Digital transformation: definition, meaning and tips for companies

The most important facts at a glance

• Digital transformation requires not only technological adjustments, but also a comprehensive cultural and organizational change within a company in order to make processes and business models more efficient and competitive.
• The main objectives of digital transformation are to develop new digital products and business models, optimize existing products to improve customer loyalty and increase internal efficiency by digitizing business processes.
• Successful digital transformations, such as those of Lego, Netflix and the Port of Hamburg, show that companies that rely on digital technologies strategically and at an early stage can significantly increase their competitiveness.

Definition of "transformation"

The word "transformation" comes from the Latin "transformatio", which means "transformation" or "metamorphosis". It is made up of "trans-" (across, over) and "formare" (to form, shape).

Transformation refers to a fundamental change or transformation in the structure, form or function of a system, process or object. In business and management, the term transformation refers to comprehensive changes within an organization that aim to improve processes, structures and strategies in order to increase efficiency and adapt to new market conditions.

Definition of "digital transformation"

Digital transformation means using the digital possibilities of today to bring about a fundamental change in the company in order to produce better products for the customer and thus become more successful as a company itself.

Digital transformation is an ongoing process of change that is being driven by increasingly powerful digital techniques and technologies in business and society. In contrast to mere digitalization, which only describes the automation and flexibilization of existing business processes, digital transformation encompasses complex social change and the integration of digital technologies and solutions into all areas of a company. This process is fundamentally changing the value chain and the structures of companies and society as a whole.

Digital transformation goes beyond the mere use of technology. It requires a fundamental adjustment of the business model and a willingness to think outside the box. Digital transformation initiatives are aimed at designing more efficient and competitive business processes or creating new business models.

Goals of the digital transformation

The main objectives of digital transformation are diverse and include both external and internal aspects.

Company aims to achieve this:

1. Developnew digital products, services and business models to respond to changing customer needs and open up new market opportunities. (External)
2. Use digital technologies to improve existing products and increase customer loyalty or acquire new customers. (External)
3. Internally, the focus is on increasing efficiency by optimizing business processes, i.e. to reduce costs and increase productivity.

1. new digital products, services and business models (external)

Digitalization opens up numerous opportunities for companies to develop new business models and digital products. Uber has replaced the traditional cab, Airbnb is one of the largest "hotel operators" without running a single hotel of its own, the Product Masterclass is replacing traditional product management training with digital online coaching, hairdressers are now finding customers via Google Maps, Netflix has revolutionized DVD rental, ShareNow has created a new way to rent cars, the list is long and goes through all business areas.

New business models enable companies to better adapt their offerings to the needs of customers and take advantage of new market opportunities. Agility plays a decisive role in the development of new digital products and services. Companies must be able to quickly test the relevance of their products with customers and develop iterative, hypothesis-driven business models. A good example of this is the Experiment Tracker, which helps organizations to systematically test and successfully introduce new business models, products or functions.

By combining speed and performance, companies can adapt more quickly to changes in the digital world. A successful business model describes how a company delivers value to its customers and retains a portion of that value for long-term profitability. Companies must continuously develop innovative solutions to remain competitive and meet changing customer demands.

2. digitize existing products to increase customer loyalty or acquire new customers (external)

Companies use digital technologies to improve existing products and services and increase customer loyalty. A good digital "product mindset" is of crucial importance here. Digitalization makes it possible to change the way customers search for and communicate information, thus improving the overall impact on marketing, sales and service.

Today, every company is digital, or has competitors that make full use of the digital possibilities of digitization. As a result, virtually every company is forced to go digital.

In order to increase customer loyalty, companies must consistently focus on customer needs and make comprehensive use of knowledge about customers and their behavior. Good digital expertise (DX) helps to improve customer service and ensure consistent customer interaction across all platforms.

3. digital transformation to increase efficiency (internal)

Increasing internal efficiency is a key aspect of digital transformation. By using digital technologies, companies can optimize their business processes and increase productivity. Two important levers for increasing efficiency are reducing costs and increasing productivity.

Some examples of increased efficiency are the use of:

• Smart meters that enable optimization of grid and resource monitoring and control and significantly reduce daily electricity consumption. These control systems are also available for heating systems in professional building technology and, thanks to companies such as Tado and Bosch, also in the consumer goods sector.
• IoT sensors in production facilities that replace manual inventory checks. Companies such as Konux use IoT sensors to optimize railroad infrastructure, transport companies optimize their routes by constantly comparing their location with current traffic data, and insurance companies offer cheaper rates if a sensor is carried in the car.
• AI-supported analyses for adapting marketing campaigns, AI-supported verification of damage reports in the insurance industry, AI-supported resource planning in industry. The list of efficiency gains through digital transformation goes on and on.

These measures help to increase efficiency.

The importance of digital transformation in today's business world

Digital transformation is crucial for companies to remain competitive and adapt to changing market conditions. Companies need to rethink and modernize their operating and business models to succeed in the digital economy. The focus is no longer on whether companies need digitalization, but on how quickly they can implement the digital transformation.

The market situation has changed fundamentally and companies are facing new competitors such as Amazon, Google and agile start-ups that are shaping the digital business. In order to remain economically successful, companies must continuously respond to new customer requirements and take advantage of growth opportunities. Growing customer expectations include the permanent availability of companies and consistent service across all channels.

The COVID-19 pandemic has significantly accelerated the digital transformation in many companies. Companies that had already integrated digital processes and technologies were able to adapt more quickly to the new challenges and continue their business activities. Digital processes also offer potential for cost reductions and better resource planning through technologies such as machine learning and artificial intelligence.

Drivers of the digital transformation

Technologies such as artificial intelligence (AI), the Internet of Things (IoT) and big data are the main drivers of digital transformation. These technologies enable companies to gain new insights and optimize processes by analysing large volumes of data. Big data, AI and machine learning form the core partnership for business and digital transformation to drive predictive planning and responsive automation.

Mobile technologies such as smartphones and tablets are changing working models and require adaptations to meet the needs of tech-savvy employees. Hybrid cloud solutions combine the advantages of on-premise and cloud IT infrastructures and are necessary due to the spread of mobile and IoT technologies. Devices and machines in an IoT network can send and receive digital data, which can optimize performance and efficiency. In this context, technology plays a crucial role.

AI-powered business systems continuously analyze information for patterns, trends and correlations to provide detailed and accurate analysis for businesses. These technologies help companies to identify foreseeable bottlenecks in network capacity and improve their business processes.

Examples of successful digital transformations

Successful companies such as Lego, Netflix and the Port of Hamburg have modernized their business models and increased their competitiveness through digital transformation.

These examples show how different industrial sectors can benefit from the integration of digital technologies.

Lego

Lego has implemented a new enterprise system that has significantly improved data exchange throughout the company. This change has enabled the company to adapt more quickly to customer requirements and develop innovative digital enhancements for its products. One notable example is the combination of physical Lego sets with mobile apps that challenge children to solve problems.

The digital transformation turned Lego from near bankruptcy into a global success. Implementing a new technology infrastructure and focusing on core business processes led to a significant increase in EBITDA margin and impressive sales with the first Lego movie. This transition enabled Lego to establish a culture of continuous improvement and make data-driven decisions.

Lego recognized the importance of digitalization early on and made it one of the company's four strategic priorities. These initiatives helped the company to optimize its production processes and promote a global collaborative culture.

Netflix: From DVD rental to streaming giant

Netflix began as an online video store that sent DVDs by post, but quickly recognized the opportunities offered by the internet. Faced with increasing competition and changing media consumption, Netflix decided to transform their business model and switch to streaming services. This decision was the key to its success and led to an unprecedented period of growth.

Netflix's digital transformation strategy focused on producing its own content in order to stand out from the competition and retain customers through exclusive offers. At the same time, the company used data-driven algorithms to create personalized recommendations and improve the user experience. This level of personalization and the constant expansion of its offering helped Netflix to achieve a strong market position.

The results of this transformation are impressive. Since the launch of the streaming service, Netflix's share value has risen by 6,230 %. Today, the company is a global giant with a market capitalization of almost 145 billion dollars. Netflix has shown how a bold and well-executed digital transformation can lead to sustainable success.

Port of Hamburg: Smart Port Logistics

The Port of Hamburg, one of the largest and most important ports in Europe, has revolutionized its logistics processes through the use of IoT sensors and digital systems. These technologies enable real-time monitoring and management of logistics, leading to a significant improvement in efficiency.

The digital transformation has enabled the Port of Hamburg to reduce congestion, increase the speed at which goods are handled and shorten waiting times. Real-time information is passed on to truck drivers and other road users to ensure seamless coordination between different modes of transport. These measures have made the Port of Hamburg a pioneer in the use of digital technologies for logistics.

The most important fields of digital transformation

Strategy & Management

The direction and leadership of a company into the digital future is the responsibility of top management. Flexibility and speed of implementation are essential in a rapidly changing digital landscape, but traditional structures can hinder this agility. Positions such as Chief Digital Officer (CDO), Chief Technical Officer (CTO) and Chief Information Officer (CIO) play a crucial role in driving digital transformation.

These managers are responsible for developing and implementing digital strategies that affect the entire company. They must ensure that the corporate culture is open to change and that all employees are involved in the transformation process. Only in this way can the digital transformation be implemented successfully and sustainably.

Customer orientation

Customer orientation is a central element of digital transformation. The customer experience is crucial to the success of a brand. It encompasses all interactions between the customer and the brand. Companies must meet customer expectations for seamless and personalized interactions across different channels.

Digital platforms, including social media, play a crucial role in this, as they enable networked value creation and help companies to position themselves strategically in their own ecosystem. One example of this is Netflix, which analyzes user data to create intelligent recommendations for films and series. By intelligently networking information, the brand experience can be improved and the customer fully understood.

Product and service innovations

The development of new products and services in the digital transformation is being driven by new digital, technological possibilities. Companies are using advanced analytics and automation to develop innovative products and services. Artificial intelligence and machine learning play a central role in this.

One example of the use of data-driven systems is Rewe, which uses these technologies to optimize stock levels and orders. By continuously innovating and adapting to new technologies, companies can always offer their customers the best products and services and ensure their competitiveness.

Challenges in the digital transformation

The digital transformation brings with it numerous challenges. One significant obstacle is the cultural resistance to change within the company. In addition to the implementation of new technologies, digital transformation requires far-reaching changes to the company's culture, processes and workflows. This resistance can significantly delay or even prevent the implementation of the transformation.

Another major problem is the talent shortage and skills gaps. Companies often struggle to find skilled workers with the necessary digital skills. This is particularly critical, as qualified employees are central to a successful transformation.

Data security and the protection of privacy are also essential challenges. Data breaches and cyber attacks can seriously damage a company's reputation. Companies must therefore ensure that their digital systems are secure and comply with legal requirements.

Success factors for the digital transformation

A positive and innovative corporate culture is an important success factor for digital transformation. Companies must embrace change and successfully integrate new digital strategies. This also includes involving and supporting existing staff in order to strengthen digital skills.

A well-positioned management team is crucial for the success of the digital transformation. Agility and the integration of business processes play a central role in the implementation. A strong partner ecosystem supports the success and sustainability of the transformation.

Data analysis is another key success factor. By using data intelligently, companies can adapt and continuously improve their strategies. This helps to boost efficiency and increase customer satisfaction.

How the Product Masterclass can support you in your digital transformation

The Product Masterclass supports companies and employees in the digital transformation on two levels.

Developing new products with the "New Product" Masterclass

We have many years of experience with intrapreneurship programs and supporting teams in new product development. To this end, we have developed a 12-week program in which we support in-house teams in iteratively testing and developing new business models.

Improve existing products with the Product Masterclass

The Product Masterclass helps product managers and product teams to optimize existing products. In the 8 weeks of the Product Masterclass, we show with the support of 4 coaches how first-class digital products are created, using numerous examples and case studies from successful companies. Participants go through the process from customer to product discovery and internal stakeholder alignment to roadmap and implementation and learn tools, tactics and methods to create excellent digital products.

Summary

Digital transformation is a comprehensive and ongoing process that affects all areas of a company. It requires a fundamental change in business models, processes and corporate culture. Successful companies such as Lego and Netflix show how the integration of digital technologies can lead to sustainable success.

It is crucial to recognize and proactively tackle the challenges of digital transformation. A clear vision, the involvement of employees and the use of advanced technologies are key success factors. Companies that implement these principles are well equipped to remain competitive in the digital economy and be successful in the long term.

Frequently asked questions

What is the difference between digitalization and digital transformation?

The main difference is that digitalization is the conversion from analogue to digital with the help of technology, while digital transformation is the complete redesign of business processes and models. Ultimately, digital transformation is a more holistic process than digitalization.

What is digital transformation?

Digital transformation is an ongoing process in which digital technologies are used to optimize business processes and develop new business models. It integrates digital technologies into all areas of the company.

Why is digital transformation important?

Digital transformation is important in order to remain competitive and respond to market changes and customer needs. It is crucial for the long-term success of a company.

What challenges does the digital transformation entail?

Digital transformation brings challenges such as cultural resistance, talent shortages, integration of legacy systems, data security and high upfront costs. These need to be carefully considered to ensure successful transformations.

Which success factors are crucial for digital transformation?

A positive corporate culture, a strong leadership team, agility, data analysis and a strong partner ecosystem are crucial for the success of digital transformation. Ultimately, these factors play a decisive role in the successful implementation of digital transformation.

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