Digital is Creating New Market Leaders - Invest or be Left Behind

The message is loud and clear. “Your enterprise’s business model is already under attack from digital disrupters,” says Geoffrey Moore. “Its time to bite the bullet.”

Investment in Digital Disruption is critical. Executives are declaring a goal to make their business to Digital by 2020. But how will they get there and will it be fast enough?  Every aspect of the worlds largest and long standing industries is being disrupted – all at the same time.  Retail, Automotive, and Banking are just a few that come to top of mind for major shifts.

Venture capital investment in the US alone in 2015 doubled that of 2011; with a total investment of $58.8 billion. The technologies being created are there to challenge the incumbents across every major industry from financial services to retail and consumer products.  (PWC Money Tree Q4 2015)  Poshmark and TheRealReal in Retail or Faraday Future and Local Motors in Automotive, or Wealthfront and Zenefits in Banking – disruption is here. 

In parallel, mergers and acquisitions dominated the Internet of Things (IoT) landscape in 2015 and there is no sign of slowing down. Software industry players and traditional businesses are investing in technology, and data, to ensure their place in the future.

IBM has acquired The Weather Channel as data input to a vast number of analytics algorithms. Cisco acquired Jasper, the hub for device and access management for all of the major telecommunications companies.

Under Armor is quickly becoming a technology company. A series of acquisitions, their newly built connected fitness HQ, and connected apparel is putting them on a path to disrupt themselves and their competitors. GM jumped into the fray with an investment in Lyft and the acquisition of assets from SideCar to ensure their place in the world of autonomous vehicles. 

The quiet – but not sleeping – giant Tyco has joined the ranks of the Digital disruption leaders. The industry leader in security and fire monitoring last year they acquired Footfall, a retail solution to track in-store traffic.  Recently they acquired ShopperTrak, the analytics company that also monitors the movements of shoppers. Combining in-store movement with the security (think RFID tag) data, can provide an opportunity to create new customer experiences. The latest announcement of the Tyco and Johnson Control merger takes their market position from being part of the smart building ecosystem to owning it.  While Apple, Google, and Amazon fight each other for their place in the retail and smart buildings market, Tyco is an incumbent that is making sure they are part of the future.

What type of investment is needed? Marketing, M&A, and Venture investments are a great start - but alone will not create the new market leaders. Building the foundation is a must. There are two foundational components of transformation; people and technology. Without investment in these two areas, the success of acquisitions, or investment in Omni-channel reach, Industrial Internet of Things (IIoT), or the next sharing economy, will be unlikely. 

People

The core of your success will be your people. Not just the culture you create, but their skills. The world is changing and along with it the skills required. Retail sales associates will need to interact with in-store technology, use data generated from historical purchases, and social media data to create personalized experiences. Plant floor managers will need to make meaning from equipment, weather, and other generated data for decision making and quick action. They will be required to marrying the physical plant floor with the ability to redesign and reinvent old processes and systems in real time.  

Utilities, Manufacturing and Agriculture - industries where specialized skills have been required and infrastructure is costly - are most likely to have tenures reaching an average of 20+ years or more. The median tenure at these companies is 9 years. Recently, AT&T provided insight to their own transformation. The average tenure is 12 years; and 22 years if you exclude call centers. In 2014, corporate training grew 15%, the highest rate in seven years.  Investment in training is growing, but is it driving the skills needed for the platform economy? Innovation platforms where third parties build on top of the business or transaction platforms where everything is sold as a service – both change not only IT skills required, but business models and the related sales, marketing, service, and operations skills. 

Technology and business wait for no one. It is important to invest in retooling your employees to meet the changing market needs.  Randall Stephenson, Chief Executive at AT&T, talked about their transformation to Cloud – and the retooling they are investing in for their employees.   The company is both requiring employees invest in their own personal growth with time and dollars, and in parallel, AT&T is investing in their education. Udacity and AT&T partnered to create curriculum that would allow their employees to prepare themselves for AT&T’s future, as well as the future of the broader economy. The company is very clear that some will move forward and others wont – but for the company to survive, new skills are a must.  

Core Technology

Many executives are investing in things you can see and feel.  This investment is reflected in a recent Gartner report that notes the Chief Marketing Officers budgets increased by 10% year over year in 2015; including dedicated Innovation budgets.  

Matt Turck, in his latest post the Big Data Landscape, notes products and services that receive widespread interest beyond the technology teams inside a large company tend to be those things that people can touch and see or relate to such as mobile apps, social networks, wearables, etc. Investment goes to things you can see and touch. Things like big data and analytics are plumbing – no one sees it – yet these technologies power the consumer and business user experiences these companies are seeking to transform. Yet, overall IT spend was down in 2015 according to Gartner.  

Digital transformation and Internet of Things initiatives rely on the the underlying tools, technology and data. A single view of the customer is a major effort in any organization. Data cleanup from years of acquisitions both at large corporations, and at their customers, is a costly effort.  Without it, the customer experience journey, or the automation of your supply chain becomes challenging at best. APIs across all data sources and services, internal and external, that will ultimately feed your analytics engine requires prioritization.  Planning the architecture of a target state and the migration to that architecture requires investment in time, people, and resources across the business. Finally, the investment in the infrastructure, cloud computing and big data, and the selection of the analytics platforms such as machine learning, log or social analytics and visualization tools.  If you want to build the next global automotive company, you need a way to collect and create value from the data of your autonomous cars and the sharing economy they support! These investments cannot be overlooked as they sit at the core of successful implementations of new customer and business experiences.  

Conclusion

Steven Denning pointed out a few years ago in Forbes that fifty years ago, the life expectancy of a firm in the Fortune 500 was around 75 years. Today, it’s less than 15 years and declining all the time.  Playing offense, and adding value for the customer will drive longevity.

New market leaders are created by strategy and execution. Digital Transformation is a long game.  Investment in people and skills, and the underlying enabling technologies are the foundation for creating customer value- and a long lasting company.

The 3 Pillars for Successful Innovation Inside an Enterprise

Over the next 5-10 years companies will transform themselves as part of the Digital Revolution. Innovation will be at the heart of companies, old and not so old, as they compete with the dizzying and relentless speed of technology advances across all industries. A large number of companies already have Chief Innovation Officers, Innovation Labs or Emerging Technology teams. Those that have not yet established an innovation organization are creating one to help lead the shift to Digital Transformation and the Internet of Things (IoT).

The motivation for creating an innovation organization is to keep pace with the changing landscape. To be successful, an innovation organization must create value that can be measured (e.g. as better customer engagement, increased revenue, improved operational efficiency), and do this in quickly enough to ensure ongoing support by the company.

There are three pillars that will ensure the success of an innovation organization inside a corporation. 

1. People and culture. It seems cliche, but it requires careful curation of internal and external resources.
2. Focus and execution. Identifying new customer experiences, products or business models requires as much energy and focus as the core business.
3. The funding model. It is the most critical component for success and yet is what holds most innovation organizations back. 

Below are additional thoughts on each of these pillars and an approach to creating a successful innovation organization.

People and Culture

The goal of any innovation organization is to identify new opportunities for transforming customer experience, business models, and business processes.

Identifying the right people internally and externally is the first hurdle. You want to find people from within the company who like change, and yet know the company processes. Their role is to help figure out what processes can be worked around, changed, or just need to be followed. Internal team members need to be confident of executive support for identifying and executingneeded changes.

Team members hired from outside the company should have backgrounds that complement the internal team member skills. It is invaluable if you can find individuals who have worked in both a startup environment and large companies.  Look for individuals who understand the potential roadblocks and challenges, but know how to get things done quickly. 

Beyond passion and technology skills, the ability to collaborate is critical, and its importance cannot be underestimated. An innovation organization does not have a lot of time to earn credibility, so does not have the luxury of learning to collaborate before executing.  An innovation organizations’ credibility comes from people and culture as much as execution.   

Focus and Execution

An innovation organization must show it can have a near term impact on the business. According to Merriam-Webster dictionary, innovation is “the act or process of introducing new ideas, devices, or methods”—fast time to market and immediate value. It is not research, which connotes lengthy study and evaluation. Focus and execution are the next pillar to a successful innovation organization.  A new idea or technology is not a success for an innovation organization in a corporation.

For example, drones, while interesting technology, could be an area for research but are not an outcome from an innovation organization.   On the other hand, implementing a same-day delivery service, would be a valuable business outcome. It is important to identify and focus on innovations that address tangible, outcome based, business opportunities. Exploring new technologies can be fun and interesting, but unless the investment is addressing a critical business problem, gaining support from the business will be challenging. Focus is required. Create selection criteriabased on targeted outcomes---nothing complicated but something to prioritize the projects.

Success will be measuredby the percentage of projects turned into products.  This means execution; product management is crucial for success. The innovation organization may not own implementation, so there will be a handoff of any prototype from the innovation organization to the product owners/ development teams who take the product to market.  Documentation of architecture, requirements, assumptions, revenue or business model, and the draft of an overall business case all help execution. Borrow best practices from the startup ecosystem: successful startups still have a business plans and capture requirements.  The traditional Product Requirement Document (PRD) is overkill, however, the User Story model from Agile Development are a simple way to capture requirements. Documentation is important to create the alignment with the business, and to prevent rework at handoff to the product owners and delivery teams. 

Funding

Delivering on the promise of innovation projects is the “Crossing the Chasm” moment.  Getting value from an innovation organization requires a combination of business readiness and investment.

Funding the implementation is the Achilles Heel of innovation inside an enterprise; it is more challenging than entrepreneurs looking for a round of venture funding. It is important to have in-year budget available to begin execution on the successful projects; the productization.  The traditional capital planning process allocates the budget to specific projects at the beginning of the year and does not take into account “innovation activity.”  The innovation team can create a successful prototype, but if the product owners do not have current funding for implementation, the work of the innovation organization will die after handoff. This decreases the innovation organizations credibility with the business owners, and diminishes the usefulness of the organization.

Successful ways to address funding the productization of innovation projects range from dedicated centralized innovation budgets, to department- level engineering tax and co-development funding with industry partners. Communicating to the business how and when successful innovation projects will be funded through production will determine the organization’s overall success.

Conclusion

Innovation is not just about new products (or business models), it is about changing behavior.  Behavior changes start at the top.  Innovation organizations in an enterprise requires executive support. The executive leaderships role will be to reduce the overhead that comes with a large, shareholder-based business. The support ranges from helping to drive changes needed to internal processes such as funding models, to the need for legal support and expedited decision making.   Innovation organizations require the same foundational elements of your core business: people, execution, and funding.  Without multi-year support and commitment from executive leadership, the Digital Revolution will pass you by.

CC: David True - thank you for the conversation and the assistance in capturing the essence of this interesting topic.