The 4 areas digital innovation must cover

Most companies are spending more and more on digital innovation, but few are aware of exactly what sort of impact that funding is having.

To help companies be sure their investments are yielding the best possible returns, Nils O. Fonstad, TPP ’96, PhD ’03, a research scientist with the MIT Center for Information Systems Research, has developed a framework for designing the right competitive innovation portfolio. 

Based on his analysis of both in-depth qualitative data from over 30 firms and survey data from 201 firms, Fonstad found that the most successful ones practiced digital innovation to some degree in four areas — each developed simultaneously: 

• Employee experience, to enhance team productivity — especially with regards to testing and learning
• Business operations, to improve operational efficiency and flexibility
• Customer-facing products and experiences, to defend and increase revenue per product or service and revenue per new or existing customer
• New business models, to generate new revenue from new types of customers

How top performing companies allocate their total investment in digital innovation across each category, on average, depends on business outcome, Fonstad found, whether that’s growing revenue, increasing innovation within the firm, aiming for higher customer satisfaction, or increasing efficiency. 

However, “no matter which of these competitive portfolios you want to prioritize, they all consist of all four types of digital innovation,” Fonstad said.

But most companies haven’t paid enough attention to coordinating their innovation efforts across those categories. Going “pure play” — focusing too much on one of the four areas and neglecting others — is the most common trap a company can find itself mired in, Fonstad said.

And the most successful companies, he said, were the ones that were able to recognize and harness the synergistic relationships between each type.

“Top performers on customer experience, they invest a quarter on employee experience because they need to make sure their employees have access to the tools necessary to deliver that great customer experience,” he said. “Similarly, for new business models, companies rely on investment in new business models to inform and prioritize their investments in business operations.”

Fonstad said being able to effectively track and assess investments in innovation is key to any successful digital innovation portfolio.

“If you can’t stop projects, you’ll end up doing too many and focusing on the ones that are less valuable. And you’ll wonder why the impact of your investments is less than you thought it would be,” Fonstad said.

How Deutsche Telekom did it When German telecommunications giant Deutsche Telekom found itself facing intense competition from “over-the-top” competitors like Netflix, YouTube, and Salesforce, which draw revenue from providing services built on top of the network the company offers, the company realized it was losing out on a potential revenue source of its own.

But two years later, when the company went to assess what it had to show for it, it found no one was able to account for anything. “They did not coordinate their investments. They went to the other extreme,” Fonstad said.

New leadership entered the picture in 2014, he said, and pared down the 64 areas the company was trying to push innovation in to just five — four focusing on projects of immediate strategic importance, and one longer-term project.

Of the first four, two focused on developing new products for consumers and business customers, while the other two focused on improving the company’s processes and networks. The fifth area was selected for its potential to influence each of the other four further down the road. 

The company also set up a funding mechanism for projects inspired by venture capital processes: projects were funded in phases and progressed to the next phase only if it proved its worth in the prior phase. Otherwise, it was stopped before more resources were wasted. The company also fostered a more cross-functional, collaborative work environment, which allowed beneficial partnerships to form throughout the company.

Initially, the changes introduced by Deutsche Telekom led to better results on individual projects and assured leaders of their ability to track their investments and realize greater synergies across them. 

“Ultimately,” argues Fonstad, “they make a company adaptable.”