Which Way at the Digital Transformation and Innovation Crossroads?

I went to a meeting about innovation recently with a former client, and a discussion about digital transformation broke out. It was both interesting and strange.

Most corporations are struggling to comprehend the changes in front of them, but at the same time are so fixated on short-term thinking that they struggle to see the tsunami that is emerging just over the horizon. They know it’s there. They know they should prepare. They just don’t have the time to consider it or the contextual frameworks to understand it.

Most larger corporations have arrived at crossroads, and not by their own making or decisions. Change is being thrust upon them. As Gary Hamel wrote, “We are the first generation in history where the pace of change has gone hyper-critical within our lifetimes.” In other words, most corporations are arriving at crossroads not because of any strategic decisions or actions they took. The corporations didn’t change. The conditions and circumstances did. And what happens when corporations with business models and structures, and governing capabilities built for slower change and market dominance, meet the agile, nimble competitors and shifting customer expectations at this unexpected crossroads?

Where innovation and digital transformation meet

Let’s add in, of course, two really interesting management phenomena occurring before our eyes. Innovation has been a watchword for corporations for about 20 years. I’ve suggested previously that the innovation era began about in 1997, when Steve Jobs returned to Apple, and when Clayton M. Christensen first published his book, The Innovator’s Dilemma (Harvard Business Review Press, Reprint edition 2015). From that time until present day, innovation has entered management philosophy and has become an often cited if not always executed concept for large corporations. Innovation has been around long enough to have lived through one or two generations of management, but it hasn’t overcome the concurrent pressures of efficiency, cost reduction, outsourcing, and a host of other activities focused on efficiency and effectiveness.

Innovation seems almost “long in the tooth” and has less tangible outcomes than you might expect. It meets the emerging digital transformation movement head on. Digital transformation is inevitable. Once we have enough devices and enough connectivity, consumers will generate more and more data, and corporations will find ways to use those data and create more connectivity. Becoming digital isn’t enough, however. Digitalization will lead to digital transformation to underlying technologies, but it will also bring about better use of the data that are generated, and more important, radical change to business models.

Business models, channels, data, and experiences

So where does innovation and digital transformation meet? Perhaps in hindsight, to relatively obvious places. The problem with innovation to date has been a fixation on product innovation, constantly updating or inventing new products, but with little exploration beyond the product. What most people fail to realize about interesting innovators of the last 20 years is that they innovated products and experiences and business models. And this is something that many people clamoring for digital transformation don’t understand, either: The ultimate and most important change will be in the... you guessed it, business model.

Take for example the automotive industry. Today most car companies make money selling cars (and make most profits in financing those sales) to individuals who own the car as an asset. Families expect to have a house and two cars, but if we looked closely at usage, we’d realize that most cars are used extensively about two to three hours a day at most. Most of the time cars are parked and unused. No business would allow a valuable asset to be so underutilized.

Now with autonomous cars, families need fewer cars, because they can call on Uber, or an autonomous car service, and pay for usage rather than ownership. This is a dramatic business model change. The product is incrementally different—perhaps an electric engine and autonomous controls but still a car—but Detroit’s business model will be different. Automakers won’t sell lots of cars to lots of families and finance those sales to individuals. They’ll sell fewer cars to more service-oriented organizations with different financing needs.

Business models in the crossroads

Where innovation—a bit long in the tooth but not fully or adequately deployed in most organizations—and digital transformation—still an emerging concept that is really a number of technologies that are more or less ready for prime time—will collide, and where businesses will need to change, is in the business model. It has been argued that innovation has a role in business model change, but often innovation hasn’t had the right to address business models. Digital transformation may seem like an IT-oriented activity, but it will create change that impacts the business model.

There’s no better place to think about these two management philosophies and how they will work together than to think about how they’ll impact the necessary business model changes that will be required during the next 5–10 years.

Are you thinking about how your business model needs to change, to be more competitive as innovation, customer demands, competitive threats, and shifts caused by digital transformation occur? Product innovation will seem child’s play by comparison, but business model change will be the real opportunity.

First published Feb. 13, 2019, on the Innovate on Purpose blog.

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