More and more organizations skewing towards digital innovation: Study

The introduction of new technologies, like the Internet of Things (IoT) and Artificial Intelligence (AI), present companies with a myriad of business opportunities; however, to successfully deploy these innovations, organizations will require a profound transformation of corporate innovation systems, including their processes and capabilities to co-ordinate multiple external sources such as universities, start-ups, third parties and crowd-sourcing.

Organizations continue to up their investment in digital transformation with 62% of companies saying they have invested ?more? to ?a lot more? in digital innovation compared to five years ago, according to Capgemini and MIT?s report, titled Lifting the Lid on Corporate Innovation in the Digital Age. This skew towards digital is even more pronounced when assessing the most successful business projects; 95% of executives surveyed said their most successful projects were primarily digital. The focus on digital innovation by companies can also be seen in the growth of the innovation sources used. The most adopted innovation sources in the last two years are digital-focused (see Figure 1).

Figure 1: Newly adopted innovation sources are digital-focused

Increased focus on digital has been followed by increases in revenue. Corporations investing more in digital innovation are generating a bigger share of their revenue from new or significantly improved goods or services (see Figure 2).

Figure 2: Investment in digital innovation

It is unclear whether the increase in investment generates the increased revenue, or if firms are investing in digital innovation alongside a larger push for more revenue. Either way, digital projects and digital innovation are now core to corporate growth strategies.

The recent years have also witnessed a new wave of digital technologies ? AI, IoT, virtual reality / augmented reality (AR/VR), 5G and others ? opening up endless business opportunities to further innovate.

According to the research, 94% of the 320 large companies surveyed used at least two or more external sources of innovation, underlining that this has become the new norm. New capabilities required to harness innovation are not always available internally, so large corporations must find and access them wherever they are available. However, the research also highlights that firms are not abandoning their internal sources as they hold a lot of advantages. When using internal sources, 87% of company projects produced an advantage which persisted. In contrast, only 60% of projects externally sourced yielded persistent competitive advantage, whilst 40% of the time, competitors or outsiders matched or overtook them (see Figure 3).

Figure 3: Advantage gained from innovating with different sources

To successfully explore new technologies, markets, processes or business models, big firms must use a combination of internal and external innovation in order to succeed.

The report recommends the below three-step innovation approach to build the required capabilities:

1. Identify technological competencies

The first step a company must take is to identify the technological capabilities that are likely to be critical in the future. Some of that happens during the annual strategy planning process; most companies conduct an annual gap analysis of the capabilities they lack, and there are board-level and business-level discussions about whether they should be plugged. Rarely does the exercise result in a roadmap showing the capabilities that companies should develop internally in the medium or long runs, and those that they must source externally immediately ? that is the missing link.

The key element in the calculation will, of course, be if the acquisition of the technological capability will help differentiate the company from rivals. The degree to which digital technologies are critical will differ; accessing data science expertise may be critical for a chemical manufacturer, for instance, but not for a real estate management company that only need to understand sales and rental trends.

The next step must be to find the sources that will allow the company to access the critical technological competences and applications. Companies should reach out to universities, startups, and others to figure out who is conducting the most exciting innovation relevant to them and build a portfolio that can fill their competency gaps. Keeping abreast of numerous would-be sources of external innovation can be difficult, requiring focused attention and dedicated time by seasoned executives.

2. Create an architecture

Developing new sources of innovation requires companies to rebuild their innovation architectures, so they can manage both internal and external sources of innovation. It is important to get the three building blocks right.

First, most companies will have to refine their organization?s design. Second, the innovation process must change if the company?s powerful business units are to buy into and adopt external innovations.

Finally, companies must develop innovation governance models with appropriate metrics to ensure consistency with their strategy. Many of the companies initially struggled with governance and metrics. They assigned people to innovation projects, but the business units retained control of the budgets and approvals. That resulted in slowing down the innovation unit, which was hamstrung by the bureaucracy. Best practice is often to have a senior level executive overseeing the innovation project to ensure that the growth, innovation strategy and objectives are consistent with the architecture and operating model in place.

3. Develop transfer processes

One of the most common mistakes companies make is not laying down a technology competence transfer strategy from the very outset. Transfer strategy means a roadmap that shows how externally developed capabilities and skills will be brought into the company in the medium or long run. There is no one-size-fits all solution, though; the circumstances will determine each company?s approach.

It is essential to think through different models and develop several paths for bringing externally sourced skills into the company. In some cases, a company will be able to hire technological capabilities from external sources; in other situations, it might make sense to acquire start-ups (a.k.a. acquihire). A third option could be to develop a build-run-transfer partnership. This arrangement will allow a technology firm with the capabilities the company needs to build a dedicated team and manage it initially. Over a period of time, the partner transfers the team, and all its work, to the parent.

Disruption in companies is real and evident. In order to stay afloat, big firms must change the way they innovate and adapt their innovation sources. In the context of the new wave of digital technologies, capabilities primarily drive the innovation in companies. Indeed, critical capabilities are at the cornerstone of the ability to create value and make the most of the digital tools available today. According to the report, companies are looking for those specific capabilities outside of the firm with newer innovation sources such as universities or innovation labs, when they lack them internally. However, the importance of more traditional innovation sources, such as central R&D or suppliers, still remains. Thus, R&D is not becoming virtual; firms are not substituting one source for another; they are rather broadening their innovation sources. Moreover, the lines are blurring between fully hybrid models (such as innovation labs or intrapreneurship) are taking off.

In the next few years, companies will have to adapt their organization and ways of collaborating to support these fully hybrid models. The key to successfully meeting the innovation challenge in the digital era is to identify the critical capabilities needed, find the balance between internal and external innovation sources through a clear architecture and find a way to incorporate critical resources in-house.

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