Digital Transformation and Disruption

Digital transformation is the phenomenon of integrating digital technology into every aspect of a business, organization, or public administration, and it is happening rapidly. Digital transformation is moving the world from the physical (a world of atoms) to the digital (a world of bits). Digitalization is happening in almost every field, and businesses born out of new technologies have a competitive advantage. But for organizations with a pre-existing business model, disruption from digitalization can cause a significant loss of value.

However, trying to combat digital transformation is not the solution. Digital transformation is inevitable. It is a global phenomenon, happening at different speeds in different geographical areas and across industries. Consumers and organizations must either be a part of it or risk getting left behind.

Digital Disruption and Digital Transformation

Digital transformation is closely linked with digital disruption, which occurs when a technological innovation destabilizes a business environment and erodes the status quo. The smartphone is one such new technology that made many other technologies obsolete.

How Digital Disruption Relates to Digital Transformation

To understand the relationship between digital transformation and disruption, it is useful to contrast digital transformation with digitalization. Digitalization is the conversion of human-driven processes to software-driven processes. For businesses, this conversion can be relatively easy and it often allows the underlying business model to remain intact.

On the other hand, with digital transformation, innovation in technology fundamentally disrupts how businesses run and impacts their entire value proposition. To survive, an organization must rethink its entire operating model and adapt, incorporating new technologies and infusing digital innovation into the entire supply chain.

How Smartphones Created a Digital Disruption

Smartphones are a prime example of disruptive innovation. When smartphones accelerated in popularity in the first decade of the twenty-first century as distributed digital platforms, they caused a digital disruption to multiple pre-existing technologies and industries.

Smartphones disrupted portable media technology and navigation systems, and created massive disruptions in photography, by combining all of those abilities in a single device. And because smartphones provided crucial communication services like texting, talking, and social media, people kept them nearby at all times. By the mid-2010s, devices like MP3 players, GPS navigation devices, and digital cameras had almost disappeared.

Other Disruptive Factors Leading to Digital Transformation

However, digital disruption isn’t the only factor that can cause digital transformation. Economic, societal, and regulatory factors also create industry turbulence that influences digital transformation. The evolution of the car as a mode of personal transport perfectly illustrates all three of these factors.

Economic Factors: The Creation of Ridesharing Apps

Recent studies show that private cars in the United States are only in use around 5 percent of the time. This illustrates an economic problem: people spend money on cars just in case they need them. And while the price of buying a car remains high, the perceived value of cars is decreasing as people use them less.

So innovators created car and ridesharing services. A vehicle participating in one of these services is in use around 20 percent of the time, four times more than a private car.

And with car and ridesharing services, the owner of the shared car has an even more valuable asset because the car becomes a way to increase personal revenue. Additionally, people without cars can still enjoy getting around in one without having to worry about buying a car or paying for insurance, parking, and maintenance. All they have to pay for is the cost of the service.

Granted, innovations in technology, like smartphones and mobile apps, are also crucial to car- and ridesharing services. But the economic factors play a major role in this digital transformation.

Societal Factors: The Perception of Self-Driving Cars

Cars will continue to evolve as societal factors influence disruption. As self-driving cars become a reality in the foreseeable future, part of the disruption to the personal transportation industry will be the societal perception of self-driving cars.

Since people will no longer need to drive themselves, society may come to view self-driving cars similarly to public transportation, albeit with more convenience. With individuals no longer driving recklessly, car commercials won’t rely on amazing acceleration and adrenaline as a selling point. Instead, the value perception will shift to the car’s safety features, the comfort of the interior, and the services the user can enjoy during the trip.

Regulatory Factors: Cars and Beyond

The third factor affecting digital transformation and disruption is regulation. In the evolution of the car, regulation has been pertinent from the very beginning, with mandatory driver’s licenses and license plates. Regulation will continue to apply as digital transformation efforts continue. Safety regulations will guide the development of self-driving vehicle technology and strongly influence the prevalence of self-driving vehicles on the road.

In fact, regulatory factors influence all kinds of digital innovations. Concerns over 5G, big data, and data privacy have created regulations that have shaped the world’s digital transformation journey.

Consider the COVID-19 pandemic. In response to COVID-19, governments began regulating many behaviors in early 2020, restricting how individuals could work, learn, travel, and engage in almost every aspect of daily life. As a result of these restrictions, organizations had to accelerate digital transformation as they moved production and services to cyberspace. And these changes aren’t going away.

Digital transformation is certainly reliant on technology, but economic, societal, and regulatory factors drive it forward.

Industry Disruption Resulting from Digital Transformation

Digital transformation converts the world of atoms to a world of bits. This means moving from an economy of scarcity to an economy of abundance. Understanding this concept and how it creates a loss of value for companies and industries is crucial for adapting to digital disruption and transformation. The recorded music industry is a perfect illustration of this concept.

Loss of Value in the Music Industry

In 1995, the recorded music industry had a value of $21.5 billion from vinyl records, cassettes, and CDs—all physical products made of atoms. These products took money to create, and users paid to own them because the items were part of the economy of scarcity. The economy of scarcity exists because when an individual gives away a physical object, like a vinyl record, the original owner no longer has it.

Then in the first decade of the twenty-first century, the popularization of MP3s overturned the economy of scarcity and seriously disrupted the recorded music industry. By 2015, the value of the recorded music industry had fallen to $6.9 billion. That’s because, although MP3s still required atoms to create (recording studios) and listen to (smartphones with headphones or speakers), the MP3s themselves were based in bits.

Bits versus Atoms

Bits are so inexpensive because people can duplicate and move them at no cost and without the loss of the original. For example, sharing a song with a friend doesn’t delete it from one’s phone. Edits to bits are also low cost, and editors can still maintain copies of the original—like DJs making song remixes. This is the economy of abundance, and it’s how bits devalue all similar products based on atoms. Atoms are costly to produce, distribute, and purchase.

MP3s are so cheap and convenient for users to purchase, store, and play that they quickly made all other forms of recorded music almost obsolete. For digital natives, old forms of recorded music—like vinyl records, cassettes, and CDs—are relics of the past.

And it’s not just the music industry. Digital disruption and the resulting transformations have created the loss of value in various industries—such as how video streaming disrupted the business of movie rentals. And digital cameras have caused disruptions in the film photography industry, resulting in an $86 billion loss in value.

Some think that the lower price of bit-based technology will drive sales to the point of offsetting the decrease in price per unit. Unfortunately, this isn’t always the case, as is evident in the recorded music industry. But because digital transformation and disruption are bound to happen, organizations must adapt to survive.

The Use of Digital Platforms to Adapt to Digital Transformation

Some organizations fear digital disruption and the resulting loss of value and they try to combat it. But disruption is a reality, and society must evolve. Organizations can navigate the challenges and complexities of digital transformation by structuring a digital transformation strategy that forecasts and embraces disruptions and uses digital platforms to their advantage.

Forecasting Digital Disruption

The first way to adapt to digital disruption is to get ahead of it. Before embarking on a digital transformation initiative, organizations can attempt to forecast disruptions by monitoring political, economic, social, and technological trends and researching disruptive innovations on the horizon.

Predictions are already being made that explore post-pandemic scenarios. Businesses should stay up to date to mitigate concerns about digital disruption, then use their research to create a digital transformation strategy for their organization that takes advantage of digital platforms.

Understanding Digital Platforms

Digital platforms can take many forms, but they must have the following characteristics:

  • Have storage, processing, and connectivity capabilities
  • Be open to third-party development
  • Affirm a standard to decrease the cost of interfacing
  • Support scaling to accommodate more users and features
  • Aggregate investment to create an attraction point

For example, Smartphones are a digital platform. Self-driving cars may become a digital platform. Although the platform must operate on an atom-based device, the software and processes operate through bits.

Using Digital Platforms to Facilitate Digital Transformation

Smartphones are a great example of a now-ubiquitous digital platform. Many organizations are taking advantage of them to drive digital transformation.

For example, car and ridesharing businesses take advantage of their users’ digital platforms for almost all logistics and scheduling, via custom mobile apps. Drivers use their phones to provide their location and accept new bookings. Users can use a mobile app on their phones to order rides, get status updates, pay for the service, and review their experience.

Organizations should take advantage of the digital platforms already available to facilitate digital transformation where possible. But if a platform doesn’t yet exist for a specific purpose, organizations can create one. This is what the Provincia Autonoma di Trento did with its Open Data Initiative and what the Expo 2015 in Milan did with its digital ecosystem.

Creating a Digital Transformation Strategy

Navigating the challenges and complexities of digital transformation is industry-specific and incredibly nuanced. But organizations should first understand what digital disruption is, how it relates to digital transformation, and how it creates a loss of value in the industry. Leaders should also use research that forecasts digital disruption and transformation.

Would-be leaders must create an organization-wide, top-down digital transformation strategy. It must incorporate innovative technology at every level of the supply chain and organizational structure. Organizations should use digital platforms as a means of communication and coordination. And because disruption may lead to a loss of value in some areas of business, it is important to develop a long-term strategy that prioritizes change management and meeting the needs and expectations of customers.

Embrace Digital Transformation and Disruption

Digital disruption and transformation aren’t something to combat. Increasingly driven by economic, societal, and regulatory factors, digital transformation and disruption are inevitable as the world moves from atoms to bits.

By understanding digital transformation, organizations can prepare for the loss of value in their industries. And by creating a digital transformation strategy, they can prepare to evolve, becoming stronger than before.

To learn more about digital transformation, take IEEE Learning Network’s course with Roberto Saracco, “Understanding Digital Transformation: The Key Concepts.”

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