Digital innovation strategy: A framework for diagnosing and improving digital product and service innovation

Digital

innovation

strategy:

A

framework

for

diagnosing

and

improving

digital

product

and

service

innovation

Daniel

Nyle

´n

*

,

Jonny

Holmstro

¨m

SwedishCenterforDigitalInnovation,DepartmentofInformatics,Umea˚University,S-90187Umea˚,Sweden

1.

The

perils

and

promises

of

the

digital

world

Digital technologyhas becomeincreasingly impor-tant asfirms seekto achievetheir business goals.

However, recent research (e.g., Grover & Kohli, 2012) hashighlighted difficulties in evaluating the valuegeneratedbydigitaltechnologyinvestments. In the 1990s, a first generation of ITapplications enabled firms to streamline their internal opera-tions while providingopportunities for process in-novation (Lee & Berente, 2012). More recently, digitaltechnologyexpandedbeyondinternal dimen-sions,penetratingfirms’productandservice offer-ings (Yoo, Boland, Lyytinen, & Majchrzak, 2012). Availableonlineatwww.sciencedirect.com

ScienceDirect

www.elsevier.com/locate/bushor KEYWORDS Digitalinnovation; Strategy; Valueproposition; Userexperience; Improvisation

Abstract Digitaltechnologyisincreasinglyimportantinachievingbusinessgoals, anditspervasiveeffectshaveresultedintheradicalrestructuringofentireindustries. Consequently, managers’ extensive interest in handling digital innovation is not surprising. Recent research hasillustrated how digital technologies give riseto a vast potential for product and service innovation that is difficult to control and predict.Therefore,firmsneeddynamictoolstosupportthemselvesinmanagingthe newtypesofdigitalinnovationprocessesthatemerge.Thenatureoftheseprocesses forcesfirmstochallengepriorassumptionsabouttheirproductandserviceportfolio, theirdigitalenvironment,andwaysoforganizinginnovationwork.Inthisarticle,we presentamanagerialframeworkthatsupportsfirmsinthisundertaking.The frame-work,gearedatsupportingongoingimprovementsindigitalinnovationmanagement, coversfivekeyareas:userexperience,valueproposition,digitalevolutionscanning, skills,andimprovisation.Wealsopresentadiagnostictoolthatcanbeutilizedasfirms begin the process of implementing theframework. Finally, we conclude with our thoughtsonthemanagerialimplicationsoftheframeworkwhengoingforwardina rapidlychangingdigitalinnovationlandscape.

#_{2014KelleySchoolofBusiness,IndianaUniversity.PublishedbyElsevierInc.Thisis}

anopenaccessarticleundertheCCBY-NC-NDlicense(http://creativecommons.org/ licenses/by-nc-nd/3.0/).

* Correspondingauthor

E-mailaddresses:daniel.nylen@informatik.umu.se

(D.Nyle´n),jonny.holmstrom@informatik.umu.se(J.Holmstro¨m) http://dx.doi.org/10.1016/j.bushor.2014.09.001

0007-6813/#2014KelleySchoolofBusiness,IndianaUniversity.PublishedbyElsevierInc.ThisisanopenaccessarticleundertheCC BY-NC-NDlicense(http://creativecommons.org/licenses/by-nc-nd/3.0/).

Givendigitaltechnology’scentralroleintheradical restructuringofanumberofindustries(e.g.,Evans, Hagiu,&Schmalensee,2006),managers’extensive interest in handling digital product and service innovationisnotsurprising.Addressingthisinterest, we present a framework that both motivates and keepstrack offirms’digitalinnovationefforts.

The unique properties of digital technology en-able new types of innovation processes that are particularlyrapidanddifficulttocontrolandpredict (Henfridsson,Mathiassen,&Svahn,2014;Yooetal., 2012; Yoo, Lyytinen, Boland, & Berente, 2010). Therefore, firms need dynamic tools to support them in managing their digital innovation efforts. Tothisend,ourframeworkidentifiesfivekeyareas tobemeasuredandevaluatedinseekingtomanage digital productandserviceinnovation:

First,digitalproductsandservicesmustnotonly be efficient to use and easy to learn, but also providearichuserexperience.Suchuser experi-encecan be measured on itslevels of usability, aesthetics,and engagement.

Second,firmsneedtoclearlyarticulatethevalue propositionof each digital product and service: How do they create value for the users? The qualityof suchvaluepropositionsis assessedon thedynamicsofcustomersegmentation,product andservicebundling,andcommissionstochannel owners.

Third,digitalevolutionscanninginvolves gather-ingintelligenceonnewdevices;digitalchannels suchaswebservices,mobile operatingsystems, and social media; and app stores–—as well as standardsandAPIs–—inorder toidentifyand ex-ploitopportunitiesforinnovationacrossemerging usecontextsand newuserbehaviors.

Fourth,asdigitalinnovationrequiresnew skills, firmsneedtoevaluatetheirmechanismsfor sup-portingcontinuouslearningoftheunique proper-ties of digital technologies in order to set up dynamicinnovationteams.

Fifth–—andfinally–—asdigitalinnovationprocesses areoften ignited when organizational members extemporizewithdigitaltechnologyina learning-by-doing fashion, assessing the available space andtimefor improvisation andthe mechanisms forcoordinatingsuchefforts iskey.

The process of implementing the framework pre-sented inthisarticleinvolvesmakinginformed de-cisionsthatcut acrossthreedimensions:thefirm’s

products,itsdigitalenvironment,and organization-alproperties.Byobtainingcompositemeasuresfor each area, the framework enables firms to effec-tively manage their digital product and service portfolioovertime.Whileimplementingthe frame-workenablesfirmstoharnessanexpandedscopeof digitalinnovationbenefits, itshouldbe notedthat such an effort requires planning and preparation. Sufficient time must be allocatedfor the process, andsinceitinvolveschangethroughoutthe organi-zation,unintendedconsequencesarelikelytooccur along the way. To support the first step of the implementation process, we present a diagnostic tool that allows organizational members to score their current operations. This enables the firm to get started in evaluating andmeasuring its digital innovation efforts. The outcome of implementing theframeworkisareadiness fordigitalinnovation wherebyfirmscontinuouslyadjust theiroperations inordertoharnessthebenefitsofdigitalinnovation. Inpresentingtheframework,thisarticleis struc-turedasfollows:InSection2,weexplainthewaysin whichinnovationiscastinanewlightduetodigital technology,highlightingthekeychallengesinvolved whenmanagingdigitalproduct andservice innova-tion.Theseinsightsarecapturedbyourframework, which is presented in Section 3. Presenting the framework, we describe the elements to be mea-suredandhowtheycanbeutilizedtomotivateand keeptrackofthefirm’sdigitalinnovationefforts.In Section4,wepresentadiagnostictoolthatcanbe utilizedasfirmsbegintheprocessofimplementing theframework.Finally,inSection5,weconcludeby presentingourthoughtsonthemanagerial implica-tions of the framework when going forward in a rapidlychanging digitalinnovationlandscape.

2.

Digital

innovation:

What’s

new?

Asinformationis increasinglydigitizedand mobile devicesaccelerateinpervasivenessandprocessing power,anarena andarchitecture for innovationis openedup–—oneinwhichphysicalanddigital com-ponents are combined (Yoo et al., 2012). Recent research(Henfridssonetal.,2014;Yooetal.,2012) hashighlightedhowtheuniquepropertiesofdigital technologyenablenewtypesofinnovation process-es thataredistinctively different from theanalog innovation processes of the Industrial Era. In the following sections, weexplore the topicof digital innovationinmoredetail.Indoingso,wediscussthe challenges in managing digital innovation (2.1.), exploretheuniquepropertiesof digitalinnovation processes (2.2.), and contextualize the phenome-non of digital innovation, providing a number of illustrativeexamples (2.3.).

2.1.

Can

digital

innovation

be

managed?

Digital technology generates highly complex inno-vation challenges. We have seen how firms that failedtoaddressthemappropriatelysufferedmajor consequences(e.g.,Lucas&Goh,2009).Therefore, the questionarises:How candigital innovationbe managed?Or, rather,can itbemanagedatall?

A rich body of management research (e.g., Evansetal.,2006;Robey&Holmstro¨m,2001; Tush-man & Anderson, 1986) has investigated the rela-tionship between technological innovation and radical change. To this end,new technologies can profoundly challenge existing markets. However, thecompetenciesofestablishedfirmsactuallystand inthewayofinnovating(Christensen,1997). Schol-arshaveelaboratedonmacro-levelstrategicmodels thatcanenablefirmstoovercomethisdilemma.For example, it is argued that firms can learn how to dealwithradicalandincrementalinnovation simul-taneouslybybuilding ambidextrousstructures and accumulatingdynamiccapabilities(O’Reilly& Tush-man,2008).

While these established strategic models for technological innovation management are useful, recentstudies(e.g.,Benner&Tripsas,2012)utilize newdigitaltechnologies,suchasdigitalcameras,as objects of research. Still, the distinct and unique characteristics of digital technology tend to fade intothebackground.Tothisend,extantresearchon digital technology and organizations suffers from twolimitations:

1. It tends to not fully open up the black box of technology (Orlikowski & Iacono, 2001). When workingtowardmanagingdigitalinnovation,this isanimportantfirststeptotake;firmsthatseekto innovatetheirproductandserviceofferingswith digitaltechnologyneedmanagerswell-versedin thespecificnatureofdigitaltechnology.

2. Research on technological innovation tends to adoptamacro-levelperspectiveonitsobjectof study, often resulting in high-level descriptions of strategic recommendations. To address this gap, we turn attention to the key areas to be addressed when managing digital innovation processesastheyunfold inpractice.

2.2.

Digital

innovation

processes

Whiledigitalinnovationisameansfornewentrants toleveragedigitaltechnologyinordertochallenge incumbent firms–—ultimately causing radical industry-level transformation–—it also provides op-portunities for incumbent firms to enhance and

expand their product and service portfolios into newdomains.However,akeychallengeforanyfirm seekingtomanagedigitalinnovationentails under-standingtheuniquepropertiesofdigitalinnovation processes(Yooetal.,2010).

Whenengagingindigitalinnovation,both incum-bentsandnewentrantsfacechallengesand oppor-tunitiesthatshowcaseanexceptionalcomplexity. Onekeyaspectofthiscomplexityistherapidpace ofdigital innovationprocesses (Yoo etal., 2010). Ultimately thisrapidpace is enabled bythe mal-leability of digital technologies: the ease with whichtheycanbereconfigured(Tiwana,Konsynski, &Bush,2010;Yooetal.,2010).Therapidpaceof digital innovation processes is particularly chal-lenging as firms engage in the design of ‘hybrid’ or‘smart’ products,viawhichdigitalcomponents areembeddedintraditionalproducts.Anexample can be found in the ways in which a major car manufacturer faced complex challenges when embedding GPS systems while separate analog anddigitalinnovationprocessesunfolded simulta-neouslyataradically differentpace (Henfridsson etal.,2014).

One of the reasons why digital innovation pro-cessesareparticularlydifficulttocontrol and pre-dictisthegenerativityofdigitaltechnology(Avital &Te’eni,2009;Yooetal.,2012)–—thatis,‘‘a tech-nology’s overall capacity to produce unprompted change,drivenbylarge,varied,anduncoordinated audiences’’ (Zittrain, 2006, p. 1977). When users leveragedigitaltechnologiesascomponentsor plat-formstocreate newproductsandservicesbeyond theoriginaldesignintent(Yooetal.,2010),itcan result in cascades of innovation, whereby each innovationprovidesaplatformforthenextcascade. Finally, digital technologies constantly evolve towardhigherprocessing capacityand lower cost. Asdigital technologybecomesincreasingly ubiqui-tous and affordable, hindrances are removed for engaging in digital innovation, thus enabling new constellationsof actors togenerate, develop,and fundnoveldigitalproductsandservices(Yooetal., 2010).

Whenexploringhowfirms canaddressthe com-plexitiesassociatedwith digitalinnovation,we ar-gue that the characteristics of digital technology need to be put in the foreground (Orlikowski & Iacono, 2001). These unique properties of digital innovation processes call for firms to challenge established views and assumptions about the role andconfigurationoftheirproductandservice port-folio,theirrelationshipstothedigitalenvironment, andhoworganizationalpropertiesareconfiguredto supportinnovationwork.Toshedsomelightonthe issues involved, we illustrate in the next section

howdigitalinnovationismanifestedinanumberof contexts.

2.3.

Digital

innovation

in

context

Looking back, the first online shopping websites were oftenpoortranslationsof printedmailorder catalogues.E-commercehassinceevolved, expand-ingthefrontiersofdigitalserviceinnovation.Now, online retailers such as Amazon and Zappos offer more than convenience and cheaper products; by offeringrecommender systemsaswell asproducts at the far end of the long tail,they provide truly novel retailgoods consumption.Online digital ser-viceinnovationinvestmentshave alsoenabled tra-ditional firms such as cab companies and grocery store chains to gain strategic competitive advan-tage.

Anewfamilyofproductsiscurrentlyemergingas digital components are embedded in traditional products such as toothbrushes and heat pumps. Frequently referred to as ‘smart products,’ the embeddeddigitalcomponentsenablefirmsto com-plement physical goods with online and mobile servicesthatutilizethedatagenerated(Bharadwaj, El Sawy, Pavlou,& Venkatraman, 2013).While the promises of smart products and ‘the Internet of things’ is hotly contested,it is predominantly dis-cussedinthecontextofhomeappliances.However, smartproductsarealsoemerginginthecontextof industrialmanufacturingequipment.Here, embed-deddigitalcapabilitiesenablereal-timemonitoring andserviceforecastinginsteadofscheduled servic-ing(Westergren& Holmstro¨m,2012).

Theeffectsofdigitalinnovationareparticularly pervasiveforfirmsthatengageininformation-based productsthatcanbefullydigitized.Whilethe main-stream mediaindustry iscurrently in the midstof sucharestructuringprocess,itseemsthatthemusic industry has somewhat stabilized aftera transfor-mationthatwasignitedattheturnofthe millenni-um:recordlabelshadoptimizedtheiroperationsfor selling one product–—music records/CDs. To this end, pressing sound onto vinyl albums (later CDs) andthendistributingcopieswasanefficientmeans of delivering music artists’ recorded work to the publicfromthe1940sonward.Inthelate1990s,the emergence of peer-to-peer networks such as Nap-sterand Kazaaconfrontedthemusicindustrywith unexpectedchallenges(Liebowitz,2006).Whenthe audience wanted to listen to new music in novel ways, theindustry’s somewhatclosed approachto innovation wasexposed.Althoughcustomers were moving in another direction, many major record labels continued to consider their core business the productionand saleof musicCDs. Historically,

labelscontrolledtheirownvaluechainfromendto end:fromsigninganewartiststodistributinghisor her music to record stores. Unwillingness to chal-lengethisdefinition,alongwithcertaininsensitivity towardcustomers’interestin MP3files,hampered digitalinnovation.

Whilethemusicindustryeffectivelyillustratesan information-based sector that failed to manage digital innovation,other, morefirm-specific exam-plesincludethebankruptcyofbookretailerBorders in2011andKodak’sfailuretore-orientitsbusiness asdigitalcamerasemerged(Lucas&Goh,2009).We have,however,alsoseenhowdigitalinnovationcan enableestablishedfirmstomoveintonewdomains. Aclassiccaseof suchdigital portfolioexpansionis IBM’sshiftin focusfrom hardwaretosoftwareand services as PC diffusion accelerated in the early 1990s. In a mainstream media industry context, Nyle´n, Holmstro¨m,and Lyytinen (2014)conducted a case study illustrating how Scandinavia’slargest incumbentpublishingfirmrevitalizeditscore busi-nessbydesigningdigitaltablet-basedversionsofits magazineswhilesomewhatserendipitously becom-ing an innovator in digital publishing platforms. Anotherexampleofsuchdigitalportfolioexpansion is Apple effectively becoming a music distributor withiTunes. Alongwithnew entrantSpotify,Apple contributedtoenergizingthebusinessecosystemin the music industry through digital service innova-tion.AlthoughtheInternetonceseemedhopelessas an arena for paid content, Netflix rebutted such notions while invigorating the film and television industries. Tothis end, Netflixtook digital service innovation a step further by not only distributing digitalcontent,butalsoproducingit.Goingbackto the music industry, additional links in the value chain were eventually reconfigured due to digital innovation;for example,softwaresuch as Garage-bandenablescheaperandhighlymobilemusic pro-duction, while free-of-charge alternatives such as SoundcloudillustratethatiTunesandSpotifyarenot theonlygateways.

Asfirmsengageindigitalinnovation,theyfacea number of uncertainties. For example, questions arise about what factors govern the adoption of digitalproductsandservices.Inadditiontodefining theboundariesbetweendifferentproductsand ser-vices,firmsneedtoconsiderhoweachproductand service can generate revenue in different ways through balancing free and premium components. Firmsarealsochallengedtoconstantlykeep up-to-date with how new digital technologies relate to theirbusinessandtoidentifynewopportunitiesfor innovation. In organizing their digital innovation efforts,firmsneedtocultivateandsourcenewskills both internally and externally while coordinating

improvisationaleffortsinmultipledigitalinnovation projects. While these issues are critical, research has yet to come up with concrete answers. To addressthis,wenowturntopresentingthe compo-nentsof ourframework.

3.

A

managerial

framework

for

digital

innovation

strategy

In seeking to manage digital product and service innovation,uncertaintyoccursacrossthree dimen-sions: the firm’sproducts, itsdigital environment, andorganizationalproperties(seeTable1). There-fore,firmsneedaholisticviewofdigitalinnovation when navigating the rapidly changingdigital inno-vationlandscape.Theframeworkpresentedinthis articleenablesfirmstogainsuchaholisticviewof digital innovation, helping them to motivate and keeptrackoftheirdigitalinnovationefforts.Inthe

following sections we explore the five key areas includedinthe framework:userexperience(3.1.), value proposition (3.2.), digital evolution scanning (3.3.),skills(3.4.),andimprovisation(3.5.).Tomake the framework applicable, we detail and explain threekeyelements.

3.1.

User

experience

Sincethe late1990s, consumer goods andservices such as home appliances and air travel have been increasingly purchased via e-commerce websites, whichcompeteonmorethanjustprice.Here, web-site navigation has to be smooth while based on filteringfunctionalitiesthatallowuserstoseamlessly navigatemassiveproductdatabasesandarriveatthe desiredproductinafewclicks.Measuringefficient browsingandusabilityis,however,notenough;the customers’experienceofinteractingwiththese web-sites is key. While the user experience designis a

Table1. Theframework

Dimension Area Scope Element

Product

Userexperience

Digitalproductsandservicesmustofferhighlevelsof usability,possesscarefullydesignedaesthetic properties,andevokeengagement.

Usability Aesthetics Engagement

Valueproposition

Digitalinnovationinvolvesanarticulatedvalue proposition;i.e.,acustomersegmentationincluding strategicpricingandpositioningoftheproduct portfolio,dynamicbundlingofproductunits,and carefullynegotiatedcommissionstochannelowners.

Segmentation Bundling Commissions

Environment Digitalevolutionscanning

Inordertoidentifyopportunitiesforinnovation,firms needtoscantheirdigitalenvironment.Thisinvolves gatheringinformationonnewdigitaldevices, channels,andassociateduserbehaviors.

Devices* Channels** Behaviors

Organization Skills

Inordertoreapthebenefitsofdigitalinnovation, firmsneedtoacquirenewskillsbothinternallyand externallywhileestablishingnewdigitalroles.In doingso,firmsshouldpromotecontinuouslearningof theuniquepropertiesofdigitaltechnologiesinorder tosecuredynamicinnovationteams.

Learning Roles

Teams

Improvisation

Themalleabilityandlowcostofdigitaltechnologies affordsahigherdegreeofimprovisation.Asa consequence,managersneedtoensurethatthey provideorganizationalmemberswithan

improvisationalspacewherestructureandflexibility isbalancedinsuchawaythattheconstraints maximizecreativity,dedicatedtimeisgiven,and improvisationaleffortsarecoordinatedtodealwith overlapsandwaste.

Space Time

Coordination

* _{Hardwaresuchasmemory,processors,chips,PCs,smartphones,tablets,etc.} ** _{Webservicesandplatformssuchassocialmediaandappstores}

centraldifferentiatorandcompetitiveforce, Forres-ter recently reported that 97% of websites had a substandarduserexperiencedesign(Brokaw,2012). Indigitalinnovation,measuringtheuser experi-enceinvolvesnotonlyusabilityissues,butalsothe aesthetic properties of digital products and ser-vices.Usersareaffectedbybeautyandappearance; therefore,theseaspectsneedtobecarefully lever-aged and aimed at evoking a positive emotional response from the user (Hassenzahl & Tractinsky, 2006;Tractinsky,Cokhavi,Kirschenbaum,&Sharfi, 2006). It can be argued that the consistent aes-thetics of Apple’s hardware and software under thereignofheaddesignerJonathanIvecontributed to raisingthe userexperiencehighabove compet-itorssuchasPCmanufacturersandMicrosoft, there-bycontributingtoApple’s marketdominance.

Finally,inourframework,theuserexperienceis measuredonthewaysthefirm’sdigitalproductsand servicesevokeengagement.Whenseekingawayto createdigitalproductsandservicesthatare engag-ing, firmsneedtoexploreandtapintovaluesthat can makethe experienceof their digital products andservicesmeaningfultousers(Diller,Shedroff,& Rhea,2005).Creatinganintegrateduserexperience that evokes engagement is particularly important when moving beyond websites and desktop appli-cations. To this end, the smartphone application Foursquare is a successful example of the role of engagement in the user experience design. While supportinglocation-basedcheck-ins,Foursquare re-wards the userwith both virtual badgesand titles while showing theuser how she is currentlydoing compared to friends. Through gamification at the intersection of virtual and non-virtual life, Four-square rewards the user with promotional offers at shops and restaurants in the user’s geographic area,thusevokingengagement.

User experience is the first key area that firms needtomeasureinordertomotivateandkeeptrack of their digital innovation efforts. This is done throughobtainingacompositemeasureofthelevels of usability, aesthetics, and engagement in firms’ digital productsandservices.

3.2.

Value

proposition

In the Industrial Era, dominant designs provideda structure that enabled benchmarking and unified pricing.Inthedigitalage,however,firmsincreasingly innovateonmalleableintangiblesthatcanberapidly reconfigured.Therefore,whiledigitalproduct cate-goriesarefragileandnegotiable(Nyle´netal.,2014), the ongoing reconfiguration of the firm’s business modelhasbeen highlightedascriticalin acontext ofdigitalinnovation(e.g.,Lucas&Goh,2009).Inthis

context,thebusinessmodeldefinesthe ‘‘architec-tureoftherevenue’’whileaddressingtheprocesses ofvaluecreationinvolvingthevaluenetworkaround the firm, includingsuppliers, customers, and third parties(Chesbrough&Rosenbloom,2002,p.530).

Indeed,digitalinnovationhascontributedto de-molishingseveralestablishedIndustrialErabusiness models.Tothisend,digitalinnovationisassociated with a new logic and configuration of revenue streams.Inguidingfirmsinthisnewlogic,however, weneed todrilldownthroughthemacro-level de-scriptions,pastarchitecturalissues,andconsiderthe veryconcretewaysinwhichcoherentvalue propo-sitionsareinscribedindigitalproductsandservices. Inourframework,thevaluepropositionofdigital productsandservicesisevaluatedthroughassessing three elements, beginningwith customer segmen-tation.Thisinvolvesanalyzingthecustomerbasein order to make strategic decisions about how to reachdifferentgroupsofcustomerswiththe prod-uctsandservicesin thefirm’sdigitalportfolio.For example,whilemostwebsiteswerehistoricallyfree to consume, some firms have recently started to experimentwith‘paywalls.’Suchdecisionsare typ-icallybasedontheassumptionthatthereisagroup of customersthataremotivatedenoughtostart a paidsubscriptionifitgivesthemaccessto addition-al content. Smartphone and tablet apps, on the otherhand,areoftenbasedona‘freemium’model viawhichuserscanoptoutofadsbypayingafee. Customer segmentation enables firms to start re-flectingonthepricingandpositioningoftheirdigital productsandservices.

Having segmented the customer base, firms need to decide how the products and services in their digital portfolio can be differentiated and bundled.Thisincludesthespecificconfigurationof thebalancingofpremiumandfreeandtheroleof advertising in each of the firm’s digital products and services, as well as defining boundaries be-tweenthem whiledefiningunits ineachofthem. Tothisend,iTuneschallengedthemusicindustry’s established bundling model by pricing tracks in-stead of albums. Therefore, when engaging in digital innovation, firms need to consider how productsand services can bebundled in newand innovative ways.

Incontrasttotraditionalproductlicensing mod-els, firmsengagingin digital innovationarefaced withcommissionsofchannelowners.Forexample, the Apple Store and GooglePlay both takea 30% commissiononsales,whilee-commercestorefront services vary in their commissions. Therefore, firms need to consider how the commission of channelownerscanbenegotiated.Value proposi-tion, dealing with how value is created and

captured in each digital product and service, is thus the second key area to assess forfirms that seek to achieve successful digital innovation management.

3.3.

Digital

evolution

scanning

The nature of digital technology implies that it evolvesina‘recombinant’or‘combinatorial’ man-ner. This refers to the ways in which hardware circuitsandlinesofcodeareconfiguredtointeract in new ways. In other words, digital technology seems to evolve out of itself, starting with a few simple hardware and software components, com-bined in several rounds over time into more and more sophisticated and integrated ones, forming systems ofincreasingcomplexity(Arthur,2009).

During the last decade we have seenhow this evolutionary process is constantly speeding up. Thisisnotonlymanifestedinever-shorterrelease cyclesofdigitaldevices,butalsointheexplosion of social media and communication services and applications. This calls for revisiting established notions of strategic environmental technology scanning(e.g.,vanWyk,1997).Indeed,firmsneed tomonitorthesedevelopmentsin ordertoensure compatibilitybyimplementingtimelyupgradesof their digital productsand services. However,this scanning moves beyond compatibility concerns whenfirmsseektoharnessthefullscopeofdigital innovation.

Digital evolution scanning involves identifying newopportunitiesforinnovation.Asdigital innova-tionemergesin theseactsofrecombination,firms need to continuously consider how they can be active participants. That is,how can theyexploit these opportunities and generate an aggregated valuethroughcreatingdigitalproductsandservices thatutilizeexistingcomponents?

In doingso, firms needtokeep up-to-datewith andanalyzetheprogress ofdigital technologyand associated usage patterns. This is done through gatheringintelligence on whichnew hardware de-vicesareontheirwaytomarket,including compo-nents such asmemory, processors, and chips, and devices such as PCs, smartphones, and tablets. While the former can enable embedding digital capabilities into traditional analog products, the increasedprocessingcapabilitiesof mobiledevices is continuously allowing resource-demanding ser-vices andcontent such asfilms,video games, and advanced editing to be done on the same device. Firmsneedtoexpectthisevolutiontocontinueand assess howitrelatestotheirbusiness.

Furthermore,digitaltechnologyhasenableda re-invention of sales and distribution channels. Firms

can nowposition and integrate their productsand serviceswithanabundanceofmobileoperating sys-tems,socialmediasites,andappstores.Facebookis currentlyakeyactorformanyfirmsthatutilizethe platform to a varying degree, ranging from small businessesthatpushinformationouttotheir custom-ers, to large players like Skype and Spotify that instead utilize Facebook to pull new customers in throughformalizedFacebookpartnerships material-ized in integrated user accounts. Finally, digital evolutionscanninginvolvesobserving newuser be-haviors.Tothisend,newmarketscanemergeasusers sometimesunexpectedlyadoptadigitaltechnology intoanewusecontext.

Asnoted, the ways in which devices,channels, andbehaviors co-evolveis highly complex. Rather than try to reduce this complexity, firms should instead seek to harness it (Axelrod & Cohen, 2000).This isdone through digital evolution scan-ning, whereby firms can identify and exploit the structuralholes(Burt,1992)inwhichopportunities for combinatorialdigital innovation reside.Digital evolution scanning is thus the third key area that firmsneedtoaddressinordertovalidatethatthey havethemechanismsinplaceforidentifying oppor-tunitiesfor innovationthatemergein theirdigital environment.

3.4.

Skills

The rapid pace of digital innovation processes suggests that current forms oforganizing innova-tion work need to be transformed. As noted by Christensen(1997), the corecompetencies of in-cumbent firms can actually stand in the way of innovatingwhenenteringnewmarkets.Thisisalso achallengeindigitalinnovation,butasproduction ofqualityproductsand contentremainskey, digi-tal innovation requires newskills without making all existing skills obsolete. Three main elements should be measured when evaluating the firm’s digitalinnovation skills.

First,IndustrialErafirmsshouldseektoleverage andtranslateskillsobtainedfromdevelopinganalog products. Measuring this key area involves taking stockofthewaysinwhichlearningissupportedand promoted throughout the organization. Digital in-novationinvolvescontinuouslearningwherebynew digitaltechnologiesareexploredinordertocreate an understanding of their unique properties. This can involve establishing conditions for retraining and incentives for existing staff toacquire digital skills. To this end, it is critical to acknowledge organizational members’spontaneous digital inno-vation initiatives throughout the firm. Therefore, firms should be alert and identify organizational

Table2. Diagnostictool

Donot agree

Partially agree

Agree Score Diagnosis (lowscores) Userexperience

Usability

Ourdigitalproducts& servicesareeasyto learn&interactwith.

1 2 3 0

Theuserexperience oftheproductsand servicesincludedin thefirm’scurrent productportfolioneeds toberedesigned. Aesthetics

Theyhavearticulated aestheticproperties thatevokeapositive emotionalresponse.

1 2 3 0

Engagement

Theyarecreatedto offerourcustomers meaningfulexperiences.

1 2 3 0

Compositemeasure: 0 Valueproposition

Segmentation

Wehaveanalyzedour customerbaseand divideditintomultiple segments.

1 2 3 0

Thefirm’sdigitalprofits canbeboostedthrough reconfiguringthe valueproposition inscribedinthefirm’s productsandservices. Bundling

Thecomponentsofour digitalproductand serviceportfolioare differentiatedandthe boundariesandrelationships betweenthemareclearly specified.

1 2 3 0

Commissions

Wecontinuouslyevaluate andnegotiateour relationshipswith channelowners.

1 2 3 0

Compositemeasure: 0 Digitalevolutionscanning

Devices

Wecarefullyfollowwhich newhardwarecomponents &devicesareunder development.

1 2 3 0

Thefirmneedstodevelop digitalevolutionscanning mechanisms.

Channels

Wetracktheevolution ofdigitaldistribution channels(e.g.,software platforms,operating systems,&webservices).

1 2 3 0

Behaviors

Wepayattentionto emerginguserbehaviors acrosscontextsandmarkets.

1 2 3 0

Compositemeasure: 0 Skills

Learning

Wepromotecontinuous learningoftheunique propertiesofdigital technologies.

1 2 3 0

Thefirmneedstoacquire newskillsinternallyand externallywhilepromoting continuouslearning. Roles

Thebalancebetween overalldigitalskills &specializeddigital rolesisadequate.

members that are drifting from their established rolestowardimprovisingwithdigital technologies. Suchtalentisimportanttopickupinordertosecure the appropriate skillsets for future projects, ulti-mately achieving sustainable digital innovation management.

While new roles can emerge from within the organization, firms may necessarily recruit exter-nallyfor specializeddigital rolesthatcomplement existing roles. In combining such roles, it is a key challengeformanagerstoassessthecurrentstatus oforganizationalmembers’skills,ensuringthatthey can be fruitfully assembled in dynamic innovation teamswiththeright combinationofskillsforeach project.Therefore,firmsneedtocarefullyconsider thebalancebetweencarryingoutdigitalinnovation projectsin-houseandengagingspecializedexternal consultants.

While managersmay prioritizeinvolvingleading consultants toachieve supreme digital service de-signs in individual projects, developing in-house skillsensurestheagilityneededtohandletherapid paceofdigitalinnovationprocesses.Inlargefirms, thiscouldinvolvesourcingandcombiningresources and skills from multiple countries and divisions withinthefirm.Guidedbythecomposite measure onthisfourthkeyarea,managerscanorganizetheir digital innovation teams to address the rapid un-foldingofdigital innovationprocesses.

3.5.

Improvisation

In the Industrial Era, product development was a slow and costly procedure. Trained organizational membersin formal engineeringand designer roles exclusivelyhandledthisactivity.Incontrast,digital

technologiesareubiquitousincontemporaryfirms. Wearguethatbypromotingimprovisation through-outtheorganizationratherthantryingtoimposea centralcontrol on all digitalinnovation processes, contemporaryfirmscanharnesscomplexitythrough combinatorialinnovation.

Research on organizational improvisation (e.g., Weick,1998)hasexplorednotionsofstructureand arrangementsinjazzmusic,viawhichimprovisation involves composing and performing at the same time. In this context, improvisation is defined as ‘‘the conception of action as it unfolds’’ (Cunha, Cunha,&Kamoche,1999,p.302).Althoughitoften emergesasaconsequenceofformalplansnot play-ingout, managerscan intentionallyemploy impro-visationasadeliberatestrategy(Pavlou&ElSawy, 2010).

Inthedigitalrealm,improvisationisoftenanact ofreconfiguration.Tothis end,the malleabilityof digitaltechnologiesaffords ahigherdegree of im-provisation thantheir analogcounterparts. Impro-visation involvesrisk taking, andin the contextof digitalinnovation,thelowcostofdigitaltechnology alsomeansalowercostoffailure.Therefore, man-agers need to ensure that they provide organiza-tional members with an improvisational space in whichstructure and flexibilityis balanced in such awaythattheconstraintsmaximizecreativitywhile evokinggenerativity(Avital& Te’eni, 2009;Yooet al.,2012).

Allocatingtimeforimprovisationiskey;wehave recentlyseenhowGoogleallocates20%of employ-ees’workinghourstoindividuallyinitiatedprojects and‘skunkworks.’Indigital innovation, improvisa-tionaleffortstypicallyoccuracrossdifferentunits, levels, and divisions of the firm. Therefore, it is Table2(Continued)

Donot agree

Partially agree

Agree Score Diagnosis (lowscores) Teams

Wecanassembleteams withtherightcombination ofskillsforeachdigitalproject.

1 2 3 0

Compositemeasure: 0 Improvisation

Space

Wetrytoorganizework inawaythatstructure andflexibilityarebalanced.

1 2 3 0

Thefirmneedstoadjust itsroutinesandstructures tosupportimprovisation. Time

Wededicatetimefor improvisationalefforts ineachprofession. 1 2 3 0 Coordination Wehavemechanisms inplacetocoordinate improvisationalefforts. 1 2 3 0 Compositemeasure: 0

critical for firms to establishmechanisms for cap-turing the successful outcomes of such efforts. Meanwhile, in order to deal with overlaps and waste, coordinationisakeymeasure.

Digital innovationrequiresanorganizational cul-turethatallowsforimprovisation–—and,thereby,also failures–—throughout thefirm.Improvisationisthus thefinalkeyareatobeassessedbyfirmsthatseekto achievesustainabledigitalinnovationmanagement.

4.

Implementing

the

framework

Wedevelopedadiagnostictoolthatsupportsfirms in takingthefirststepofimplementingthe frame-work (see Table 2). Based on the framework, the tool consists of 15 Likert-style questions. Here, organizational members are asked to score the firm’s currentoperations byassigning avalueona scale of 1—3forthree questions ineach keyarea. For each area,participants areasked tocalculate and filloutthecompositescore.

Aftertheformshavebeencollected,aworkshop facilitatorshouldcalculatethetotalaveragescores. Whendiscussingthefiveoverallaveragecomposite scores that have been produced at this point, we encouragefirmstofirstfocusonthelowestscores. These are the areas in which the firm currently underperforms, thus hamperingthe overalloutput of itsdigitalinnovationefforts.Thebriefdiagnosis inthefar-rightcolumnarticulateswhatneedstobe improved. We encourage firms to use this brief diagnosis asafoundationwhen runningaseries of workshopsinvestigatinghowtheycanestablish rou-tinized data-capturing mechanisms and start to transformtheirdigitalinnovationpracticesinthose areas.

5.

Concluding

thoughts

Aspiringtobringtechnologytothecenter,we pre-sented a framework (Table 1) informed by recent research exploringtheuniquepropertiesof digital innovationprocesses(e.g.,Henfridssonetal.,2014; Lee&Berente,2012).Wethen illustratedand dis-cussed the elements tobe measured in each area and detailed the first step of the implementation process,whichincludesusingtheproffered diagnos-tic tool(Table2).Whensuccessfullyimplemented, the framework enables firms to continuously adjust theiroperationsinordertooptimizedigital innovationefforts.Itshouldbenoted,however,that becauseeachfirmisunique,thewaysinwhicheach measureisoperationalizedanddeployedmaydiffer substantially. Tailoringthe frameworkinvolves de-cidingwhethertoutilizequantitativeorqualitative

measures; the framework provides the space for eachfirmtodefinethis.Indeed,digitaltechnology opens up multipleways of capturingdata. For ex-ample,intheproductdimension,firms can negoti-atewith customers tosharetheir datain orderto gain insight regarding usage and purchasing pat-terns. In terms of the environment, firms need to investigate how theycan capture or‘scrape’ web data from technology blogs and similar venues to obtainintelligenceondevelopmentsindigital tech-nology that complements their existing business intelligence practices.

Asshown in ourframework, many factors influ-encefirms’digitalinnovationefforts.Whilefactors such as political policies and regulations were al-ways important in a context of innovation, this is alsothecaseindigitalinnovation.Ourframework, however,focusedonthenewkeyareastobe priori-tized due tothe uniqueproperties ofdigital tech-nology.Anotherlimitationoftheframeworkisthat it does not cover internal process innovation en-abledbydigitaltechnology.Althoughitfallsoutside thescopeofthisarticle,wecallformoreresearch intohowdigitalprocessandproductinnovationare relatedand canbeintegratedinfirms.

While being able to deal with the rapid change associatedwithdigitalinnovationprocessesiskeyin contemporaryfirms,thisisclearlystillunchartered territoryfor manycompanies. Thisfact underlines theimportanceforallfirmstohaveinplace appro-priatetools formanagingdigital innovation.Given the lackof such tools, ourframework shouldbe a welcome contribution. Although our framework is informedbyrecentresearchandindustry develop-ments, we hope to inspire additional managerial accounts aswell as further scholarly study in this exciting domain. As noted, industry accounts of digital innovation typically include failures to adapt. Therefore, we encourage successful exam-ples to be documented, involving both new en-trants’ and incumbent firms’ experiences of managingdigital innovation.

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