59. Digitalization Staircase

Key Definitions

Digitalization is the process of using digital means to change activities that were previously carried out physically or using analogue technology. These digital means include IT hardware (equipment such as computers, mobile phones, and robots), software (programs such as operating systems, applications, and artificial intelligence) and connectivity (interaction methods such as the internet, 5G, and near field communication).

Digitalization can be applied to a single activity (e.g. printing a letter instead of typing one), to a workflow of activities (e.g. tracking inventory with an ERP system instead using paper records), to a value proposition (e.g. using banking apps instead of branch offices) and even the entire business (e.g. running a platform instead of a physical store).

Conceptual Model

The Digitalization Staircase gives insight into four categories of digitalization and the potential benefits that can be gained as the ‘staircase’ is ascended. The higher up one goes, the more competitive value the move is likely to create – from sustaining the current competitive position to disrupting the competitive game and building a new position. Yet, the higher one climbs, the larger the scale of change will be – from a modest transition to a full-scale transformation.

Key Elements

The four steps on the staircase are the following:

1. Digital Automation. When single activities are performed by a machine without a direct human operator, it is called automation – traffic lights change, heating is turned on and a robot vacuum cleaner whizzes around. While some of this automation is possible using analogue technology, digital means are generally smaller, cheaper, and more powerful, hugely accelerating the process. The result is often that tasks can be carried out cheaper, faster, and more accurately/reliably than by manual means.
2. Digital Process Transformation. When not just one, but a sequence activities, is digitalized, it is called digital process transformation – e.g. when the invoicing or quality control systems are digitalized. Generally, the activities are not automated separately, but the entire workflow is reconfigured, changing the shape and order of each activity. As with automation, the result is often lower cost, higher speed, and more accuracy, but also a process that is more convenient, more controlled, and leads to better quality.
3. Digital Experience Transformation. When it is not only an internal process being digitalized, but also the externally oriented process of interacting with the customer somewhere during their customer journey, we speak of digital experience transformation. As with the previous steps on the stairs, the customer experience can be made cheaper, faster, more accurate, easier, more controlled, and of higher quality, but also more personalized, more integrated into a frictionless flow and overall, more enjoyable.
4. Digital Business Transformation. When multiple internal and external processes are significantly changed by introducing a different business model based on digital means, it is called digital business transformation. Besides all of the previously mentioned strengths of digitalization, a business transformation can create an entirely distinct business model, potentially targeted at a specific market segment, while also building a unique competitive advantage that is dominant and very difficult for others to copy.

Key Insights

• Digitalization is about leveraging technology to create value. Digitalization is the process of using digital technology (i.e. hardware, software and connectivity) to replace manual labor and/or analogue machinery (not to be confused with digitization – the change of analogue information into zeros and ones). From a business perspective, digitalization is about employing new technology to adapt an organization’s way of working to create added value and strengthen an organization’s competitive position.
• Digitalization is not always transformational. Although we live in the ‘Age of Digital Transformation’, not every application of digital technology is ‘transformational’. It is important to distinguish which aspects of an organization’s work are being changed by digital means to understand the level of transformation.
• Digitalization can be found at four levels. Digital technologies can be applied at four levels or steps on the ‘digital staircase’ At the lowest level, digital automation, only single activities are digitalized, while at the second level, digital process transformation, sequences of internally oriented activities are changed. At the third level, digital experience transformation, customer-facing activities are also digitalized, while at the fourth level, digital business transformation, the entire business model will be converted.
• Digitalization can create different types of value. Every step up the digitalization staircase gives more potential for competitive value creation, going from improving cost, speed, and accuracy (level 1), to enhancing convenience, control, and quality (level 2), to increasing personalization, frictionless flow and fun (level 3) and building business model distinctiveness, segment focus and a winner-takes-all market position (level 4).
• Digitalization can require different levels of change. Yet, every step up requires more change, going from a simple activity transition to full organizational transformation.