What is digital transformation?

Tibetans and the adaptive strategy of markets

Tibetans have an incredible tolerance to high altitudes, and this can teach us an important business lesson on the importance of digital transformation.

On the 4000m high Tibetan tableau, there is around 40% less oxygen than at sea level. Under such conditions, a regular human being like you or me would experience altitude sickness:

You get tired fast.
Start to feel dizziness.
You can’t breathe.
You get a headache.

Tibetans, on the contrary, don’t have these problems. At all.

Both professional athletes and regular people living in high altitudes would normally adapt to these conditions by increasing their blood cell counts (higher blood cell count means more oxygen transportation to your body’s tissues). For instance, indigenous people in the Peruvian Andes do show a higher blood cell count. So would you, if you started a progressive training schedule running in high altitudes for several weeks.

But not Tibetans or sherpas. In their case, they have the highest expression levels for a gene called EPAS1 in the world. The EPAS1 gene contributes to regulating anaerobic and aerobic metabolism. It provides a more optimal way of adapting to high altitudes, and this allows Tibetans to easily walk on a 4000m-high landscape.

According to scientists, “EPAS1 may therefore represent the strongest instance of natural selection documented in a human population”.

The process of natural selection is similar to business survival through strategy and transformation. Some comparisons that we can apply:

– Species adapt their genetic code to survive the challenges of their environment –> Organizations adapt to survive to challenges of the markets (e.g: changes in consumer behaviour, new technologies or regulations).
– Natural Selection –> Market selection (e.g: popular examples such as Kodak or Blockbuster).
– Genetic Mutations –> Business transformation to adapt (e.g: Netflix started as a mail-based rental business and later transitioned to streaming).

The critical difference between genetic adaptation (evolved over thousands of years) and business adaptation and transformation needs?

Digital transformation today is extremely fast, happening every several months.

Origins of digital transformation

Organizations need to adapt and transform themselves constantly.

This is a response to changing market conditions. It will always remain like this. New technologies, competitors entering an industry, disruption or political shifts, to name a few examples. Change is the only constant.

When it comes to the “digital” aspect though, we could say that this digital transformation trend started in the 1990s.

Pre-Internet Era (1950-1989)

This is the time where the foundational “hardware” blocks of future digital technologies were created: expansion of global trade led to manufacturing of microchips, processors, semi-conductors and eventually the personal computing industry and all its devices.

Post-Internet Era (1990-2006)

Organizations started to use digital technologies to transform manual processes, automate tasks, reduce costs and adapt workflows. This is the era of the PC (Personal Computer), the Internet and websites boom. It was also when the creation of Google or Amazon took place.

Smartphone Era (2006-2019)

A clear turning point in this era was the invention of the iPhone by Apple. This led to a massive shift to mobile-first consumer behaviour, software as the cornerstone of modern businesses and cloud computing. It was the Salesforce, SAP or Amazon Web Services (AWS) era. This is the time where digital transformation was at its highest popularity. Organizations all over the world invested millions to become digital-first.

Post-pandemic Era (2020-2022)

The pandemic era gave rise to remote-first communications and contactless business operations. There was a rush to become as digital as possible as an adaptation to the changing environmental restrictions and forced shifts in consumer touchpoints. Examples are Zoom calls, online teaching, the metaverse discussion or streaming platforms such as Twitch.

Generative AI Era (2022-present)

On November, 30th 2022, OpenAI released ChatGPT. This was a generative artificial intelligence chatbot that went down in history as the fastest application to reach 100 million users (it did so in just two months).

Although the AI boom started earlier (in the 2010s) and OpenAI had already been working on generative pre-trained transformer technology (GPT) for a long time, the general sentiment and consensus is that the release of ChatGPT in 2022 was the turning point of this generative AI era.

Digitization, Digitalization and Digital Transformation

In a popular article written by Jason Bloomberg, he defined the differences between these 3 processes for organizations to gain competitive advantage and digitally transform their business:

1. Digitization
   This means translating existing data in analog format (e.g: paper) into digital data. For instance, the financial department of an organization uses paper invoices to process accounting. Digitization would mean scanning all those papers to store them as images or PDF files on a computer. An important point here: you are not transforming a business process, just the format of information.
2. Digitalization
   Digitalization goes one step further. According to Gartner’s definition, as cited by Bloomber’s article itself, “Digitalization is the use of digital technologies to change a business model and provide new revenue and value-producing opportunities,”. That is, using digital technologies (e.g: cloud-based services such as AWS or Salesforce) to transform business operations and ways of working.
3. Digital Transformation
   Organizations might carry out several digitalization projects. For example, migrating your Hubspot CRM to Salesforce Sales Cloud, or moving one business process from manual workflows to an automated process using an ERP. Your org can implement lots of these individual projects (even grouped within digital programs).However, Digital Transformation goes beyond that and cannot be boxed into one program or project. Digital transformation will typically include digital programs of digitalization, but it is a strategic and transversal, org-wide transformation. That is, a change across all departments, processes, staff and work culture, including leadership. It is a fundamental strategy change to adapt to future changes in how your business delivers value to customers end-to-end.

Why transform your business?

As we’ve seen before, genes evolve over millenia to adapt to constant changes in the environment. They do this to survive and adapt to changing conditions. In other words, to deal with survival uncertainty.

Organizations need to deal with uncertainty too, today more than ever. Running a succesful business that delivers value to customers and keeps its market share and competitive advantage, all while enduring the passing of time, is such an incredible (and rare) feat.

Below are some common scenarios where organizations face survival uncertainty and might end up going out of business:

Incumbents and the Innovator’s Dilemma

The popular book “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” by Clayton Christensen highlights a common irony that haunts incumbents and innovation.

Some big companies are first born as innovative disruptors, targeting niche markets. This is a well-known business strategy: when trying to penetrate a market, focusing on a specific segment to gain a competitive advantage is better than trying to compete with well established players.

These small companies keep innovating and improving their core value delivery with a series of technological innovations, product enhancements and efficiency gains, where they capture more and more market share, keeping healthier and healthier margins. Eventually though, they end up focusing on their best paying clients and highest margin opportunities.

However, this can leave a crack in the wall. By focusing on the highest paying customers, they neglect smaller segments and potential shifting consumer needs. These underserved small niches, in turn, are ripe for new “disruptors” to come into play and repeat the cycle: delivering to those segments, improving their core value proposition, until they might end up taking over a considerable large part of the incumbents’ market share.

Nassim Taleb and the concept of antifragility

Nassim Taleb is a Lebanese-American mathematical statistician, risk analyst and essayist. He is one of the most brilliant minds alive today when it comes to understanding randomness, probability, uncertainty and complexity. Taleb is also a well-known author, having published best-seller books such as “Fooled by Randomness”, “The Black Swan” or “Antifragile: Things That Gain From Disorder”.

In “Antifragile: Things That Gain From Disorder” (2014), Taleb explains the concept of antifragility comparing it to fragility: something fragile is something that does not benefit from volatility (e.g: changes, stressors). A glass of wine is fragile: any wrong movement, strength applied or mishandling would easily break it. It does not like stressors or volatility.

On the other hand, something antifragile is the opposite and does benefit from disorder and stressors. It thrives and improves thanks to stressors.

Let’s go back to Tibetans’ gene adaptations. By being exposed to a stressor (lack of oxygen, high altitude), the human body does not break but grows and responds in a non-linear way (it develops mechanisms to cope with the stressor, be prepared for more of them in the future and it also makes adaptations). Same applies to muscles when you work out and lift heavy weights.

Taleb’s thesis, in a nutshell, would conclude that in an uncertain and highly volatile world, the safest economic strategy is to try to be as antifragile as possible: protect yourself from downside (fragility) while at the same time, try to benefit and improve from external changes and events (volatility).

This is closely related to the concept of Digital Transformation. According to Taleb’s ideas, what an enduring business should aspire to is antifragility. Not resilicency. Notice the difference between the two:

• Resilient: a system which is tough and able to recover from difficulty or damage.
• Antifragile: a system that increases in capability to thrive and improve as a result of stressors or difficulty.

An example of business antifragility would be Zara’s fashion supply chain.

Zara’s supply is based on short-feedback loops (normally 1-2 weeks). For that reason, volatility and changes improve its responsive capability to meet customer demands quickly and learn from trend shifts.

Another example would be an Agile methodology when trying to design new products and services. By embracing an MVP philosophy, running lots of fast experiments and apparent failures, an organization can gain faster insights and benefit from those low-downside mistakes or negative outcomes.

Competition and business scope lines are blurred today

As stated by S. Gupta in “Driving digital strategy : A guide to reimagining your business”:

“your business’ competitors are no longer defined by traditional industry lines”.

For instance, can we really define what business Amazon is in? What are the competitors of Amazon Prime Video? are they the same competitors as those of Amazon Web Services (AWS)? Not quite. One could argue that Amazon has dozens of categories of competitors.

Digital Transformation, in this case, is what Jeff Bezos decided to embrace when they entered the cloud computing industry. Expanding the business scope of your organization (either doing it yourself or leveraging existing ecosystems and partners) is adapting to future uncertainty. You deliver value to other segments and untap new opportunities to diversify revenue sources.

Leveraging collaboration networks

Digital Transformation often unlocks more agile communication among employees, departments, Business Units and also providers and any external third parties.

This is related to the previous item of blurred competition lines.

By improving communication and collaboration flows, the organization can leverage shared knowledge, creativity and new ideas. This has a multiplicative effect, and it helps fight uncertainty: more ideas, creativity, knowledge co-creation = more value that the organization can create for its strategic advantage in the market.

Beyond Agile Efficiency Gains

Digital Transformation programs often involve agile methodologies to be internalised across the whole organization. Workflows are optimized, processes are transformed and ways of working change in order to gain efficiency.

However, that’s the most mainstream concept of digitalization in order to automate tasks and be more agile. There’s a more important aspect of technology to note here, as mentioned by Sangeet Paul Choudary in his book “Reshuffle: Who wins when AI restacks the knowledge economy”.

“In any economic system, the most significant economic breakthroughs don’t come from making individual parts move faster. […] True transformation occurs when everything moves in harmony […] This is the difference between making components better and making them work better together. Both matter, but the most important advances come from coordination“.

That’s again the difference between Digitization, Digitalization and true Digital Transformation. Digital Transformation only works if the whole system is transformed and aligned.

Automating one simple task might improve the performance of that component, but it can lead to wasted bottlenecks at the next step of the value chain or waiting times that cost money: “An overemphasis on optimization, paradoxically, can actively break down whatever coordination exists today, making the entire system less reliable”.

Higher quality decision making and AI with data

Although it has been present for many, many years now, one of the highest value drivers in today’s economy (today more than ever perhaps) is data: making better, faster and more informed decisions based on having the right data.

Digital Transformation often includes the management and usage of that company data. Typically, via Business Intelligence (e.g: Reporting, Dashboards), Big Data (e.g: Machine Learning, Data Visualization) and Business Analytics (e.g: Regression).

Endless data applications, methodologies and practices are available today for businesses to leverage that data in many ways.

Data is also the foundational feed for AI Large language models (LLMs) such as Claude, ChatGPT or Gemini to operate. It is no surprise that the company Salesforce has made such an evident strategy and value proposition shift towards their Customer Data Platform (CDP) product Salesforce Data Cloud and their recent Agentforce platform: enterprise AI Agents will retrieve this data as input so that they can produce and work with accurate outputs.

Second and third-order effects on ROI

The impact of improving a task or business process seems simple at first. You can calculate how much time that process takes and how much money it costs the business to keep doing it manually.

Migrating from one MAP tool to a better suited one might seem obvious as well. You can reduce license costs, expand features available to end-users or have a more robust toolset to address better and more complex customer journeys.

However, all these ROI gains are first-order effects. The true magic of digital transformation lies in its expansive and exponential potential.

By automating a business process that costs your organization 500.000 EUR per year, you are obtaining a positive ROI. Yet, as Sangeet Paul Choudary points out in “Reshuffle: Who wins when AI restacks the knowledge economy”:

“Compounding is about scale; cascading effects drive scope expansion. The first breakthrough may look like cost savings, but the second creates new industries. […] With each solved coordination problem, new layers of activity are unlocked and the system’s scope expands”.

By automating 100 tasks, you’re expanding what the same number of employees can accomplish and you’re also changing the way the organization operates, which in turn can have multiplicative network effects on more agile knowledge sharing, being able to serve other parts of the value chain and ultimately, expand the value that the business drives for customers.

The benefits of digital transformation for organizations

As you may have noticed from the previous section, the benefits of Digital Transformation, if performed correctly, can be many.

Below is a summary recap of some of the most common ones for most organizations:

Customer Experience (CX)

Delivering value to customers and improving their CX should be the main obsession of every business.

Digital Transformation programs are aimed at improving this customer experience by, for instance:

• Enhancing existing products and services.
• Untapping new business opportunities by developing new ones.
• Deploying innovative ways of creating touchpoints throughout the customer lifecycle.
• Communicating with customers on new channels.
• Leveraging hypersonalization in customer communications.

Operational Efficiency

Within the organization, Digital Transformation programs lead to not only automation, as we said above, but also second and third-order effects in the value chain and its coordination. Some of the main benefits here are:

• Cost savings.
• Manual task automation.
• Gained efficiencies in existing workflows for optimized operational costs.
• Streamlined processes and more agile operations.
• Improved productivity.

Better Employee Collaboration and Satisfaction

Digital Transformation can often benefit employees in many ways:

• More flexible ways of working.
• Better internal network communications, unified collaborating and knowledge sharing.
• Improved employee participation and empowerment.
• Improved productivity by adopting agile methodologies.
• Expansion and transformation of employees’ tasks and scope.

Strategic Advantage

In the same way species that adapt via genetic mutation get to surive more in natural selection, businesses that implement ongoing Digital Transformation can gain strategic and competitive advantages to fight market uncertainty.

Some examples, related to the points mentioned in the previous section of this article:

• New business scope and revenue source opportunities.
• Second and third-order strategic advantage ROI effects.
• Better, faster and more informed strategic decisions.
• Enhanced and expanded existing competitive advantage.
• Accelerated business growth.
• More antifragile organizations.

Challenges of digital transformation

It seems obvious that Digital Transformation can have many benefits.

There are many well-known examples and case studies of how organizations have thrived thanks to the right digital strategy and programs.

However, it would not be fair to only point out the potential upside. There are also challenging aspects of Digital Transformation that need to be taken into consideration. In particular, I’d like to make an emphasis on 3 that are not so often discussed:

Survivor Bias and failure data points

A 2009 article written by Jason Cohen (four-time entrepreneur across 25 years, both bootstrapped and VC-funded, current CIO of WP Engine) highlights the importance of not taking business advice at face value.

• Survivor Bias = drawing conclusions or principles only from the data that is available, ignoring the 99% of the remaining, unavailable data.

For instance, in enterprise business advice, we often get to only hear or read about the famous success stories of thriving companies:

Zara
Amazon
Google
Apple

Papers are written on their innovation and digital strategy success. Case studies are analysed by thousands of MBA students every year.

Yet, this can be a skewed and biased analysis because we do not read about all the other 99% of businesses that do not make it (and all the business advice and learnings we could gain from that data).

In Jason Cohen‘s words, “could failure contain more lessons than success?”. Paraphrasing Steven Levitt (Freakonomics) on business advice books, he cites:

“These business books are mostly backward-looking: what have companies done that has made them successful? The future is always hard to predict, and understanding the past is valuable; on the other hand, the implicit message of these business books is that the principles that these companies use not only have made them good in the past, but position them for continued success.”

This is why Digital Transformation itself cannot (and should not) aspire to bulletproof an organization 100% on its own. If done correctly, it should, however, be based on a deep and thorough understanding of the current strategic analysis of each company, to help the business drive positive ROI and become more antifragile, in Nassim Taleb‘s terms.

Using propietary data and data-proven frameworks, with the right expertise and experience in the industry (based on both success and failure data points) is crucial here, to learn from both the award-winning cases but also from lessons learned along the way where things did not go so well.

Evaluating IT Innovation Waves

Generative AI
Customer Data Platforms
Datalakes
Blockchain
AI Agents

IT Innovation waves hit the market continuously. Faster and faster every day.

CIOs often face the challenge of keeping up with all these overwhelming innovations. What’s more, decisions at an enterprise level are critical, so making the right assessment of these technologies becomes a high-stakes judgement call. It is then crucial that CIOs understand how IT Innovation waves work so that the right Digital Transformation strategy is in place.

E. Burton Swanson (an American information scientist, and Professor Emeritus of Information Systems at the UCLA Anderson School of Management) wrote “The Manager’s Guide to IT Innovation Waves”, where he provides a framework for managers and executives to detect IT Innovation waves and assess whether an organization should adopt them and when to do so.

Although his framework is very thorough and would be best analysed in a dedicated, separate article, here you have a summary of the article (paraphrased for simplicity from E. Burton Swanson‘s article).

There are 4 stages that every IT Innovation wave goes through:

1. Attention
   This is where the wave of innovation starts. Here, the innovation is still trying to gain attention momentum. This is a very early stage.
   The focus here should be on adjusting the attention that your organization (and yourself) should pay to this new trend.
2. Adoption
   Companies are starting to adopt this technology. They may announce that they will adopt it or the vendor might make such an announcement, publish press releases, etc. The focus here should be on assessing the impact and progress of this adoption.
3. Implementation
   This is the stage where companies are carrying out an actual implementation of the technology. The focus for the executive here should be on analysing gaps between announced adoptions and actual implementations, learning from the initial implementation frustrations, evaluating the existing agencies offering these professional services, etc.
4. Value
   This is the phase where actual companies who have implemented the technology are driving positive ROI from it. Focus here should be on real case studies with positive outcomes, analysing the success stories published, evaluating if the promised ROI was achieved or not (and why not), etc.

While surfing these IT Innovation waves and stages, there are some questions a CIO can ask themselves when presented with a new IT Innovation wave or IT trend. The responses to these 5 questions will often correlate with the different maturity stages of the wave, as described above:

1. Does this technology have more than 1 name or definition?
   For instance, take CDP for Customer Data Platform, as opposed to technology where the market does not seem to agree 100% on a specific definition yet. Clearly defined and agreed on naming = more mature technology.
2. Is there competition? 
   Several providers offering that technology indicate that the wave is more mature and reliable, gaining momentum. For example, a CRM is nowadays a very mature technology, with plenty of providers in the industry (e.g: Salesforce, Hubspot).
3. What does this technology do?
   If you read and hear a lot about this technology and after your research you still cannot describe what it does in a simple way, the market is likely to feel the same about its purpose and use. Very obscure and hard to explain its value = less mature.
4. What case studies and business stories do you read and hear about it?
   The more case studies and success stories you can find about implementations of the technology, the better and more mature the wave is. E. Burton Swanson points out the importance and relevance of “horror stories” too, as they indicate the difficulty of early implementations.
5. Have other companies made a commitment to this technology?
   As an enterprise CIO, you will not risk implementing a technology that no other companies have decided to buy and implement yet. For example, Salesforce is a very mature technology because its market share in the CRM space has been outstanding over a long time, and there is nowadays a huge ecosystem of implementation partners. This is a very positive sign of maturity and proof of value.

Change Management and Company Culture

Last but not least, change management and company culture play a crucial role in Digital Transformation programs.

Human > Machine

No matter how sophisticated, innovative and exponential the technology applications might seem for an organization. On paper, a digital strategy can be “the” one thing that the company needs to transform itself and become more competitive. Yet, human beings, with our emotions, desires, resistance to change, politics and subjective interpretations, will always have the last word and highest impact on the final outcome.

Here are some common aspects that need special attention during any digitalization project or digital program, as highlighted by Cristina Batarseh Mancha, Noemí Fortón Moix and Pere Suau-Sanchez in “Estrategia en transformación digital” (English: “Digital Transformation Strategy”):

• Top-down sponsorship and commitment from leadership. Both C-level and middle managers must be aligned and involved for the program to be successful. If the right business alignment is in place, leadership will be fully onboard with the need to drive this transformation, they will understand the ROI and impact on the Balanced Scorecard, etc.
• Truly understanding customer needs. This means the needs of not only the external customers of your company (e.g: how to deploy hyperpersonalization based on customer insights or apply omnichannel marketing based on digital behaviour), but the internal ones as well (= your employees, the ones using the technology on a daily basis).
• Having and selecting the right talent. From the CIO to middle managers or local champions of the program, having the right people in the right positions is key (e.g: motivation to drive change, coordinate others, having the right digital skills, effective leadership, influence within the company, etc).
• Change management throughout the entire program, not only until execution is finalised. Effective collaboration is essential: defining change management strategies and actions, communicating the transformation and its vision to all employees, involve the staff from day one, be open to ongoing feedback, plan and execute the necessary training sessions, go beyond usual trainings to deliver QA and reinforcement upskilling, etc.

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