Abstract

This study systematically reviews digital transformation to enhance our understanding of theories, determinants, consequences, and contingent variables that have been used in prior studies. The study highlights five building blocks of digital transformation pyramid. Based on the review, dynamic capability lens is the main theory associated with digital transformation. The review highlights the role digital transformation plays in fostering competitive advantage, employee productivity, customer loyalty and satisfaction and firm reputation. The connection between digital transformation and employment is inconsistent due to mixed evidence reported by scholars. It was observed that leadership, human resource capability and employee empowerment are the main enablers of successful digital transformation initiatives. The contingent variables of digital transformation were discussed. Future research on digital transformation should include more contingent factors (moderating and mediating variables).

Keywords: Digital Transformation, Digital Transformation Pyramid, Business Model, Execution, Dynamic Managerial Capabilities.

1. Introduction

The rapid changing world exposes businesses to a lot of challenges especially, technological and environmental. In this context, organisations must rethink their strategies and business model by investing more in technology to survive (Craven, Liu and Mysore 2020). Digital transformation enables a firm to change its structure, processes, functions and business models by implementing digital technologies/tools (Matt et al., 2015; Sahu et al., 2018). Organisations can use digital tools such as the Internet of things, machine learning, artificial intelligence, augmented reality, in-memory computing to enhance their operations and services. Digital technologies minimise transaction and coordination costs and enable Small and Medium Entreprises (SMEs) to reach different stakeholders across countries (Fieseler and Fleck 2013; Fischer and Reuber, 2014). Digital technologies foster seamless information exchange (Alarcón-del-Amo, Rialp and Rialp, 2017; Mathews and Healy 2008), reduce barriers to market entry and enables more people to transact in the international market (Aldrich, 2014; Nambisan, 2016; Friedman, 2008). Digital transformation bridges the gap between digital consumer expectations and its real value (Verdino, 2015). Terrar (2015) submits that change of leadership, strategic thinking and a culture that support innovation are vital for digital transformation. Thus, implementing digital transformation call for strategic decision-making that is connected to value creation, digital engagement, assessment of the firm’s skills and culture. Globally, Coronavirus (COVID 19) pandemic has both social and economic impacts on governments, organisations, and employees (Pramathesh et al., 2020). This pandemic has altered the way people work and live their lives. As such, organisations are leveraging digital technologies to serve customers and protect their employee’s wellbeing. Remote working and studying were easy for organisations that have digital technology capabilities, while others had no choice but to implement digital transformation. Indeed, technology still plays an important role in business continuity and stability. More so, the growth of smart devices has changed the way customers and organisations intercommunicated and transact business. Importantly, the growth of digital payment platforms and financial technology (Fintech) firms, such as “PayPal”, “TransferWise” had created more online-based sales and happy customers. Amazon Go uses (digital) technologies such as computer vision and machine learning to create value for customers and the company. This chapter employs a systematic literature review to shed light on how digital transformation has emerged and evolving. The review herein considers digital transformation pyramid, moderating and mediating variables aside from theories, effects, and determinants of digital transformation. The chapter contributes to the literature by using the systematic review methodology to summarize existing information on digital transformation pyramid, theories, consequences, antecedents and contingent factors (moderating and mediating variables) used in digital transformation research, allowing more general conclusions to be drawn about the phenomenon. This will help to reconcile the volume of studies on digital transformation. The chapter informs practitioners, policymakers and researchers with new insights into digital transformation. The chapter addresses the following research questions (RQs):

RQ1: What theories have been used in previous digital transformation research?

RQ2: What is the impact of digital Transformation?

RQ3: What are the antecedents of digital transformation?

RQ4: What moderating and mediating variables have been used in previous digital transformation studies?

• RQ1 – What is Digital Transformation

Fundamentals

Digital transformation is useful in restructuring economies, institutions, and societies (Brennen and Kreiss, 2016; Unruh and Kiron, 2017) and for reducing transaction costs (Parker et al., 2016). It has been argued that without the transformation of businesses, economic and environmental issues cannot be adequately addressed (Bican and Brem, 2020). Digital transformation has received attention from both scholars and practitioners, yet, there is no consensus in terms of its definition (Morakanyane et al., 2017; Osmundsen et al., 2018). Researchers see it as a process (Hansen et al., 2011; Cichosz, 2018; Hausberg et al., 2018), a business model (Henriette et al., 2016) or a strategy (Bharadwaj et al., 2013; Kane et al., 2015). Scholars note that DT involves the use of new digital technologies to make significant business improvements (Fitzgerald et al., 2014). It is worthy to mention that Digital Transformation is not about a single technology, rather a combination of, computing, information, communication, and connectivity technologies (Bharadwaj et al., 2013). Digital transformation affects organisational structure, routines, information flow and a firm’s ability to optimise information technology (Cui and Pan, 2015). Bloching et al. (2015) assert that digital transformation is a continuous interconnection and adaptation to the digital economy by business sectors. Digital technologies use re-programmable functionality and repurposable digital devices (Tilson et al., 2010) to reduce asset-specificity. Digital infrastructures such as the internet and mobile networks, facilitate data sharing and link objects, individuals and organisations that use and generate data (Gawer, 2020).

Digital Transformation Pyramid

Digital Transformation focuses on a new way of doing business and new business models (Turchi, 2018). According to Turchi (2018), digital transformation hinges on 3 levels; strategy (business model), execution and technology. These three levels represent the digital transformation pyramid (DTP). For digital transformation to be effective, at least two of the three levels must be adopted. For instance, a new “Digital” Business Model, need execution through a new Go-to-Market approach and a new IT system to be effective. It can be argued that each of the three levels of the digital transformation pyramid influences other elements of the framework. A “system” approach that integrates strategy, execution or technology foster Digital Transformation (Turchi, 2018). Turchi identified five building blocks that define the framework:

• Business Model / Business Strategy
• Operating Model
• Operations
• Go-to-Market
• Technology

The importance of these elements in promoting digital transformation cannot be overemphasized. Technologies support the operating model, the operations of a firm and the evolution of the Go-to-Market. Also, operating models, operations activity and market approach support business model adoption.

• Level 1: Strategy (Business Model)

An organisation must analyse the benefits and threats associated with crafting a business strategy in a digital environment. Human resource and strategic analysis capability foster the strategic performance of firms (Nwachukwu and Chladkova, 2019). As such, digital strategy focuses on developing strategic plans and leveraging information technology of digitised business environment. It has been argued that a systematic approach to strategy formulation promotes the innovation performance of firms (Nwachukwu, Chladkova and Olatunji, 2018). Hence, it is important to formulate a digital strategy that will give a firm a competitive edge in the market. Bhardwaj et al. (2013) opine that a digital strategy defines how a firm should leverage new digital technologies in an existing business. “They add that digital strategy enables an organisation to create value both externally and internally”. Firms can create value externally via e-commerce and internally by efficiently utilising their internal processes. The digital business model can be defined in terms of “enhanced resource optimization via digital technologies, like with Uber-like mobility-sharing schemes or Software as a Service (SaaS), interacting between entities and systems”.

• Layer 2: Execution

Execution is important for a successful digital transformation programme. According to Turchi (2018) “execution happens within the firm and outside the firm”. For instance, a firm executes a digital transformation strategy to serve actual and potential markets. Turchi (2018) identified three “building blocks of execution”; corporate operating model, operating model of operations and Go-to-Market approach. Firms need to give attention to these elements when developing digital transformation programme. A firm digital transformation strategy is achieved through:

• Products offered to customers and considering important factors such as selling price, distribution channel, promotion and communication approach, digital-enabled product value proposition among others
• Organisation, procedure and tools that support the structure of the firm and how it works
• Operations which identify how a firm delivers its products and services to the market.

These elements are relevant to strategy execution in both digital transformation and other contexts. However, in the digital transformation contexts, organisations focus on evaluating digital and technological impact. For instance, what is the “product” in a digitally enabled environment such as food delivery platforms? Does the customer get the food at the time needed? Is the App efficient, reliable and easy to use? Does the service have an impact on the price and value provided? Uber eats, Foodora, and Wolt are examples of companies using digital platforms to ensure that customers get foods without leaving the comfort of their homes.

• Layer 3: Technology

Technology is an enabler of digital transformation which supports the achievement of business goals through the “execution” blocks. Turchi (2018) asserts that “technology is the driver of the evolution of the operating model, operations and the achievement of the Go-to Market approach”. It supports transformation at each level of the pyramid. Organisations should build strategic capability that will allow them to spot the impact of technology on each level of the pyramid. The ability to identify changes in the business environment due to technology enables firms to implement appropriate strategies to deal with them. It is worthy to mention that digital transformation is more about people than technology, hence, openness towards technology and innovation by all in an organisation is key for its success.

Figure 1. The Digital Transformation Pyramid (Turchi, P, 2018)

Theories used

The concept of affordance was initially used to explain the “human-computer interaction” that support the use of objects (e.g., Norman, 1988). Affordance focuses on “interaction-centred approach” which explains the connection between users and the technology employed by organisations (Vyas et al., 2006, 2017). This theory has been used to examine digital transformation in varying contexts. For instance, digital literacy as one of the key skills needed in the era of digital transformations. Based on affordance actualization theory, Orlikowski (2000) submits that different uses of a system can occur based on how people connect with it. Du, Pan, Leidner and Ying (2019) contend that affordances and their actualisation are two distinct concepts that depend on organisational context. For instance, Vyas et al. (2006) opine that digital technology can be used to run simulations, but users need to find out this potential themselves. Vyas et al. (2017) identify “three levels of affordances: single user, organisational and societal levels”. They add that “relationship can be one-to-one i.e., user and a specific technology (individual level), or one-to-many (the organisational) or many-to-many (society level)”. Digital technologies functionality, design features and infrastructure affect affordances by improving the technical facilities of work and social interaction (Anderson and Robey, 2017). Li., Su., Zhang and Mao (2018) use dynamic managerial capabilities to explore digital transformation in Small and Medium Entreprises SMEs. The theory of dynamic managerial capabilities (DMC) suggests the “managers capabilities to build, integrate, and reconfigure organisational resources and competencies” (Adner and Helfat, 2003). It emphasises managers’ capabilities to drive their firms’ digital transformation initiatives. Extant literature demonstrates that DMC hinges on three core areas: “managerial cognition, managerial social capital, and managerial human capital” (Helfat and Martin, 2015). Managerial cognition focuses on managers’ “personal beliefs” and “mental models” which support decision‐making (Adner and Helfat, 2003). It connotes managers’ knowledge and understanding of current events which inform their decisions. Managers with poor managerial cognition may not be able to spot changes which could hinder their firm efforts to transform (Helfat and Martin, 2015). Managerial social capital involves “formal and informal relationships between managers and other people” (Helfat and Martin, 2015). Managerial social capital allows managers to get different resources and information (Tsai and Ghoshal, 1998), spot market opportunities and challenges (Adler and Kwon, 2002; Burt, 1992) and reconfigure firm resources (Helfat and Martin, 2015). In this context, managerial social capital can promote digital transformation. Managerial human capital consists of the knowledge, experience, skills, and education (Helfat and Martin, 2015) of individual managers and group of managers. Indeed, superior DMC support successful strategic change such as digital transformations. Dynamic managerial capabilities DMC of top management can enable them to leverage market opportunities and support the implementation of new technologies, which is the core of digital transformation (Chatterjee et al., 2002). Matarazzo, Penco, Profumo and Quaglia (2020) uses dynamic capabilities to explain how digital transformation influence customer value creation in small and medium-sized firms (SMEs). Helfat and Winter (2011) opine that organisational capability is the “capacity to perform a particular activity reliably and satisfactorily”. Organisational capabilities focus on specific capabilities that are relevant to an organisation in different contexts. For instance, firms in dynamic environments require superior market‐sensing capability (Teece, 2012) and robust research and development (R&D) capability to achieve a competitive edge in hi‐tech industries (Eisenhardt and Martin, 2000). Chopra and Sodhi (2004) note that channel management capabilities are vital to compete in the traditional retail market segment. Arguably, firms need new capabilities to engage in new businesses or compete in new markets after organisational transformation. Extant studies in IT‐driven organisational transformations emphasizes the need to develop not only IT capabilities but also complementary capabilities such as IT human resource (Li et al., 2018), or new service delivery capabilities (Aral and Weill, 2007; Singh, Mathiassen, Stachura and Astapova, 2011). Chawla and Joshi (2017) use the Technology Acceptance Model (TAM), Unified Theory of Acceptance and Use of Technology (UTAUT) and Diffusion of Innovations (DoI) theories to explain the moderating impact of demographics characteristics on user attitude towards mobile banking.

Table 1.

Summary of articles addressing research question 1

Source. Author’s elaboration

1.2. RQ2- The Impact of Digital Transformation

The sophistication of mobile devices and the Internet have changed customers’ expectations, preferences and behaviour. More so, technologies, such as “artificial intelligence (AI)”, “blockchain”, “augmented reality (AR)”, and “virtual reality” (VR), and others are causing disruptions. The changing consumers’ demands and technology advancement call for a new approach to meeting customers’ expectations (Nwachukwu and Žufan, 2017). Indeed, innovations will continue to transform human behaviour (Sahut, Dana and Laroche, 2020) and create value for various stakeholders. Digital transformation improves operational efficiencies, customer experiences, business models, strategic differentiation, competitive advantage, stakeholder relationships, cost savings, (e.g., Berman and Marshall, 2014; Morakanyane et al., 2017). Scholars highlight the positive effect of new embedded usage of digital technologies on employee productivity, work efficiency, supply chains, increased customer loyalty and satisfaction (Coupette, 2015; Kagermann et al., 2015; Loebbecke and Picot, 2015). Artificial intelligence (AI) influence service management by fostering service provision and customer interaction effectiveness and efficiency (Larivi`ere et al., 2017; Marinova et al., 2017), for instance, using AI for predicting customers’ reaction to films. On the other hand, AI threatens human service jobs in different sectors, “from bus drivers and call centre agents to financial analysts, lawyers and doctors” (Huang and Rust 2018). Further, new firms often IT companies, emerge in traditional service markets and threaten established firms (e.g., Amazon and Alibaba in retail, Uber, and Google in mobility, Airbnb in hospitality) (Perren and Kozinet, 2018). Goldfarb et al. (2015) examine the connection between digitalization and production costs. It was observed that digital transformation may minimise operational, production, distribution and marketing costs. They concluded that the cost reduction effects of digital transformation will reduce general prices in the economy. Draco et al. (2015) find a positive effect of ICT’s on productivity based on the “mutual interaction” between “costs and production”. They concluded that increases in productivity from the digital transformation affect real output on a national scale. Choy (2020) submits that digital transformation is a major enabler of technological progress that influence economic growth rather than economic stability. Sibgatullina, Merzon and Seibgll (2019) highlight the role social and psychological aspects of the digital environment play in promoting talent management systems. Digital environment fosters human capital, creativity and mindfulness as well as lifelong education. Anderson (2014) asserts that digital transformations through a change in business models and value chain, positively influence the firm’s reputation. Analysing Small and Medium-sized firms in Italy, Matarazzo, Penco, Profumo and Quaglia (2020) finds a strong connection between digital instruments and business model innovation, new distribution channels and new ways to create and deliver value to customer segments. Aly (2020) reports a positive effect of digital transformation index on economic development, labour productivity and job employment. However, some sectors implementing digital transformation were prone to reducing their workforce rather than creating more jobs (Katz, 2017). Further, Fossen and Sorgner (2018) submit that digital transformation via the use of AI would make workers either change occupations or lose their jobs. They note that transformation risk is higher in unincorporated entrepreneurship compared to incorporated firms. Similarly, in a study of German firms, Arntz et al. (2019) observed that digital technologies have little impact on total employment rate but promote significant labour mobility between occupations and industries.

Table 2.

Summary of articles addressing research question 2

Source. Author’s elaboration

1.3. RQ3- Antecedents of Digital Transformation

In Australia, Eden, Jones, Casey and Draheim (2019) reports three workforce transformation practices which drive digital/workforce transformation: “flexing”, “deepening” and “revitalizing”. Schultz and Peltier (2013) submit that customer behaviour and preferences promote the implementation of digital transformation. Cichosz, Wallenburg and Knemeyer, (2020) observes that pressure from stakeholders such as customers, employees, business partners and competition, foster digital transformation. They add “teamwork, employee and client engagement, communication and feedback are important drivers of logistics companies’ digital transformation”. Other scholars argue that top management support is important for the successful implementation of e-commerce (Beige and Abdi, 2015; Chong, Bian and Zhang, 2016). de la Boutetière, Montagner and Reich, (2018) identifies five key factors that promote successful digital transformation: digital-savvy leaders, human resources capabilities, empowering people to be innovative, digital tools and effective communication. They concluded that successful digital transformation requires “digital-savvy leaders and employees with the capabilities to make a change happen”.

Table 3.

Summary of articles addressing research question 3

Source. Author’s elaboration

1.4. RQ4 – Moderating and mediating variables of Digital Transformation

Wang, Feng, Zhang and Li (2020) employs “Skewed conflict”, “minority dissent theory” and “too-much-of-a-good-thing” perspective to explain moderating effects of cognitive conflict in the relationship between digital transformation strategy and financial performance. They observed that cognitive conflict strengthens the impact of digital transformation strategy on the short and long-term financial performance of Chinese firms. Ahmed, Salman, Malik, Streimikiene, Soomro and Pahi. (2020) found that mediating variables (electronic word of mouth (eWOM) and attitude) and moderating variables (technology and addiction) has a significant effect on smartphones usage and students’ academic performance in Pakistan. In India, Chawla and Joshi (2017) report that demographic characteristics (gender, age, qualification, experience, occupation, income and marital status) enhanced user attitude towards mobile banking. Conversely, educational background did not moderate the relationship.

Table 4.

Summary of articles addressing research question 4

Source. Author’s elaboration

2. Methodology

To conduct a quality review, articles from high-quality sources were used. Quality studies are found in reputable sources such as academic journals and conferences papers. Google Scholar accessibility and sophistication gives it an edge over other databases (Lim, Yap and Makkar, 2020). Given this, the Google Scholar search engine was used to identify relevant literature on Digital Transformation. In terms of keywords, the review considers single keywords as “Digital Transformation” and papers published between 2017 and 2020. This is to ensure that the search strategy is closely linked to studies on Digital Transformation. The focus on recent papers published between 2017 to 2020 is to add fresh and timely insights.

3. Conclusion

Globally, digital platforms are changing economies and making life easier and better for people (Evans and Schmalensee, 2016). Digital transformation has become important to deal with an unpredictable and ever-changing business environment. Organisations are leveraging digital technologies to remain competitive in the marketplace. Firms must be open to technology and innovation to achieve successful digital transformation. This chapter contributes to the digital transformation scholarship by providing a review of empirical studies. The chapter focuses on empirical studies done globally from 2017 to 2020. The authors analyse and summarise studies on the theories, determinants, effects and contingent factors that had been explored by scholars. Through an in‐depth study of extant literature, the authors address four research questions.

The study highlights theories (RQ1) that support digital transformation research. In terms of theory, some degree of diversity was observed. Different theories are applied to explain digital transformation, e.g., affordance, dynamic managerial capabilities, organisational capabilities, technology acceptance model, unified theory of acceptance and use of technology, diffusion of innovation, skewed conflict, minority dissent and too-much- of -a -good-thing. Theories are important to explain a phenomenon. Dynamic managerial capabilities and organisational capabilities are the most widely used theories. Building and optimising capabilities are important for successful digital transformation efforts. Nonetheless, it would be interesting to use another theoretical lens to increase theoretical diversity and to expand the scope of the field.

In terms of the effect of digital transformation (RQ2), It was observed that it improves operational efficiencies, customer experiences, business models, strategic differentiation, competitive advantage, stakeholder relationships, cost savings, employee productivity, work efficiency, supply chains, customer loyalty and satisfaction, economic growth, human capital, creativity and mindfulness, lifelong education, firm’s reputation, distribution channels and economic development. However, the effect of digital transformation on employment is mixed and unclear.

In terms of the determinants (RQ3), the following enablers were identified: flexing, deepening, revitalizing pressure from stakeholders (customers, employees, business partners and competition), teamwork, employee and client engagement, communication and feedback, top management support, digital-savvy leaders, human resources capabilities, empowering people to be innovative and digital tools. This lends credence to the importance of people to successful digital transformation initiatives. Additionally, top management buy-in and workforce empowerment are crucial for successful digital transformation. Based on the review, digital transformation is mainly influenced by people.

Last, a look at moderating and mediating variables (RQ4). In terms of contingent factors, cognitive conflict, technology, addiction, gender, age, qualification, experience, occupation, income and marital status are moderating variables. Two mediators were identified: electronic word of mouth (eWOM) and attitude. “Electronic word of mouth (eWOM) connotes information exchange between receiver and sender using electronic and digital media” (Lien and Cao, 2014). Electronic word of mouth was found to enhance the effect of entertainment on student academic performance. Attitude towards smartphone usage enhance the impact of entertainment on student academic performance.

Overall, based on this review, we infer that research on digital transformation is rather diverse and cut across a broad area of research, revealing its evolving nature. Digital transformation cannot be separated from innovation. Hence, firms need to develop a culture of innovation to benefit from digital transformation as well as organize themselves differently to be able to tap into the opportunities it represents.

3.1. Limitations and suggestion for future research

The findings were summarised by analysing theories, antecedents, consequences, and moderating/mediating variables that have been included in previous studies on digital transformation. Some articles may have been omitted unintentionally. This may limit the findings provided in this review. Nonetheless, to the author’s knowledge, most of the previous articles on the subject were included. The present review identifies some gaps in the literature. First, there were no studies that examined digital transformation using a contingency lens. Future studies should use contingency theory to test antecedents, consequences and contingent variables that may enhance or hinder digital transformation. More so, this review shows that digital transformation’s impact on employment is inconsistent. Thus, introducing moderating and mediating variables may reduce this inconsistency.

This study informs the research community and practitioners and adds to the debate on digital transformation.