Driving growth through digital innovation
Every company leader knows that to succeed, innovation must be at the core of their business. But reimagining the way products and services are made—at scale—is easier said than done.
Take a global sportswear manufacturer: with ever-growing demand for hyper-personalization, executives were facing a major challenge—how to create customized sneakers that were both comfortable and durable, with fast turnarounds on a global scale. To meet the challenge, the company opened a manufacturing facility that relied on automation through robotics, machine learning and 3D printing.
But implementing emerging technologies wasn’t enough. The fully automated production line couldn’t ramp up fast enough. The manufacturing facility couldn’t adapt operations to support its automation system. With financial losses that befuddled shareholders, production was terminated three years into the project. An otherwise successful brand couldn’t scale design and innovation profitably.
The truth is, they’re not alone.
Today, large industrial companies need to deploy digital technologies for wide-ranging aims. To stand out among competitors, they must apply innovation not only to existing and new operations but also to the products and services they develop.
But only a select few industrial companies manage to get the return they expect on digital investments.
To find out why, we zeroed in on a critical transitional phase for large, innovative organizations: when and how they move from a successful digital proof of concept (PoC ) to scaling that pilot for growth and profit.
A revealing survey
Our survey of 1,350 global senior executives in key industrial sectors found that few companies win, most struggle and some completely fail, especially as they attempt to shift from improving the efficiency of their operations to generating new value for customers.
Between 2016 and 2018, the industrial companies in our survey spent a little over $100 billion on scaling digital innovations to drive new experiences and efficiencies. Yet 78 percent of industrial companies didn’t reach expected earnings.
Only 22 percent of industrial companies we looked at achieved a return on their digital investments (RODI) that exceeded their expectations. This small group of industrial companies, which we call “Champions,” are nailing digital transformation and rising above the rest.
Our findings show that these companies approach the organizational challenges associated with innovation very differently to their peers. They are more strategic, identifying the value they want to achieve and recognizing how their innovation efforts will affect their organization. For high-performing Champions, it’s not about scaling more pilots (even though they do). It’s about earning more by scaling better.
Eyes on the prize:
What Champions stand to gain
Champions are achieving greater value than their industry peers and are consistently exceeding higher performance expectations.
- Champions expect to achieve RODI—and they earn RODI higher than industry average for returns on overall invested capital (ROIC) and industry RODI. They also scale more than 50 percent of their digital pilots.
- The other 78 percent of companies? Up against common challenges, they’re struggling.
- The companies trailing Champions—the second group (“Contenders”)—earn RODI lower than industry ROIC and lower than industry RODI despite scaling more than 50 percent of their digital PoCs.
- The companies in the third and last group (“Cadets”) earn RODI lower than industry ROIC and lower than industry RODI and scale less than 50 percent of their digital PoCs.
What’s at stake for industrial companies that fall into these three groups? We collected data on 23 different organizational challenges across six categories. With an econometric model, we estimated the correlation between critical levels of the organizational challenges and the RODI.
Our analysis reveals how much incremental value, by percentage, could be achieved by overcoming these challenges, across industries. Then we compared the effect on discrete industries, where companies produce and assemble products made of distinct parts, and process industries that formulate complete offerings.
By overcoming alignment challenges and infrastructure inadequacies, companies can unlock the most value—with a chance of almost doubling their RODI.
The incremental value associated with overcoming challenges of digital skills and partnerships is marginally lower. And there is a measurable value associated with improving organizational culture.
Though Champions and the rest face common challenges, the size of the prize varies. Champions have overcome some of these critical challenges—as evidenced by the high RODI they earn. And yet, they can still unlock an additional 3.5 percent RODI. For others, the value at stake is much higher—almost three times as much—9.9 percent.
Struggling to scale:
The four biggest challenges
“Innovation is known to impact much more than the direct bottom line of the product in which it is implemented,” Jorge Guzman, Assistant Professor of Business at Columbia Business School, told us. “Besides net income for a specific product or service, innovative work also changes the capabilities of a company to tackle the future and helps them try new ideas that could be risky, but potentially highly profitable.”
New innovations require companies to reimagine how they work, to digitally transform their operations and to exceed their customers’ ever-evolving needs. Each of these tasks comes with a unique set of challenges.
Executives of discrete producers and process industries repeatedly ranked four issues as the top barriers to scaling proof-of-concept projects:
1. Defining digital value, from the top down
Whether it’s improving the customer experience or innovating a new product, adding digital value can mean different things to different people. But if top leaders disagree on the customer experience they want to deliver, the cascading effect of such conflict can be deeply problematic.
2. Aligning with middle management
Top management needs a vision for how middle management should build, execute and scale pilots and innovate efficiently. If there’s friction among middle managers and between middle and top managers—amid time and budget pressures—the company will fall short of its goals.
3. Syncing talent pools with IT assets
Many mechanized products manufacturers are burdened with legacy IT tools and solutions. Rising digital experts find these cumbersome and ill-suited to designing, developing and scaling digital offerings for the company and customers, while middle and senior managers can’t always leverage new IT and digital technologies.