How digital technologies transform innovation

The last 150 years advancement of technological innovation is unprecedented in human history.

Just considering your grandparents. If they now are in their 90’s and grew up in the countryside, it is likely that they had neither electricity or running water in their youth. Even more mind-blowing; polyester and most other plastics were not even invented until they were in their early teens (Reinhardt and Ganzel, 2003; Barclays, 2018).

With our collected knowledge just a few clicks away and with most people constantly connected—not only to all their friends and acquaintances through the smartphone in their pockets—but with more than 5 billion people; it is easy to forget that the Internet as we know it today is an invention which did not exist before the 1990’s,

From an anthropological view, the cultural changes brought by the new digital technologies introduced the last thirty years has transformed our cultural codes, communication, fields of knowledge, the way we work, buy and sell products and services. These shifts, according to Combi (2016), Lohr (2001) and Birkinshaw (2018), have had such enormous impact on our societal- and cultural structures that we now have entered a new anthropological shift: the information age or the age of big data.

The 2018 Barclay’s Equity Gilt Study is an excellent illustration of the last few decade’s remarkable technological advances from a historical context (Fig 1; below).

By using ‘productivity’ as a variable to quantify innovation, Barclay’s have measured workers productivity and output per hour from the year 1760 onward, with a base index of 100 that year. According to this data, it took 200 years for the productivity index to go from 100 to 1.000 between 1760 and 1970, and then only thirty years to reach today’s index of 3.000. What’s particularly notable in their study is also that of all technical innovations which the last thirty years have had a significant influence on productivity; 100% are digital (Fig 2, below).

Fig 1: Growth in productivity measured in total output per hour across the UK and USA from 1760 and onward (Barclays, 2018)

Fig 2: Major technological innovations advancing productivity (Barclays, 2018)

Why digital is a critical enabler of recent years explosive growth of productivity, and a fundamental component of all significant value innovations from the last three decades.

The World Economic Forums (WEF) 2016 technology report (2016) highlights six areas in which digital technologies have directly, or indirectly, impacted and transformed the very nature of innovation. The primary findings of this report is discussed in the following sections:

Business Model Innovation

New digital technologies have allowed, and sometimes demanded, that organisations re-imagine traditional business-models and innovation strategies. Countless businesses such as Polaroid, Nokia, and Xerox that just one or two decades ago dominated their spaces but failed adapting their business-models and product offerings to today’s markets, have found themselves out-competed by new entrants leveraging digital tools, technologies, and crowd-sourcing models for innovation grounded in agile workflows and rapid prototyping (pp. 7-30), allowing them to quickly innovate and adapt to today’s ever-changing market conditions.
Many of these new strategies and frameworks such as the Blue Ocean Framework (2018), Business Model Canvas (2018), Ten Types Of Innovation framework (2018), Design Thinking (Cohen, 2014), and Lean Start-up (Ries, 2011), has moved the focus from incremental product- and service innovations to market-making, which according to WEF, have attributed to “some of the biggest success stories of the digital era” (p.7).
It’s worth noting, though, that while proponents of these new business-strategic idioms often claim that modern innovation strategies built on market creation (Blue Ocean) have a higher success-rate than strategies built on dominating existing markets; this, at least to some extent, is a self-serving bias resulting from a handful business cases which are echoed in almost all recent business- and marketing literature including Nintendo Wii (Hollensen, 2013), Yellow Tail Wine (The Branding Journal, 2018), and Cirque de Soleil (Harvard Business Review, 2018).
What current research instead show, is that organisations that do best on today’s markets are those with strategies of innovation that are a mix of market creation and competitive strategies (the domination of existing markets) (See Burke, Stel and Thurik, 2010; Cranfield University, 2018 ).

Product- and Process innovation

Digital technologies have made it possible to re-engineering production systems resulting in huge cost- and quality advantages, while also providing efficient business operations and economics of scales by employing new procedures and systems; such as automatic supply chain solutions, inventory tracking, and process reordering matching. Real-time monitoring of capital equipment also has reduced downtimes, and with new processes for back-office consolidations with centralised and interconnecting business operations of all elements in the value chain; this new generation of companies who by statistically analysing their business data has been able to form better decisions both for their organisations and customers (p.41).

R&D and basic research

According to WEF, digital technologies allow for near-costless innovation that many times requires little or no R&D (p.4). Some of the best examples of companies disrupting their industries and generating multi-billion revenues without initial investments in R&D include Uber, Airbnb, YouTube, and Facebook; all of which have built disruptive business-models and value propositions based on open-source technology stacks.

Increased market size

Online e-commerce markets such as Amazon, Wish, and Alibaba have given companies direct access to global markets, making it possible even for one-man businesses to reach a worldwide audience, as discussed by Anderson (2008). These online platforms not only have shed the barriers to international markets, but also have reduced or eliminated much of the friction which prior to the digital revolution was an intricate element of international business; such as the need to set up local entities in global strategies, and the need to build an infrastructure for international distribution from scratch.

Reduced barriers to entry

One of the most significant opportunities presented to modern businesses is Cloud Computing, which has eliminated much the capital expense to buy computer hardware. Today, even boot-strapped start-ups for a few dollars per month have access to IT-infrastructures that just a few years ago was accessible only to organisations with the budgets to invest in multi-million data centres (Erl, Mahmood and Puttini, 2013).
Payment solutions such as PayPal and Square also has made it possible for small- and medium-sized enterprises (SMEs) to accept payments without having to invest in complicated and expensive processing systems, and companies like Magento and WooCommerce has simplified the process of setting up e-commerce platforms to the extent that anyone with basic computer skills now can launch a web shop within a few hours.
On the marketing side, channels including Google AdWords and Facebook Ads has allowed targeted marketing campaigns with minimal budgets, and social-media also has introduced a new marketing paradigm built on social trust with verticals such as inbound marketing and “viral campaigns” which arguably have levelled the playing field vis-à-vis between SMEs and large enterprises.

Acquiring and leveraging knowledge of consumer preferences.

Big Data and advanced marketing tools such as Google Analytics, Kissmetrics, and Mixpanel enable organisations to better understand the preferences of their target audiences. As a result, organisations now can create products and services which are better aligned with customers’ demands, as well as personalised strategies of marketing closely aligned with customers’ needs and wants to sell their offers.

An assessment of Airbnb in the light of WEFs six categories of digital innovation

Figure 3, below, illustrates how Airbnb—a posterchild of the digital revolution, have harnessed digital innovation as a fundamental component of their business- and market strategy in light of WEFs six areas of digital innovation and Osterwalder’s Business Model Canvas:

Conclusion

Digital innovation have been a critical enabler of recent years explosive growth of productivity, and a fundamental component of all significant value-innovations from the last three decades including: Business Model Innovation, Product and Process innovation, R&D, increased market size, reduced barriers to market entry, and in acquiring and leveraging knowledge of consumer preferences. While many of these innovations have supported market creation strategies over competitive strategies; research show that entrepreneurs who want to maximise their odds to succeed should take time to learn about both.

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