Mid-sized companies and large scale enterprices are weathering the recession. Despite rising costs and a stalling economy, independent studies show that over half of global executives are continuing to invest in Digital Transformation. Products, services, and entire business models are being digitalized and reimagined. But what exactly is the difference between digitalization, digitalization and digital transformation—and why is it important for business leaders to understand the distinction?
Digitalization Is a Component of Digital Transformation
Initiatives aimed at increasing a company’s digital maturity can be grouped into three categories:
- Digitization – The conversion of analog processes and information into digital formats
- Digitalization – The enhancement of existing processes and products using digital technologies
- Digital Transformation – The strategic development of business and organizational models to improve outcomes through digital technologies
These terms are often used interchangeably in business, but they refer to different stages on the journey to transformation. And caution is warranted: misusing these terms—intentionally or not—can be misleading, especially when “digital transformation” is a trendy buzzword that evokes both curiosity and fear of being left behind.
Digitization, Digitalization, and Digital Transformation
All three categories build on one another and are often depicted as steps on a staircase—see for example Frederic Milani’s foundational work, Digital Business Analysis. Let’s take an analytical look at each term to help you better categorize your own (or upcoming) digital initiatives—and to derive practical success factors from them.
Digitization – The Foundation
Digitization refers to the conversion of analog signals or media into digital formats. For example, compressing music into MP3s or scanning a filled-out form into a PDF file. This translation captures the content in digital form without altering the underlying message or purpose.
In a business context, digitization is the act of translating existing processes or products into a digital format—without changing or improving them.
For instance, instead of a physical prescription passed from a doctor to a pharmacy, the form is emailed or filled out via an online form.
Digitization is the foundational layer for both digitalization and digital transformation. It includes ensuring high-quality data and secure, efficient data storage. Without this, successful digitalization—or digital transformation—cannot be achieved.
Because digitization is the basis for critical and often time-sensitive digitalization initiatives, it must not be overlooked or skipped. The continued use of paper-based workflows in many industries proves there’s still substantial catching up to do in this area.
Digitalization – Process Optimization
Digitalization builds on digitization—the availability of digital information—and refers to using digital technologies to improve existing processes, products, or services, with the aim of boosting efficiency. This can even affect your business model and steer it towards becoming partly digital.
The most well-known example is the creation of an online store, where customers can purchase products and services 24/7. You’re offering the same value, but the delivery method is digital.
But not all digitalization projects are as visible to the customer. The greatest potential often lies in internal processes, and in improving communication with suppliers and partners.
A successful digitalization project starts with a thorough analysis of the business process, the involved assets, stakeholders, and process environment. This provides a comprehensive understanding of system gaps, manual workarounds, and friction points.
To find the best-fit concept, it’s worth comparing multiple options. The most obvious solution isn’t always the best one. Proven methods like Design Thinking or the 5-Day Sprint can support concept creation and validation in agile teams. Useful tools like mind mapping, lightning demos, and Crazy 8s (which we explore in separate blog articles) can help craft the right digitalization strategy—tailored to your business.
Digital Transformation – Strategic Business and Organizational Development
Digital Transformation—often referred to as Digital Business Transformation—is a holistic endeavor across your organization. It creates cross-functional value through the use of digital technologies. And this is where untapped potential still lies for many businesses. A study by MIT and Capgemini found that companies with digitalized processes generate 6–9% more revenue across industries and—when paired with strong leadership—achieve on average 26% higher profitability, highlighting the impact on increases in efficiency.
The distinction from digitalization becomes clear when multiple processes are reimagined and optimized at their core, and when products and services are reinvented. For example, physical products might be enhanced or replaced by digital services or algorithms. Experts refer to this as “servitization”—transforming goods into (digital) services.
Digital transformation represents a long-term change from an existing system to a desired future state. Large, complex transformations can take several years to fully implement.
During this time, your business must remain fully operational. That’s why transformation requires far-sighted planning. We recommend developing a Transformation Map—a high-level planning tool that helps clearly communicate your strategy to stakeholders and internal teams alike.
To ensure successful planning and implementation, your team must bring together the right skill sets:
- IT know-how
- System architecture
- Cybersecurity and data privacy
- Functional expertise
- Business analysis
- Process management
What’s Next?
Digitization, digitalization, and digital transformation represent a wide spectrum of your possible solution space. Navigating this range with clarity and nuance is key. A precise understanding of these terms is the first step toward a successful digital journey.
