What’s new about digital innovation?

Practitioners see digital innovation as vital to their business. Academics are also increasingly paying attention to digital innovation. However, it is often unclear what is meant by digital innovation and how it differs from traditional (IS/IT) innovation. To advance our understanding of digital innovation, this paper identifies different conceptualizations of digital innovation in the IS literature and extracts common themes that can point to what is “new” about digital innovation and what is emerging as research areas for the IS discipline. 

Our research identifies two prominent digital innovation conceptualisations, based on Fichman, Dos Santos, and Zheng (2014) and Yoo, Boland, Lyytinen, and Majchrzak (2012), and presents four prominent digital innovation themes: the nature of digital technologies, digitization, digital business model innovation and digital-enabled generativity. We integrate these themes into a framework that conceptualizes digital innovation as a rippling effect starting with digital technologies and conjecture that digital innovation can become ‘hyperinnovation’ through powerful virtuous cycles.

See here for more information.

The Digital Innovation of everyday things: New, Copy, Paste, Search, Save, Print, Send, etc.

With the ongoing proliferation and immersion of digital technologies into everything we use, we often wonder how the future of the things we use would look like. While it is not possible to predict this, it is possible to think about it. Chance favors the prepared mind.

Take the digital camera. The way we now go about with taking and sharing pictures is quite different from how it used to be with the film camera. One of the influences has been the information technology, in fact the digital camera probably has more in common with a computer than with a film camera. This also means that a lot of functionality associated with computers has entered the world of digital photography like ‘save,’ ‘copy,’ ‘delete,’ metadata, etc.(and we expect that this functionality works in a way similar to a computer environment, e.g., a perfect copy with one click).

One of the ways of thinking about how digital technologies influence everyday things, may be to apply these notions of computer functionality to them as a thought experiment. For example, what would ‘new’ mean in relation to a digital fridge. I could mean that it registers every new product I put in. Or I may be able to ‘search,’ by asking it if there is any fruit left or how much fruit has been consumed in the last week. I may also be able to ‘save’ so I can see overtime what has been in my fridge.

What do we mean with business model?

While the growing attention for business models and business model innovation is a positive development, it also stresses the need for better understanding what we mean with the business model concept. This is not straight-forward as business models are still not well comprehended and the knowledge about business models is fragmented over different disciplines, such as information systems, strategy, innovation, and entrepreneurship. We need to further develop our conceptualisation of business models by discussing and synthesising business model definitions, frameworks and archetypes from different disciplines.

I tried to contribute to this development by the whitepaper ‘Understanding business models.' After reading this whitepaper, the reader will have a well-developed understanding about what business models are and how the concept is sometimes interpreted and used in different ways. It will help the reader in assessing their own understanding of business models and that and of others. This will contribute to a better and more beneficial use of business models, an increase in shared understanding, and making it easier to work with business model techniques and tools.

Why is business model innovation challenging?

Business model innovation is challenging because it is a form of innovation that has not been often explicitly recognized and presents significant challenges for organizations.

‘When executives think of innovation, they all too often neglect the proper analysis and development of business models which can translate technical success into commercial success’ (Teece, 2010).

Chesbrough and Rosenbloom (2002) warn that the current business model as dominant logic can hinder organizations in defining new business models because ‘the choice of business constrains other choices, filtering out certain possibilities, even as other prospects are logically reinforced.’ In line with this, Zott and Amit (2007) state that more established firms may be more constrained by path dependencies and inertia than more entrepreneurial firms.

According to Johnson et al. (2008) companies are confronted with two challenges. Firstly, there is a lack of understanding into the dynamics and process of business model development in general. Secondly, most companies do not understand their existing business model well enough to determine when they can leverage it and when a new model is required.

References

Chesbrough, H., & Rosenbloom, R. S. (2002). The role of the business model in capturing value from innovation: Evidence from Xerox Corporation's technology spin-off companies. Industrial and Corporate Change, 11(3), 529-555.

Johnson, M. W., Christensen, C. M., & Kagermann, H. (2008). Reinventing your business model. Harvard Business Review, 86(12), 50-59.

Teece, D. J. (2010). Business Models, Business Strategy and Innovation. Long Range Planning, 43(2-3), 172-194.

Zott, C., & Amit, R. (2007). Business Model Design and the Performance of Entrepreneurial Firms. Organization Science, 18(2), 181–199.

Start-ups and business model discovery: A talk by Mike Maples

In a talk about ‘thunder lizards’ and ‘pivots,’ Mike Maples discusses the topic of business model discovery. In his view a start-up exists for one reason only: to find a business model that turns its innovation into economic value.

Mike Maples pictures a business model as flows between the company and the customer (see example). Red flows go towards the customer and represents what costs the company money. Green flows come back to the company and represent what the company gets paid for. The more the green is larger than the red, the better the business model. While this is straight forward, most start-ups are not able to draw their business model.

Business models matter according to Mike Maples because there are maybe 20 to 30 flows and every flow is a strategic hypothesis that the company has to validate. If these hypotheses do not hold then the company has to ‘pivot’ and make a discontinuous change to the business model. Therefore, start-ups need to be dynamic and in a discovery mode.

The ultimate goal of business model discovery is to get product/market fit, meaning that the product can be offered to the market in a scalable and profitable way. Alter a start-up has discovered its business model it transitions to a real company. So a start-up is not a small version of the large company, it exists to discover the business model with the highest potential. Mike Maples discussed three forms of pivots and an example for each: pricing pivot (ngmoco), product pivot (Chegg), and an entire company pivot (Odeo/Twitter).

The start-up needs the tactical ability to iterate and the strategic ability to pivot. The dangerous is that start-ups get stuck in iteration after iteration and do not take aggressive, creative pivots. However, taking pivots should not be underestimated, it can be hard and painful, requiring to throw away what has cost a lot of effort and sacrifices. This means letting go of some things that are precious, like a product, a group of customers, a website, revenues, a strategy, etc.

These ideas have a strong relation with innovation theory. However, where innovation theory often discusses the inability of established companies to change radically, Mike Maples stresses that this problem is as relevant for a start-up who run the risk of iterating instead of pivoting. In addition, it shows that next to tools and techniques for product and process design and innovation, there is a strong need to support business model innovation, both for the content and for the process.

See also an earlier post on Business model shift.

Innovating Your Business Model

Mark Johnson, Innosight chairman, on how you can seize the white space. See also the book "Seizing the White Space: Business Model Innovation for Growth and Renewal," more information can be found here.

Critical success factors for business model innovation

Okay, you have a fantastic idea and managed to translated that into a superb business model design. The hard work is done, or not?

The need for deconstruction

Business model innovation, as a form of radical innovation, requires ‘creative destruction’ that challenges the certainty of current core competencies and revenue stream in favor of uncertain future competencies and revenue stream. This requires vision and risk-taking, something that is often discouraged by corporate incentives and institutional arrangements.

The ability of to execute

Translate a high-level business model into a more detailed operational model and implemented that model in a way that stays consistent with the original concept. A few small compromises here and there (in particular, in performance indicators and incentive schemes) can easily result in a flawed business logic in the operational processes.

Challenge you own innovation

Do not get too attached to the first idea or implementation, how good and promising it may seem. Built in feedback loops and monitor early warning signals to explicitly challenge your original concept and be willing and able to completely change it, if required.

Note that this kind of explicit learning is facilitated by a consistent implementation of the original concept, as described above. Otherwise, it is unclear how to interpret feedback, is it caused by the original concept of by the implementation.


The role of timing

You cannot be too early, but certainly not too late.

IBM study: Three ways to innovate your business model

An IBM study into business model innovation (Mar 2009) reveals three primary types of business model innovation: (1) industry model innovation, (2) revenue model innovation and (3) enterprise model innovation.

The study is based based upon an examination of 35 cases. It also which models generate success and which seem easier to implement. It concludes that with a sound strategy and strong execution, any of the paths can lead to success.

Google Chrome: A small step for ...

Google just released its web browser Chrome. Google has steps in the browser business with a new concept as the Web is moving from pages to applications (with, of course, Google as an important player with Google Aps). The first impression is to perceive this as a direct attack on both MS Internet Explores and Windows. But is Google really interested in head-on competition?

In Nicholas Carr's opinion Google is motivated by something much larger than its congenital hatred of Microsoft. 'It knows that its future, both as a business and as an idea (and Google's always been both), hinges on the continued rapid expansion of the usefulness of the Internet [...]' In line with this, Iyer and Davenport published not too long ago (April 2008) an interesting article about 'Google’s Innovation Machine.'

IBM study: Business model innovation for telecom providers

The IBM Institute for Business Value study published an interesting study on the telecom industry. Most interesting, according to the study, business model innovation gained prominence in relation to products and services innovation. The transformation of business models by 'redefining their role in the emerging convergent value chain (of IT, media and telecom) and exploring alternative ways of earning revenue' will also require the development of new set of a set of complementary distinctive capabilities for sustainable competitive advantage.

The relevance of business models: Business model functions

The particular functions of business models will be related to the application areas. A common application area of business models is innovation. A business model can be used for mediating between market and technology. Another application area of business models is the tactical level that brings strategy and operations together. Sometimes, business models are even considered as part of strategy. Business models can also produce business requirements that can be used in information system development.

When one takes a comprehensive perspective, it can even be argued that business models are a management approach that supports the process of designing, implementing, operating, and improving the way one or more firms deliver a specific service. Maybe the other functions discussed above can be seen as different subfunctions of business models as a management approach.

In practice different applications of business models come together. We take the application of business models for electronic business as an example. Electronic business models are often presented as an innovation in a particular industry, for example, direct sales via the Internet. Moreover, a business model enables one to try out different varieties of direct sales. The direct sales model can also be seen as a strategic move to compete with incumbents who make use of intermediaries and, therefore, cannot make a move towards direct sales easily. The specification of the direct sales model can serve as an input for the information systems development identifying building blocks such as a catalogue and online payment.

Business model dynamics

In an uncertain and turbulent environment companies often have to change their business model. This is in particular the case for companies where information and communication technology (ICT) is an important driver for change. For example, with the rise of e-commerce Amazon starting developing its business model. What originally looked like an online bookshop has developed in a broad commercial and technological service provider. Nowadays, we see new Web companies like Facebook developing business models for social networking. See this article for an interesting discussion on the Facebook economy.

Most literature on business models takes a snapshot approach. It describes how a specific business model at a certain moment in time can be designed and analyzed. It does not, however, discuss the dynamics of business models. One of the exceptions is the work of Harry Bouwman and Mark de Reuver from the Delft University of Technology (see, for example, this paper).

The dynamics of business models raises the question what kind of changes are possible. To address this question I will differentiate between, on the one hand, changes of the business model and, on the other hand, changes in the business model. I will also try to label different kinds of changes, such as business model innovation, business model development, and business model life-cycle.

With changes of the business model I refer to a change in the rationale of value creation and/or value capture. This can either be a completely new business model or the transformation from one business model to another. For example, the introduction of direct sales by Dell as new company in the computer industry is often used as example for a new type of business model (at a certain moment in time, in a specific context). This may be called business model innovation. A company can also change, for example, its revenue model from subscription to advertising. This is an example of business model transformation (and innovation if it is new).

With changes in the business model I refer to a change in the business model without a significant change in the rationale of value creation and/or value capture. For example the first version of a business model may be a rough sketch and a later version may be more detailed and concrete. This can be called business model development. A business model also changes during the transition from a R&D product to a commercial product. For example, in the R&D phase different kinds of actors are important than in the commercialization phase. This may be referred to as the business model life-cycle. Finally, a business model itself can contain dynamic elements. For example, a marketplace in the organizational network implies that the actors can differ per transaction or a value proposition based upon network externalities implies dynamics in value creation. This may be called dynamic business models.

What do you think of the different kinds of dynamics? Do you have ideas about other ways of categorizing dynamics? Do you have examples of different kinds of change?

What are the unique value propositions of innomediaries?

In a previous post I discussed innomediaries and suggested that they can build unique capabilities (compared to other actors in a business network) based upon the following characteristics: connectivity, specialization, and neutrality.

Den Hertog (pdf of article) discusses services of intermediaries (or knowledge intensive business services) that can fill or bridge various gaps in innovation processes with respect to resources and innovation management capabilities. Relating this to the previous discussed intermediaries' characteristics, I would argue that the more these services make use of connectivity, specialization, and neutrality (and their linking), the more there is a need (and, therefore, opportunity) for innomediaries.

Following is a list of the services mentioned by den Hertog and a first attempt of relating them to the intermediaries' characteristics:

Based upon this mapping experience-sharing and benchmarking seem to be the kind of services that offers innomediaries opportunities for unique value propositions towards innovation seekers and solution providers.

Innomediaries: The capabilities of intermediaries in (open) innovation networks

The intermediary is sometimes popping up in discussions on new business models and innovation strategies, such as 'open innovation' and 'connect & develop.' This already resulted in the term 'innomediaries' (Google search). Why would this be? The middleman has been proclaimed death many times, in particular with the increasing possibilities of ICT.

An intermediary brings together actors and facilitates demand and supply activities for the exchange of products (goods, services, ideas), information, and money. The term ‘intermediate’ refers to a position: being or occurring at the middle place, stage, or degree or between extremes (Merriam-Webster).

Being in the middle emphasizes that intermediaries can occupy a special position in the business network and build capabilities based upon:

1. Connectivity: Intermediaries can connect many customers with many suppliers. Therefore the intermediary can provide services that individual customers and suppliers cannot offer and gain efficiencies via the reduction of necessary contacts between customers and suppliers.

2. Specialization: Intermediaries can specialize in exchange activities and supportive production functions; an exchange is a task in itself.

3. Neutrality: Intermediaries can act as a neutral party, a buffer between the interests of customers and suppliers.

What are your ideas on this? Are intermediaries a dying breed? Or will they stay but do they have to adapt their role? Or will nothing change at all?