Re-recorded video of the keynote speech given by Dr Claude Diderich on June 11th, 2020 at the 5th International Conference on Digital Economy (ICDEc 2020).
At least since the advent of Amazon, digital business model innovation is in every manager’s mouth. Many successful firms, including Airbnb, Facebook, and Apple, rely on fundamentals of digital business models to define their strategy. To understand the drivers of their success, it is important to grasp what determines success. The academic answer to this generic question is also generic, namely “strategy”. Strategy, according to Ansoff, Andrews, or Barney is rooted in allocating scarce resources. Strategists, like Kaplan, Norton, or Steyer, see planning as the foundation of strategic success. Porter, another renown strategy researcher, defines success as identifying and exploiting competitive advantages in an industry setting. Others, like Mintzberg, see success rooted in managerial decision making. All these definitions of success fail to consider the specificities of a digital world, including being service oriented, its ever-changing nature, the availability of big data, and the blurring of the notion of industry.
STRATEGY IN THE DIGITAL WORLD
Martin defines strategy as making informed choices about how to play and win the competitive game. This definition comes closer to a digital economy reality. A core element of how to play in a digital world is defining a firm’s business model. The business model framework is the new concept for leading organizational renewal in a customer-centric digital world. The simplest definition of a business model is a description of i) how a firm creates value for its customers and ii) how it captures value for itself. When analyzing business models of successful firms, five key attributes can be identified and related to answers from five key questions:
- Customer segments – Who are the customer segments targeted by the firm and what are their needs to be addressed, or, in Christensen’s terminology, what are the jobs that customers want to get done?
- Value proposition – How do the products and services that the firm wants to sell generate value for customers by addressing their needs and supporting them to get their jobs done?
- Capabilities – How does the firm ensure that it can deliver upon the promises made to its customers? This is especially relevant and challenging if the offerings are intangible, like services or relationships, as is most often the case in a digital world.
- Financials – How does the firm make profit from selling its offerings to its customers? Stated differently, why should customers be willing to pay the price requested by the firm to get their needs satisfied, their jobs done?
- Competitive advantage – Why should customers buy the products and services from the firm, rather than prefer those of their competitors or rely on substitutes?
WHAT DIFFERENTIATES DIGITAL BUSINESS MODELS
To design an innovative digital business model, it is important to understand three key differences between business models of brick and mortar firms (e.g. car manufacturers, shopping malls, craftsmen) and those of business models from firms operating in a digital economy.
First, many digital business models target multiple distinct customer segments and create value by connecting them. A typical example is Uber, who connects people seeking transportation from A to B with drivers offering such transportation on a customized basis. Another example are credit card companies, connecting consumers (buying products) with stores (selling products) and banks (handling the transfer of money). The traditional concept of industry is replaced by that of ecosystem.
Second, successfully digital business models focus on a superior understanding and fulfillment of customer needs. Rather than putting technology at the forefront (e.g. blockchain or artificial intelligence) or focusing on scaling a commodity service (e.g. messenger services or payments), as many less effective digital firms try to do, success comes from helping customers get their job done. For example, Amazon addresses the need for choice and availability of books rather than trying to sell books in stock. Hilti offers access to construction tools, like drillers, on demand for specific tasks as a service rather than selling them. WeTransfer supports transferring large files from one user to another instead of selling a medium.
Third, successful digital business models address the old-fashioned competitive advantage question in a novel way. Having a differentiating trait is especially important in the digital world, as it is often all too easy to copy a digital business model. Sometimes, competitive advantage is based on a winner-takes-all approach, like in the case of Facebook. But often, having a distinct hard to imitate differentiating characteristic is key. Access to specific resources (e.g. movies available on Netflix, songs on Spotify) may be considered such a competitive advantage. Against common knowledge, differentiation may come from focusing on specific customer segments, specific jobs to be done, or even specific roles in an ecosystem, rather than trying to satisfy any need from any customer at any cost.
KEY SUCCESS FACTORS
In summary, successful digital business models need to exhibit four traits:
- Desirable – Successfully digital business models offer products and services that customers want to buy because they address one or more of their needs and create value for them.
- Feasible – Successful digital business models ensure that they can deliver upon the promises made to their customers.
- Viable – Successful digital business models offer products and services at a price that customers are willing to pay and that does allow to generate a profit.
- Competitive – Successful digital business models differentiate in a way that the targeted customers prefer their products and services over those of competitors or relying on substitutes.
Note: This post describes the keynote presentation by Dr Claude Diderich at the 5th International Conference on Digital Economy (ICDEc 2020) on Emerging Technologies & Business Innovation, June 11-13, 2020. The actual presentation is available from sideshare.net.