Setting the Bar for Digital Innovation

Most are well aware of the churn in the S&P 500 over time. And many are aware that expected churn in the S&P 500 today occurs at a higher velocity compared to several decades ago. The pace of disruption is accelerating, and it picked up significantly during the pandemic.

The notion of disruption has become more accepted in the market. Disruptive threats include “unknown unknowns,” or so-called black swans, as well as “known unknowns,” or so-called gray rhinos charging from a distant horizon. Pandemic risk is an example of the latter. We knew the threat of a highly transmittable airborne virus was there, but we didn’t know when it might hit, much less how severe it would be.

These are the types of risks that are often classified in corporate risk assessments as “high-impact, low-likelihood” events typical of so-called tail risks. They may not receive the same emphasis as other risks — particularly the “known knowns” that command attention day-to-day — but they nonetheless are often the source of the most damage when they ultimately manifest themselves. And the unprepared end up being hurt the most. That is why resilience in the face of the unknown is the name of the game. The big lesson from the pandemic: Organizations that were more digitally mature and advanced proved to be the most resilient.

Digital leadership is a state of mind. It’s not just about implementing robots, deploying artificial intelligence to modernize infrastructure and maximizing use of the cloud. Digital transformation is more about changing the way the organization thinks and acts in everything that it does where technology matters, innovation is needed and disruption is required. Focusing on the latest shiny objects does not enable necessary change.

Companies should think about digital as an opportunity and enabler to innovate processes, products and services; enhance the customer experience; and secure competitive advantage, rather than react to what competitors are doing. Digital skeptics are reactive and risk-averse. Digital beginners embrace change by piloting and trying new things but often implement a collection of point solutions rather than a well-thought-out strategy.

Both digital skeptics and beginners need to view technology as an opportunity to out-innovate competitors and grow market share. Digital followers move in this direction by engaging in more coherent digital initiatives with a clearer vision and direction and are reasonably effective in delivering change. Digitally advanced players achieve higher levels of automation that translate to a lower cost base and a hyper-scalable business model, making them more agile and less people-dependent. Finally, digital leaders (e.g., Amazon and Airbnb) are highly innovative and industry-disruptive.

A Journey, Not a Destination

This “journey” presents a continuum — starting with skeptics and beginners, progressing to followers and more advanced experts and ultimately, for some companies, to industry leaders. It offers executives and directors a context for evaluating where their respective organizations stand, with the point being that digital transformation prepares organizations to be more resilient, prepared and decisive when disruptions arise. And it is primarily because they are innovative.

With this context, following are some lessons drawing from experiences during the pandemic and their relevance going forward:

Companies accelerated their innovation cycle during the pandemic. This is a recurring theme out of necessity we see for many companies due to the impact of the virus on public health policies, consumer behavior and business performance, not to mention the economic distress it has wrought on the marketplace. The pandemic was a wake-up call to adapt or die, forcing companies to either creatively solve the challenges imposed by lockdowns in a mere fraction of the time required prior to the onset of the virus or come to a complete cessation of operations. The resulting innovations reinvented business models and fostered contactless, virtual environments. Some examples:

• A healthcare system shifted 80 percent of its visits to a telehealth model as the pandemic limited mobility. Industrywide, prior to the pandemic, 43 percent of health centers were capable of providing telemedicine. But that changed fast. During the pandemic, 95 percent of health centers used telehealth options. Bottom line, health centers adapted quickly through expanded telehealth visits and have continued their use.
• A homebuilder of multi-unit buildings accelerated the implementation of digital locks for apartment units to facilitate contactless security measures.
• An event support company highly dependent on brick-and-mortar occasions pivoted rapidly to support virtual events with a digital platform that had been under development for four years.
• A flooring company implemented visualization software that enabled customers to see samples very clearly on their computers and envision how their selections would appear in their homes, striving for contactless customer service and delivery. The company’s management believes that the fast-track innovation process they deployed during the pandemic could be a blueprint for future advancements.
• The workplace was also affected, particularly in those industries in which a physical presence in interacting with people, machines and processes is not required at a specific location or in a specified environment. Before the pandemic, the largest disruptions to work and the workplace involved new technologies and outsourcing and offshoring. But the pandemic has elevated the importance of the physical dimensions of work, specifically in terms of where workplaces are located. It has thereby has accelerated a reimagining of the workplace.

These and other examples have demonstrated that companies can make quick decisions, get things done out of necessity and engage their people to adapt. The question is, will reinvention continue going forward?

Focusing on people and data will enable digital innovation going forward. Many businesses are people businesses; thus, technology innovations should be driven by people. Companies should assign a diverse, multi-disciplinary team to focus on digital innovation and formulate a coherent strategy and the most cost-effective means to implement it given the nature of the business and considering the appropriate questions. What do our customers need? What are our competitors doing? Do we buy it? Do we build it? When?

Engaging younger generations and blending digital experience and expertise with institutional knowledge can support digital thinking and help drive decisive action when innovations are needed. It also helps to use data to inform decision-making. Regardless of where the business stands on the digital maturity continuum, there is opportunity to leverage data and information for insights on how to better reach and serve the company’s customers and improve operational efficiency.

An innovative culture is vital to continued success. Culture is a key differentiator in successful organizations that are prepared for the unexpected, decisive at the critical moment and able to pivot. It follows that culture is a key enabler to successful digital transformations. The organization’s culture must be adaptive and agile in rapidly changing markets. A trust-based culture fosters speed, which is a concept made possible through high-velocity, high-quality, data-informed decision-making as well as by willingness to take reasonable risks and deploy world-class talent to highest and best use.

Speed connotes the ability to pivot and be agile in reacting to market developments, particularly changes in customer preferences. Instinctively, most observers know that the winners in the marketplace will be able to do this and the losers will not. When enterprises are disruptive, embrace speed and are enabled by an adaptive culture, transformation and innovation drive them to become industry leaders and separate them from laggards.

A company doesn’t need to be a digital leader to succeed. From a risk/reward standpoint, many companies may prefer to watch others take risks, assess what works in the market and adopt best practices as they evolve, but in an agile manner. Agile followers can succeed when they focus on the market and constantly assess new ways to reach customers and enhance the customer experience with a keen eye on leading competitors. However, the counterpoint is that digital leaders may end up pulling further ahead. The quest is all about strengthening competitive position in rapidly changing markets, and that may require companies to become disruptive themselves as they advance their processes, products and services to enhance the customer experience.

Smart companies are well-prepared for the next disruptive scenario. The pandemic continues to play out with COVID-19 variants. But disruption can also come from unexpected developments of varying velocity. Companies with an innovative culture and a commitment to innovation will likely be the most prepared. That said, it’s not always easy to invest. In some cases, disruptive innovation can take a long time to generate returns, hampering profitability. For example, Millennial and Generation Z preferences are expected to drive dramatic market shifts. This shift in preferences is coming, but the lag time between initial digital innovation investments and ultimate profitability could be significant, creating a dilemma for boards and their management teams to consider.

Look for supply chains to reduce risk. One of the lessons from the pandemic is its effect on global supply chains, forcing businesses to build resilience into procurement processes. Such restructuring focuses more on speed in a digital world and could ultimately entail shifting the attention of traditional procurement processes to reducing lifecycle costs, managing operational risk factors and achieving enduring business partnerships (versus a vendor mindset) as part of a high-performance procurement ecosystem. A strategic mindset not only helps resolve current supply chain issues but also mitigate potential future challenges.

Digital innovation will play an important role in sustaining relevance over the next decade. When they look to the next decade, business leaders are concerned about the future of work, the rapid speed of disruptive innovation, talent development, substitute products and services, fleeting customer loyalty and competing with “born digital” competitors. In industries not dependent on the physical concentration of people, digital leaders have stood out in pivoting and quickly reacting to the pandemic’s new normal by engaging customers, innovating new products and services, obtaining better market intelligence for decision-making and maximizing operational efficiencies.

Digitally mature companies will most likely continue to maintain their edge going forward into the evolving “next normal” as they innovate. A trust-based culture, effective utilization of data analytics and the ability to pivot in the face of disruptive change will prove vital to sustaining the organization’s relevance over the next decade.

In summary, during the pandemic, many companies implemented new ideas in days and weeks, not months and years. They took risks out of necessity. In doing so, they discovered for themselves the power of digital transformation and an innovative culture. With respect to digital disruption, executives and directors need to be cognizant that the biggest risk comes from not acting, being slow and overly methodical, failing to focus on being agile and engaging in broad and lengthy debates that frustrate the imperative of being an early mover in rapidly changing markets.

Questions for Executive Management and Boards

Following are some suggested questions that senior executives and boards of directors may consider, based on the risks inherent in the entity’s operations:

• Do we have access to the expertise and experience needed to provide oversight over how to approach digital transformation and innovation? Is our organization thinking and acting digitally and nurturing an innovation culture that facilitates attracting and retaining the talent needed to effect change?
• Are we assessing our organization’s digital readiness and identifying the strengths and limitations across the business in the context of a clearly articulated digital vision, mission and strategy? If not, should we discuss the need to conduct such an assessment to identify and address strategic priorities?
• How do we compare the resiliency of our company during the COVID-19 pandemic versus its peer competitors? What lessons can be learned from this assessment?
• Are there barriers to innovation and digital transformation that exist within our organization that require our attention from a change management standpoint? Are steps being taken to eliminate these barriers and track progress over time?