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The Changing Nature of Innovation in the Digital Age

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September 17, 2021
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September 17, 2021
The Changing Nature of Innovation in the Digital Age

The nature of innovation changes along with mainstream technologies and their applications across industries. Innovation carries different meanings and impacts in the digital age, touching various aspects of organizational operations and development strategies.

The prevalence of digital technologies and blooming digital businesses have transformed the nature of innovation and technology’s new business models. The World Economic Forum (WEF) has recently published a report on global information technology, highlighting how the digital revolution has changed the nature of innovation.

There are three main areas where the nature of innovation has been due to the direct impact of the digital revolution: R&D, product and process innovation, business model innovation. In addition to that, digital technology has had an indirect impact on the market structure and competitive environment, changing the incentives of incumbents to innovate: increased market size, reduced barriers to entry and acquisition, and leverage of the knowledge of consumer preferences.

As WEF also outlines, “In addition to increasing competitive pressures from new forms of innovation, the central position of networks in this emerging industrial landscape is dramatically changing the rules of the game for companies across sectors: a key implication for businesses is that the ability to scale fast is starting to become a precondition for innovation success.”

Direct ways digital revolutions have changed the nature of innovation

Powerful R&D tools

R&D is one of the most critical units of any organization, and previously, only large corporations could afford to maintain costly research efforts. In 2016, powerful tools were developed to decrease the costs of previously unaffordable research activities for businesses across industries. They allow more accurate inference based on larger data and enable more extensive long-distance research collaboration, including crowdsourcing.

Moreover, modern tools enable near-costless types of innovation that require little or no R&D effort. WEF brings examples including the digitization of existing products and processes, distributed manufacturing, blockchain, and advertising-based free services, as well as the prospect of more uberized activities in multiple sectors, including transport, banking, entertainment, and education.

A multitude of data analytics tools enables cost-effective in-house processing of gathered from product usage consumer data. Companies offering these solutions enable business owners to see actionable insights on dashboards to pivot their products based on market need and ensure successful endurance. Companies can even collect data gathered from all aspects of their operations across regions and apply advanced statistical analysis to make better decisions, both for the business and for customer satisfaction, as WEF adds.

Product & process innovation

Digital technology makes possible new products and services, and re-engineering production systems give cost and quality advantages. In addition, technology companies have developed advanced software to allow international companies to centralize standard business operations to take advantage of economies of scale (human resources, accounting, payroll, support call centers, marketing, etc.).

Supply chain automation solutions allow companies to automatically track inventory levels, process reordering, and match supply and demand. Internal communication in large international companies is one of the most complex parts of the ecosystem that significantly affects operational efficiency. Modern enterprise communication software (Slack, Beekeeper, Ryver, etc.) increases team efficiency and boosts opportunities for collaboration.

Cloud computing technology is a whole another topic and probably one of the most significant opportunities presented to modern businesses. Not only do cloud-based services enable scalability, but they also significantly decrease costs and lower capital expenditure on IT hardware, infrastructure, software, and applications, all provided as a service. In addition, cloud-based services are reported to reduce capital investment, lower the total cost of ownership, and increase business agility and resilience to failures.

Business model innovation

Technology allowed businesses to entirely reimagine traditional business models, leveraging a potent mix of emerged digital tools, advanced machinery, and adjusted workforce, giving an advantage to price and quality of service over incumbents.

The modern innovation of business models is originated by the tech professionals’ community and is taken further by business professionals that have acknowledged new opportunities. As WEF suggests, the key for businesses is the new opportunities this brings for matching people to needs and leveraging the network for decentralized information gathering to create systems that are constantly re-optimizing themselves.

Moreover, advanced AI, machine learning, and efficiency of deployment of such technologies allow a place for more efficient directed/explicit learning systems in the form of crowdsourcing models for innovation, the new level of connectivity that characterizes the emerging industrial landscape is also creating self-learning systems increasingly. In other words, modern businesses are learning businesses; they adjust as they go and respond to the changing market conditions/hazards, customer needs, trends by leveraging digital technologies.

The Changing Nature of Innovation in the Digital Age

Data source: The Global Information Technology Report 2016

Indirect ways digital revolution has changed the nature of innovation

In an indirect way, digital technology is leading to more innovation by changing the incentives of incumbents to innovate. This is competition-driven innovation, where innovation itself does not necessarily involve new technologies.

Increasing market size

We have emphasized the concept of borderless innovation in the top five trends in the payments industry. Professionals from WEF have expressed a similar idea saying that technology acts to integrate markets by reducing communication costs and increasing matching efficiency. That, in turn, increases competitive pressure in national markets that comes from international players.

Before the digital revolution, international expansion has been a complex, time and resource-consuming endeavor for businesses. Modern, digital businesses have shed the barriers to international markets, reducing friction to the necessity to register the company and obtain a license in the worst case. Online platforms, for example, through which firms can connect almost without cost to a global consumer base, are creating a tougher competitive environment in local markets by serving as a ‘digital tunnel’ for companies to cross oceans and reach new audiences.

Reducing barriers to entry

Increased market size is a benefit of the digital age due to reduced barriers to entry into new markets. Since technological advancements allow companies to operate globally even while being physically located in one country, it increases competition for local companies that did not achieve that stage of technological improvement.

In addition, technological innovation is quickly adaptable. APIs offered by financial technology companies allow businesses to jump to another level of efficiency and experience relatively easily. Innovation spreads quickly due to its technological nature, making it easier and faster for businesses to build products, adjust them and jump over national fences.

New online services, such as globally accessible cloud computing and online marketing platforms are saving startups and SMEs a significant share of the fixed costs of running a business. This facilitates entry and scaling and thereby contributes to a leveling of the playing field vis-à-vis large incumbents.

Acquiring and leveraging the knowledge of consumer preferences

Since technology enables hyper-targeting and accurate profiling of customer base based on lifestyle hallmarks, data analytics solutions allow companies to target products, so they more closely align with consumer preferences based on the more accurate information. Products, hence, can be more customized and service offering personalized to meet personal demands.

As a result, other market participants are forced to innovate to respond to upgraded competition, which benefits the end-user. Personalized services engage customers and build their loyalty, increasing trust and customer retention.

Data-driven personalization ensures relevance and communicates the sense of customer-centric organization looking out for customers’ best interests. Professionals believe that customers will tend to stick with a provider willing to provide exactly what they want or need. Such an approach can only add value to the products and services delivered by allowing customers to feel comfortable with the package.

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