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Digital Business Transformation and Strategy: What Do We Know So Far?

Authors:
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Digital Business Transformation and Strategy:
What Do We Know So Far?
Mariam H. Ismail, Mohamed Khater, Mohamed Zaki
While many companies are experimenting with digital transformation,
recent studies of success stories have shown that the enhanced
competitive positioning of successful firms does not depend solely on the
technologies they adopt, but, more importantly, builds on the strategies
that their leaders deploy. Nonetheless, there is still a wide gap between
executives’ intentions and the realization of successful digital
transformation initiatives and the consequent need to demonstrate the
embedded strategic considerations. To help managers through the
formulation and implementation of their firms’ digital transformation
strategies, this article 1) consolidates the current state of the literature
regarding business-level digital transformation to understand its origins
and roots; 2) synthesizes findings regarding the context, content and
strategy process of digital business transformation; 3) adds novel insights
regarding the positioning of digital transformation; and 4) reveals the key
characteristics that distinguish it from previous technology-enabled
transformations.
INTRODUCTION
Digital transformation (DT) is becoming a prime topic for firms across the globe (Von
Leipzig et al. 2017; Kane et al. 2015; Kaufman & Horton 2015; Fitzgerald et al. 2013). It is
anticipated that companies that are unable to adapt to the digital world will undoubtedly
fall victims to
“digital Darwinism”,
where incumbents may disappear and only the most
adaptable enterprises, responsive to technological trends, will survive to remain on the
competitive landscape (Schwartz 2001). Yet, the history of companies’ technological
advances has been plagued with failed attempts that focus solely on technologies
without taking broader strategic decision areas into account (Kane et al. 2015). Currently,
there are many examples of organizations unable to keep pace with the new digital era
and managers still lack clarity about the strategic considerations in their digital
transformation endeavors (Hess et al. 2016; Matt et al. 2014).
From an academic viewpoint, digital transformation per se is a rather fragmented field as
a result of the existence of multiple and diverse areas of investigation, such as the digital
transformation of societies, industries, economies and individuals. Recent work related to
digital business transformation has predominantly focused on investigating its
challenges, drivers and the failures of previous attempts. Although the pivotal role of a
dedicated strategy has been recognized in the literature stream, it is still in its infancy,
requiring more in-depth work to fully comprehend how the transformation can be
achieved (Kulatilaka & Venkatraman 2001; Yoo et al. 2010; Matt et al. 2014; Hess et al.
2016). Exploring digital business transformation from a strategic point of view should
therefore enhance the academic literature with valuable insights and also aid leaders in
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grasping the recent developments and underlying strategic building-blocks of the
transformation that they are attempting.
Thus, our goal in this paper is to consolidate the research that focuses on the company
perspective. Through this process, we aim to: 1) review and consolidate the current body
of knowledge regarding business-level digital transformation to understand its origins
and roots; 2) further hinge the examination of business-level transformation on a strategy
perspective and examine it from a strategic management point of view by exploring the
content, as well as the process, of a digital transformation strategy; 3) position digital
transformation in the context of previous technology-enabled transformations; and 4)
identify its key distinctive features. Although this narrowed approach (company
perspective) is partially restrictive, it allows better comprehension of one perspective of
the phenomenon, possibly assisting in establishing connections and linkages with the
wider scope of the field.
To do so, we organize the paper as follows: first, we start by introducing the different DT
perspectives encountered in the literature. Continuing with the company perspective, we
present varying definitions found in the literature and introduce our working definition
regarding digital business transformation. Next, we continue by describing our
methodology and illustrate the framework designed to guide this research. Finally, we
summarize our synthesis into diagrams and discuss our findings.
DIGITAL TRANSFORMATION PERSPECTIVES
The digital transformation phenomenon has been explored widely in different academic
domains, resulting in a crude overview of the field. In this section, we present the
different digital transformation perspectives encountered in the literature before
positioning this review within the field.
An unrefined search for academic publications using the keyword
“digital
transformation”
yields thousands of articles, which examine the phenomenon from
various perspectives, as grouped in Figure 1. While they are represented as distinct
perspectives, they also sometimes overlap. They will be briefly touched upon next.
Figure 1: Digital Transformation Perspectives in the Literature
Company/
Institutional
Individual
Industry/ Ecosystem
Social/ Economic
Era
Network
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From a digital era perspective, DT stresses the fundamental change in our world due to
the pervasive nature and proliferation of digital technologies (Anderson & Lanzolla 2010).
Arguably, we have reached the
fourth industrial revolution
, which builds on the
preceding three but uses new digital technologies with “full force”, whereby both the
development and diffusion of innovations are much faster than before (Schwab 2016). A
new global world economy, characterized by dynamism, customization and intense
competition, is developing and the cornerstones for succeeding in it involve embedding
knowledge, technology and innovation into products and services (Atkinson 2005).
Additionally, the novel concept of a circular or sharing economy is shifting the linear
take–make–dispose model of resources to a model where flows of materials, energy,
labor and new information interact and promote a restorative, regenerative and more
productive economic system (Schwab 2016). The industry perspective highlights how the
disruptive nature of digital technologies has revolutionized the way that industries
operate and how the traditional boundaries between them have dissolved. In recent
years, manufacturing has gained popularity with the introduced concepts of “Industry
4.0”, “smart factories” and “advanced manufacturing”, which seek to enable industry to
navigate its way through digitalization through the use of cyber-physical systems in the
production network and service-orientation in traditional industries (Lasi et al. 2014; Blau
& Gobble 2014). New technologies have also accentuated the changing network
dynamics from the center of organizations to accommodate digitally engaged customers
at the edge, where consumers and communities co-create value in a digital ecosystem
(Gray et al. 2013). Value network competition is another research area for academics, who
seek to explore how IT affects overlapping, as well as non-overlapping, networks
(Evangelos Katsamakas 2014). The need for transformation is also a clear business reality,
which occurs in all industries and impacts companies of all sizes and shapes (Basole 2016).
It is no surprise that “90% of business leaders in the U.S. and U.K. are expecting IT and
digital technologies to make an increasing strategic contribution to their overall business
in the coming decade” (Hess et al. 2016). DT is also exhibited in the
“extended self”,
where technological changes dramatically affect the way in which individuals present
themselves and communicate. Five crucial changes resulting from the digital age have
been conceptualized in the literature (Belk 2013):
de-materialization
of possessions in the
form of photos and videos;
re-embodiment
of our physical bodies into pictures and
videos;
sharing
more with the help of digital devices;
co-constructing
the sense of self
through digital enablers such as social media and blogs; and a
distributed memory,
where human memories are outsourced to engines and hard drives. This individual level
of digital transformation allows an exponential increase in digital data volume, revealing
a huge amount of information floods that often bypass intentionally constructed barriers.
Thus, researchers have recommended ways of managing the super-transparency of
people in our world today (Austin & Upton 2016). We have shown the different
perspectives explored in the literature and will continue to focus on the company
perspective based on its importance in our new market reality, as evidenced in the
introduction.
GUIDING DEFINITIONS
A key question is whether digital transformation, as a topic, is really new. Early work on
business transformation seeks to integrate multiple long-lasting concepts within the
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strategy and information systems (IS) literature. We trace the roots of digital
transformation back to the 1990s when initial work on business transformation was
developed, and continue to illustrate its development across these two domains.
Business Transformation
“Transformation” became a catchphrase for a variety of practices and organizational
outcomes in the 1990s (Muzyka et al. 1995). An early attempt to define business
transformation at a conference organized by the Corporate Renewing Center at INSEAD
resulted in a two-dimensional concept: “A fundamental change in organizational logic,
which resulted in or was caused by a fundamental shift in behaviors” (Muzyka et al. 1995;
McKeown & Philip 2003). Building on this broad definition, Muzyka et al. (1995) cluster
transformation concepts into four constructs:
Re-engineering
:
improving overall organizational efficiency while only partially
addressing the better engagement of the workforce;
Restructuring:
improving efficiency without necessarily improving the
organizational ability to achieve its long-term goals and opportunity capturing;
Renewing:
gaining improved efficiency, effectiveness and innovativeness through
employee empowerment without a clear focus on the desired results;
Regeneration
:
improving existing processes and fundamentally revisiting the
direction and portfolio of available opportunities.
All of the above-mentioned types of transformation create tensions in norms and
behaviors between old competencies and present and future challenges. The 1990s
additionally linked business transformations to the strategy field, with Prahalad and
Oosterveld (1999) describing it as the invention of strategies and management processes
that must be driven by new ideas, a new concept of opportunities. Based on their
experience they share a number of lessons that they have learned about business
transformation. First, it must involve the entire organization, with top managers changing
the worldview of the organization. It must also deal with deeply embedded values and
beliefs and requires a new set of skills to be built at all levels. Finally, it must be coupled
with new management processes, including performance evaluations, rewards, career
management, product development and logistics. The strategy link has also been
established in recent years: McKeown and Philip (2003) consider a business
transformation to be “an overarching concept encompassing a range of competitive
strategies which organizations adopt in order to bring about significant improvements in
business performance”. These strategies include business process re-engineering,
organizational development, total quality management and the use of information
technology. More importantly, technology has been identified as a key internal
dimension aiding organizations in transforming. In fact, the role of new information and
communication technologies has been widely recognized because of their rapid
development and diffusion, resulting in triggering business transformation
considerations within organizations (Morgan & Page 2008). The so-called technology-
enabled transformation will be explored next.
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IT-Enabled Transformation
The IS domain has extended the concept of business transformations with its vigorous
investigation of the competitive potential of information technologies and their role in IT-
enabled transformations (Venkatraman 1994). These transformations are often perceived
as a change caused by a transformational information technology, where the
transformational power of IT must be exhibited in at least three of the following
dimensions: processes, new organizations, relationships, user experience, markets,
customers and disruption (Lucas et al. 2013). Many authors have established
transformation rules and criteria that fit with an IT-enabled one. For example, Dehning et
al. (2003) suggest that information technologies are transformational if they
fundamentally alter traditional ways of doing business by redefining capabilities,
processes and relationships. They should also involve strategic acquisitions in order to
acquire new capabilities or to enter a new market. Finally, the use of IT should
dramatically change how tasks are carried out and enable firms to operate in different
markets, serve different customers and ultimately gain considerable competitive
advantage. Similar to business transformations, Gouillart and Kelly (1995) further
categorized IT-enabled transformations into four transformation constructs:
Reframing the company’s view of itself and the perception of the business;
Restructuring the internal configuration of the organization to allow for more
flexibility;
Revitalizing the organization along its value-chain alignment with marketplace
opportunities; and
Renewal of people-based issues in regards to skill improvement.
In an attempt to integrate the work of several authors on IT-enabled transformations,
Morgan and Page (2008) propose four phases through which organizations progress.
They build on one another and increase in risk and gains, as companies advance through
them. These phases consist of adapting, where selected activities are automated,
evolving, where ICT alignment is created, envisioning, where the business network
process is redesigned and, finally, renewing
,
where the business scope is reframed.
Digital Transformation
Multiple perceptions of digital transformation emerge in the literature. The idea of a
digital transformation arises from the blending of personal and corporate IT
environments and encapsulates the transformational effect of new digital technologies
such as social, mobile, analytics, cloud and the Internet of Things (SMACIT) (White 2012;
Kane et al. 2015; Sebastian et al. 2017). A broad definition describes it as the integration
of digital technologies and business processes in a digital economy (Liu et al. 2011). A
similar wide-ranging view regards it as the use of technology to radially improve the
performance or reach of enterprises (Westerman et al. 2014). A more detailed perception
views digital transformation as the use of these technologies to impact three
organizational dimensions: externally, with a focus on digitally enhancing the customer
experience and altering its entire life cycle; internally, affecting business operations,
decision-making and organizational structures; and holistically, where all business
segments and functions are affected, often leading to entirely new business models
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(Kaufman & Horton 2015; Schuchmann & Seufert 2015; Hess et al. 2016). In general,
scholars have come to agree that digital transformation is linked to a fundamental shift in
reaching a superior performance and that it considers internal, external and holistic firm
dimensions.
The described nature of digital transformation found in the literature further suggests
that its degree of complexity exceeds that of previous IT-enabled transformations. This is
supported by the fact that DT is considered to be one of the major challenges in all
industries in recent years, without exception (Schuchmann & Seufert 2015), and even
though companies recognize its paramount importance, they still face multiple obstacles
that inhibit them from initiating, let alone benefiting from, digital transformation (Von
Leipzig et al. 2017). They struggle to get business benefits from new digital technologies,
as competing priorities lead the list of common speed bumps (Kane et al. 2015; Fitzgerald
et al. 2013). This might be due to a lack of clarity about the different available options and
elements that managers need to consider in their transformation approach (Hess et al.
2016). Fitzgerald et al. (2013) suggest that a significant minority of companies have
succeeded in developing the right managerial and technological skills to gain
transformational effects from new digital technologies. They further propose that
additional leadership and institutional challenges are also faced by businesses today.
Leadership challenges include a lack of urgency, vision and direction, whereas
institutional ones are related to the attitudes of older workers, legacy technology,
innovation fatigue and politics. Institutional challenges can best be explained by the fact
that most technology-enabled transformations involve a certain degree of resistance to
change manifested in the behavior of certain members, who refuse to accept the new
state of affairs (Lawton 2015). This cultural barrier is often underestimated and usually not
recognized by companies (Von Leipzig et al. 2017).
Overall, we conclude that digital transformation is a more complex type of technology-
enabled business transformation, which needs to address the strategic roles of new
digital technologies and capabilities for successful digital innovation in the digital world
(Yoo et al. 2010). We define it as the process through which companies converge multiple
new digital technologies, enhanced with ubiquitous connectivity, with the intention of
reaching superior performance and sustained competitive advantage, by transforming
multiple business dimensions, including the business model
,
the
customer experience
(comprising digitally enabled products and services) and
operation
s
(comprising
processes and decision-making), and simultaneously impacting people
(including skills
talent and culture) and networks (including the entire value system).
METHODOLOGY
This study systematically reviews the current body of knowledge in an attempt to
consolidate a firm foundation and therefore advance our knowledge in the digital
transformation domain. Digital transformation is explored using the guiding framework
in Figure 2, which shows the building blocks for this study.
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Digital Transformation
Transformation
Context
Transformation
Process
Transformation
Content
Transformation
Strategy
Transformation
Strategy Content
Transformation
Strategy Process
Transformation Literature
(Organizational Change Stream)
Strategy Literature
(Manufacturing Strategy Stream)
Figure 2: Guiding Framework
Coherent with the previously discussed framework, the questions in Table 1 (below)
were specified.
Table 1:Questions to be Addressed
Questions
Rationale
Q1: Why do companies digitally
transform?
Seeks to understand the context of
digital transformation
Q2: What do we know about the
dimensions of digital business
transformation?
Seeks to understand the content of
digital transformation
Q3: How do businesses formulate and
implement their digital business
transformation strategies?
Seeks to understand digital
transformation from a strategy lens and
explores its content and process
SYNTHESIS
This section synthesizes the data obtained in this review based on the guiding framework
and explores the DT context, DT content and DT process. When exploring the first two,
we contrast digital transformation with earlier IT-enabled transformations in an attempt
to fully explore the DT concept first. In doing so, we look at the internal and external
transformation drivers and also consolidate the transformation levels/dimensions. We
further investigate DT from a process point of view to comprehend its strategic
implications. This is accomplished by identifying the various key decision areas and by
discussing the strategy lenses and frameworks encountered in the literature. A summary
of this section is illustrated in Figure 3.
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Figure 3: Literature Synthesis Framework
1. Digital Transformation Context: Why Do Companies Digitally Transform?
This section examines the context in which companies transform by looking at previous
IT-enabled transformations in the 1980s and 1990s, and contrasting them with digital
ones. The information revolution has recognized the strategic importance of integrating
information systems to enable companies to gain and maintain a competitive advantage
(Ward 1987; Jelassi & Dutta 1993; Yetton et al. 1994; Galliers 1994; Raghunathan & Madey
1999). Internally, the business environment focus has been on cost savings (Venkatraman
1994; Noble 1995). There has also been an increased emphasis on achieving improved
operational efficiency, effectiveness through the proper management of information
needs and a strategic differentiation from competitors (Ward 1987; Noble 1995; Clark et
al. 1997; Ward et al. 1990). Externally, companies have reaped the benefits of
improvements in technology cost and performance (Eisley & Ttang 1996; Raghunathan &
Madey 1999), which has led to the emergence of new IT/IS-based products and services
(Ward 1987; Ward et al. 1990). We identify an agile response to changing industries and
market volatility (Eisley & Ttang 1996; Clark et al. 1997), to client expectations (Sheppard
1989; Venkatraman 1994; Noble 1995) and to competitive rivalries (Clark et al. 1997;
Sarker & Lee 1999). Similar to the notion of start-ups today, Ward (1987) stresses the
emergence of new IT/IS-based competition to compete with already existing companies.
Ward et al. (1990) also suggest examining other industries and the business relationships
with the outside business world to potentially share the benefits from new technologies.
Many drivers unfold when trying to contextualize why companies digitally transform, and
these can also be divided into internal motivations and external triggers. Internally,
companies are motivated to transform themselves as a result of decreasing sales and
financial pressure on the current core business (Hess et al. 2016; Andriole 2017). They also
strive to drive social and economic benefits for their stakeholders, with special emphasis
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on their employees, who actively seek to interact and collaborate more effectively with
the customers they serve. Employees now want to work for digitally enabled
organizations and require improvements in the company’s IT and greater flexibility in
their working environment (Kaufman & Horton 2015; Kane et al. 2015; Webb 2013).
Operational drivers are also linked to why companies endeavor to digitally transform, in
order to gain efficiency growth (Kane et al. 2015; Andriole 2017) or the closely related
productivity improvements (Von Leipzig et al. 2017). Furthermore, many companies
aspire to the innovations (Andriole 2017; Hess et al. 2016) and the competitive
differentiation (Berman 2012) that digital transformations deliver. Although these
internal motivations are mostly proactive approaches, digitally integrated organizations
sometimes passively transform to formally comply with corporate social responsibility
initiatives as a minimum requirement imposed upon them (Kaufman & Horton 2015).
Externally, emerging technologies play a pivotal role as a trigger for transformations. In
particular, their speed of development (Chahal 2016), their market-changing (Hess et al.
2016; Kohli & Johnson 2011) and industry-disrupting potential (Westerman et al. 2014;
Fitzgerald et al. 2013) demand that firms quickly respond and assemble their digital
resources. Because of the resulting connectivity, mobility and social networks that digital
technologies are equipped with or enable, tech-savvy connected customers across all
facets of society have completely changed their behaviors and expectations from the
companies they interact with, which is a common theme identified in numerous papers
(Hess et al. 2016; Kane et al. 2015; Earley 2014; Berman 2012; Fitzgerald et al. 2013; Chahal
2016). More importantly, they expect firms not only to react to their demands but also to
anticipate their future needs before identifying them themselves, putting immense
pressure on companies to respond accordingly (Von Leipzig et al. 2017). Customers aside,
common pressure is also exerted from increased digitally focused competition in a highly
globalized world, which is another reason for companies to speed up their
transformation (Westerman et al. 2011; Kohli & Johnson 2011; Von Leipzig et al. 2017).
Innovative start-ups are additional triggers; they are seen to disrupt the business model
of many incumbent firms as they take advantage of low barriers (Loebbecke & Picot
2015). These drivers for transformation, depicted in Figure 4, converge together making
DT an inevitable business endeavor. The representation shows that they cannot be
strictly categorized as internal versus external drivers, as there is no concrete distinction
between these two interconnected concepts. Yet, the drivers can incline more towards
one of the contexts. For example, although innovation mostly stems from internal
aspirations it can also be a response to external triggers in the competitive environment
in some cases.
Observing the drivers found in the literature, we find that there is an emergent need to
respond to people’s expectations, namely, tech-savvy employees, who want to work for
digitally transformed organizations, and tech-savvy customers, who expect companies to
keep pace with new technological trends in order to remain on the competitive
landscape. Morever, the emergence of small start-ups disrupting incumbents is also
gaining more attention in the literature. These start-ups, known for their speed in
acquiring and even developing emerging technologies for competitive advantage, are a
critical factor adding to the importance of embarking on digital transformation initiatives.
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Figure 4: Digital Transformation Context
2. Digital Transformation Content: What Do We Know About the Dimensions of Digital
Business Transformation?
We examine the content by looking at areas of transformation tackled in previous IT-
enabled transformations and by contrasting them with digital ones. The seminal work on
strategic alignment (Venkatraman et al. 1993) and on IT-enabled transformation
(Venkatraman 1994) has initiated an excessive investigation of the potential of
information systems in enabling organizational transformation (Morgan & Page 2008;
Besson & Rowe 2012; Bharadwaj et al. 2013; Valdez-de-leon et al. 2016). Venkatraman’s
(1994) highly cited paper (1,643 citations) on IT-enabled transformations sheds light on
five different transformation levels with varying degrees of change and potential
benefits. The schematic representation of his proposed framework has proven to be
useful in comprehending the content of previous IT transformations. While the
revolutionary levels reap greater benefits, they also involve a higher degree of
organizational changes such as new structuring activities, reporting mechanisms,
performance measurement criteria and informational flow. Evolutionary levels, on the
other hand, indicate marginal benefits but also entail lower degrees of complexity in
terms of change requirements. The five levels of IT-enabled transformations are
summarized in Table 2.
Table 2: Five Levels of IT-Enabled Transformation
IT-Enabled
Transformations
Characteristics
Levels
Localized exploitation
Decentralized leveraging of IT systems
within organizational functions
Evolutionary level
Internal integration
Systematic leveraging of IT capabilities
throughout the entire business process
Evolutionary level
Business process redesign
Redesigning the current business
process and organizational design
Revolutionary level
Business network redesign
Redesigning the nature of exchange
between multiple stakeholders in a
business network
Revolutionary level
Business scope redefinition
Expanding the business scope and
fundamentally restructuring activities
within the value chain
Revolutionary level
Adapted from Venkatraman (1994)
Internal
Context
External
Context
Financial
Operational
Employees
Dierentiation
Innovation
Technologies
Operating Environment
Customers
Competition
Start-ups
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In a localized exploitation the role of information technology is limited to supporting
functional requirements (Venkatraman 1994; Ward 1987), where the IT value can be
restricted to informational and transactional benefits such as faster and easier access to
information, reduced operating costs or enhanced employee productivity (Gregor et al.
2006). Internal integration
shifts IT’s back-office role and brings it more to the fore by
integrating existing systems and linking different functions into organization-wide
networks, thus removing departmental barriers and aligning more closely with the rest of
the business for improved performance (Noble 1995; Roepke et al. 2000; Boddy & Paton
2005; Goh et al. 2007). Yet, these mere evolutionary levels, where IT processes are left
intact, explain the concerns that IS managers have regarding the measurable impact of IT
investments on organizational competitiveness (Galliers 1994; Burn 1993; Sheppard 1989;
Porter 1985). Business process re-engineering
has gained popularity with Hammer and
Champy's (1993) pioneering work, which describes it as a “fundamental rethinking and
radical redesign of business processes to achieve dramatic improvements in critical
contemporary measures of performance such as cost, quality, service and speed”. At the
heart of this radical approach is the notion of discontinuous thinking, breaking away from
the outdated assumptions of the old operational design (Galliers 1994). Consequently, a
number of companies have resorted to this approach while migrating to an e-business
(Krell & Gale 2005), data warehousing platforms (Cooper et al. 2000), enterprise resource
planning (ERP) systems (Voordijk et al. 2003; Grabski & Leech 2007) or customer
relationship management (CRM) systems (Beldi et al. 2010). Business network redesign
goes beyond the organizational boundaries by leveraging information technology to
transform the value activities with external stakeholders such as customers, suppliers and
other business partners with the objective of improving firm performance; radically
different organizational forms take shape such as downsizing, corporate venturing and
building strategic networks (Ebrahimpur & Jacob 2001; Zhao et al. 2008). As integration
between firms takes place more complexity arises for technological, as well as political,
reasons (Noble 1995). The role that IT plays in business scope redefinition
directly
influences the logic of business relationships within the extended business network,
allowing firms to offer entirely new services and to enter new markets (Venkatraman
1994; Sheppard 1989; Clark et al. 1997). As a consequence of this role companies
transcend from the secure confines of their stable business and invent business models
that take full advantage of the growing centrality of IT (Dhar & Sundararajan 2007; Rau
2007; Cagle 2008).
Looking at more recent papers, which specifically address digital transformation, we use
a similar approach to identify the transformational dimensions in the digital age, as
shown in Figure 5. It is important to note that we differentiate between areas that
companies intentionally transform and areas that are subsequently impacts by the
transformation process. The proliferation of digital technologies has opened the door to
potential business opportunities, enabling organizations to create new business models
(Singh & Hess 2017; Hess et al. 2016; Kane et al. 2015; Matt et al. 2014; Kaufman & Horton
2015). This transformation varies in scale, as it can be in the form of a digital modification
to the existing business or the creation of an entirely new digitalized business model
(Westerman et al. 2014; Daimler 2017). We use Porter's (1991) firm’s value chain and value
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system framework to classify the rest of the dimensions. A firm’s value chain includes the
various activities within the firm’s own boundaries, from inbound logistics to services,
and also consists of supporting activities to facilitate the end-to-end production process.
A firm’s value system, on the other hand, extends to suppliers upstream and also to
channels and end-customers downstream.
We identify two areas within the firm’s value chain that are being transformed or
impacted: an operational and a human element. Transforming the operational element
targets key business operations and processes (Matt et al. 2014) as companies seek to
streamline their operations (Singh & Hess 2017; Fitzgerald et al. 2013) and to integrate
their processes with digital performance management (Westerman, Tannou et al. 2012;
Westerman et al. 2014). When transforming operations, companies further disseminate
new digital technologies for improved decision-making (Kane et al. 2015; Kaufman &
Horton 2015; Kohli & Johnson 2011). As a consequence, the human element is impacted
by the newly shaped company culture, especially when companies create a more flexible
and employee-friendly work environment and enhance knowledge sharing as a result of
virtualized offices, for instance (Westerman et al. 2014; Webb 2013). We also identify two
areas within the firm’s value system that are being transformed or impacted: a customer
element and a network element. The customer element focuses on transforming the
customer experience, which ranges from a better customer understanding through
designed analytics to seamless and enhanced customer engagement across all touch-
points and digitally enhanced communication tools (Singh & Hess 2017; Westerman et al.
2014; Earley 2014; Fitzgerald et al. 2013; Westerman, Tannou et al. 2012). In line with
attempts to reshape customer value propositions are initiatives to digitally enhance the
products and services offered to customers (Hess et al. 2016; Matt et al. 2014; Berman
2012; Daimler 2017). Companies exploit digital technologies beyond their borders, which
ultimately impacts their supply chains, allowing for novel ways of interactions with their
industry network (Matt et al. 2014). Although deploying these technologies enables
strategic alliances, partnerships and complex relationships to be built with the wider
network, this can also lead firms to cut away unnecessary layers in the value system
(Andal-Ancion et al. 2003). It is important to highlight the strong interplay between the
transformed and impacted dimensions. For example, if companies transform their
customer experience, they might have to transform their operations, which might also
affect their interactions with their value networks. Thus, there is a blurred boundary
between the transformations and the consequently impacted areas as they cross firm’s
value chains and their entire value system. We also propose that the business model
transformation is the most difficult area to transform, as it is likely that it touches upon all
elements within a firm’s value chain and value system.
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Figure 5: Digital Transformation Content
3. Digital Transformation Process: How Do Businesses Formulate and Implement Their
Digital Business Transformation Strategies?
Faced with multiple digital transformation challenges, companies have recognized the
need to govern this complex endeavor by formulating and executing a clear strategy to
keep pace with the new digital reality (Matt et al. 2014). This is supported by various
stakeholders within organizations: executives see the potential of emerging digital
technologies, and yet they are unclear about how to achieve their transformation goals.
Experts in the business world are all in agreement that the ability to digitally reinvent the
business is not just about the technologies being adopted, but rather about a radical
strategic and cultural change within the organization (Von Leipzig et al. 2017), and
corporate employees equally believe in the central role that strategy plays for
successfully adopting new technologies (Fitzgerald et al. 2013). Both levels, individual
and organizational, are therefore advised to comprehend this strategic imperative
behind any digital integration and transformation attempts (Kaufman & Horton 2015).
Despite the paramount importance of formulating a dedicated strategy that integrates all
the prioritization, coordination mechanisms and implementation steps of digital
transformation, academia still fails to provide a coherent guideline that addresses a
company-wide transformation strategy (Matt et al. 2014; Hess et al. 2016). “We need
strategic frameworks that are aimed at deliberately harnessing the unique capabilities of
digital technology that are embedded into products to gain competitive advantage” (Yoo
et al. 2010). This “growing sense of urgency about the need to craft successful strategies
for the digital marketplace” (Kulatilaka & Venkatraman 2001) makes it apparent that the
concept of a company-level digital transformation seems to hinge on a strategy
perspective, which is needed in the literature, as well as in practice. Therefore, this review
continues to focus on the strategic perspective of a DT and the following sections explore
this in more detail.
Transformation
Operational Element:
Operations/Processes
Decision-Making
Human Element:
People
Culture
Business Model
Firm Value Chain
Entire Value System
Impact
Transformation Impact
Customer Element:
Customer Experience
Products / Services
Integrated
Value Networks
Network Element:
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14
Before introducing the digital transformation strategy and positioning it within the
hierarchy of companies’ strategies, we briefly touch upon the relevant strategy levels
recognized in the literature, as shown in Figure 6. These levels are the most commonly
met in the world of business. It is useful to identify the strategy hierarchy for each
situation, since strategic choices can be tempered or restricted depending on the
members involved at each level (Mills et al. 1995).
Adapted from Mills et al. (1995)
Figure 6:Three Major Strategy Levels
Digital Transformation Strategy Definition
A digital transformation strategy is considered to be an overarching and company-wide
strategy guiding an organization in its entire digital transformation journey. It therefore
surpasses functional thinking and holistically tackles the opportunities and risks
associated with the enabling digital technologies (Singh & Hess 2017). Its distinctive
nature of being inclusive of all business segments and company-spanning characteristics
necessitates several alignment mechanisms: first,
alignment with the business strategy;
and, second,
alignment with other operational or functional strategies to act as a unifying
link between different strategy levels within companies (Matt et al. 2014; Kaufman &
Horton 2015; Hess et al. 2016). Digital transformation dimensions also include digital
activities and changes to products, services and business models, thus going beyond the
firms’ operational boundaries. Consequently, the scope of a digital transformation
strategy should be more broadly designed, and because of the unchartered waters of
many transformation initiatives, the strategy should be subject to a continuous
reassessment regarding its underlying assumptions, as well as its progress (Matt et al.
2014).
The literature accentuates the difference between a digital transformation strategy, IT
strategy and digital business strategy. Venkatraman et al. (1993) articulate three
dimensions as inherent in an IT strategy, namely the IT scope, systemic competencies and
IT governance, meaning that it typically concentrates on the efficient management of IT
infrastructure and application systems, with limited impact on driving innovations. The
resulting system-centric focus regarding the future use of technologies is considered to
be hindering the product-centric and customer-centric transformational opportunities
crossing firms’ boundaries in a digital economy (Matt et al. 2014). A digital transformation
strategy, on the other hand, impacts companies more broadly and allows for
transformational opportunities within business models, products, processes and
Corporate Strategy
What set of business should we be in?
Business Strategy
How should we compete in this business?
Functional Strategy
How can this function contribute to the competitive advantage of the business?
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15
customers. It is further argued that the previous IT strategy knowledge cannot simply be
transferred to a digital transformation context (Hess et al. 2016).
With the rise of digital products, processes and services, Bharadwaj et al. (2013) define
digital business strategy as an “organizational strategy formulated and executed by
leveraging digital resources to create differential value”, which revamps the role of IT
strategy from a functional strategy to one that is fused with the business strategy.
Although this strategy determines the desired future business opportunities based on
the integration and use of new digital technologies, it does not provide guidelines
regarding the transformational steps needed to reach the desired future state (Matt et al.
2014; Hess et al. 2016).
As a result of the lack of a coherent and rigorous definition of a digital transformation
strategy found in the literature, we propose the following working definition and criteria
for a digital transformation strategy. A digital transformation strategy is a company-
spanning strategy that is formulated to enable a company to incorporate the
opportunities of the digital economy by leveraging digital resources and capabilities, and
digitally transforming along multiple business dimensions: operational, customer-
focused and business models. It further:
a) Recognizes the fusion between the business strategy and IT strategy;
b) Translates the digital layer of a business strategy to the various functional strategies
and acts as a missing link;
c) Provides specific transformational guidelines to reach the future state; and
d) Considers broader organizational restructuring requirements and acquisitions.
Thus, the discussed characteristics, as well as the necessary alignment mechanisms of a
digital transformation strategy, position it at the level of a business strategy in a
company’s strategy hierarchy. This allows it to incorporate the vast opportunities that the
digital environment and the readily accessible digital technologies present (Sebastian et
al. 2017), as depicted in Figure 7. It also illustrates the necessary functional alignments
that the digital transformation strategy fulfills.
Figure 7: Positioning Digital Transformation Strategy
Business Strategy
How should we compete in this business?
Functional Strategy
How can this function contribute to the
competitive advantage of the business?
Digital Transformation Strategy
How can we incorporate the opportunities
of the digital economy?
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16
3.1 Digital Transformation Strategy Content: What Decision Areas are Relevant?
The design of a digital transformation strategy requires companies to make appropriate
strategic decisions in several key areas and this section synthesizes the relevant ones
encountered in the literature, as summarized in Figure 8. We categorize the content
according to the strategy level being addressed. We further propose that these strategic
decision areas have to be incorporated into the strategy formulation process by making a
set of deliberate choices to meet the long-term goals of the transformation endeavor.
Figure 8: Digital Transformation Strategy Content
From a business point of view, an initial business case has to be made, in which the long-
term objectives need to be clear and also overweighing the mere pursuit of quick gains.
Closely related to this are decisions about the potential need for an overall change-
readiness assessment in order to comprehend the current state of a company’s
performance, and to identify potential problems, vulnerabilities, opportunities and the
associated risks (Lawton 2015; Kaufman & Horton 2015). Furthermore, digital
transformation implies changes in value creation
,
derived from the way in which adopted
digital technologies alter the current business model. Companies are required to rethink
the scope of their business and also identify potential new revenue streams from digitally
enhanced products, services and customer interactions (Hess et al. 2016; Matt et al. 2014).
They should also consider the integration of digital technologies with their core values
and business goals to ensure a sustainable outcome (Kaufman & Horton 2015). Most
importantly, academics emphasize the importance of establishing a common and clear
vision across the entire organization to inform all the stakeholders where they are
heading and to ensure the transformation’s future success (Chahal 2016; Fitzgerald et al.
2013; Westerman, Tannou et al. 2012; Webb 2013). Decisions will also involve how the
vision will be set and who is going to communicate it to the rest of the organization.
Technological decisions are crucial when introducing new emerging technologies into
companies. Among areas being explored here is the role that technologies play in the
firm to achieve strategic goals. This can be divided into an enabling role for new business
opportunities or a merely supportive one to fulfill current business requirements. Closely
related to that is a company’s attitude towards new technologies and its ability to exploit
them for future business goals. Firms usually fall into two broad categories: they either
adopt established and widely used technology solutions and act as market followers or
become the market leaders by innovating and introducing new technology solutions to
the markets (Hess et al. 2016; Matt et al. 2014). This stems from investments in their
capabilities to conceptualize how digital technologies can impact their business (Kane et
Business
Managerial Organizational Structural Operational
Technological
Digital Transformation Strategy Content
Business Level Content
to compete in the business
Functional Level Content
to contribute to the competitive
advantage of the business
Customers
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17
al. 2015) and also requires dedicated change programs to ensure that the organization is
concurrently evolving with the technologies (Webb 2013).
Numerous strategic decisions have to be taken in relation to changes in the interaction
with customers.
Companies are encouraged to investigate potentially new benefits
created in their customer experience through digitally enhanced changes to the
customer journey (Valdez-de-leon et al. 2016). This can be achieved by exploring all the
customer touch-points and integrating the companies’ interactions across various digital,
as well as physical, platforms (Berman 2012). Transforming the customer experience can
also be accomplished through the introduction of digitally enhanced products and
services (Hess et al. 2016; Matt et al. 2014; Valdez-de-leon et al. 2016). Additionally,
investments in R&D can further help organizations develop digitized solutions to
anticipate customer needs rather than merely responding to existing ones (Sebastian et
al. 2017).
Managerial
decision areas have a financial element, which evolves around choosing how
to finance the digital transformation endeavor, after assessing the financial pressure on
the current business (Hess et al. 2016; Matt et al. 2014). The focus on fostering innovation
is also a critical element to be discussed (Kane et al. 2015; Lawton 2015), in which
managers are encouraged to view digital innovation as an integral part of their strategy
(Kaufman & Horton 2015). Agile and new flexible working, along with a consideration of a
bottom-up innovation processes, should drive an ongoing digital transformation
(Westerman, Tannou et al. 2012; Valdez-de-leon et al. 2016). Managers need to further be
aware of the paramount importance that various capabilities play, namely,
organizational, technology-based, product-related and digital capabilities (Kane et al.
2015; Matt et al. 2014; Westerman, Bonnet et al. 2012). Examining their firms’ strategic
assets and capabilities through a digital lens may help managers pinpoint which existing
assets can be leveraged, which capabilities can be used in new ways and whether or not
new competencies are needed to be brought into the company (Westerman & Bonnet
2015; Hess et al. 2016; Ross et al. 2017). In their empirical work with large, old companies,
Sebastian et al. (2017) reveal the importance of two technology-enabled assets that are
necessary for a successful digital transformation: an operational backbone to ensure
efficiency and reliability of core operations; and a digital service platform to support
business agility and rapid innovations.
Various organizational decisions are also identified in the literature, in which companies
are advised to take a closer look at the employees, culture, talent and skillset, and
leadership. Companies should review the need for developing a collaborative work
environment and ensure that the transformation project is staffed correctly (Kane et al.
2015; Matt et al. 2014). Employees are often assessed from a maturity point of view, in
which their roles, expertise and capabilities are scrutinized (Von Leipzig et al. 2017). This
enables companies to classify themselves into a category of digital maturity and also
helps them to navigate their transformation in a structured manner. Further
considerations are required regarding the necessary changes in the company’s culture,
which are aimed at adapting it to work with new technologies rather than imposing
these technologies on employees (Chahal 2016). Additional decisions are made around
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18
techniques for encouraging risk, creating the right digital mindset and helping
employees to adapt quickly to change (Kane et al. 2015; Kaufman & Horton 2015). This
cultural shift is considered to be the biggest challenge encountered in transformation-
related change programs (Webb 2013) and is also viewed as a critical success factor in
technology-induced business transformations (Lawton 2015).
A digital transformation strategy formulation needs to further include decisions
regarding securing people with the necessary skills and talent to be able to capitalize on
the digital trends (Kane et al. 2015; Westerman, Tannou et al. 2012; Berman 2012). Action
plans are taken upon assessing which organizational skills are affected (Matt et al. 2014),
what skills changes are required (Hess et al. 2016) and whether internal training or new
talent acquisition is necessary (Kaufman & Horton 2015). Kane et al. (2017) further
recommend recognizing on-demand talent markets as strategic resources, balancing full-
time and part-time talent and creating an environment where the best people want to
work.
Within the organizational decision areas is the criticality of the buy-in from senior leaders
and the board (Chahal 2016), who are expected to articulate their vision to the staff and
prepare the roadmap for future commitments (Fitzgerald et al. 2013). This top-down
approach is preferable (Westerman, Tannou et al. 2012; Kane et al. 2015), and yet there is
no clear answer as to which c-suite position should be in charge of the digital
transformation strategy (Matt et al. 2014). Together with CIOs or even CEOs, new
positions such as CDOs are also emerging as potential candidates for driving the
transformation.
A pattern of other structural decisions is also articulated in the literature and involves the
right internal governance, as well as external collaborations through partnerships or
acquisitions. Internally, companies face multiple structural choices to support the
execution of their digital transformation strategy and to make decisions regarding
whether new operations will be incorporated into their existing structures or through
new separate units (Valdez-de-leon et al. 2016; Hess et al. 2016). Establishing a strong
company-wide coordination mechanism through communication and collaboration
rules, along with the desired KPIs, are also of paramount importance to ensuring the firm
is on the right path to transformation (Westerman et al. 2011; Von Leipzig et al. 2017). We
identify multiple models that can be adopted depending on the company’s current state,
as shown below:
Internal Models (Westerman et al. 2011; Guest 2014)1
1 S = strategy; OP = operations; B = budget; models are adapted from Westerman et al. (2011).
Head Quarter
B
U
1
B
U
2
B
U
3
OP
S
B
OP
S
B
Head Quarter
B
U
1
B
U
2
B
U
3
OP
S
OP
B
Head Quarter
B
U
1
B
U
2
B
U
3
OP
S
B
OP
S
B
Digital Solution
Provider/ Hub
OP
S
B
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19
a) Tactical models b) Centralization models c) Champion models
Tactical models,
also referred to as silos, have no enterprise coordination; strategies,
operational teams and budgets for digital initiatives reside in each business unit. Here
digital technologies are used in an efficient and effective way to achieve business units’
targets.
Centralization models
exhibit more coordination since digital strategies and
funds are managed at an enterprise/corporate level. This structure enables organizations
to scan the market for opportunities and provide a central team to work with business
units for implementation.
Champion model
business units have their own strategies,
operational teams and budgets but must use the resources and solutions offered by the
dedicated digital business units. Here, emphasis is placed on education, knowledge-
sharing and enabling others in the business.
External Models
(Hess et al. 2016)
a) Company takeover b) Partnerships c) External sourcing
Adopting the right
external models
allows companies to seek help from external sources.
Companies accumulate the necessary know-how during
takeovers
in the form of merger
and acquisition activities. Companies can also develop their workforce in digital
technologies through fostered
partnerships.
Another alternative is to obtain the
necessary resources from outside through
external sourcing.
The
operational dimension of strategic decisions cannot be overlooked in digital
transformation projects and mainly incorporates choices regarding necessary operational
changes and adaptations to the current business processes (Hess et al. 2016; Webb 2013).
Here companies have to make decisions based on mapping exercises to determine the
processes that will be affected by the new technology integration (Matt et al. 2014).
Organizations must also be primed to tightly infuse the use of new data into their
processes and decision-making (Kane et al. 2015). They should be further equipped with
the predictive capability to obtain certain insights from analytics and to leverage the data
to optimize its digitally enabled supply chain and interaction with customers (Berman
2012). Ways to drive operational agility and efficiency can be achieved by determining
points of vulnerabilities and addressing them (Kaufman & Horton 2015). Maturity models
also exist to help companies assess the state and agility of their current processes, and to
increase their digitalized operation (Valdez-de-leon et al. 2016; Von Leipzig et al. 2017).
A comprehensive digital transformation strategy needs to address the above-mentioned
decision areas, and, depending on the company context, the right choices from various
alternatives should be selected.
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20
3.2 Digital Transformation Strategy Processes: How Do Companies Transform?
We aim to scrutinize the different strategy perspectives in this section to help us find an
answer regarding
how
companies transform. This is achieved by exploring the different
strategy types, strategy paths, strategy configurations and strategy frameworks.
3.2.1 Strategy Types
The strategy types encountered in the literature either define the focus of the strategies
being deployed or describe them from a managerial perspective. Sebastian et al. (2017)
articulate two types of strategy identified in their empirical work, with incumbents
embarking on a digital transformation journey: a customer engagement strategy (CSS);
and a digital solutions strategy (DSS).
While a CSS focuses on offering a superior,
innovative, personalized and integrated customer experience, a DSS aims to reformulate
a company’s value proposition through the integration of products, services and data
(Ross et al. 2017). They have been identified as two types of strategy that companies can
commit to when operating in a digital age.
Kaltenecker et al. (2015) also conducted empirical work with well-established companies
in the software industry shifting their focus from an on-premises market to an on-
demand market as a result of the emergence of cloud computing technology. The
resulting applications on a cloud infrastructure help them to extend their generic
management strategies when transforming and dealing with disruptive innovations. This
is based on Christensen’s theory of disruptive innovations, in which he describes the
innovator’s dilemma: incumbents operate on a sustaining trajectory by focusing on
improving their current products and services for their most profitable and demanding
customers and consciously ignore the needs of other segments. New entrants, on the
other hand, choose the disruptive trajectory by targeting the overlooked segments and
providing more suitable functionality at a lower price before slowly finding their ways to
incumbents’ mainstream customers, where they then expand their offering in volume
(Christensen 1997; Clayton et al. 2015). Well-established companies are expected to face
this dilemma as they hold on to their technologies, even though they see the potentially
disruptive new technologies emerging (Kaltenecker et al. 2015). Table 3 (below) shows a
set of different management strategies adopted by incumbents in the software industry
to manage potentially disruptive innovations using cloud computing as an example. This
construct of strategy typologies is useful in understanding the transformation strategy
process; yet the literature still lacks a full exploration of other relevant strategy types that
may only be understood through further empirical work related to additional digital
technologies, and not just cloud computing.
Table 3: Digital Transformation Management Strategies
Strategy Type
Explanation
Spin-Off
Independent spin-off or a separate organizational unit to ensure adequate
staffing and help follow potentially disruptive innovations.
Leader
Early preparation and market entry to gain a first-mover advantage.
Expert Opinion
Gathering information from a wide range of sources: technological staff,
cooperation partners, customers and external experts to support the
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21
transformation process despite internal resistance from stakeholders.
Trial and Error
Testing products and markets to achieve fully developed software,
especially for high-quality products.
Recruitment
Recruiting innovative and experienced staff to help with the
transformation process or cooperating with universities and lead
customers.
Direct Sales
Distributing on-demand software directly or by financially incentivizing
resellers to promote on-demand sales.
Step-by-Step
A ramping-up approach by focusing on smaller solutions in the beginning
and expanding the customer base with time.
Partnership and
Ecosystem
Gaining access to technology expertise through a strong technological
partner to adapt to a disruptive technology faster.
Visionary Top
Management
Top management vision communication can accelerate the
transformation process and motivate employees.
Adapted from Kaltenecker et al. (2015)
3.2.2 Strategy Paths
Several paths are suggested in the literature to guide companies when choosing their
transformation journey’s starting point. Berman (2012) proposes three strategic paths
as
different starting points when choosing the company’s digital transformation dimension.
The underpinning activities evolve around reshaping the operating model by creating,
leveraging or integrating digital operations, or reshaping the customer value proposition
by enhancing, extending or redefining it with digital engagement. The first path’s
starting point evolves around reshaping the operating model by leveraging information
and digital capabilities within the organization before reshaping the customer value
proposition and experience through digitally enhanced products and services. The
second path starts with transforming the value proposition before reshaping the
operating model and the third alternative route transforms both simultaneously from the
start. The suggested paths seem to be industry-specific; companies with mostly physical
products and fewer customer requirements for information may begin their digital
endeavor by transforming the operations, whereas asset-light companies such as
financial services are most likely to have an initial focus on transforming the customer
value propositions.
Similarly, Sebastian et al. (2017) build on their two aforementioned strategy types
(customer engagement and digitized solutions strategies) and propose committing to
only one type of strategy as a starting point before being able to benefit from the
outcomes associated with the other strategy. This study reveals that committing to only
one starting point aids in making strategic decisions regarding resource allocation.
The appropriate starting point has proven to be a characteristic of a robust and successful
strategy formulation methodology, since there must be clearly defined expectations of
what the strategy process involves and what type of results need to be obtained (Platts
1994). Nevertheless, the different industry-specific starting points still need to be further
tested with a larger industry sample to provide deeper insights regarding when and why
certain business dimensions are chosen to be transformed before others. The literature is
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22
also lacking in-depth analysis of how these suggested starting points are interlinked, and
whether or not, and to what extent, they influence one another.
3.2.3 Strategy Configurations
We demonstrate the different strategy configurations followed when companies adopt
new technologies to help them transform. We identify different techniques to be used
with a direct impact on the external environment, the internal environment, or both.
Andal-Ancion et al. (2003) explore the investments in new information technologies (NIT),
which enable several business transformations, and introduce three types of mediation
strategy that change the industry’s value chain. These strategies include techniques that
are characterized by classic disintermediation, where companies’ distributors are cut out
of the value chain, remediation
,
where companies’ distributors are embraced, and
network-based mediation
,
where new alliances and partnerships shape complex
relationships in an industry.
Internal procedures focus on multiple strategic configurations that should be followed
when companies transform. The notion of recognizing the importance of information
systems, and the need for their integration into business strategies, has already been a
point of discussion since the 1880s. Ward (1987) has shown how the business objective of
information systems extended from enabling efficient operations in the 1960s, to
providing better management information in the 1970s and to increasing business
competitiveness in the 1980s. Consequently the term strategic alignment was coined and
this lens refers to how different strategy levels must be configured, with a special focus
on the alignment between business strategy and functional IS/IT strategies to realize
strategic value from IS investments (Venkatraman et al. 1993). The central argument is
that a firm’s ability to achieve differential advantage requires continuous alignment
between four domains: business strategy, organizational infrastructure and processes, IT
strategy and IS infrastructure. The strategic alignment model and its underlying
components are now a well-established theme in IS research (Coltman et al. 2015;
Lawton 2015) and are also adopted in the context of digital transformation. The four
domains also offer a tool to align business and digital strategies and to conceptualize the
necessary e-leadership qualities and capabilities that drive this alignment (Li et al. 2016).
Similarly, drawing on the experience of the digital transformation in the oil and gas
industry, the alignment approach is chosen to close the gap between the business and IS
strategy (Kohli & Johnson 2011). It further leads to establishing guiding principles within
the organization for acquiring IT, information availability and creating value from IT
investments. Similarly, in the context of cloud computing as an innovative and disruptive
technology Peter Ross and Blumenstein (2013) accentuate the fact that a firm’s
competitive advantage will be realized when it better integrates its information and
communication technologies (ICT) with the core business. This calls for a more strategic
role, as opposed to IT’s past isolated role in the back office.
Moreover,
strategic fit as a strategy configuration refers to the technique of aligning a
firm’s internal resources and capabilities with the environmental environment. It extends
the resource-based view, which recognizes internal resources and capabilities as a main
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23
source of competitive advantage, by extending the analysis to external factors. Arguably,
the strategic fit lens allows us to explore the digital transformation phenomenon fully,
and is developed into a framework to aid in understanding digital initiatives in the
banking industry (Liu et al. 2011).
There seems to be a common agreement that digital transformation strategies need to
be exhibiting certain configurations to allow companies to successfully transform.
Although DT research is still in its infancy, we expect academics to continue
experimenting with different strategy configuration models and to provide us with their
performance implications.
3.2.4 Strategy Participants
We explore the key participants in a digital transformation that need to be known during
the strategy formulation, as well as the implementation process. The wide-spanning
nature of a digital transformation (Matt et al. 2014) and its alignment with different
strategy levels highlights its cross-functional integration within the business and the
need for cross-functional teams to be on board (Kane et al. 2015; Harrington & Tjan 2008).
Sebastian et al. (2017) indicate that the old “divide-and-conquer” approach, where
functions are working in silos to optimize their individual performances, are not suited to
digital transformation; people should collaboratively experiment with technologies and
embrace collaborations across functional and organizational boundaries. From a
leadership point of view, we have already discussed their roles and level of involvement
in the strategy content; yet we notice the importance of distinguishing between
additional participants who formulate the strategy, participants who are affected by it
and participants who implement it, the project owners. Little is known about these roles,
which can still be developed and incorporated into strategy frameworks.
3.2.5 Strategy Frameworks
We examine six digital transformation strategy frameworks encountered in the literature
and shed light on their nature (Westerman, Tannou et al. 2012; Kaufman & Horton 2015;
Hess et al. 2016; Parviainen et al. 2017; Von Leipzig et al. 2017; Sebastian et al. 2017).
They entail much of the previously discussed strategy content and are all designed in
stages, which build on one another. This echoes the idea that a transformation is a
process that advances through stages, building on one another as opposed to occurring
as single events (Kotter 1997). We identified six distinctive phases that can be applied to
all of the frameworks, and also equip managers with a structured approach while
progressing from one stage to the next.
Table 4:Phases identified in Digital Transformation Frameworks
Phase
Description
Initiation
Understanding digitalization opportunities, threats and impact
Ideation
Imagining transformation dimensions as options for the business
Assessment
Evaluating digital readiness levels and identifying gaps
Engagement
Communicating the vision and integrating the necessary people
Implementation
Proceeding with the action plan in various domains
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24
Sustainability
Validating and optimizing the action plan continuously
We further contrast the frameworks with Kotter's (1997) guide, in which he thoroughly
explains why transformation efforts fail in businesses. He outlines eight critical success
factors, including establishing a sense of extraordinary urgency to communicate the
vision and change the company culture. We find that several of the steps in the digital
transformation frameworks touch upon the human-related factors mentioned in Kottler’s
guide and thereby denote the paramount importance of the people’s perspective: the
right leaders have to be chosen, the vision needs to be communicated throughout,
employees are empowered to take initiatives and the right skills have to be acquired.
Although it might seem that there is a plethora of strategy frameworks in the literature, it
is important to note that their empirical work is rather limited to certain criteria. For
example, Westerman, Tannou et al. (2012) and Sebastian et al. (2017) focus solely on
examining large companies, where most of them are also incumbents in their field. Other
studies also pay closer attention to specific industries such as the media industry (Hess et
al. 2016) or the service sector in Germany (Von Leipzig et al. 2017). Parviainen et al. (2017)
synthesize their findings from diverse industrial case studies as a unit of analysis, while
Kaufman and Horton (2015) propose their DT blueprint without validation from industry
engagements. These findings uncover the need to develop additional frameworks in
different contexts to allow us to comprehend the DT phenomenon in more depth, to
explore more industry-specific insights and to allow for wider reach.
The importance of building a new portfolio of core capabilities that suit the digital age
and allow for efficiency and responsiveness is recognized in the literature. In fact, Berman
(2012) highlights the importance of a digital capability and proposes that they
encompass business model innovation, customer collaboration, cross-channel
integration, insights from analytics, digitally enabled supply chains and a networked
workforce. Likewise, Sebastian et al. (2017) underline the need to develop the necessary
technology and business capabilities to ensure efficiency, scalability, reliability and rapid
implementation of digital innovations. Foremost, companies are urged to assess their
current resources and capabilities, and identify the relevant competencies that will be
needed in the future (Hess et al. 2016). Despite the paramount importance of assessing
and developing digital and other organizational capabilities, the frameworks lack
comprehensive and pragmatic approaches to how to do so.
DISCUSSION
This section aims to reflect on the findings. It contributes by positioning digital
transformation within the context of technology-enabled transformations and also sheds
light on the distinctive features that emerged from the review.
Positioning Digital Transformation
Analyzing the content of digital transformation allows us to position the digital
transformation phenomenon and distinguish it from previous technology-enabled
transformations.
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25
We propose that:
a) the degree of complexity in digital transformations exceeds that of previous IT-
enabled transformation, as it takes a revolutionary approach to fundamentally
change any of the above-mentioned dimensions;
b) the range of potential impact and benefits arising from digital transformation are
also higher and have a clear external impact crossing traditional organizational
boundaries.
This differentiation is illustrated using the schematic representation of Venkatraman’s
(1994) diagram for IT-enabled transformations in Figure 9. We argue that digital
transformation only entails revolutionary levels of transformation as a result of its
increased complexity and impact. This is apparent in the nature of the business
dimensions that are being transformed and their interlinks:
a) The operations: with multiple impacts requiring a fundamental redesign;
b) The customer experience: with a wider impact crossing firm’s boundaries;
c) The business model: adding additional layers of complexity and wide-spanning
impacts.
Figure 9: Positioning Digital Transformation
Distinctive Features of Digital Transformation: How is Digital Transformation Different
to Previous IT-Enabled Transformations?
Following the positioning of digital transformation within IT-enabled transformations,
this section attempts to demystify some novelties and the distinctive characteristics of
digital transformation. We mainly argue the differences from a technological point of
Business Transformation
Technology Induced Transformation
IT-enabled
Transformation
Digital
Transformation
HIGH
LOW
LOW HIGH
Transformation Complexity
Transformation Impact
Revolutionary
Levels
Evolutionary
Levels
Localised Exploitation
Internal Integration
Business Process
Redesign
Business Network
Redesign
Business Scope
Redefinition
Customer Experience
Trasformation
Business Model
Transformation
IT-enabled Transformation
Digital Transformation
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26
view and show its implications on products, firm’s value chains and the external
environment before concluding with the necessary organizational restructuring.
Technological Perspective
Arguably, the nature of digital technologies is a fundamental key difference causing the
dramatic shift within organizations and in the competitive landscape. Today, we are
reaching an inflection point, where the effect of these digital technologies manifests with
“full force” and enables “unprecedented things” (Brynjolfsson & Mcafee 2014). They have
computer hardware, software and networks at their core, and have benefited from the
exponential improvements in IT capacity, which can best be explained using Moore’s
Law. Moore and Fellow (1998) write: “The complexity for minimum components costs has
increased at a rate of roughly a factor of two per year. Certainly over the short term this
rate can be expected to continue, if not to increase.” They have revised this doubling of
computing power from one year to two, and nowadays it is common to use a doubling
period for general computing power of 18 months. Progress in the digital world depends
on “how many electrons per second can be put through a channel etched in an
integrated circuit, or how fast beams of light can travel through fiber-optic cable”
(Brynjolfsson & Mcafee 2014). This digital progress may slow down with time, as many
people have already predicted, and yet there are two reasons why it will not: first
,
we
underestimate the engineers and scientists working in the computer industry; and,
second,
only if we use the same technology will we run into limitations. In fact, Moore’s
Law is different to the laws of physics, as it is a predication related to the work of people
in the industry, who have shown consistent success in the past. Furthermore, we are not
limited to one technology. A convergence of multiple technologies is happening today as
the innovations build on and amplify one another in a fusion of multiple technologies
across the physical, digital and biological realm (Schwab 2016). Our central argument in
identifying the key differences of digital transformation is further grounded on multiple
characteristics of digital technologies. Yoo et al. (2010) note that they differ from earlier
technologies in three characteristics:
a)
Re-programmability:
allowing separation of the functional logic from the physical
embodiment that executes in addition to a wide array of functions;
b)
Homogenization of data: storing, transmitting, processing and displaying digital
content such as audio, video, text or image using the same digital device;
c) Self-referential nature:
the requirement of using digital technology, leading to a
faster diffusion and positive network externalities.
In addition, digital technologies have mobility and ubiquitous connectivity features, which
provide immediate interaction and access to a wide range of data and computing power;
these features are also reflected in today’s products and enable a wider reach (of people),
regardless of geographical location (Schwab 2016; Lanzolla & Anderson 2008; Lanzolla &
Giudici 2017). The exponential availability of data as a result of the discussed features
enables companies to analyze the insights and derive the right decisions in real time.
In summary, these technologies do not merely automate basic processes, satisfy
information needs or affect the business strategy, as was the role of IT in previous eras
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27
(Ward et al. 1990); they also have the capacity to reformulate the entire business strategy
as a result of their unprecedented capabilities: ensuring efficiency, scalability, reliability
and predictability of core operations, while simultaneously facilitating rapid development
and the implementation of rapid innovations in response to, or even anticipation of,
customers’ needs (Sebastian et al. 2017).
Product Perspective
The third wave of technology-enabled transformations encountered nowadays is
allowing technologies to be an integral part of the products themselves, which is
regarded as a fundamental difference from what we have seen before (Porter &
Heppelmann 2014; Hansen et al. 2011). New smart connected products are emerging as a
result of the immense improvements in processing power, device miniaturization and the
network benefits of ubiquitous wireless connectivity mentioned above. They share
physical components (mechanical and electrical items), smart components (sensors,
microprocessors, data storage, controls, software, operating systems and digital user
interfaces) and connectivity components (ports, antennae, protocols and networks
enabling communication with the product cloud) (Porter & Heppelmann 2015). Having
these core components, they offer greater opportunities for new functionality, more
reliability, higher utilization and further capabilities that transcend the traditional product
boundaries (Porter & Heppelmann 2014). Thus, the new features of products in the digital
world allow firms to reformulate their value propositions by combining products and
utilizing their embedded data.
Value Chain Perspective
The software-intensive nature of the above-mentioned smart, connected products
support the co-creation of value together with stakeholders and customers
(Zimmermann et al. 2016), and additionally restructure the entire value chain activities. In
terms of the design and development activities, Porter and Heppelmann's (2015) recent
work demonstrates how these products now rely more on software engineers than
mechanical engineers. Their designs need to accommodate remote servicing in addition
to fine-tuning flexibility to meet new customer requirements or performance hiccups.
The new emphasis on the software’s functionality further diminishes the complexity
previously associated with products’ physical layers. Due to this increased software
functionality, manufacturing activities can even shift their assembly at the customer end,
where software is uploaded and configured. We are now witnessing the emergence of
smart factories and national initiatives such as Industrie 4.0, possibly the largest world-
wide trend in manufacturing (Von Leipzig et al. 2017), requiring cloud-based systems and
networked machines to optimize production. Today’s term “Internet of Things” takes
tracking activities in logistics to a completely new level, as it eliminates the RFID scanning
process and relies on interaction between objects. Moving on to the marketing and sales
activities, Porter and Heppelmann (2015) further delineate how data retrieved from
smart, connected products enables companies to conduct finer customer segmentation,
to tailor their offerings and to develop more sophisticated pricing strategies that are in
line with the data they extract and analyze. Moreover, even the after-sale service activities
are reshaped as companies shift from reactive to preventive and proactive servicing
activities.
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28
External Environment: Customer and Network Perspective
Digital transformation is fundamentally different to previous IT-enabled transformation
because of the specific trends observed when companies engage with customers.
Looking at transformations in media, telecommunications and technology companies,
Lanzolla and Anderson (2008) distill three specific trends:
a) Digital interactions:
the features of digital technologies allow people to have more
active interactions with content since they are capable of creating, eliminating or
consuming it when and how they want.
b) Digital distribution
:
the diffusion of digital technologies allows content to be
widely distributed to customers as a result of the increased number of available
channels and devices.
c) Ubiquitous digital reach
:
digital interconnectivity overcomes physical barriers and
allows companies to reach more people and build a customer network based on
interests rather than geographical location.
These trends in our digital era embody a change in customer behavior, as they are now
“more informed, communicate more with other customers and are forming ever higher
expectations regarding digital service provision that spans across all channels and
industries” (Von Leipzig et al. 2017). Customers nowadays expect companies to anticipate
their expressed demands, as well as their still unknown future needs. Companies that
embrace these new demands will succeed, while others will no longer be able to
compete. Gray et al. (2013) further emphasize how the focus of IT activity is shifting from
the center of an enterprise to its edge to be able to engage with consumers who are
digitally connected and activated. In particular, consumer-centric service industries need
to realize new strategic value at the edge, where consumers are considered to be co-
creators of value, knowledge organizers and important factors of production.
Katsamakas (2014) identifies another defining feature of digital transformation: the
emergence of network competition. Here value networks, regarded as “interdependent
firms coordinating closely to deliver value to consumers in the form of products of
services”, shift the locus of industry competition from the individual companies
competing against one another to a value network competing together in the
marketplace. Their key attributes are:
a) Increased cooperation, information sharing and intensity of collaboration;
b) Co-specialized investments;
c) Long-term, repeated interaction based on trust and strong relationships formed
among partners.
Internal Organizational Structures
Digital transformation is often described as a continuous, complex and revolutionary
undertaking that even goes beyond company borders (Matt et al. 2014; Hess et al. 2016;
Liu et al. 2011). Kane et al. (2015) argue that the uniqueness of digital transformation lies
!
29
in risk-taking being a cultural norm as companies seek new levels of competitive
advantage. It will not have a completion date because of the accelerated developments
in digital technology and fast-changing customer behavior requiring businesses to be
quick to continuously change and adapt themselves (Chahal 2016). Accordingly, digital
transformation substantially shapes a company in its entirety and demands major
changes in its organizational structures, as well as a reassessment of its norms and values
(Liu et al. 2011).
The ability to digitally transform a complete restructuring, as well as the introduction of
new roles, are necessary. This is supported by the fact that the classical functional model
of separate functional units (i.e. logistics, production, logistics, sales, finance, IT) is
breaking down. The transformation permeates every part of the business and involves
the entire business, from the board to the front-line staff, rendering preceding silo
operations a failed approach (Chahal 2016). Some functional roles often overlap and blur
(Porter & Heppelmann 2015), and thus the creation of cross-functional teams is
encouraged to better link and coordinate internal firm activities (Ross & Blumenstein
2013). A potential solution is to introduce interdisciplinary teams representing the
business, as well as the IT side, with an operational lead (Horlach & Drews 2016). The
newly introduced data-intensive environment leads to the formation of new units such as
customer success management units or unified data-organization units to ensure
enterprise-wide data integration (Porter & Heppelmann 2015). Horlach and Drews (2016)
also reveal the necessity of having a bimodal IT operation, where digital IT and traditional
IT, sometimes referred to as “two-speed IT”, coexist. Furthermore, new digital
technologies require different skills and mindsets to previous waves of transformative
technologies, arguably a reason why CIOs are often not in the best place to take charge of
digital transformation (Singh & Hess 2017). In response, some firms appoint new
positions at the top management level, for example, a chief digital officer (CDO), to work
alongside the CIO and to take care of the digital products and services at the customer
interface (Hess et al. 2016).
CONCLUSION
The objective of this review has been to show the current state of academic research in
digital business transformation strategies. It reveals the reasons why companies digitally
transform and illustrates companies’ internal motivations, as well as their external
triggers. The content of digital transformation is also framed and we distinguish between
the business dimensions that are being transformed and the areas that are being
impacted by the transformation. Finally, we identify multiple dimensions regarding the
content of strategy formulation in the digital era, and also comment on the strategy
process. The review additionally adds novel insights regarding the positioning of digital
transformation and the key characteristics that distinguish it from previous technology-
enabled ones.
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30
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... Munculnya teknologi digital, pesatnya inovasi digital pesaing, dan konsumen perubahan perilaku telah mengganggu banyak perusahaan lama yang membuat mereka kehilangan pangsa pasar mereka dengan cepat [3]. Perusahaan yang tidak mampu beradaptasi ataupun bersaing dengan dunia digital akan menjadi korban "digital Darwinism" [7] di mana hanya sebagian besar perusahaan yang mampu beradaptasi, yang mana perusahaan tersebut mampu bertahan untuk tetap berada di competitive landscape yaitu perusahaan yang responsif terhadap tren teknologi [7]. ...
... Munculnya teknologi digital, pesatnya inovasi digital pesaing, dan konsumen perubahan perilaku telah mengganggu banyak perusahaan lama yang membuat mereka kehilangan pangsa pasar mereka dengan cepat [3]. Perusahaan yang tidak mampu beradaptasi ataupun bersaing dengan dunia digital akan menjadi korban "digital Darwinism" [7] di mana hanya sebagian besar perusahaan yang mampu beradaptasi, yang mana perusahaan tersebut mampu bertahan untuk tetap berada di competitive landscape yaitu perusahaan yang responsif terhadap tren teknologi [7]. ...
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The emergence of emerging technology disruptions, changes in stakeholder behavior towards digital, coupled with the Covid-19 pandemic has forced various incumbent organizations to transform digitally (TD). There are still many investments related to TD that fail to achieve the expected expectations due to the alleged lack of good governance implementation. Previous studies have examined the significant role of information technology (IT) on organizational performance. However, it is suspected that traditional IT Governance (TKTI) practices are not necessarily effective in the digital era. Only a few have examined the effect of IT governance (TKTI) on TD, and no one has examined the effect of TD on organizational performance (KO). Therefore, this study aimed to validate the effect of hybrid TKTI mechanisms (traditional and agile/adaptive) on TD, as well as the effect of TD on knockouts and their performance achievements through a balanced scorecard (BSC) perspective. The research method used is a survey by distributing Likert-scale online questionnaires to 11 roles related to BP in Asuransi B and succeeded in getting 50 relevant respondents. Data from the results of filling out the questionnaire were analyzed with the help of SmartPLS 3.0 tools. The test is carried out using Structural Equation Modeling (SEM) with a formative model, in the form of testing the inner model and outer model. The test results of this study indicate that both traditional and agile/adaptive TKTI mechanisms have a significant positive effect on BP. Then TD also proved to have a significant positive effect on KO. This research contributes to the knowledge base for further research on related topics, and can be an implementation reference to oversee the success of TD for practitioners, especially in the context of the insurance industry
... According to Ismail et al. (2017), the work on the transformation of organisations can start at an external, internal or holistic point or a combination of them. External means, for example, when the focus is on enhancing the customer experience, eventually altering the organisation's entire life cycle. ...
... Some internal and external factors can motivate an organisation's competitive transformation strategy towards pursuing sustainable competitive advantages (Ismail et al., 2017) and designing new value propositions. For Porter et al. (1996), competitive strategy is about being different in the following sense: deliberately choosing a different set of activities to deliver a unique mix of values different from those of rivals. ...
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Organisations are increasingly transforming themselves to remain profitable and obtain sustainable competitive advantages. Business processes are as important as technology in promoting organisational transformation. Organisational transformation ultimately entails combining existing business components, whether or not with the same use and design, with new ones to generate novel products and services. For example, one particular type of organisation transformation is digital transformation. This notion, which covers even the subjective aspects of organisational transformation, is currently under intensive discussion and suffers from the semantics terms fluctuation related to the notion of ‘organisational transformation’. We argue that this topic could strongly benefit from an ontological analysis and conceptual clarification of these notions. This paper contributes with an attempt in this direction by proposing a Core Ontology of Organisational Transformation (COOT). This ontology comprises concepts and relations central to creating a reference model representing the organisational transformation paradigm. COOT was applied in a real-world case study on a car rental company.
... Other research states that many organizations are still trying to organize and implement a digital agenda [5,21,22]. Most research results focus on specific aspects of digital transformation or case studies [18] The lack of an integrated approach to developing a company-wide digital transformation strategy was also identified by Hess et al. [23], Hyvönen [24] and Ismail [25]. Meanwhile, some academic literature partially discusses aspects of Digital Transformation [26][27][28][29]. ...
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The Digital Transformation (DX) potentially affects productivity and efficiency while offering high risks to organizations. Necessary frameworks and tools to help organizations navigate such radical changes are needed. An extended framework of DMM is presented through a comparative analysis of various digital maturity models and qualitative approaches through expert feedback. The maturity level determination uses the Emprise test of the international standard ISO/IEC Assessment known as SPICE. This research reveals seven interrelated dimensions for supporting the success of DX as a form of development of an existing Maturity Model. The DX–Self Assessment Maturity Model (DX-SAMM) is built to guide organizations by providing a broad roadmap for improving digital maturity. This article presents a digital maturity model from a holistic point of view and meets the criteria for assessment maturity. The case study results show that DX-SAMM can identify DX maturity levels while providing roadmap recommendations for increasing maturity levels in every aspect of its dimensions. It offers practical implications for improving maturity levels and the ease of real-time monitoring and evaluating digital maturity. With the development of maturity measurement, DX-SAMM contributes to the sustainability of the organization by proposing DX strategies in the future based on the current maturity achievements.
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