The why, what, and how of digital innovation
“Capture the Kodak moment” was the popular catchphrase in the 1960s and 70s when Kodak was one of the leading photography companies in the world. Boasting a 100-year legacy, Eastman Kodak had already captured 85% of the cameras market and 90% of the film market by 1976, firmly establishing itself as the dominant player. However, the rise of digital cameras reduced the demand for photographic film and analogue cameras, and Kodak was late in riding the digital wave. Despite inventing the digital camera in 1975, Kodak failed to see its potential and continued to remain complacent, focusing instead on their film rolls sales. Eventually, they lost out to digital players and filed for bankruptcy in 2012.
Kodak’s story is a perfect example of how even large market leaders can decline when they fail to reinvent themselves. With Covid-19 as the backdrop, and in the face of increasing competition, it becomes even more important for firms to not just leverage disruptive technologies, but also to embrace the novel business models that these technologies can open. This can hasten the process of innovation, thus enabling businesses to gain on three fronts — customer experience, revenue generation and cost cutting. It is with this approach that we aim to understand the need for digital innovation and how firms can leverage it to gain a sustainable competitive advantage.
Digital innovation
But what exactly do we mean by “digital innovation”?
Innovation is generally referred to as the practical implementation of new ideas. In simple terms, if a novel idea can create and realize value at the same time, (say through the introduction of new goods and services), it qualifies as an innovation. However, this doesn’t consider the fact that a firm must be able to measure the value created, so that its performance can be monitored.
Hence, from our viewpoint, digital innovation can be defined as the “use of digital tools and capabilities to create value through the implementation of measurable and viable new ideas”.
It is important to note here that this varies slightly from “digital maturity”, a commonly used term these days. While digital maturity assesses the existing level of digitalization and technical competence within a company, digital innovation captures the future readiness of the organization in being able to leverage new technologies and create business value. For example, a digitally mature company may have implemented an automated workflow, but unless they are digitally innovative, they may not be able to adapt to an increasingly digitally competitive environment.
Technologies driving digital innovation
Being future-ready implies that firms would have to transform the way they function and interact with their customers. Cutting edge technologies like AI, IoT, 5G, Edge computing etc. have been around for some time now, and it’s imperative that businesses understand the benefits and challenges associated with them. For example, while AI can lead to enhanced productivity and customer service, it requires huge computing power and suffers from scarcity of neatly labelled data. Similarly, while 5G promises to provide low latency and high bandwidths, its range happens to be much smaller, hence creating the need for an extensive system of nodes and thus increasing infrastructure costs.
Cybersecurity remains a major area of concern while implementing these technologies. IoT and edge computing systems are known to be notorious for frequent attacks, and organizations should double down on their security tools and seek professional support, if needed, to minimize the risk of obtrusion. Ever since the pandemic began, there has been an increasing number of devices connected to the internet and we can expect firms’ cybersecurity costs to increase correspondingly. These cybersecurity mechanisms can also prevent data leakage and misuse, and thus ensure data privacy, which is another issue plaguing AI/ML systems and has become a hot topic of discussion among the public today.
How do we measure digital innovation?
As a first step towards digital innovation, it helps to be able to have a metric indicating where the firm currently stands and how it fares with respect to its peers. On this front, there have been several attempts by different agencies (private firms, policy think-tanks) at measuring innovation either in firms or cities/states. During our secondary research, we looked at a few major indices including the European Digital Social Innovation Index, Strategy& Global Innovation 1000 report, NITI Aayog’s India Innovation Index etc.
There were a few key insights that we gained from this exercise. Firstly, it is crucial to identify the key characteristics of successful innovators, as this helps in creating pillars for our framework. There is also a need for transparency in the methodology, as multiple subjective decisions are made while developing an index that might affect rankings. Additionally, we realized that measuring the effectiveness of innovation initiatives is as important as measuring the “activity” of innovation, for example, ROI from R&D investments is as crucial as the amount of R&D investment. Overall, there is a dire need for a single framework that measures digital innovation in businesses and provides a transparent methodology for the same.
Now, if we were to prepare such a framework, the initial step would be to identify the most important themes affecting digital innovation. Here, we can take the help of the existing indices and aggregate the relevant themes for digital innovation into our conceptual framework, while also keeping in mind the exhaustiveness of the final index that we wish to compute. Hence, we arrived at the following six themes.
Governance would determine the overall business strategy, and how the people within the company are organized and managed. Once the broad direction has been set by the firm, it would have to access and leverage the three major sources of capital — human, financial and infrastructure. The final two themes deal with the external stakeholders — customers, collaborators, governments etc.
Conclusion
When IKEA embarked on a digital transformation journey in 2018, they began by assessing their current gaps and revamping the supply chain with the help of AI and Cloud Computing. This helped them to grow their e-commerce business from 7% of revenue to 31% in just 3 years, enhance their customer experience, and discover new ways to operate their business. With even legacy companies like IKEA going digital, it has become imperative for firms to embrace digital transformation to stay ahead of their competition.
The framework laid out above can provide a starting point towards developing a comprehensive metric that can help firms in their digital transformation journeys. By breaking down the themes into further indicators, the metric can also be used to pinpoint the exact areas where a firm is lagging and provide recommendations to improve on the same. This would help firms to constantly evaluate their current state, assess where they stand with respect to competition and be able to bridge the gaps through leveraging digital technologies.
