Digital Transformation on Purpose

Digital technology has great potential to address many challenges facing the world, but its effects on society are being experienced at such breakneck speed that there has been little time to consider how its diffusion can serve society’s higher goals. In a series of articles over the coming months, we will explore the question of how digitalization can be done “on purpose” — that is, how we can ensure that digitalization will be a force for good, a force to transform economies so that they foster greater equity, environmental integrity, and shared global prosperity.

This article sets out to define the terms digitization, digitalization, and digital transformation so that they can serve as a framework for understanding how the digital revolution can also become a revolution for sustainable development. It represents a first step in helping leaders purposefully guide their organizations toward a better digital future.

The Digitalization Blitzkrieg

The progressive digitalization of industries is causing anxiety in C-suites around the world. Wave after wave of digitalization — publishing, music, film, banking — has disrupted multibillion-dollar industries. It is now upending retail, as companies like Amazon.com Inc. leave a trail of zombie shopping malls across the heartland. On the horizon is the disruption of sectors like energy, hotels, and transportation. Manufacturing is not far behind.

It’s no wonder that most leaders are struggling merely to come to grips with the implications of digitalization, let alone forming a clear strategy about how to deal with it. But if we can rise above the fog of digital war, a larger horizon can be seen. From our elevated view we can ask larger questions about what businesses and society want from digitalization. Questions like: “Can we pursue digitalization with a higher purpose in mind?” and “Can we steer digitalization to be a force for good, a force to transform economies so that they foster greater equity, environmental integrity, and shared global prosperity?”

Right now, two principal forces are driving digitalization. One is digital technology itself and its associated services and gadgets. Another is the invisible hand of the market responding to the evolving wants of consumers.

While these have historically been two powerful forces for progress, there are inherent limitations in their ability to steer society. First, laissez-faire markets have inequality built into them. This is because they respond preferentially to the wants of those with fat wallets. The needs of the world’s poor are poorly translated into market signals. Markets are also imperfect in that they fail to take into account externalities like environmental pollution, which degrades the planet. These limitations, if not attended to, almost guarantee that digitalization will not become the force for societal good that it has the potential to be.

Purposeful Digital Transformation

The world’s leaders — commercial, nonprofit, and governmental — need to pursue digitalization on purpose, purposefully leading the world toward a better digital future. Doing so requires a bigger perspective and greater responsibility for decisions made around digital technologies. It requires proactively scanning the emerging landscape for both social and environmental risks while simultaneously looking for opportunities to use digital technologies to resolve global challenges. This is digital transformation on purpose.

Grounded decision-making depends on having a framework for understanding the consequences of choices, so it would be helpful to have a framework for understanding how digitalization proceeds. We offer one below that defines the terms digitization, digitalization, and digital transformation. There is no consensus on the meaning of these terms and their definition often depends on who is using them: technologists, consultants, etc. Our goal in defining the terms here is to create a framework that can help managers and policy makers think about using digital technology for the purpose of tackling the world’s sustainability problems. The definitions are presented in “A Framework for Understanding Digitalization.”

At a basic level is digitization, which is the initial conversion of products and services into a digital format, along with the concomitant inventions that result from digitization. This has happened first with sectors like publishing, music, and finance, mostly because their products were really just information to begin with — it’s just that the information had historically been captured in a physical analog format like vinyl records and accounting ledgers.

While digitization of this type of information is relatively easy, it has been slower with more tangible, physical products. New technologies, however, are changing this. Manufacturing will be upended by imaging technology that can scan 3-D objects and turn them into data files that can be freely shared over the internet. Improving sensor technology will allow for the capture of digital data about objects in real time, forcing continuous evolution of the internet of things. Combine these technologies with 3-D printers that can locally render the digital files into desired objects and you open the floodgates for the disruption of nearly every manufacturing sector.

The next phase is the digitalization of industries in which innovators and entrepreneurs develop new business models and business processes that can take advantage of the newly digitized products. It was the process of digitalization that allowed Steve Jobs to become the world’s largest music retailer. Apple didn’t invent the digitization of the music industry, but it did invent the digital business model that upended it.

Digitalization is usually disruptive for incumbents because it renders their existing business models and processes obsolete. The proud legacy assets of market giants quickly go from a source of competitive advantage to the proverbial albatross around the neck. This is why executives’ hair is graying as digitalization progresses across industries.

Digitalization will not be limited to the commercial sector, however. It is also coming to the public sector and will alter the role of governments and how they engage with their constituencies. Digital technologies do not, in general, recognize political boundaries but instead connect citizens of many countries into a single network. The question of who is a constituent in this environment will change. For example, citizens in many countries are affected by the election of a U.S. president, but only Americans (in theory, if not always in practice) have a say in the choice. Similarly, Amazon’s decisions about where to locate facilities can have a huge impact on a locality’s economic development, but only senior executives have a say in deciding.

Questions of global inclusion, equity, prosperity, and environmental integrity will likely shift us away from traditional thinking about “government” to a broader understanding of “governance” that will blur the roles of local communities, governments, and corporations.

The final phase in this framework is digital transformation, which occurs when new digital business models and processes restructure economies. Societies also evolve as people integrate the technologies into their lives and habits. Digital transformation is a systems-level transition that alters behaviors on a large scale.

Consider mating behavior. The telephone and the automobile, for example, revolutionized dating, taking young couples out from under the watchful eye of their parents at the church picnic to far more private parking lots and “cruising” spots across suburbia. Smartphone apps have more recently upended dating, replacing flowers and chocolates with Tinder swiping and hookups, even obviating the need for another human for sex. Digital technologies are poised to continue transforming everything from communication to work — even the human genome.

Of course, technology-facilitated transformations restructure society in both positive and negative ways. And humanity has usually adapted in a reactive — not proactive — way to these changes. This is often because technologies can proliferate much faster than our ability to understand their impacts. The automobile had been ubiquitous for decades before we understood the downsides of “car culture,” like smog, sprawl, and climate change.

Undoubtedly, there are unforeseen and unintended consequences looming from digital transformation. The stakes for getting this right, or wrong, are huge. Technological unemployment risks deepening inequality, but also offers new opportunities for leisure and artistic expression. Bioengineering advances offer hope for a healthier future, but also risks eugenics. Broad-based digital infrastructure connects the world, but also introduces new systemic threats and vulnerabilities. Digitalization on purpose demands that we not let the transformation of society be driven solely through the animal spirits of imperfect market forces, but also through the visible hand of society’s better angels.

Being Purposeful About Transformation

Each step in the above process offers opportunities to ask how digital technology can be used to tackle the world’s sustainability challenges. In fact, there are examples of this already happening.

Silicon Valley’s Tesla Inc., for example, was explicitly founded to “accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.” An integral part of this mission is the use of digital technology to transform transportation by connecting Tesla automobiles into shared fleets of self-driving vehicles operating on a distributed, renewable energy grid. Mastercard Inc. is similarly using its digital network to help governments like South Africa tackle corruption and foster financial inclusion by converting social benefit programs from cash to safer digital payments. The Cleanweb Initiative is an organization of businesses, developers, and investors working to ensure information technologies become “a tool to improve global sustainability, economic prosperity, and human well-being.”

Opportunities like these will abound as the digital future unfolds. Our subsequent articles will follow the ensuing social transformation to provide real-time insight into how leaders can ensure their inevitable decisions serve our common digital future.