Digital Transformation: Separating Reality from the Hype

Digital transformation is a term that has clearly taken its place in the current business lexicon. But what does it really mean? Does it represent the latest zeitgeist or a true opportunity? Is it nothing more than a way for consultants and vendors to sell more of their wares?

Like many catchphrases, digital transformation can mean many things to many people. So what makes for a true digital transformation? I believe every successful digital transformation has the following three elements:

• A new customer experience
  Most companies want to deliver an incredible customer experience and I’ve previously described five steps to turn customer experience aspirations into reality. While these steps will improve an existing customer experience, a digital transformation involves an extreme makeover of the experience or, more likely, a new experience entirely. For example, the ability to download an album instead of buying it in a store was certainly a new experience for music consumers. Music became more portable – and more shareable. Over time, the experience changed even more as it became possible to purchase individual songs, instead of entire albums. Songs quickly replaced albums as the backbone of the music industry.
• A new business model
  Over the last two decades, companies have invested heavily in optimizing their existing business processes, resulting in substantial productivity improvements. In the digital economy, existing business models are subject to “rapid displacement, disruption, and, in extreme cases, outright destruction.” To continue with the music example, recently there has been a successful business model shift from owning music to renting it with the accompanying change in pricing from per transaction to a monthly fee. This change is so significant that it encouraged Apple â€“ the previous winner of experience in the music industry – to follow suit.

• A new value creation model
  The traditional R&D process attempts to develop and launch products with minimal cost and time to market while meeting perceived customer requirements. In a very real sense, it ignores the interests of all stakeholders except the organization and its customers. Co-creation, on the other hand, focuses on the interests of all stakeholders (suppliers, distributors, employees, the general public) and how they interact with one another. In doing so, the emphasis is to maximize the size of the overall market for the ecosystem at large, not just the share of value captured by the organization. In the music industry, co-creation is rare; people are creating their own playlist and radio stations but they are not capturing economic value.

Many organizations have made progress on one or two of these elements but few have embraced all three. To give a sense of what a true digital transformation looks like, consider Airbnb:

• New customer experience?
  People are staying at a person’s home, not a hotel. Guests often develop a personal relationship with their hosts, gain insight into things to do and see from a local’s perspective, and enjoy amenities completely different from those in traditional commercial lodging.
• New business model?
  This is a peer-to-peer model in which consumers are using the Airbnb Web site to rent accommodations from local hosts. The service is free to consumers and Airbnb realizes revenue through a commission from the hosts. The company itself is lean, as most of the tasks required by a traditional hospitality company are covered by the hosts, and it achieves scale by matching more guests with hosts, not just by adding more inventory.
• New value creation model?
  Business travelers have traditionally chosen hotels based on brand affinity; vacation travelers based on price and location. In the Airbnb model, the hosts must create their own unique value proposition which may include the in-room experience, nearby merchants, and even the personalities of the other occupants. With the addition of the Wish List functionality, guests help create these value propositions by curating their favorite or aspirational destinations and sharing them with others.

Airbnb follows all the elements and, in my opinion, is a good example of true digital transformation in the hospitality industry.

In subsequent articles, I’ll look at other industries for successful digital transformations and challenge widely-held examples of digital transformation. Stay tuned.

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