Managing Digital Transformation: Scope of Transformation and Modalities of Value Co-Generation and Delivery

Abstract

The diffusion of digital technologies has enabled a notable transformation in the firms’ boundaries, processes, structures, roles, and interactions. It is now clear that digital transformation is not just a traditional IT back-end process; rather it affects the organization as a whole, redefining strategies, entrepreneurial processes, innovation, and governance mechanisms. This permeation has led to the emergence of new ways of organizing firms’ value chains and interfirm relationships, which now increasingly occur in digital ecosystems and marketplaces. The scope of transformation as well as the modalities of value co-generation and delivery are here used to introduce the content of this Special Issue of California Management Review on Digital Transformation.

Keywords

platforms transformations IT management value chains ecosystems governance strategic innovations

The diffusion of digital technologies—for example, Artificial Intelligence, blockchain, cloud computing, digital platforms, virtual reality (VR), and the like—has enabled a notable transformation in the firms’ boundaries, processes, structures, roles, and interactions. It is now clear, and widely accepted, that digital transformation is not just a traditional IT back-end process; rather it affects the organization as a whole, redefining its strategies, entrepreneurial processes, innovation, and governance mechanisms. This permeation has in turn led to the emergence of new ways of organizing firms’ value chains and interfirm relationships, which now increasingly occur not in isolation but in so-called digital ecosystems¹ and digital marketplaces.² Firms and organizations use digital transformation in different ways. Some use it to improve the internal organizing process of innovation and run it more efficiently and effectively (e.g., GE, IBM). Others use it to sharpen the way they connect to and collaborate with consumers, product suppliers, and other firms, including rivals (e.g., BMW, CFA, and Tesla). Others instead leverage digital transformation to build multi-sided platforms and remodel their role and impact within entire industries by changing the rules of competition (e.g., Airbnb, Uber, or Amazon).

The benefits of digital transformation have been widely recognized in the business press and academic literature alike.³ Among those benefits are the ability of digital artifacts to foster generativity—the technology system’s “capacity to produce unprompted change driven by large, varied, and uncoordinated audiences”⁴—and the enhanced modularization of interfirm collaborative relationships. However, these benefits do not come without challenges and may hide important trade-offs,⁵ along with new management challenges and risks associated with the “illusion of objectivity” and the “black box” of decision making. Thus, how should firms think about and manage digital transformation? What are the critical choices and challenges of the digital transformation process, and, if any, the new managerial principles? We launched a call for papers in 2018 to address these questions, the selected papers of which form the set of this Special Issue.

The Articles in This Special Issue

For this Special Issue, we received 25 submissions from which 6 papers were accepted for publication after a two-stage review process, including a paper development workshop organized at Cass Business School in March 2020 that was run online. As it is common for California Management Review, the articles in this Special Issue span different research methods and empirical contexts. In terms of research questions, they can broadly be clustered into four categories:

The role of data in digital transformation (Bjorkdahl);

The process of digital transformation (Correani et al. and Guenzi and Habel);

Micro-foundations of organizational design (Kretschmer and Khashabi); and

Cognitive and emotional foundations of digital transformation (Solberg et al. and Kostis and Ritala).

Below, we briefly introduce these articles before elaborating more broadly on some emerging regularities.

The Role of Data

Bjorkdahl adopts a multiple case-study approach of 26 European leading manufacturing firms to analyze the specific patterns of using data generated by digital technologies in driving multinational manufacturing firms and their products. He aims to uncover how manufacturing firms generate and capture value from digital technologies and the increased volumes of data involved. The article finds that many firms are far from being ready to benefit fully from digitalization since they are primarily focused on achieving greater efficiency, rather than pursuing a real growth and transformation agenda. For instance, only a quarter of the firms under observation deem that they pay more attention to increasing revenue rather than to lessening costs. Bjorkdahl shows that the key challenge toward growth is identifying “profitable” configurations of the competencies, assets, and data generated from digital technologies, as well as orchestrating and exploiting them in an agile organization.

The Process of Digital Transformation

Correani et al. elaborate on three cases of successful digital transformation: ABB, CNH Industrial, and Vodafone. Correani et al. develop a framework to guide managers in the effective implementation of a digital strategy and in the development of a digital business model. They highlight that data, digital platforms, and Artificial Intelligence play an enabling role in the implementation of any digital strategy and business model transformation. Then, they show that digital transformation should lead to new business models where information and knowledge, people, and (external) partners are wired in novel ways. Correani et al. show that this business model transformation is crucial for value creation and value capture in the digital age and stress the role of considering digital-technology-enabled interdependencies, both within and across organizations.

Guenzi and Habel zoom in a specific process: the digital transformation of sales. They built their model from qualitative interviews with 19 key informants and tested the model in a cross-national sample of 540 managers. Guenzi and Habel identify four processes that should be modified digitally: prospecting, qualifying, presenting, and following-up. First, they show that sales transformation should start with a clear why (transform) and what (to transform). On the latter, they highlight six “S’s” (Substitute, Supplement, Simplify, Share, Support, and Service), which underpin consistent digital pathways to the transformation. Second, at the implementation level, Guenzi and Habel show that successful sales transformation entails the digitalization of internal and customer-oriented processes along with the constant monitoring (and learning) from interactions with customers.

Cognitive and Emotional Foundations of Digital Transformation

Solberg et al.—on the ground of an examination performed in 2018 on Amazon’s Mechanical Turk (MTurk) platform that totalized 282 responses—study how employees’ beliefs about personal and situational resources in the context of technological change turn into different digital mind-sets, and how these digital mind-sets affect the way employees make sense of and respond to digital transformation initiatives. Wong and Solberg posit that the different combinations of these individual beliefs are reflected in four types of digital mind-sets: that is, fixed/expandable digital mind-set, growth/expandable digital mind-set, fixed/zero-sum digital mind-set, and growth/zero-sum digital mind-set. In fact, employees’ beliefs reflect the extent to which their technological ability is fixed versus malleable (resulting in fixed or growth-oriented beliefs), as well as the extent to which they deem situational resources limited or expandable (resulting in zero-sum or expandable-sum beliefs). These are in turn connected to different roles individuals take when facing digital transformation.

Kostis and Ritala analyze how the use of VR-enabled digital artifacts affect the interactions between co-creators and interpretive uncertainty management. Kostis and Ritala show how the adoption of VR-enabled digital artifacts alters managerial practice by supporting co-creation participants to redefine their boundary roles. They find that the successful incorporation of digital artifacts in co-creation projects allows professionals to engage in a co-creation process in which there is less space for misinterpretation—hence, incentives can be better aligned. This condition lessens the call for complex contracting and scheduled project check-ups. In this way, firm boundaries become more blurred, as experts from different firms engage in joint teams run via digital interfaces.

Organizational Design

In the only conceptual piece of this special issue, Kretschmer and Khashabi develop an integrated picture on how digital transformation affects organization design. They do this by classifying and analyzing the effect this has on the process of output creation in firms. The starting assumption is that digital transformation can alter the way firms define, divide, and group the sub-tasks required to reach an expected output. For defining and dividing tasks, this outcome come about via the action of two mechanisms. On one hand, digitalization processes significantly augment the amount of information available to organizational decision makers. On the other hand, digital transformation creates a wave of new critical elements for firm outputs, which leads to demanding new tasks while turning some of the existing ones outdated. Two core features of this organizational redesign should be considering interdependencies (including those with the prospective activities that will be added in the longer term) and deciding where to draw the organizational boundaries around those activities.

What Is Digital Transformation?

Despite the differences in research questions, methods, and contexts, these articles highlight some common themes. First, the articles in this Special Issue show that digital technologies may affect organizations at different levels and that it is over-simplistic to speak of digital transformation tout court. The articles in this Special Issue confirm some emerging regularities in the managerial and practitioner literature that the strategic scope of the transformation can range from rewiring existing processes to redefining relationships beyond a company’s own boundaries in a broader web of interconnected relationships within the legacy sector or across sectors. We represent this first common theme—“the scope of the transformation”—as the X axis in Figure 1.

Figure 1.

Digital transformation: An integrative framework.

Second, the articles published in this Special Issue highlight different mechanisms through which companies can engage with their stakeholders to create and deliver value, which we call “modalities of value co-generation and delivery.” On one hand, companies can be contributors to value co-delivery in the broader new connected economic systems, delivering value through their core, legacy products. On the other hand, companies can become the “architects” of entire new value systems by designing and orchestrating ecosystems. These ecosystems allow the co-creation and delivery of superior value propositions to customers through interconnected products and services and through platform marketplaces, which allow for aggregating multiple offerings (across distinct sectors and market segments) around some centered customer needs. We represent this second common theme as the Y axis in Figure 1.

At the intersections of the different positions that companies can take on the X and Y axes, the articles published in this Special Issue contribute to our understanding of some of the key elements of a company’s digital transformation, which implies changes in the whole business model.⁶ Digital transformation results in three different types of business model transformation: Data-Driven Processes, Ecosystems, and Platforms.

Leveraging Data-Driven Processes

The first approach to digital business model adaptation is for companies to leverage data-driven processes by focusing on monitoring, optimization, and organizational responsiveness. While addressing management issues at the level of a firm’s operations through digital might imply changes in the internal processes, these are adaptations typical of any shift of technology. Overall, they happen within the same management paradigm. Given the inward-focus, this type of transformation will afford limited options for value co-creation with external firms (“contributors”). Here, firms might enhance their market competitiveness since greater efficiency might translate into greater profit margins, and greater organizational responsiveness might translate in a higher ability to engage with and retain customers (compared with rivals). However, the firm’s competitive standing might be quickly eroded to the extent that the industry and the market evolve rapidly toward new value production and delivery models as a result of a broader digital transformation at the sector level.

The study by Bjorkdahl shows the limits of focusing on efficiency, running the business “as is” rather than leveraging digital technologies to redesign the configuration of value-creation and value-delivery processes in a pursuit of a real growth and transformation agenda. As the study shows, for some of the leading European manufacturing firms, the challenge is finding optimal organizational process configurations to exploit a firm’s competencies and assets with the data generated from digital technologies.

Correani et al. provide a process for such configurational design, and how to leverage it to create new business models based on digital-technology-enabled interdependencies.

Focusing on the specific firm–customer relationship, Guenzi and Habel show that firms can benefit from digital sales channels to the extent that they transform the customer-oriented as well as the internal-related processes to create virtuous feedback loops between engaging and learning from the interactions with customers.

Leveraging Ecosystems

The second approach to transforming business models is to leverage ecosystems. Digital technologies can offer new means to collaborate with other firms, to establish new interfirm routines for sharing information and resources, and to create collective output that can offer new or enhanced value propositions to customers. The impact of transformation goes beyond the firm boundaries, affecting the level of complementarities across firms’ activities and products. Besides changing the logic of value creation, this can lead to increased interconnection and interdependence across the set of firms forming the ecosystem. While firms in the ecosystem are tied by greater interdependence, digital also affords the member firms greater flexibility, autonomy, and latitude of action. It allows firms to coordinate their activities without the need to form ad hoc hierarchical organizational structures (such as joint ventures or alliances). Firms in the ecosystem act as a collective enterprise with open, permeable boundaries; digital technologies and digitally enabled interfirm routines offer the new governance mechanism to regulate interfirm collaborative relationships and incentives for value production. Kostis and Ritala document how firms can change their interfirm managerial practices and collaborative arrangements through the use of VR digital artifacts, which reduce the need for complex contracting and monitoring of joint project collaborations.

In this case, companies rewire their business model for value co-generation and delivery and reshape their organizational boundaries. As advanced by Kretschmer and Khashabi, firms can leverage digital technologies to redesign the way firms divide and group the sub-tasks required to create some joint output or connect their products into an integrated solution. This allows firms to separate out the level of products, tasks, and activities integration from firm organizational integration. While interdependencies can expand as a result of digital-enabled information, firms can benefit from the enhanced modularity that digitalization affords to decouple the different integration processes (e.g., knowledge integration vs. manufacturing integration vs. system supply integration). As a result, some processes can be moved outside the organizational boundaries and others can be expanded by connecting to other organizations in the ecosystem.⁷

What we observe today is a continuous transformation of entire sectors of the economy, which become increasingly interdependent to the point that some morph into new, converged ones.⁸ New structures of economic relationships among firms emerge as a result of such transformation, which redefines the economic principles and success factors themselves. Nokia, and the evolution of the mobile phone industry, is a case in point of how digital can redefine value, production processes, competitive dynamics, and the relational power of the market. Nokia was the undisputed market leader in the mobile phone market. However, by focusing on its traditional product strategy and failing to open up its value creation processes to external firms, it failed to keep pace with competition from new entrants like Apple and Google. Fundamentally, Nokia continued to apply a product-based competitive logic, focusing on the individual product attributes and related market segments for delivering value, while Apple first, and later Google (with its Android OS), redefined the competitive arena by focusing on a digital platform product system, which grows in functionalities and value with the provision of additional connected products and services via the apps.

Leveraging Platform Marketplaces

The third approach to business model transformation is leveraging platform marketplaces. Platform-based digital markets are critically altering the way companies generate and deliver value to final customers, and thus the way companies compete in the market. With value shifting increasingly from a stand-alone product to platform systems, product market boundaries are no longer relevant for defining the type and intensity of competition. Some platforms (e.g., Amazon Marketplace) leverage the data traffic generated by its users and providers to facilitate transactions through an efficient matched market; other platforms (e.g., Apple’s iOS) connect and integrate the workings of a core product with complementary innovations to offer an integrated product solution to customers; while others (e.g., Google’s Search or Maps) leverage their scale and scope to enable the searching and sharing of relevant information.

This completely changes the competitive dynamics. Because of its generative and connectivity nature, digital can change the nature of competition itself, “dismantling the contours of sectors and industries as we knew them, and creating new opportunities while destroying long-successful business models.”⁹ Traditional markets are conceived as given, with their fixed structure and size; competition is thus just a zero-sum game between firms competing for capturing a larger share of the total fixed value available in the market. Instead, digital technologies, particularly digital platforms, can transform the shape of a market and expand the overall value by enabling complementarity between different products, which then expands the consumption options for customers.

Firms need to reconsider their traditional sources of value capture (such as control of or exclusive access to downstream sale channels) and find new ways to build an effective positioning in evolving digital markets (themselves subject to competition from other rival digital markets). Therefore, besides the typical within-market competition from competing products/services, firms need to assess cross-markets competition or platform competition and decide on which platforms to be present and how to compete. Traditional value capture strategies won’t work. As maintained elsewhere,

platform market boundaries span across multiple (traditionally defined) product markets and even sectors. Treating each of these product-market segments as separate markets would miss the key point of digital markets: increased inter-connectedness and interdependence across multiple products across various markets and sectors that can form an integrated product system for the final customer.¹⁰

Firms should thus consider the scope of the digital transformation along with the opportunities for value co-creation that the digital-enabled products and processes provide. The way that these products and services are linked to co-generate greater consumption experiences and benefits for customers can permeate to adjacent industries, leading to industry convergence. As a result, digital transformation at the market/industry level can unsettle the dominant structural positions that some firms may have gained in the past, redefining the economic relationships—and relative power—of firms in the industry.¹¹

Managing Digital Transformation: Do We Need New Managerial Principles?

The articles in this Special Issue highlight some management challenges (along with the benefits) when delivering on a company’s digital transformation. We summarize these challenges in Table 1. At a close look, these challenges are both old and new. They are old, to the extent that they point to managing the typical managerial trade-offs, including balancing the short term and the long term, prioritizing decisions, integrating knowledge, engaging stakeholders, structuring organizations and incentives, managing interdependencies, and building culture. They are new, because they have to be addressed in a new, different, and evolving context that keeps on getting transformed by the affordances of digital technologies—including, for instance, pervasive connectivity, automated decision making, virtualization, speed of change, and unanticipated product functionalities and applications that expand the value options (and thus the opportunities to explore new revenue and business models). The transformations brought forward by digital technologies are non-linear, ambiguous, and interact with the legacy managerial challenges.¹² In this context, are our received managerial principles still relevant?

Table 1.

Management Challenges and Benefits of Digital Transformation.

Paper	Identified management challenges	Identified benefits
Bjorkdahl	• Balancing trade-off between firms’ near-term strategies for supporting the current business and long-term strategies fully embracing digital transformation • Recognizing the right path to realize a successful digital transformation, they are expected to tackle the questions of why, where, what, and how to ignite digital change	Increasing cost advantages through: • improved production throughput, fewer breakdowns • more efficient maintenance • more effective integration across activities in the internal value chain • new product development methods
Correani, De Massis, Frattini, Messeni Petruzzelli, and Natalicchio	• When implementing a digital transformation strategy, a firm is required to rethink its business model and to reduce risk and uncertainty • Digital transformation may fail because of disconnection between strategy formulation and implementation	• Improving customer care services using • conversational autonomous interfaces • based on AI • Developing smart products that allow providing value added services to customers
Guenzi and Habel	• When too many things are transformed simultaneously in digital transformation, the key challenges are represented by a lack of prioritization and unclear organizational responsibility/ownership of the digital transformation • A second key challenge is represented by the (re)design and implementation of a multi-channel, integrated, and consistent customer experience management strategy	• Automated, harmonized, and prioritized internal processes • Enhanced services through digital channels (e.g., chatbot integrated with company’s service portal) • Personalized marketing mix
Kretschmer and Khashabi	Digital transformation requires • considering (new) interdependencies in designing the digital organization • considering organizational structure and strategy as twins • redesigning the organization, considering the competitive advantage ten years ahead	• Charting organization’s information flows along the production processes • Evolving the firm’s strategy and structure on the basis of core benefits of digital transformation • Decoupling of activities and processes that will shape the (long-term) competitive edge of the firm, and those leading to (short-term) efficiency gains
Solberg, Traavik, and Wong	• Employees’ digital mind-set shapes the extent to which they see digital transformation initiatives as opportunities for professional growth • The mind-set critically influences the extent to which employees are willing to participate in (or relinquish) digital transformation initiatives	• Four specific roles are identified for digital mind-set combinations (i.e., leaver/mover/skeptic, partner/collaborator, star/master, and transformer/change agent)
Kostis and Ritala	• Continuous experimentation with new digital tools and methods enable enhanced co-creation opportunities • They present challenges and require large investment and the introduction of novel engaging role types for customers, providers, and other co-creation participants	• Forming nimble joint teams with experts from different firms via digital interfaces • Better coordination and governance of joint projects thorough enhanced orchestration of existing roles and introduction of new ones, such as that of VR specialist

Note: AI = Artificial Intelligence; VR = virtual reality.

At the intersection of the old challenges and the new context, we believe that the articles in this Special Issue highlight the need to develop new principles and new tools to grapple with the idiosyncrasies of the digital age, such as

Managing and organizing the integration of people’s intelligence and Artificial Intelligence;

Managing and organizing pervasively connected systems;

Managing and organizing experimentation at speed; and

Managing and organizing for sudden shocks.

While much more research is needed, we have provided an integrative framework of digital transformation to help managers identify the trade-offs ex ante and help guide their managerial actions in the future.

Footnotes

Notes

Author Biographies

Carmelo Cennamo is professor of Strategy and Entrepreneurship at Copenhagen Business School, where he is Co-Director of the Entrepreneurship Concentration studies of the MBA Program (email: cce.si@cbs.dk).

Giovanni Battista Dagnino is chair of management and professor of digital strategy at the University of Rome LUMSA—Palermo Campus (email: g.dagnino@lumsa.it, dagnino@unict.it).

Alberto Di Minin is associate professor of Strategy at the Institute of Management, Scuola Superiore Sant’Anna, Pisa, Italy, and Research Fellow with the Berkeley Roundtable on the International Economy (BRIE) at the University of California, Berkeley (email: alberto.diminin@santannapisa.it).

Gianvito Lanzolla is professor of Strategy at Cass Business School, City, University of London (email: gianvito.lanzolla.1@city.ac.uk)