The 3 Ps of Innovation

What does digital transformation mean? Many struggle to answer it. But it may be less complex than you imagined. For example, Mastercard is a classic example of a company transformed by digitalization, and highlights how the by-product of new digital technology can create huge new opportunities for organizations with the ability to identify and embrace them.

Mastercard evolved as an innovative financial services business, offering credit alongside the convenience of card payment – and so creating the ‘credit card’; the existing players in the 1960s, Diners Card and American Express, required their users to pay off their bill in full each month. Mastercard later evolved to processing transactions electronically, instead of the original duplicated slips being returned to clearing centres. But Mastercard’s real digital transformation occurred almost by accident, when CEO Ajay Banga introduced a strategy to compete with cash. What Mastercard discovered along the way was that everywhere they replaced cash with a transaction, they also created a data point, and this data, when aggregated had incredible power. For example, by replacing Oyster cards in the Transport for London system with instant payment via credit cards, Mastercard could suddenly predict and potentially reshape rush hour travel to make the experience less hard on travellers and the system. Alternatively, they could use their big data to help retail businesses and property developers identify where their best locations to open stores might be. Most importantly, they could use their digital platforms to ease frictions in whatever market they may be, not just in the payments markets. Suddenly the financial services company had become an information services company too.

Contrast Mastercard’s digital transformation with the transformation of Russian airline Aeroflot. For many years Aeroflot was feared by travellers for its poor safety record, absence of customer service skills and unreliability. Today it is second only to Emirates in terms of net promoter score.  Part of this transformation is the company’s embracing of digital technologies; their core business is still entirely tied up in capital intensive airplanes and flying them from A to B, but behind the scenes the back office has replaced the old systems with new digital technology, and at the front customer-facing side, stewards now have tablets that allow them to have notes on frequent passengers and help with onward flights in case of delays. It is not magic, but it is significant improvement through leveraging digital technology.

Removing some of the mystique around digital transformation is important. Many of the opportunities businesses miss to digitally improve are due to being blind to the simple changes they can make. Essentially it comes down to answering the question “what does new technology allow us to do differently?” and the answer will be either “we can do new things because of the technology” (like Mastercard capturing new, adjacent opportunities) or “we can do the same things but better” (like Aeroflot transforming the customer experience with digital tools).

To make this identification process simpler, I ask my program participants to take a look at their front stage (the customer engaging side of products and services) and their back stage (the behind the scenes activities to make the front work) and then think through what digital upgrades would make a significant impact. This makes the process much more tangible and so manageable.

For most companies the change is likely to be ‘doing what we do now but better’ and ‘doing that on the back stage’, and that is fine.

Having said that, to make a properly disruptive impact, businesses need to think about three things:

• Think about platforms as well as products. An app is a product, while the App Store is the platform. The true disruption comes from platforms – think Uber and AirBnB. The digital world allows far more platform innovations than was conceivable before.
• Think about ecosystems not just our own independent firm. You don’t need to have all the capabilities yourself in the digital world, you can innovate much faster and more effectively if you collaborate with the wider ecosystem you operate in.
• Think about digital business models, not just your traditional business model. Digital opens up new business model possibilities, including new ‘hybrid’ business models between your traditional business approach and new digital opportunities.

Ultimately for any innovation to work requires the three pieces to be in place. First, people who can be creative, which is more a function of the behaviour and the environment then their DNA. Second, the right process to test the new digital initiatives and innovation opportunities. Thirdly, an environment that allows for innovation, which includes the elements of culture, leadership, and related influences which I call the company’s ‘philosophy’. So: People, Philosophy and Process are the three necessary Ps for enabling innovation in an organization.

Learn about INSEAD’s 'Leading Digital Transformation and Innovation' program here.