Digital transformation is often talked about by brands, particularly in annual reports and updates.
It’s become a catch-all term for various types of business change, but what does it mean? How can digital transformation help companies?
The COVID-19 pandemic has produced a dramatic shift in terms of digital transformation, underlining the need more effective digital strategies in many large organisations.
In this post we’ll look at why digital transformation is important, the factors that drive the need for change, and how to plan your own digital transformation strategy.
What is digital transformation?
Digital transformation refers to the reorganisation of businesses and business models to reflect the changes in customer behaviour brought about by the internet and digital technology in general.
This transformation is the journey from where a business currently is to where it needs to be digitally to thrive and meet customer needs.
Some examples of digital transformation are established retailers changing their working methods and structures to serve customers across several channels, or it could be a shift from using branches to online and mobile apps for transactions in the case of a financial brand.
The common theme is a recognition of the need to change existing structures and ways of working to meet changing customer demand.
The need for businesses to adapt to changing circumstances is not a new concept in itself, but the ‘digital’ part of the term reflects the vast changes brought about by the internet and the tech used to access it.
Key trends which drive digital transformation
Digital transformation can be necessary as a result of three factors:
- Trends and changes in technology.
Technology can change rapidly, opening up new markets and possibilities, or new threats, almost overnight.
The internet is one such example of course, as is the introduction of the first iPhone, and the adoption of mobile commerce that followed it.
- New competition or changes to existing competitors’ strategy.
The entrance of a new competitor, perhaps one who ‘disrupts’ the market as in the case of Amazon or Airbnb can force companies to adapt or fall behind. Likewise, failure to keep up with rivals can have the same effect.
- Changes in customer behaviour and expectations.
Customer behaviour is often driven by technology and competition, but can also be the result of changes within society. The failure to keep up with consumer trends can make a business less relevant and less competitive.
It’s often the convergence of these three factors which brings about the need for change. New technology brings about changes in customer behaviour, and can lead to new business models being created in response.
Another possible consequence is that your competition adapts more rapidly and offers what customers are looking for. Ultimately, it’s the change in customer behaviour that matters. If they aren’t buying from you, there is no business.
Take Blockbuster as an example. At its peak in the early 2000s it had more than 9,000 stores around the world, and was the dominant player in the video rental market.Now it has just one, available to rent on Airbnb.
New competitors such as Netflix, and LoveFilm in the UK provided competition in the form of DVD rental by mail, which offered greater choice and convenience for customers.
The internet expanded the audience for this model, and when technology allowed online downloads and streaming of movies, Blockbuster had no answer to the threat posed by Netflix.
In the case of Blockbuster, as in many examples, the changes in technology, competitor behaviour and customer expectations presented the challenge, to which its leadership had no adequate answer.
The reason businesses fail is the lack of a successful response to the challenges posed by these changes. And this is where digital transformation is important.
The pandemic has proved to be a major driver in customer behaviour, with many business having to close physical outlets for long periods of time.
This had the effect of shifting customer behaviour and producing rapid growth in digital interactions (as shown in these digital transformation stats) with companies.
This has highlighted these businesses with less than adequate digital channels, and forced them into rapid transformations. Indeed, some stats suggest that the pandemic speeded up digital transformation by seven years.
Why is digital transformation needed?
One key focus when thinking about digital transformation is customer centricity.
As we set out in the previous section, technology and competition help create the need for transformation, but it’s customer behaviour that ultimately matters.
Put simply, if you are thinking about what your customers want and how you can sell to them or provide services, then this will help your business succeed.
Businesses which fail to adapt quickly enough to changing customer behaviour will struggle.
Many well established retailers have failed over the past five to ten years. There may be multiple reasons for the demise of these businesses but one common theme has been the failure to adapt to the growth of ecommerce and the changes it has brought in terms of customer behaviour.
The need for businesses to change and adapt is not a new concept in itself, but the ‘digital’ part of the term reflects the vast changes in technology and customer behaviour brought about by the internet and the gtech used to access it.
It’s also the sheer speed of change that brings the importance of transformation into sharp focus. To quote an example from HBR:
“In 1958, corporations listed in the S&P 500 had an average stay of 61 years. By 1980, numbers from research firm Innosight revealed that the average stay had declined sharply to 25 years. In 2011, the average tenure dropped to 18 years. At the present rate of churn, research estimates three-quarters of today’s S&P 500 will be replaced by 2027.”
This is why digital transformation matters. It can be a matter of survival for many businesses.
For even the most established business, the failure to adapt to changing trends before it’s too late can be fatal.
How to set your digital transformation strategy
Transformation begins with the recognition that fundamental change is needed. This realisation may come as the result of a downturn in performance or perhaps the entry into the market of a new competitor.
For example, Amazon will have given the management of many retailers plenty of sleepless nights. The very presence of a rival like Amazon will have led many businesses to take digital seriously, and to think about how their organisations need to change to be more competitive.
The same can be true in other markets. Sites such as lastminute.com or booking.com have presented a serious challenge for established travel brands, while the same is true for insurance brands after the arrival of confused.com.
There is no one size fits all solution for transformation. The process is different for B2B and B2C companies and can vary between sectors. It can also depend on exactly how far along a company is in its adoption of digital.
One key factor is leadership. Transformation, especially at scale, needs to be driven from the top. This can be hard in businesses where decision making has been slow and reliant on the input of many different stakeholders.
The need for digital transformation needs to be recognised by senior management and decision makers, and to be spread throughout the organisation.
Here are some key areas to consider when setting strategy:
- Set strategy in practical terms
A strong strategic vision is essential. If you’re changing the technology you use and the way you use it, the reasons should be clear.
Think about how you can use tech to improve overall business performance and efficiency, to expand your market, or to improve overall efficiency within the business.
It’s not just about adopting technology and new ways of working for the sake of it, but to achieve clear business goals through the use of tech.
- Make the case for change to employees
Significant changes to businesses require buy-in from all levels of the business, so it’s important to set this out clearly.
To most employees, digital transformation probably just sounds like more management-speak, so it’s important to explain in practical terms how transformation will benefit them, how it will affect their roles, and why it’s important.
- Ensure that digital transformation teams are close to the top table
People with responsibility for setting strategy and implementing changes need to have the ear of senior management and the backing and authority to put changes into practice.
This means that the C-suite needs to be brought in to digital transformation projects, attending meetings and helping to build support throughout the whole organisation.
- Align transformation to business goals
There’s no point in beginning projects without a clear vision of how the company will benefit, and goals to work towards.
Transformation projects can affect every team within the business, their roles and their budgets, so they need to be aware of the reasons this is happening. .
A clear vision of the intended outcomes – increasing online sales for example – can help employees see that any effort is worthwhile.
- Have a clear idea of tech requirements
It’s important to know exactly where your business is in terms of technology and skills.
Can your current systems and skills enable you to provide the customer experience you’re aiming for? It may, for example, be necessary to re-platform and move away from technology that limits what you can do.
The digital experience also matters for employees, as it can negatively affect work culture, and impact the quality of service to customers.
For this reason it’s important that technology supports how you want to work. For example, does it make the sharing of data and general cooperation between teams easy and efficient?
- Measure and review your progress
The roadmap you set out at the start may need adjustment as you go on. By using key metrics and data, you can learn about what works and use this insight to adjust and improve strategy.
- Remember that transformation never ends
Technology never stops changing, your competitors will improve, and new ones appear, and customer behaviour is in constant flux, so transformation is an ongoing process.
Think of digital transformation as a continuous journey.
You need to be aware of new tech that arrives on the scene and how it can help you, and be able to respond to changes in customer expectations.