The origin and development of the term “digital transformation” can be examined based on Germany’s Industry 4.0, the Fourth Industrial Revolution, and the development of the digital economy. First, Industry 4.0 was a policy adopted in November 2011 as a strategy for information and communications as a part of Germany’s High-Tech Strategy 2020. Its goal is to achieve innovation in the manufacturing business , and according to Deloitte, the goal of this policy encompasses not only the development of specific technology but also a paradigm shift in the manufacturing business.
The origin and development of the term “digital transformation” can be examined based on Germany’s Industry 4.0, the Fourth Industrial Revolution, and the development of the digital economy. First, Industry 4.0 was a policy adopted in November 2011 as a strategy for information and communications as a part of Germany’s High-Tech Strategy 2020. Its goal is to achieve innovation in the manufacturing business , and according to Deloitte , the goal of this policy encompasses not only the development of specific technology but also a paradigm shift in the manufacturing business.
Since 2013, in the early stage of the policy, research began on digital transformation as a research agenda by industry associations (BITKOM, VDMA, ZVEI). Then, starting in April 2015, this was expanded to Platform Industry 4.0 by the Federal Ministry for Economic Affairs and Energy and Federal Ministry of Education and Research, driving the digital transformation of firms in earnest. This concept was extended to the Fourth Industrial Revolution through “Mastering the Fourth Industrial Revolution” at the 46th World Economic Forum, indicating that digital transformation is the key to the Fourth Industrial Revolution.
Next, digital transformation can be examined in the development process of the digital economy. The term “digital economy” refers to a concept that is contrary to the analogue economy and has been widely used since 1994. However, it was actually developed back in the 1960s. Its development can be seen in the terms “digitization” in the 1960s, “digitalization” in the 1990s, and “digital transformation” since the 2010s.
Digitization converts offline analogue data to digital values, enabling offline transactions to be conducted online as well. This does not entail much of a change in terms of improving processes or developing new business models within the firm but merely indicates converting its various resources and assets online.
Digitalization refers to digitalizing a firm’s various business activities, which include the entire process of planning, producing, and distributing products and services. In other words, digitalization encompasses digitalizing processes as well as products and services. Process digitalization refers to converting one analogue process carried out in the real world into multiple segments of processes in the virtual world. Product digitalization refers to converting products with physical form into digital products that can be traded in virtual space. Service digitalization refers to providing in virtual space services that had been offered in physical space.
According to Kim , transforming face-to-face transactions between sellers and buyers in the market into contactless transactions on a website with a connection of multiple players (e.g., people, firms, and SW) in online shopping can be regarded as process digitalization; converting music CDs and maps into digital products, such as music files and navigation, can be regarded as product digitalization; and providing real estate agent services, consulting, education, and performances in virtual space can be regarded as service digitalization.
However, digital transformation refers to a drastic transformation brought about by digital technologies to not only a firm’s business but also the entire economy and society (see Table 1). At a corporate level, digital transformation refers to a significant change in firms’ business models and the main fields of business overall based on performance in digitalization. For example, the main fields of business for firms, like Apple or GE, were converted from analogue to digital, and online to offline service providers, such as Amazon in the United States and Delivery Hero in Germany, are blurring the lines between online and offline platforms.
|Focus||Digitization of data/content||Digitalization of processes and products/services||System changes of business/industrial/economic activities|
|Main purpose||Improving efficiency and effectiveness in terms of cost, time, and other business activities||Improving efficiency and effectiveness in terms of business relationship including value chains through value co-creation and sharing||New business models for firms
New opportunities for startups
|Fundamental strategy||Transforming transactions and commerce from offline to online||Transforming business online or creating new online business||Innovation of all business processes and customer experiences|
In other words, while digitization focuses on data/content and digitalization on processes and products/services, digital transformation focuses on all sectors, such as firms’ products/services, production process, business process, corporate strategies, business models, working methods, organizational culture, and leadership. In terms of business activities, digital transformation is a term that embraces not only input–output and process digitalization in the middle but also the strategies and implementation plans to create new business models or market opportunities through the digitalization of the entire life cycle of business activities.
As previously mentioned, digital transformation is strongly influenced by Industry 4.0 and the Fourth Industrial Revolution; thus, some regard the three as the same thing , and the terms “digitization”, “digitalization”, and “digital transformation” are conceptually linked to one another. One thing that is clear is that digital transformation is a term that encompasses the economic and social impacts of digitization and digitalization . From this perspective, concepts and definitions of digital transformation have been emerging since the 2000s , and more specific definitions were introduced by various institutions and researchers in the 2010s as shown (see Table 2).
Table 2. Definition of digital transformation.
|Stolterman and Fors ||The changes that digital technology causes or influences in all aspects of human life|
|Martin ||Now commonly interpreted as such usage of information and communication technology, when trivial automation is not performed but fundamentally new capabilities are created in business, public government, and in the life of people and society|
|IBM ||Reshaping customer value propositions, and transforming operating models using digital technologies for greater customer interaction and collaboration|
|Solis. ||The realignment of, or new investment in, technology, business models, and processes to more effectively compete in an ever-changing digital economy|
|Ismail et al. ||The process through which companies converge multiple new digital technologies with the intention of reaching sustained competitive advantage in terms of business models, customer experience, operations and processes, and people and networks|
|Reis et al. ||The use of new digital technologies that enables major business improvements and influences all aspects of customers’ life|
|Veldhoven and Vanthienen ||The continuously increasing interaction between digital technologies, business, and society, which results in transformational effects and increases the change in process velocity, scope, and impact|
|OECD ||A multifaceted and fast-moving phenomenon that changes the business models of firms using new digital technologies|
Stolterman and Fors  defined digital transformation as changes that can influence all aspects of human life. In other words, all aspects of human life may change due to digital transformation. This can be a revolution in human life, which can also be interpreted as the Fourth Industrial Revolution. Martin  defined digital transformation as the usage of information and communication technology without trivial automation but with the creation of fundamentally new capabilities. This indicates that information and communication technology is the fundamental technology of digital transformation, which creates new values and capabilities. IBM  stated that expanding global connectivity and improving customer capabilities are the driving forces that lead to digital transformation.
A few industries, such as music, entertainment, and electronic goods, were merely exploring digital products and services in the 1990s; however, as consumer demand for digital products and services continued to grow and evolve in the 2000s, customers began to have greater authority and expectations. As a result, improved customer capabilities have become a major driving force of digital transformation. Therefore, IBM  forecasted that, for firms to draw out the potential for devastating technology, they must reshape customer value propositions (CVP) and transform business operations so that they can provide CVP effectively, efficiently, and innovatively, thereby, bringing change to the entire industry.
Solis  defined digital transformation as realignment or investment, which includes overall corporate activities, such as technology, business models, and operations. This view describes how digital transformation can actually be achieved by firms. In a similar vein, Ismail et al.  defined digital transformation as the process through which companies converge multiple new digital technologies to secure sustained competitive advantage in terms of business models, customer experience, operations and processes, and people and networks.
Reis et al.  identified the three elements of technology, organization, and society that define digital transformation, and thus defined it as the use of new digital technologies that enable major business improvements and influence all aspects of customers’ life. The definition takes account not only of business improvements of firms but also the impact in terms of changes in customers’ lives.
Veldhoven and Vanthienen  regarded digital transformation as the continuously increasing interaction between digital technologies, business, and society, which results in transformational effects and increases the change in process velocity, scope, and impact. They interpreted digital transformation as a vector, referring to dynamic activity and direction itself as digital transformation. The OECD  also defined digital transformation as a multifaceted and fast-moving phenomenon that changes the business model, including the dynamic activity itself.
Digital transformation has different definitions according to various aspects of technology, industry, and society. Nonetheless, all definitions tend to interpret digital transformation not as a single technology or process but as an expanded concept that encompasses various changes brought by digital technologies. In this view, digital transformation can be regarded as a revolution that changes the values throughout industries and societies as well as all aspects of life by fundamentally changing all business-related activities of firms based on digital technologies. From the firm’s perspective, therefore, the most important thing is to determine which technologies are needed for digital transformation, what characteristics these technologies have, and how they affect business activities.
In 2016 and 2018, the WEF mentioned the technologies leading the Fourth Industrial Revolution (4IR). As shown in Table 3, Schwab  classified these technologies into physical, digital, and biological spheres and examined over 10 technologies. Digital technologies include the Internet of Things (IoT), blockchain, bitcoin, on-demand economy (or sharing economy, platform business, or digital platform). Later, Schwab et al.  classified the technologies leading 4IR into the categories of extending digital technologies, reforming the physical world, altering the human being, and integrating the environment, and provided 12 technologies. The extended digital technologies include new computing, blockchain/distributed ledger, and IoT.
Table 3. Leading technologies of 4IR by WEF.
|Digital Technologies Leading 4IR (2016)||Extended Digital Technologies Leading 4IR (2018)|
|IoT, blockchain/bitcoin, and on-demand economy (or sharing economy/platform business/digital platform) ||New computing (e.g., centralized cloud, quantum computing, optical computing, and neural network processing), blockchain/distributed ledger, and IoT |
From a similar view, the WEF  classified the motives for 4IR technologies into nine types. These motives include internet and cloud technology (34%), information-processing capability and big data (26%), new/renewable energy and related technology (22%), IoT (14%), sharing economy and crowdsourcing (12%), robotics and autonomous vehicles (9%), artificial intelligence (AI) (7%), advanced manufacturing and 3D printing (6%), and advanced materials and biotechnology (6%) depending on their influence. The technologies with the biggest influence are mobile internet and cloud technology.
The former has increased the convenience of individual life with smartphones, various smart devices, and mobile apps, and the latter has improved the quality of decision making by contributing to increased work productivity of firms and promoting the production and distribution of big data. The IoT provides constant connections of people, objects, and devices, thereby, enabling autonomous decision making and implementation, and the development of various platforms has contributed to the sharing and supply of labor forces, knowledge, and assets. Later, the WEF assumed that the development of the four technologies—ubiquitous high-speed mobile internet, AI, big-data analysis, and cloud technology—would have a positive impact on business growth in the next four years .
The OECD  mentioned the characteristics of digital transformation that affect technologies, data, business models, and policies. The digital technologies included IoT, next-generation 5G wireless communications, cloud computing, big data, AI, blockchain, high-performance computing (HPC), and quantum computing (QC). The ecosystem of interdependent digital technologies will support digital transformation and evolve in a way that leads to future socio-economic changes.
This ecosystem opens up a new window of opportunities through interoperation and complementarity, and it is, thus, much more powerful and functional than individual components. The report forecasts that data along with technology will result in digital transformation, which indicates that the ecosystem of digital technologies depends on data. Thus, it is necessary to understand data as a significant source of resources and values.
From this perspective, digital component technologies that accelerate digital transformation are not some fixed technologies or technology groups. Moreover, it can be seen that core or component technologies constantly change depending on the phases and maturation process of digital transformation. In other words, it is difficult for firms to develop or adopt technologies for digital transformation through specific technology development projects. Rather, they must derive core technologies necessary for digital transformation considering their field and status, and thus they need to constantly determine, develop, and adopt adequate technologies in the process of digital transformation.
Kim  divided digital transformation technologies into four layers: application, service, platform, and infrastructure. This is consistent with the IT approach that originates from the seven layers of the Open Systems Interconnection (OSI) model. This indicates that, using an IT classification, digital technologies can be interpreted as new technologies, and digital transformation can be interpreted as an extension of IT.
Table 4 shows the classification of digital technologies. First, digital infrastructure refers to the computer system that firms must have. As manufacturing businesses need infrastructures, such as factories for production, digital transformation requires the foundation of computing systems, which include both hardware and software. A digital platform is an environment for using and developing various services. In other words, it includes common technologies to manage the data and implement the processes necessary for providing the service.
Table 4. Classification of digital technologies (Kim ).
|Digital infrastructure (base technology)||Computer HW, system SW, and wired/wireless network||Host computer, PC, smartphone UNIX, Android LAN, and WiFi|
|Digital platform (common technology)||Data management, process implementation, and information protection||Sensing, cloud, big data, AI, machine/electronic device control, and biometric authentication|
|Digital application||Included in various digital services and performing specific functions||Distributed ledger/blockchain, IoT, VR/AR/MR, and 3D printing|
|Digital service (applied technology)||Products/services and industries to support specific goal attainment||Component technology: Telematics, Biometric products/services: Autonomous vehicles
Industry: Online shopping, car sharing, digital content, smart home, and smart city
Typical platform technologies include AI, machine learning and deep learning, big data, cloud, mobile, and 5G communications. Digital service refers to the form of products and services, or a business model, to provide specific applications. Most digital services include the function of sensing-control-actuation as well as various smart systems provided based on this function. Finally, the digital application refers to each unit of function, product, or package included in the service. To form an application, component technologies are required, such as distributed ledger/blockchain, IoT, VR/AR/MR, and 3D printing.
As mentioned above, digital transformation is a macro-level revolution caused by unprecedented convergences of multiple radical innovations across technological domains and industries as well. While digital transformation makes products/services “smart” and offers diverse collaboration opportunities to all members in present value chains , it can also bring unpredictable and unintended changes to established technologies, business models, industry systems, and customer perceptions.
During this transformation time, existing standards of both technologies and business models will be changed or challenged  and eventually replaced by new dominant standards. Therefore, it is worth noticing that, despite the numerous potential benefits expected due to digital transformation, various risks may be inherently embedded in the digital transformation process. In this section, we discuss how digital transformation may threaten the sustainable competitiveness of incumbents in existing business systems in three aspects.
First, digital transformation generates many disruptive technologies that will fundamentally change the established “rules of the game” in many industries, thus, requiring firms to make various risky investments in developing new technologies, business models, and processes to adapt to the new rules. For instance, the emergence of cryptocurrency such as Bitcoin can significantly influence performance of traditional finance firms or the rule of conventional financial system . Second, as digital integration via technological convergence increases the complexity of knowledge embedded in products or systems, it may be more vulnerable to external-attacks, such as cyber-hacking or unanticipated system errors.
For example, the Industrial Internet of Things (IIoT), the new industrial environment based on the convergence of Informational Technology (IT) and Operational Technology (OT) environments, is more likely to be exposed to various cyber-attacks due to the time lag between the development of new systems and defense strategies for those new systems . This type of risk can be applied to a wide spectrum of industrial sectors, including energy service sectors, financial services, nuclear reactor sectors, healthcare, communication, manufacturing, etc. Lastly, during the rapid transitional period, not only new requirements for existing business models but also new customer preferences for products/services may emerge.
These changes and pressures significantly challenge the efficacy of operating business models and, furthermore, force firms to redesign their business models with unprecedented customer value propositions. In this vein, Javaria et al.  investigated ongoing dynamics in e-commerce markets and found that consumers considered diverse perception of risks, such as financial, performance, functional, and time-related risks, when making purchasing decisions under changing environments. In a nutshell, although digital transformation is expected to bring a positive change for the sustainable growth of firms, it is important to investigate further how digital transformation potentially increase risks that influence the business strategies and competitiveness of the firm.
According to Rogers , firms can be affected by digital transformation in five domains: customers, competition, data, innovation, and value. First, digital transformation will change customers who are passive targets of marketing (one-way) to targets of mutual communication (two-way). In other words, firms can have customers as a constantly changing dynamic network, not as predetermined mass-market customers. The competition will also transform from competition within the industry to fluid inter-industry competition or competition over the formation of new industries. This can be a connection-based competition in which the major assets to secure competitive advantage are transferred from the internal to the external networks of the firm.
The purpose of data will be shifted from storage and management for internal efficiency to core assets for value creation. Innovation will also change from innovation that focuses on finished products to innovation with upgraded versions through quick prototype releases and iterations. Traditionally, innovation was considered expensive, high-risk, and exclusive and was managed with a focus on finished products. Since it was difficult and expensive to test new ideas, firms relied on the managers’ analysis and intuition to predict what kind of product to develop before releasing anything in the market. Due to the high costs of failure, the most important thing was to avoid failure at all.
However, digital technologies enable firms to develop products at the low cost based on quick experiments and continuous learning, helping them to test the products quickly with user communities. Finally, past values were fulfilled by optimizing one business model for a long time; however, after digital transformation, values will be defined based on customer needs, resulting in a constant evolution of the business model into the next business. Depending on unchanging value propositions has become so risky that it may even affect firm survival, and repeating and settling for the same successful value proposition is equally dangerous. The only way to deal with the changing business environment is to watch all technologies as a method to expand and improve our value propositions for customers and continue evolving.
In terms of business activities, these can be divided into development processes and operations of products and services, products and services themselves, business models, business goals, and strategies . First, intellectualization (or smartization) of processes and operations may increase the nonlinear and multilayered connections between processes. This may also enable digitization and connection of the entire processes of production and operations, thereby, changing the production method from a centralized control system to an autonomous decentralized system .
This operation method will enable customized production by changing the existing method of mass-producing small product varieties to mass-producing multi-variety products . Second, products and services may change themselves. Turning products into services or services into products will result in the convergence of the two. In particular, platforms as a medium may activate tIndustry Type for Digital Transformation
The association between firm size and innovation has received constant attention from innovation and management scholars. On the one hand, small firms may possess more advantages in adopting and pursuing innovation based on their flexibility and agility, while large firms may suffer from organizational inertia. On the other hand, one can argue that large firms might be advantageous in pursuing innovation with the abundant resources and experience that small firms usually lack. As digital transformation is a macro-trend innovation related to the competitiveness and survival of firms across industries, the debate on the relationship between firm size and digital transformation has received attention from recent studies . These studies explored the question of how SMEs, compared to large firms, recognize, prepare, and implement digital transformation strategies.
Another emerging stream of research investigates how digital transformation strategy and performance vary by industry type. As digital transformation is analogous to Industry 4.0, smart factories, and cyber-physical systems, the manufacturing industry has been viewed as the core industrial area to understand the nature of digital transformation . In addition, as digital transformation significantly influences the existing business model , and its impact on the service sector has become a salient issue . As digital transformation is basically knowledge convergence across sectors, identifying which sector plays a leading role and grasps hegemony becomes important. By recognizing these research trends, our study employs firm size and industry type (manufacturing and service sector) as classification instruments to explore how a firm’s perceptions of, and responses to, digital transformation vary.