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A digital transformation leverages the opportunities presented by technology – from IT to advanced analytics, sensors, robotics, and 3D printing – to drive business forward. The entire ecosystem of the company is affected, including employees, customers, suppliers, and partners. Companies that want to digitize successfully can either improve their current business model and processes, add new sources of revenue to their business model, or replace their old business model with a new superior model. In doing so, companies realize new customer experiences, generate new value propositions, and raise the organization to new levels of effectiveness and efficiency. Digitization thus changes structures, processes, and IT, as well as the people who live and work in this new reality.

Digital Players Conquer and Disrupt All Industries

However, this wonderful new world has a dark side: those who refuse to change, lose. Digitization triggers creative destruction, a term popularized by economist Joseph Schumpeter. The new combination of production factors ousts and destroys old structures and traditional business models.

Digitization claimed its first prominent victim when the Internet was still in its infancy, when smartphones belonged to the realm of science fiction and apps were still unheard-of: Compaq was the undisputed global leader in personal computer (PC) and server sales in 1996, with a market share of more than 50 percent in the business customer segment. Compaq built its computers in the old-fashioned way, and delivered them to distribution partners for sale in their stores. That same year, the then 31-year-old Michael Dell launched direct sales of his Dell PCs via the Internet without the need for brick-and-mortar stores. And it wasn’t just the order process that was revolutionary: Dell’s customers were able to assemble their own customized PCs using a kit on the website. Thus, computers were no longer built according to the Compaq principle of “build to stock,” but rather “build to order,” and were tailored to the needs of the individual customer.

Although not immediately apparent to its competitors, Dell’s business model was superior to the business model of Compaq and the rest of the industry. Online sales and lean mass production according to the build-to-order principle made the difference between earning and losing money in this hard-fought market with tight margins. Compaq didn’t dare to change its business model because it feared a channel conflict, and ultimately stayed true to its existing model. In 1997, Compaq was acquired by Hewlett-Packard, and Dell rose to become the world market leader.

Since Dell’s digital revolution of the PC industry, many industries have had their foundations shaken. Video libraries, CD stores, travel agents, and local banks are just some of the endangered species in a world where we now stream our movies and music via Netflix and Spotify, book our flights and accommodations via portals like Expedia and Airbnb, manage our bank accounts online, and can even secure classic banking services like loans via crowdfunding sites like Prosper.

Digitization Is Relevant for All Industries – Only Scale and Speed Will Vary

Anyone who hopes one’s own industry will not be affected by digitization and chooses to continue along as before in blissful oblivion is making a risky assumption. Essentially, all sectors are affected; the only difference is the severity and length of time until the old business model is rendered obsolete.

Companies face dramatic challenges in many industries. Who is to say that tomorrow’s driverless cars will still be built by Ford, BMW, Toyota, and the like, and not by Tesla, Google, or Apple? And in a few years, who will equip our smart homes with Internet-connected robot vacuum cleaners and ovens? Who will deliver the groceries that our smart refrigerators automatically order online? Kroger or Amazon?

Naturally, the topic of digitization is on the agenda of most companies. Many companies have started digital initiatives, for example in customer communications, in production, or in supplier interaction. However, most CEOs currently admit they do not have an overarching digital strategy. Their ideal transformation toward becoming a digital company often lacks definition, and all too often they have too narrow an understanding of the term digitization. It is not just IT and technology. These are only the foundation. Rather, it is about transforming the entire company – redefining customer value propositions, value-added processes, and people’s working methods.

It has radically changed consumer behavior and expectations, destroyed traditional business models, and redefined industries. It revolutionizes production – think Industry 4.0 – and rocks entire business sectors. Retail faces challenges from digital competitors like Amazon and Alibaba, the banking industry is threatened by lucrative fintech segments, travel portals like Expedia and Priceline are shaking up the tourism industry, and the traditional business models of the advertising industry are being rocked by a variety of digital channels. Digitization is even creating new markets, for example the so-called sharing economy where urban hipsters dispense with owning a car in favor of Uber or Zipcar.

Companies operating in the analog world must not let it get too late before they join the digital mix. Start-ups that tap into a customer need sometimes experience explosive growth. In China, for example, Tencent, whose WhatsApp-equivalent QQ is used by 900 million Chinese customers, saw its revenues increase a hundredfold in 10 years to around €14 billion in 2015. Tencent states that one in two employees works in research and development. And Chinese Uber rival Didi Chuxing, which dominates the taxi and limousine market in the country, more than tripled its company value in 18 months from around $6 billion in 2015 to some $20 billion.

New Business Models Follow a Classic Pattern

The business ideas triggered by digitization can be grouped across two dimensions depending on whether they are driven by the supply side or the demand side and whether they lead to extended or improved or even completely new business models. An example of a new offering leading to an extended business model is Kayak. The company has digitized the classic travel agency business, allowing users to search for flights, hotels, and rental cars online. The business model itself is still based on a classic system where providers pay a commission to Kayak.

Other digital companies’ offerings tap into a demand that it was previously not possible to service. One example of this is Spotify, whose streaming service provides customers with access to its entire library of music. Rather than paying to listen to individual songs, users pay a subscription. This completely new business model revolutionized the music market and fundamentally turned the industry on its head. By comparison, Apple’s iTunes music store appears conventional.

An example of a demand-driven revolution is the Dollar Shave Club. The company, which was recently bought by Unilever for $1 billion, offers razors and shaving accessories for men in return for a membership fee. By subscribing, members receive a monthly package containing the necessary blades and shaving foam, which saves a trip to the drugstore.

Nike iD is a demand-driven extension of a business model. Customers can individually design their sports shoes online, customizing the shape, material, and color, and even add a monogram.

Consumer Behavior Has Dramatically Changed in Recent Years

The McKinsey long-term study “TMT Digital Insights” tracks changes in consumer behavior in the most important global markets and segments, and has revealed dramatic changes in US consumer behavior. Here are two examples:

Consumers want everything, anywhere, anytime: In 2016, 83 percent of consumers possessed a smartphone – the same number as those who own a home PC. Even tablets, which first became a mass phenomenon in 2010 with Apple’s iPad, are now owned by two-thirds of consumers. This has key consequences for user behavior: US consumers now spend more time on their smartphones and tablets than they do on the PC. Mobile consumers expect answers immediately when researching products and prices on the move or when they want to order something. Smartphones and tablets have become personal command centers. Companies that do not adjust their online presence to service the mobile “anytime, anywhere” mentality may lose ground to their competitors.

Increasing relevance of visual media: The medium of video has become significantly more important. Consumers now spend more time watching videos than before – often at the same time as other (often also digital) activities. So-called over-the-top (OTT) video content published directly online is threatening traditional linear TV and pay-per-view models. To remain attractive to customers, companies need to supplement their traditional text-intensive communications with videos. For a long time now, consumer fascination with the virtual world has impacted the real world economy: advertising budgets have shifted dramatically – from TV and print to mobile providers. And now video content is conquering the small screen: series are now optimized for smartphone screens in terms of time and image composition.

Retailers, service providers, and consumer goods companies are also feeling the pressure to digitize their processes and offerings, driven by customers whose research and buying behavior has drastically changed in the past decade. Consumers browse online forums to find out about a product’s quality, they check value for money on comparison sites, and they use Twitter, Instagram, and the like to post their opinions. And even when shopping in a store, they’re happy to check their smartphones to see if a product they like is available for a lower price from an online retailer or a local rival.