Three Steps to Digital Transformation
As the global economy enters a ‘new normal,’ countries must urgently find new means of growth, for which digitalization is an extremely effective new driver. In China, for instance, it is estimated that by 2020, digitalization will generate 3.7 percent growth for the Chinese Gross Domestic Product (GDP). Such an impressive scale of growth is expected to a lesser extent in other developed economies, including the U.S., U.K., and Japan, as well as developing economies like Brazil.
Despite the alluring prospect offered by digitalization, companies seem to hesitate before investing in this gold mine. In an survey of global companies in 32 countries, Chinese CEOs ranked only 26th in terms of their enthusiasm to invest further in IT.
‘Not knowing what to do’ is the biggest problem mentioned by these business leaders. Of the enterprises that are ‘crossing the river by feeling the stones’ or reforming step by step, some just perceive digitalization as a simple technical project that is of interest to them when they try to introduce information technologies to improve the control of production processes. Some companies even take a simplistic view that equates digitalization with the construction of online business channels and eCommerce.
Such an unexamined start often ends well below the expected return, which, consequently, discourages businesses from making continuous investments in digitalization. To seize the enormous potential of digitalization, enterprises must take a three-step approach to planning digital transformation.
Global ranking of enthusiasm for IT investment
Have a clear understanding of the necessity and objectives of digitalization. In this stage, company leaders need to conduct a comprehensive analysis of many factors, including the development trends of technologies, industries, and consumption, and then define the company’s optimal objectives for digitalization.
One major objective is to enhance operational efficiency; another is to increase revenues. The former focuses on the use of digital technologies to optimize processes and improve business agility. The latter emphasizes digital technologies to build new sources of revenues; for example, using new technologies to improve the consumer experience and develop new pricing modes. As an example, Walmart established a goal of creating digital campaigns to improve marketing accuracy. The U.S. retailer set up a new search engine based on innovation and algorithm optimization that enables the company to push the most relevant merchandise to consumers by analyzing their search history and social patterns. This search engine has brought a 10 to 15 percent increase in trading volume for Walmart.
Once enterprises have defined clear objectives, they must start a more profound process of internal evolution in which they will undergo changes from mindsets to capabilities.
Companies need to increase their company-wide recognition of the significance of digital transformation and establish a ‘digital way of thinking’ to help make changes. These include a mindset change from self-sufficiency to open cooperation for establishing competitive advantages; a switch from linear development to rapid testing in terms of product design and development (a modification from machine replacement of human beings to human-machine cooperation); and a shift from compulsory compliance to proactive pursuit to support information security.
It is a given that new digital technologies will keep emerging, so companies must make informed decisions on creating digital businesses and winning over digital consumers.
To develop into digital businesses, enterprises should make use of the Industrial Internet of Things (IIoT), Artificial Intelligence (AI), agile innovation, and other digital technologies to upgrade their operations so they can improve their internal operating efficiency.
To win digital consumers, enterprises need to get rid of the long-accepted, conventional, product-driven development approach. Companies must truly understand customers’ explicit and implicit demands so they will be able to provide solutions and user experiences that are closely related to the personalized needs of their customers. For example, a Japanese convenience chain collected and analyzed data from 40 million loyal customers around the world to optimize its marketing investment programs and improve shelf space allocation and utilization. This initiative brought a net profit of USD 1.24 million (CNY 8.5 million) from an annual revenue growth of more than USD 125 million (CNY 858.5 million).
Eventually, enterprises must associate their digital transformation initiatives with sustainable digital business models, as well as operating models that will support the successful operation of these models.
To establish a sustainable business model, companies have to identify and integrate digital resources within the ecosystem to provide customers with differentiated value propositions. For example, consumers want to enjoy the most cutting-edge product features within a reasonable price range for the best user experience. Therefore, successful digitized companies need to identify the best resources in their own value chain and integrate them into their asset allocation systems. In this context, profit maximization is no longer the goal of a single company but the goal of a group in the value chain — consumers, upstream suppliers, downstream distributors, and others. Participants in this enterprise ecosystem actively work together in different ways to provide products or services collectively that will cost-effectively deliver the best user experiences.
To sustain operations of its digital business models, a truly digitized company needs a corporate culture that encourages faster adaptation to change, higher levels of collaborative cooperation, and a stronger willingness to accept risks. First, companies must form a collaborative atmosphere within teams that encourage parties to resolve problems more quickly and, second, encourage innovative ways to approach work that form new sets of employee behaviors. General Electric (GE), as an example, released Predix, an operating system for the IIoT, to attract more talented people to participate in the development of IIoT programs. In 2015, more than 4,000 engineers developed over 500,000 software programs and applications on this platform.
As enterprises continue to undergo a profound digital revolution, they must be aware that digital transformation cannot be achieved overnight and that they have to implement systematic, long-term planning, a clear definition of their objectives for digital transformation, and effective implementation. Specifically, enterprises need to enhance the recognition of digital transformation from within their organization and encourage digital thinking and capabilities.
Digital transformation must become the top priority of each enterprise. Those companies that quickly leverage the power of digitalization will become the most vital and competitive businesses within their respective markets.