How to Keep Digital Innovation Thriving Post-Pandemic
A mix of internal and external innovation must continue to fuel business growth despite disruption and cost pressures
Digital innovation is more than a strategic goal; more than ever it needs to be embedded in corporate DNA and used to reinvent businesses post-pandemic. For decades, the perfect prescription to buy versus build, partner or go-it-alone, has proven elusive. A new research study by MIT and Capgemini released this week re-frames the discussion and concludes that the “right” recipe is not a binary either/or choice. Innovating with external partners is important, but doesn’t always give companies a competitive advantage; it needs to be balanced with internal efforts.
The research shows that many businesses were already heading in this direction before the COVID-19 crisis hit, and they must stay the course. External sources are increasingly being tapped to ramp up advanced capabilities such as AI, machine learning, and image recognition, according to the report.
The pandemic has only intensified the need for nimble digital transformation. In particular, it has propelled digital disruption into overdrive. Overnight, remote work is the norm; online transactions are mandatory; industries — from retail to manufacturing — are upended.
The research report by Neil C. Thompson, Didier Bonnet, and Yun Ye is featured in the current issue of MIT Sloan Management Review. It is based on in-depth interviews and surveys of hundreds of international executives across multiple industries conducted last year. Thompson, Research Scientist at the MIT Initiative on the Digital Economy (IDE), and Bonnet, EVP at Capgemini Invent and Professor at IMD, discussed their findings — and how the COVID-19 pandemic may change long-term innovation strategies — with IDE Content Manager, Paula Klein. What follows are highlights from the conversation.
MIT IDE: Your research reveals big shifts in corporate approaches to innovation, specifically for digital transformation. While there is a surge in external partnerships, you also advise businesses to retain internal innovation capabilities. Explain what the “right” mix looks like.
Didier Bonnet: Our research uncovered three key findings and a few surprises: First, the shift to external sources is significant. Though open innovation has been in the air for the past 10–15 years, it has grown radically in last five years — especially for digital technology innovation. Secondly, the rise of digital innovation that we measured was not just a blip; it represents nearly all (95%) of the most successful innovations being done today across seven industries and eight countries. Third, the shift in portfolios is widespread. Firms have far surpassed the old 70/20/10 rule about how to allocate innovation resources; today, one-third of innovation investment is in transformational projects.
Neil Thompson: I agree. The data shows that businesses are expanding their use of external innovation sources — such as universities, outside labs, and crowdsourcing — particularly, in areas where they are lacking expertise, like AI and machine learning (ML). But, in areas where they are capability-leaders, they rely on internal innovation
IDE: So many businesses are looking for guidance in these unprecedented pandemic times as they adapt and pivot. While there may be less capital to invest, there is also a greater need to move quickly. Generally, will the pandemic be a key innovation accelerator?
NT: From a big-picture context, there have been long-standing accelerators pushing innovation forward, especially the need to digitize the business. This is leading to market disruption, even apart from the pandemic. With ML, deep learning, image and sensor technologies all automating tasks that could not be automated before, market disruption will be pushed even farther.
One thing we are already seeing as a result of COVID-19 is that companies that were still on the sidelines are being pushed to become more digital. That will mean more data, and more online transactions feeding into these businesses and helping them innovate over the long term.
DB: When it comes to adoption of digital tools, necessity is indeed the mother of invention. Paradoxically, we are seeing some positive effects of the pandemic and some amazing, fast innovation responses: LVMH, for instance, is moving from upscale perfume to hand sanitizer production; Ferrari shifted some car manufacturing to make hospital ventilators. These are significant shifts at remarkable speed. But how much will stick? I’m optimistic about the adoption of tools, but more cautious about innovation overall. Necessity and autonomy are driving actions now; people are acting swiftly outside of corporate bounds; but when we go back into offices, especially large ones, will we go back to traditional ways? The restart of business will require fundamental changes, but the permanence of those changes will vary by industry.
IDE: Do you expect a change in the portfolio mix — internal/external innovation — and will innovation be key to restarting the global economy?
NT: For most firms, working with outside innovation sources was already the new normal before the crisis. As firms get more comfortable with distance work, this could help them draw from further afield, helping them work with firms in Silicon Valley or experts in Berlin without having to be there physically.
DB: As a reminder, although we’ve documented this shift to external collaboration, there are still many reasons to maintain internal innovation sources — including competitive advantage and intellectual property rights. That’s why we’re suggesting firms seek more broadly for innovation — not as a replacement for -in-house expertise, but where it is lacking. And, even then, we see a need for reintegration of those competencies that, over the longer term will be essential for the business to create competitive advantage. Cost effects will be big factors, too.
There is a huge desire to protect operations right now, so there may be more focused investments in the short term. Invariably, successful restarts will include a balance between costs and innovation, as well as a good dose of reinvention resolve.
NT: The crisis is a huge shock to businesses. For some companies, the right approach will be to just batten down the hatches and try to ride out the storm. But, for many more, this will be a time of reinvention, when they experience in a compressed timeline what we have seen many companies experience over the course of years. Short term, they will quickly reach out to external innovation sources that will help them adapt to the changing business environment. Then, longer-term, they will need to bring key skills back in-house. For these companies, the crisis will be a very busy time for innovation.