Digitization, Digitalization and Digital Transformation

The forces of the digital revolution have shaken company after company. Industries have been transformed. Entire media and product forms have vanished. Pity the enterprise whose fortunes are tied exclusively to the analog world, be it producing film, renting videos, retailing books, or selling packaged software.”

– ‘Key Words for Digital Transformation’, by Paul Michelman. MIT Sloan Management Review

Foundation discussions around Digital Transformation usually begin with a description what I call the three ‘Ds’: Digitization, Digitalization and Digital Transformation. Clearly this is because it is difficult to explain the third without explaining the first two.

I have come across different definitions of these terms. Some of these have been clear and some not so much. But here is how I would like to define and describe the three ‘Ds’.

  1. Digitization: Capturing information in a digital format. Digital here simply meaning the recording of information as a series of 1s and 0s.
    1. An example from the music industry: Moving music albums from analogue formats (cassette, vinyl) to digital (CDs). One of the original drivers for this was the improved quality of the sound in the new digital format. However this digitalized music where still sold and distributed by the traditional music distribution companies. Some saw digital music in the form of CDs as just was just another audio format like Cassette and Vinyl.
    2. An example from the banking industry: Moving from storing customer account transactions on paper ledgers to back office computer systems.
  2. Digitalization: Using digitized data and digital technologies to improve and transform a business process. This usually involves moving digital data through computer networks, and lowering the transaction costs of the business process.
    1. An example from the music industry: With the rise of the internet, the distribution model for digitalized music began to change. The distribution costs for digitized music could be significantly reduced by making it available for consumers to download. The almost zero marginal transaction cost introduced by this model became a threat to traditional analogue music distribution companies. However, file sharing platforms and companies like Napster took advantage of this digitalized distribution process.
    2. An example from the banking industry: No longer would customers require a paper passbook to get view of their accounts. The bank could generate a computer print out of their account statement on demand based digitized information on the banks computer system. With the invention of the ATM, banks could also provide this digital information to customers via that channel. And with the rise of the Internet, this digital account information could also be provided to customers with Internet banking.
      Business processes that would normally be done in a branch (for example making a payment to another bank account account) where outsourced to the customer via digital technologies like Internet banking. Replacing human contact with digital interfaces lower transaction costs but also enable the bank capture more digital information2.
  3. Digital Transformation: Changing an organization’s business activities and business model based on digitalized processes.
    1. An example from the music industry: The popularity of music distribution over the internet grew. The digital format allowed consumers to download specific tracts instead of the whole album. Traditional music publishers had to negotiate with new digital distributors like iTunes, and rethink their pricing model of selling music by the album. New entrants like Spotify adopted a whole different business model – for one flat subscription fee, a customer can access a vast library of music. This business model would have been impossible without digitalization.
    2. An example from the banking industry: The digitalization of many customer facing bank processes has grown. More customers are using digital technologies (e.g mobile banking and internet banking), and there has been decreased footfall at bank branches. Banks have had to wrestle with the question – do we need a physical bank branch? A large branch network was considered an asset a few decades ago. However in the face of digital transformation, many banks now see this as a liability2. They are adopting a cost-cutting intiative to reduce the size of their branch network.
      New market entrants have risen. Neo banks and non-bank Fintechs do not have the high cost of ‘assets’ (like physical branches) which traditional banks have. They do not have the baggage of some of the analogue processes that traditional banks have. They are able to take advantage of digital technologies like mobile banking and target segments of market. Neobanks are able to offer banking services at a fraction of the cost. Fintech payment companies have been able to take over many of the local and international payment business of banks.

References

  1. “Unleashing the killer app : Digital Strategies for Market Dominance” – by Larry Downes and Chunka Mui. 1998. Harvard Business School Press.

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