Digital transformation is the most popular phrase in “digital” technology. The term is searched close to 1 million times a year on Google and means different things to different people. This usually results in a lack of alignment on its definition of success and impact for a company.

What Is Digital Transformation?

When there is a discussion about digital transformation, there seems to be some disconnect since the meaning of “Digital Transformation” will be different for each of us based on our role and priorities.

In this article, we will review what digital transformation could mean for different roles in an organization; but the best thing is to ask these three questions when there is a discussion about digital transformation

1. What do you mean by digital transformation?

2. What are your objectives and how will we track progress?

3. How will these benefit the other parts of the organization and how will you get buy-in and collaboration?

After we review the meaning of different definitions, we will provide a common, theoretical definition based on microeconomics and value chain analysis. Theoretical definition will help us understand the impact of digital on our company and the overall market and forms the basis for developing your digital strategy.

Before we discuss the theoretical discussion, here’s a summary of what we have heard when discussing digital transformation with different stakeholders. It would be great if you can add your definition and priorities to the end of this article.

• for a CEO, it could mean the revenue share from digital products or channels and avoiding being the next Blockbuster or Toys R Us.

• for an Enterprise CIO, it could mean having a Digital Transformation group and leader working closely with the business and achieving continuous delivery and daily release capability similar to companies like Amazons, Netflix, and Google

• for a VP of Data, it could mean the ability to integrate multiple databases and answer data questions that were not possible before and that drive business outcomes

• for a VP of Infrastructure, it could be cloud and mobile first enablers implementation, multi-cloud management, l across the enterprise,

• for a Chief Security Officer, it could mean defining Cybersecurity guidelines in the digital world, implementing DevSecOps and enabling agile Identity and Access management in the world of cloud, Internet of Things and digitization

• for an HR leader, it could be Workday implementation and using data tools to help employees with their career progress

• for a Salesperson, it could be the ability to do real-time lead scoring and predictive analytics on the Salesforce platform,

• for a Marketing VP, it could mean implementing best in class digital marketing strategies, building end to end customer journeys and enabling algorithm driven, dynamic pricing models

• for a Developer, it could mean that the teams can use a Jira tool and they now have an agile team with a fully trained Scrum Master and full-time Product Owner from the business.

Combine this with how the vendors are defining and marketing digital transformation in ways that best fit their product and service portfolio, and you have even more definitions for digital transformation.

The theoretical definition of “digital transformation” based on microeconomics and value chain analysis is as follows:

“Digital transformation is the creation, displacement or re-distribution of profit pools along the value chain of a market due to leveraging digital technologies and distribution that result in significant changes in supply and demand functions for a market”

Three questions to answer based on this definition are as follows:

1. How are digital technologies impacting distribution part of the value chain in my market?

2. How is digital changing the supply function in my market, whether through changing the cost base (change in elasticity of the function) or removing barriers to entry so that supply is greater (parallel shift in supply function)?

3. How is digital changing the demand function in my market such as my adding new value elements for the customers and increasing their demand?

Exploring digital transformation

We define digital transformation as “the creation, displacement or re-distribution of profit pools along the value chain of a market by leveraging digital technologies and distribution that result in changes in demand and supply functions for a market.”

When considering digital transformation, we ask the following three questions:

1. How is digital changing demand in my market such as adding new value elements for the customers and increasing their demand?

2. How is digital changing the supply function in my market? This can happen when the cost base changes or barriers to entry are removed so supply is greater.

3. How are digital technologies impacting distribution part of the value chain in my market?

Answering these questions forces companies to rethink their business models. The creation of new capabilities can enable a faster pace environment, agility, and responsiveness. These changes are often correlated with the assumption that companies will be better aligned to meet customers’ needs and experience growth.

However, that is not always the case.

Not all digital technologies cause permanent and significant changes in the economics of markets. When that happens, it is considered a digital disruption.

Driving digital disruption: digital distribution, demand, and supply

In the last 20 years, companies have experienced massive disruption. Half of the names on the Fortune 500 list from the year 2000 no longer exist.

When full market disruption occurs, a few technology investments are no longer adequate, and a full digital re-invention response is required. It requires an understanding of the elements that drove the disruption: demand, supply, and digital distribution.

Digital disruption happens when digital technologies impact all three drivers of digital distribution, demand and supply, and create a significant impact.

In some cases, the impact starts small and increases past a tipping point when key technologies mature so that adoption increases and cost goes down.

Understanding these concepts help companies begin their full “Digital Reinvention”

Digital disruption drivers for Uber and Netflix

Uber has disrupted the taxi transportation value chain by using digital technologies such as mobile phone Apps, geo-location capability for the “last mile distribution” of taxis to customers in a new way (clicking a button and access to larger proximity vs. waving hands to taxis in proximity).

This has increased demand by offering new customer values such as safety (reviews of drivers, location tracking), no money exchange (payment on the App enabled by digital payment technologies) and more certainty and shorter wait times (knowing when the taxi will come, access to more cars outside of immediate location).

This has also increased supply since anyone with a car that qualified could enter the market, breaking existing barriers to entry such as taxi licenses. The ability to serve the increased demand with increased supply (decreasing prices) resulted in customers capturing more value and changed their behavior.

Netflix disrupted the store-based movie rental market value chain by using digital technologies such as advent of DVDs that could be easily sent by mail as opposed to VHS cassettes, web-based online platform and a robust user interface for mailing DVDs for rent and then disrupted the movie distribution value chain by offering a streaming service, enabled by digital technologies such as a proprietary content distribution networks to serve large files, machine learning algorithms to deal with large amounts of data, cloud technologies to scale to thousands of servers and terabytes of storage within minutes and capacity improvements in Internet bandwidth and 4G (LTE) live streaming techniques to enable streaming consistently in multiple devices.

This has increased demand by offering customers new value such as convenience and speed (on-demand movie vs. going to video store in the past), access to a larger selection of movies, ability to offer recommendations based on watch history and no late fees.

This has also increased supply since barriers to entry decreased as movie producers could now bypass major film studios and online platform removed the capacity constraints of a rental store. Netflix also started adding to the supply of movies and shows by producing unique shows to increase customer stickiness on their platform.

Ripple effects of digital disruption on adjacent markets

Disruption does not just impact one specific industry. It causes ripples in other markets in the form of concentric circles. The new business model starts in one disrupted market and moves to other markets over time, impacting all the markets in the process. That is why it could be difficult to estimate the impact of a disruption in a totally different market to your industry

In the case of Uber, adjacent markets felt the impact of digital disruption in taxi transportation market. Business travelers have started to use Uber more and more instead of rental cars, decreasing demand for rental cars.

This “on-demand” service model extended far beyond transportation. It created new markets where people can get their groceries and food delivered more easily. Consumers can now even find house sitters, nannies, and hair stylists on demand and have those services delivered. These new markets offer similar significant values of convenience, trust, and options to consumers, resulting in new demand functions.

Another impact of this disruption was that the taxi market supply-side became more competitive since Uber drivers had more options to deliver on-demand services. As a result, taxi companies had more competition to recruit drivers and started offering large sign-on bonuses to new employees.

In the case of Netflix, this business model also created new markets in adjacent markets such as game rentals. Gaming distribution companies such as Steam are offering online game distribution and many other benefits to impact the demand and supply functions, like how on-demand service providers such as Instacart, Grubhub, TaskRabbit, Wag are expanding Uber model in new markets using similar technologies.

Positioning companies for digital success

“What can we do to protect our company from disruptive forces? And if disruption results in value chain changes in our market, how do we position ourselves for success?

Here are a few tips.

1 – Increase awareness on the impact of digital technologies on digital distribution, demand and supply: Review the main and adjacent markets from the perspective of demand and supply functions. Consider the disruption potential of digital technologies on the value chain. To increase awareness, start with digital disruption.

2 – Apply and scale agile practices of tech companies to drive innovation and become customer-centric: First used in software development, the application of agile practices can be applied to any industry. When aligned with business goals, creating an agile environment can help a company create new opportunities to serve customers quickly and more efficiently. Understanding and responding to customers’ needs is the biggest protection against disruption.

3 – Make the right investments in disruptive companies: Blockbuster CEO personally invested in Netflix because he saw the potential for disruption, even though he underestimated its speed. Many companies have corporate venture arms and innovation labs to invest in innovative companies. However, these organizational constructs need to be able to make big bets based on the digital disruption impact potential of start-ups to their core business and such companies are not always in the same industry.