Introduction to Digital Transformation: 1- The Business Models
Introduction to Digital Transformation:
1- The Business Models
Making some steps towards more Modern Business Models is an opportunity companies should not miss.
Giandomenico Rivetti, Lars Dittmann
This series of articles is an introduction to digital transformation. We are going to exploit different aspects of the journey to become more customer centric through digital technologies.
Today, we start with the essential topic of the business model and compare traditional models with more modern set-ups. In traditional set-ups producers are offering their assets to satisfy customer’s needs, while modern business models are designed starting from customer needs. But what does this catch phrase really mean? Let us find out.
The Traditional Business Model
When we are talking about traditional business models, we are looking at set-ups that have created enormous amounts of wealth and prosperity to entrepreneurs, stakeholders, and communities over decades and centuries.
Thinking about traditional producers of industrial and consumer goods as well as providers of common services to make our daily lives more convenient. These enterprises have a strong focus on value: creating value, delivering value, capturing value, and defending it against the competitor.
An emphasis on structure with centrally controlled hierarchy and functional excellence has made many of these companies strong. As the marginal cost for producing the next unit is still high, the focus on EBITA (profit) as most important KPI to manage the near future is appropriate. For these companies, digitalization offers an opportunity to escape the rat race of producing the given value with ever reduced cost. By acknowledging this, needs of the existing customer base can be satisfied through digital technologies. These companies can start a journey of digital transformation.
Let us get inspired by a view on more modern business models.
The Modern Business Model
Modern business models do not come across in a one-size-fits-all format. But what they do share, is a well-defined digital set-up at the core of the model and a vision to drive down incremental cost per unit to zero.
They use modern information and communication technologies, artificial intelligences, large-scale databases, and data mining algorithms. They collaborate through these technologies.
Some even show an extreme customer centric culture with the customer totally being cushioned in a digital bubble.
To make the modern business model more tangible with examples and different nuances of digitalization, let us distinguish between the sub-categories: Usage, Collaborative, and Pure Digital.
The Usage Model – Get to perfectly know your customers to serve them at best
The usage model is the closest to the traditional business model. The basic difference is the extensive use of modern information and communication technologies in the value chain. Prominent examples are companies like Ikea and Zara in the B2C, or Hilti in the B2B. The supply chain visibility in the Zara’s logistics system has been described in many case studies (https://www.hbs.edu/faculty/Pages/item.aspx?num=29709 ).
It allows the company to change the offered collection faster and adapt to customer feedback. The point of sales data is used by the fashion designers in an instance to alter and improve. Many retailers have copied the idea and caught up. The characteristics of the usage model are an excellent knowledge of the customers and the logistics as a key success factor. Many times, accompanied with a low-cost distinction. Always with a customer sensation that all needs are satisfied.
The Collaborative Model – Partnership as an alternative to M&A
When we talk about collaborative models, we basically mean Platforms. The customers perceive the platform as the-place-to-be to satisfy their needs. The offered products and services are crowd-created, meaning not coming from a single producer. Prominent examples are Uber or Airbnb. But you can also go to China and take a closer look at the vigorous Alibaba platform with the highest number of users worldwide. So strong that it makes the political elite nervous.
The platforms have the tendency to form monopolies as the benefit of each user increases with an increase in the total number of users. The winner takes it all. On the other hand, the platforms outsource the value creation. In the case of Uber and Airbnb, there are many small entrepreneurs that pay a fee to offer their services on the platform. The incumbents themselves do not own a lot of assets and they are growing through partnerships. Comparing this to traditional industrial companies, we see a different set-up: Industrial companies own factories, machinery, and a lot of inventories, many times even offices and logistic hubs.
In this set-up Mergers and Acquisitions seems to be the natural choice to grow more market share. The question is what is to be learned from the collaborative model ?
The Pure Digital Model – the employees are at the center as well as the customers
In this model the customer centric culture is taken to an extreme. The entire value chain is digital. The customer interface is digital. Most processes and functions are digitally based.
Examples are Google or Facebook. They are using advanced algorithms based on artificial intelligences and they are entering deeply in the space of decision making on the side of the customers. These algorithms may make better decisions than the customer would do by him- or herself. Starting with what route to take to visit a friend and what kind of music to listen to.
Again, the question arises what can we learn from the Pure Digital Model ? As customer needs are changing all the time, the pure digital model can adopt to these changes very quickly. Discontinuity is seen as a standard which has implications on the company culture. Traditional industrial companies can learn how a culture of constant change can add a new facet to their own culture.
Most companies work with traditional business models. Now, in the digital age, times are changing and the pressure to act is building up. So, our recommendation is to start with a closer look at your own business model and see whether acting at the borders of your model is preventing or supporting yourself to go to the next stage.
Increasing the usage of digital technologies in the value chain is one way to start. Understand the existing, growing digital platforms in your sector is another way to start. In the further articles we will see how to design the digital transformation with the customer in the center. Customer centricity is one core value of every successful transformation.
In addition, cases and examples are presented in the following videos
The Voice of the Expert
Successful cases of B2B companies that moved toward Modern Business Models