What Is Digital Transformation and Why Does It Matter?

While forward-thinking organizations understand the importance of adopting new technology, staying on top of the latest digital transformation trends and best practices can be challenging.

Because digital transformation is a broad term, some business leaders might not know exactly how to approach it, strategically or tactically. However, one thing is for certain: In today’s rapidly evolving business world, sticking with outdated processes, technology, and thinking doesn’t work.

While no two business strategies are alike, to drive long-term business success, it’s not a matter of whether to digitally transform, but rather how to get it done.

Table of contents:

• Digital transformation basics
• Why is digital transformation so essential in 2023?
• The four types of digital transformation
• Examples of successful digital transformation

Digital transformation basics

Digital transformation is the process of adopting and integrating new technology across all areas of a company to improve business performance. These ongoing activities have a significant impact on how a business operates, meets the needs of customers, and builds and develops team members.

To support successful technology adoption, understanding the six pillars of digital transformation—beyond technology—is important. The pillars include:

• Experiences. Understand the customer journey to identify key areas to improve.
• People. Engage and develop skilled full-time workers and independent professionals with a bias for action.
• Change. Build an organization capable of changing in an agile and efficient way.
• Innovation. Communicate and collaborate to support ongoing innovation.
• Leadership. Secure approval and direction from senior leadership to support digital transformation initiatives.
• Culture. Define and support a mission-driven culture that embraces change, allows for failure, and encourages curiosity.

A key goal of digital transformation is driving efficiency and optimization. Before developing a digital transformation strategy, consider doing a deep dive to answer the following questions:

• Which aspects of the business are inefficient or expensive and would benefit most from digital transformation?
• What are the costs associated with digital transformation?
• Do you have the right team and infrastructure in place to support the strategy?
• Do you have buy-in from senior executives and stakeholders?
• How can technology support a more seamless customer experience?
• How can technology be used to engage team members and drive improved business outcomes?
• How are your competitors approaching digital transformation?

Related: Developing a Digital Transformation Strategy in 2022

Why is digital transformation so essential in 2023?

The global pandemic has accelerated the need for digital transformation. In recent years, organizations have had to quickly determine how to best serve their customers while adapting to remote and hybrid work environments.

Technology adoption shows no signs of slowing down. According to data from the research company IDC, global spending on the digital transformation of business practices, products, and organizations is forecast to reach $1.8 trillion in 2022, an increase of 17.6% over 2021. This level of growth is expected to continue through 2025. However, research from the World Economic Forum found that only half of companies are prepared for disruption related to digital transformation.

A proactive digital transformation strategy is essential for organizations to succeed, both now and in the future. Organizations that invest in digital technologies will reap the benefits, while those that fall behind will face challenges with maintaining relevance in their target markets.

Benefits of digital transformation include:

• Improved agility and responsiveness
• More efficient remote and distributed work
• Better customer engagement
• Increased revenue
• Continued business relevance

Drawbacks of lagging on digital transformation include:

• Decreased productivity
• Increased operational costs
• Recruitment and hiring challenges
• Cybersecurity risks
• Lost customers and business relevance  

Related: Why Every HR Department Needs to Digitally Transform—Now

The 4 types of digital transformation

Any time your organization develops or evolves your digital transformation strategy, you should keep the following key types of digital transformation in mind.

1. Process transformation

Process transformation involves reinventing and modernizing business processes to integrate new technology, drive efficiency, lower costs, and improve quality.

An example of process transformation is implementing a project management tool to free up time previously spent on manual processes, stay on track with individual project tasks, and complete projects on deadline.

Another example is streamlining the onboarding process to ensure all steps are completed in a timely manner and improve the experience for all team members.

One important aspect of any process transformation is identifying and tracking key metrics to determine success. These can include costs, time savings, errors, and improved business outcomes, among other metrics.

2. Business model transformation

While process transformation focuses on improving specific areas of the business, with business model transformation, companies rethink how value is delivered to customers in a specific industry. Examples include Uber reinventing the taxi industry and Apple transforming the music industry with iTunes.

Business model transformations lead to significant new opportunities for growth. Since such transformations are complex, they require involvement and support across leadership and various departments within the business. To support business continuity, these opportunities are often launched as separate business units while maintaining traditional business operations.

3. Domain transformation

Through domain transformation, organizations adopt technology to reinvent products or services. Domain transformation leverages a company's advantages in one domain to expand into another. This type of digital transformation presents a substantial opportunity for technology to unlock entirely new businesses and revenue streams for companies beyond their current target markets.

Amazon is one of the most common examples. While Amazon started as an online bookseller, the company has since expanded to add its own streaming platform (Amazon Prime), the world’s largest cloud computing and infrastructure service (Amazon Web Services), and many other product and service offerings.

Domain transformation is the least common type of digital transformation, but in today’s digital-first world, businesses have access to a wide range of technology needed to efficiently unlock new growth, including cloud computing, artificial intelligence, machine learning, and more.

Related: What Digital Transformation Looks Like in 2022 and Beyond

4. Cultural and organizational transformation

Successful digital transformation requires an organizational mindset shift. In addition to adopting new technology or rethinking product and service offerings, aligning the business culture and organization with digital transformation goals is critical.

Research from Boston Consulting Group shows that 70% of digital transformation initiatives fall short, most often due to resistance or simply apathy and inertia from team members. In the absence of organizational transformation, businesses face such risks as slow technology adoption, decreased productivity, and lost revenue. On the other hand, encouraging a collaborative effort can help foster a culture that understands, embraces, and advances digital transformation.

Organizational transformation includes developing agile workflows, having a bias toward action, focusing on learning and building skills, encouraging collaboration, and taking active steps to bring change to the organization.

Examples of successful digital transformation

Many of the world’s most well-known brands excel at digital transformation. Every company’s business strategy is different, so this list is not meant as a guide, but rather inspiration for your organization’s digital transformation journey.

Examples include:

Netflix

Netflix is a noted example of business model transformation, and to keep pace with evolving consumer demands, the company always seeks new ways to improve the customer experience. Initially a competitor to brick-and-mortar video rental chain Blockbuster, Netflix launched a mail-order DVD service in 2002.

By 2007, Netflix began offering customers a video streaming subscription in addition to physical DVD rentals, paving the way for the countless streaming services available today—including Amazon Prime, Hulu, and Disney+, to name a few.

To further expand customer engagement and stand out from competing streaming services, Netflix also invests significantly in creating new, original content for its diverse subscriber base.

Through 2021, Netflix saw significant revenue growth, while only one store remains for early competitor Blockbuster. When it first launched its mail-order service in 2002, Netflix generated $152.8 million in revenue. By 2021, it reached nearly $30 billion in revenue.

However, in the second quarter of 2022, Netflix lost nearly one million subscribers, largely due to a subscription price hike and increasing competition from other streaming services. As a result, Netflix continues to identify ways to transform its business model, including launching a lower cost, ad-supported subscription tier in 2023.

The Netflix success story and recent slowdown is a classic example of the need to take an ongoing approach to digital transformation.

IKEA

Swedish retail giant IKEA is known for its furniture showrooms and aisles of ready-to-assemble products. While IKEA has focused on digital transformation for some time, with e-commerce capabilities first launching in 2001, the global pandemic accelerated the company’s digital transformation strategy.

In 2020, IKEA closed 75% of its stores for about seven weeks, losing $1.5 billion in sales, but its digital-first strategy helped the business stay afloat during this challenging period. Prior to the pandemic, IKEA revamped the customer journey to focus on an end-to-end online shopping experience, moving interactions, the purchase process, and sales support online.

IKEA’s digital readiness and agility enabled the company to accelerate online sales while stores were closed—and beyond. Once stores reopened, IKEA was well ahead of other retailers with the pandemic-driven contactless curbside pickup trend, as it launched a “Click & Collect” feature to buy online and pick up in store in 2015.

IKEA further expanded its digital transformation strategy by testing augmented reality and virtual reality capabilities. The company acquired Geomagical Labs in 2020 to develop AI-enabled solutions that let customers visualize and model IKEA products in their rooms before they purchase. This user-friendly solution is available via a smartphone app, helping to further engage customers and push them closer to a purchase.

A commitment to digital transformation contributed to a 73% increase in online sales in 2021. According to IKEA Chief Digital Officer Barbara Martin Coppola, much of this success can be attributed to organizational transformation and a focus on people.

In a Diginomica article about IKEA’s digital transformation, Coppola said, “It's all about people. The starting point sometimes is technology or having the right systems—it’s not. It's actually about mindsets, people, having the right energy, the right motivation and the right skills to be able to create a whole new company or a whole new way of thinking.”

Subway

Subway is in the midst of a multi-year, multi-faceted digital transformation,” with the goal of enhancing customer engagement and building loyalty in the digital age.

One step Subway took to reach digital-first customers was developing a mobile app for online ordering and payments. Subway further enhanced the app by offering customers options to name and save their sandwich order preferences in the app, store payment methods, and complete one-click orders.

Digital transformation isn’t always an overnight success, but rather a long-term commitment and evolution. Subway’s revenue was mostly flat in 2018 and 2019 and declined in 2020 before Subway further evolved its strategy and saw record revenue in 2021.

In 2021, Subway launched its Eat Fresh® Refresh campaign, the largest menu update in the brand’s history. The brand also adapted its digital and in-store experience to meet customers’ changing preferences across online ordering, delivery, curbside, pick up, and catering. As a result, digital sales surpassed $1.3 billion in 2021, tripling since 2019.

Honeywell

Like many other companies, Honeywell, a 100-year-old manufacturing conglomerate, had no choice but to quickly pivot its business operations when the global pandemic hit in March 2020.

Honeywell’s Chief Digital Technology Officer, Sheila Jordan, joined the company in January 2020 and only two months into her tenure, she faced the challenge of quickly redesigning Honeywell’s network infrastructure to support remote work. Since Honeywell was primarily a manufacturing company—rather than a software company—for a century, the network did not have the capacity to seamlessly support 110,000 employees in 83 countries.

At the time, while tens of thousands of team members worked remotely, Honeywell’s VPN capacity was only about a third of what the company needed—and security is a top priority for Honeywell when it comes to remote work. The company also needed to supply thousands of workers who weren’t previously remote with the right laptops. By quickly identifying necessary and rolling out updates, Honeywell increased its VPN capacity to support 90,000 workers within eight days, and supported the full 110,000 workers soon after.

Another challenge Honeywell faced with this transition was the need to increase its IT staff after years of outsourcing its tech team to third-party consultants and vendors. Honeywell shifted from an outsourcing to an insourcing model and hired 600 IT staff members within six months. The new insourcing model is projected to save Honeywell millions of dollars in IT spend each year and better position the company with the resources needed to continue with its digital transformation.  

Related: Examples of Digital Transformation by Vertical

Find the right talent to drive digital transformation

Digital transformation is an ongoing, cross-functional process; having the right team in place can help your business drive successful outcomes.

Talented independent professionals are available on Upwork, the world’s work marketplace to affordably scale your team and support your organization’s digital transformation strategy.

To further fuel growth and business success, Enterprise Suite is a powerful platform that offers immediate access to highly skilled independent talent, so you can empower teams across your organization to think bigger. Through Enterprise Suite, we’re here to help you build, design, and manage a workforce with the scale and flexibility to move with the market.

Learn more about Enterprise Suite and get started today.