Over the past two years, two research reports on the strategic development plans of the US and the EU have revealed the significance of digital transformation in building a country’s competitiveness.
The first report, Accelerate: Turbocharging the Manufacturing Renaissance in an Era of Energy Abundance, was published by the US’s Council on Competitiveness in October 2018. The report clearly states that the US needs to develop an innovation-led economy powered by a secure, sustainable, affordable energy portfolio and a robust, agile, advanced manufacturing sector.
The report also makes clear that big data is a prerequisite for the development of the digital economy. This means that the US should protect and take full advantage of big data resources, further enabling a knowledge-based economy.
Promoting European Growth, Productivity, and Competitiveness by Taking Advantage of the Next Digital Technology Wave — the second report — was published in March 2019 by the Information Technology and Innovation Foundation (ITIF). It highlights that digital transformation should not be limited to the manufacturing industry. Instead, all physical systems, including those used in agriculture, buildings, infrastructure, logistics, and transportation, can and should reap the benefits that digital transformation offers.
Both reports affirm that digital transformation remains the very foundation from which countries have to build their global competitiveness.
Three Phases of Digital Transformation
Digital transformation is achieved through three phases: first digitization, then digitalization, and finally digital business transformation.
Digitization is the process of converting information from analog to digital form. From analog televisions to digital televisions, film cameras to digital cameras, physical typewriters to word processing software — all are real world examples of digitization that have occurred over the last few decades.
Put simply, digitization uses the binary system to convert information into zeros and ones to assist reading, writing, storage, and data transfer.
Digitalization is the transformation of processes. Digitalization involves using digital technologies to change business models and provide new revenue and value-producing opportunities.
For example, by using systems such as Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), and Supply Chain Management (SCM), companies are able to digitize their workflow processes — effectively optimizing the efficiency of operations.
Digitalization helps companies increase workplace collaboration, boost resource efficiency, and capitalize on the value of information.
- Phase III: Digital Business Transformation
Digital business transformation involves using digital technologies and supporting capabilities to create a robust new digital business model. Unlike information- and process-oriented digitization, this phase is centered on the complete transformation of businesses — enabling companies to develop new business models and competitive strengths in a modern, digital business environment.
Take a bicycle-manufacturing company as an example. In the digitization phase, the company introduces electronic financial tools to change traditional manual accounting into computer-assisted accounting.
In the digitalization phase, the company introduces an ERP system, establishing an enterprise process management IT system and integrating key financial activities, such as accounting, compliance control, financial reporting, staff management, and cost analysis. During this phase, the manufacturing company’s main business scope and model does not change.
Later, after realizing that the digital economy can offer new business opportunities, the company starts to develop their bicycle sharing capabilities. They transform their business model from bicycle selling to time-based bicycle renting by applying digital technologies. Only when this process is completed will the company’s core business scope and model achieve digital transformation.
Figure 1: ‘Focuses’ and ‘examples’ in digital transformation’s three phases
Digital Transformation Success Stories
Amazon and Apple are two companies that have successfully achieved digital transformation.
Amazon started as a bookstore and later became an eCommerce platform. Then it developed Amazon Web Services (AWS).
Since its launch in 2006, AWS — which provides application programming interfaces and on-demand cloud computing platforms — has become a major component of Amazon’s business. In 2018, AWS’s sales revenue reached US$25.66 billion, accounting for 11 percent of Amazon’s total corporate revenue. Meanwhile, the gross profit of AWS reached US$7.296 billion, representing 44 percent of the company’s entire total gross profit. Indeed, the clear success of Amazon’s digital transformation pattern has led to many eCommerce companies trying to replicate it.
Apple is another example. The company was surpassed by Microsoft and its ecosystem partners — Dell and HP — in the 1990s. It couldn’t compete in terms of market share, and almost went out of business. Then, in 1996, after he returned to Apple, Steve Jobs began transforming the company’s business model. Today, Apple has revolutionized the all-in-one PC business model, switching it from one that focused on hardware manufacturing and Operating System (OS) software, to a new business model that integrates hardware, OS software, and digital content ecosystems. The company also built iTunes and the App Store, two platforms on which ecosystem partners can upload their digital content.
According to Apple’s 2018 annual report, the revenue of its digital content services reached US$37.2 billion, accounting for 14 percent of total corporate revenue. Meanwhile, Apple’s digital content service was the only division that experienced successive growth from 2014 to 2018.
From these examples, it is clear: digital business transformation has to be focused on a company’s core business. The overarching idea is to develop a new business model, one based on the results of digitization and digitalization.
Digital-native enterprises are the main competitors of enterprises that have yet to or are in the process of undertaking digital business transformation. These digital natives established themselves after the digital economy had already developed and have, as a natural result, already designed their business models according to the patterns and rhythms of the digital economy.
Unlike large- and medium-sized traditional enterprises striving to adapt to the digital economy, the digital natives — names such as SenseTime and YITU — do not require digital transformation: they were born digital, proactively identify business opportunities, and grow rapidly because of their digitally-native capacity.
A Way for Traditional Enterprises to Achieve Digital Transformation
How can industry-leading companies established before the era of the digital economy maintain their competitiveness by undergoing digital transformation? We believe that the ecosystem-based collaborative innovation strategy is an effective way for traditional enterprises to achieve digital transformation. The strategy consists of three core concepts: ecosystem-based innovation, ecosystem-based collaboration, and collaborative innovation.
Figure 2: Ecosystem-based collaborative innovation strategy
- Ecosystem-based Innovation
An ecosystem-based innovation model requires an open, innovative ecosystem, in place of a closed, centralized innovation structure. The failures of Bell Labs and Xerox PARC demonstrate that companies that adopt closed innovation systems are likely to miss out on the opportunities the new technological revolution brings.
Bell Labs’ transistor technology contributed to the establishment of first-generation information-based companies such as Intel. Meanwhile, the Graphical User Interface (GUI) system developed by Xerox PARC helped second-generation information-based companies such as Apple and Microsoft grow their businesses. Both research institutes created industry-leading technologies that facilitated the growth of other companies, but they failed to promote the successful development of their own companies.
Conversely, Apple, Microsoft, and Amazon — the US stock market’s top three companies — continue to grow in their respective ecosystems. All have successfully attracted ecosystem partners by developing platforms such as iTunes and the App Store, Windows OS and Microsoft Azure, and Amazon eCommerce and AWS. Such platforms provide opportunities for partners to create innovative projects, which in turn contribute to the platform’s own development. This leads to the formation of innovative ecosystems that are energized by collaboration with, and competition between, innovation-driven partners.
Such examples suggest that traditional large-scale enterprises should assign a Chief Technology Officer (CTO) to oversee technological Research and Development (R&D) and establish an open, innovative ecosystem. CTOs help companies use digital technologies to transform into technologically innovative global industry leaders.
- Ecosystem-based Collaboration
Ecosystem-based collaboration requires proactive ecosystem management, using big data technologies and data-based ecosystem operations.
An ecosystem’s slow, natural growth presents considerable uncertainty, and may not satisfy company requirements. Technological competition has recently expanded from R&D to sales. Companies with poor sales results need to accelerate their development to catch up with competitors. Organizations that do fall behind can, however, surpass their competitors with stimulation of the ecosystem and cross-organizational collaborative innovation, as shown in the success of the Apollo and China high-speed railway R&D programs.
The digital economy, Internet of Things (IoT), and big data technologies have greatly reduced costs and increased the efficiency of large-scale ecosystem collaboration. To ensure continued success, enterprises should appoint a Chief Data Officer (CDO) to integrate partner capabilities in domains such as R&D, supply chain, sales, talent development, and financing and investment, using big data technologies. The CDO should manage the entire ecosystem’s data-based operations to ensure sufficient support from the collaborative ecosystem as well as the company’s rapid digital transformation.
Collaborative innovation is the core engine that drives technological and business model innovation in the digital economy.
While digitalization involves using digital technologies to automate business operations and transform an existing business model, digital business transformation focuses on using innovative digital technologies to create a new business model. Digitalization is a digital upgrade of existing resources, while digital business transformation is an exploration of a new economy using both technological and business model innovation.
Collaboration is difficult for sales departments and R&D departments, which have different business models. Indeed, few companies have realized collaborative innovations in both technology and business models.
In fact, sales departments are usually more effective at innovating business models based on customers’ needs, while the technological innovation of R&D departments is usually superior. A traditional company needs to appoint a Chief Innovation Officer (CIO) to help both departments maximize their potential. By driving collaborative innovation, integrating new technologies and business models, companies can successfully achieve digital transformation.
A traditional company needs a CTO, CDO, and CIO, to implement a corporate ecosystem-based collaborative innovation strategy that includes collaborative innovation, ecosystem-based collaboration, and ecosystem-based innovation. Following the implementation of such a strategy, companies will enjoy ongoing development and success, powered by technological innovation and business model innovation.
The digital economy is advancing by adopting new technologies. To capitalize on this, companies must undergo their own digital transformation journey. This is certainly not easy, and many companies fade away during the process. To ensure that they don’t suffer a similar fate, traditional companies have to fully understand the potential benefits of digital transformation and develop a clear strategy to seize the opportunities it provides. In doing so, they will thrive and prosper in the digital economy.