Harnessing the Power of Digital Innovation

How can large enterprises protect the core, while re-imagining the future?

The Context:

Innovation has been a fundamental driving force behind the industrial growth and evolution of economies through last few centuries. Fueled by the power of digital, the pace of innovation and change have been exponential in the last few decades. Many large established enterprises across industry sectors have been disrupted time and again by so called nimble start-ups, who leveraged the power of digital innovation to create enormous amount of value for the customers and eventually toppled the incumbents. This has led to a steady decline and eventual death of many of the yester year’s traditional companies

According to a research by American Enterprise Institute only 10% of Fortune 500 companies have been on the list since 1955. What happened to the rest of them? — Perhaps, they were disrupted and displaced by a more nimble, digital-at-core competitors who could harness the power of digital innovation to deliver much higher value to the customers and ecosystems at large. Echoing this trend, another recent study by McKinsey found that the average life-span of companies listed in Standard & Poor’s 500 was 61 years in 1958. And today, it is less than 18 years.

The Problem:

To sustain their market position, survive and thrive in the decades to come, the large established enterprises across industry sectors, must harness the power of digital innovation to fundamentally re-invent their businesses. It’s not a question of choice, but of survival! However, the inconvenient truth is that most established large companies are great at protecting and incrementally improving their core business, but not at reimagining the future of their business.

The key issues large organizations face when re-inventing themselves –

· Myopic definition of what business are they in and who do they serve

· Comfort with the things that made them great for decades

· Poor innovation strategy and innovation investment allocation

· Sheer inertia to take up big challenges and risk averse decision making

· Complex legacy organization structures, value chains, infrastructure and incoherent culture

The Solution

So, the BIG QUESTION is ‘how can large established companies innovate, not only to protect their core businesses and be competitive in their industries, but also to re-invent their future with digital at core?’

At Publicis Sapient we define Digital Innovation as ‘Creation of new sources of growth & prosperity by harnessing the power of digital’.

1. Creation means more than just conceiving of an idea, it means honing and developing that idea until it becomes a reality in the market
2. Few ideas are completely new-to-world, but an innovation that is new to its context still has great potential to unlock new value
3. An innovation can happen anywhere in an organization or in its interactions with the wider world, but the strongest innovations span this spectrum
4. The keenest definition of an innovation is the impact it creates, for both its architects and its recipients. This is the yard stick by which we measure innovation
5. Digital at core — means harnessing the power of digital to not only sharpen the current products and services, but also to build new business models to re-invent their future

To achieve the right balance between various types of innovation, organizations need a structured approach to define their innovation strategy and investment priorities. What we call “innovation mix matrix’ that focuses on two aspects — where should an organization focus (the vertical axis) and what are the expected outcomes (the horizontal axis).

Which quadrant an organization focuses on depends on various factors like their current industry growth rate, competitive intensity, disruptor activity and threat, consumer buying and consumption behaviors and overall ecosystem stability.

Protecting the core — Sustaining Innovation: If an industry’s growth is still significant, demand for current products is positive and competition products and services are threatening, then the decision to could be to focus on incremental improvements that could help sharpen the products and services resulting into retaining existing customers and attracting new customers.

As a case in a point, PS has helped a leading QSR chain in improving ordering, drive-through pick up process and touch free food delivery using power of digital. This is a classic case of sharpening the offerings for the current market that could sustain the revenues, improve customer retention and loyalty. This type of innovation could be addressed by Incremental Product Innovation, Process Innovation, and Service Innovation etc.

Expanding into adjacent areas — Evolutionary Innovation: If the industry growth is flattening, the competition is already intense and there is significant threat from the new disruptors, then the focus could be on Evolutionary innovations that can help expand into new customer segments, adjacent markets and geographies to create new sources of revenue.

For instance PS worked closely with a large 100 year old luxury hotel group in defining a new source of revenue by expanding into premium and luxury home rental business with an assurance of the brand’s quality standards and linked to their core loyalty program. This could be achieved through new product, process and service innovation in combination with a business model innovation

Re-imagining the future — Disruptive Innovation

If the industry growth rate is already on a decline, and very intense competition and the products / services the organization focuses on are becoming obsolete basis changing consumer preferences, then one has to go out of the box and bank on disruptive innovation that can help them create completely new market and help then re-invent for the future.

For instance, at PS we worked with a leading global bank to build a new fully digital bank for millennials in 9 months, right from conceptualization to go-live. In another instance, we worked with a leading powersports vehicle manufacturer in improving the capabilities of their in-house incubator designed to accelerate Innovation. Out of this engagement, we came up with two new business models that could help them significantly improve their business. In addition, we even recommended them to diversify into digital gaming industry focused on power sports! When implemented, this could be game changer for the client in many ways. This type of innovation is typically achieved through Architectural Innovation, Business Model Innovation in combination of introducing new products/ services or processes.

How should large organization address this Innovation puzzle?

As a Digital Business Transformation consultant of choice for many leading Fortune 500 and traditional large companies, we believe there are concrete steps that they need to take to build and sustain the Innovation capability across the spectrum defined above:

Define a higher echelon shared innovation purpose beyond core: The classic 1960’s HBR publication by Theodore Levitt challenged the traditional companies to re-think beyond their current industries to be relevant in future. Looking at the recent disruptions, this argument still holds good! Companies that define their business too narrowly risk their existence and there are many documented examples — Blockbuster vs. Netflix; traditional retailers vs. Amazon, Marriott vs. Airbnb etc. To be successful with innovation, companies need to define a broad purpose that clearly defines a larger shared purpose and distinguish the innovation initiatives focused on protecting the core vs. re-imagining for the future

Define a clear Innovation Portfolio Strategy and balanced resource allocation: Research is fairly consistent in showing most of the companies probably invest about 70% of their innovation budgets into sustaining their market positioning and between 10% and 20% on incremental innovation to stay competitive in their industry, leaving very little resources and budgets for re-inventing their future. To be successful in future, organizations need to have a clear portfolio level innovation strategy with clear business cases for where to prioritize their investments and this completely depends on the current industry growth rate, competitive intensity, disruptor activity and threat, consumer buying and consumption behaviors and overall ecosystem stability.

Shape and validate ideas through rapid prototyping: The prioritized innovation ideas and hypothesis from the portfolio of ideas need to be validated before taking them to market. Successful organizations crush the time to market and value delivery through rapid prototyping, testing and learning from experimentation with real customers and building confidence in the feasibility and viability. This helps build a closed loop mechanism to sharpen the proposition by quickly learning and improving continuously.

Re-organize to focus on the spectrum of innovation needs — Most of the successful large companies are structured in the same exact way for decades, around their current business models that help them to cater to their current customers. But, if they need to re-imagine their future, they will need to think of new markets, new customers and business models.

Basis our experience, we believe a hybrid organization structures with the larger part of the traditional organization focusing on incremental innovation while spinning off an internally funded or VC funded incubation unit that can almost act as a nimble start-up to focus on disruptive innovation. What is needed in addition is a clear governance and performance management structure to monitor the performance and impact of the innovation in terms of value and outcomes

Develop Innovation Capability, Systems & Culture — Organization culture is not some sloganeering or having great vision and mission statements. Most of the legacy organizations built over decades have cultures that are non-conducive to foster innovation. To be successful, organizations should build a new culture that supports rapid experimentation, tolerance to failure, ability to seamlessly collaborate, at the same time having high standards, having high level of accountability, being extremely disciplined and having zero tolerance for incompetence.

Author: Sanjeev Krishnaji Itagi, Director Product Management, Publicis Sapient