Digital Innovation - components to produce novel products. Therefore...

Digital Innovation

GEO3-2276

Yoo et al. (2010) Digital innovation can be defined as the carrying out of new combinations of digital and physical components to produce novel products. Therefore, the focus of digital innovations is more on product innovation, instead of process innovation. Digitization makes physical products programmable, communicable, traceable, etc.

Digital technology has three key characteristics:

•Reprogrammability •A digital device has a processing unit that executes digitally encoded instructions and a storage unit that holds both instructions and manipulated data. This data can be manipulated again by new instructions, therefore, it is reprogrammable.•Homogenization of data •Due to the use of bits, any type of data can be stored, transmitted, processed, etc. by any digital device.•Self-referential nature •Digital innovation requires the use of digital technology, leading the positive externalities that further accelerate the creation and availability of digital devices, networks, services, etc., these are network effects. These effects result from lower entry barriers, learning costs, and accelerating diffusion rates.These three characteristics enable a layered architecture. These

layers have two critical separations:

•Between device and service because of reprogrammability •Between network and contents because of homogenization of data

A layered architecture consists of four layers, as seen on the right:

•Devices •Physical machinery, such as computer hardware •Logical capability layer, such as its operating system •This sublayer connects the physical machine to the other layers •Networks •Physical transport, such as cables, routers, etc.•Logical transmission layer, such as network standards •Services •Application functionalities that serve users as they manipulate, create, store data •Contents •Data such as texts, videos, etc.For physical product design, two architectures have dominated. First, integral architecture, in which functional elements and physical components overlap and are complex, resulting in trade- offs. Secondly, a modular architecture is based on predefined standards for separate components, resulting in a reduction of complexity and an increase flexibility regarding design.Shifts in product architecture cause shifts in organizational design. For an integral architecture, a vertically integrated hierarchy is dominant. Also, economies of scale are key value creators, while product positioning is often used for a competitive strategy. For a modular architecture, vertical disintegration is more common, resulting in a network of firms. Value creation comes from agility to recombine components without sacrificing costs.The digitation of physical products introduces a new type of product architecture, a layered modular architecture. This means that the boundaries of the product become fluid as the product can be used in several ways. For example, Google Maps can be used on a phone, laptop, car, etc. and it can be used as a search product, a navigator, etc. See image below for an overview./ 118Digital Innovation 2021 1 / 3

A layered architecture allows a digitized product be both a product and a platform. For example, you phone can be used a product by you, but as a platform by other organizations as they can create apps for the operating system of your phone. Therefore, firms can invest in digital product platforms that help with creating ecosystems. Such a digital product platform tends to encompass a range of layers that can function as a new product, but also enable other organizations to to innovate upon buying the platform resources, such as API’s, provided by the firm. As a result, firms can compete on one layer, while having a symbiotic relationship on another layer.With a layered architecture, firms seek to attract heterogenous actors to design and produce novel components on layers outside its digital platform. As a result, the generativity of a layered modular architecture comes from the firm’s ability to design a product platform that can attract many heterogenous actors. Generally, the more the heterogenerity, the more generative a platform becomes. This ability is limited by a firm’s economic, structural, cognitive and institutional constraints.Doubly distributed organizing logic means that value creation comes from heterogeneous actors, while control over product components is distributed across multiple actors as is the product knowledge.A product-agnostic component indicates that a product is not made for a single use case as it can be used in various manors.Digitization of product and the layered modular architecture lead to new strategies as it blurs the boundaries between industries, enables new possibilities for digital components in hardware, enables creation of platforms, etc.They also lead to new organizational structures as numerous organizational activities become more efficient, such as transactions, information management, etc. In addition, organizational control needs to be rethought due to conflicting design hierarchies.Ander (2006) The innovation ecosystem is the collaborative arrangements through which firms combine their individual offerings into a coherent, customer-facing solution. Firms that focus on innovating should take this ecosystem into account as their individual efforts could otherwise be useless. As a result, there are strategic implications, such as timing, resource allocation, and risk assessment.

Risk assessments very important and there are three types of risk:

•Initiative risks •Evaluating the feasibility of the product itself, likely benefit to customers, competition, supply chain, etc.•Interdependence risks •Innovation do not stand alone and often need other enabling technologies or infrastructure to succeed.•The more interdependency, the more risk (multiply probabilities of other actors’ success) / 218Digital Innovation 2021 2 / 3

•Integration risks •Which actors have to adopt before the consumers can adopt?•The more intermediaries, the more uncertainty (add timeframes of other actors’ adoption)

Integration risks can be managed in several ways:

•Synchronize adoption cycles •Train employees downstream •Subsidize early adopter •Shorten supply chain •Coordinate with government

To map the ecosystem in which a firm is involved, seven steps are needed:

1.Identify all intermediaries that need to adopt your innovation 2.Identify all complements (enabling technologies) required for your innovation to reach market 3.Estimate the delays caused by interdependence with complementors 4.Estimate the delays caused by adoption process and estimate time needed for intermediaries to integrate the innovation 5.Estimate the delays caused by intermediaries interdependent with own complementors and integration hurdles 6.Estimate time-to-market based on 1-5 7.Reassess initial expectations and strategy

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