Innovation vs Transformation

I noticed recently a predilection for using the words “digital innovation” and “digital transformation” interchangeably and synonymously, sometimes in the same paragraph.

The misuse creeps into companies’ Annual Reports which makes it quite confusing for people to understand where the company is, on the evolutionary scale.

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So let us attempt to clarify the difference and go a bit beyond that as well:

Innovation(s) and transformation(s),

digital or otherwise, are two separate things

Schumpeter, who showed that innovation is the source of economic fluctuations, notes that “the pure idea is not adequate by itself to lead to implementation”.

Between the two, in most cases, there is a mutually causal relationship with the differentiator being the speed element (presence or lack thereof) and the order in which they surface.

Generally speaking, transformations “take time” in moving from one given state to another. Innovation is usually a sudden creative a-ha idea, spark-like process or technology that may or may not find its way into the company’s strategy; it needs however to be a value-creator (tangible or intangible) for the company.

Transformation is an integrated nexus of technologies, tools, best & emergent practices in process, learning and optimal use of interfaces/human capital

Digital transformation is, in simple terms, the corporate-led strategy for technology implementation to reach a certain point/scope/end value, hence with a set objective. Digital transformations end up with a new reality, a new status quo which will remain valid until the next transformation cycle is sparked by innovation (or other factors). Innovation is “one” of the drivers of digital transformation (change) and usually, but not necessarily, precedes the change process.

One of my friends put it nicely saying that in a technology-savvy business, “Digital innovation and digital transformation are hand and glove”.

Now, the question is:

Must all innovations lead to transformation?

and by extension,

Must digital innovation lead to a company-wide digital transformation?

The answer is: it depends.

Innovations can take place

1. internal to the business,

2. at the edge of the business or

3. outside the business boundaries but with the appropriate linkages.

And by their very nature (and to complicate things further), innovations can be

A.) Autonomous or

B.) Systemic.

I discussed the difference between the two in a previous article titled “Systemic vs Autonomous Innovation”

Autonomous Innovation

To return to the original question, in many instances autonomous innovation does not require a full company-wide transformation.Take for instance the $15.3bn acquisition of Mobileye by Intel who aims to enter the driverless technology market. Sure, the integration of Mobileye will take some amount of transformation within the business, but such transformation will take place at the fringes and across a number of interfaces and will not create the impetus for a “core business transformation” of Intel. If you can imagine a company’s capabilities as:

1.) Foundational,

2.) Core and

3.) Strategic

a.) Distinctive (VRIN-type) and

b.) Evolutionary adaptive,

then the transformation at Intel will be at the strategic level. Note that Intel and Mobileye have been engaged in a partnership well before the acquisition took place (ie. Intel, in this case, “innovated at the edge”).

Systemic innovation is different and requires changes in the supply chain, management, information technology (digital innovation), learning processes etc. Systemic innovation depends on a series of interdependent innovations, hence in most cases, it is a trigger for a business-wide transformational process. If the organizational design is heavily based on a decentralised structure such companies are rarely in the position to coordinate properly at the boundaries (fuzzy) and stitch those interdependent innovations together… hence the transformation process will most likely fail.

As explained in my previous article on innovation,

the choice of org design is paramount to the deployment of innovation and subsequently to the deployment of business transformation.

The IBM saga

The early years of IBM is a prime example of the innovation-business transformation interplay, both success and failure and I often quote this example in the strategy planning sessions with my Clients.

Only three years from the introduction of the PC , IBM replaced Apple as the top supplier of microcomputers. The following year (1985) IBM captured over 40% of the market and relied exclusively on outside relationships, suppliers, supply chain and “creative business” to solidify their no.1 status. They used the outside ecosystem to coordinate and control innovation and technological improvements.

Of course the sole reliance on external companies and preventing from controlling the compatibility of PC open architecture gave plenty of ammunition to competitors. When IBM introduced OS/2 operating system, Microsoft followed suit with the introduction of Windows, which worked with the old (DOS) operating system hence diminishing users’ impulse to switch to the new OS. Intel-Compaq alliance followed with the 80386 processor and the rest is history. That signalled the beginning of the end of IBM’s architecture supremacy. Note that at the time, IBM owned 11% share in Intel which did not prevent Intel from eating away at IBM’s competitive advantage.

The story above illustrates how delicate the balance between innovation, organizational design and ability to exploit systemic or autonomous innovation is. IBM should have been able to “bring in” the externally driven innovation in PC architecture and integrate it within the business via a company-wide transformation, hence limiting the exposure of its platform as a playground for others to innovate upon.

The leadership failed the company and lost in the competitive game.

Today, the strategists at Intel know better, hence the Mobileye acquisition.

Axiom:

Competitors have the habit of catching up with innovation so, prepare yourself.

Let’s not forget that innovation(s) and transformation(s) are not only private business pursuits. Today we talk about smart cities, the digitisation of the public sector and its management of assets. Tomorrow we will be talking about “smart countries”. In Norway most of the population are “digital taxpayers” as the tax authority has totally digitised tax returns. The citizen does not need to do anything to hand in his tax return which will be posted on the government website Altinn. He may view it or amend it (if necessary) or do nothing if all correct. I plan to dedicate an essay to the exciting topic of smart cities.

A clearly articulated innovation strategy, alignment and the associated “transformation” usually separates the successful companies from the rest of the pack.

Digital strategies focus on the role of technology in building new capabilities and new business models. Digital transformation is the "cultural engine" that enables digital strategy to be executed, meaning that it integrates

- the newly created business models (that spring from new technology advances) with

- new business processes and

- customer touch-points (delivery).

The ability to innovate and transform – with the essential glue of deep sensing, leadership, asset orchestration and organizational learning – represent important dynamic capabilities that help companies build competitive advantages, short-lived and frequent in nature in order to be able to remain relevant in today’s high velocity markets.

For those interested in a deeper analysis of this topic, Smith and Tushman did a lot of work around the exploitative vs explorative innovation strategy as part of the Ambidextrous Model.

Acknowledgements

Many thanks to my friend Mile Terziovski, Professor of Innovation and Dean at Curtin Graduate School of Business for his invaluable comments and brainstorming.