Digital transformation

Creating new business models where digital meets physical

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Digital transformation is intensifying

Individuals and businesses alike are embracing the digital revolution. Social networks and digital devices are being used to engage government, businesses and civil society, as well as friends and family. People are using mobile, interactive tools to determine who to trust, where to go and what to buy.

At the same time, businesses are undertaking their own digital transformations, rethinking what customers value most and creating operating models that take advantage of what’s newly possible for competitive differentiation. The challenge for business is how fast and how far to go on the path to digital transformation.

The new digital age

In every industry, business leaders realize customer expectations have created tremendous pressure to change the way they set their strategies andrun their organizations. Yet, because they have to manage existing, often traditional, offerings and operations, new requirements to incorporate information and interactivity quickly drive up costs and complexity.

Back in 2010, our IBM Global CEO Study found complexity to be the biggest challenge facing CEOs. However, in that same study, the ability for technology to mitigate complexity was also clear: technology was second only to market factors as a force for change. This seminal digital transformation report explores the opportunities and challenges that arise when business and operating models need to be integrated into existing organizational capabilities.

Business leaders have long used information technology to improve productivity and efficiency, reach new markets and optimize supply chains. What’s new is that customer expectations have also changed. People everywhere are using social networks to find jobs and restaurants, lost friends and new partners—and, as citizens, to achieve common political goals. They are using the internet for entertainment, shopping, socializing, and household management.

Start with an integration strategy

How can businesses best respond to this shift? How can they take advantageof the opportunity to innovate, differentiate and grow? And how can they do all this cost-efficiently, optimizing the newest information technologies as part of their overall physical operations?

In our analysis of leading companies and our work with clients, we have found that companies with a cohesive strategy for integrating digital and physical elements can successfully transform their business models—and set new directions for entire industries.

These companies focus on two complementary activities: reshaping customer value propositions, and transforming operating models using digital technologies for greater customer interaction and collaboration. To do so, they are building a new set of capabilities that allows them to progress along both dimensions.

Forces for business change

Chief among forces for transformation are the surge in devices for mobile connectivity, such as smart phones and tablets, and the ongoing expansive creation of social networks. Both of these developments are creating an exponential explosion in data, which, in turn, requires business analytics to make sense and take full advantage of the information.

Businesses have always looked at new information and digital technology in terms of what it can do for them, for example: greater profitability, and expanded customer reach through online shopping. Now, customers also have a range of new choices, many of which are beyond the purview of business. Decisions about what to focus on or buy are increasingly informed through social networks, where personal and business contacts, product selections, home video clips, favorite news items, even real-time location coordinates, are shared instantly and widely.

People who reach out to their personal networks for advice on the latest generation of washing machines are also likely to use smart phones or other devices to check out their professional networks for views about business procurement choices. The habits of consumers—such as seeking independent information and advice before making a purchase—have become the habits of business buyers.

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Meet the authors

Saul Berman, PhD

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, Vice President and Chief Strategist

Paul Papas

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, Global Leader, Digital Strategy & IBM iX

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