Digital Transformation: A Modern Form Of Creative Destruction

Derrick Steiner

Digital is a such a broad term ingrained in so many different aspects of our lives these days, it’s difficult to keep up with what all this terminology even means anymore. In the corporate world, digital transformation is the new hot topic at board meetings but rarely fully understood and properly prioritized by today’s business leaders. Why? At its core, it’s rarely brought into the context of the bigger picture, which is that the world has drastically changed and most corporations are playing catch up. Nearly 90% of managers and executives anticipate they will be disrupted by digital trends, but only 44% say their organizations are adequately preparing for the disruptions to come.

We don’t need to go into details of how digital our daily lives are, just look at your phone or even how digital our work lives are, again just look at your phone. Instead, let’s take a step back and think about what being digital really means. Being digital is being faster, stronger, smarter, integrated, more efficient, more effective, more agile, and more profitable. And while these digital characteristics also happen to be the underlying goals of a corporate enterprise, few are fully embracing digital transformation. There is a widening chasm between the haves and have-nots, and thus we are entering a new age of creative destruction.

Creative destruction

Creative destruction is a concept in economics developed by Austrian-American economist Joseph Schumpeter (1883 – 1950).

“The strategic stimulus to economic development is innovation, defined as the commercial or industrial application of something new – a new product, process or method of production, a new market or source of supply, a new form of commercial, business, or financial organization.” (The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, 1934)

“The process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroys the old one, incessantly creates a new one.” (Capitalism, Socialism and Democracy, 1942)

Schumpeter viewed economics as an organic and dynamic process that is constantly evolving through innovation, and this evolutionary process rewards profitable adaptations and innovations and punishes less efficient ways of organizing resources. The process can be bumpy and unpleasant for some, but the trend line is toward progress, growth, and higher standards of living. While this current period of innovation through digitalization might be viewed as unique, the concept of creative destruction and its real-world implications are not. There are countless historical examples of innovative companies or underlying technologies and processes that have transformed economies and created more profitable ways of organizing resources; the printing press, steam engine, automobile, assembly line, computers, software, ERP, personal computer, Internet, and smartphones.

The status of digital transformation

Schumpeter described progress as a historical process of structural changes, substantially driven by innovation. He divided the innovation process into four dimensions: invention, innovation, diffusion, and imitation. In Schumpeter’s analysis, the invention phase or the basic innovation has less of an impact, while the diffusion and imitation process have a much greater influence on the state of an economy. The macroeconomic effects of any basic innovation are hardly noticeable in the first few years. What matters in terms of economic growth is not the discovery of basic innovation, but rather the diffusion of basic innovation, which is the period when imitators begin to realize the profitable potential of the new product or process and start to invest heavily in that technology.

Many strongly believe enterprise digital transformation is in the diffusion and imitation phase with the digital disruption being recognized but not sufficiently invested in yet. Nearly 90% of managers and executives anticipate they will be disrupted by digital trends, but only 44% say their organizations are adequately preparing for the disruptions to come. Investment in information technology has been on the rise but only modestly at a 2.5% average annual growth from 2005 – 2017.

chart of worldwide IT spend

All things are relative and when normalizing the IT spend statistics vs. global economic indicators such as GDP and market capitalization, strong arguments can be made for a lack of IT investment. Worldwide IT spend as a percent of GDP decreased 1.9% annually from 2005 – 2017, and as a percent of market capitalization decreased 8.6% annually when 2008 is excluded (due to the recession and decreased denominator).

chart of worldwide IT spend as a perent of GDP
chart of worldwide IT spend as a percent of market capitalization

In addition, analyzing other forms of capital investment also highlights the lack of IT funding. Historic levels of share buyback, dividend, and mergers & acquisition activity dominate the news cycle and, according to the U.S. Federal Reserve, “elevated payouts to shareholders and weak corporate investment of recent years have not been confined to the United States, but are a global phenomenon.”

These statistics, coupled with the observation of day-to-day life and the advancement of individual consumer digital adoption, can make one wonder about the innovation rate for companies. This quote from a Capgemini and MIT study sums it up well: “Come on – I know the company’s more than 100 years old, but our IT capabilities don’t have to match the age of the company.”

Call to action

The ubiquitous term “digital transformation” is a modern form of creative destruction with the convergence of several world-changing and rapidly evolving innovations. In this digitally connected world, corporate digital transformation is at the tipping point of hyper diffusion and imitation, and business leaders are being challenged to evaluate their digital transformation strategy. Some simple advice is to look down at your smartphone and ponder on all the magical things it does for you, think about your technology experience in your business, and reflect on Joseph Schumpeter’s words: “nothing is so treacherous as the obvious.”

The costs of managing, powering, and moving products and services are about to change dramatically. Tick Tock: Start Preparing for Resource Disruption.

Derrick Steiner

About Derrick Steiner

Derrick Steiner has significant experience leading companies around the globe through strategic and operational transformations to improve cost, cash flow and service as a former management consultant, trusted c-suite advisor, analytical engineer, and change agent. Derrick’s focus at SAP is developing thought leadership to help organizations realize the value and business outcomes of digital transformation.