How digital technologies transform innovation

The last 150 years has seen an astounding advancement of technological innovation.

Just considering your grandparents. If they are in their 90’s and grew up in the countryside, it is very likely that they had neither electricity or running water in their youth and 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 the worlds knowledge just a few clicks away and with most people being always connected to all their friends and acquaintances through the smartphone in their pockets it is easy to forget that smartphones hardly existed even just fifteen years ago and 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 and 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 recent Barclay’s Equity Gilt Study (2018) 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 1760 onward with a base index of 100 that year. According to this study, 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, though, is that of all technical innovations which the last thirty years have had a significant influence on productivity; 100% are digital (Fig 2, next page).

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) recent 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

Digital technologies have allowed and sometimes demanded that organisations reimagine traditional business models and innovation strategies with established businesses finding them outcompeted by new entrants leveraging digital tools, technologies and crowd-sourcing models for innovation grounded in agile workflows and rapid prototyping (pp. 7-30).
Many of these new strategies and frameworks; such as the Blue Ocean Framework (2018), the Business Model Canvas (2018), the 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).
However; while the proponents of this business strategic idiom often claim that Blue Ocean Strategies (market creation) have a higher success rate than strategies built on dominating existing markets; a self-serving bias resulting from the handful successful business cases built on this strategy which have been repeated to death in recent business and marketing literature including the stories about Nintendo Wii (Hollensen, 2013), Yellow Tail Wine (The Branding Journal, 2018) and Cirque de Soleil (Harvard Business Review, 2018); this notion is not true.
What current research instead show is that efficient competitive strategies are a blend of these two approaches and that entrepreneurs who want to maximise their odds to succeed, therefore, should take time to learn about both (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 and providing efficient business operations and economics of scales by using innovative strategies such as automatic supply chain solutions, inventory tracking and process reordering matching supply-and-demand and maybe best epitomised by Amazon.
Real-time monitoring of capital equipment also have 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 by statistically analysing their business data has been able to form better decisions both for their organisations and for their customers (p.41).

R&D and basic research

According to WEF digital technology allows 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 initially investing in R&D include Uber, Airbnb, YouTube and Facebook whom all 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 has given companies direct access to global markets making it possible even for a one-man business 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; notable the need to set up local business entities in global strategies and having to build infrastructure for international distribution.

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
and even boot-strapped start-ups for a few dollars per month now have access to IT-infrastructures which just a few years ago was accessible only to organisations with the budgets to invest in multi-million datacentres (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 webshop within a few hours.
On the marketing side channels such as Google AdWords and Facebook Ads also has allowed targeted marketing campaigns with minimal budgets, and Social Media 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-a-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, in addition to also creating effective and personalised marketing strategies closely aligned with customers’ needs and wants to sell their offers.

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

Appendix 1, below, illustrates how Airbnb, one of the posterchild’s 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 innovations has 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 of 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 has shown that entrepreneurs who want to maximise their odds to succeed, therefore, should take time to learn about both.

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