What Are the Driving Forces Behind Digital Transformation?
Digital transformation is a forceful change sweeping across multiple sectors and industries — disrupting many businesses along its path. This new wave of innovation is not like the corporate initiatives of the past based on familiar business themes, it’s not like the strategy themes from a leading consultancy, and it’s not like the vendor campaigns aimed at technology adoption.
Digital transformation is often instigated by competition from unlikely places, bringing innovation to entire sectors and industries. This new revolution that digital brings to the world of products and services is often referred to as the “Fourth Industrial Revolution,” or Industry 4.0.1 Impactful or not, the changes are clearly visible in many industries — banking, payments, and transportation, to name a few — and are forcing companies to rethink their current strategy and embark on the journey of adopting digital.
As we explore in a recent Executive Update, understanding the driving forces behind digital transformation, its effects, and the role that certain enterprise architecture (EA) best practices can play in embracing digital transformation will help organizations benefit in this challenging time.
We are at an intersection of advancing technologies, escalating digital literacy, and emerging new economies that brings opportunities of innovation at a large scale.
While digital offers the experience, technology is the key enabler of it. The maturity level of many existing and new technologies has lowered the barriers to adoption significantly. Besides lower cost, ease of use is a critical contributing factor in the speed of adoption for businesses. Technologies not only advance, but also extended reach. For the same reasons — cost and ease of use — technology has found its way to places where it was unavailable before and to people who could not afford or manage the use of it.
Components of the technology landscape — cloud computing, mobile computing, data analytics, and information security — provided a starting point to various new directions, such as mobile first, software as a service, social media, predictive analytics, machine learning, and many more. These directions then became the foundation of new capabilities in the organization and the building blocks of new products in the business.
Digital experience was fueled by the widespread adoption of technologies. As literacy grew, technology enabled users in ways never seen before. The traditional channels of sales and services, along with other areas, have expanded with digital channels, and a significant portion of engagement migrated to those.
Collaboration is one of those areas enriched by digital technologies. Human interactions take new shapes on social networks and media and are capable of sparking new ideas, which eventually leads to innovation. As Steven Johnson wrote in Where Good Ideas Come From: “When you share a common civic culture with thousands of other people, good ideas have a tendency to flow from mind to mind.”
Ultimately, however, enterprises will have to battle through the organizational inertia manifesting as risk when adopting new structures, processes, skills, and technologies. Digital literacy can mitigate that risk and can improve the chances of successful transformation.
Recent cycles in economic uncertainty have pushed established businesses to become frugal and manage their costs against a struggle to keep margins up. Once costs reach rock bottom, competition must refocus on gaining new customers, entering new markets, and ultimately discovering new economies. In a recent Forbes article, Mark Knickrehm notes that “the digitally enabled platform economy is often cited as the greatest opportunity for growth … ‘born-digital’ companies dominate platform business models today.” Products and services in this space rely on a web of partnerships, which further expands the platform and brings even more opportunities for business.
However, platforms are not the only viable new economies. Other economies, which increasingly fall under the emerging FinTech space, include social networks, peer-to-peer (P2P), and blockchains — and more remain undiscovered.
Social network economies benefit from the network effect among participants. The richer the network gets, the more valuable the entire network becomes. Operators of these networks can monetize on the strength of connection between the users. Crowdfunding (e.g., CrowdCube), for example, relies on a network of investors typically contributing small amounts, and the social platform aggregates those and makes it a sizable equity. Moreover, on social investment platforms such as eToro, subscribers can share detailed, transparent investment portfolios and strategies that others can copy.
Peer-to-peer economies decentralize networks and put users in charge of the value generated on the network. Enablers of these networks can profit from managing the transactions between peers. P2P lending networks (e.g., LendingClub), for instance, connect borrowers and investors and manage the lending process just as banks do. In the currency transfer/payments space,TransferWise makes a similar matchbetween transferrers of currency.
Finally, blockchains remove the centralized oversight of transactions in the network and distribute the ledger among peers. Blockchains allow financial institutions (a network of peers) to clear and settle transactions in near real time without an intermediary or centralized authority. The technology and platforms (e.g., Ethereum and R3’s distributed ledger system) in this space are still at an early stage.
1In his book The Fourth Industrial Revolution, Klaus Schwab offers the following explanation: “It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres. There are three reasons why today’s transformations represent not merely a prolongation of the Third Industrial Revolution but rather the arrival of a Fourth and distinct one: velocity, scope, and systems impact.”
[For more from the author on this topic, see "The Digital Transformation Journey: EA Best Practices."]