5 Ways Digitalization Is Changing Innovation

October 16, 2018

5 ways digitalization is changing innovation

Digitalization is impacting every aspect of business, not least how companies today innovate, evolve and grow.

Innovation is widely recognized as the economic growth driver of the future, with new technologies acting as the main catalyst. Many of today’s most significant innovations are being created by a new generation of businesses that are almost entirely digital. These companies are harnessing technology to offer more appealing products and services, changing the competitive landscape dramatically.

For established companies, there’s new urgency to innovate as a matter of survival. While innovation has long been an integral part of industry, digitalization is changing the very nature of the innovative process. Most importantly, it’s providing companies new opportunities to create value, evolve, and grow. We’ve identified five ways digitalization is changing innovation and here we outline the implications of these developments for companies going forward.

1. Increased emphasis on the customer
Customization is at the center of the digital revolution, enabled by increased access to customer data, which has become an important measure of competitive advantage. New market entrants have set the bar high by offering more tailor-made, personalized, and on-demand products and services. New technologies and digital tools have allowed these companies to provide unprecedented levels of choice and increase customer satisfaction. Companies that make proper use of their customer data are better able to compete, as they design products around what their customers actually want and are willing to pay for. The needs of the customer are being hardwired into every stage of research and development. Looking ahead, we’ll see fewer companies making the classic mistake of over-engineering products. Offerings will become leaner and better monetized down to the individual-customer level. 

2. The merging of product and service
The gap between products and services is closing. In many industries, we’re seeing a shift from hardware to software along with a move toward servitization, i.e. the packaging of services as products. In the future, services will follow a much stricter innovation process, particularly in the automotive and industrial sectors. A good example of this is Caterpillar’s predictive maintenance service, which knows in advance when a machine will break down. We’re also observing this trend in medtech, another high-tech industry where there’s increasing investment in OpEx over CapEx. Companies know they can operate systems more efficiently than their clients, and with enhanced data access, new GPS technologies, and predictive maintenance, they can adopt a pay-as-you-go model to better monetize their offering. Innovation relies on increased connectivity, bringing businesses and their customers closer together, joining machinery and devices, and allowing entire industries to integrate.

3. New monetization models
We’re observing major structural disruption in how companies monetize innovations as digitalization is opening up new opportunities for companies to leverage customers’ willingness to pay. For example, subscription-based models are emerging almost everywhere, even in unlikely industries, such as consumer packaged goods. Procter & Gamble have led the way by selling household products, such as laundry detergent, online directly to the consumer on a subscription basis. Software as a service (SaaS) is also paying off for many software companies and has proved better able to monetize their offerings by selling customized subscription models rather than off-the-shelf software packages. This shows companies need to think outside the box about how they can generate profit from products and services, particularly as other profit levers, such as cost-cutting, are diminishing in importance. This will require taking a broader perspective in assessing potential monetization models, drawing on new sets of skills and expertise — namely that of market and commercial specialists – from the very beginning of the research and development process.

Related insights: The 5 pricing models companies need to consider when innovating

4. Increased diversification across teams and industries
Higher levels of complexity, increased overlap between industries, and integration within industries as a result of digitalization mean companies need to think creatively when developing new products and solutions. Multi-discipline input from technology specialists, software engineers, and marketing, commercial, and sales experts during the product development process will help companies innovate. Considerable benefit can be drawn from the expertise of neighboring industries and from external collaborations, sharing insights, equipment, and data to find better solutions.

5. Faster and more efficient processes
Speed and efficiency are defining markers of innovation in the digital age. Incumbent companies will depend on a continuous pipeline of new product and service offerings to survive and thrive. If companies fail to innovate, or don’t do so fast enough, they will fall behind. However, with around three quarters of new offerings failing, it is crucial that only viable products are released. Innovation practices need to ensure failures happen early on and are resolved quickly. A rapid phase of testing and pivoting must be complete before the long and costly product development process gets underway, and well before going to market. New digital tools for design, project management, and sales combined with unprecedented access to customer data will enable companies to better align products and services with individual customer needs, making the process infinitely more efficient.

The take-away
While no means exhaustive, these five developments will have important implications for the way companies do business. With 72 percent of new products currently missing the mark and the majority of game-changing innovations coming from tech-based companies, digitalization presents established companies with new and exciting opportunities to evolve, grow, and compete more successfully with the great tech-disrupters of our time.