Your organization needs a digital business model

Digital Business Model
… organizations with more than 50% of revenues from digital ecosystems had 32% higher revenue growth and 27% high profit margins than industry averages.

As the digital economy becomes a reality, managers will be forced to do more than ever to lead major business transformations. According to IDC, worldwide spending on digital transformation technologies will increase nearly 17% to reach $1.3 trillion in 2018. The stakes of the current investments may sound high, but the implications will separate leaders from laggards in the years to come. In an MIT Center for Information Systems Research (CISR) survey, senior executives estimated that 32% of their company’s revenue would be threatened by digital disruption in the next five years.

The potential loss of one third of revenue should be a wake-up call – managers need a new playbook for doing business and engaging customers to succeed in the digital world.

The new business models for the digital economy

Peter Weill, MIT CISR director, and research scientist Stephanie Woerner offer insights to help managers build a playbook around emerging digital business models in their Sloan Management Review article, “Thriving in an Increasingly Digital Ecosystem.” Considering the new digital business models and their implications can provide leaders a useful context to set strategy for their future business model.

The new digital business models are organized by two major types of transformation objectives:

  • Increased end customer knowledge
  • Increased operation in a digital ecosystem

These two goals form the axes of a 2×2 framework with four, distinct business models (as shown below): Supplier, Omnichannel, Ecosystem Driver, and Modular Producer.

Source: Weill & Woerner, “Thriving in an Increasingly Digital Ecosystem,” MIT Sloan Management Review 56, no. 4 (June 2015)

Suppliers, in the lower left quadrant, have little direct knowledge of their end customers. They sell their products and services to distributors in the value chain. Competing on content, suppliers are under constant pressure to refresh and renew their offerings. Due to the ease and availability of digital information, they are vulnerable to pricing pressures and commoditization as customers look for less expensive alternatives. White goods manufacturers and Automotive OEMs are examples of Suppliers. To compete in a digital world, Suppliers will need to operate with high levels of efficiency, while increasing their customer intimacy. As commoditization creates pressure on price, suppliers will need to find increased efficiency. As digitization drives end customer preference toward customization, suppliers will need to become far more customer-aware to differentiate their products and services. Successful suppliers who do both will become leaders in this quadrant or move up and right to another digital business model.

Omnichannel Businesses, in the upper left quadrant, operate within a value stream and tend to have deep knowledge of their customers. Omnichannel Businesses compete on customer experience, providing customers access to their products across multiple channels, giving them greater choice and a seamless experience. Because they enjoy a direct relationship with customers, Omnichannel Businesses will need to use their customer knowledge to ensure the seamless experience their end customers have come to expect. Examples of Omnichannel Businesses include some retailers, banks, and insurance companies. Successful Omnichannel Businesses will deepen and broaden their understanding of customers and their life-events, and look to build integrated experiences around them. More than simply adding channels to move product, Omnichannel leaders must be masters of customer intimacy, finding new and innovative ways to use data and insight to delight customers at the right moment.

Modular Producers, in the lower right quadrant, offer a distinct capability that spans ecosystem(s). They tend to have little direct knowledge of end customers. Their plug-and-play offerings can work with any number of channels or partners, but they rely on others for distribution, as well as for guidance on what the customer needs. Payment companies are an example of a Modular Producer. Modular Producers will compete on the merits of their platforms, which must be fast, efficient, scalable, reliable, and interoperable to meet the needs of customers in a variety of ecosystems.

Ecosystem Drivers, in the upper right quadrant, occupy the prime real estate of the digital business world. Ecosystem Drivers compete on content, platform, and customer experience, leveraging deep end-customer knowledge to create the “go-to” destination for customers. They provide a seamless experience, selling not only their own products and services, but also those of other providers. In this way, Ecosystem Drivers create value for themselves, while extracting rent from others. Examples of Ecosystem Drivers include large internet retailers and full-service healthcare and financial service providers.

Research shows that organizations with a strong digital ecosystem and understanding of their customers’ needs show higher growth and profit

While each digital business model can be viable, there are advantages to moving up and right in the framework by increasing customer knowledge and expanding beyond traditional value chain participation. In their article, Weill and Woerner report that organizations with more than 50% of revenues from digital ecosystems, and who showed high knowledge of their end consumers, had 32% higher revenue growth and 27% high profit margins than industry averages. Ecosystem Drivers will likely enjoy the greatest potential for value creation and premiums, while Suppliers will likely see the least.

When you define your digital business model you define your organization’s journey

Today’s leaders must understand which digital business model is most appropriate for their company and develop strategies that build digital muscle through great customer intimacy, greater platform capability, or both.

Siemens provides a great example of a company moving from being a Supplier of industrial products to an Ecosystem Driver in the Industrial Internet of Things (IIOT) with its MindSphere open IOT Operating System. Serving as a platform for services provided by third-party vendors as well as Siemens core businesses, MindSphere helps companies jumpstart their own digital efforts by connecting product, plant, system, and machine data with Internet of Things (IoT)-enabled advanced analytics.

Digital technologies will create many opportunities and paths to success. Successful digital leaders will be those who understand where their organizations are today, where they want to be tomorrow, and what capabilities they must build to meet the challenges of tomorrow’s digital business model.

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ABOUT THE AUTHOR: As Director and Industry Principal for Global Manufacturing and High-Tech Markets at Pega, Gerry McCool helps clients create exceptional customer engagement and business outcomes through digital transformation.