Digitalization in SMEs: Moderate innovation instead of disruption

Digitalization in SMEs: Moderate innovation instead of disruption

Disruptive business models are not helpful for the digitization strategies of medium-sized companies. This article describes the ideas of radical and moderate innovations. […]

Numerous established entrepreneurs are uncertain about the disruptive influences of digitization on companies, products and markets. The prominent cases of Amazon, Uber, Google or WhatsApp are often presented as examples of digital change on a variety of channels and are intensively examined.

However, these extreme examples are not the benchmark for a consistent, mid-sized company looking for its strategic path in the digital age. Far-sighted managers of small and medium-sized companies develop strategies to master the digital transformation and invest considerable amounts in digital technologies.

Due to the limited investment volumes, these companies are faced with the fundamental decision to gradually develop their existing business models and thus further expand the existing basis of their business success or to radically change them in order to become a disruptive innovation leader like Amazon, AirBnB & Co. The last option seems highly risky to unrealistic. Rather, entrepreneurs should think about moderate changes in their business models through the use of digital technologies and observe threats from innovative competitors.

According to innovation pioneer Joseph Schumpeter (1942), companies must constantly review the foundations of their business success and constantly implement new ideas and inventions in order to compete. This thesis, confirmed over eight decades, raises the question of the degree to which companies invest in innovation.

Entrepreneurs are faced with the fundamental decision to use their budgets for the gradual evolution of their products or to develop completely new products or services that attack or even destroy existing business processes and models (“Creative Destruction”). This question concerns the “innovator’s dilemma”described by Harvard professor Clayton Christensen (1997). Entrepreneurs have the choice between

  • the moderate innovation strategy, that is, the improvement of your products and the gradual expansion of business success, or
  • the radical, disruptive innovation approach with the aim of rewriting the rules of competition with highly differentiated products.

The radical approach is extremely risky, it can lead to market dominance or bankruptcy of companies. In the context of the so-called digital transformation, the positive cases such as Uber and AirBnB are mostly cited; however, the large number of failed start-ups remain largely unmentioned.

Small and medium – sized companies that have already conquered the markets with their products should not be confused by the few successful examples of radical, digital innovation-they are selected extreme examples that are unsuitable as a benchmark. Rather, the opportunities offered by digital technologies for moderate (or incremental) innovation should be explored and exploited.

Moderate innovations of products and services improve performance and / or offer new features compared to the previous products and the offerings of existing competitors. Operator comfort, flexibility, reliability, and ease of maintenance are some examples of features that are being further developed with new products (Blitz, 2016).

Digital innovations go beyond these goals by incorporating digital aspects into product development and application. The digital innovation factors (Gellweiler & Krishnamurthi, 2020) for the generation, collection, transport, processing and use of data are:

  • New, digital technologies that simulate human capabilities.
    Examples: seeing, hearing, smelling, touching and feeling with sensors; learning, thinking and deciding with artificial intelligence.
  • Use of social trends.
    Examples: social networks, environmental protection, health protection, “sharing economy”.
  • Networks that connect devices and servers and transmit data from people and devices.
    Examples: Internet, WAN, Wireless LAN, NFC, Bluetooth, RFID.
  • Changing business models, i.e. the way products/ services are delivered, used and paid for.
    Examples: methods for revenue generation and payment, integration of partners in the value chain, development of innovative sales channels, integration of online retail and brick-and-mortar retail.

These digital innovation factors can be combined with each other, but do not all have to be integrated into product development and associated marketing at the same time. A company should examine its existing business model holistically and examine the possible applications of digital technologies and social trends.

The existing business model does not have to be replaced or developed from scratch (radical approach), but it is sufficient to create new, creative combinations based on the current business model (moderate approach). The focus is on increasing customer benefit; the novelty of digital technologies is subordinate.

Digital innovations do not guarantee business success. The use of innovative, digital technologies is only expedient if added value can be generated for the buyers. The goal of all investments is to improve value creation, i.e. increase profitability by reducing costs and / or revenue growth. When it comes to creating value, customers are the main focus, they are the sources of payment flows. Digital innovations and corresponding business models must therefore be perceived by customers as added value for which there is a willingness to pay.

The customer added value must be evaluated before the start of digital innovation projects. These customer benefits result from three types of benefits:low prices, superior product or service features, and/or special customer relationships, such as brand image, purchasing experience, or trust (Treacy & Wiesema, 1993, 1995). The customer advantage is crucial for the success of digital innovations, not digital technologies as such.

  • The success of prominent digital business models (Amazon, Google, etc.) and their radical innovations are not decisive for the digital transformation of established companies.
  • Entrepreneurs should focus on moderate (or incremental) digital innovation.
  • Sensors, artificial intelligence, network technologies and social trends offer opportunities to use data for new digital business models.
  • At the forefront of digital business models is the improvement of customer benefits through cost advantages, improved customer relationships and/or functional product advantages.

Note: For reasons of readability and comprehensibility, the generic masculine, which includes all genders equally, is used here.

* Dr. Christof Gellweiler is an independent IT management consultant with more than 25 years of professional experience at numerous international companies. He has a broad and deep education: Dipl.- Ing. (TH Bingen), Executive MBA (Kellogg-WHU) and PhD in Management (Aarhus University). His research focuses on strategic IT planning and IT architecture. He is certified by PMI and Cisco Systems and teaches project management at various universities.

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