e-Books are books, but they no longer require paper, printers, binders, publishers, and visits to bookstores. Similarly, Tesla is on a mission of digitizing automobiles. Unlike e-books or autonomous vehicles, certain digital product transformations are subtle, like operating air conditioners with smartphone apps. All kinds of products, from microwave ovens to airplanes, are having increasing digital features. We have been observing digital product transformation from incremental advancement to reinvention. In addition to offering higher quality, often at less cost, digital product transformation has been changing the competitive landscape. Digital technologies are being exploited to increase Economies of Scale, scope, and network externality effects. The exploitation of digitization in these strategic areas may create disruptive effects, giving rise to Startups while destroying incumbent dominant firms. Hence, digital transformation is more than using digital technologies to modify products and processes for a better customer experience.
Some of the common digital technologies are liquid crystal display, sensors, mobile internet, microprocessor and software running in them, memory, data analytic and machine learning algorithms, actuators, graphics, etc. In the beginning, they emerged as standalone products like computers. But very soon, innovators started using them to add incremental features and update existing ones to products that are not computers. They also started reinventing conventional products by changing the electromechanical technology cores with digital ones. For example, telephone exchanges went a significant transformation due to digitization.
Similarly, watches, telephone sets, televisions, and many other products have gone through so much transformation that they have become computers by themselves. Some products, such as typewriters, torch lights, books, alarm clocks, and music players, have lost their identity altogether through the process. Besides, due to product transformation out of digitization, companies like Kodak disappeared, and a little Microsoft or Apple has become a giant.
Three facets: addition, enhancement, and change of technology core
Digital product transformation is about evolving products by leveraging digital technologies. Although there has been a common understanding that digital transformation pertains to the IT department, whether you make a car or washing machine, digital technologies pose significant challenges and opportunities to product management. And it’s not limited to the development of new product only. Product management should pay adequate attention to multiple dimensions pertaining to the evolution of Innovation in an episodic form. Hence, among the four main areas of digital transformation, product evolution is at the core.
Innovators transform products through three important means: adding new features, improving existing ones, and changing the technology core. Along with relative complexity, their implications on value proposition varies. Similarly, their effects in the competition space also vary. For example, the addition of a rear-view camera to cars looks like a good to have feature. But the change of book to eBook is a paradigm shift. Similarly, autonomous vehicles or cancer detection by AI algorithms will have profound implications.
Advancement of existing features:
The exploitation of digital technologies started for advancing existing features of products. Among others, one of the target features was the user interface. For example, rotary knobs or physical buttons of the control panels of many products became the target of enhancement. Hence, unlike in the past, we operate a washing machine, photocopier, and many other products through touch. Many internal components have been changed too, such as electromechanical relays have been switched with photo relays. Among others, analog signal processing activities starting from storage, retrieval, and amplification are now in digital domains. As a result, the quality has gone up. In some instances, the cost has come down too.
Addition of new features:
Innovators are after digital technologies to add new features to existing products. As a result, the perceived value has been going up, as they offer additional jobs to get done. For example, the internet feature to thermostats or smoke detectors has enabled homeowners to monitor and operate their homes remotely. Similarly, the addition of adaptive cruise control has made driving relatively easier. A growing number of Apps available at the Apple or Google store gives us an impression about how we can extend the Utility of a product like a mobile phone by downloading one after another App. As additional features increase the utility, products get further momentum to diffuse deeper.
Changing the technology core for reinvention:
The implication of the above two digital product transformations is incremental. Unlike them, reinvention of products by changing the mature technology cores with digital ones is quite profound. For example, in the 1970s, the typewriter went through incremental advancement due to digital technologies. But its reinvention started in the 1980s as a word processor software application running on PCs. Similarly, the transformation of Books to e-Books, many other products have already gone through such transformation. Starting from camera, music player to x-ray imaging, the list goes on. Many others are now in the process of transformation. One of the notable examples has been money, like coins and notes.
Economics of product transformation: scale, scope and network Externality Effect
At the core of digital technologies are data and algorithms running as software. The cost of copying, storing, and retrieving these vital elements is virtually zero. Furthermore, their quality does not degrade over time. Unlike music stored on magnetic tape in the 1980s, MP3 data do not degrade over time. Similarly, as long as you have a smartphone, the cost of producing another copy of the App or music for you is zero. Hence, digitization of products or product features expands the scale advantage.
As the cost of copying software and digital content is zero, it expands the opportunity of having economies of scope advantage. Redesign of products having a common digital core opens the opportunity of reducing the cost, as the core elements could be copied at a zero cost. Similarly, it also increases the ease of the evolution of those products by improving the core elements and copying them.
Connectivity and software open the opportunity to create and advance network externality effect, so that perceived value keeps rising with the growth of the customer base. For example, the connectivity of digital x-ray machines with teleradiology services creates a network externality effect.
Business implications of product transformation: incremental progression, sustaining innovation, creative destruction, and Disruptive innovation
At the outset, the addition or enhancement of features with digital technologies offers Incremental innovation benefits. They will have a minor effect on value proposition, cost reduction, and market penetration. But the cumulative effect of consistent gradual advancement may produce an immense benefit.
Furthermore, the implication of feature enhancement and addition out of digital possibilities may have a significant implication on sustaining innovation. To counter the competition response, a bunch of incremental digital features may give a burst of thrust, resulting in a sharp rise of perceived value. Apple and many other companies have been leveraging this digital product transformation aspect in releasing successive better versions.
For certain products, digital technologies offer the opportunity to change the technology core. For example, analog technology core of Television or film of the camera has already been changed. Innovators have been working on bringing such changes to many other products. One of the target areas has been replacing the human role in product operation with AI. A notable example has been autonomous vehicles. Unlike incremental advancement, change of technology core gives birth to a creative wave of destruction. In some instances, in addition to destroying products around mature technology core, these creative waves take the shape of disruptive innovation causing destruction to once-dominant firms through Kodak moment.
Digital product transformation: from subtle to disruptive
At the beginning of the digital technology lifecycles, effects on the evolution of products used to be subtle. However, over the decades, the cumulative impact of those subtle advancements as incremental steps has become substantial in certain products. For example, although there has not been a major visible change in automobiles, the cumulative role of digital transformation has been profound. In certain instances, transformation is so massive that some products have lost their appearance, making them invisible. Hence, digital product transformation should be at the product management.
On the other hand, the implication of this transformation in product diffusion is also quite significant. For example, the diffusion of watches, radio, music players, cameras, and many more products have been democratized due to the incremental digital transformation of mobile handsets. Furthermore, the competition race has been experiencing profound implications from digital product transformation. Infrastructure, regulatory, and legal capacities are also being uplifted to facilitate and accommodate such a massive unfolding transformation.
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