Business Transformation

The Threat of Digital Business Models

Source: Global Beehive

Author: Hans Gillior

What happened? We suddenly live in a society in full motion into a digital unknown – affecting all aspects of our lives. What we know is that the way we consume, communicate and interact is undergoing rapid change with the help of digital technology. The role of institutions such as banks and government agencies are being questioned and challenged with an increased demand for customer centricity and value-driven interaction. Size (power) is no-longer a decisive factor for success but rather how well these institutions adjust to customer needs and behavior – build trust with their customers and citizens. The fact is that the industrial barriers that have protected industries and institutions (based on required capital, regulations, and physical patents/technology) for decades have been reduced or eliminated – meaning that everybody can compete with a democratized technology, global capabilities and easy access to funding. Companies such as Airbnb, Uber and Spotify are a few examples of companies that have successfully challenged traditions and opened a door to a new digital rivalry. There are many factors and trends that have made this digital transformation possible. But why have these digital companies been so successful?

The question is very complex and includes many perspectives – such as culture, leadership, and governance. For example, we know that digital companies have a higher degree of motivated and engaged staff, shorter response time for trends, and view digital capabilities (for example: technology and information) in a different way. Competitiveness is based on quickly understanding, analyzing and acting (applying digital capabilities) on new trends and behavior – with focus on customer experience and value creation. The role of the business model plays a decisive factor in how the digital companies compete and acts as a basis for their role in the market.

“A business model describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts.” Wikipedia 2018

The business model takes its starting point from the organization’s assets and capabilities. Here we see a difference between traditional and digital companies in how they view their assets. Traditional companies tend to rely on physical assets (buildings, machinery, labor, and distribution) as a foundation for their business model while digital companies rely more on digital assets (information, business intelligence and digital platforms). Traditional hotels rely on the availability of physical buildings and rooms as basis for their revenue, while Airbnb (and other digital companies) focus on creating the optimal customer experience through digital services and data analysis (consumer habits and needs) leaving the physical building or room to someone else to provide. Traditional taxi companies rely on physical cars while Uber focus on customer experience without cars. We see this scenario in industry after industry where new digital companies emerge with new business model focusing on customer experience based on digital assets. This is the new normal.

Traditional Business ModelDigital Business Model
Based on physical assetsBased on digital assets
Buildings, Machinery, Labor, DistributionTraditional Governance (slow iterations > 12 months)Digital Platforms, Business Intelligence, InformationAgile Governance (fast iterations < 12 months)
Increase productivityIncrease customer experience & value
Low growth and profit marginsHigh growth and profit margins

Table 1: Traditional versus Digital Business Models

If we take a step closer, we see that the digital business model includes a number of digital capabilities that supports customer experience and value creation. The digital companies excel in digital capabilities such as customer interaction (digital channels), digital service development/innovation, IT and information, (edge) competence and structure (including value chain and ecosystem) – all on a platform of motivating and empowering culture and change leadership. It is interesting to see how these capabilities work effectively together (never in silos) toward a common customer-centric vision and value proposition. These factors are a natural part of the digital company DNA making it easy (digital readiness) to compete in the new digital environment. In the end, it is about mind-set.

An interesting aspect of the digital and traditional business model comparison is how they perform. During the last couple of years, we have seen an increased business growth and margins in the digital business model. Why is that? Digital companies deliver higher value-adding service (what customers are willing to pay for) that traditional companies by capturing and managing their expectations in an effective way. For example, are customers willing to pay extra for a car mortgage to cover the bank’s high infrastructure cost? No, they could not care less. In the digital landscape, customer wants to pay for the capabilities and services in relationship to the value and experience they provide. Low value = low revenues!

My view is that all companies need to understand the new digital prerequisites of business – and how they deliver value to their customers (business model). The business performance of companies will depend how well they deliver value to their customers in every moment. Any value gap/deficit will automatically result in All industries will, sooner or later, be challenges by new digital companies and business models as the industry becomes more and more IT intensive. It is an unstoppable mega-trend that we all need to relate to. The question we need to ask ourselves is what our role is in the new digital business landscape – continued traditional or upgraded digital. What do we concretely do when that moment comes? Are we ready for the digital transformation? A digital transformation will take years to complete (addressing culture, leadership, capabilities and governance) while disruption comes quickly – from nowhere.

Recommendations:

  • Build awareness internally of how your company and industry will be challenged in the future. Assume that your company and industry will be challenged with negative impact on your competitiveness, and change is needed. Denying the digital challenges will not work.
  • Assess how well your company is prepared for the digital transformation. There are a number of assessment tools on the market to assess your digital readiness (capabilities) and understand the strengths and weaknesses of your organization (where to focus).
  • Start recruiting/hiring experts, advisers and change agents/coaches with hands-on experience to drive the digital transformation agenda to increase probability of success. 70% of all transformation initiatives fail and mainly due to challenges relating to culture and leadership. What can you do to increase that probability?

It is difficult to foresee the future for the two different business model (traditional versus digital). Today we see high growth in the digital companies with a digital business model but what we need to understand is that both models are required in the future. One cannot exist without the other. Uber and Airbnb would not have any business if nobody supplied the physical attributes to their business model. There will with all certainty come new business models (hybrid) that re-shape the game. It will be an exciting and unpredictable future that brutally will phase out companies and organizations not finding their role in the new digital normal.