Digital is not the solution, it is ‘only’ an enabler of innovation

The evolution of digital technologies is disrupting every business. The question is not if but when your industry will be impacted.

According to Moore’s law, this process is happening at an unprecedented speed. In fact, every couple of years technology becomes twice as faster and smaller, revolutionising the ways companies have been running their operations for decades. By 2020, there will be 50 billion connected devices and 212 billion sensor-enabled devices (source). With such massively disruptive forces at work in how consumers get information and interact with products and services, marketers need to realise that their traditional sources of competitive advantage are dissipating. 

So if on the one hand we can assume change will continue, on the other we must admit that we have no idea what that change will look like. All over the world firms are struggling to find ways to stay relevant, in a world in which the majority of revenues in five years will come from products and services that do not exist today.

What should company do? Explore new territories looking for Blue Oceans business or fighting to increase sales in the Red Oceans? Should they make an inventory of what they are good and extend from there out? Or should they innovate working backwards from their customers' needs?

In the ‘traditional model’ managers were used to invest resources in developing new products and services and then defending them tooth and nail against competition.

In today’s hyper-competitive world, customer expectations are higher than ever before, boundaries between products and services are blurring and barriers to entry are getting lower everyday.

Innovation is something you can’t expect to pursue only within the walls of your R&D department, instead it should be sought in an open source mode working together with other companies, start-ups, freelancers and universities.

What is the ‘new’ model then? What is the operational blueprint companies should follow to remain competitive?

Clearly, reinventing a business from the ground up to avoid being disrupted by this powerful wave of digital revolution comes with huge risks as well as potential great rewards. As we know,

Innovation is an experiment with unknown outcomes. 

In this very interesting article appeared yesterday on The Economist, the author focuses on the so-called ‘Edge Strategy”, an idea based on a new book by Alan Lewis and Dan McKone from LEK Consulting. They argue that before turning themselves upside down firms should think harder about profiting from the “edges” of existing businesses.

Although I did not have the chance to read the book yet (I’ve just bought it and look forward to eat it up next weekend!), I found the schematisation they provided quite interesting. According to the Lewis and McKone we should consider edges around three areas:

I. Products: how can you stretch merchandise so that it generates more income or appeals to more people? An obvious way is to make accessories. Another is to link services to products, a tactic made easier by the internet of things.

II. Customer Journey: customers usually buy goods and services to solve a problem. Firms have lots of opportunities to make money if they walk in customers’ shoes and keep their eyes open. Think of a company specialised in high-quality raw ingredients which starts selling ready-to-eat food in order to simplify their customers’ lives.

III. Underused parts of the enterprise: many firms may leverage and monetise collateral business opportunities related to their core operations. It may be the case of a carmaker which sells traffic information generated by its vehicles to local governments and businesses.

Many of these edge businesses started as an afterthought but have become vast sources of revenues for innovative companies like Amazon, Netflix and Google among others.

It’s very hard to say which is the best way to look at the future. For sure companies will keep pursuing their innovation strategies, seeking ways to make businesses more profitable. After all, the business of business is business, as Milton Friedman brilliantly synthesised decades ago.

In my humble opinion the key-aspect while developing an innovation strategy is focusing on the WHY instead of the HOW and put customers’ needs and wants first.

Once companies have answered simple questions like:

Why should people care?
Why should they pay for it?
What is the benefit for the customers?
Which problems are we trying to solve?

Only then, companies should develop a path to innovation and build their pipelines. Digital is definitely not an answer, it is ‘only’ the enabler.