ArticlePDF Available

Digital Transformation Strategies

September 2015
Business & Information Systems Engineering 57(5):339-343

DOI:10.1007/s12599-015-0401-5

Authors:

Christian Matt

University of Bern

Thomas Hess

Ludwig-Maximilians-Universität in Munich

Alexander Benlian

Technical University of Darmstadt

In recent years, firms in almost all industries have conducted a number of initiatives to explore new digital technologies and to exploit their benefits. This frequently involves transformations of key business operations and affects products and processes, as well as organizational structures and management concepts. Companies need to establish management practices to govern these complex transformations. An important approach is to formulate a digital transformation strategy that serves as a central concept to integrate the entire coordination, prioritization, and implementation of digital transformations within a firm. Despite first research efforts and the frequent challenges encountered in practice, academia still lacks specific guidelines for firms on how to formulate, implement, and evaluate digital transformation strategies.

The digital transformation framework

…

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*** This is a working paper version of the article: ***

Matt, C.; Hess, T.; Benlian, A. (2015): Digital Transformation Strategies, Business and In-

formation Systems Engineering, 57(5), 339–343,

http://link.springer.com/article/10.1007/s12599-015-0401-5.

Digital Transformation Strategies

Christian Matta, Thomas Hessa, Alexander Benlianb

Institute for Information Systems and New Media

Ludwig-Maximilians-Universität München, Ludwigstr. 28,

80539 Munich, Germany

e-mail: matt@bwl.lmu.de; thess@bwl.lmu.de

Chair of Information Systems & E-Services

Technische Universität Darmstadt, Hochschulstraße 1,

64289 Darmstadt, Germany

e-mail: benlian@ise.tu-darmstadt.de

Keywords: Digital transformation framework, cross-functional strategy, digital technologies

1 Background and Basic Understanding

In recent years, firms in almost all industries have conducted a number of initiatives to ex-

plore new digital technologies and to exploit their benefits. This frequently involves transfor-

mations of key business operations and affects products and processes, as well as organiza-

tional structures and management concepts. Companies need to establish management prac-

tices to govern these complex transformations. An important approach is to formulate a digital

transformation strategy that serves as a central concept to integrate the entire coordination,

prioritization, and implementation of digital transformations within a firm. We define digital

transformation strategies and differentiate them from related concepts, describe their main

elements as parts of a general framework, and show opportunities for further research in this

field.

The exploitation and integration of digital technologies often affect large parts of companies

and even go beyond their borders, by impacting products, business processes, sales channels,

and supply chains. Potential benefits of digitization are manifold and include increases in

sales or productivity, innovations in value creation, as well as novel forms of interactions with

customers, among others. As a result, entire business models can be reshaped or replaced

(Downes and Nunes 2013). Owing to this wide scope and the far-reaching consequences, a

digital transformation strategy seeks to coordinate and prioritize the many independent

threads of digital transformation. Owing to their company-spanning characteristics, they cut

across other business strategies and should be aligned with them (Figure 1).

Fig. 1 Relation between digital transformation strategy and other corporate strategies

While there are various concepts of IT strategies (Teubner 2013), these mostly define the cur-

rent and the future operational activities, the necessary application systems and infrastruc-

tures, and the adequate organizational and financial framework for providing IT to fulfill

business operations within a company. Hence, IT strategies usually focus on the management

of IT within a firm, with only a narrow impact on driving innovations in business develop-

ment. To some degree, this constricts the product-centric and customer-centric opportunities

that arise from new digital technologies, which often cross firms’ borders. Further, IT strate-

gies present system-centric roadmaps on the future uses of technologies in a firm, but they do

not necessarily account for the transformation of products, processes, and structural aspects

that go along with the integration of technologies.

Digital transformation strategies take on a different perspective and pursue different goals.

Coming from a business-centric perspective, they focus on the transformation of products,

processes, and organizational aspects owing to new technologies. Their scope is more broadly

designed and explicitly includes digital activities at the interface with or fully on the side of

customers, such as digital technologies as part of end-user products. This depicts a clear dif-

Corporate strategy

Operational strategy

(Products, markets,

processes)

Functional strategy

(Finance, Human Resources,

IT, …)

Digital transformation strategy

ference to process automation and optimization, since digital transformation strategies go be-

yond the process paradigm, and include changes to and implications for products, services,

and business models as a whole.

Similar to the previous discussion on the alignment between business strategies and IT strate-

gies (Henderson and Venkatraman 1993), it is critical to get a close fit between digital trans-

formation strategies, IT strategies, and all other organizational and functional strategies. Re-

search has addressed this issue and has sought to consolidate IT strategies and business strate-

gies into a comprehensive “digital business strategy” (Bharadwaj et al. 2013). Digital business

strategies often discuss the possibilities and the effects of digital technologies for firms. For

instance, Oestreicher-Singer and Zalmanson (2013) shed light on the connection of content

and community, and prove that community-based digital business models can create profita-

ble revenue streams in times of ‘freemium’ business models. Drnevich and Croson (2013)

show how IT can impact on a firm’s business-level strategies and its capabilities. Therefore,

while digital business strategies often describe desired future business opportunities and strat-

egies for firms that are partly or fully based on digital technologies, they do typically not in-

clude transformational insights on how to reach these future states. In contrast, a digital trans-

formation strategy is a blueprint that supports companies in governing the transformations

that arise owing to the integration of digital technologies, as well in their operations after a

transformation. Despite first research efforts and the frequent challenges encountered in prac-

tice, academia still lacks specific guidelines for firms on how to formulate, implement, and

evaluate digital transformation strategies.

2 Two Perspectives on Digital Transformation Strategies

Strategic planning refers to the process of defining a strategy as well as deciding on the re-

sources that are allocated to pursue a strategy – as the means to achieve firms’ goals. While

procedural aspects govern the development, implementation, and evaluation of digitization

strategies, owing to their novel character, one first needs to define which content aspects digi-

tal transformation strategies should consist of. The following four key elements and the

framework are the result of preliminary works, including literature analysis and multiple case

studies and interviews.

2.1 The Four Dimensions of Digital Transformation Strategies

Independent of the industry or firm, digital transformation strategies have certain elements in

common. These elements can be ascribed to four dimensions: use of technologies, changes in

value creation, structural changes, and financial aspects. We will outline these four corner-

stones of a digital transformation strategy are explained in some detail. The use of technolo-

gies addresses a company’s attitudes towards new technologies as well as its ability to exploit

these technologies. It therefore contains the strategic role of IT for a company and its future

technological ambition. A firm needs to decide whether it wants to become a market leader in

terms of technology usage with the ability to create own technological standards, or whether it

will resort to already established standards and sees technologies as means to fulfill business

operations. While being a technological market leader can lead to competitive advantages and

can create the opportunity of other firms becoming dependent on one’s technological stand-

ards, it might be more risky and requires certain technological competences. From a business

perspective, the use of new technologies often implies changes in value creation. These con-

cern the impact of digital transformation strategies on firms’ value chains, i.e. how far the

new digital activities deviate from the classical – often still analog – core business. While

further deviations offer opportunities to expand and enrich the current products and services

portfolio, they are often accompanied by a stronger need for different technological and prod-

uct-related competencies and higher risks owing to less experience in the new field. The digit-

ization of products or services can require or enable different forms of monetization, or even

adjustments to firms’ business scope, since other markets or new customer segments are now

addressed. With different technologies in use and different forms of value creation, structural

changes are often needed to provide an adequate basis for the new operations. Structural

changes include variations in a firm’s organizational setup, especially concerning the place-

ment of the new digital activities within the corporate structures, but also whether it is mainly

products, processes, or skills that are affected most by these changes. If the extent of the

changes is fairly small, it might be more reasonable to integrate the new operations into exist-

ing corporate structures, while for more substantial changes, it might be better to create a sep-

arate subsidiary within the firm. However, the former three dimensions can only be trans-

formed after considering financial aspects. These constitute both a firm’s urgency to act ow-

ing to a diminishing core business and also its ability to finance a digital transformation en-

deavor; financial aspects are both a driver of and a bounding force of the transformation.

While lower financial pressure on the core business may reduce the perceived urgency to act,

companies already under financial pressure might lack external ways to finance a transfor-

mation. Therefore, firms should openly and timeously confront the need to conduct digital

transformations and explore their options.

To ensure the successful rollout of a digital transformation strategy and fully exploit its in-

tended effects, it is essential to closely align the four different dimensions use of technologies,

value creation and structural changes, and financial aspects. Figure 2 illustrates the dependen-

cies between the different dimensions as part of the Digital Transformation Framework

(DTF), which supports firms in the assessment of a firm’s current abilities and the formulation

of a digital transformation strategy.

Fig. 2 The digital transformation framework

2.2 Procedural Aspects of Digital Transformation Strategies

Owing to its wide scope, digital transformation is a continuous complex undertaking that can

substantially shape a company and its operations. It is therefore important to ensure adequate

and clear responsibilities for the definition and implementation of a digital transformation

strategy. If a digital transformation strategy is approached half-heartedly, firms may lose their

scope and may encounter operational difficulties. Companies should therefore ensure that the

person who is operationally responsible for the digital transformation strategy has sufficient

experience in transformational projects and directly align his or her incentives with the strate-

gy’s targets and progress. To date, there is no clear answer on which senior manager should

be in charge of a digital transformation strategy. In addition to CIOs or even CEOs, potential

candidates include dedicated business transformation managers or the fairly new role of the

Chief Digital Officer (CDO). Given the longer duration of the transformational processes, this

should preferably be one and the same person over time. Further, beginning with the initial

planning phase, top management support is essential along the whole transformation process,

since digital transformation strategies affect the entire company, and there may therefore be

resistance in different areas of the company. To deal with such resistance, transformation

leadership skills are essential and require the active involvement of the different stakeholders

affected by the transformations.

Use of

technologies

Changes in

value

creation

Financial

aspects

Structural

changes

Besides adequate staffing for both the initial phase and further implementation, firms need to

find procedures for formulating, implementing, evaluating, and – if necessary – adapting digi-

tal transformation strategies. This can be a complex endeavor, and experts from inside and

outside the company might be needed as additional support. Further, since diffusion of digital

technologies can change swiftly, there typically is high uncertainty concerning the digital

transformation strategies’ underlying assumptions. Hence, digital transformation strategies

should be subject to continuous reassessment, in which both the underlying assumptions as

well as the transformational progress to date are evaluated. To ensure that early actions can be

taken if expectations are not met, clear procedures on the reassessment of digital transfor-

mation strategies are needed. This not only concerns the intervals between reassessments, but

also the definition of procedures and measures to evaluate intermediate progress and thresh-

olds upon which corrective actions can be taken. Such methods are important to ensure man-

agement credibility and to avoid decision-making biases, for instance if large sunk costs im-

pede the willingness to counter-steer.

3 Further Research Opportunities

While the basic foundations on digital transformation strategies have been laid, there are vari-

ous opportunities for further research, which can be divided into at least three different topics.

3.1 Elements and Success Patterns of Digital Transformation Strategies

The Digital Transformation Framework describes the cornerstones of the transformation

along four dimensions. Future research should seek to further identify and concretize common

elements that are attributable to these four dimensions. This pertains in particular to the dif-

ferent attributes companies could adopt for each of these elements. Empirical insights could

help comparing digital transformation strategies across different industries to assess common-

alities as well as differences, so as to increase success rates. One key question relates to the

optimal extent of digitization that a firm should achieve, since higher use of digital technolo-

gies may not always be desirable (Grover and Kohli 2013). Future research should analyze

whether a firm’s size or the extent to which its core products can be digitized have different

influences in this respect. Likewise, it is of high interest whether successful patterns for B2C

companies differ from those of B2B companies.

Further, digital transformations are often accompanied by changing skill sets that are neces-

sary for the transformation itself, but also for regular operations thereafter. This sourcing issue

appears to be both difficult and essential. While current staff members may have a different,

less tech-savvy mindset and may lack the required technological capabilities to cope with the

upcoming changes, new, highly skilled, and focused staff members might be difficult to find,

given the particular location of a firm. Research could support firms by providing guidance on

the assessment of their existing technological capabilities and on procedures to weigh up their

current options, but also on the design of training procedures for current employees and new

hires.

3.2 Procedural Aspects and Responsibilities

Owing to limited empirical evidence, ambiguity about conventions on how to formulate and

reassess digital transformation strategies remains. This is reinforced by the high uncertainty

that results from swift technological changes and makes necessary adjustments to the digital

transformation strategy at a later stage more likely. This calls for concrete recommendations

for procedures on the continuous refinement of digital transformation strategies, such as how

to observe and evaluate technological developments and how to test their impacts in con-

trolled environments within the company. Other key questions include the desired extent of

digital transformations and the granularity as well as the temporal extent of digital transfor-

mation strategies, which could vary from swift, one-time actions to multiple successive pro-

jects.

In addition to the definition of procedural aspects, further insights are required to solve ques-

tions of responsibilities, particularly related to the new CDO role officer in the planning and

deployment of digital transformation strategies (Horlacher and Hess 2014). Owing to the

cross-functional characteristics and the far-reaching scope of a digital transformation strategy,

a dedicated CDO might be useful to take responsibility for digital transformation strategy

(CIO 2013). Research should analyze the necessity for a dedicated CDO position in greater

detail and should formulate guidelines for the definition of this new role. For companies em-

ploying both a CIO and a CDO, research should provide recommendations for the concrete

alignment between both; such research can build upon prior research on CIO-CEO alignment

(Johnson and Lederer 2010).

3.3 Integrating Digital Transformation Strategies into Firms

As noted, digital transformation strategies have a cross-functional character and need to be

aligned with other functional and operational strategies. However, the alignment of IT strate-

gies with other strategies has remained a difficult and controversial endeavor. Given the rather

recent appearance of digital transformation strategies, further evidence is needed on how this

alignment can be conducted in practice – not only related to IT strategies but also from an

organizational perspective. In this respect, the interaction of digital transformation strategies

with business development and business models also needs to be assessed from a responsibil-

ity perspective. Since digitization strategies cut across various other strategies at the same

time, complex coordination efforts might be needed. Research should provide guidelines for

firms to help structure these processes in order to achieve shared goal-setting, the alignment

of different strategies, and cooperation between various people and entities throughout a firm.

4 References

Bharadwaj A, El Sawy OA, Pavlou PA, Venkatraman N (2013) Digital Business Strategy: Toward a Next

Generation of Insights. MIS Quart 37 (2):471-482

CIO (2013) Why the Chief Digital Officer Role Is on the Rise.

http://www.cio.com/article/743421/Why_the_Chief_Digital_Officer_Role_Is_on_the_Rise?p

age=1&taxonomyId=3123.

Downes L, Nunes PF (2013) Big-Bang Disruption. Harvard Bus Rev 91 (3):44-56

Drnevich PL, Croson DC (2013) Information Technology and Business-Level Strategy: Toward an

Integrated Theoretical Perspective. MIS Quart 37 (2):483-509

Grover V, Kohli R (2013) Revealing Your Hand: Caveats in Implementing Digital Business Strategy. MIS

Quart 37 (2):655-662

Henderson JC, Venkatraman N (1993) Strategic Alignment: Leveraging Information Technology for

Transforming Organizations. IBM Syst J 32 (1):4-16

Horlacher A, Hess T (2014) Der Chief Digital Officer. MedienWirtschaft - Zeitschrift für

Medienmanagement und Kommunikationsökonomie 11 (3):32-35

Johnson AM, Lederer AL (2010) CEO/CIO Mutual Understanding, Strategic Alignment, and the

Contribution of IS to the Organization. Inform Manage 47 (3):138-149

Oestreicher-Singer G, Zalmanson L (2013) Content or Community? A Digital Business Strategy for

Content Providers in the Social Age. MIS Quart 37 (2):591-616

Teubner RA (2013) Information Systems Strategy. Bus Inf Syst Eng 5 (4):243-257

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Full-text available

Jul 2012

The content industry has been undergoing a tremendous transformation in the last two decades. We focus in this paper on recent changes in the form of social computing. Although the content industry has implemented social computing to a large extent, it has done so from a techno-centric approach in which social features are viewed as complementary rather than integral to content. This approach does not capitalize on users’ social behavior in the website and does not answer the content industry’s need to elicit payment from consumers. We suggest that both these objectives can be achieved by acknowledging the fusion between content and community, making the social experience central to the content website's digital business strategy. We use data from Last.fm, a site offering both music consumption and online community features. The basic use of Last.fm is free, and premium services are provided for a fixed monthly subscription fee. Although the premium services on Last.fm are mainly aimed at improving the content consumption experience, we find that willingness to pay for premium services is strongly associated with the level of community participation of the user. Drawing from the literature on levels of participation in online communities, we show that consumers’ willingness to pay increases as they climb the so-called ‘ladder of participation’ on the website. Moreover, we find that willingness to pay is more strongly linked to community participation than to the volume of content consumption. We control for self-selection bias by using propensity score matching. We extend our results by estimating a hazard model to study the effect of community activity on the time between joining the website and the subscription decision. Our results suggest that firms whose digital business models remain viable in a world of “freemium” will be those that take a strategic rather than techno-centric view of social media, that integrate social media into the consumption and purchase experience rather than using it merely as a substitute for offline soft marketing. We provide new evidence of the importance of fusing social computing with content delivery and, in the process, lay a foundation for a broader strategic path for the digital content industry in an age of growing user participation.

The big idea: Big Bang disruption

Article

Jan 2013

Information Technology and Business-Level Strategy: Toward an Integrated Theoretical Perspective

Article

Jun 2013

Information technology matters to business success because it directly affects the mechanisms through which they create and capture value to earn a profit: IT is thus integral to a firm's business-level strategy. Much of the extant research on the IT/strategy relationship, however, inaccurately frames IT as only a functional-level strategy. This widespread under-appreciation of the business-level role of IT indicates a need for substantial retheorizing of its role in strategy and its complex and interdependent relationship with the mechanisms through which firms generate profit. Using a comprehensive framework of potential profit mechanisms, we argue that while IT activities remain integral to the functional-level strategies of the firm, they also play several significant roles in business strategy, with substantial performance implications. IT affects industry structure and the set of business-level strategic alternatives and value-creation opportunities that a firm may pursue. Along with complementary organizational changes, IT both enhances the firm's current (ordinary) capabilities and enables new (dynamic) capabilities, including the flexibility to focus on rapidly changing opportunities or to abandon losing initiatives while salvaging substantial asset value. Such digitally attributable capabilities also determine how much of this value, once created, can be captured by the firm--and how much will be dissipated through competition or through the power of value chain partners, the governance of which itself depends on IT. We explore these business-level strategic roles of IT and discuss several provocative implications and future research directions in the converging information systems and strategy domains.

Revealing your hand: Caveats in implementing digital business strategy

Article

Jun 2013

Digital business strategies (DBS) offer significant opportunities for firms to enhance competitiveness. Unlike the large proprietary systems of the 1980s, today's "micro-applications" allow firms to create and reconfigure digital capabilities to appropriate short-term competitive advantage. In the quest to provide value to customers through digitization, such applications can be efficiently deployed. However, we propose that in the long-term not all digitization is desirable. Indiscriminate digital initiatives through the use of micro-applications by a firm could "reveal its hand" to competitors and erode competitiveness. We propose that a firm's DBS must balance its system--software, process, and information--visibility with the ability to appropriate value from such systems. Through a visibility-value framework, and examples drawn from practice, this article illustrates the tradeoffs involved in making these choices as the firm traverses a dynamic business environment. In doing so, it raises sensitivity to an important caveat in digital environments epitomized by hyper-competition and transparency.

Information Systems Strategy

Article

Aug 2013
BUS INFORM SYST ENG+

Rolf Alexander Teubner

The paper depicts the current state of IS strategy research with the aim of identifying research needs as well as appropriate ways to study IS strategy in the future. To this end, the paper introduces the results of an extensive analysis of academic literature on IS-strategy. In addition, it sheds light on current practice as uncovered in case-study research and through in-depth interviews with IS strategy professionals. A comparison reveals that the issues prevalent in practice and the ones traditionally focused on in the academic debate on IS strategy often vary considerably. A conspicuous attempt to fill this is the so-called “Strategizing” framework put forward by Robert Galliers. This framework, which is receiving increasing attention in the current academic debate, calls for a practice turn in IS strategy research in that it treats strategy as something people or, more precisely, IS strategists do. In addition, by identifying the challenges and problems IS strategists are faced with, the framework intends to better reflect the new planning conditions which are often seen as characteristics of the information age. The framework distinguishes three general problem domains of IS strategizing: exploration, exploitation, as well as implementation and change management.

Strategic Alignment: Leveraging Information Technology for Transforming Organizations

Article

Jan 1993
IBM SYST J

It is cleaaar that eventhough information technology (I/T) has evolved form its traditional orientation of administrative support toward a more strategic role within an organization, there is still a glaring lack of fundamental frameworks within which to understand the potential of I/T for tomorrow's organizations. In this paper, we develop a model for conceptualizing and directing the emerging area of strategic management of information technology. This model, termed the Strategic Allgnment Model, is defined in terms of four fundamental domains of strategic choice: business strategy, information technology strategy, organlzational infrastructure and processes, and information technology Infrastuvture and processes--each with its own underlying dimenslons. We illustrate the power of this model in terms of two fundamental characteristics fo strategic management: strategic fit (the interrelationships between external and internal components) and functional Integration (integration between business and functional domains). More specifically, we derive foru perspectives for gulding management practice in this Important area.

CEO/CIO mutual understanding, strategic alignment, and the contribution of IS to the organization

Article

Apr 2010
INFORM MANAGE-AMSTER

Mutual understanding between the CEO and CIO is thought to facilitate the alignment of an organization's IS with its business strategy, and thereby enhance the contribution of the IS to business performance. A survey of 202 pairs of CEOs and CIOs was taken to investigate the relationships between them. Mutual understanding was measured as the role of IS in the organization, using the perspectives of both executives. Strategic alignment was measured as the fit between the CEO's assessment of eight STROBE dimensions and the CIO's assessment of the analogous STROEPIS dimensions; both the CEO and CIO evaluated IS contribution. Mutual understanding of the role of IT led to seven alignment dimensions whereas six alignment dimensions led to IS contributions. Our study extended the theory of IT strategic alignment and provided direction for CEOs and CIOs interested in improving the IS contribution of their organization.