Digital transformation is not just a passing fad. It's a way for businesses to stay competitive and relevant in an increasingly digital world. Simply put, a digital transformation is the integration of digital technology into all areas of a company, resulting in significant changes to how it operates and delivers value to customers. It is an essential move for an organization to stay relevant in a world dominated by technology.
Types of digital transformation
There are four distinct types of digital transformation with varying impact and scale: process, business model, domain, and cultural or organizational.
What flavour of transformation an organization pursues depends on its specific needs and objectives. Undertaking all types at once is not always necessary, and usually, only one or a few will be required. Regardless, attempting to transform a business rapidly is like trying to solve a puzzle blindfolded. It's crucial to approach digital transformation iteratively, using results from previous small changes to inform the next steps, or you'll end up with a jumbled mess.
Let's explore the four types of digital transformation in more detail.
When most of us think of digital transformation, we default to process transformation. It’s an operational efficiency play that strives to reduce operational costs and effort required by introducing automation, fostering more collaborative delivery, and refining processes to ensure teams are focusing on the right things. Every company at every stage of the growth journey can identify an area that could be improved in some way, whether to become more efficient, less costly, more impactful, or to reduce time to market (or cycle time).
The ’digital’ aspect of process transformation considers how technology can be applied to optimize processes. But it's not just about improvement – it's about solving a problem. For example, say you're a municipal worker and generally submit your timesheets on paper. When COVID hit, your organization was forced to adopt a digital solution to solve the problem of multiple people handling timesheets on paper.
Process transformations are often small, incremental changes – transformation with a lower-case ‘t,’ if you like. Transformation in this context is about examining where processes are today and identifying the particular problem or issue we are seeking to solve – from process cost to usability. It’s outcome-driven and not motivated by the desire to adopt the latest, shiniest object into the system.
The idea of incrementally pursuing business outcomes through digital transformation is critical in Lean or Agile, where processes need continual improvement or fine-tuning. When we redesign processes, we’re likely to bring in a lot of things that, over time, will prove to be redundant or dead ends. We need the discipline to reassess our processes and trim the steps, which, although essential for us to learn how to deliver our product, no longer add value.
Lower-case ‘t’ process transformations are about finding and implementing small changes that give a business a leg up on the competition or open pathways to new opportunities. In contrast, upper-case ‘T’ transformations are more about reinventing experiences. They throw out established processes altogether and reinvent the company’s current approach to doing business. They are big, stepped changes that are highly disruptive and often require cross-departmental changes leading to deeper cultural shifts.
Business model transformation
Business model transformation affects how a company interacts with its customers. In this context of digital transformations, technology becomes a strategic partner in achieving business outcomes. For example, it might enable a new channel to market, bypassing brokers or partners and allowing an organization to build direct relationships with their customers. This is typically achieved by leveraging technology to build deeper relationships with customers and broadening or enhancing the service offered, increasing customer acquisition, customer retention, or customer spend.
Business model transformations are driven by strategic leaders who explore how the company’s technologies, processes, resources, and skills can stitch together in a new and different way to enhance customer interactions, improve the customer experience, and become more competitive within a given landscape. This may require a shift in how we go to market, find our customers, package our services, or receive our payments.
Consider something like the Starbucks app. Traditionally, customers would wait in line, place their orders, and wait for their coffee. But with the app, they can order their coffee in the elevator, and it’s ready and waiting for them when they get to Starbucks. This transforms the business model and dynamic of customer interactions, and it’s proved hugely successful. With 31.2 million users, the Starbucks app has the second most mobile payment users in the United States behind Apple. More Americans use the Starbucks app than Google Pay and Samsung Pay, and more than one in four Starbucks transactions are processed through the mobile app.
However, it is not as simple as launching an app and calling it a day. In the case of the Starbucks app, new operational procedures and additional staff were required in-store to support the increase in orders. The whole business had to shift from a mindset of stores and baristas to include the digital customer experience outside the store. Meaningful business model transformation demands a mindset shift, a change in how a business is run in light of new digital elements. And that’s why business model transformations aren’t easy or obvious.
They demand innovation, and that requires experimentation. You cannot whiteboard your next ground-breaking business model transformation and implement it perfectly on day one. It’s a process of evolution that challenges you to listen to and understand your customers and continually assess emerging shifts and trends in the markets and technologies in which you operate. It requires you to brainstorm and try different ideas while paying close attention to where customers turn their attention and the points you can leverage to gain traction. Because if you aren't disrupting the market, you are adjusting your business models to keep up. You have no choice – you either respond or watch your market share dwindle.
Domain transformation occurs when a company enters a new domain and uses its existing expertise and capabilities to take a different approach and disrupt the new (to them) market.
The company's unique perspective on the domain, which is different from current market incumbents, can fundamentally change how the market operates. Typically, this new perspective is driven by technology and focuses on how the new company leverages their skills and experience from one domain to compete in another. They have different logic than companies that have been serving the market for a long time. They bring a fresh perspective and shake up the status quo.
Amazon is a great example of domain transformation in the context of digital transformation. The company started as an online retailer of books but eventually entered the infrastructure and data center market with the launch of Amazon Web Services (AWS). AWS allows businesses to access cloud computing services, such as data storage, computing power, and networking, on a pay-as-you-go basis. This transformed how companies manage and deploy infrastructure and data centers and disrupted the enterprise server market. Instead of purchasing and installing their own computer equipment, businesses could buy the service from Amazon and access it over the internet.
This domain transformation was made possible through Amazon's digital technologies expertise and ability to apply those capabilities in a new market. It was also a case of exaptation from their existing model. They needed robust –and crucially – rapidly scaleable infrastructure to handle the seasonal spike in their retail business in the run-up to Christmas. This meant that Amazon had vast infrastructure resources available to them that were almost unused through most of the year. This opportunity provided the company with an extremely profitable segment, which now accounts for 16 percent of total net sales.
Uber is an example of how Silicon Valley companies are disrupting industries through domain transformations. They are taking the technical capabilities developed over many years and applying them to different domains stuck with a more traditional mindset. Instead of owning and operating a fleet of traditional taxis, the company developed a market for rides, using a platform to connect riders with drivers who use their own personal vehicles. This innovative approach disrupted the traditional taxi industry and reimagined the way people thought about transportation. Uber's success shows Silicon Valley companies' power to build brilliant digital solutions that can disrupt and transform entire industries that traditionally think of technology as a service they lean on rather than a strategic capability essential to their business success.
To execute a domain transformation, we need a clear understanding of our capabilities. We need to recognize the skills and expertise of our teams, as well as the resources and technology uniquely available to us. With this knowledge, we can determine how to apply our capabilities in a new marketplace. Think of a company's capabilities as a toolkit. By understanding which tools are at its disposal and how to use them effectively, the company can look for a domain in which these capabilities give them an edge, stand out in the marketplace, and potentially disrupt the existing industry.
One helpful tool in this process is Wardley Mapping, a strategic planning technique that helps organizations understand and navigate complex systems. In the context of a domain transformation, Wardley Mapping can be a valuable instrument for understanding your company's strengths and capabilities when used to map your value chain alongside a market of interest. This can help to identify gaps in the market your company might be strongly suited to address. What makes Wardley Mapping stand out as a strategy tool is that it combines both the current state – where is the market or company today – with possible future states determined by market trends and growing capability maturity. As a predictive or exploratory strategy tool, it is unrivalled.
However, it’s important to note that domain transformations are tough. They require a significant shift in company thinking and operations, a significant investment, and a continuous learning mindset since decisions and hypotheses are necessarily made with limited information (you are not an informed incumbent in the domain you are entering).
Moreover, the success of domain transformations is not always immediately apparent, and it can take time for the impact of the company's approach to be fully realized. For these reasons, we need the ability to innovate and move quickly to stay ahead of the competition and adapt to changing market conditions. Therefore, we should recognize that there are many examples of failed domain transformations we rarely hear about.
Cultural and organizational transformation
Organizational or cultural transformation is an inevitable part of any other type of transformation. Whether you're changing your processes, your business model, or the market you operate in, your organizational culture is likely to change as a result. This is why it's crucial for large transformations to approach cultural change with intention and awareness rather than ignoring it or pretending it's not happening.
The value of your organization is disproportionately tied up with the individuals who work there. These individuals determine how your company operates. Recognizing that a cultural change is inevitable, leaders often seek to drive that change from the top while understanding that it's not something that can be accomplished by leadership alone. Instead, it requires the involvement and buy-in of key individuals across the entire organization.
What's more, measuring cultural change can be tricky. It's intangible and difficult to quantify. However, this doesn't mean it's not important to try. Ignoring the progress of cultural change or failing to address it deliberately can leave your organization like a leaf in the wind, constantly reacting to external factors rather than proactively shaping its own direction.
It's important to take a more evolutionary approach to cultural transformation instead of disrupting everything in a revolutionary manner and hoping that the organization will adapt well to the change. Cultural change is a living thing. It cannot be sketched out and simply rolled out like a process or system change. This complexity makes it highly suited to iterative approaches, which cause small, manageable ripples in your organization, rather than large changes that result in unmanageable waves.
Take small, incremental steps and build on them over time rather than trying to make sweeping changes all at once. Start with a small team, system, or area of the organization and introduce change there. Build belief in the change by creating an army of change agents who have experienced benefits from the change and who are peers to the next generation of change makers. This allows you to understand what the change will look like in practice and use it as a kind of 'mini snowball' that you can build on over time.
Where does agile transformation fit in?
Any significant transformation involves a cultural shift in addition to at least one other type of transformation. Both agile and digital transformations aim to bring about change and improvement in an organization. But, while digital transformation focuses on adopting new technologies, agile transformation centers on the people within the organization. And in today's tight labour market, people are more important than ever to successful change. Research shows that 93 percent of people believe a sense of belonging drives organizational performance. However, employee engagement has experienced its first decline in a decade, with just over one-third of employees being engaged. Even more troubling is the rise in actively disengaged employees, who now represent 17 percent of the workforce.
Agile transformations change how people interact and work together. They break down traditional siloed ways of working, fostering collaboration and responding to a fast-paced market. They typically involve a combination of process and organizational or cultural transformation, with the urgency and risk of a domain or business model transformation. The stakes are high, and there is a multitude of expectations placed on the desired results. Successful transformation requires a collaborative approach between leaders and the organization, focusing on the people impacted by the change.
Leadership plays a crucial role in agile transformation, but it's not a one-person show. The key to success is combining a top-down visionary perspective with a bottom-up problem-solving approach. Leaders provide direction, set expectations, and define enabling constraints to guide the change, while the organization offers problem-solving skills and a positive desire to accommodate the change.
How to right-size your digital transformation
Right-sizing your digital transformation allows you to focus on what’s necessary and relevant to your organization rather than trying to implement changes that are not aligned with your goals. Successful transformation requires a significant investment of resources, time, and effort, so it's crucial to ensure that your approach is tailored to the needs and intentions of the organization and aligns with your long-term goals.
By asking the right questions, you can ensure that the digital transformation is well-defined and well-executed and that the desired outcomes are achieved.
What are you trying to achieve?
Defining the objective of a digital transformation is like setting a compass for a journey. Without a clear purpose, it's easy to lose direction and sight of the desired outcomes, putting the success of the transformation at risk.
Who will be impacted?
A digital transformation involves more than just adopting new technologies; it requires a mindset shift. Therefore, it's essential to identify who will be involved in the cultural change and ensure they are prepared for it. The success of the transformation will depend on how well it's received and adopted by those impacted.
Who will play a role in enacting the change?
The signifier of success is whether the transformation and required change is supported high enough in the organization. Respondents in The Business Agility Report 2020 rate business agility maturity 11 percent higher when the C-suite or Board of Directors lead the journey compared to those headed by a Line of Business leader.
Elevate your business with digital transformation
Digital transformation is a way for businesses to stay competitive and relevant in an increasingly digital world. By embracing the four facets of digital transformation and the tools, techniques, and culture that come with them, your business can reach new heights of efficiency and success.
When done right, digital transformation has the power to genuinely transform a business, creating a real and lasting impact on its success. Get in touch if you're ready to take the first step on your digital transformation journey. Our team offers tailored consulting and training to help you navigate the complex and often challenging pathway to agile digital transformation. Schedule a consultation today, and let's talk about the future of your business. Together, we can make your aspirations a reality.