How to Build a Digital Transformation Strategy

Digital technology has been unsettling markets and disrupting businesses and industries for more than two decades. However, many business leaders are still struggling to understand and deploy disruptive technologies, and manage the cultural and market-related changes they are bringing about.¹ A number of enterprises have started out on the digital journey without realizing that this journey needs to be at the heart of their entire business strategy. They end up applying legacy strategies and outdated principles to their digital programs, resulting in a capped delivery of the digital business, frustration, and failure. Crucially, digital strategy is not separate from business strategy. Today, simply having digital technology is necessary to compete in the market. Thus digital should form the backbone of an organization’s competitive strategy.²

A broad definition of digital transformation can be seen as the integration of digital technologies with business processes to improve an organization’s performance or reach. However, a more progressive view of digital transformation is that technology can impact a business in three ways: ³

• Externally, or customer-focused, with a view to use digital to improve the customer experience, and potentially change the entire customer life cycle of the business
• Internally, or operationally, where digital and technology impact on business operations, decision-making and potentially the structure of the business
• Holistically, where every function and segment of the business is affected, often leading to an emergence of completely new business models

The best place to start your digital transformation journey is first to establish a vision with the needs of your customers at its heart, but that also includes the needs of employees, shareholders, and other business stakeholders. Research and choose technologies, infrastructure, resources, and expertise – whether internal or external – that will help you achieve that vision. Alter practices both internally and externally as suits that vision, and create a culture that fosters continuous innovation.⁴

The current state of digital transformation in business

A recent survey by Deloitte found that businesses are certainly aware of the urgency of digital transformation: 80 percent considered digital capabilities a key differentiator in their industry, while 65 percent said companies that didn’t transform in the next five years could face demise. Crucially, digital maturity emerged as a marker of business resilience, with 39 percent of highly digitally mature organizations saying that digital initiatives helped them weather the challenges of the COVID-19 pandemic, compared to 27 percent of median maturity. Higher digital-maturity companies were also twice as likely as lower-maturity ones to report annual revenue growth and net profit margins well above their industry averages.⁵

A similar survey by Gartner found more than two-thirds of boards had accelerated their digital initiatives in response to the pandemic. It also revealed the growing influence of the chief information officer (CIO) in organizations: ⁶

• 66 percent increased strength of CIO-CEO relationship
• 70 percent CIOs taking control of high-impact initiatives
• 80 percent CIOs educating CEOs and other senior stakeholders on the importance of new technologies

How to build a digital strategy

Digital transformation is not only for large corporations; even medium-sized enterprises are starting to feel the pressure to evolve. Regardless of the size of an organization, successfully implementing digital transformation involves a host of challenges, including:⁷

• Failure to address inertia by accounting for the disruption to employees, including their job security, skills rotation, and mindset
• A lack of digital savvy among top leadership, including CEOs and chief experience officers
• Ineffective organizational change management means company culture and structure may not be sufficiently aligned with the objectives of digital transformation
• Not having implemented modern business processes such as agile development, DevOps, and iterative deployment
• A mismatch between ambition and capabilities, which need to be assessed carefully so projects can be scaled appropriately
• Confusing digital optimization with digital transformation – the former improves existing processes and business models, while the latter involves a holistic reassessment of how a company uses its resources

Despite the many challenges, it’s worth building digital into your business strategy. Although the return on investment (ROI) varies from business to business, the common, overarching benefits include increased efficiency and productivity, better resource management, improved customer engagement, increased agility and responsiveness, and quicker time to market.⁸

Implementing a digital business transformation strategy

A digital strategy provides businesses with the framework they need to effectively use their digital tools. However, it’s important to understand that when a business is digital, all strategies should be digital. This way of thinking opens organizations up to new opportunities and areas of competitive advantage. It also helps guide technology investment and budgeting, which should be seen as a core function of business strategy, rather than just the scope of the IT department. Bear in mind that digital technologies – including data and analytics platforms, artificial intelligence (AI), trend detectors, and dynamic scenario tools and simulators – can help organizations develop, test, and monitor their strategies.⁹

Given the importance and complexity of the process, organizations should follow these steps to help them achieve digital transformation success:¹⁰

1. Align on the reasons for digital transformation. Business goals and needs, rather than technology, should lead the discussion, so identify short-, medium-, and long-term goals, then start looking for ways to achieve these.
2. Be prepared for culture change. Develop a culture of understanding and learning beyond top management, all along the value chain, and be prepared to handle resistance to change.
3. Take a small but strategic first step. Try starting with initiatives that show results within six months or less. By proving ROI through these programs you’ll build momentum for other, longer projects.
4. Develop a clear technology roadmap. This will help you identify which technologies you already have and which need to be developed or acquired from partners.
5. Find the right partners. These should have the necessary expertise but also complement and understand your business. Look towards building long-term relationships.
6. Define KPIs, evaluate, and refine where necessary. Create a feedback loop so all parties learn as the strategy develops, and be agile enough to adjust it according to your results.
7. Scale and transform. Look for opportunities to apply similar strategies to existing locations as well as connect additional technologies to existing ones.

A useful framework to determine whether transformation complements your existing key business processes is the Matrix of Change, a tool developed by Brynjolfsson, et al.¹¹ This matrix allows you to input ideas for your business and assists in critiquing the proposed digital transformation, such as incorporating AI, machine learning, and neural networking, for example. It also reveals whether these digital platforms will ultimately enhance or conflict with existing processes. As with many business process transformations, multiple components of a new system interact with each other, which can make it complicated to implement them in isolation. This matrix helps determine the feasibility of the proposed changes, the ideal speed of execution of these changes, and the optimal sequence of changes and can help ensure the implementation of these changes is adopted successfully in the business.¹²

The five stages of digital strategy implementation

Once you are ready to launch and accelerate the digital transformation process, understanding your present stage in that process can help guide your strategic imperatives. These stages can be conceptualized as people, data, insights, action, and results.¹³

Stage 1: People

People lie at the heart of any business, and it’s with them that digital transformation should begin. People connect with clients, consumers, and other employees, in the process gathering information about them. For a small business with only a few clients or staff, people are capable of processing this information, albeit in a potentially unreliable manner.¹⁴

Stage 2: Data

The larger your organization or the more complex and unpredictable your business interactions, the more you’ll want to scale and replicate the information you have. Technology makes this possible through digitization – converting analog data into a digital format so it can be widely and easily accessed.¹⁵

Stage 3: Insights

Data is only really useful if you can clean and sift through it for valuable insights. This requires systematic modeling in the form of data analytics. Models can be tested through predictions, enabling iteration and improvements.¹⁶

Stage 4: Action

Establishing which insights are actionable requires you to consider how they align with your priorities, how they relate to solving business problems, their novelty, and whether or not they can be clearly communicated.¹⁷ Once these have been considered, you need a plan to turn them into actions, along with the skills, processes, and change management to effect that plan.¹⁸

Stage 5: Results

Evaluating the results of your actions reveals information that must be added to your original data. In this way you can create a feedback loop of continuous iteration and improvement.¹⁹

An evolving business model

Be prepared for potential shifts in your business model at the introduction of a digital strategy, as digital transformation can impact your business model in three different ways: ²⁰

Value creation

Digital transformation enables organizations to create greater value through products and services in a number of ways. These include extending product lines and services, understanding customers better and tailoring offerings to their needs, promoting a disruptive sharing economy approach, and the creation of digital platforms that allow for easier connection and access to services.²¹

Value delivery

The processes involved in delivering value to consumers have been impacted too. Companies are developing their core knowledge to become more digitally savvy. They’re introducing new capabilities to address the evolving value chain and business ecosystem. They’re innovating across their processes and activities to be more sustainable and cost effective, and are reassessing their positions in their respective industries.²²

Value capture

Digital transformation is changing revenue streams and cost structures. Big data is enabling companies to optimize processes and improve decision-making, while new technologies are permitting enhanced levels of service and personalization.²³

If you hope to build a successful digital strategy in your business without changing the fundamentals of the business, your efforts may be futile. Building digital into your business strategy isn’t about building a digital business, but about transforming your entire business. Implementing a digital strategy is not just about digital innovation, but more about rethinking the way your business can operate with digital tools. Understanding this is the foundation of a successful digital strategy for your business.

Hone your strategic understanding of digital innovation in the Digital Business Strategy: Harnessing Our Digital Future online course from MIT Sloan School of Management. This six-week course takes a unique approach to finding a balance between traditional methods and new ways companies can harness transformative technology to improve best practices.