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DIGITAL INNOVATION SUMMARYLECTURE 1
-What is digital innovation?
Yoo et al. New combinations of physical and digital components to produce novel
products
Digital innovation is not only virtual. Physical component is also important because it
is interesting to see the influence of introduction of digitization. Focus lies on product
innovation, not process innovation. With embedded digital capability, products offer
efficiency and offer novel functions and improved price/performance ratios.
Changing the way we produce/consume products, so not only making them more
efficient. Therefore focus on product innovation, not process innovation. But some
process innovation build on product innovation (e.g. robotics)
We are however interested in radical
innovations that disrupt the current
process, which is able to know if we
focus on product innovation
Digitization is the transformation
mechanical (computer) to a digital
product (digitize information = turning
it to digital formats, bits 0 & 1)
Dominant vision for the future;
“Internet of things”
Wikipedia: The Internet of
things (IoT) describes the network
of physical objects—a.k.a. "things"—that are embedded with sensors, software, and
other technologies for the purpose of connecting and exchanging data with other
devices and systems over the Internet
In this way, you will not lose data by digitizing. Objects in our environment (physical
aspects) are also part of the Internet (and of digital innovation), automated ecology
of things so they can be used in more efficient ways.
Digital technologies always rely on a physical basis (energy), physical location (Wi-Fi)
and with physical (waste) effects.
So digital innovation is not just ‘virtual’ (making it abstract with bits of 0&1) but also
physical creating a huge infrastructure (goes beyond Internet)
The combined digital/physical aspects of digital innovation generates new
inequalities, between high and low educated people for example
Characteristics of digital innovation
Re-programmability (physical carriers can be used for many purposes)
Homogenization of data (data are independent of physical carriers (all in terms of
bits 0&1)
‘Self-referential’ (network externalities: each adopter increase the value, both
directly (social media) and indirectly (development of complementary
innovations). The more people that make use of the innovation, the more value
the innovation have.
Architecture (digital innovation part of complex architecture)
Layered
Contents (pictures)
, Service (apps such as social media)
Network (needed to make use of
services)
Device (most physical layer, mobile
phone for example. You need logical
capability to download something)
Modular (betekenis van Dale: een
modulair systeem is een
constructiesysteem waarbij veel onderdelen
uitwisselbaar zijn met diverse modellen)
Modular technologies: aircraft, because
most of the parts can be replaced without
adjusting other components, but it is
product-specific.
With models that you are not pre-specified, on the other hand, you will not know at
the beginning what the functions will be:
Google maps: we will map the whole world. They created a functionality that
could be combined with others. Google maps is therefore product agnostic
rather than product specific
Products within plane (motor) are product-specific. Uber app, on the other
hand, is product agnostic modules.
Network layer consists of both physical as logical aspect because…
Physical transport: information packages need to be physically transported,
thereafter decoded
Logical transmission: protocols to make message clear to everyone, to know how to
unpack the transported information package. Message the same at every place so a
certain dictionary to understand the bits 0&1 speaking the same language
Modular architecture: a physical device such as iPhone is both a traditional modular
product and a digital platform offering other firms to develop complementary devices,
apps and content using Software Development Kits (SDKs) and Application
Programming Interfaces (APIs)
NOTES TUTORIAL:
Content - data such as texts, sounds, images, and videos that are stored and
shared.
Netflix: sounds & videos, films en documentaries
Service – apps, Netflix: Netflix app. Application functionality – omgeving waar jij die
services aanbiedt, verzameling aan content.
Network – Making it able to apply service, such as Internet
Logical transmission – protocollen, standaarden die nodig zijn om het netwerk
draaiende te houden. Zoals IP.
Physical transport – kabels, transmittors, internet verbinding
Device – Where the content is given, such as laptop
Physical machinery: device, laptop or phone
Logical capability: operating system, android for example. De standaarden
waar het apparaat op draait.
Product agnostic component – not specific to a product, such as Uber app. Google
maps – niet product gebonden omdat het op verschillende producten gebruikt kan
worden en in verschillende contexten (navigatie, adres, games…). Een app is geen
goede ‘product agnostic component’ omdat het niet perse een component is, maar
eerder een product. Onderdelen van een app, daarentegen, kunnen dit wel zijn.
, dit maakt layered modular architecture anders dan modular architecture
Power
In traditional industries, firms higher up in the product hierarchy are general larger
and have more power
In digital industries, on the other hand, firms in each layer can function
independently. Power resides in platform firms, which can be located in the device
layer (Windows, IOS, Android etc.) or service layer (Facebook, Amazon etc.). Some
are monopolist because we cannot do without them anymore.
Firm’s strategy (Yoo et al.)
Digital innovation blurs product and industry boundaries: prepare for
distribution
Choose your position in a layered modular architecture: few companies can
fulfill the platform role
What to develop yourself, what to use from the shelf and what to have
developed by partners
Ecosystem logic
The ecosystem metaphor: digital services are typically co-produced by several
organizations that jointly create value to end consumers
Advantage: Every organization can focus on its core competence
Disadvantage: A single firm is not able to control the quality of the product (other
organizations need to improve their products to make your product work, imagine
producing a Ferrari without highways)
Example: traditional car rental vs. car sharing
3 fundamental types of risk:
1. Standard: initiative risk the familiar uncertainties of innovation such as
resources, demand and competition
2. Ecosystem: interdependence risks the uncertainties of coordinating with
complementary innovators
The more partners, the more value can be created, but… also more risks!
To make the innovation work, all partners need to be successful due to
interdependence (ecosystem). As a result, one weak link in system will highly decline
the success rate of your innovation, so look for other partner or take up the task
yourself. Other option: not many partners
3. Ecosystem: integration risks the uncertainties presented by the adoption
process across the value chain
As firms and industries have different cycles of product renewal, adoption times in a
value chain are not always synchronized
The longer the supply chain, the more intermediaries, the more likely a delay: thus,
the higher up a firm is positioned in the value chain, the higher the risks
Mitigating integration risks
Synchronize adoption cycles (delay your innovation)
Train employees downstream
Subsidize earlier adopters
Coordinate with government (regulation)
Shorten the supply chain through vertical integration (take over next in value
chain), product-as-a-service (for example: by-passing wholesale and retail using
, global e-commerce platform) and digitization (for example: direct marketing via
social media and distribution via apps)
NOTES TUTORIAL
As a consultant for Uber, you are asked to develop a strategy to launch Uber in rural
areas. What innovation ecosystem strategy would you recommend?
Je brengt innovatie op de markt die niet op zichzelf staat, je hebt informatie nodig
van bestaande bedrijven/innovaties.
- interdependence risks
je zit te wachten op product van bedrijf eerder in supply chain, niet in jouw handen
(zoals chip voor playstation)
- integration risks
Verderop in supply chain, product naar ander brengen, innovatie bedrijf moeten
adopteren zijn er niet klaar voor.
Uber app: in rural areas heb je minder gebruikers, ze zijn niet gewend aan dat soort
vervoer. In stad daarentegen wonen heel veel mensen die zelf rijden en willen rijden
om ergens te komen. Strategie voor rural areas: geld aanbieden, met overheden
kijken om bepaalde groepen te subsidiëren zoals ouderen of validen. Vervoeren van
mensen combineren met boodschappen bezorgen bijv. (dus Uber samenwerken met
Albert Heijn integration risks)
Interdependence risks wat heb je nodig? Mobiel, netwerk, in sommige rural areas:
geen bereik. Is er wel voldoende dekking voor netwerk? En hebben mensen wel
mobiel? Samenwerken met degene die de apparaten maken bijv.
Wat je eerder kunt verwacht op tentamen: what kind of ecosystem risks do you
recognize in these cases?
Leadership (see figure)
Each firm must consider its role in
each ecosystem, different positions:
Leadership position is a high-
risk, high gain-strategy
Follower position is a low-risk,
low-gain strategy
Special position
Digital innovation
Zero marginal costs (all focus
on product innovation)
Venture capital: high risk, high gain in winner-takes-it-all markets
Freemium: free version to generate network effects and premium version for
extra’s
R&D is not about scientific understanding but beta testing with continuous feedback
from users (trial & error). Ecosystem is key due to multi-layered nature of digital
technologies
Plug-and-play: basic modules can be outsourced (sales, marketing, distribution,
computing, storage)
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