Digital innovation strategy: A framework fordiagnosing and improving digital product andservice innovation

Daniel Nylen *, Jonny Holmstrom

Swedish Center for Digital Innovation, Department of Informatics, Umea University, S-901 87 Umea, Sweden

Business Horizons (2015) 58, 57—67

Available online at www.sciencedirect.com

ScienceDirectwww.elsevier.com/locate/bushor

KEYWORDSDigital innovation;Strategy;Value proposition;User experience;Improvisation

Abstract Digital technology is increasingly important in achieving business goals,and its pervasive effects have resulted in the radical restructuring of entire industries.Consequently, managers’ extensive interest in handling digital innovation is notsurprising. Recent research has illustrated how digital technologies give rise to avast potential for product and service innovation that is difficult to control andpredict. Therefore, firms need dynamic tools to support themselves in managing thenew types of digital innovation processes that emerge. The nature of these processesforces firms to challenge prior assumptions about their product and service portfolio,their digital environment, and ways of organizing innovation work. In this article, wepresent a managerial framework that supports firms in this undertaking. The frame-work, geared at supporting ongoing improvements in digital innovation management,covers five key areas: user experience, value proposition, digital evolution scanning,skills, and improvisation. We also present a diagnostic tool that can be utilized as firmsbegin the process of implementing the framework. Finally, we conclude with ourthoughts on the managerial implications of the framework when going forward in arapidly changing digital innovation landscape.# 2014 Kelley School of Business, Indiana University. Published by Elsevier Inc. This isan open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/3.0/).

1. The perils and promises of thedigital world

Digital technology has become increasingly impor-tant as firms seek to achieve their business goals.

* Corresponding authorE-mail addresses: daniel.nylen@informatik.umu.se

(D. Nylen), jonny.holmstrom@informatik.umu.se (J. Holmstrom)

http://dx.doi.org/10.1016/j.bushor.2014.09.0010007-6813/# 2014 Kelley School of Business, Indiana University. PubBY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/3

However, recent research (e.g., Grover & Kohli,2012) has highlighted difficulties in evaluating thevalue generated by digital technology investments.In the 1990s, a first generation of IT applicationsenabled firms to streamline their internal opera-tions while providing opportunities for process in-novation (Lee & Berente, 2012). More recently,digital technology expanded beyond internal dimen-sions, penetrating firms’ product and service offer-ings (Yoo, Boland, Lyytinen, & Majchrzak, 2012).

lished by Elsevier Inc. This is an open access article under the CC.0/).

58 D. Nylen, J. Holmstrom

Given digital technology’s central role in the radicalrestructuring of a number of industries (e.g., Evans,Hagiu, & Schmalensee, 2006), managers’ extensiveinterest in handling digital product and serviceinnovation is not surprising. Addressing this interest,we present a framework that both motivates andkeeps track of firms’ digital innovation efforts.

The unique properties of digital technology en-able new types of innovation processes that areparticularly rapid and difficult to control and predict(Henfridsson, Mathiassen, & Svahn, 2014; Yoo et al.,2012; Yoo, Lyytinen, Boland, & Berente, 2010).Therefore, firms need dynamic tools to supportthem in managing their digital innovation efforts.To this end, our framework identifies five key areasto be measured and evaluated in seeking to managedigital product and service innovation:

� First, digital products and services must not onlybe efficient to use and easy to learn, but alsoprovide a rich user experience. Such user experi-ence can be measured on its levels of usability,aesthetics, and engagement.

� Second, firms need to clearly articulate the valueproposition of each digital product and service:How do they create value for the users? Thequality of such value propositions is assessed onthe dynamics of customer segmentation, productand service bundling, and commissions to channelowners.

� Third, digital evolution scanning involves gather-ing intelligence on new devices; digital channelssuch as web services, mobile operating systems,and social media; and app stores–—as well asstandards and APIs–—in order to identify and ex-ploit opportunities for innovation across emerginguse contexts and new user behaviors.

� Fourth, as digital innovation requires new skills,firms need to evaluate their mechanisms for sup-porting continuous learning of the unique proper-ties of digital technologies in order to set updynamic innovation teams.

� Fifth–—and finally–—as digital innovation processesare often ignited when organizational membersextemporize with digital technology in a learning-by-doing fashion, assessing the available spaceand time for improvisation and the mechanismsfor coordinating such efforts is key.

The process of implementing the framework pre-sented in this article involves making informed de-cisions that cut across three dimensions: the firm’s

products, its digital environment, and organization-al properties. By obtaining composite measures foreach area, the framework enables firms to effec-tively manage their digital product and serviceportfolio over time. While implementing the frame-work enables firms to harness an expanded scope ofdigital innovation benefits, it should be noted thatsuch an effort requires planning and preparation.Sufficient time must be allocated for the process,and since it involves change throughout the organi-zation, unintended consequences are likely to occuralong the way. To support the first step of theimplementation process, we present a diagnostictool that allows organizational members to scoretheir current operations. This enables the firm toget started in evaluating and measuring its digitalinnovation efforts. The outcome of implementingthe framework is a readiness for digital innovationwhereby firms continuously adjust their operationsin order to harness the benefits of digital innovation.

In presenting the framework, this article is struc-tured as follows: In Section 2, we explain the ways inwhich innovation is cast in a new light due to digitaltechnology, highlighting the key challenges involvedwhen managing digital product and service innova-tion. These insights are captured by our framework,which is presented in Section 3. Presenting theframework, we describe the elements to be mea-sured and how they can be utilized to motivate andkeep track of the firm’s digital innovation efforts. InSection 4, we present a diagnostic tool that can beutilized as firms begin the process of implementingthe framework. Finally, in Section 5, we conclude bypresenting our thoughts on the managerial implica-tions of the framework when going forward in arapidly changing digital innovation landscape.

2. Digital innovation: What’s new?

As information is increasingly digitized and mobiledevices accelerate in pervasiveness and processingpower, an arena and architecture for innovation isopened up–—one in which physical and digital com-ponents are combined (Yoo et al., 2012). Recentresearch (Henfridsson et al., 2014; Yoo et al., 2012)has highlighted how the unique properties of digitaltechnology enable new types of innovation process-es that are distinctively different from the analoginnovation processes of the Industrial Era. In thefollowing sections, we explore the topic of digitalinnovation in more detail. In doing so, we discuss thechallenges in managing digital innovation (2.1.),explore the unique properties of digital innovationprocesses (2.2.), and contextualize the phenome-non of digital innovation, providing a number ofillustrative examples (2.3.).

Digital innovation strategy 59

2.1. Can digital innovation be managed?

Digital technology generates highly complex inno-vation challenges. We have seen how firms thatfailed to address them appropriately suffered majorconsequences (e.g., Lucas & Goh, 2009). Therefore,the question arises: How can digital innovation bemanaged? Or, rather, can it be managed at all?

A rich body of management research (e.g.,Evans et al., 2006; Robey & Holmstrom, 2001; Tush-man & Anderson, 1986) has investigated the rela-tionship between technological innovation andradical change. To this end, new technologies canprofoundly challenge existing markets. However,the competencies of established firms actually standin the way of innovating (Christensen, 1997). Schol-ars have elaborated on macro-level strategic modelsthat can enable firms to overcome this dilemma. Forexample, it is argued that firms can learn how todeal with radical and incremental innovation simul-taneously by building ambidextrous structures andaccumulating dynamic capabilities (O’Reilly & Tush-man, 2008).

While these established strategic models fortechnological innovation management are useful,recent studies (e.g., Benner & Tripsas, 2012) utilizenew digital technologies, such as digital cameras, asobjects of research. Still, the distinct and uniquecharacteristics of digital technology tend to fadeinto the background. To this end, extant research ondigital technology and organizations suffers fromtwo limitations:

1. It tends to not fully open up the black box oftechnology (Orlikowski & Iacono, 2001). Whenworking toward managing digital innovation, thisis an important first step to take; firms that seek toinnovate their product and service offerings withdigital technology need managers well-versed inthe specific nature of digital technology.

2. Research on technological innovation tends toadopt a macro-level perspective on its object ofstudy, often resulting in high-level descriptionsof strategic recommendations. To address thisgap, we turn attention to the key areas to beaddressed when managing digital innovationprocesses as they unfold in practice.

2.2. Digital innovation processes

While digital innovation is a means for new entrantsto leverage digital technology in order to challengeincumbent firms–—ultimately causing radicalindustry-level transformation–—it also provides op-portunities for incumbent firms to enhance and

expand their product and service portfolios intonew domains. However, a key challenge for any firmseeking to manage digital innovation entails under-standing the unique properties of digital innovationprocesses (Yoo et al., 2010).

When engaging in digital innovation, both incum-bents and new entrants face challenges and oppor-tunities that showcase an exceptional complexity.One key aspect of this complexity is the rapid paceof digital innovation processes (Yoo et al., 2010).Ultimately this rapid pace is enabled by the mal-leability of digital technologies: the ease withwhich they can be reconfigured (Tiwana, Konsynski,& Bush, 2010; Yoo et al., 2010). The rapid pace ofdigital innovation processes is particularly chal-lenging as firms engage in the design of ‘hybrid’or ‘smart’ products, via which digital componentsare embedded in traditional products. An examplecan be found in the ways in which a major carmanufacturer faced complex challenges whenembedding GPS systems while separate analogand digital innovation processes unfolded simulta-neously at a radically different pace (Henfridssonet al., 2014).

One of the reasons why digital innovation pro-cesses are particularly difficult to control and pre-dict is the generativity of digital technology (Avital& Te’eni, 2009; Yoo et al., 2012)–—that is, ‘‘a tech-nology’s overall capacity to produce unpromptedchange, driven by large, varied, and uncoordinatedaudiences’’ (Zittrain, 2006, p. 1977). When usersleverage digital technologies as components or plat-forms to create new products and services beyondthe original design intent (Yoo et al., 2010), it canresult in cascades of innovation, whereby eachinnovation provides a platform for the next cascade.

Finally, digital technologies constantly evolvetoward higher processing capacity and lower cost.As digital technology becomes increasingly ubiqui-tous and affordable, hindrances are removed forengaging in digital innovation, thus enabling newconstellations of actors to generate, develop, andfund novel digital products and services (Yoo et al.,2010).

When exploring how firms can address the com-plexities associated with digital innovation, we ar-gue that the characteristics of digital technologyneed to be put in the foreground (Orlikowski &Iacono, 2001). These unique properties of digitalinnovation processes call for firms to challengeestablished views and assumptions about the roleand configuration of their product and service port-folio, their relationships to the digital environment,and how organizational properties are configured tosupport innovation work. To shed some light on theissues involved, we illustrate in the next section

60 D. Nylen, J. Holmstrom

how digital innovation is manifested in a number ofcontexts.

2.3. Digital innovation in context

Looking back, the first online shopping websiteswere often poor translations of printed mail ordercatalogues. E-commerce has since evolved, expand-ing the frontiers of digital service innovation. Now,online retailers such as Amazon and Zappos offermore than convenience and cheaper products; byoffering recommender systems as well as productsat the far end of the long tail, they provide trulynovel retail goods consumption. Online digital ser-vice innovation investments have also enabled tra-ditional firms such as cab companies and grocerystore chains to gain strategic competitive advan-tage.

A new family of products is currently emerging asdigital components are embedded in traditionalproducts such as toothbrushes and heat pumps.Frequently referred to as ‘smart products,’ theembedded digital components enable firms to com-plement physical goods with online and mobileservices that utilize the data generated (Bharadwaj,El Sawy, Pavlou, & Venkatraman, 2013). While thepromises of smart products and ‘the Internet ofthings’ is hotly contested, it is predominantly dis-cussed in the context of home appliances. However,smart products are also emerging in the context ofindustrial manufacturing equipment. Here, embed-ded digital capabilities enable real-time monitoringand service forecasting instead of scheduled servic-ing (Westergren & Holmstrom, 2012).

The effects of digital innovation are particularlypervasive for firms that engage in information-basedproducts that can be fully digitized. While the main-stream media industry is currently in the midst ofsuch a restructuring process, it seems that the musicindustry has somewhat stabilized after a transfor-mation that was ignited at the turn of the millenni-um: record labels had optimized their operations forselling one product–—music records/CDs. To thisend, pressing sound onto vinyl albums (later CDs)and then distributing copies was an efficient meansof delivering music artists’ recorded work to thepublic from the 1940s onward. In the late 1990s, theemergence of peer-to-peer networks such as Nap-ster and Kazaa confronted the music industry withunexpected challenges (Liebowitz, 2006). When theaudience wanted to listen to new music in novelways, the industry’s somewhat closed approach toinnovation was exposed. Although customers weremoving in another direction, many major recordlabels continued to consider their core businessthe production and sale of music CDs. Historically,

labels controlled their own value chain from end toend: from signing a new artists to distributing his orher music to record stores. Unwillingness to chal-lenge this definition, along with certain insensitivitytoward customers’ interest in MP3 files, hampereddigital innovation.

While the music industry effectively illustrates aninformation-based sector that failed to managedigital innovation, other, more firm-specific exam-ples include the bankruptcy of book retailer Bordersin 2011 and Kodak’s failure to re-orient its businessas digital cameras emerged (Lucas & Goh, 2009). Wehave, however, also seen how digital innovation canenable established firms to move into new domains.A classic case of such digital portfolio expansion isIBM’s shift in focus from hardware to software andservices as PC diffusion accelerated in the early1990s. In a mainstream media industry context,Nylen, Holmstrom, and Lyytinen (2014) conducteda case study illustrating how Scandinavia’s largestincumbent publishing firm revitalized its core busi-ness by designing digital tablet-based versions of itsmagazines while somewhat serendipitously becom-ing an innovator in digital publishing platforms.Another example of such digital portfolio expansionis Apple effectively becoming a music distributorwith iTunes. Along with new entrant Spotify, Applecontributed to energizing the business ecosystem inthe music industry through digital service innova-tion. Although the Internet once seemed hopeless asan arena for paid content, Netflix rebutted suchnotions while invigorating the film and televisionindustries. To this end, Netflix took digital serviceinnovation a step further by not only distributingdigital content, but also producing it. Going back tothe music industry, additional links in the valuechain were eventually reconfigured due to digitalinnovation; for example, software such as Garage-band enables cheaper and highly mobile music pro-duction, while free-of-charge alternatives such asSoundcloud illustrate that iTunes and Spotify are notthe only gateways.

As firms engage in digital innovation, they face anumber of uncertainties. For example, questionsarise about what factors govern the adoption ofdigital products and services. In addition to definingthe boundaries between different products and ser-vices, firms need to consider how each product andservice can generate revenue in different waysthrough balancing free and premium components.Firms are also challenged to constantly keep up-to-date with how new digital technologies relate totheir business and to identify new opportunities forinnovation. In organizing their digital innovationefforts, firms need to cultivate and source new skillsboth internally and externally while coordinating

Digital innovation strategy 61

improvisational efforts in multiple digital innovationprojects. While these issues are critical, researchhas yet to come up with concrete answers. Toaddress this, we now turn to presenting the compo-nents of our framework.

3. A managerial framework for digitalinnovation strategy

In seeking to manage digital product and serviceinnovation, uncertainty occurs across three dimen-sions: the firm’s products, its digital environment,and organizational properties (see Table 1). There-fore, firms need a holistic view of digital innovationwhen navigating the rapidly changing digital inno-vation landscape. The framework presented in thisarticle enables firms to gain such a holistic view ofdigital innovation, helping them to motivate andkeep track of their digital innovation efforts. In the

Table 1. The framework

Dimension Area Scope

Product

User experienceDigital productusability, posseproperties, an

Value proposition

Digital innovatproposition; i.strategic pricinportfolio, dynacarefully nego

Environment Digital evolution scanning

In order to idenneed to scan tgathering inforchannels, and

Organization

Skills

In order to reafirms need to aexternally whidoing so, firmsthe unique proto secure dyna

Improvisation

The malleabiliaffords a higheconsequence,

provide organiimprovisationais balanced in

maximize creaimprovisationaoverlaps and w

* Hardware such as memory, processors, chips, PCs, smartphones** Web services and platforms such as social media and app store

following sections we explore the five key areasincluded in the framework: user experience (3.1.),value proposition (3.2.), digital evolution scanning(3.3.), skills (3.4.), and improvisation (3.5.). To makethe framework applicable, we detail and explainthree key elements.

3.1. User experience

Since the late 1990s, consumer goods and servicessuch as home appliances and air travel have beenincreasingly purchased via e-commerce websites,which compete on more than just price. Here, web-site navigation has to be smooth while based onfiltering functionalities that allow users to seamlesslynavigate massive product databases and arrive at thedesired product in a few clicks. Measuring efficientbrowsing and usability is, however, not enough; thecustomers’ experience of interacting with these web-sites is key. While the user experience design is a

Element

s and services must offer high levels ofss carefully designed aestheticd evoke engagement.

Usability

Aesthetics

Engagement

ion involves an articulated valuee., a customer segmentation includingg and positioning of the productmic bundling of product units, andtiated commissions to channel owners.

Segmentation

Bundling

Commissions

tify opportunities for innovation, firmsheir digital environment. This involvesmation on new digital devices,associated user behaviors.

Devices *

Channels **

Behaviors

p the benefits of digital innovation,cquire new skills both internally andle establishing new digital roles. In should promote continuous learning ofperties of digital technologies in ordermic innovation teams.

Learning

Roles

Teams

ty and low cost of digital technologiesr degree of improvisation. As amanagers need to ensure that theyzational members with anl space where structure and flexibilitysuch a way that the constraintstivity, dedicated time is given, andl efforts are coordinated to deal withaste.

Space

Time

Coordination

, tablets, etc.s

62 D. Nylen, J. Holmstrom

central differentiator and competitive force, Forres-ter recently reported that 97% of websites had asubstandard user experience design (Brokaw, 2012).

In digital innovation, measuring the user experi-ence involves not only usability issues, but also theaesthetic properties of digital products and ser-vices. Users are affected by beauty and appearance;therefore, these aspects need to be carefully lever-aged and aimed at evoking a positive emotionalresponse 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 underthe reign of head designer Jonathan Ive contributedto raising the user experience high above compet-itors such as PC manufacturers and Microsoft, there-by contributing to Apple’s market dominance.

Finally, in our framework, the user experience ismeasured on the ways the firm’s digital products andservices evoke engagement. When seeking a way tocreate digital products and services that are engag-ing, firms need to explore and tap into values thatcan make the experience of their digital productsand services meaningful to users (Diller, Shedroff, &Rhea, 2005). Creating an integrated user experiencethat evokes engagement is particularly importantwhen moving beyond websites and desktop appli-cations. To this end, the smartphone applicationFoursquare is a successful example of the role ofengagement in the user experience design. Whilesupporting location-based check-ins, Foursquare re-wards the user with both virtual badges and titleswhile showing the user how she is currently doingcompared to friends. Through gamification at theintersection of virtual and non-virtual life, Four-square rewards the user with promotional offersat shops and restaurants in the user’s geographicarea, thus evoking engagement.

User experience is the first key area that firmsneed to measure in order to motivate and keep trackof their digital innovation efforts. This is donethrough obtaining a composite measure of the levelsof usability, aesthetics, and engagement in firms’digital products and services.

3.2. Value proposition

In the Industrial Era, dominant designs provided astructure that enabled benchmarking and unifiedpricing. In the digital age, however, firms increasinglyinnovate on malleable intangibles that can be rapidlyreconfigured. Therefore, while digital product cate-gories are fragile and negotiable (Nylen et al., 2014),the ongoing reconfiguration of the firm’s businessmodel has been highlighted as critical in a contextof digital innovation (e.g., Lucas & Goh, 2009). In this

context, the business model defines the ‘‘architec-ture of the revenue’’ while addressing the processesof value creation involving the value network aroundthe firm, including suppliers, customers, and thirdparties (Chesbrough & Rosenbloom, 2002, p. 530).

Indeed, digital innovation has contributed to de-molishing several established Industrial Era businessmodels. To this end, digital innovation is associatedwith a new logic and configuration of revenuestreams. In guiding firms in this new logic, however,we need to drill down through the macro-level de-scriptions, past architectural issues, and consider thevery concrete ways in which coherent value propo-sitions are inscribed in digital products and services.

In our framework, the value proposition of digitalproducts and services is evaluated through assessingthree elements, beginning with customer segmen-tation. This involves analyzing the customer base inorder to make strategic decisions about how toreach different groups of customers with the prod-ucts and services in the firm’s digital portfolio. Forexample, while most websites were historically freeto consume, some firms have recently started toexperiment with ‘paywalls.’ Such decisions are typ-ically based on the assumption that there is a groupof customers that are motivated enough to start apaid subscription if it gives them access to addition-al content. Smartphone and tablet apps, on theother hand, are often based on a ‘freemium’ modelvia which users can opt out of ads by paying a fee.Customer segmentation enables firms to start re-flecting on the pricing and positioning of their digitalproducts and services.

Having segmented the customer base, firmsneed to decide how the products and services intheir digital portfolio can be differentiated andbundled. This includes the specific configuration ofthe balancing of premium and free and the role ofadvertising in each of the firm’s digital productsand services, as well as defining boundaries be-tween them while defining units in each of them.To this end, iTunes challenged the music industry’sestablished bundling model by pricing tracks in-stead of albums. Therefore, when engaging indigital innovation, firms need to consider howproducts and services can be bundled in new andinnovative ways.

In contrast to traditional product licensing mod-els, firms engaging in digital innovation are facedwith commissions of channel owners. For example,the Apple Store and Google Play both take a 30%commission on sales, while e-commerce storefrontservices vary in their commissions. Therefore,firms need to consider how the commission ofchannel owners can be negotiated. Value proposi-tion, dealing with how value is created and

Digital innovation strategy 63

captured in each digital product and service, isthus the second key area to assess for firms thatseek to achieve successful digital innovationmanagement.

3.3. Digital evolution scanning

The nature of digital technology implies that itevolves in a ‘recombinant’ or ‘combinatorial’ man-ner. This refers to the ways in which hardwarecircuits and lines of code are configured to interactin new ways. In other words, digital technologyseems to evolve out of itself, starting with a fewsimple hardware and software components, com-bined in several rounds over time into more andmore sophisticated and integrated ones, formingsystems of increasing complexity (Arthur, 2009).

During the last decade we have seen how thisevolutionary process is constantly speeding up.This is not only manifested in ever-shorter releasecycles of digital devices, but also in the explosionof social media and communication services andapplications. This calls for revisiting establishednotions of strategic environmental technologyscanning (e.g., van Wyk, 1997). Indeed, firms needto monitor these developments in order to ensurecompatibility by implementing timely upgrades oftheir digital products and services. However, thisscanning moves beyond compatibility concernswhen firms seek to harness the full scope of digitalinnovation.

Digital evolution scanning involves identifyingnew opportunities for innovation. As digital innova-tion emerges in these acts of recombination, firmsneed to continuously consider how they can beactive participants. That is, how can they exploitthese opportunities and generate an aggregatedvalue through creating digital products and servicesthat utilize existing components?

In doing so, firms need to keep up-to-date withand analyze the progress of digital technology andassociated usage patterns. This is done throughgathering intelligence on which new hardware de-vices are on their way to market, including compo-nents such as memory, processors, and chips, anddevices such as PCs, smartphones, and tablets.While the former can enable embedding digitalcapabilities into traditional analog products, theincreased processing capabilities of mobile devicesis continuously allowing resource-demanding ser-vices and content such as films, video games, andadvanced editing to be done on the same device.Firms need to expect this evolution to continue andassess how it relates to their business.

Furthermore, digital technology has enabled a re-invention of sales and distribution channels. Firms

can now position and integrate their products andservices with an abundance of mobile operating sys-tems, social media sites, and app stores. Facebook iscurrently a key actor for many firms that utilize theplatform to a varying degree, ranging from smallbusinesses that push information out to their custom-ers, to large players like Skype and Spotify thatinstead utilize Facebook to pull new customers inthrough formalized Facebook partnerships material-ized in integrated user accounts. Finally, digitalevolution scanning involves observing new user be-haviors. To this end, new markets can emerge as userssometimes unexpectedly adopt a digital technologyinto a new use context.

As noted, the ways in which devices, channels,and behaviors co-evolve is highly complex. Ratherthan try to reduce this complexity, firms shouldinstead seek to harness it (Axelrod & Cohen,2000). This is done through digital evolution scan-ning, whereby firms can identify and exploit thestructural holes (Burt, 1992) in which opportunitiesfor combinatorial digital innovation reside. Digitalevolution scanning is thus the third key area thatfirms need to address in order to validate that theyhave the mechanisms in place for identifying oppor-tunities for innovation that emerge in their digitalenvironment.

3.4. Skills

The rapid pace of digital innovation processessuggests that current forms of organizing innova-tion work need to be transformed. As noted byChristensen (1997), the core competencies of in-cumbent firms can actually stand in the way ofinnovating when entering new markets. This is alsoa challenge in digital innovation, but as productionof quality products and content remains key, digi-tal innovation requires new skills without makingall existing skills obsolete. Three main elementsshould be measured when evaluating the firm’sdigital innovation skills.

First, Industrial Era firms should seek to leverageand translate skills obtained from developing analogproducts. Measuring this key area involves takingstock of the ways in which learning is supported andpromoted throughout the organization. Digital in-novation involves continuous learning whereby newdigital technologies are explored in order to createan understanding of their unique properties. Thiscan involve establishing conditions for retrainingand incentives for existing staff to acquire digitalskills. To this end, it is critical to acknowledgeorganizational members’ spontaneous digital inno-vation initiatives throughout the firm. Therefore,firms should be alert and identify organizational

Table 2. Diagnostic tool

Do notagree

Partiallyagree

Agree Score Diagnosis(low scores)

User experience

Usability

Our digital products &services are easy tolearn & interact with.

1 2 3 0

The user experienceof the products andservices included inthe firm’s currentproduct portfolio needsto be redesigned.

Aesthetics

They have articulatedaesthetic propertiesthat evoke a positiveemotional response.

1 2 3 0

Engagement

They are created tooffer our customersmeaningful experiences.

1 2 3 0

Composite measure: 0

Value proposition

Segmentation

We have analyzed ourcustomer base anddivided it into multiplesegments.

1 2 3 0

The firm’s digital profitscan be boosted throughreconfiguring thevalue propositioninscribed in the firm’sproducts and services.

Bundling

The components of ourdigital product andservice portfolio aredifferentiated and theboundaries and relationshipsbetween them are clearlyspecified.

1 2 3 0

Commissions

We continuously evaluateand negotiate ourrelationships withchannel owners.

1 2 3 0

Composite measure: 0

Digital evolution scanning

Devices

We carefully follow whichnew hardware components& devices are underdevelopment.

1 2 3 0

The firm needs to developdigital evolution scanningmechanisms.

Channels

We track the evolutionof digital distributionchannels (e.g., softwareplatforms, operatingsystems, & web services).

1 2 3 0

Behaviors

We pay attention toemerging user behaviorsacross contexts and markets.

1 2 3 0

Composite measure: 0

Skills

Learning

We promote continuouslearning of the uniqueproperties of digitaltechnologies.

1 2 3 0The firm needs to acquirenew skills internally andexternally while promotingcontinuous learning.

Roles

The balance betweenoverall digital skills& specialized digitalroles is adequate.

1 2 3 0

64 D. Nylen, J. Holmstrom

Table 2 (Continued )

Do notagree

Partiallyagree

Agree Score Diagnosis(low scores)

Teams

We can assemble teamswith the right combinationof skills for each digital project.

1 2 3 0

Composite measure: 0

Improvisation

Space

We try to organize workin a way that structureand flexibility are balanced.

1 2 3 0

The firm needs to adjustits routines and structuresto support improvisation.

Time

We dedicate time forimprovisational effortsin each profession.

1 2 3 0

Coordination

We have mechanismsin place to coordinateimprovisational efforts.

1 2 3 0

Composite measure: 0

Digital innovation strategy 65

members that are drifting from their establishedroles toward improvising with digital technologies.Such talent is important to pick up in order to securethe appropriate skillsets for future projects, ulti-mately achieving sustainable digital innovationmanagement.

While new roles can emerge from within theorganization, firms may necessarily recruit exter-nally for specialized digital roles that complementexisting roles. In combining such roles, it is a keychallenge for managers to assess the current statusof organizational members’ skills, ensuring that theycan be fruitfully assembled in dynamic innovationteams with the right combination of skills for eachproject. Therefore, firms need to carefully considerthe balance between carrying out digital innovationprojects in-house and engaging specialized externalconsultants.

While managers may prioritize involving leadingconsultants to achieve supreme digital service de-signs in individual projects, developing in-houseskills ensures the agility needed to handle the rapidpace of digital innovation processes. In large firms,this could involve sourcing and combining resourcesand skills from multiple countries and divisionswithin the firm. Guided by the composite measureon this fourth key area, managers can organize theirdigital innovation teams to address the rapid un-folding of digital innovation processes.

3.5. Improvisation

In the Industrial Era, product development was aslow and costly procedure. Trained organizationalmembers in formal engineering and designer rolesexclusively handled this activity. In contrast, digital

technologies are ubiquitous in contemporary firms.We argue that by promoting improvisation through-out the organization rather than trying to impose acentral control on all digital innovation processes,contemporary firms can harness complexity throughcombinatorial innovation.

Research on organizational improvisation (e.g.,Weick, 1998) has explored notions of structure andarrangements in jazz music, via which improvisationinvolves composing and performing at the sametime. In this context, improvisation is defined as‘‘the conception of action as it unfolds’’ (Cunha,Cunha, & Kamoche, 1999, p. 302). Although it oftenemerges as a consequence of formal plans not play-ing out, managers can intentionally employ impro-visation as a deliberate strategy (Pavlou & El Sawy,2010).

In the digital realm, improvisation is often an actof reconfiguration. To this end, the malleability ofdigital technologies affords a higher degree of im-provisation than their analog counterparts. Impro-visation involves risk taking, and in the context ofdigital innovation, the low cost of digital technologyalso means a lower cost of failure. Therefore, man-agers need to ensure that they provide organiza-tional members with an improvisational space inwhich structure and flexibility is balanced in sucha way that the constraints maximize creativity whileevoking generativity (Avital & Te’eni, 2009; Yoo etal., 2012).

Allocating time for improvisation is key; we haverecently seen how Google allocates 20% of employ-ees’ working hours to individually initiated projectsand ‘skunkworks.’ In digital innovation, improvisa-tional efforts typically occur across different units,levels, and divisions of the firm. Therefore, it is

66 D. Nylen, J. Holmstrom

critical for firms to establish mechanisms for cap-turing the successful outcomes of such efforts.Meanwhile, in order to deal with overlaps andwaste, coordination is a key measure.

Digital innovation requires an organizational cul-ture that allows for improvisation–—and, thereby, alsofailures–—throughout the firm. Improvisation is thusthe final key area to be assessed by firms that seek toachieve sustainable digital innovation management.

4. Implementing the framework

We developed a diagnostic tool that supports firmsin taking the first step of implementing the frame-work (see Table 2). Based on the framework, thetool consists of 15 Likert-style questions. Here,organizational members are asked to score thefirm’s current operations by assigning a value on ascale of 1—3 for three questions in each key area.For each area, participants are asked to calculateand fill out the composite score.

After the forms have been collected, a workshopfacilitator should calculate the total average scores.When discussing the five overall average compositescores that have been produced at this point, weencourage firms to first focus on the lowest scores.These are the areas in which the firm currentlyunderperforms, thus hampering the overall outputof its digital innovation efforts. The brief diagnosisin the far-right column articulates what needs to beimproved. We encourage firms to use this briefdiagnosis as a foundation when running a series ofworkshops investigating how they can establish rou-tinized data-capturing mechanisms and start totransform their digital innovation practices in thoseareas.

5. Concluding thoughts

Aspiring to bring technology to the center, we pre-sented a framework (Table 1) informed by recentresearch exploring the unique properties of digitalinnovation processes (e.g., Henfridsson et al., 2014;Lee & Berente, 2012). We then illustrated and dis-cussed the elements to be measured in each areaand detailed the first step of the implementationprocess, which includes using the proffered diagnos-tic tool (Table 2). When successfully implemented,the framework enables firms to continuouslyadjust their operations in order to optimize digitalinnovation efforts. It should be noted, however, thatbecause each firm is unique, the ways in which eachmeasure is operationalized and deployed may differsubstantially. Tailoring the framework involves de-ciding whether to utilize quantitative or qualitative

measures; the framework provides the space foreach firm to define this. Indeed, digital technologyopens up multiple ways of capturing data. For ex-ample, in the product dimension, firms can negoti-ate with customers to share their data in order togain insight regarding usage and purchasing pat-terns. In terms of the environment, firms need toinvestigate how they can capture or ‘scrape’ webdata from technology blogs and similar venues toobtain intelligence on developments in digital tech-nology that complements their existing businessintelligence practices.

As shown in our framework, many factors influ-ence firms’ digital innovation efforts. While factorssuch as political policies and regulations were al-ways important in a context of innovation, this isalso the case in digital innovation. Our framework,however, focused on the new key areas to be priori-tized due to the unique properties of digital tech-nology. Another limitation of the framework is thatit does not cover internal process innovation en-abled by digital technology. Although it falls outsidethe scope of this article, we call for more researchinto how digital process and product innovation arerelated and can be integrated in firms.

While being able to deal with the rapid changeassociated with digital innovation processes is key incontemporary firms, this is clearly still uncharteredterritory for many companies. This fact underlinesthe importance for all firms to have in place appro-priate tools for managing digital innovation. Giventhe lack of such tools, our framework should be awelcome contribution. Although our framework isinformed by recent research and industry develop-ments, we hope to inspire additional managerialaccounts as well as further scholarly study in thisexciting domain. As noted, industry accounts ofdigital innovation typically include failures toadapt. Therefore, we encourage successful exam-ples to be documented, involving both new en-trants’ and incumbent firms’ experiences ofmanaging digital innovation.

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