The term “digital transformation” is often used in today’s society and business world, but its meaning is not always clear. To gain a comprehensive understanding of digital transformation and its impact on modern businesses, it is essential to differentiate between two related concepts: digitization and digitalization.

This article explores the difference between the two concepts, and how digitalization is driving fundamental changes towards digital business models. By the end of this article, you will have a more profound understanding of digital transformation and its importance for businesses in the 21st century.

The Difference Between Digitization and Digitalization: Understanding the Core of Digital Transformation

In society and business, the term “digital transformation” is widely used, but there is often confusion about what it actually means. This is partly because many people perceive digital transformation as a process that has been happening for centuries. To understand what is different this time, it is helpful to break down digital transformation into two related concepts: digitization and digitalization.

Digitization refers to the automation of business processes through using computers and the implementation of off-the-shelf enterprise software. This process began in the 1960s and is still ongoing today. Digitization helps to convert analog and physical information into machine-readable digital information composed of bits and bytes.

Definition of digitization (Credit: Oktay Demir)

In the 20th century, digitization was primarily used for automation and optimization, by equipping workplaces with PCs, introducing office programs, and enterprise software, such as resource planning systems. Digitization was characterized by the automation of value chain processes, such as order processing, bill paying, computer-aided design, and production planning. Later it was characterized by the integration of stakeholders with firm processes, such as suppliers and customers, to integrate globally distributed supply chains.

While the introduction of enterprise software helped to increase efficiency and responsiveness, and drive additional economies of scale across firms, it never really changed the structure of a company or the rules of competition. Digitization has led to companies becoming businesses with digital processes.

Digitalization is fueled by exponential technologies such as Al, cloud computing, data analytics, loT, and individualized software. By integrating these technologies into a company’s business and operational model, organizations are revolutionizing how they create, capture, and deliver value. This has led to the emergence of digital business models where these technologies form the foundation of operations.

Definition of Digitalization (Credit: Oktay Demir)

Now, in the current wave of digital transformation, technology is becoming an integral part of the value creation, capturing, and delivery process itself. Digitalization affects the core and essence of a company. It weaves exponential technologies with the business and operational model of the company. By leveraging exponential technology, such as AI, cloud, data, IoT, and individualized software, it changes how a company creates, captures, and delivers value entirely. Digitalization has led to companies with digital business models by putting exponential technologies at the core of the business and operational working mode.

The Drivers of Digitalization

In the 21st century, digitalization is driven by four key technologies that are generally referred to as “general-purpose technologies”: 1) electricity, 2) computer processing power and software, 3) the internet, and 4) artificial intelligence. These technologies form a virtuous circle, with electricity being a prerequisite for processing power to run software, and connectivity of people and things generating data, which fuels artificial intelligence.

Moreover, these technologies exhibit exponential growth, which means that they have a continuous increase in performance and a decrease in costs over time. This growth has been evident in areas like renewable energy, sensors, and CPUs, which have shown increasing performance and decreasing costs over several decades. For instance, the cost of producing renewable electricity, such as solar and wind, has been declining exponentially. Similarly, the processing power of computers has been increasing exponentially, as has the amount of data generated due to the growing connectivity of people and things. Since artificial intelligence is based on these previous general-purpose technologies, it, too, is on an exponential growth trajectory.

The definition of digital transformation used in this article is based on digitalization, which refers to the integration of exponential technologies into all areas of a business and its value chain. 

Digital transformation leverages exponential technologies such as artificial intelligence (AI), cloud computing, data analytics, custom software, and the Internet of Things (IoT). The goal of digital transformation is to improve cost-effectiveness, efficiency, and sustainability, enhance customer experience, and create new business models that are better equipped to meet future challenges. 

This process results in fundamental changes to how businesses operate and deliver value to their customers, transforming everything from business processes to customer experiences and even entire organizational cultures.

Conclusion

Digital transformation is more than just the digitization of business processes. It involves the integration of exponential technologies such as AI, cloud, data, custom software, and IoT into all areas of a business and value chain, resulting in fundamental changes to how businesses operate and deliver value to customers. 

Digital transformation is a continuous process that aims to improve the competitiveness of companies. With the exponential growth and decreasing costs of general-purpose technologies, it is critical for businesses to embrace digital transformation to remain competitive and relevant in the 21st century.

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Appendix – Definition of term

The following definitions are provided for clarification:

• Value Capture indicates the value the customer is willing to pay the firm to satisfy their needs. Ideally, this value exceeds the cost of generation of the product / services. 
• Value deliver refers to the operationalization of the value creation and capture. 
• Value Creation indicates the problem that a firm solves for its customer. Also referred to as value proposition. 
• The business model(corporate strategy) describes how to create value (differentiation, cost, or focus) and capturing value (price, license, or promotion).
• The operating model (systems, processes, and capabilities) describes the way the strategy is carried out and how to deliver value to the customer. The operation model relates to scale (volume, complexity), scope (variety, range) and learning (R&D, continuous improvement, intellectual property generation).