A successful - and sometimes transformative - business model represents a better way. When we think about an industry in “transformation” such as traditional print, media or retail, we often think about the adoption of a new technology as the better way. However, new tech is not transformative in and of itself. Rather, what creates disruption is the ability to envision how we will leverage emerging tech in order to address an anticipated market need.
There are a number of commonalities in digital business models that make them transformative. The IMD Center for Digital Business Transformation wrote one of the most informative white papers on the topics of Digital Business Models. Their research into the business models of over 100 disruptors revealed three main themes based on creating value: 1) Cost Value 2) Experience Value 3) Platform Value. Successful models will often use a combination of more than one of these.
Delivering Value Based on Cost
Here the disruptors greatly lower the cost of the product or service and the cost of delivering that said product or service. Virtualization or “dematerialization” (think digital music) has been a key component of how disruptors lower costs. Characteristics include:
- Dematerialization of products and services through digitalization and often demonetization
- Free services (Freemium)
- Pay as you go or for what is consumed
- Group buying or discounts; economies of scale
- Comparison shopping and transparency of price or reverse auctions
Example: Dropbox, Spotify, Groupon, Skype
Delivering Value based on a Greatly Improved Experience
Not only are disruptors’ products and services typically less costly, they also provide a greatly improved customer experience: more convenience, personalization and control are key features here. Central to this model is the notion that physical offerings can now be “unbundled” into smaller pieces that customers truly want and delivered instantly to any device or location. Characteristics include:
- Enabling self-service; increased customization and design improvements
- Personalization of products and services
- Disintermediation of middlemen; control, convenience and immediacy
- Automation of processes and removing of bottlenecks
Example: Netflix, PayPal, Fintechs
Delivery Value by Creating a Platform Model
The principle of “platform” or networks has likely been the most disruptive to competitive dynamics because of its exponential effects where the number of users is directly correlated to the value derived by them. Think of the masses contributing to the success of Airbnb and Uber. Characteristics include:
- Value from status, gamification or reputational capital
- Internet of things; leveraging real time data, optimization
- Crowdsourcing and greater diversity of ideas
- Creation of new marketplace, “sharing economy”
Example: Quora, Airbnb, Uber, TED
The startups which not only think about creating value in this way combined with added digital capabilities (e.g. less traditional hierarchical models of decision making to more agile management for example) can enter an existing industry and displace incumbents with a new value proposition.
For all the buzz on startups however, we can’t forget that existing players also have an important advantage: they can evaluate the threats, understand the opportunities and leverage their large customer base and financial stability to create new models of their own. We’ve also seen the incumbents partner with the disruptors as it is often more efficient to acquire the capabilities rather than build them in-house.
A common thread in all research covering digital business models emphasizes what we at Differly know to be true - that digital transformation is about strategy and people. Technology is the vehicle. A good business model “à la Peter Drucker” aims to quite simply answer: Who is the customer and what do they value? And on the flip side: How will we deliver said value to customers while creating value for the business?
Organizations don’t disrupt, people do. As we move from predictable value chains to more-complex, network systems, disruptive leaders understand that the more of these disruptive principles they can leverage in combination, the better to create new models that have the potential to transform.
As always, I would love your comments and feedback on future topics. Please leave your thoughts below!