Digital Transformation: The Greatest Opportunity and Challenge for Businesses

The digital era has revolutionized the opportunities for businesses. When technology is leveraged correctly, it can streamline processes, enhance customer experience, and open doors to new business opportunities. However, profound digital transformation requires the entire organization's culture and structure to adapt to this new era. For many established and traditional organizations, the extent of digital transformation can come as a surprise. It's not just about updating technology and shifting product sales to digital channels. Digital transformation is about much more than just adopting new tools; it's about overhauling the entire business and organizational culture.

Digitization vs. Digitalization vs. Digital Transformation

Do you have paper forms that you scan, i.e., digitize documents into your digital channels? The customer still sees that same old paper form, now just in a digital format online or in a mobile service. The data entered on the form is stored within the form itself and is not usable elsewhere for decision-making. The organization digitizes things, converting the same old analog world artifacts and operating models into a digital environment. True, there's no longer a need for miles of folder space on a shelf, but it's like trying to install a 1970s car engine into today's Tesla. One might think any car will do, but perhaps not. Digitization is far from digitalization, let alone digital transformation.

Digitalization is about streamlining and renewing processes through technology. Business becomes more profitable when human labor isn't required everywhere, and work can be automated. For instance, we've moved from paper billing to electronic invoicing, and processes can be further refined and optimized using various robotic tools that combine and input data from one process to another. At the same time, the customer experience has improved in many areas, and new business models have emerged. Great, but we're not quite there yet.

Digital transformation is a comprehensive change where technology enables the entire business to be reshaped using data and artificial intelligence, offering personalized customer experiences. Digital transformation enables entirely new business models if things are designed following the laws of the digital era, forgetting the operating models and limitations of the analog world. However, for digital transformation to occur, the organization requires a change in thinking and operating methods and a restructuring of organizational structures.

What is digital transformation?

Digital transformation isn't just about updating technologies or starting to sell products in digital channels. It's a comprehensive change that affects the entire business and organization. In the digital era, the customer, value creation, technology, and data take center stage. Companies now need to reconsider how they create value for their customers and other stakeholders and how they utilize technology and data in their decision-making. In this change, the customer becomes central, and companies must offer holistic experiences. But how do technology and data support this vision? And how can traditional companies navigate in this new digital age where old operating models no longer apply?

Customer and Holistic Value Creation

The primary source of money for all companies is the customer. The customer must be at the center of everything, and businesses should organize around the customer. It's no longer about producing products or services for customers, but companies must be able to offer holistic experiences. Everything a company does affects the customer experience, starting with strategy creation. Customers are more demanding, and experiences are compared to those offered by companies in other sectors. Even for small players, it matters how their online store and related delivery and return processes work. With social media, customers also have better ways and power to give public feedback on a company's offerings and operations. Often, customers also have alternatives, and if things don't work, they vote with their feet.

Since Professor Milton Friedman's publication in the 1970s, where a company's responsibility should be limited to profit-making and maximizing shareholder value, we've come a long way in time, thinking, and values. In 2019, 181 CEOs of the American Business Roundtable decided to sign a statement committing to value creation for all stakeholders, including customers, employees, suppliers, society, and owners. Maximizing shareholder value is no longer enough, and companies can't afford to ignore other stakeholders. Companies are also expected to have social responsibility and aim for sustainable growth instead of maximizing short-term profits. Established and traditional players need to change their mindset to remain relevant to their customers and other stakeholders in the future.

Technology and Data

Technology enables personalized and better customer experiences, and it's no longer just a cost-causing IT unit. Technology is at the core of the business, enabling what you want to do. Unlike in the analog world, everything leaves a trace in the digital environment, and data can be used to support decision-making. Customers' actions in online and mobile services can be monitored almost throughout the customer journey, and behavioral data from different channels can be combined, as well as other data from external and internal sources.

Instead of data existing in each function's systems, it needs to be combined and provide comprehensive support for decision-making. This is a significant challenge for many established functionally organized companies. It's not enough to build only technical data capabilities, but thinking and operating models should change from functional silos to organizing around the customer experience. Data is not collected for its own sake but to make more informed decisions, offer a better customer experience, and do better business.

What challenges do established and traditional players face?

Since digital transformation is so extensive and comprehensive, change doesn't happen overnight. It requires challenging current practices, learning new things, and unlearning old ones. Established and traditional players face challenges in changing the entire organization's operations, including management. Top-down management and decision-making are too slow for today's digital business pace. We also live in such a complex world that one person or entity doesn't have answers to all the business problems. Participation and collective leadership are needed. In hierarchical organizations, some leaders see this as a threat to their status when power and responsibility have to be given to lower levels. Resistance to change is very likely, and management can thus be a bottleneck for organizational change.

Organizational silos are remnants of the industrial era, where the company is organized into vertical functions and not around the customer. Collaboration across organizational boundaries rarely happens, or if it does, there's always resistance to change. Partly, vertical goal setting and measurement only promote working in silos and navel-gazing. Even sales and marketing are no longer the same, as digital transformation also changes the dynamics of these two functions. There might no longer be a separate entity that sells and one that markets, but the purchase can happen at the end of a sales funnel defined by digital marketing. This can cause friction between sales and marketing teams in traditional companies, as face-to-face sales have played such a significant role, and sales as a function have been represented in management teams.

Technology is no longer just a cost item, but technology and data should be seen at the core of the business as an enabler. However, management often lacks the expertise and visionary nature of the digital age technology, and technology is not fully utilized. The legacy systems of established players from decades ago are also a significant burden. Reforms have been postponed from year to year until the situation arises where the house of cards is about to collapse, and competitors are sweeping past from left and right. It's clear that years of technological debt can't be fixed quickly with little money. When all systems are decades old and not designed to meet today's real-time operations, it's challenging to decide where to start renewing when there's so much work to be done.

In addition to the above, established organizations and traditional players also face a lack of skills. New digital age skills and thinking are needed both in management and among experts, in business, but also a comprehensive strategic vision to understand the change in customer experience and customer behavior. You also need to understand the feasibility and the big picture of technology, how everything is enabled using new technologies, artificial intelligence, and data.

Digital transformation is not a choice but a necessity. It's a journey that requires ambition, vision, and the ability to abandon the old and embrace the new. Established players must boldly adopt the laws of digital age business; otherwise, they might fall behind and disappear from the world map.