Digital Business Models

This is part 3 in the 3 part series on the key areas that need focus in a digital transformation exercise. These key areas are:

1. Customer Experience
2. Operational processes
3. New business models

Part 1 had talked about Customer Experience. This part takes a look at improving operational efficiencies using automation, data and analytics.

Part 2 talked about the Operational processes and how they can be transformed.

In Part 3, I look at the third key area which is new business models.

A digital business model is a model in which digital technology plays a significant role in the value proposition, value creation, value delivery and value capture. Companies and enterprises that are born digital, such as Amazon and Google have used the power of digital technologies. They have used technologies for innovating platforms on which their products and services are built, and have used these platforms to enable the business models that have fundamentally changed how companies can do business. The digital business models allow companies to create entire ecosystems that does much of the work helping the company to grow. The platform is the business model which enables growth for companies.

A new focus on building new business models across the organization is a key digital driver in the digital transformation exercise for any business. The organization has to develop new ways of realizing and monetizing value. It has to create the strategy and execution plan of delivering this value to the market.

Some important differences between a traditional and digital business model are that a traditional value chain business model has value creation in a linear fashion and is a one-way street. It goes from production to distribution to marketing and to the consumer, while in a Digital Value chain the business model has value creation in a loop and is continuous with the the loop being between the Platform and the Ecosystem which consists of the developers, publishers, content owners, various service providers etc.

A traditional approach to business is to have single point solutions with independent return on investment targets, wheras a digital approach would be to adopt a model that would result in a total transformation. Traditional businesses are system-centric, internally focused whereas digital businesses would be experience led and externally focused. In traditional companies, the risk management would be around cost with a focus on incremental improvement versus a digital business where the risk optimization would focus on opportunities and threats and would be open to experimentation and innovation in pursuit of improving the business. Most important, the operating model in a traditional business is primarily internally owned whereas in a digital business the operating model includes the entire eco-system.

The value proposition of these companies arises out of the the ability of digital technologies to support the informational part of products and the related information transforms a product into a service, a model in which the ownership of the physical part of the product is not at all required, and the consumers usage of the product is made possible by digital technologies. For example, the ability for consumers to book, locate, and access a car (a product) via a smartphone app enables cars to be made available as resources for consumers. This is a service and the company does not own a single physical car (for eg. Uber).

Companies can create value by tapping into resources and capacity that they don’t have to own. Take Apple for example, and the iOS App Store. The App Store was launched shortly after the iPhone and today the iOS App Store includes an ecosystem of hundreds of thousands of developers that have created millions of applications that have been downloaded billions of times and have generated billions in sales for Apple. The model splits the revenue with the developers and has generated billions of dollars for the company. And all this by using resources that it does not need to own!

Shown below is a diagram showing the Apple ecosystem.

The apple ecosystem consists of the apple design, marketing and manufacturing facilities, the distribution, apple stores and partner stores, the developers who develop the apps, the content providers who provide the music and movies content, the apple platform made up of all the components that facilitate the development of the apps, the submission, review process and the app stores and finally the customers who buy the devices, download the apps and consume the content.

1. The developers sign up on the apple developer portal and using the accounts and the sdks available for app development develop the apps.
2. The apps are submitted on the developer portal. The description and price along with other necessary information needs to be provided while the app is being submitted.
3. There is an extensive review process that reviews the app for compliance with all the apple guidelines for apps.
4. Once the review is successful and the app is accepted it is then featured on the iOS app store.
5. There is a similar process for the apps built for the desktops and laptops are featured on the Mac App Store.
6. Content providers of music and movie content as well as books can also submit content.
7. The content is submitted on the platform for being sold on iTunes, which is the online content store of apple.
8. There is a review process for the content.
9. The iTunes store features all the content that is available for streaming and download by the users on their devices.
10. The iBooks store features the books that are sold online.
11. The apple devices are designed in California in the US, and manufactured at various facilities around the world.
12. The devices are then sold at Apple stores as well as partner stores around the world.
13. The apple devices like the macbooks, iMac, iPads, iPhones, iPod touch, apple watch and apple TV are then purchased by customers.
14. The customers then use these devices to buy, download and stream apps and content from the iOS app store, the Mac app store, iTunes and iBook store.
15. The Apple company generates revenue from the sale of the hardware devices and the apps in the app store (free apps are also available on the app store), the subscriptions of the developers and the rental and sale of the content on iTunes and iBook stores. The company shares the revenue generated from the sale of the apps and content with the developers and the content providers as per the revenue sharing agreement it has with the partners. The ecosystem which is built around the platform that has been built by Apple allows apple to generate revenues using resources and infrastructure which is not necessarily owned by it.

Some other examples of digital business models of companies also are given below.

Uber does not own a single vehicle, unlike traditional taxi companies that need to own and maintain a fleet of vehicles. Uber has at its core, a platform that connects people and drivers on a massive scale creating an experience that allows them to book cars at their convenience of time and location. Uber completely disrupted the traditional industry leader Hertz.

Netflix gives customers the option to stream video on demand. In the process it has disrupted not only itself (it had an online rental model where you rented online but the physical videotapes were delivered to you for viewing), but all other channels of entertainment and transformed the way that people view film and television media. The ability to consume movies and TV shows at any time or place has been made possible by the platform that enabled this business model.

Disney has embraced digital technology in order to enhance experiences in its theme parks, with the use of MagicBand, a wristband that uses RFID and radio to connect with sensors in the park, and transformed the entire park experience for visitors – the experience going to an attraction, staying in a hotel, dining at a restaurant, taking a photo and sending it to friends or family, and buying merchandise as a souvenir.  Visitors receive the MagicBand a few weeks before the visit and can use it to enter the park, buy food or merchandise, reserve attractions, and watch real time data on wait times.

Similarly Airbnb has disrupted Hilton, the traditional leader in the hospitality business and Amazon disrupted Walmart in retail.

The digital business models have at their heart the platform which allows the company to become part of an ecosystem and in the process is able to create value, deliver value and capture value using the value network that has been created.

With this I conclude the 3 part series on the key areas that need focus in a digital transformation exercise which are Customer Experience, Operational processes and New business models.