New digital technologies have upended conventional business models, organizational structures, and operating processes in most industries. Almost every aspect of business — customer relations, supply chain management, after-sales service — has been radically altered.
Nowhere is that more evident than in brick-and-mortar companies’ innovation processes. Facing tough competition from digital upstarts that are creating and capturing value in new ways, incumbents are trying to figure out how to keep up.
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While the need for innovation in the digital age may be an open-and-shut case, CEOs of these companies aren’t sure whether their innovation processes should be open, shut, or both. Many businesses that used to depend only on internal innovation have begun to tap external innovation to quickly acquire the digital capabilities they need to navigate the constant stream of new technologies. However, forging partnerships and investing in startups doesn’t always confer a competitive advantage; often, we find, it only helps incumbents catch up with rivals. The need to acquire capabilities quickly is important, but companies must also continue to invest in developing key capabilities internally, even if that takes more time.
Most companies, our research suggests, should rethink their innovation systems and develop portfolios with a balance of innovation sources. They must treat external innovation as a way of broadening their portfolios, not as a substitute for internal innovation. Only then will they be able to execute the transformations that will allow them to win the digital future.
Reaching Out to New Partners
It’s beginning to dawn on many businesses, be they consumer-facing or industrial, that digital transformation isn’t just about investing more in IT, digitizing operations, and creating websites, mobile apps, and online channels to connect with customers and suppliers. All that improves efficiency, but it doesn’t alter the business model. A digital transformation is a deeper change.