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The astonishing success of digital platforms is because it’s a new business model that is extremely well aligned with fundamental evolution of innovation management theory. In this case, knowledge of innovation management theory is not an option but an absolute requirement to develop and manage this new type of enterprise.
The publication of “The New Age of Innovation: Driving Co-created Value Through Global Networks” (Prahalad and Krishnan, 2008), to drive personalized user experience for each customer through mass customization with the assistance of a global network of co-creation suppliers as a competitive advantage for the 21st century, really stuck with me ever since. The theory suggested a new look at existing business processes, the use of digital applications to connect with customers and the application of analytics to predict customer needs. A new paradigm was suggested how corporations should manage the innovation of new products or services of value. With the increase in speed and agility to develop and deliver new complex technologies, big-data analytics and digital platforms did became significantly important to drive innovation and growth in the global competitive market (Ringel, et. al., 2015).
Digital platforms integrate digital transformation technologies with new disrupting business models that leads to phenomenal exponential growth. Under the hood, these digital driven business models are highly sophisticated, complex, and dynamic ecosystems that needs to be managed accordingly. One may state the same for existing large global corporations, but the fundamental difference is the control existing corporations have on internal operations versus an external environment digital platforms needs to coordinate. The control over internal operations allow many corporations to get away without the implementation of digital transformation and innovation management business functions. But, digital platforms are new “bleeding edge” business models that absolutely require strong adoption of digital technologies and innovation management capabilities.
The trouble is, while innovation management is on almost every corporate agenda as a top strategic priority for sustainable growth, less than 10 percent implement the necessary capabilities to manage innovation as a corporate function (Bouwer, 2015). It is also known that the gap between best and worst companies managing innovation are getting bigger and the rest of the companies are stuck in the middle, from an interview with Dr Scott J. Edgett. To make matters even worse, while C-suite executives overwhelmingly agree that digital transformation will increase future revenue and profit margins, many corporations still struggle to realize the promise (Bughin, et. al., 2015).
In contrast, the most innovative corporations in the world such as Apple, Google, 3M, Tesla, Amazon, Samsung, Microsoft, IBM etc. (according to PwC Strategy& and BCG annual global innovation reports) enjoyed phenomenal financial growth with unprecedented high market capitalization valuations. These corporations were also the first to develop digital platforms as an innovation strategy through the past decade.
The successful innovation of digital platforms is not just random haphazard inventions from a few startup companies, but can be explained with the accumulation, alignment, and integration of existing innovation management theory. It is therefore highly recommended that corporations must understand the fundamentals of innovation management theory, to be successful with the innovation (instigation, development, and implementation) of future digital platform ecosystems.
1 Digital Platforms
In generic terms, a digital platform is a new type of as-a-service business model ecosystem where online Internet based cloud computing technologies are used as the infrastructure to connect collaborative and interactive networks of suppliers and consumers in real-time as the value proposition. (Morvan) (Parker et. al., 2016).
Figure 1: Digital Platform based on Innovation Management Theory
Important to note that some digital platforms (i.e. Microsoft Azure, etc.) drives innovation within its own ecosystem, that provides a technology as a foundation to support an open services innovation model (Chesbrough, 2011) for other 3rd party technology companies, to either develop their own digital platforms or alternatively deliver applications for other digital platforms as suppliers (Evans et al.). In most cases the new inventions developed within the digital platform ecosystem can be sold directly to consumers, which can be described as a B2B2C (Business-to-Business-to-Consumer) type business model. This means, digital innovation platforms can get very complex and essentially must be managed as an innovation management ecosystem with the primary shift from an internal corporate focus to an open external focus with a network of multiple partner businesses collaborating and co-create as highly decentralized and distributed R&D centers.
When a digital innovation ecosystem works, it creates more value than a single firm can create alone at a lower cost, which is the supplier network effect that is observed with digital platforms (Parker, et. al.).
Appendix A describe three digital platforms with the purpose to provide technologies for 3rd party companies to either develop their own platforms or participate as suppliers within other digital platform ecosystems.
2 Innovation Management Theory
This is by no means a comprehensive list of innovation management theories that can be used to understand and explain the success of digital platforms, but the following paragraphs will elaborate on six innovation management theories to help explain the phenomenon.
2.1 Innovation ecosystems
Innovation ecosystems are collaborative arrangements where firms combine their potential cross-industry products or services into well-coordinated and coherent (integrated and aligned) value networks with the application of digital information technologies (Adner: 2006) (Adner: 2012) (Adner: 2016) (Leinwand and Mainardi: 2010, 2011).
Each innovation ecosystem must develop a core competency, where 3rd party network of supporting companies develop specific capabilities that are aligned and integrated with the core competency. This allows then for incredible flexibility to develop highly unique capabilities and individualized products for a diverse network of customers (Garrett) (Prahalad and Hamel, 1990). Digital innovation platforms are the perfect information technology that can coherently integrate and align the innovation ecosystem’s core competency with the distributed supply base of capabilities.
To add a visual perspective to these digital innovation platform ecosystems, Prof Rahul C. Basole created very novel visual analytical applications to show how these ecosystems look like as a digital map of available application programming interfaces (APIs) (Evans and Basole) (Iyer and Basole).
2.2 Open innovation
Open innovation is where knowledge flows inside and outside of the company at any stage of technology development lifecycle, to increase value generation for the company either outside or inside the company. As the open innovation theory was embraced by industry after 2003, it went off in a hype with the predominant focus on outside-in (aka inbound) knowledge transfer. This created a whole ideation industry as a strategy to implement some form of co-creation.
The evolving definition of open innovation increased collaboration and the how a company will engage with large external networks of participants to generate highly customizable value in a coupled mode (coupled open innovation) with simultaneous inbound and outbound knowledge flows. New open business models will have to be invented to define the requirements for participation and the mechanism to capture value for itself. (Chesbrough: 2012) (West: 2014).
This new definition of open innovation will be implemented through innovation architecture as an innovation generation method where complicated technologies are partitioned in (a) a standardized platform managed and owned by the innovation architect, and (b) with a highly customization technology development capability that allows a network of 3rd party companies to develop technologies on the platform. The responsibility of the platform owner is to align and integrate the various technologies with the platform while it organizes and coordinate the creation and distribution of value for platform. To accomplish this, innovation platform architects must first establish the system solution, then communicate about it, persuade a network of 3rd party contributing ecosystem to support to creation of value, and finally make sure it will also capture some of the value for themselves. (Chesbrough: 2003) (Chesbrough: 2009). This then, paved the path for digital platforms should be established as a method for innovation.
Open services innovation theory was suggested to support the growing demand where corporations deliver a holistic service with the products they are selling to increase growth, which fuels the services industry. (Chesbrough: 2011) (Chesbrough: 2012). This is exactly where digital platforms play, providing faster, more convenient, and highly individualized services.
2.3 Value innovation
Interesting to note that the value innovation theory was published (Kim and Mauborgne: 1997) the same year disruptive innovation theory was introduced (Christensen: 1997), which eventually evolved to became known as Blue Ocean Strategy (Kim and Mauborgne: 2004, 2005). Both theories support each other exceptionally well, insisting that it is not about the technology (Chesbrough: 2007) that drives new markets, but new business models that can produce new value maps to provide simpler services at a much lower price, that will attract non-current consumers (from current industries) and low-price seeking consumers who have been over-served with current high price and performance solutions. Blue ocean strategy (and value innovation) explains at a strategic level what needs to be done to create “blue spaces” in the market, while Prof Christensen explains from a disruptive innovation theory and technology management view the effect this will create in the competitive dynamics within a market. Within a few years, customer-driven innovation also became the focus of some researchers as yet another alternative theory to look at value innovation (Desouza, et. al.: 2008).
From the theory, the Outcome-Driven Innovation (ODI) methodology was developed by Anthony Ulwick (Founder and CEO at Strategyn) a few years later, to help and assist corporations how to create and capture the blue spaces (Ulwick: 2002) for B2C corporations. Dan Adams (AIM Institute) adopted the ODI methodology, but with the focus only on B2B innovation opportunities. Most recently, Dr Alex Osterwalder (Founder and CEO at Strategyzer) introduced the value proposition canvas as another practical methodology (Osterwalder, et. al.: 2014) to implement value innovation.
In subsequent blue ocean strategy publications (Kim and Mauborgne: 2004), it was mentioned that good value products will create network effects., which is exactly what digital platforms must accomplish as a requirement to succeed. Extremely important to note that if there isn’t at least a three-way value proposition for digital platform suppliers, consumers, the platform owners and in some cases marketers, the digital platform will stop to exist.
2.4 Business model innovation
Business model innovation for digital platforms is where open innovation and value innovation theory meet and intersect with each other to develop new value networks and customers willing to pay for the service.
The open innovation theory evolved to open business models and the supporting researchers developed a maturity model for business models, they found the highest most valuable kind of business model is the platform model. It is more open since it highly integrates and align 3rd party innovators with the platform architecture. The open business model theory further evolved to define open services innovation platforms since many of the new high growth companies delivers services in conjunction with products (Christensen, et. al., 2016) (Chesbrough: 2006, 2007, 2010, 2012) (Kavadias, et. al.: 2016).
With the business model theory, methodologies and tools were necessary to help industry with their business model innovation efforts. The business model canvas was developed by Dr Alex Osterwalder (Osterwalder, et. al.: 2010), and Prof David Rogers developed the digital platform business model map (Rogers: 2016) which are more specifically applicable for digital platform innovation.
2.5 Disruptive innovation
Very simplified, disruptive innovation came to being when large corporations that only focuses on sustainable and efficient innovation efforts that drives higher profit margins, will eventually deliver a product with a performance (quality, capabilities, and features) surplus which most customers do not care about and do not want to pay for. This then opened the door for new competitors that will apply an existing technology in such a new application where it can deliver just-good-enough performing products at a lower price point (or cost), which then increased the value proposition for the customer or consumer. Very important that the new application of a technology must enable the disrupting entrant in the market to still obtain sustainable profit margins when delivering solutions at a low cost levels. (Christensen: 1997, 2014).
To find the just-good-enough performing product, value innovation methodologies and tools must be used to find the minimum performance requirements customers and consumers are willing to work with, which in many cases is known as the dominant design of the product. (Utterback and Abernathy: 1975).
Digital platforms are disruptive innovations since it applies new digital technologies to drive new business models to give access to new unique solutions or services in a simpler manner and at a lower cost, through new value networks that either captures new markets or low-end markets (Christensen: 2014).
The simplest examples are Airbnb and Uber, both digital platforms used new digital technologies to develop simpler business models to deliver cheaper services. Both companies qualified as new-market disruptions, where they created new mass consumer markets to enjoy transportation or accommodations (travel) that could neither afford or manage the complexity with the options that existed before these companies were founded.
2.6 Decoupling of technology
Digital platforms are innovative solutions that has been designed as a system, but decoupled to allow many technology and services suppliers to participate in the overall architecture of the value creation ecosystem.
It is important to know when and how a new technological system can be modularized, the decoupling of technology theory (Christensen: 2004) is extremely useful to modularize integrated systems solutions. Decoupled technologies and products enjoy the benefits of being highly customizable while delivering good-enough performance that meets most expectations at a lower price and at a higher value point.
The theory suggests that integrated products with surplus performance (as with luxury cars such as Rolls Royce, Bentley, Maybach etc.) as a result of continuous sustainable innovation, can only beat competitors in the market with a business model that delivers additional premium services with increased speed, responsiveness and convenience for higher-demanding customers who are willing to pay a premium price. The uniqueness of digital platforms is that it benefits not only from being a decoupled modularized technological solution (which is highly customizable, simple to use, low cost), but in addition the digital technology supporting the business model also enables premium service delivery capabilities such as speed (real-time), responsiveness (as-a-service) and convenience (from anywhere and anytime) (Christensen: 2004) (Morvan).
Digital platforms end up being a disruptive innovation that delivers a premium service as well, which explains (when done right) why large corporate incumbents cannot fight this blitzkrieg business growth as a result of network effects.
Figure 2: Development Timeline of Innovation Management Theory
3 Outcomes for Innovation Management
Digital platforms almost always start out with the innovation of a core interaction, and as with many other startups it will go through various phases of growth (Churchill and Lewis: 1983) (Greiner: 1972) to the point where a portfolio of innovations need to be managed on a continues basis.
The unique benefits of digital platforms are that the inherent architecture and value proposition deliver outcomes that will even further enhance innovation management. This means that a digital platforms’ network effect is not the only factor that is responsible to increase market growth exponentially. Other outcomes from digital platforms also further enhance the continuous growth of a startup digital platform to become a global corporation in a very short time.
In a nutshell, digital platforms deliver the same outcomes (explained in the following paragraphs) that are usually associated with well managed innovation ecosystems.
3.1 Digital social collaboration
It is already a difficult task to enable collaboration within large corporations, taking it outside the corporation to suppliers and even other industries is even much more difficult. But, if digital platforms can be implemented in such a manner that it increases collaboration between larger corporations (most likely digital platform owner) and startup companies (platform suppliers), the Accenture Digital Collaboration Index (DCI) predicts that it can increase the GDP output of the G20 countries with US$ 1.5 trillion collectively. In addition to the economic growth, Accenture also predicts it can generate 10 million youth jobs over the next 4 years. (Berthon, et.al.).
Digital collaborative innovation is practiced extremely successful within the startup and SME manufacturing communities in Shenzhen, China, according to Prof Silvia Lindtner’s research at the University of Michigan (Horwitz). The digital collaboration platform enabled these companies to perform innovation and deliver new product to the market at a blistering speed and low cost, which is a key requirement for innovation (Ringel, et. al.: 2015).
3.2 Data marketplaces
Industry 4.0 integrates technologies such as machine learning, Internet of Things (IoT), big data, cloud computing, Artificial Intelligence (AI), robotics and analytics, etc. (Deichmann et. al.).
Digital innovation platforms can deliver application programming interfaces (APIs) for 3rd party companies to deliver value-added innovation services as suppliers for the platform, which include new technologies or new data sets. The data added to the digital platform will increase the perceived value the platform can deliver to its customers who use the data for their own purpose or downstream for other end-users, while willing to pay for it. With the creation of such a business model arrangement, a data marketplace is created.
3.3 Dominant business model design
When a digital platform reach a certain critical mass scale of supplier and consumer networks (almost a disruptive monopoly), the digital platform and more specifically the business model will become the de facto dominant standard in the industry, and thus the dominant business model design. Good examples are LinkedIn and Facebook for social media, Google for searching and Wikipedia for knowledge (Srinivasan, et. al.) (Utterback and Abernathy).
With digital platforms, the challenge is that the first dominant business model design in the market will ultimately become the functional brand for the job-to-be-done (Christensen: 2005).
3.4 Disruptive innovation
Digital platforms must be disruptive innovations, with new innovative business models it provides services and products at a much higher productivity or response rate, and at a lower cost (Christensen: 2014). If a digital platform cannot accomplish this, it will not be able to compete with large corporate incumbents in the existing market.
3.5 Growth and market capitalization
Most digital platform corporations experience very favorable financial flexibility, large cash reserves, high returns on invested capital (ROIC) and market capitalization (market cap) against traditional manufacturing OEMs to their competitive advantage (Beiker, et. al.).
There may be a couple of reasons why digital platforms drive growth and market capitalization. First, the business model of digital platforms enforces digital transformation as an absolute requirement, which enables access to products and services for many consumers who normally did not have access or the financial means. Secondly, because of network effects where supplier or consumer network growth accelerates as networks grow, either direct (same side) or indirect (opposite side) network effects. Third, digital platforms also eliminate the role of gatekeepers that manages the supply, logistics and distribution of goods throughout the value network in regular pipeline business (Parker, et. al.).
Data collected by Prof Parker shows that only within the past 5 years, digital platform corporations managed to take the top 5 position on global market capitalization as of Q3 of 2016 (Parker et. al.). Latest data was confirmed via Wikipedia to be as follows: Apple $612B, Alphabet $541B, Microsoft $448B, Amazon $401B and Facebook $368B.
It is quite a challenge to quantify exactly the true market capitalization effect of digital platforms overall in broad terms, since many existing traditional pipeline OEMs are also starting to adopt and integrate some form of digital platforms into their businesses.
4 Digital Platform Management Capabilities
The current hypothesis is that there are strong similarities in the management of digital platforms and highly functional corporate (pipeline business models) innovation ecosystems. The good news is that the same innovation management capabilities that have been developed within pipeline corporations can also be applied with digital platform ecosystems.
This is where the Capabilities-Driven Innovation Management framework can help digital platform ecosystems to make sure all the required innovation management capabilities are in place to successfully manage and grow digital platforms in a sustainable manner (Bouwer: 2015).
Figure 3: Capabilities-Driven Innovation Management framework (Bouwer: 2015)
The PDF document with the full list of reference can be found on my LinkedIn profile page.
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