Business

Are you neglecting these critical elements of digital transformation?

Illustration by Erica Kitamura.

Driving digital transformation is the key to competitiveness, yet it includes a bunch of insidious pitfalls. In this blog post, Reaktor’s strategy consultant Riku Ruotsalainen reflects on the dos and don’ts of digital strategy. 

Today’s business leaders have become acutely aware that staying competitive in the digital economy means investing in digital strategies, business models, and capabilities. Yet, the efforts to drive transformation tend to miss a few critical elements. 

So far, the investments made in many companies have focused on the adoption of the latest data management and analytics technology. While sophisticated digital tools can be critical to data collection, aggregation, and analysis, technology per se isn’t enough to extract business value from data. Successfully harnessing technology requires new organizational capabilities and a shift in decision-makers’ mindsets – elements of digitalization that have been mostly unattended so far.

“The success of digital disruptors does not come from technology. It comes from how they use it.”

One of the most immediate issues of technology-driven digitalization is that the payback period of technology investments is unnecessarily long. If a company focuses first on adopting new technology and only then starts developing the organizational capabilities needed to create business value from it, they miss an opportunity. Increasing performance with repeated iterations and smaller-scale digital innovation could create business value much more rapidly.

There’s also a risk that the investments a company makes in the latest digital tools may actually not contribute to its long-term competitiveness. Scared of the disruption of their digital rivals, business leaders may be tempted to favor quick adoption of off-the-shelf technology over strategic analysis. In the worst case, making hasty investment decisions can take companies on unfruitful and costly journeys that jeopardize competitiveness. Long-term competitive advantage hinges on the development of unique resources that are both valuable and hard to copy.

What should you do, then, to approach digital innovation the right way? Over the past five years, Reaktor’s strategy consultants have helped various organizations focus their digital efforts towards solving business problems that truly matter. In this post, we share some of the insights we’ve gained along the way.

You can’t command digital innovation – but you can nurture it

The success of digital disruptors does not come from technology. It comes from how they use it. The disruptors have managed to utilize digital technology to create affordable products and services that create more value than the existing competitors did. The key is to recognize creative ways for utilizing the resources at hand for new, more valuable purposes. Consider, for example, TransferWise: they built a successful business by creating a digital international money transfer service that enables clients to avoid the currency transfer charges of traditional banks. 

Digital innovation requires the ability to recognize potentially valuable ideas for new digital products or services, to create and launch them successfully, and to leverage business value from those products or services. Established companies often struggle with this, mainly because digital innovation, like all innovation processes, can’t be commanded. Yet, it can be nurtured by systematically developing the capabilities that support it: understanding the intersection of customers’ changing needs and new technologies, recognizing potentially valuable digital innovation opportunities, and fostering capabilities for successfully carrying them out.

Learn how to learn: Develop practices to recognize opportunities

At the heart of digital innovation is the willingness and ability to create knowledge about both new technologies and key customer groups. While most established companies excel at learning about tech at the heart of their industry, they lack the skills to absorb information about other, more distant technological domains.

Both our experience at Reaktor and academic research on strategic management emphasize the importance of developing organizational structures and managerial practices that enable senior management to learn about new digital technologies and become more engaged with customers. Developing knowledge-creation capability often involves:

  • Allocating top management attention to other industries, new technological developments, and industry outsiders to recognize potential innovation partners
  • Building relationships with selected innovative firms and becoming involved in selected innovation networks to gain access to frontiers of new knowledge creation
  • Engaging with your existing customers and systematically studying how customer preferences are changing 
  • Developing knowledge-sharing practices for effective transmission of strategically important knowledge

Bear in mind that simple knowledge-sharing practices can also be useful, as long as they increase awareness of your core markets’ changes and emerging innovations impacting your business. For instance, Jake Burton, the founder of Burton Snowboards, systematically searched for new market trends by spending most of his days snowboarding and talking to youngsters, the core clients of Burton. A pretty cool way of creating knowledge about changing consumer preferences! 

Recognizing how new technology frontiers and changing customer preferences intertwine is one of the critical first steps of the digital innovation journey. However, these ideas can only generate business impact if the company’s senior management recognizes the potential of the ideas and allocated resources accordingly.

Prepare your senior management to build the future

Senior managers often struggle to recognize and deeply understand how to combine investments in new innovations with the company’s existing capabilities. 

Over the past 70 years, research on strategic management has provided rich insights about how and why business leaders often fail in integrating new capabilities – such as data or digital skills – with the existing capabilities of their firms. Building on the work of the Nobel prize winner Herbert A. Simon, scholars have highlighted that a core barrier to innovation is that senior managers’ cognitive models of their firm’s existing resources oftentimes do not align with the actual value and nature of these resources.

In other words, senior managers’ views of what will make their firm successful in the future do not always match with the reality. It is hard to blame business leaders, though, because oftentimes they find it hard to find the time to refresh their views of what makes their firms valuable in the contemporary competitive landscape amidst all the people requesting their help and views on pressing daily issues.  

Yet, a company can be successful in digital innovation only if its leaders’ cognitive models, heuristics, and beliefs develop, too. Through the work we’ve done with our clients, we’ve learned that those cognitive structures are best forged by working iteratively and rapidly on new business development cases for a few months. Utilizing concrete cases helps foster active dialogue among senior management and understand what they need to be successful in a competitive business environment.

“A company can be successful in digital innovation only if its leaders’ cognitive models, heuristics, and beliefs develop, too.”

When working with clients on concrete new business development cases, we talk about threshold capabilities and critical future capabilities. Threshold capabilities are those that a firm needs to have in place to be able to compete in the first place. For example, if you are an airline, a capability for aircraft maintenance is needed for continuing the business, but this capability will not differentiate you from the competition. Critical capabilities, in turn, are those that hone your competitive edge. We’ve learned that while threshold capabilities may be easy to recognize, a big chunk of the senior management’s time and effort goes into understanding the critical capabilities of the future.

We often facilitate active dialogue about critical future capabilities by recognizing different innovation horizons and their implications for strategic scenarios. By identifying the potential innovations that are likely to shape the competition in the future, we can develop a few strategic scenarios that help us define the future capabilities crucial to competitiveness. If a company has developed structures and practices for creating strategically important new knowledge (as discussed above), it can use this knowledge as the basis for the strategic scenarios. This is important for increasing commitment to the scenarios and the strategy work as a whole. 

To recognize potentially valuable digital innovation projects, you can practice by connecting the abstract (the capabilities that underpin the long-term competitiveness of our firm) with the concrete (new business development cases). Developing a shared understanding of critical future capabilities is hard work. But at the same time, it is only the beginning for actually developing the routines, processes, and management models that comprise the capability. 

Choose the iterative approach

At Reaktor, we firmly believe in a goal-oriented and iterative approach to product or service innovation. Having cross-disciplinary teams continuously build pragmatic solutions and repeatedly test their business value yields maximum learning per time and effort. Accordingly, we think that capabilities for digital innovation are also best developed by focusing on concrete business problems and then working in an iterative fashion to learn what new organizational capabilities, managerial practices, and mindsets are needed for turning potentially valuable new ideas into actual, valuable, and reliable digital innovations. 

The iterative approach to innovation is often mistakenly conceived as pure creativity where anything goes and the work has no connection to the business. On the contrary, taking an iterative approach requires the creation of knowledge that bridges technology frontiers and changing customer preferences, a cognitive ability to recognize potentially valuable digital innovation projects, and discipline in being focused on creating business value throughout the project. Digital innovation requires creativity but also tons of hard business development work. The silver lining here is that if you repeatedly do this, you can be quite certain that you are developing the critical capabilities of digital innovation that so many of your competitors neglect. 

Take the next step with Reaktor’s strategy consultants

Reaktor’s strategy consultants work with clients to help them understand the impact of digital business models and digital innovations on their business. Our clients have appreciated especially the creative, iterative, and holistic approach we take both for helping them to recognize what future critical capabilities they need and for driving the development of those capabilities.

If you are interested to hear more, do get in touch with us. We are happy to tell you about the work we do and to hear about your most pressing strategic challenges.

Drop me a line

Principal consultant, Strategy and Business Design

Riku Ruotsalainen

riku.ruotsalainen@reaktor.com

+358 50 301 5755‬

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