The nature of digital transformation: What exactly are we up to?
Digital transformation is taking place all around us and there is hardly a single aspect of life that has not been affected. In a traditional sense, digital transformation refers to the use of computer and internet technology for a more efficient and effective economic value creation process. In a broader sense, it refers to the changes that new technology has on the whole; on how we operate, interact, and configure, and how wealth is created within this system. It has become clear by now that the digital transformation has an obvious, lasting, and even revolutionary impact, not only on the economic systems and commercial players, but increasingly on the lives of individuals and on society at large:
It lowers the cost of interaction. All economic systems and market interactions result in costs for information exchange, coordination, safeguarding, enforcing, etc. Digitalization will lower these costs and therefore unleash value; the more exchanges, the higher the potential benefits. More accessible information will reduce information asymmetry between market participants, which will in turn make markets more fluid and influence competition.
The structure of information exchange will change considerably. We are moving from a predominantly unilateral and bilateral exchange towards a networked form of exchange. In other words, individuals and market participants will be involved in a multitude of exchange networks that easily form, grow, and then dissolve again. As a result, the number of connections in economic and societal systems will grow exponentially.
It produces massive amounts of data. The constantly growing computing power and strongly distributed nature of computing capacity leads to so called Big Data. Predictions by Cisco Systems suggest that Internet traffic in 2016 will be around 1 Zettabyte (1x1021 bytes). In comparison, the information contained in all books worldwide comprises about 480 terabytes (5x1014 bytes) and a text transcript of all the words ever spoken by humans would represent about 5 Exabytes (5x1018 bytes), according to a 2003 study conducted by the UC Berkeley School of Information. In this environment, data is accessible everywhere and in real time, which leads to enormous data processing, storage, and retrieval operations. A key challenge is to analyze and interpret patterns in these large data volumes and to gain insights for actionable decisions.
It is irreversible and will go on. The digital transformation is pervading and transforming our daily life fundamentally. Moreover, the developments so far are irreversible. The core driver of these changes is the underlying computing technology. The cost of computation has been declining at an accelerating rate. While the annual cost decline between 1945 and 1980 was on average 37 %, these costs declined even more rapidly with an average annual rate of 64 % during the 1980s and 1990s , according to Yale professor Nordhaus. As computing power and capacity continue to grow exponentially, and will continue to do so at least within the next decade, the underlying forces will continue their impact.
New value – at a cost
Digital transformation is expected to bring greater tangible and intangible value[KC(V1] . Given the apparent changes, this promise should easily materialize. At the same time, the changes do come with certain costs and risks, sometimes unforeseen. It is thus important to understand the opportunities and potential challenges surrounding value creation in digital environments for the various groups. We will more or less all be affected.
Customers. For the commercial engagement of customers, the digital transformation brings greater transparency, less information asymmetry, and new customer benefits such as new products and services, greater convenience, more choice, new experiences, and lower prices. At the same time, these opportunities are accompanied by potential costs such as cognitive and/or tangible investments, learning, information and activity overload, and risks such as loss of privacy and performance uncertainty.