Digital is fundamentally challenging the way organizations function. As they race towards mysterious new lands in search of unconventional revenue streams, innovation is what will drive them to future-proof themselves. Organizations will need to re-imagine customer experience, develop new products and offerings, embrace proactive positions and build on their digital capability during this digital expedition. Innovation will strongly influence the survival of organizations in a disruptive, interconnected world.

Interestingly, the epicentre of innovation is now moving away from an ‘internal-closed door’ approach to an ‘external-collaborative’ approach. ‘Co-creation’ or ‘open innovation’ is the emerging theme. It manifests itself through interaction across the ecosystem—with partners, vendors and customers. Social media can play a big role in co-creation.

As organizations prepare to embrace this paradigm shift in their business approach, they face two tough issues: how to stay relevant; and how to gear up for collaborative innovation.

The rise of interconnected ecosystems

The twilight of the industrial era gave way to the dawn of the ‘enterprise’ during the latter half of the 20th century. The ‘enterprise’ emerged as a self-indulging entity with a clear demarcation of its organizational boundaries. It laid strong emphasis on ‘core competence’, paying careful attention to the strengths that lay within, while borrowing or adapting external ideas. An enterprise gained competitive advantage through domination of its value chain encompassing customers, vendors and distributors. Closed innovation was the primary vehicle that sustained domination and market differentiation.

Today, that very concept of the ‘organizational boundary’ is being challenged by Internet-fuelled digital businesses. Traditional value chains have been de-constructed and are transforming themselves into ‘value networks’ of partners operating within their own digital ecosystems. Each partner synergizes the network to create a world-class customer experience that any single organization may not be capable of delivering. Visa Inc. is an American multinational financial services corporation. On the face of it, Visa has very little to do with car manufacture. But in an innovative masterstroke, Visa set up Visa Innovation Centres at various outlets that included car companies, tech giants, start-ups and research organizations. Partnering with Visa brought these outlets value by solving their clients’ problems. This is an example of ‘open innovation’, with significant emphasis on ‘co-creation’. David Dean, a former BCG senior partner, described the new digital metasystem as one where all companies are effectively tech companies. Enterprises should now look at business from a new perspective that counts strongly on digital innovation.

The need for externalization of innovation

The challenges of today’s world, in all sectors, are more complex than ever before. But technology provides us with a unique advantage: heaps of information can be retrieved on demand at an abysmally low cost; and video conferencing can connect experts across far ends of the world. This enables organizations to ideate with unknown partners during live ‘hackathons’; the best resources in the world can be leveraged. The knowledge-based economy pushes boundaries of imagination and eliminates former constraints.

Toy manufacturer Lego A/S has been able to leverage the ideas of industrial designers, master builders, start-ups and researchers to set up a Future Lab. Its traditional business model would never have given it access to the expertise of such individuals. Lego derived success due to its willingness to use the digital platform to tap the expertise of unlikely partners.

Xiaomi is the world’s fifth largest smartphone maker. It has created an extensive Internet-enabled ecosystem comprising customers, social media and fans. Company officials listen closely to customer feedback, even allowing them to test out upcoming features. Customers’ suggestions are taken seriously, and a fuzzy concept can become a reality in as little as one week.

Almost a quarter-century ago, Bill Joy, co-founder of Sun Microsystems Inc., predicted the potential of crowdsourcing by saying, “No matter who you are, most of the smartest people work for someone else."

Mechanisms for tapping external innovation

Companies have explored avenues such as acquisitions, partnerships, joint ventures, licensing and more recently, customer feedback and hackathons, to tap external energy. But technology enables them to manipulate the rules of the game. The world that they venture into is almost ‘limitless’. Organizations can choose from several models within the ecosystem; some of them include corporate venture capital, accelerators, incubators and innovation labs. Companies need to embrace a new mindset, while overcoming trust and quality issues. BCG’s Global Innovation Survey 2016 reconfirms the global trend of organizations that are transcending their own boundaries in search of the unknown (see chart).

General Electric Co. veered away from its core business towards digital solutions. It clocked $7 billion in software sales in 2016. It has created a global community for fostered innovation, using the power of start-ups and the social media. This enables it to succeed despite its principle of working with a lean in-house team. DHL Express (USA) Inc. has set up DHL Innovation Centers where customers and business stakeholders engage with company experts on innovation-related issues. Visitors can deep-dive into logistics solutions for their specific needs. This has enabled it to emerge as a thought leader in the logistics industry.

Addressing innovation/co-creation to become future-ready

To be ready for digitally-fuelled Innovation 2.0, companies will need to focus on the following measures:

Build diverse in-house skills: The future will involve cross-functional environments. Organizations should build appropriate skills and develop a culture of diversity.

Identify the wider ecosystem and enter into digital partnerships: Organizations should constantly look out for digital partnerships. The application programming interface (API) economy has created significant new opportunities and business channels.

Leverage external and internal data: Traditionally, organizations depend solely on their in-house analytics data. Futuristic solutions will blend data models across industries; for example, online retail lending decisions will consider customer data from an e-commerce site alongside that of the bank.

Establish a digital platform for innovation: The constant influx of ideas will need robust digital enablement. Organizations should strongly encourage digital interactions. In the 2006 movie Goal, soccer player Santiago learns the power of teamwork in ‘passing’ the ball, as he can never outrun a moving ball. Similarly, the power of digital lies in collaborating to build something that was not possible earlier. Organizations must now develop a ‘limitless’ mindset for innovation.

Vikas Banga is associate director and Shrikant Patil is project leader, technology advantage practice, The Boston Consulting Group India.