Four
Business Models for the Digital Age
Digitization, which is of course happening
all around us, is opening up a whole new spectrum of opportunities to create
value. But how do you navigate this new horizontal world?
Peter
Weill and Stephanie Woerner offer some useful insights on these challenges in
their 2015 Sloan Management Reviewarticle, “Thriving
in an Increasingly Digital Ecosystem.” In
exploring these insights, and some of their implications, leaders can gain a
fuller understanding of the landscape they face.
Opportunities
for companies in every industry are occurring on two critical dimensions:
knowledge of the end customer and business design, i.e., breadth of product and
service offerings. These dimensions combine to form four business models for
creating value (see exhibit): Suppliers, Multichannel Businesses,
Modular Producers, and Ecosystem Drivers.
Suppliers, in the lower left quadrant, have little direct
knowledge of the preferences of their end customers, and may or may not have a
direct relationship with them. These companies sell their products and services
to distributors in the value chain. Due to the ease of digital search, they are
vulnerable to pricing pressures and commoditization as customers look for less
expensive alternatives. Washing-machine manufacturers are a good example of
Suppliers, as are companies that create mutual funds sold by someone else.
If you are a Supplier, you need to make sure
your operations are as efficient as possible, but that’s only the first step.
As digitization continues, end customers will increasingly expect you to cater
to their likes and needs. So if you don’t know much about your end customers
and aren’t intent on solving their problems, you’ll need to find other ways to
ward off commoditization. That means making sure that your product is highly
differentiated or that it goes through a distribution channel other than one
controlled by an Ecosystem Driver, another of the business models, which has a
broad supply base. Otherwise, you risk losing all the value your enterprise has
created.
Haier,
the world’s largest manufacturer of white goods, has deployed various
strategies to differentiate itself from competitors. It has developed a variety
of niche products, including washing machines that accommodate the long gowns
worn by women in Pakistan, and freezers that can keep food frozen for 30 hours
in the event of a power outage in Nigeria. More recently, Haier used the
Internet to open up its
innovation process to people outside the company, enabling
an unprecedented level of customization.
Multichannel
Businesses, in the upper left quadrant, have deep
knowledge of their consumers because they enjoy a direct relationship with
them. Companies in this category provide access to their products in various
digital and physical channels to ensure the seamless experience their end
customers have come to expect. Many banks and brokerage houses are Multichannel
Businesses, as are some retailers and insurance companies.
If you are an Multichannel Business, there’s
no such thing as too much customer knowledge. Broadening your understanding
your customers’ life-event needs is essential for building out the integrated
experience that will retain existing consumers and attract new ones.
IKEA,
the world’s largest furniture company, is an example of an Multichannel Business
that continues to find ways to enhance the range of offerings within its value
chain. Building upon its global presence — currently more than 300 stores in 41
countries — IKEA used its extensive knowledge of its customers (gleaned through
visits to homes, for example) to develop “products for an everyday life” — from
bedroom furniture to prepared food, all under IKEA’s
iconic brand. After decades of focus on the customer
experience in its stores, IKEA recently launched online
shopping, making the purchasing experience truly
seamless and gaining a way to learn even more about its customers.
Modular
Producers, in the lower right quadrant, offer a
distinct capability that spans the ecosystem, but they have little direct
knowledge of the end customer. 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. A good example is payment
companies that enable the consumer to pay for a wide range of goods and
services, such as groceries and college tuition.
If you are a Modular Producer, you need to be
the best at everything. As is the case with Suppliers, competition is fierce,
so your offerings need to be innovative and well priced.
Square
Inc. fits the profile of a Modular Producer. Founded in 2009, the B2B payments
company has continuously launched innovative
software and hardware products that
are ecosystem-agnostic. Square’s point-of-sale, payroll, employee management,
and appointment apps can be used on Apple and Android devices alike, as can its
chip and magstrip readers.
Ecosystem
Drivers, in the upper right quadrant, have the best
of both worlds: deep end-customer knowledge and a broad supply base. They
leverage these dimensions to provide consumers with a seamless experience,
selling not only their own proprietary products and services but also those
from providers across the entire ecosystem. Thus, they create value for
themselves while extracting rent from others. Large internet retailers in the
U.S. and China are good examples of Ecosystem Drivers, as are some healthcare
providers.
If you are an Ecosystem Driver, you’ll want
to keep pushing the boundaries in both dimensions, increasing your knowledge of
end customers and the breadth of offerings available to them.
As Weill and Woerner’s research demonstrates,
the prospects for creating value are greatest for companies that participate in
ecosystems rather than in value chains, so Ecosystem Drivers have the greatest
potential for value creation and Suppliers the smallest. All four paths are
viable routes to enduring success, provided you are clear on what your generic
strategy is and what that strategy requires. If, however, you are losing
customers or growing more slowly than your market, you should consider moving
to a different quadrant, either by expanding your knowledge of your end
customers or by becoming more of an ecosystem.
Or
even by doing both: GE is moving from being a Supplier of industrial products
to an Ecosystem Driver in the Industrial Internet of Things, with
the help of Predix, the cloud-based operating system it
launched last year. Serving as a platform for services provided by third-party
vendors as well as GE business units, Predix helps companies collect, analyze,
and leverage operational data so they can optimize the performance of their
entire system. As Predix’s customer base grows, so will GE’s status as an
Ecosystem Driver.
As digital becomes the new normal, the paths
to success are there for the taking. But be sure you know your destination
before setting out.
John Sviokla
http://www.strategy-business.com/blog/Four-Business-Models-for-the-Digital-Age?gko=67c74&utm_source=itw&utm_medium=20161213&utm_campaign=resp
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