Does digital transformation hurt short-term profits?
Yes, and this is a critical trade-off that businesses must plan for. A study of seven Indonesian digital banks from 2016 to 2023 found a clear U-shaped relationship between digital transformation and profitability: profitability deteriorates in the short run due to huge IT investments, but then significantly improves in the long run [3]. This means companies should expect a temporary dip in financial performance and need to budget for it.
The same pattern appears in other sectors. Research on Chinese firms shows that digital transformation involves both 'exploitation' (improving existing business efficiency) and 'exploration' (creating new growth), and both positively affect business performance, but the effects are not immediate [10]. The key is that companies must invest in both areas simultaneously—a capability called 'digital transformation ambidexterity'—to see long-term benefits [10].
Why is digital transformation now a survival issue?
Because the competitive landscape has fundamentally changed. A 2023 study in the European Journal of Information Systems states bluntly that 'only those organisations that can adapt faster and make better, quicker decisions will become more competitive' [2]. The same paper warns that being a first mover is only the start—companies must implement digital strategies to stay ahead [2].
The evidence from multiple industries is consistent. In the textile industry, digital transformation knowledge, technological resources, and competitive pressure all significantly drive a company's intention to transform [4]. In the hotel business, digitalization is described as 'a necessary condition for the successful functioning of hotels' [9]. A broader analysis of manufacturing and business practices concludes that 'businesses’ failure to embrace digital transformation in this era contributes to their demise' [7]. The message is clear: digital transformation is not a luxury—it is a prerequisite for survival.
How does digital transformation actually improve long-term performance?
Digital transformation boosts performance through multiple mechanisms. A survey of 390 professionals in China and Kazakhstan found that a company's 'digital transformation capacity' strongly mediates business performance, with an effect size of 0.809 (on a scale where 1.0 would be a perfect correlation) [1]. This capacity is built through consumer engagement and investments in digital technologies [1].
Beyond direct financial performance, digital transformation enables sustainability—which itself is a competitive advantage. A systematic review of 75 studies found that digital transformation acts as both a driver and a predecessor of sustainability at the firm level [6]. For example, digital tools like predictive analytics and big data help optimize manufacturing by reducing overproduction and underproduction, saving resources and costs [7]. Another study highlights that digital transformation supports Environmental, Social, and Governance (ESG) goals through data-driven decision-making and improved resource management [5]. Companies that integrate digital transformation with sustainability build business models that are resilient for the long term [8].
Sources used in this answer
Digital marketing tools and digital transformation capability as a factor in enhancing business performance in China and Kazakhstan.
A survey of 390 professionals in China and Kazakhstan found that digital transformation capacity strongly mediates business performance (effect size 0.809), with consumer engagement being the strongest driver of that capacity (0.418).
Transform or be transformed: the importance of research on managing and sustaining digital transformations
Argues that only organizations that adapt faster and make better, quicker decisions will become more competitive, and that managing and sustaining digital transformation is critical.
Role of Digital Transformation on Digital Business Model Banks
Analysis of 7 Indonesian digital banks (2016-2023) shows a U-shaped relationship: digital transformation hurts profitability in the short run but significantly improves it in the long run.
Digital transformation of business model innovation
In Taiwan's textile industry, digital transformation knowledge, technological resources, and competitive pressure positively influence perceived benefits and negatively influence perceived risks, driving transformation intention.
Digital Transformation: A Catalyst for Sustainable Business Practices
Explores how digital transformation enables sustainability (ESG goals) through data-driven decision-making and improved resource management, while also addressing challenges like cybersecurity.
Digital transformation as a strategy to reach sustainability
Systematic review of 75 studies finds digital transformation is both a driver and a predecessor of sustainability at the firm level, and that companies must enhance digital capabilities to survive.
Digital Transformation and Its Influence on Sustainable Manufacturing and Business Practices
States that businesses’ failure to embrace digital transformation contributes to their demise, and that digital transformation strongly influences firm effectiveness and survival from technology and business model standpoints.
Digital Transformation and Sustainable Business Models
Argues that firms seeking to maximize the impact of digital transformation should aim to build a Sustainable Business Model (SBM).
Digital Transformation of the Hotel Business as a Necessary Condition for the Successful Functioning of Hotels
States that digital transformation is a necessary condition for successful hotel functioning, driven by the Covid-19 pandemic and the growing role of e-commerce.
Digital transformation ambidexterity and business performance
Analysis of Chinese firms shows that both digital transformation exploitation (improving existing business) and exploration (creating new growth) positively affect business performance, with heterogeneous effects.