Platform Ecosystems as Innovation Acceleration
One of the most effective strategies for vertical, supply chain businesses to increase their rate of innovation is creating or joining ecosystems, which offer the possibility of exponential growth by access to digital talent and customers for product development. This is a trend we are seeing reported by many of the largest management consulting firms.
Accenture, the global management consulting firm released a report in April, entitled RETHINK, REINVENT, REALIZE. How to successfully scale digital innovation to drive growth, by David Abood, Aidan Quillgan, Raghav Narsalay, and Aarohi Sen.
The authors surveyed 1350 global C-level executives in industrial companies and found that although those surveyed had invested over $100 billion trying to drive innovation in efficiencies and experiences, only 22% achieved a return on digital investments (RODI) that exceeded their expectations. These few are called Champions, in distinction with Contenders and Cadets.
As the authors state,
Our findings show that these companies approach the organizational challenges associated with innovation very differently to their peers. They are more strategic, identifying the value they want to achieve and recognizing how their innovation efforts will affect their organization. For high-performing Champions, it's not about scaling more pilots (even though they do). It's about earning more by scaling better.
Champions Are Different
Champions start with higher goals, and exceed them, while Contenders and Cadets do not:
Champions expect to achieve RODI---and they earn RODI higher than industry average for returns on overall invested capital (ROIC) and industry RODI. They also scale more than 50 percent of their digital pilots.
The other 78 percent of companies? Up against common challenges, they're struggling.
The companies trailing Champions---the second group ("Contenders")---earn RODI lower than industry ROIC and lower than industry RODI despite scaling more than 50 percent of their digital [proofs of concept] PoCs.
The companies in the third and last group ("Cadets") earn RODI lower than industry ROIC and lower than industry RODI and scale less than 50 percent of their digital PoCs.
The four biggest challenges to scaling:
- Defining digital value, from the top down -- When top leaders fail to align on what they want to deliver to customers, things don't come together.
- Aligning with middle management -- When leaders can't convey the vision to middle managers, things don't come together.
- Syncing talent pools with IT assets -- many in the industries surveyed are hampered by aging or obsolete technologies which the rising digitalistas find poor for digital transformation. Meanwhile, existing middle and senior managers are not up to speed on new technologies.
The authors cite Nicholas van Zeebroeck:
"New information systems have always upset business processes, requiring investments in both organizational change and technology," said Nicolas van Zeebroeck, Professor of Innovation & Digital Business, Solvay Brussels School of Economics & Management, Université libre de Bruxelles. Digital technology today not only imposes new work structures but also requires new business models and rapid adjustments to accelerating innovation.
"The new work, delivery and business models require a new mix of skills, culture and governance that will deeply change existing organizations," he tells us. "Without those complementary investments in organizational change, the technology simply cannot deliver tangible results."
4. Positioning in-house innovations to win in the digital ecosystem -- Manufacturers need to get up to speed on the ecosystem economy, and how to participate in that new world order. At the same time, employees worry that outsider will displace them.
How do Champion succeed when others fail?
- Define the value that will guide innovation efforts -- Champions define goals clearly, narrow opportunities, and direct innovation efforts to meet the goals.
- Focus on internal organizational change and external digital value -- Champions blend organizational change and digital transformation, a so-called ambidextrous organization. 'Ambidexterity enables an organization that continuously uses rapidly maturing digital technologies to grow its core and taps emerging technologies to develop and scale new endeavors.'
- Build in-house innovation factories with targeted influence -- When a proof of concept has been developed within an autonomous group, Champions blend members of the autonomous group and the larger organization to foster organic adoption and learning. They also link the new group to the company's profit and loss, so they can learn the return on digital investment.
- Find out what enables innovation in each business function -- Champions are much better at matching 'enablers' -- applications, platforms, and analysis tools -- that are well-suited to business functions.
The authors offer Haier as an exemplar of successful innovation at scale:
For example, one key enabler for Champions is to redefine ecosystem partnerships by adding new partners or rethinking existing relationships. This approach ensures Champions have access to the digital talent they need in the product design and development function. Addressing the challenges of syncing talent pools with IT assets and positioning innovations to win in digital ecosystems, these partnerships and platforms help bridge the talent, technology and data deficit required to build and scale an appropriate pilot.
Haier---the global appliances manufacturer---has been able to encourage cross-functional collaboration, and tap the strengths of a digital services platform, to deliver successful innovation at scale. In 2005, with the foresight displayed by other Champions, Haier CEO Zhang Ruimin divided the organization into hundreds of microenterprises which join on a broad delivery platform of domestic appliances. The result is an environment with very little hierarchy. In each unit, leaders plan and communicate directly across different functions, pushing swift innovation. Direct interaction between these microenterprises and their end-user communities---unencumbered by the bureaucracy of the larger organization---feeds the innovation process as well. At the same time, the broad platform focuses on the big picture and the minutiae, gathering and analyzing big data and small, in real time, and pushing that information out to the microenterprises.5 Like Haier, many Chinese organizations are adept at this kind of "iterative innovation," said Zhu Hengyuan, Associate Professor and Vice Chair at Department of Innovation, Entrepreneurship and Strategy, School of Economics & Management, Tsinghua University.
To begin with, they introduce a minimum viable product or service into smaller markets," Zhu says. "They gather feedback from customers and partners in the innovation value chain. Based on this feedback they initiate the next round of product innovation---many times with stakeholders in the innovation ecosystem. In this way, they evolve the product or service very quickly and sustainably."
"They focus on innovating at a speed that can help them roll out products and services relevant to that context," Zhu says, whether it's internal to the company, such as the manufacturing context or supply chain context, or external, such as the emergence of new markets.
Haier calls its operating model "rendanheyi"--ren, in Chinese, refers to the employees, dan means user value, and heyi indicates unity and an awareness of the whole system.
The Bottom Line
Champions generally started preparing the ground for their transition into ambidextrous organizations a decade or more in the past. But the Accenture researchers believe that what Champions do can be adopted by other not-so-advanced companies:
While most of the Champions in our research made decisions years ago that positioned them where they are today, other companies can get on track. They can immediately identify and articulate the value spaces they want to capture, instead of launching shotgun-style innovation or scaling efforts.
To succeed, they'll have to be as innovative internally as they aspire to be for their customers.