Lectures Management of Digital Innovation
Lecture 1 – The nature of digital technologies 03-09-2024
Core themes of this course:
• Properties of digital innovation. Digital innovation is different compared to
traditional innovation. What is really different?
• Industrial dynamics of digital innovation. This is the second model.
• Innovation processes for digital innovation. This is the third phase of this course.
Why is digital innovation different? Disruptive innovation has become important. Which
of the older traditional concepts still apply? Product and process innovation becomes
blurrier.
Routinization of innovation
Stage-gate models has been applied by most of the organizations. They do not fit
with digital innovation best. There is a number of stages, from idea screen, etc. with
gates in between. With digital innovation, steps become more unpredictable. Digital
innovation does not have a clear starting and end point. With digital, innovations are
never completed, they always can and have been updated. They can continuously
update. So, products are not finished. The stage-gate suggests that you know what
you need in your next stage. Within digital innovation we need another approach. What
is important from stage-gate, is that there are multiple stages where you can evaluate.
Companies are sometimes taking the wrong approach, because they are not using
those gates, you will end up stuck in the process eventually. This aspect from the
stage-gate approach is relevant (Cooper, 2001).
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,Digital innovation
Digital innovation is the use of digital technology in new products, services, business
models, and business processes.
• Many of the innovations nowadays are digital, many with a physical aspect as
well. This is what the paper by Yoo et al. (2012) assumes: that digital innovation
has to be material as well. Incorporation of digital capabilities into objects that
previously had a purely physical materiality (Yoo et al. 2012).
• A product, service, process, or business model that is perceived as new,
requires some significant changes on the part of adopters, and is embodied in
or enabled by IT (Fichman 2014).
• The creation of (and consequent change in) market offerings, business
processes, or models that result from the use of digital technology (Nambisan
et al. 2017).
Digitization & digitalization
• Digitization is the encoding of analog information into digital format: binary
digits (bits) (Yoo et al. 2012; Tilson et al. 2010) à Digitization means turning
possibly analock data into bits.
• Digitalization is a sociotechnical process of applying digitizing techniques to
broader social and institutional contexts (Tilson et al. 2010) à Digitalization
refers to the use.
Impact on innovation
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,Characteristics of digital technologies
“Because all digital information assumes the same form, it can, at least in principle, be
processed by the same technologies. Consequently, digitizing has the potential to
remove the tight couplings between information types and their storage, transmission,
and processing technologies” (Tilson et al. 2010)
à Homogenization & decoupling with this digitization (bits) you get that data takes the
same form and that has implications. We stored music in different ways in the past.
Now the data is stored in a similar way, so it can be stored, transferred, etc. in the
same way.
Consequences for products and services
• Low marginal costs à Because the data is stored in the same way, the
marginal costs are much lower. With low marginal costs, total costs are not very
depended on the number of units, with high marginal costs, it depends. Think of
books, the costs will double if you double the production of physical books.
When you produce an e-book, it doesn’t matter how much you produce, you
may need a bit more storage, but marginal costs are close to zero, some even
say they are zero. However, keep in mind that the digital innovation does cost
a lot of energy and therefore CO2 emissions.
o Digitized information can be transmitted, stored, and computed in fast
and low-cost ways (e.g. electronics, electromagnetic waves, optical
signals) Goldfarb & Tucker.
o Moore’s law: computing power (costs, speed) improves exponentially.
• One more consequence is that user experience may converge. à convergent
user experience.
Consequences for innovation management
à Implication for innovation: disruption, winner-takes-all, convergence of
industries, combinatorial innovation.
What would be the implication of scale? It might become easier to scale. Of course
there is an initial investment, but you can scale relatively easy with a little investment.
For example, Facebook had a million customers with only fifteen employees. Because
your costs are relatively stable, the larger the scale, the more profitable you come. With
digital innovation, scaling is important. That logic is reversed, in the past you first
wanted to be profitable and then scale.
It depends on the digital product you sell, cause sometimes you need to add additional
services. Let’s take the example on radiologists for using AI to takeover radiology
tasks, with the idea that that could save time and money. The algorithm scales easily,
where a radiologist is quite a steep curve. In theory this sounds good, but what often
happens is that still the radiologists are involved and that might even take more time.
This combination from human activity and digital services, which could result in higher
quality, is thus an issue as well. One more consequence is that user experience may
converge.
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, Connectivity
Characteristics of digital technologies
Connectivity is with other users, with other applications (products) or between firm and
customer (suppliers).
Consequences for products and services
• (Direct) network externalities: when the value of a good to a user increases
with the number of other users (installed base) of the same or similar good. à
Connectivity between users is network externalities. The value of a product
goas up with the number of users of that product. When you are the only one
with a phone, it has low value. The value of the phone is depended on the users.
Take for example Whatsapp as well. Once there is a firm that comes on top, it
is very hard to compete, because you are mainly competing against that whole
network that is already using it (implication).
• Interoperability: the ability of a product or system to work with other products
or systems. à you need to recombine products. Recommendatory innovation
is studied in the smart home industry. There was a user in research who used
Apple Home is the hub, but he used another hub as well. Products get more
value in combination with other products, example your phone with apps. For
an innovation company it is important to know how you can connect with other
products. This is interoperability.
o Standardized and open interfaces
o Interoperability drives network externalities
Consequences for innovation management
à Implication for innovation: disruption, winner-takes-all, (platform) ecosystems,
combinatorial innovation.
• Platform ecosystem: which role do you want to play? Ecosystems is not per se
the number of products of a single firm. They must have complementary value.
Some are from the same firm, and some are not. There are regulators involved,
example usb-c and apple. You can get locked in if there is no interoperability.
Matter is being adopted as one homogenization.
Reprogrammable & smart
Characteristics of digital technologies
Digital products can be edited and reprogrammed (e.g. software updates). This can be
done by the supplier (connectivity!) or autonomously (machine learning!). A digital
product uses sensors, processors and actuators for this.
Consequences for products and services
• Emerging functionalities: This reprogrammability has the implication that the
products are never finished. You need to organize this continuous development,
IT becomes important.
o Product versioning
o Differentiation
o Incompleteness (never finished malleable)
o Backward & forward compatibility
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