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Organizational Capabilities and Digital Transformation Research Paper

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Updated: Jul 17th, 2021

Introduction

Business performance improvement is a core goal of organizations. They develop core capabilities that drive a sustained transformation to achieve the set strategic objectives. Further, high-performance firms adopt policies for change management and adaptation to remain competitive in an unpredictable business environment (Heavin and Power 38). One capability that impact organizational performance is information technology (IT). Significant competitive gains are linked to superior IT resources that support digital business (Heavin and Power 39). Strategic integration of IT into organizational processes is seen as a way to promote greater digitization and transform a firm. This paper explores the digital transformation phenomenon, related challenges facing organizations, examples of successful and failed attempts, types, and associated risks. From the analysis, recommendations for creating a digital footprint in the industry are included.

About Digital Transformation

IT-driven transformation encompasses the competitive capabilities drawn from information technology. According to Nadeem et al., the transformational potential of IT is seen in business processes, relations, consumer experience, clients, and disruption (5). Thus, a fundamental characteristic of digital transformation is the ability to change traditional models or confer new capabilities. The technologies should alter firm operations, support expansion to different markets or customers, and yield competitive gains. Conceptually, digital transformation encompasses four constructs: reframing, restructuring, revitalizing, and renewal (Nadeem et al. 7). Transformational IT must enable a firm to reinvent its image and redesign its internal processes for enhanced flexibility. Revitalizing implies value-chain realignment with market needs, while renewal entails skill improvement and redefining business scope.

Digital transformation (DT), as a concept, comprises a personal and business technology dimensions. It includes transformational IT tools such as social media, cell phones, data analytics, and cloud computing (Andersson et al. 41). These IT solutions are shaping business models and changing the way businesses operate. Thus, DT can be defined as the integration of IT and into company processes to improve performance. More specifically, the phenomenon encompasses technologies impacting the firm in three ways: “externally, internally, and holistically” (Andersson et al. 47). The external dimension focuses on improving the consumer experience, while the internal component centers on streamlining business operations, structures, and corporate governance. A holistic impact implies new business models and a redesign of the entire organization. Thus, DT has two goals: improving organizational performance and expanding the reach of entities.

DT describes transformations that are founded on information technologies. Internally, DT can be viewed as the movement of the entire organization to big data, business intelligence, cloud, and social media (Nadeem et al. 7). While firms are continually evolving to remain competitive, DT focuses on transformations founded on digital technologies, as a core strategy. The outcomes of DT include improvements in business operations and processes. A secondary benefit is new value creation – new products. DT is more than a digital upgrade that seeks to enhance internal efficiencies through IT. It entails a radical change to the entire business using technologies that are integrated into all aspects of a firm’s operations.

IT capability enables an organization to use its digital resources to improve business performance and revenue. DT can only be realized if a firm utilizes prevalent technologies in the market. Thus, IT capabilities are needed to enable digital transformation. Companies with superior IT resources and expertise are more likely to achieve DT than those without (Nadeem et al. 8). They can leverage their digital capabilities to redesign and reconfigure current business processes to offer innovative (digital) products.

Challenges Facing an Organization during its Transformation Journey

Most enterprises have incorporated DT into corporate strategy. Organizations are often ambitious to transform three core elements through digital solutions: user experience, business models, and operational efficiency (Nylén and Holmström 58). However, they face a myriad of challenges in their transformation journey. The first obstacle is prioritizing DT over other strategic actions. Heavin and Power note that organizations grapple with the problem of whether to invest in DT to optimize internal operational efficiency or concentrate on customer/market needs (40). The two competing priorities are often incompatible with each other. Firms starting the digital transformation journey may be torn between focusing on efficiency or the customer. At its inception, DT may lower consumer satisfaction, loyalty, and sales (Heavin and Power 41). These outcomes often force executives to revert to traditional models in a bid to avoid losing customers.

Another challenge relates to predicting user behavior versus serving the consumer. DT capabilities such as big data and analytics enable firms to determine market patterns and segments. As a result, they can adopt a differentiated marketing strategy, where each category is targeted with a unique product (Nylén and Holmström 62). Focusing solely on consumer patterns may be a challenge to personalization that is critical to satisfying customer needs. Allocating resources to IT staff or self-service analytics for optimal DT outcomes is another challenge. The return from either investing in data analysts or managerial training on digital technologies may be hard to quantify.

Further, system upgrades to promote compatibility with newer technologies are costly – human resources and budget. However, preparing for the next generation of software is critical to the development of innovative value propositions, products, and strategic advantages (Nylén and Holmström 65). Identify and using digitization opportunities as well as allocating significant resources to digital enhancement are critical to DT success.

Firms also face the problem of data storage and management. Market information presents both an opportunity and a challenge. A digital strategy entails using big data and business intelligence to acquire a competitive advantage in the industry. Thus, all datasets captured must be stored and analyzed to support business decisions. Data indexing, quality evaluation, and aggregation are some of the procedures that may be complex and costly to firms going through a digital transformation (Andersson et al. 73). The information must undergo these analyses for it to be useful.

The decision to embark on a digital transformation journey will impact staffing decisions. Computing machines and smart devices with the potential to replace semi-skilled employees are a part of the ongoing transformation embraced by firms (Andersson et al. 77). A complete digital transformation will have winners and losers and effects on workplace dynamics. Firms face the dilemma to either adopt smart machines to do specific tasks or continue with the current staff. Technologies such as personal assistants and business decision software have the potential to replace skilled workers. Thus, determining the work to be done by staff and smart machines is a challenge to firms undergoing a digital transformation.

With big data comes the problem of security. Crucial information about customers or markets may be easy or difficult to access depending on user rights assigned to critical people. Executives must balance the usefulness of data and accessibility issues (Andersson et al. 81). This dilemma is particularly significance in healthcare. Access and sharing of sensitive data should be secure to enhance individual privacy. DT is an opportunity for firms to redesign or change the way they do business based on consumer insights gleaned from captured information. Thus, balancing between the need to understand the customer and privacy concerns can be a challenge to digital organizations.

Companies also grapple with the legacy challenge when transforming into a digitally-fit organization. The adoption of technologies and disruptive business models require sophisticated infrastructure. Organizations viewing DT as a necessary process critical to their survival are focused on integrating IT into business operations, aligning internal functions with digitization, and improving their offerings (Andersson et al. 81). However, getting the basics right is a challenge to the majority of the firms. Substantial financial investment has gone into creating legacy infrastructure for DT. According to Heavin and Power, such systems are a costly obstacle to making a step forward in the digital transformation journey (42). They are usually outdated and cannot support newer applications. Having the right IT infrastructure/systems is a challenge to organizations that impedes their DT progress.

Organizations face the agility challenge in their digital transformation journey. Agile mindsets characterized by teamwork and functional collaboration are crucial to digital learning (Heavin and Power 43). A change of the cultural set-up in an enterprise is a critical success factor in this area. Organizations must foster curiosity and collaboration through training, create cross-functional teams, and collaborate with stakeholders – users, suppliers, regulators, and rivals – to design open source architectures that are instrumental in DT (Andersson et al. 84). Operating in a traditional silo structure and the failure to collaborate are impediments that firms must overcome in their DT journey.

Examples of Companies that Succeeded/Failed in Digital Transformation

Some brands have overcome the above challenges to implement a successful digital transformation strategy. One example is Siemens Power Services, which utilizes “strategic segmentation” to recognize and capitalize on opportunities that come with DT (Andersson et al. 114). The corporation uses a formula to allocate its DT efforts to three areas: cost savings, create value/money and develop new revenue-generating opportunities. It apportions its digitization efforts or resources to these domains in the ratio of 60:30:10 (Andersson et al. 114). The approach enables the firm to structure activities and create an impetus for change among staff and stakeholders.

Siemens’ Next 47 is a product of its digital transformation efforts. This unit, which has a budget, acts as a “coordinating platform” for all corporate projects and initiatives of the company (Andersson et al. 119). The goal is to merge an agile mindset and Siemens’ broad technological capabilities to link enterprises to the global market. Thus, the corporation promotes mutual strategic growth during its digital transformation. Another firm that excelled in its DT efforts is SAP, a German software company. The corporation first sought to change its organizational culture before embarking on business transformation. Its success in digital transformation can be attributed to two factors: addressing cultural issues and create a digital learning mindset in the firm (Andersson et al. 121). SAP built internal DT capabilities through staff training and adaptation as opposed to depending on input from consultants.

Daimler took a different approach to digital transformation; it created agile teams known as “swarms” through its Leadership 2020 program (Andersson et al. 134). The initiative is meant to transform the firm into a digitally-fit corporation. Each swarm is given resources and autonomy to make independent decisions based on data insights. This new approach to work ensures that issues are addressed in real time. Daimler’s Lab is the nerve center of its global innovation system. This unit serves as a hub for the conception, testing, and refining of new business models before implementation. A successful example is the car2go platform – an adaptable “free-floating car sharing service” (Andersson et al. 134). Thus, Daimler uses its IT infrastructure developed through the DT to offer innovative products and solutions.

Daimler’s Future [email protected] exemplifies a successful DT initiative. The division, which has a multifunctional workforce of 150 developers and engineers, seeks to transform the company from a car maker to a provider of integrated transport services (Andersson et al. 135). The unit operates as an independent entity reporting to the Head of Vans, not the line manager. Most of its staff are recruited from outside Daimler to bridge identified skill gaps. It collaborates widely with external players, including start-ups and consumers. Thus, this unit is set up to operate differently from the traditional structures where internal R&D is the sole developer of products. It fosters new ways of thinking, innovative business models, and customer engagement.

Lufthansa is another example of successful digital transformation efforts. The airline’s innovation hub located in Germany is the center where the company’s DT strategy is developed. The platform allows Lufthansa to interact with mobility providers in the travel industry and recognize and analyze growth opportunities for the firm (Andersson et al. 138). Through this hub, the airline can evaluate its relationships with players such as Daimler’s mytaxi.com. As a result, the company can create technologies that support automated check-in process for all carriers and share the data through the Lufthansa Open API (Andersson et al. 138). The vice president of digital strategy coordinates the airline’s DT initiatives.

Some firms that set out on an ambitious journey towards DT encountered challenges and failed to their goals. An example is GE, which developed innovative digital capacities, including implanting sensors into its product offerings, creating new software, and adopting a different business model (Andersson et al. 142). The company also embarked on transforming its sales function and supply chains. An outcome of its initial DT efforts was an improvement in service margins. However, a lack of investor buy-in derailed GE’s digital ambitions. The company’s stocks dropped in value, forcing senior executives, including its CEO to exit the firm.

Another example of failed digitization efforts is Nike. The company cut the budget to its digital unit by half in 2015 and discontinued investments into “Fuelband activity tracker” due to financial performance problems (Andersson et al. 151). In its DT journey, Procter & Gamble also encountered growth challenges related to a touch economic landscape in the 2012-2013 period. P&G’s failed DT project can be attributed to poor digital governance and strategy-value fit. In contrast, the Burberry brand suffered a slow growth after initiating its DT, forcing it to discontinue the project to develop digital infrastructure and luxury products. Ford’s DT journey saw its shares drop in value because of cost and quality problems within the firm. The DT projects drained company resources with little returns, resulting in failed digital transformation. Other firms ran into financial hurdles due to slowing markets, bad decisions, and reduced product desirability after implementing transformative business technologies.

Types of Digital Transformation

Firms have used different forms of DT to achieve varying degrees of success. While some companies are transforming specific elements of their operations, others are overhauling entire structures and processes. Three types of digital transformation are used by organizations to move forward with DT: client understanding, process digitization, and digitally-modified business models.

Customer Experience Transformation

Transforming consumer experience entails leveraging on legacy systems to gain insights into specific market segments (Heavin and Power 44). Organizations use social media to determine customer likes and dislikes. Others promote their brands and run marketing campaigns on these platforms. Following the 2008 economic crisis, some financial firms created digital tools to educate customers on safe investment (Heavin and Power 44). Most companies interact with customers via online communities to enhance brand loyalty and stay connected with clients. Analytics capabilities are geared towards customer experience transformation. Specifically, insurers use analytics-based financing and pricing to develop products tailored to different consumer needs (Heavin and Power 45). Restaurants also use analytics to change prices based on demand and stocks in their franchises.

Revolutionizing the sales experience through digitally-enhanced selling, predictive marketing, and streamlined customer processes is an essential component of the DT efforts. The salesforce is substituting in-person exchanges with digital communications to pass information about new products (Heavin and Power 42). Customer experience transformation also involves using client purchase data to offer customized products for each segment. Personalized mobile coupons are relayed via mobile phones or internet to buyers located near stores. Clients can share their experiences through online communities created by the company. Some organizations run an e-commerce site that allows customers to view, order, pay, and schedule pick-up time for products. Firms use this integrated multi-channel approach to transform customer experiences.

Operational Process Transformation

This type of digital transformation encompasses process digitization, worker enablement, and performance management. Automation is employed to enhance efficiency and quality. Enterprise resource planning (ERP) software for streamlining “transactional, financial, and supply chain” processes are becoming widespread (Andersson et al. 63). Self-service systems for staff are increasingly being used to apply leave days. In this way, the workload of the HR unit is reduced, allowing it to focus on its core role of personnel management. R&D automation enables scientists/innovators to concentrate on creating new products, not on production. Automated systems are also being used to minimize labor requirements and achieve quality gains (Heavin and Power 39). The digital marketplace has fostered downstream collaboration. Prototypes can now be shared digitally with manufacturers instead of moving them physically, significantly decreasing the product development cycle. Additionally, designs can be modified easily in response to changing consumer preferences.

Virtualization of work is another component of operational process transformation. Networking tools such as e-mail and video conferencing allow staff in different locations to collaborate or work from home. They have created broad communication channels and reduced costs. Such tools have also enabled real-time knowledge sharing among sales, R&D, and production functions. Transactional systems are useful in performance management. Managers use these tools to learn about products or markets and make decisions based on data. Strategic decision-making is enhanced because of the insights gleaned from internal indicators of performance and customer information.

Business Model Transformation

In this type of DT, physical operations are augmented with technology through an e-commerce platform. A business model that includes a digital component removes the barriers associated with organizational silos, presenting new growth opportunities (Andersson et al. 65). Digital products are developed to reach new clients. Financial institutions have created digital credit options for customers in far-flung locations.

Business model transformation is implemented in new digital offerings. Airlines provide end-to-end products, including in-flight catering, hotel services, duty-free shopping, and cab services to passengers. Thus, the business model transformation has reshaped value chains and increased vertical integration. Digital technology supports both the decentralization of design and production functions to enhance local responsiveness and centralization for strategic reasons. Thus, multinational organizations can guide local managers to meet specific market needs and remain committed to the global strategic goal.

Risks Associated with Digital Transformation

From an enterprise view of an organization, threats to DT efforts can be contextual, implementation-related, or governance-related. Inadequate drivers in the context of organizational goals, a lack of a risk management strategy for a digital transformation initiative, and poor prioritization that results in disruption can adversely impact DT (Deloitte 3). On the other hand, inappropriate IT infrastructure for operations, security, and business processes can derail the implementation of a DT initiative. Poor program management leads to a digital governance risk. Timely and cost-effective implementation of DT projects is required to avoid this threat.

Digital initiatives have inherent risks that must be managed for the project to succeed. Control measures depend on the degree of digitization and type of threat. A strategic risk may arise, forcing the corporate strategy to be reviewed. Typically, it develops from a misalignment of a DT initiative with organizational goals. A strategic risk usually affects consumer experience, company reputation, and competitiveness (Deloitte 5). A cyber threat may also occur during DT. Unauthorized access of a firm’s systems is the source of this risk. Controls such as secure network architecture are required to contain this threat. A technology risk that derives from hardware failure or obsolescence can affect systems and processes. Thus, addressing issues of scalability and compatibility of IT infrastructure is critical.

Operational risks may affect the capacity of firms to realize its business objectives through digital transformation. They may stem from insufficient controls in operating processes. Data leakage is also a threat to the success of the digital transformation initiatives. Adequate protections – during storage and exchange – through encryption are essential. Third-party risks resulting from inappropriate vendor features can compromise data security. Privacy issues arising due to the mishandling confidential customer/employee data constitute another threat to DT efforts. Other risks associated with digital transformation include regulatory constraints, fraud, and disruptions caused by disasters.

Recommendation/Conclusion

Firms must contend with disruptive technologies to compete and survive. Solutions that have hit the digital marketplace in recent years include the cloud, analytics, and social media. Companies in a DT journey have to develop digital capabilities and skills to create new value propositions, reinvent their business models to achieve operational efficiency, and enhance the customer experience. Learning to deal with DT challenges is also critical. It allows an enterprise to redefine its strategic goals and restructure internal functions and external relationships. Implementing a digital risk framework is also important to address threats to the success of DT initiatives. It is recommended that firms initiating digital transformation projects initiate robust measures around data management, privacy, and software/hardware scalability to guarantee digital resiliency and avoid failure.

Works Cited

Andersson, Per, et al editors. Managing Digital Transformation. Stockholm School of Economics Institute for Research, 2018.

Deloitte. Managing Risk in Digital Transformation. Deloitte Touche Tohmatsu India LLP, 2018.

Heavin, Ciara, and Daniel Power. “Challenges for Digital Transformation – Towards a Conceptual Decision Support Guide for Managers.” Journal of Decision Systems, vol. 27, no. 1, 2018, pp. 38-45.

Nadeem, Ayesha, et al. “Editorial: Digital Transformation and Digital Business Strategy in Electronic Commerce – The Role of Organizational Capabilities.” Journal of Theoretical and Applied Electronic Commerce Research, vol. 13, no. 2, 2018, pp. 1-8.

Nylén, Daniel, and Jonny Holmström. “Digital Innovation Strategy: A Framework for Diagnosing and Improving Digital Product and Service Innovation.” Business Horizons, vol. 58, no. 1, 2015, pp. 57-67.

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