What is the common denominator? Digital technology. These companies have been deploying digital technologies into their innovation programs. This in itself proved to be a unique aspect of their respective businesses, giving them a competitive edge.

This article (first of two in the series) shares a perspective on what differentiates companies that are strong in innovation and how digital innovation is one of the game changers for championing businesses that can positively respond to the challenges of the future.

Our research has found the digital innovation trend is pervasive across industries, penetrating even the most stolid and conservative businesses. Eleven of the 50 companies ranked in Boston Consulting Group’s (BCG) 2018 Global Innovation Survey, including seven of the top 10, are digital innovators. These companies have gone through a process of transformation with big changes in strategy, operations and organization.

The survey, however, has also indicated a growing digital divide, where 79 percent of the strong innovators reported that they had properly digitized innovation processes. On the other hand, more than one-third of the respondents said digitalization had not accomplished much for their companies, reflecting the need to deepen the understanding of the digital imperatives and their potential to spark innovation.

Types of innovation: The innovation initiatives can be categorized by product, package, service etc. as well as by their distance from the core, e.g., line extensions vs. new brands. There are four key types of innovation that have grown in importance over the past five years. These include advanced analytics, new technologies, mobile products and capabilities and digital design. Big data analytics has moved up on the scale as one of the top three most pursued innovations by companies. In BCG’s survey, more than half of the respondent companies deployed data analytics for understanding new market trends, providing input for idea generation, informing innovation investment decisions and setting portfolio priorities.

The importance of speed in adopting new technologies has also moved up from nearly last place to number four. For instance, the number of companies targeting fast adoption has increased significantly in manufacturing, insurance, metals and mining and the public sector.

The digital divide: Akin to digital transformation, digital innovation can be a challenge. It requires organizations to shift their strategies, change their operational focus and many times, revamp their business models. These transitions require strong leadership, in the absence of which the digital divide grows wider. The companies with effective digital programs grow stronger, while the weak lag behind.

Strong innovators understand the critical need for speed, scale and value, and the weak innovators continue to struggle with functional challenges related to three key aspects. These include application of technologies across new products, services and business models; application of digital technologies to drive innovation, leveraging new tools, platforms and processes to transform ideas into new solutions; and the process of transformation into digitally enabled organizations and cultures that can make digital innovations work and bring them to the market.

Case of a strong innovator: Ranked number three after Apple and Google, Microsoft is a strong digital native on BCG’s Most Innovative Companies of 2018. For over a decade of its growth journey, Microsoft achieved much success with its “product-centric” approaches when the objective was simply to put a PC on every desk and in every home. As technologies evolved and the open-source ecosystem took shape, a transition was imminent for Microsoft to look beyond transaction value maximization. The new age customers of Microsoft knew no boundaries and looked for seamless technology platforms, with many more options, possibilities and solutions. Microsoft responded by embracing open architecture and enabling and empowering its customers to achieve more through cloud and mobile technologies. From traditional Windows to hybrid cloud solutions such as Azure, the transformation journey of Microsoft speaks of its re-emergence as the technology titan. Over the last decade, its market capitalization grew from US$138 billion in 2008 to $693 billion in 2018.

Microsoft sets a clear example for how strong innovators differ significantly from weak ones in digital expectations and activity. Their digital innovations can take many forms — new products and services, more efficient processes, new customer channels and disruptive business models. Strong innovators are more likely to use big data and advanced analytics throughout the process of innovation as compared to weak innovators, which struggle to leverage data analytics effectively. Strong innovators consistently tap various sources of data to explore opportunities for innovation. Almost three quarters of strong innovators from the BCG survey, compared to less than 20 percent of the weak innovators, reported that new projects or ideas for growth come from social media or data mining exercises. Similarly, strong innovators are more likely to consider outsourcing to build their digital capabilities, compared to weak innovators, who may prefer to rely on their in-house capacity, which may also limit the scope and return on digital investments.

The likes of Tesla and Apple are typically led by a visionary and are focused on disrupting the marketplace with a closed innovation approach. On the other hand, the likes of Starbucks and Nike focus on creating a superior purchasing experience by seeking excellence in customer insight and delighting them with new solutions.

In other words, digital technologies can vary from a targeted to a comprehensive transformation, depending on the company’s digital strategy. However, they need to primarily understand the codependency between digital innovation and digital organizations, which are built on a set of design principles. These include adopting a customer-centric approach, going agile, fostering experimentation, applying lean, simple and standard structures, units and processes in decision-making, focusing on operational excellence, empowering for greater accountability and beating silos to inspire cross-pollination of skills and expertise.

In conclusion, businesses need to review five questions as they rethink their innovation strategies for the digital age: What’s possible? How can they use their data and software? How can they access capabilities that they need? What are the risks of not moving fast enough? And what are other successful digital leaders doing?

In the next article, we will discuss the emerging pathway to digital organization maturity and how companies can approach digital development.

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The writer is partner and managing director at Boston Consulting Group Jakarta

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