Developing Digital Capabilities

For many industries, digital has brought about a proliferation of competition and changes to traditional business models. It is no secret that established companies outside the tech sector sometimes struggle to successfully integrate digital into their business. Emma Haak of Fast Company recently published an interesting short piece about the innovation strategies of a few blue chips, advocating for venture investments. As she notes, DeBeers, Best Buy, and BMW are among the companies relying on acquiring creative, interesting start-ups for their technology as a short-cut to business innovation.

Two Approaches To Innovation

Innovation through acquisition is a well established practice. Many large companies rely increasingly on externally driven innovation. Apple integrated the Siri voice control feature into the iOS offered with the iPhone 4s after it acquired Siri Inc, the start-up founded in 2007 which developed it. Google too has a long history of snapping up interesting looking start-ups. Since 2001, Google has acquired 109 companies small and large, 26 of which were bought last year alone. Finally, Intuit’s 2009 acquisition of  personal finance tool Mint.com is a prime example of the value that can be attained through innovation by acquisition.

The alternative to this external strategy is developing and supporting an internal culture of innovation. Google’s twenty percent time, Patagonia’s policy of encouraging employees to volunteer for causes they believe in, and Nike’s Digital Sport group are all good examples.

Whether relying on acquisition or cultivating an internal culture, strategies to encourage innovation lie along a spectrum of risk. Encouraging innovation internally requires creating a safe space for trial and experimentation (a low risk activity), developing internal capabilities (moderate risk), and committing resources to support expanding new initiatives across the business (high risk). Successfully pursuing a strategy of innovation through acquisition likewise requires low risk activities such as the actual acquisition, and higher risk activities like seeding early stage companies and dealing with venture funds.

As the chart below indicates, however, the risks behind external innovation are structured differently than the risks associated with internal development. Internal innovation strategies encounter the most risk at the point of expansion, usually the final point in the process. External innovation strategies encounter the most risk in their early phases, when seed money can go nowhere and venture investments can earn small returns.

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Regardless of whether an innovation strategy is internally or externally focussed, risk remains a principal driver of how companies approach selecting investments. Companies are unlikely to pursue ventures either internally or as acquisition options that fall outside of their risk profile.

Risk And Maturity

As much as a company’s risk tolerance shapes its investment profile, commitment and maturity impact a company’s readiness to invest in digital. Mature companies can, on the one hand, commit significant resources (financial or human) to well-defined, robust digital initiatives. Some, however, lack the dexterity to adapt their practices to digital disruptions, leaving them uncertain about how to effectively capitalize on or socialize innovations through their organizations. Immature companies, by contrast, might not have substantial resources to commit but are supremely well-placed to experiment with small-scale digital innovations that may pay-off disproportionately if successful.

The framework below maps the spectrum of risk tolerance and maturity, and the steps of innovation (external and internal), in such a way that it can guide discussions and inform decisions around the focus of digital investments for the sake of innovation.

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When it comes to developing digital capabilities, there is no one-size-fits-all solution.  Risk is often overlooked in agency and consulting conversations – nobody wants to ask the difficult questions. Finding the right amount of risk in relation digital maturity is key to increasing your odds of success in digital. The right approach is all about context.

This post is part of an upcoming series that explores risk in the context of digital strategy. Questions or Comments? Connect with @vladimirpick on Twitter.