformation: Doing different things
If the goal is to open up new revenue streams, it takes more than that; fundamental change is needed. This is what we call Digital Innovation. Growth these days is simply not possible without some genuinely innovative aspect to it, and there is simply nothing new of any significance, which is not digital anymore. That kind of innovation usually happens at the edge of technology, but then quickly takes the shape of business model innovations as well, exploring the economic possibilities that the new technologies enable.
We are hence talking about something thoroughly new, not mere improvements in the legacy business such as improved speed or usability. True Digital Innovation leads to new kinds of business.
There are two distinct aspects of digital innovation:
If the innovation is focused on technology, we are talking about technology innovation.
If the innovation is focused on new adaptations of technology, we are talking about business model innovation.
Conclusion: Systemic customer centricity & digital transformation in the society
On the aggregate level of the society, this leads to a rapidly improving customer experience across the board in all industries. It’s because in the end, all of these developments ultimately question and rethink the way how we do business altogether and even how we collaborate with each other.
If “digitization” as a concept is defined too narrowly, it misses both the micro- and macro-level views as well as the interdependencies between the different aspects. Ultimately, it leads to a huge transformational impact on the society as a whole. However, the drivers for that are exactly the micro-economic building blocks that we’ve outlined in our framework.
This is something many business leaders fail to understand at the outset of a digital initiative: If you don’t live and breathe customer intimacy, you can’t ‘become digital’.
What is very unique to Digital Innovation is that the underlying technology also enabled something alien for quite many traditional businesses: Systemic customer centricity. There is nothing romantic in a humanist kind of way in that, no: It’s very simply that technology turns customer intimacy into a competitive advantage and hence an edge of growth or margin. This is unprecedented in history because for the first time technology makes customer intimacy scaleable. Vice versa, the lack of it has become a death sentence for a business (most notably in the form of bad reviews with better scoring competitors just a click away).
There is a very direct consequence from this for the way we manage digital business: Traditional metrics such as cost or revenue ratios don’t make sense for growing digital models, at all. The only meaningful financial perspective here is the unit economics view: All that counts is how much you pay for a new user and how much money that user will generate over his lifetime with your business. Hence, there is an inherent financial incentive to make customers happy in order to loyalize them, e.g. through good value-for-money, superior service, etc. Customer intimacy really is hard-wired into every truly digital model.
The 5 aspects of digital transformation
Going more in detail in the framework, any successful digital transformation must tackle 5 aspects
- Systems and process transformation
- Cultural transformation and organization
- Systemic customer centricity
- Business model innovation
- Technology innovation
1. Systems and process transformation
Progress in becoming more digital is most easily achieved by automating existing processes or products, may be mixed in with some UX improvements that come in handy along the way. But there is usually a clear cut business case for cost reduction behind those initiatives with a quick and easy to calculate return of investment.
This explains why “digitization” today is — a bit unfortunate — most commonly used as a synonym for some sort of systems/IT transformation.
In a fully digital organization, systems are designed to accommodate experimentation and aim for high performance and scalability. This requires that all core services can be accessed by external or new applications via API.
In such an organization, everything that can be automated, is automated.
Examples: Warehouse robots, most artificial intelligence applications (e.g. AI eliminating 80% of time and cost from insurances claim’s handling process), web-to-print automation.
2. Cultural transformation & organization
Many automation initiatives turn out not to be as easy to implement as initially thought because they face internal resistance. That’s when many organizations realize that there is also an important aspect of a cultural transformation to digitization. Hence they start to “work on” their culture, e.g. through management tours through Silicon Valley, the hiring of agile coaches, the introduction of scrum methodologies and the like. All with the intention to become more “startup-like”.
However, those cultural change attempts more often than not only lead to minor improvements. It’s because culture is a complex beast: It’s not only about changing individuals’ behaviours, it also comprises all the explicit or implicit rules, codes, management systems and behaviours within an organization. In fact, it’s so terribly difficult for human beings to change substantially that this is the most difficult aspect of a digital transformation of them all.
In a fully digital organization, the culture
- is entirely focused on customer value creation
- is allowing communication to flow freely across departments, geographies and hierarchies
- is welcoming feedback, at any time, by anyone
- has a high appetite for experiments and the high tolerance for failure required for that.
The prerequisite for such a digital culture is a governance that makes it possible to create one. This means in particular that digital ventures/products must be kept isolated from the legacy business. In particular the legacy business must not be allowed to determine neither business modelling, nor strategic priorities nor operations of digital models.
3. Systemic customer centricity
What is very unique to Digital innovation is that the underlying technology also enabled something alien for quite many traditional businesses: Systemic customer centricity. There is nothing romantic in a humanist kind of way in that, no: It’s very simply that technology turns customer intimacy into a competitive advantage and hence an edge of growth or margin. This is unprecedented in history because for the first time technology makes customer intimacy scaleable.
Vice versa, the lack of it has become a death sentence for a business (most notably in the form of bad reviews with better scoring competitors just a click away).
There is a very direct consequence from this for the way we manage digital business: Traditional metrics such as cost or revenue ratios don’t make sense for growing digital models, at all. The only meaningful financial perspective here is the unit economics view: All that counts is how much you pay for a new user and how much money that user will generate over his lifetime with your business. Hence, there is an inherent financial incentive to make customers happy in order to loyalize them, e.g. through good value-for-money, superior service, e.g., which really is hard-wired into every truly digital model.
It is not easy to achieve though for established organizations: Every organization struggles with being and remaining close to the customer. You can only get there by having crystal clear and coherent priorities from the top management, which start with a thoroughly customer oriented long term vision.
Examples: Customer focused vision, ongoing obsession with customer input, systems that prompt every customer for feedback, live customer feedback displays on internal platforms or in the offices, Net Promoter Score as part of management compensation.
4. Business model innovation
Once organizations start to have an internal awareness of the fundamental changes going on through the digitization, they start to look outside their walls (e.g. through “Open Innovation”) and discover that there are alternative ways of thinking about their own business.
It’s usually startups or products of large tech companies, which start to directly attack parts of the legacy business and by doing so in a completely different manner, they question the status quo. Hence the incumbents move themselves into questioning their own, old business models and try to develop them further or to develop entirely new ones. This is what we refer to with business model innovation.
Business model innovation is driven by the ongoing pursuit to constantly identify and solve customer problems using the technology progress of the day.
It is either aimed at developing new businesses, products or services or at transforming existing ones around an evolving understanding of a customer opportunity. Business model innovation requires technology, but mostly doesn’t drive technological innovation in the first place. On the contrary: Most business model innovations are entirely built with off-the-shelf technology that has just become available, at least for their first iterations.
Examples: Food boxes (e.g. Blue Apron), UBER, Flixbus, AirBnB, Instagram.
5. Technology innovation
Technology innovation is driven by exploring what is technologically just feasible at a given time. It often stems from fundamental research in any field of science, without use cases in mind in the first place. Technology innovation is not the defining element for succeeding in a digital environment, but it’s a prerequisite to make the evolution of new digital models possible.
Technological innovation is the first step of digitization when it comes to new technologies that enable new business models altogether. Think about the blockchain without which no crypto-currency would be possible. But it’s also the last step of digitization in a way: When new business models are developed, they ultimately start to realize that there is a technological gap between what technology can buy on the market and what they need to develop that business model even further. At that point digital business models often start to develop entirely new technology at some point as part of their constant evolution. Hence, technological innovation is where the digital circle closes and restarts again.
Examples: LiDAR, high precision computer vision, blockchain, deep learning neural networks.
Credits: Digitization framework © Stryber, mood image by Annie Spratt, artwork by Prisma AI.
Co-Founder & Partner