In order to provide the right perspective on how digitalization can/should be broken down, we need to first ask ourselves the question why we want to do it. Probably the answer relates to either communication needs, organization layout or accounting purposes – and in each case the “right” answer could be different.
I believe, on the most general and overarching level, digitalization breakdown should pertain to the very purpose of a business – making profit. On a most fundamental level, Profit = Revenues – Costs (here we purposefully neglect items such tax credits, depreciation, carbon credits etc.). Therefore, knowing that digitalization is just another tool for your business (see Related Posts below for digitalization definition), digitalization must relate to either Revenues or Costs. This results in the following breakdown:
Internally oriented digitalization – focused on achieving higher operational efficiency and thus reducing cost.
Externally oriented digitalization – focused on achieving higher revenues.
We can further divide digitalization into the following categories:
1. Timeframe
Short term
Medium term
Long term
2. Business domain. In a typical large company it would be:
Supply chain & Logistics
Manufacturing
R&D
Sales & Marketing
Digital products and business models
Support function (HR, Legal etc.)
3. Risk appetite & Strategic imperative
Digitalization risk is something that, according to my experience, is often not explicitly addressed. In this case, I not only refer to the commercial success aspect, but also to execution feasibility. Some of the right questions to ask before committing to a digitalization project are:
What is the return on investment from this project short-, medium, and long-term?
What do we do if we are “half successful” i.e. there is some revenue but growth stagnated, and we still have the full costs to be covered (employees, marketing etc.)
How certain are we that we can successfully execute the project within our organizational framework and limitations?
I would like to note that what I just stated relates mainly to medium to large companies, and not startups. The latter, by definition, are and more risky and often growth-oriented in short- and medium-term, compared to traditional companies that are mostly profit-oriented in short-term.
In terms of strategic imperative, there are companies that have a particular imperative for their existence and market presence that in short- or even medium-term may not look financially attractive. Few examples are:
A company willing to fully automate their production despite high investment cost and the lack of clear superiority of the automated solution when compared to the current manual or semi-manual solution.
Family-owned business that exist for whatever purpose and/or shape the owners decide for. Sometimes, the owners would supply the firm with liquidity to maintain existence.
In summary, the categorization of digitalization should be always related to the purpose such categorization serves. I believe, the proposed herein categories are one of the most general and common ones.
Let me know below in the comments section what you think. I am keen on learning from your experience!
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