Digital technology and the digital transformation of firms
Digital technology transforms firms’ capabilities, products, services, and key interrelationships within extended business networks (Bharadwaj et al., 2013). Some scholars view digital technology as a crucial resource that accelerates digital transformation processes (Kallinikos et al., 2013; Nambisan, 2017). From this perspective, the impact of digital technology on a firm’s core business during digital transformation has garnered significant attention (Hess et al., 2016; Aversa et al., 2020).
Digital technology (DT) has been widely adopted by firms to improve their innovation performance (Cheng et al., 2023). The characteristics of digital technology drive firms to develop suitable digital technology strategies for their digital transformation. On the one hand, the distribution, accessibility, and transfer ability of digital technology significantly lower the threshold for its implementation across various industries (Kallinikos et al., 2013; Yoo et al., 2010; Nambisan, 2013). Consequently, digital technology can easily be used in diverse activities related to technology development. On the other hand, the editability, openness, and generative nature of digital technology enable it to produce different outcomes in various organizational contexts (Nambisan et al., 2019; Wareham et al., 2014).
The nature of strategy is evolving with advances in digital technology (Volberda et al., 2021). Firms face increasing pressure to adopt heterogeneous digital technologies to renew and transform their business models (Baden-Fuller and Haefliger, 2013; Calvin et al., 2019). A significant volume of research highlights the various roles that digital technology plays in advancing firms’ innovative processes (Frank et al., 2019). In many firms, there is often a misalignment between digital technology and existing technologies (Wimelius et al., 2020). Piecemeal strategies may be ineffective; instead, firms need to fundamentally reconsider how they create and capture value (Priem et al., 2018). The simple use of digital technology is likely to reduce a firm’s competitive advantage in the digital era (Chen and Wu, 2020; He et al., 2020). The ability to leverage digital technology efficiently to develop existing technology is a crucial source of competitive advantage (Hossain et al., 2022; Lee et al., 2021). Hence, adopting an appropriate digital technology strategy that facilitates cooperation between digital and traditional technologies is key to the successful transformation of enterprises.
We propose that these characteristics of digital technology generate complex effects on legacy technology in the context of a firm’s digital transformation. The generative nature, accessibility, and transferability of digital technology improve its potential for combination with a firm’s existing technologies (Majchrzak and Markus, 2012; Forman and Zeebroeck, 2018). Simultaneously, other characteristics of digital technology, such as its universality and affordance, are easily imitable (Yoo et al., 2010; Nambisan, 2017), which can lead to a loss of competitive advantage (Tilson et al., 2010). Therefore, we believe that firms should seek digital technologies that are suitable for maintaining and strengthening their competitiveness.
Firm digital technology strategies
How digital technologies sustain and change the foundations of organizational learning, absorptive capacity, combination capabilities, and dynamic capabilities remains underexplored (Appio et al., 2017). Digitalization has already been shown to have a profound effect on the search for and recombination of knowledge (Austin et al., 2012; Thomke, 2020). However, prior research has not fully investigated the boundary conditions under which digitalization might enable different types of knowledge search and integration. Some scholars believe that digitalization can reinforce or overturn existing knowledge structures, substitute or complement existing competencies, and increase or decrease cognitive and emotional “costs” (Lanzolla et al., 2021). Knowledge recombination might spur various outcomes, including knowledge searching, integration, grafting, or enhancing.
The digital technology strategy aims to provide insights into how an organization-wide digital technology strategy might be adopted (Hess et al., 2016; Matt et al., 2015) to meet the challenges of managing the growing landscape of digital initiatives (Henfridsson and Bygstad, 2013). In a firm’s digital transformation, legacy technology is subject to reshaping through the use of digital technology (Agarwal et al., 2010; Iansiti and Lakhani, 2014). We argue that a firm’s competitive advantage stems from its legacy technology because it is difficult to imitate (Greco et al., 2013). Hence, we define digital technology strategy as the use of digital technology to strengthen a firm’s legacy technology during digital transformation. We classify digital technology strategies into four types: searching, enhancing, grafting, and integrating. Figure 1 provides a typology of these four digital technology strategies in a firm’s digital transformation.
Fig. 1: A typology of the four digital technology strategies in firm digital transformation.
The “legacy technology” encompasses both old and new technologies. Vertically represents the strengthening and changing effects of digital technology.
Searching
The search strategy involves finding new technology with functions similar to those of the firm’s legacy technology through digital technology. Some studies have shown that digital technology can drive enterprises to seek a deeper and broader range of new technologies (Lopez-Vega et al., 2016; Piezunka and Dahlander, 2015). For example, self-organizing digital applications initiated by individuals at lower levels of an enterprise can push the firm to adopt a searching strategy for digital transformation.
In some technology companies, employees interested in data analysis spontaneously organize teams to mine and analyse internal company data using various data analysis tools and techniques. These self-organized digital applications can provide critical business insights and decision support, thereby facilitating more effective digital transformation.
Enhancing
The enhancing strategy involves extending the functions of a firm’s legacy technology through digital technology. In this context, digital technology accelerates the development of the firm’s existing technology, thereby improving the competitiveness of legacy technology in the technical market.
Employees in many firms use their interests and skills to spontaneously organize learning groups during their spare time. These groups leverage online learning platforms or communities to collaboratively learn specific technologies or fields of knowledge. By sharing resources, discussing problems, and learning from each other, they continually enhance their professional skills. This collaborative learning is then applied to practical work, creating greater value for the company and facilitating the adoption of digital technology measures.
Grafting
The grafting strategy involves creating a simple and direct connection between digital technology and a firm’s traditional technology. This approach develops and/or adds new functions to legacy technology through digital technology. Nag et al. (2007) argued that the grafting strategy is more likely to occur when new technology is integrated into collective practice but does not substantially alter how employees use legacy technology to perform their existing tasks.
Integrating
The integrating strategy involves fusing digital technology with legacy technology to create a new, combined technology. In this case, digital technology partially subverts a firm’s legacy technology, ultimately complementing the existing core technology. With this strategy, digital and legacy technologies work together to strengthen the firm’s competitiveness (Almirall and Casadesus-Masanell, 2010). Table 1 provides the concepts of the four digital technology strategies.
Table 1 Concepts of digital technology strategies.
Configurative contexts for digital technology strategies
The digital transformation of a firm is a complex process involving strategic technology decisions (Tortorella and Fettermann, 2018), and it is influenced by various contingency factors. Forman and Zeebroeck (2018) noted that a strategy that combines a firm’s existing capabilities with digital technology is affected by the distance between the two types of technologies. Other studies have argued that the type of technical search plays a crucial role in a firm’s digital transformation (Corradini and Propris, 2017; Lanzolla et al., 2021). Additionally, some research has suggested that leaders’ perceptions of digital technology are significant contingency factors in choosing digital technology strategies (Singh and Hess, 2017; Lanzolla et al., 2020). Therefore, we use all three factors—distance, search type, and leadership perceptions—to explore the choice of digital technology strategy in firms’ digital transformation.
Technology distance
Lanzolla et al. (2021) claimed that digital technology can help firms rebuild competitive advantage by strengthening their legacy technologies. However, digital technology often differs from a firm’s legacy technology, and there are varying degrees of distance between the two (Zhu et al., 2021). Therefore, we believe that technology distance is a crucial factor in deciding which digital technology strategy to adopt in a firm’s digital transformation.
In the technical context, it is essential to consider the effects of technological distance (Bar and Leiponen, 2012). For example, technological distance encourages firms to form alliances (Gilsing et al., 2008) and improve cooperation (Bar and Leiponen, 2012). Digital technologies are categorized as general or specific on the basis of their characteristics (Henfridsson and Bygstad, 2013; Banalieva and Dhanaraj, 2019). General digital technology has advantages such as replicability, accessibility, transferability, and traceability; however, these features also increase the risk of imitation by other firms (Yoo et al., 2010). In contrast, specific digital technology is complex, and its unique functions are reflected only in a firm’s business operations (Ciarli et al., 2021), for example, the reshuffling function of digital technology in a firm’s product manufacturing (Lyytinen et al., 2016). Hence, specific digital technology is unique to an enterprise’s digital transformation and difficult to imitate. Therefore, we argue that when the distance between digital technology and legacy technology is great, searching and enhancing strategies are appropriate choices for a firm in its digital transformation. Hence, we propose the following hypothesis:
Hypothesis 1a. When digital technology is common, a firm undergoing digital transformation will adopt searching and enhancing strategies.
In contrast, when the distance between digital and legacy technologies is small, their functions will be similar. In such cases, digital technology as a specific technology can easily be connected to or integrated with a firm’s legacy technology, and it may be considered complementary to that legacy technology. Hence, we propose the following hypothesis:
Hypothesis 1b. When digital technology is specific, a firm undergoing digital transformation will adopt the grafting and integrating strategies.
Technical search type
Firms attempt to solve problems in ambiguous and uncertain environments (cf. Huber, 1991), often by engaging in organizational learning through search processes. Organizations may undertake various searches to develop new innovations (Von Hippel and Tyre, 1995), create new manufacturing methods (Jaikumar and Bohn, 1992), and conceive improved organizational designs (Bruderer and Singh, 1996). Therefore, firms acquire knowledge through search activities (Lanzolla et al., 2021).
Firms can gain knowledge through either deep or broad searches. In other words, firms address problems with their preexisting knowledge bases or knowledge closely related to them (Helfat, 1994; Martin and Mitchell, 1998; Stuart and Podolny, 1996). Conversely, new knowledge can also come from a firm’s external environment, often referred to as distant search or broad search (Afuah and Tucci, 2012; Chesbrough, 2003; Fleming and Sorenson, 2004; Gruber et al., 2012; Laursen, 2012; Rosenkopf and Nerkar, 2001). These two search types are called search depth and search breadth, which are also configured antecedents discussed in this article.
A central aspect of technological innovation for firms involves searching for new external knowledge (Li et al., 2014). In the context of digital transformation, firms can use a technical search strategy to find suitable digital technologies to promote their legacy technologies. Terjesen and Patel (2017) proposed two types of technical search strategies: search breadth and search depth. Some scholars believe that search breadth represents how broadly a firm explores various sources of external technologies in different areas, whereas search depth denotes how intensively and repeatedly a firm exploits a small number of external technological sources (Chiang and Hung, 2010). Search breadth involves the identification of new technologies outside the organization’s existing range (Teodoridis et al., 2019); when a firm seeks new technology beyond its legacy technology, it conducts a breadth search. Search depth aims to address problems with preexisting technology by finding technology closely related to it (Terjesen and Patel, 2017); when a firm seeks technology similar to its legacy technology, it conducts a depth search.
Specifically, in the search breadth strategy, a firm looks for technology beyond its core technology to compensate for any deficiencies in its legacy technology in coping with digital-based challenges. Consequently, the firm will tend to adopt searching and enhancing strategies in its digital transformation. Hence, we propose the following hypothesis:
Hypothesis 2a. When a firm conducts a breadth search for technology, it will adopt the searching and enhancing strategies in its digital transformation.
In contrast, when search depth is dominant in a firm’s digital transformation, it is likely to seek technologies that are closely related to its existing technologies. In such cases, the depth of the technical search can help the firm effectively combine digital technology with its legacy technology. Accordingly, we hypothesize that in the application of a search depth strategy, enterprises will adopt the grafting and integrating strategies.
Hypothesis 2b. When a firm conducts an depth search for technology, it will adopt the grafting and integrating strategies in its digital transformation.
Leadership perceptions
Notably, most firms have a person dedicated to managing change (Popkova et al., 2022). The influence of leader perceptions on a firm’s digital transformation has been examined in recent studies (Singh and Hess, 2017). Top managers play a largely integrative role in firms’ exploratory efforts (Heavey and Simsek, 2017). Leaders are the executors of a firm’s digital technology strategy, and their perceptions of digital technology significantly influence the adoption of that strategy. We categorize leader perceptions into two types: perceived usefulness and perceived ease of use.
Perceived usefulness involves a leader’s beliefs about the impact of technology on work performance (Rezvani et al., 2017), specifically the degree to which a person believes that using a particular technology will improve job performance (Venkatesh, 2000). Perceived ease of use refers to the extent to which a person believes that using such technology will require minimal effort (Venkatesh and Davis, 2000). Even if leaders perceive a given technology as useful, they may simultaneously find it too difficult to use. In such cases, the performance benefits of using the technology are outweighed by the effort needed. Thus, in addition to perceived usefulness, usage is influenced by perceived ease of use.
Perceived usefulness is related to the performance increase resulting from the use of technology by an individual (Amoako-Gyampah, 2007). When digital technology is difficult to apply but has a significant positive effect on legacy technology, leaders will make cautious decisions. Laudien and Daxböck (2016) reported that managers tend to rely on prior experience, favouring strategic choices with which they are familiar. Nevertheless, leaders may use digital technology to strengthen a firm’s legacy technology or to seek a new legacy technology to replace the existing one. In other words, they are inclined to adopt the searching and enhancing strategies. Therefore, we propose the following hypothesis:
Hypothesis 3a. When a leader’s perception of usefulness dominates, the firm will adopt searching and enhancing strategies in its digital transformation.
Managers form perception-based judgements by cognitively comparing what technology is capable of doing with what they need to accomplish. When leaders believe that digital technology is easy to use and can play a specific role in promoting a firm’s legacy technology, they will integrate digital and legacy technologies as much as possible to improve the company’s competitiveness. Hence, we propose the following hypothesis:
Hypothesis 3b. When a leader’s perceived ease of use dominates, the firm will adopt the grafting and integrating strategies in its digital transformation.
Table 2 provides configurations of technology distance, technical search type, and leadership perception for the four digital technology strategies.
Table 2 Technology distance, technical search type and leadership perception configurations.
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