Digital transformation reshapes businesses by integrating new technologies, improving processes, and developing innovative models. The global digital transformation market size was valued at around $469.8 billion in 2020 and is projected to reach $1,009.8 billion by 2025, growing at a CAGR of 16.5%. How will businesses approach digital transformation to remain competitive?

The Digital Age transformed how companies interact with customers, changing the processes and business models. The global digital transformation market is expected to grow to $1,009.8 billion by 2025 from $469.8 billion in 2020, at a CAGR of 16.5% during this period.

Instead of sticking to traditional methods, companies are adapting to digital changes to stay competitive. This transformation involves creating new business models, improving processes, and developing new software and systems. The goal is to boost profits, gain a competitive edge, and increase efficiency. By updating their processes and business models, companies can work more efficiently, encourage innovation, and offer better experiences to their customers.

“There is no alternative to digital transformation. Visionary companies will carve out new strategic options for themselves- those who don't adapt will fail.”- Jeff Bezos, founder of Amazon.

Siemens AG, a global tech giant in energy, healthcare, and infrastructure, undertook a major digital transformation to stay competitive. In the 2000s, Siemens integrated digital technologies like IoT, AI, and automation across its operations. This shift, including smart factories, cloud-based solutions with its MindSphere platform, and digital twin technology, helped streamline processes, improve productivity, and reduce costs.

The results were impressive: Siemens saw increased efficiency with reduced downtime and improved machine uptime by 10-20%. Maintenance costs dropped by 30%, and energy use fell by 15%. Enhanced precision in manufacturing boosted product quality, strengthening Siemens' reputation. Additionally, the MindSphere platform improved customer satisfaction by providing valuable insights and optimisation tools, while digital innovations made Siemens more agile and opened new revenue opportunities.

What is digital transformation?

Digital transformation refers to the process by which businesses and organisations leverage digital technologies to fundamentally change how they operate, deliver value to customers, and compete in the market. It involves integrating digital tools and strategies into all areas of a business, transforming processes, enhancing customer experiences, and driving innovation. According to the World Economic Forum, $100 trillion will be added to the world economy through digital transformation by 2025. Moreover, by 2025, interactions driven by platforms are expected to enable roughly two-thirds of the $100 trillion value at stake from digitalisation.

For example, small and medium-sized enterprises (SMEs) have been increasingly adopting digital transformation to remain competitive. Gousto, a meal kit delivery service, uses AI and data analytics to optimise inventory and reduce food waste, providing a more efficient and sustainable service. Renishaw, a precision engineering company, has implemented IoT and automation to improve production processes and product quality

Key components of digital transformation:

  1. Technology Integration: Using advanced technologies like artificial intelligence (AI), cloud computing, big data, the Internet of Things (IoT), and automation to modernise and streamline operations.
  2. Process Optimisation: Digital tools are used to re-engineer and automate workflows, improve efficiency, and reduce manual efforts. This may involve transforming supply chains, production processes, customer service, or marketing.
  3. Data-Driven Decision-Making: Companies gather vast amounts of data through digital tools and use analytics to make informed business decisions. This data-driven approach improves agility and responsiveness to market changes.
  4. Customer Experience: Digital transformation focuses on enhancing customer interactions through personalised experiences, real-time engagement, and new digital services, ultimately increasing customer satisfaction and loyalty.
  5. Cultural Change: Digital transformation requires a shift in company culture, with employees adopting new skills, mindsets, and agile practices to keep up with fast-evolving technologies.

What are the four main areas of digital transformation?

Digital transformation is not just about adopting new technologies but also about rethinking business strategies and processes to thrive in a digital-first world. This transformation can generally be broken down into four main areas that encompass the key elements of organisational change.

1. Process Transformation: This means redesigning how businesses operate using digital tools to make processes faster and more efficient. By using automation, AI, cloud computing, and data analytics, companies can improve their workflows and cut costs. For instance, P&G implemented digital tools like IoT sensors, AI, and data analytics to enhance its manufacturing processes. In their paper production facilities, P&G uses IoT sensors to monitor machinery performance in real time. By analysing data from these sensors with AI-driven analytics, they can predict when a machine is likely to fail or require maintenance. This predictive maintenance approach helps P&G reduce unplanned downtime, optimise production schedules, and decrease overall maintenance costs. 

2. Business Model Transformation: Digital transformation can create entirely new business models or significantly change existing ones. It might involve using digital platforms, monetising data, or shifting from selling products to offering services. For example, Netflix changed from renting DVDs to streaming digital content, completely changing the entertainment industry.

3. Domain Transformation: This involves entering new markets by using emerging technologies. Businesses can explore new opportunities and industries beyond their original focus. For example, Amazon started as an online retailer but expanded into cloud computing with Amazon Web Services (AWS), becoming a leader in this new field.

4. Cultural/Organisational Transformation: Digital transformation also requires changing a company's culture and working methods. This means fostering innovation, continuous learning, and flexible working models. For example, Microsoft and Adobe shifted their cultures to focus on cloud technology and collaboration, leading to new growth and innovation.

Industrial revolution: Development and evolution

The Industrial Revolution marks a significant transformation in production technologies, shifting from agrarian and handicraft economies to industrialisation, digitisation, and automation. It encompasses technological, socioeconomic, and cultural changes, resulting in irreversible impacts on business and society.

1. First Industrial Revolution: Power Generation (18th-19th Century)

The First Industrial Revolution began in Britain around 1760, characterised by the introduction of the James Watt steam engine. Watt's 1769 patent for an improved steam engine, which included a separate condenser, revolutionised mechanised labour in the textile industry. This period saw the transition from hand tools to machine tools, leading to mass production of steel, chemicals, and petroleum products, and fostering the centralisation of production in factories.

2. Second Industrial Revolution: Industrialisation (Early 20th Century)

The Second Industrial Revolution, beginning in the early 20th century, was driven by the widespread use of electrical energy and mass production techniques. Key innovations included the assembly line, introduced by Henry Ford for automotive manufacturing, and the development of electrical infrastructure. This era highlighted the need for effective personnel management and coordination, as well as the growth of telecommunications technologies like the telephone, radio, and television.

3. Third Industrial Revolution: Electronic Automation (Late 20th Century)

The Third Industrial Revolution brought about digitisation and automation through electronic and IT systems. Digitisation refers to converting data into a digital format, enhancing efficiency and accessibility. This period was marked by advancements in telecommunications and the rise of renewables, supported by thought leaders like Jeremy Rifkin, who emphasised the need for collaboration to drive economic transformation.

4. Fourth Industrial Revolution: Smart Automation (21st Century)

The Fourth Industrial Revolution integrates digital and physical technologies through cyber-physical systems, smart factories, artificial intelligence, and robotics. It emphasises digitalisation, which transforms business processes beyond mere digitisation, leveraging technologies like the Internet of Things (IoT), Industry 4.0, and big data. Industry 4.0 aims to enhance flexibility and productivity, enabling customised, efficient manufacturing and new business models. Key trends include big data, autonomous robots, simulation, IoT, cybersecurity, cloud computing, additive manufacturing, and augmented reality. According to Statista’s projections, the worldwide expenditure on digital transformation is expected to reach $3.4 trillion by 2026.

The drivers of technological change (digital transformation) are:

  • Cloud and mobile technologies
  • Big Data analytics and processing power
  • New energy sources and technologies
  • Internet of Things (IoT) and Industrial IoT
  • Sharing economy and crowd-sourcing
  • Robotics and autonomous transport
  • Artificial Intelligence (AI)
  • Advanced manufacturing and 3D printing
  • Biotechnology and advanced materials

The impact of digital transformation on business processes

To remain competitive, businesses must continuously enhance and adapt their processes, while fostering strategic and complementary partnerships. Business processes are defined as a set of logically related tasks aimed at achieving specific outcomes. These processes are characterised by two key features:

  1. Customer Focus: Business processes have defined outcomes with recipients who may be either internal or external to the organisation.
  2. Cross-Organisational Boundaries: Processes typically span multiple organisational subunits and are independent of formal structures.

Examples of such processes include:

  • Developing a new product
  • Ordering goods from suppliers
  • Creating marketing plans
  • Processing insurance claims
  • Writing proposals for government contracts

Adapting to Change

Business processes are subject to change due to efficiency improvements, technological advancements, regulatory requirements, or internal issues. Effective management involves controlling and adjusting these processes to enhance performance. Modern technology offers various methods for process improvement and optimisation. Decisions on which strategies to employ depend on the specific context and objectives of the organisation. Changes can be:

  • Radical (Reengineering): A complete overhaul of existing processes for competitive advantage. For example, Airbnb underwent a significant transformation when it realised that photos of rental spaces were crucial for attracting customers. They decided to completely overhaul their process by hiring professional photographers to take high-quality images of listings, which drastically improved user experience and increased bookings. This shift gave Airbnb a competitive advantage and helped them establish trust with potential guests.
  • Incremental (Refinement): Adjustments to improve processes without substantial changes to established practices. As Airbnb continued to grow, it made incremental improvements to its platform, such as refining its search algorithms, introducing more flexible booking options, and enhancing the review system. 

Data Integration and Enterprise Systems

Integrating data across the organisation is crucial for strategic decision-making. Centralised databases reduce costs and enhance information flow. Common business processes automated in enterprise systems include:

  • Financial and Accounting: General ledger, accounts payable/receivable, cash management, financial reporting
  • Human Resources: Personnel administration, payroll, recruitment, performance management
  • Manufacturing and Production: Procurement, inventory management, production planning, quality control
  • Sales and Marketing: Order processing, pricing, billing, sales planning

For instance, Stripe, a financial technology startup, exemplifies effective data integration and enterprise systems. Stripe enhances financial operations, allowing businesses to streamline payment reconciliation, billing, and financial reporting by centralising transaction data. The company's integrated HR systems manage payroll, recruitment, and employee performance efficiently. Additionally, Stripe automates order processing, pricing, and sales planning, which supports competitive pricing and personalised services for its clients.

Digital Transformation

Digital transformation alters business models, processes, and organisational structures. For manufacturing companies, digital transformation often focuses on reducing costs and improving production processes. Digitisation facilitates business expansion and internationalisation by optimising production and internal communications. Key impacts include:

  • Management Models: Enhanced decision-making with comprehensive performance data.
  • Customer-Driven Processes: Improved responsiveness to customer demand.
  • Organisational Structure: More disciplined and flexible operations.

Oura, a health tech startup, illustrates digital transformation's impact on business models and operations. By integrating smart ring technology, Oura enhances its management models with detailed health data, aiding in optimised product features and user experiences. The company's ability to analyse real-time data improves its responsiveness to customer needs and preferences, allowing for continual refinement of its offerings. Additionally, Oura’s agile organisational structure supports flexible operations and efficient internal communications. 

Industry Disruption and Innovation

Digital trends are reshaping traditional value chains, with new entrants challenging established models. Technologies driving these changes include connectivity, new business models, and regulatory practices. The impact is evident across various stages of the value chain, including R&D, procurement, and sales. By 2025, a significant portion of global revenue will be generated online, with emerging markets like China showing high growth potential in parts and service retailing.

Managing Consumer Expectations

Industries must address consumer expectations for security and data privacy amidst digital transformation. Effective management of consumer data is critical in today’s digital landscape.

DuckDuckGo, a privacy-focused search engine startup, effectively manages consumer expectations for security and data privacy amidst digital transformation. Unlike many tech companies, DuckDuckGo distinguishes itself by not tracking user activity or collecting personal data. This commitment to privacy ensures that user searches remain anonymous, addressing growing concerns over data security. 

Digital Transformation Strategy

A successful digital transformation strategy begins with a thorough analysis of current business processes and models. Key areas to assess include:

  • Digital Attitude: Organisational readiness for digital change.
  • Management Support: Alignment with digital business strategy.
  • Technology Utilisation: Current use of digital tools and communication channels.
  • Digital Infrastructure: Suitability of existing infrastructure.
  • Investment: Resources allocated for digital solutions.

Chime, a fintech startup, exemplifies a successful digital transformation strategy by thoroughly analysing its business processes and models. The company assessed its digital attitude by fostering a culture focused on user-centric solutions and ensured management support through strong leadership alignment with its digital strategy. Chime effectively utilised advanced digital tools and communication channels to streamline banking services and invested in robust digital infrastructure to support its online-only model. Significant resources were allocated to develop a user-friendly app and integrate it with other financial services. 

Cloud Services and Sector-Specific Trends

Cloud services have seen significant growth due to their operational and cost benefits. These services support various industries, including automotive, financial, and retail, by providing integrated IT platforms that optimise processes and ensure transparency. For example, Brex, a fintech startup, demonstrates the impact of cloud services on sector-specific trends. It leverages cloud-based platforms to streamline financial management for startups and growing businesses.

Sector-Specific Challenges and Opportunities

  • Banking: Digitalisation is driven by regulatory changes, real-time payments, and new payment technologies. Nubank leverages digitalisation to navigate regulatory changes, provide real-time payments, and implement new payment technologies. Their digital-first approach simplifies banking services and enhances customer experience while adapting to regulatory requirements.
  • Agriculture: Requires updates in education and training to support transformation. AgriWebb offers comprehensive training programs and resources to help farmers and agricultural professionals adapt to digital tools and practices. Their platform includes user-friendly interfaces and training modules designed to educate users on effective farm management, data analysis, and leveraging technology for better decision-making.
  • Supply Chain Management: The shift from push-based to pull-based models enhances responsiveness and reduces errors through web-based systems. Flexport uses a web-based platform to provide real-time visibility and data analytics for global shipping and logistics. By shifting to a pull-based model, where supply chain decisions are driven by actual demand and real-time data, Flexport enhances responsiveness and reduces errors. Their platform integrates various logistics functions, from booking shipments to tracking cargo, allowing businesses to make informed decisions and optimize their supply chain processes.

Customer-Driven Models

Customer-driven processes that cross organisational boundaries are increasingly effective, particularly in response to changing demands. Supply Chain Management (SCM) systems enable a shift from sequential to concurrent supply chains, facilitating better alignment with customer needs.

ShipBob’s platform integrates various aspects of e-commerce logistics, from warehousing to order fulfilment. ShipBob's system supports seamless communication between retailers, warehouses, and shipping providers, ensuring that customer needs are met more efficiently and effectively. This customer-driven approach enhances the overall responsiveness and adaptability of the supply chain, meeting the evolving demands of the e-commerce sector.

Key ways digital transformation impacts business processes

1. Increased Efficiency and Automation

Digital transformation automates repetitive and manual tasks, reducing human error and freeing employees to focus on more strategic work. Tools like Robotic Process Automation (RPA) allow businesses to automate routine functions such as data entry, invoice processing, and customer service inquiries. This leads to faster processing times and cost savings. In finance departments, digital transformation has automated tasks like payroll, invoicing, and expense tracking, drastically reducing processing time.

2. Improved Decision-Making Through Data Analytics

The availability of big data, combined with advanced analytics, helps businesses make more informed decisions. Companies can collect, process, and analyse data from various sources to gain real-time insights into market trends, customer preferences, and operational performance. This enables better strategic planning and more precise forecasting. For instance, Retailers use customer data to predict shopping behaviours and personalise marketing efforts, improving sales and customer loyalty.

3. Enhanced Customer Experience

Digital transformation allows businesses to improve customer interactions and provide personalised services. With tools like AI-driven chatbots, CRM systems, and mobile apps, companies can offer faster, more efficient, and tailored experiences. This leads to higher customer satisfaction, engagement, and loyalty. For instance, Banks now offer mobile apps for 24/7 banking services, allowing customers to access their accounts, transfer money, and make payments from their devices.

4. Agility and Innovation

Businesses that undergo digital transformation become more agile and can respond quickly to market changes. With digital tools, companies can innovate rapidly, scale new products or services, and explore new revenue streams. Digital platforms and cloud-based systems make it easier to launch new initiatives with minimal infrastructure costs. For instance, Netflix’s shift from DVD rentals to a cloud-based streaming service is a classic example of digital transformation driving business model innovation.

5. Cost Reduction

Digitalisation helps reduce operational costs by eliminating redundant processes and optimising resource use. Cloud computing, for example, allows businesses to scale resources according to demand without the need for large upfront investments in IT infrastructure. Companies that migrate to cloud computing reduce their spending on physical servers and maintenance, shifting to a more flexible, pay-as-you-go model.

6. Improved Collaboration and Communication

Digital tools such as collaboration platforms (e.g., Microsoft Teams, Slack) and cloud-based document sharing enable better communication and collaboration across departments, locations, and teams. Employees can work remotely and in real time, leading to more dynamic and efficient teamwork. Global organisations use cloud-based collaboration tools to coordinate projects across multiple regions, reducing delays and improving productivity.

The future of digital transformation in business landscape

Digital transformation has become a key driver of innovation and growth across industries. As technology continues to evolve, the future of digital transformation will likely involve even deeper integration of emerging tools, reshaping business models, and revolutionising how companies operate, engage with customers, and innovate. Below are some major trends that will define the future of digital transformation in business.

1. AI and Automation Will Become Pervasive

Artificial Intelligence (AI) and automation will continue to play a dominant role in the future of digital transformation. Businesses will increasingly rely on AI-driven solutions to streamline operations, enhance customer experiences, and improve decision-making. With advancements in machine learning, natural language processing, and robotic process automation (RPA), companies will automate more complex tasks, allowing for greater operational efficiency and cost reduction.

2. Increased Use of Data Analytics for Decision-Making

As businesses collect more data than ever before, leveraging advanced analytics will become a cornerstone of digital transformation. Real-time data analysis will allow companies to make informed, data-driven decisions, optimising everything from product development to customer targeting. Predictive analytics will help businesses forecast trends and proactively adapt to market changes, leading to more agile and responsive operations.

3. Rise of the Internet of Things (IoT) and Edge Computing

IoT and edge computing will expand the scope of digital transformation, enabling businesses to connect and manage devices, machines, and systems across diverse locations. IoT will provide businesses with real-time insights into their operations by gathering data from smart sensors and devices, while edge computing will process this data locally for faster decision-making. This is especially crucial for industries like manufacturing, logistics, and healthcare, where real-time data is critical.

4. Cybersecurity Becomes a Critical Priority

As businesses become more digital and data-driven, cybersecurity will be a top priority for ensuring the safety and integrity of digital infrastructure. Companies will invest heavily in advanced security solutions like AI-driven threat detection, blockchain technology, and zero-trust architecture to mitigate the risks of cyber-attacks and data breaches. With the increasing sophistication of cyber threats, maintaining robust cybersecurity frameworks will be essential for business continuity.

5. Sustainability and Green Digital Transformation

As businesses become more conscious of their environmental impact, digital transformation will also support sustainability efforts. Green technologies, such as energy-efficient data centres, smart grids, and supply chain optimisation through IoT, will help companies reduce their carbon footprint and move towards sustainable business practices. The focus on digital sustainability will become a key factor for businesses to attract eco-conscious consumers and investors. Logistics companies will use AI and IoT to optimise delivery routes, reducing fuel consumption and greenhouse gas emissions.