Issue 4 : The Digital Transformation model in detail

Understanding its components

Good morning, I hope you had an excellent week.

I was listening to a podcast and heard something that immediately made me think of this xkcd cartoon :


Source :

I’ll be writing about that soon, it is all about web apps, but today’s issue is a follow up to Issue 3. If you haven’t read it yet go ahead and have a look, as this issue heavily leans on the information in that issue.

Thank you for reading. Let’s get on to this issue.

The Digital Transformation Model

As previously mentioned, Venkatraman and his colleagues developed a model for Digital Transformation in the shipping and logistics industry. Their model discussed 5 levels of transformation whereby the increase in the range of potential benefits to a business corresponded to the degree of business transformation implemented within the organisation.


To recap, the five levels are named as: Localized Exploitation, Internal Exploitation, Business Process Redesign, Business Network Redesign and Business Scope Redefinition.

Builtin to the model is an additional notion that at a basic level of exploitation, transformation is only evolutionary and limited benefits are accrued. It is only when an enterprise commences its Business Process Redesign that the level of business transformation and hence, its potential benefits become ‘revolutionary’.

Looking at each level in detail gives us an idea of not only our current situation in our own businesses but also helps us understand and develop a plan to move to the next level. This is strategic thinking. This is hard to do and I don’t wish to minimise its complexity in any way. Let’s take a look at the five levels.


Source: An Analysis of Digital Transformation in the History and Future of Modern Ports, Heilig, Schwarze, VoS, 2017

Localized Exploitation

The first level, localized exploitation, describes the decision most companies have started or about to start, that is, develop and deploy IT systems in a manner that can only be described as isolated. Examples are applications to track sales, internal messaging systems like Microsoft Exchange, applications that produce quotes and help print invoices. These applications are usually extremely focalised on the task at hand and are useful uniquely to the person or groups to whom it is their responsibility. The Sales Director would no doubt be uninterested in the specialised HR application in a direct manner, preferring to defer to the HR Manager to obtain information. They are first and foremost requested by and in large part funded by the heads of the various divins in the organisations, HR Manager, Sales Manager, Stock Manager etc. 

As a result, their benefits are limited in scope — to the department concerned — and not shared throughout the organisation. This type of deployment is considered as standard, with information systems being deployed simply, inexpensively with little to no thought of the impact outside the scope of the projet. Change is minimal within the organisation and in fact often, the type of systems are chosen precisely because they impact little to no change to the status quo. Returns are quick but severely limited. Change management is often ignored in its totality, and considered unnecessary as the system perfectly fits the current way.

It is here that Opportunity Cost should be considered. I’ll discuss this notion in a different issue.

Internal Exploitation

The second level, Internal Exploitation, is defined by the process in which organisation attempt to integrate the different silos of information systems and datasets with the aim to produce a ‘whole’. Integration is difficult, slow and often results in failures when starting out from a base that is not adapted to integration. Just how do you get the Accounts, Stock, HR, Sales systems integrated?

There are two types of integration, technical and business process interdependence. According to the model most enterprises spend more time on integrating on a technical level than on the business processes. This is understandable because of the sunk cost fallacy.

The sunk cost fallacy explains why, when faced with difficulties to complete a given project, we have a tendency to stick to the original plans in proportion to the amount of time and money invested. That is to say, that having already spent a ton of money on a project that is clearly destined to fail (where the evidence is there to prove it), the scope is often revised in order to finish a project, even if it isn’t the project.

It’s at this level we see the emergence of Enterprise Resource Planning (ERP) and Data Warehouse (DW) systems. These systems align business processes with informations systems at a much deeper level than at level 1, Localized Exploitation. 

Business Process Redesign

Business Process Redesign, as its name suggests, defines how businesses restructure their organisation to maximally exploit the capabilities of their information systems to achieve better outcomes. This is driven by an ongoing sentiment in the organisation that, despite the integration efforts that have been implemented at the level 2, the benefits of that integration are not fully realised and clearly something more is required to achieve more efficiency and productivity and usually, by extension, profit margins.

It is a realisation that simply superimposing information systems on existing and often dated business processes, does not generate the desired benefits easily. Emerging technologies create the tension for an organisation still using old principles. Examples are seen today in support systems. Organisations that have completed level 3 are often better and quicker at resolving queries using social networks like Twitter than through traditional channels as email and the telephone. Some are even explicit and tell you so when you are on hold for an agent, stating that you’ll get faster support if you tweet.

Business Network Redesign

Things start to get difficult (not impossible) and an order of magnitude more complex at the fourth level, Business Network Redesign.

Up until now, the organisation has been preoccupied with its own systems and processes in which it has complete control over its strategy and development. Level 4 requires us to think about the interactions outside the organisation. What has been up to this point, a local exercise, now turns in to a macro exercise whereby all stakeholders are included in the study. Business processes at this level, need to be fully integrated internally, but also externally with the necessary partners we do business with.

There is confusion at this step that simply standardising the communications protocols or the dataset definitions for document transfer is enough, false. An interconnection is required at the very heart of the interactions with the partners systems so that they appear to be one system within the scope of the project.

We see examples emerging from the traditional actors like Microsoft. Office 365 licenses can be purchased from the reseller directly using the resellers web ordering system, which is in turn directly linked to the distributor’s order processing system with ultimate coupling straight to Microsoft’s license delivery system. This is automatic and invisible to the end user who simple selects the software, pays and receives the right activation keys, all in a matter of seconds.

Business Scope Redefinition

The final level is often the most disruptive. Sure, it has negative connotations but disruption theory is important to understand in digital transformation. Simply because disruption will happen, it is a given. It will however, either be at your behest or someone will disrupt your business for you, and there you are in the danger zone. But I’m getting ahead of myself.

The Oxford Dictionary of English defines redefinition as :

Redefinition : noun, the action or process of defining something again or differently, example: the redefinition of the role of financial advisers

At this level, business processes are often eliminated, substantially modified or even outsourced to allow the creation and/or expansion of new business processes entirely based upon the specific capabilities of new and emerging technologies — Digital Transformation in short.

New Business Models, new Strategies are the hot topic when we discuss Business Scope Redefinition. What does a new business model mean? Simply put, new products and services are imagined and innovated within the organisation, that take advantage of the fact that it may now be possible to exploit and that the supporting business models need to be developed to underpin those.

When music was delivered on atoms, the subscription business model was not practically possible. When the technology to distribute music as bits emerged, the music industry — albeit kicking and screaming — developed new business models to better support that transformation. The music industry is now a healthy business and on target to equal or beat previous sales and income records of decades ago, thanks to the likes of Spotify and Apple Music.

Netflix did it too, but for different reasons. Firstly, music is actually a different entertainment proposition that operated in a different value chain to music. Music is much more ephemeral and driven by trends than films. Films are timeless and become the stuff of cult adoration more often than music. Second, during the time that Netflix was being built music had a massive piracy problem that forced the industry to cut off the oxygen to pirates (a futile exercise that didn’t work) only ceding eventually to Apple’s breakup of the bundle. The music industry was hellbent on selling albums — this was a package in economics terms — and not singles. People wanted singles. Films were never packaged that way, apart from special collector sets.

Reading List

Ex-Walmart exec says theft helped kill Walmart's cashierless checkout technology

A captivating look at how digital technologies and Digital Transformation can be the producer of an unexpected drawback. There’s even a law for that. Making it easier for people to just walk out of the store with products, er, did just that. The system worked perfectly but had no checks and balances to deal with the inherent ingenuity of humans motivated enough to not pay for goods. Theft is a fact of life in Supermarkets, ask any manager of a store, but this went much further. Read the article, it’s worth it.

Forget it, Data Science is not about IA, Machine Learning or data technologies

Big Data, AI, ML, Blockchain, I’ve got all the buzzwords. They are a meaningless as they are meaningful if incorrectly used or understood. The article is a good example of real world, practice advice for any organisation starting out in Digital Transformation and being overwhelmed. There is a real definition of Data Science, so don’t be too harsh, and Data Science is fast becoming a structured valuable discipline with Universities offering top notch qualifications in the subject.

Reduct - The power of video with the ease of text.

When we’re looking at Digital Transformation in organisations, we’re extremely cognisant of the opportunities and the information systems software we can deploy to make business better, but this article highlights one of the most fascinating aspect of ‘real’ Digital Transformation for me. This application takes an uploaded video and is then transcribed in to English and the output is of that transcription is now inexorably linked to the images. In other terms, as you play the video the text of the spoken word in the video is highlighted, and the magic element is that form this point you can edit video by simply cutting and pasting text or moving text around. That aspect I mentioned ? It’s taking a known way of doing something and turning it on its head to come up with a completely different way of solving the same puzzle, ensuring that there is benefit to the end user.

The Future is Digital Newsletter is intended for a single recipient, but I encourage you to forward it to people you feel may be interested in the subject matter.

Thanks for being a supporter, Have an excellent weekend.

Matthew Cowen @matthewcowen