A Digital Disconnect in Innovation?

Our 2014 innovation survey reveals something of a digital disconnect. On the one hand, companies specializing in digital technologies—Apple, Google, Samsung, Microsoft, IBM, Amazon, and Facebook—hold the five top places, and seven of the top ten, on the 2014 list of most innovative companies. Their innovations and those of other digital innovators are, in many sectors, raising the bar for all companies in areas such as big data and mobile. But on the other hand, it appears that even within the technology sector, many companies are not getting the message; on average, only about a third of executives project big data and mobile will have a significant impact on innovation in their industries over the next three to five years. Even fewer are actually investing in them.

A look at the industry level reveals interesting differences. Software is the only industry in which a majority of respondents (53 percent) see big data as having a significant impact on innovation in the next three to five years—yet only 41 percent of their companies are actively targeting big data in their innovation programs. Mobile offers a similar story. Telecommunications is the only sector in which a majority of respondents (53 percent) cited mobile as important to medium-­term innovation, but only 36 percent are actually targeting it. Exhibit 1 provides the details for other industries. The red line is the point at which industry respondents’ belief in the impact of a technology is matched by its reported investment behavior. Points to the right of the “behavior = belief” line indicate that, on average, companies are not putting their money where their mouths are.

In some cases, this lack of belief and changed behavior makes sense: it is hard to imagine mobile as a primary component of innovation in the chemical industry. But for many, if not most, of the other industries, it is a source of concern. And the embrace of the broader range of digital-innovation capabilities is also lower than one might expect.

Consumers Embrace Digital Innovations Before Most Industries Do

Consumers, who have been educated by the likes of Apple, Amazon, and Google in the possibilities of digital technologies, have moved quickly up the adoption curve. Digital technologies make their lives easier and better, and they want more digital—and mobile—interaction from the companies and other organizations that they do business with. For the Millennial generation (18- to 34-year-olds) and billions of consumers in developing markets, the Internet experience is principally through the screens of their mobile devices. By 2017, according to Gartner, mobile-app downloads will have totaled 268 billion, and the pace will accelerate as more wearable devices come to market.

Companies are proving slower to adopt digital. In retail, big data and mobile are already disrupting the status quo, yet only 25 percent of respondents said that digital is having a notable impact—even as digital behemoths Amazon, Alibaba, and Tencent Holdings are reshaping the retail landscape. (See The Digital Future: A Game Plan for Consumer Packaged Goods, BCG report, August 2014.) A similar perspective exists in the automotive industry, in which only a small proportion of respondents said that big data (20 percent) and mobile (16 percent) are important. This is despite the fast-rising importance of software and connectivity for automakers. (See Accelerating Innovation: New Challenges for Automakers, BCG Focus, January 2014.) 

Among nontechnology sectors, banks have used digital technology to reinvent the way they interact with customers—much to customers’ delight. Insurance has high expectations for digital technology as well. Insurance executives ranked the importance of big data and mobile higher than any other nontechnology industry executives do. Some insurance companies are using digital technologies to streamline customer interactions, such as policy management and claims processing, and a few are experimenting with the data generated by onboard chips and sensors to factor drivers’ practices into the rate-setting process. AIG’s new CEO recently told the Wall Street Journal of his ambitious plans and expectations for big data “to manage down the cost of risk.” But in general, consumers still give insurers—along with numerous other industries such as real estate, utilities, supermarkets, and telcos and cable—poor ratings for the speed with which they have embraced digital adoption and innovation. (See Delivering Digital Satisfaction: U.S. Consumers Raise the Ante, BCG Focus, May 2013.)

As of the first quarter of 2014, 30 percent of Fortune 500 companies did not have a mobile app, and less than half had a mobile website. Most companies are not targeting mobile products and capabilities in their innovation efforts. The B2B marketplace has also been slow to catch on. Digital and mobile are only gradually making their presence felt there. (See “Out in Front: Exploiting Digital Disruption in the B2B Value Chain,” BCG article, January 2014.)

We would expect to see the most intensive innovation focus in big data, given all the attention that has been devoted to the ability of digital data and advanced analytics to generate new products, markets, and revenue streams. Indeed, BCG research shows that big-data leaders generate 12 percent higher revenues than those who do not experiment with big data. They are also twice as likely as their peers (81 percent compared with 41 percent) to credit big data with making them more innovative. Pratt & Whitney announced plans in July 2014 to work with IBM to improve the performance of the company’s aircraft engines by monitoring the information its current fleet of engines generates. The company says a single engine can produce half a terabyte of data in one flight. Nordstrom has established Nordstrom Innovation Lab, which uses big data to drive product development. Its mission is “delighting customers through data-driven products.” It analyzes customer data along with input from personal stylists to design algorithms that better predict what people want to buy. Still, three-quarters of our respondents said that their companies are not targeting big data in their innovation programs. 

Strong Innovators “Get” Digital

Strong innovators such as Nordstrom are under no illusions about the impact of digital technologies.¹ 1 Strong innovators rated their organizations’ innovation performance compared with their peers as a nine or ten on a ten-point scale where one is “worst performer” and ten is “best performer.” Average innovators rated their organizations from six through eight. Breakthrough innovators are strong innovators that rated their organizations’ focus on disruptive or radical innovation compared with their peers as a nine or ten on a ten-point scale where one is “Not a disruptive or radical innovator” and ten is “Most disruptive or radical innovator.” Notes: 1 Strong innovators rated their organizations’ innovation performance compared with their peers as a nine or ten on a ten-point scale where one is “worst performer” and ten is “best performer.” Average innovators rated their organizations from six through eight. Breakthrough innovators are strong innovators that rated their organizations’ focus on disruptive or radical innovation compared with their peers as a nine or ten on a ten-point scale where one is “Not a disruptive or radical innovator” and ten is “Most disruptive or radical innovator.” When compared with their weaker counterparts, strong innovators (a group comprising our breakthrough-innovator and strong-but-not-disruptive segments) leverage technology to enhance their value proposition or improve operations by a margin of 79 percent to 26 percent. The CIO and CTO at these companies are twice as likely to be the biggest force driving innovation. They are three times more likely than weak innovators (57 percent versus 19 percent) to leverage big-data mining for new-project ideas and three times more likely to be actively targeting innovation toward digital design, mobile products and capabilities, speed of adopting new technologies, and big-data analytics. Breakthrough innovators, in particular, said that their big-data efforts pay off. Two-thirds say they frequently generate new-product ideas and ideas for growth from social media and big-data mining.

Given the speed with which technology advances today and given digital technology’s demonstrated ability to disrupt, one wonders whether the companies that are targeting digital platforms and big data in their innovation programs are opening a lead that those moving more slowly may have a hard time closing.