Digital Innovation
GEO3-2276
Yoo et al. (2010)
Digital innovation can be de ned as the carrying out of new combinations of digital and physical
components to produce novel products. Therefore, the focus of digital innovations is more on
product innovation, instead of process innovation. Digitization makes physical products
programmable, communicable, traceable, etc.
Digital technology has three key characteristics:
• Reprogrammability
• A digital device has a processing unit that executes digitally encoded instructions and a
storage unit that holds both instructions and manipulated data. This data can be
manipulated again by new instructions, therefore, it is reprogrammable.
• Homogenization of data
• Due to the use of bits, any type of data can be stored, transmitted, processed, etc. by any
digital device.
• Self-referential nature
• Digital innovation requires the use of digital technology, leading the positive externalities that
further accelerate the creation and availability of digital devices, networks, services, etc.,
these are network e ects. These e ects result from lower entry barriers, learning costs, and
accelerating di usion rates.
These three characteristics enable a layered architecture. These
layers have two critical separations:
• Between device and service because of reprogrammability
• Between network and contents because of homogenization of
data
A layered architecture consists of four layers, as seen on the right:
• Devices
• Physical machinery, such as computer hardware
• Logical capability layer, such as its operating system
• This sublayer connects the physical machine to the other
layers
• Networks
• Physical transport, such as cables, routers, etc.
• Logical transmission layer, such as network standards
• Services
• Application functionalities that serve users as they manipulate,
create, store data
• Contents
• Data such as texts, videos, etc.
For physical product design, two architectures have dominated. First, integral architecture, in
which functional elements and physical components overlap and are complex, resulting in trade-
o s. Secondly, a modular architecture is based on prede ned standards for separate
components, resulting in a reduction of complexity and an increase exibility regarding design.
Shifts in product architecture cause shifts in organizational design. For an integral architecture, a
vertically integrated hierarchy is dominant. Also, economies of scale are key value creators, while
product positioning is often used for a competitive strategy. For a modular architecture, vertical
disintegration is more common, resulting in a network of rms. Value creation comes from agility
to recombine components without sacri cing costs.
The digitation of physical products introduces a new type of product architecture, a layered
modular architecture. This means that the boundaries of the product become uid as the product
can be used in several ways. For example, Google Maps can be used on a phone, laptop, car,
etc. and it can be used as a search product, a navigator, etc. See image below for an overview.
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, A layered architecture allows a digitized product be both a product and a platform. For example,
you phone can be used a product by you, but as a platform by other organizations as they can
create apps for the operating system of your phone. Therefore, rms can invest in digital product
platforms that help with creating ecosystems. Such a digital product platform tends to
encompass a range of layers that can function as a new product, but also enable other
organizations to to innovate upon buying the platform resources, such as API’s, provided by the
rm. As a result, rms can compete on one layer, while having a symbiotic relationship on another
layer.
With a layered architecture, rms seek to attract heterogenous actors to design and produce
novel components on layers outside its digital platform. As a result, the generativity of a layered
modular architecture comes from the rm’s ability to design a product platform that can attract
many heterogenous actors. Generally, the more the heterogenerity, the more generative a
platform becomes. This ability is limited by a rm’s economic, structural, cognitive and
institutional constraints.
Doubly distributed organizing logic means that value creation comes from heterogeneous actors,
while control over product components is distributed across multiple actors as is the product
knowledge.
A product-agnostic component indicates that a product is not made for a single use case as it
can be used in various manors.
Digitization of product and the layered modular architecture lead to new strategies as it blurs the
boundaries between industries, enables new possibilities for digital components in hardware,
enables creation of platforms, etc.
They also lead to new organizational structures as numerous organizational activities become
more e cient, such as transactions, information management, etc. In addition, organizational
control needs to be rethought due to con icting design hierarchies.
Ander (2006)
The innovation ecosystem is the collaborative arrangements through which rms combine their
individual o erings into a coherent, customer-facing solution. Firms that focus on innovating
should take this ecosystem into account as their individual e orts could otherwise be useless. As
a result, there are strategic implications, such as timing, resource allocation, and risk assessment.
Risk assessments very important and there are three types of risk:
• Initiative risks
• Evaluating the feasibility of the product itself, likely bene t to customers, competition,
supply chain, etc.
• Interdependence risks
• Innovation do not stand alone and often need other enabling technologies or infrastructure
to succeed.
• The more interdependency, the more risk (multiply probabilities of other actors’ success)
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, • Integration risks
• Which actors have to adopt before the consumers can adopt?
• The more intermediaries, the more uncertainty (add timeframes of other actors’ adoption)
Integration risks can be managed in several ways:
• Synchronize adoption cycles
• Train employees downstream
• Subsidize early adopter
• Shorten supply chain
• Coordinate with government
To map the ecosystem in which a rm is involved, seven steps are needed:
1. Identify all intermediaries that need to adopt your innovation
2. Identify all complements (enabling technologies) required for your innovation to reach
market
3. Estimate the delays caused by interdependence with complementors
4. Estimate the delays caused by adoption process and estimate time needed for
intermediaries to integrate the innovation
5. Estimate the delays caused by intermediaries interdependent with own complementors
and integration hurdles
6. Estimate time-to-market based on 1-5
7. Reassess initial expectations and strategy
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