How To Build A Successful Innovation Function

Digital and innovation are getting lots of attention from public servants for good reason. Public servants work within structures and institutions that were designed years or decades or even longer ago, and which have often not evolved as the world around them has changed.

While the potential for transformation is large – there are many areas in which public services haven’t been able to deliver optimal outcomes – some of the reasons the potential exists are quite subtle.

One example is the economics of the digital era are different from the economics of the industrial era. Cost-effective delivery of services to large numbers of users in the industrial era was based on economies of scale. The economics of the digital era make mass personalisation possible – the Amazon bookstore that I see is not the same as the Amazon bookstore that you see – social media is based on communities taking a single construct and turning it into something meaningful for themselves (my Facebook community is different from the Facebook communities created by the NSW Police).

The opportunity is for public servants to create new public services that deliver better outcomes either to existing users or beneficiaries, or users who previously couldn’t or didn’t access the services.

A starting point to address this to create a digital innovation capability, and below is a checklist of the ingredients of such a capability.

1. Define the goal. Why are you innovating, what is the service or policy outcome you want to improve. An approach which starts from ‘we want to be innovative’ or ‘we need to become a more innovation culture’ is too vague. Better goals offer a clearer picture of the future. Some say the starting point is culture (‘culture eats strategy for breakfast’). Actually, the starting point is purpose. JF Kennedy didn’t declare he wanted to develop a space exploration oriented culture, he declared he wanted to send an American safely to the Moon before the end of the 1960s. A purpose provides the necessary focus for efforts, and enables measurement of whether progress is being made (and learning and iterating).

2. Define the remit. How radical is innovation allowed to be. The choices are: (a) sustaining innovation to make the existing services more convenient, faster, or cheaper focussing on process, or how the services are delivered or by who; (b) breakthrough innovation to deliver better outcomes that are potentially radically cheaper through redesigning the services themselves; or (c) transformational innovation, which involves redesigning services plus the supporting business model.

2. Senior level sponsorship and leadership. Innovation requires the support to do things differently, which may not be welcomed by all stakeholders, and ‘air cover’ to allow a process of discovery-testing-iterating (experimentation) where things will not always work or may happen more slowly (require more cycles) than expected.

3. Money or a mandate. There needs to be a reason (and permission) why people would want to work with you. One reason is there is an ‘authorising environment’ that allows the work to happen. The other is there is money – seed funding – for public servants to come forward with problems they want to see solved.

4. Process and metrics. Innovation doesn’t happen because of good intentions. And innovation isn’t just about producing ideas. Innovation happens only when an idea (actually a hypothesis) has been through a process of testing, iterating, scaling, can be used by the target audience, and the outcomes can be measured and compared against the previous service. This requires a process and metrics.

5. Capability.  There will be many people in your organisation who can become skilled at digital innovation. However as that suggests, digital innovation is a skill requiring experience and expertise. A good approach to capability building is a ‘master-apprentice’ model where you hire people with digital innovation expertise and experience who can work collaboratively with subject matter experts and others. That process not only enables innovation, but trains the next group of innovators. This also enables digital innovation efforts to scale across your organisation, rather than rely on a single team whose expertise will necessarily need to be rationed.

Now go forth and innovate. And remember you have a responsibility to those that come after. We are all at the early stages of this exciting journey. Share your learnings.

Four Stages Of Digital Maturity

For most existing organisations, a key question is how to approach the digital opportunity and where to start. There are four stages in the progression from industrial to digital.

The first stage is Digital Denial. The organisation either ignores digital or is waiting to see how it will play out for their industry. Some have not yet identified the opportunity, or believe their customers are not yet ready. Organisations at this stage will have a website but little else.

The second stage is Digital Tactics. Here organisations realise they need to be digital but have not yet worked out the strategic opportunity. Thus this group will be active tactically with some or all of an online store, digital marketing, social media, perhaps online chat to support customer service but few of these efforts are integrated or have common goals. Metrics of success are often absent or are not very meaningful to business outcomes. 

The third stage is Emerging Digital Strategy. The key difference between the second and third stage is mindset. Emerging Digital Strategists understand there is no recipe book for driving value from digital so have initiated  efforts to experiment, measure, and iterate. As they work out the opportunity, these ‘digi-dustrial’ companies drive real change by reinventing customer experience, changing distribution strategy, and/or reinventing manufacturing and supply chain.

The fourth stage is Digital Leader. These companies regard digital as a core competency and a cornerstone of their business strategy. Right now, Digital Leaders are mostly natively digital organisations like Facebook, Google, and LinkedIn.

But there are a growing number of ex-industrial companies at this stage. Apple is an example, transforming from selling PCs to earning most of their revenue from iTunes, App Store, and internet devices (smartphones and tablets). Zara grew from a large traditional retailer to a global giant by using digital technology to invent ‘fast fashion’ (turning trends from the street and catwalk into clothes a week or two later which are only stocked for a short time).

Business Strategy vs Digital Strategy

Business strategy considers three core questions – where to play, how to win, and what is our business model. While digital strategy does not change the questions, it can generate quite different answers.

This is becoming apparent in the next wave of digital innovation, which is going beyond channel strategy (how organisations interface with customers) to reinvent the enterprise.

The emerging wave of innovation is based on reinventing:

1. what job you are doing 

2. who are the customers that require that job to be done

3. how is it delivered, and

4. what is the business model

As organisations progress past the first stages of their digital journey, they typically discover the traditional value chain is hindering further progress. This is not a problem with the value chain itself, but the fact that most companies have hard-coded the industrial value chain into functional divisions. 

These divisions – sales, marketing, product, operations, channels, customer service – report to different senior managers making digital innovation, which cuts across functional boundaries, more difficult. 

An alternative operating model starts from looking at how strategy cascades into capabilities (the grey boxes), and then re-examining the company’s operating model.

the digital enterprise 2


p.s. learn more about the ‘jobs to be done’ approach in this terrific interview with Karen Dillon, co-author with Clayton Christensen:

Five New Digital Business Models

The digital, online, internet, social, mobile revolution is steadily changing what we buy, how we buy, and what role we play as consumers. In the topsy-turvy world of digital business models, consumers become suppliers, products are given away for free, and big money is made from niche products.

Underlying the change is a rethinking of each step of the industrial value chain. Often this means rethinking what a company can do for its customers. I doubt many car companies thought seriously about solving the loss of productive time while commuting; now Google is developing driverless cars. Hoteliers setting up new hotels would not have considered your spare room as an option, yet AirBnB turns willing individuals into accommodation providers.

Five examples of new digital business models are: pay-as-you-use, platforms, crowdsourcing, freemium, and long-tail.

1. Turn products into services

This model makes products and services previously only available to buy or lease, accessible on a pay-as-you-use basis. It is also sometimes called fractional ownership

NetJets in the US offers private planes by the hour. GoCar in Australia offers cars by the hour, which are already parked in your neighbourhood and without the paperwork of rental companies. Pandora and Spotify make it unnecessary to own a library of music. Cloud computing enables companies to pay for computing power only when they use it.

Pay-as-you-use is attractive to companies who can turn fixed costs into variable costs, and to consumers who couldn’t previously afford the products or services. The stock market also loves pay-as-you-use as it turns one-off product sales into ongoing revenue streams.

Interestingly this model is also revealing, even for those who can afford it, there may be inconveniences to ownership many are keen to avoid, e.g. for those who live in the inner city, owning a car may be more headache than asset, if you don’t often need it and parking is scarce.

2. Platforms

Platforms, sometimes called multi-sided platforms, match groups of customers with different but complementary needs. The original platform is a very old business – newspapers – which sold news to subscribers as well as selling subscribers ‘eyeballs’ to advertisers.

Many digital platforms follow the newspaper model and sell eyeballs to advertisers – Google, Facebook, Twitter, etc. But new versions are emerging. LinkedIn provides a professional networking tool for individuals, as well as charging recruiters to connect with potential candidates.

Another group of platforms sell economies of scale and scope. These platforms offer small businesses some of the advantages of larger businesses that have more employees, deeper pockets, and global presence. WordPress and BigCommerce make it very easy to set up websites and online stores. Fulfillment by Amazon sells global distribution capability. Salesforce includes a marketplace, visible to all customers, for third-party applications that integrate with the Salesforce software.

3. Crowdsourcing, Open Business Models, and Prosumers

The very simple version of the industrial value chain is that companies buy materials from suppliers, turn them into products or services, and sell them to customers. In the digital world, the roles of suppliers, manufacturers and customers can be combined and intertwined, and customers can participate in businesses in ways previously unheard of.

These new models are variously called crowdsourcing or open business models, and those who participate are sometimes called pro-sumers (as they combine being producer and consumer). The key feature is that value is not just something created by a company and sold to customers, but is created and shared by participants.

Open source software and Wikipedia were early examples, using volunteers to build products. Content-sharing sites like YouTube, Tumblr and Instagram enable anyone with a camera to become a broadcaster, and earn revenue from ads if you garner enough viewers. Peer-to-peer lending companies like Kickstarter turn anyone with a dollar into a banker, and AirBnB enables anyone with a spare room to become a paid accommodation provider.

The massive appeal of crowdsourcing is humans are naturally social and participative. And for companies, active customers not only create value for other customers but also are likely to be more satisfied and loyal.

Crowdsourcing is now relevant to most companies. Most at least monitor product review sites and social media for feedback and ideas, while others actively seek new ideas for innovations directly from customers. Technology companies rely heavily on user forums to provide trouble-shooting assistance.

4. Freemium

In a freemium model, the basic version of a product is free and you pay only if you want extra features or support. The insight is that non-paying customers create value by enabling virality and scale. Of course the product has to be useful and attractive to a large audience but if it is, free means fast uptake, fast brand awareness via lots of word-of-mouth, and a much larger customer base. A large base of free customers also provides a ready audience for upselling.

Most well-known freemium businesses like Evernote and Dropbox were startups. But some are testing whether existing businesses can successfully move to a freemium model. Online newspapers are experimenting using paywalls – ’10 free articles per month and subscribe to get more’. The most successful so far appear to be NY Times and The Economist. The Economist reports an impressive 89% of their online subscribers never had a print subscription or were lapsed print subscribers.

5. Long-tail

Long-tail models are great news for those with niche tastes – which is pretty much all of us in relation to something.

The traditional retail rule-of-thumb is companies make 80% of profit from around 20% of products. Long-tail is the opposite. Long-tail companies – such as Amazon and Netflix – make a significant amount of revenue from a ‘long-tail’ of products that sell only a few each. The economics is that a lot of customers buying a lot of different books or movies equals big profits, provided storage costs are low.

Retailers can exploit this. Research by MIT shows customers who go to a website without a specific product in mind are more likely to buy less popular items provided it is easy to search and find them, and particularly if there are recommendations (‘other customers also bought’ or ‘you might also like’).