Dig­i­ti­za­tion

which busi­ness mod­els are most af­fected by dig­i­tal?

The Smart Manager - - Contents - KNUT HAANAES IS PRO­FES­SOR AT IMD. ØYS­TEIN D. FJELD­STAD IS PRO­FES­SOR AND TE­LENOR CHAIR OF IN­TER­NA­TIONAL STRAT­EGY AND MAN­AGE­MENT AT BI NOR­WE­GIAN BUSI­NESS SCHOOL.

Knut Haanaes, IMD, and Øys­tein D Fjeld­stad,

BI Nor­we­gian Busi­ness School, talk about the four busi­ness mod­els which will be af­fected by the dig­i­tal rev­o­lu­tion.

In most in­dus­tries, the com­pet­i­tive land­scape is rapidly chang­ing and as a re­sult, com­pa­nies speed through their life-cy­cles at an un­prece­dented pace (ac­tu­ally twice as fast as 20 years ago, ac­cord­ing to re­cent BCG re­search).

Not only are whole in­dus­tries be­ing dis­rupted—me­dia and en­ter­tain­ment, en­ergy and re­tail­ing, to men­tion a few—but the changes within in­dus­tries are also faster than ever.

The fig­ure be­low shows the mas­sive changes in the me­dia in­dus­try in North Amer­ica from 1950 to 2010. It il­lus­trates a more gen­eral pic­ture of what we see across most in­dus­tries. We see that com­pa­nies are jostling within in­dus­tries at an ever-in­creas­ing pace.

Dig­i­tal is the main driver of the cur­rent changes up­end­ing the busi­ness world. Dig­i­ti­za­tion af­fects all as­pects of our lives; the way we work, the way we live, and the way we con­sume. Much has al­ready been said about dig­i­tal. How­ever, in the midst of all the tech­no­log­i­cal hype/ fan­ta­siz­ing/spec­u­la­tion, we be­lieve that busi­ness lead­ers need to clearly un­der­stand how dig­i­tal en­ables more ef­fec­tive busi­ness mod­els.

A busi­ness model ar­tic­u­lates how a com­pany cre­ates value for its cus­tomers and man­ages the costs of pro­duc­tion and de­liv­ery. There are many dif­fer­ent busi­ness mod­els out there. In some way ev­ery busi­ness has its own. How­ever, there are four im­por­tant ar­che­typ­i­cal busi­ness mod­els that are most af­fected by dig­i­tal:

re­source shar­ing plat­forms

First re­source shar­ing plat­forms in­source phys­i­cal, in­for­ma­tional, and hu­man re­sources. Clas­si­cal ex­am­ples in­clude shared fa­cil­i­ties or la­bor pools, but this is a cur­rent fast grow­ing set of ser­vices cov­er­ing all busi­ness func­tions rang­ing from IT and HR to fa­cil­ity man­age­ment and contract man­u­fac­tur­ing.

The logic of re­source shar­ing is com­pelling—by lever­ag­ing the to­tal scale in the de­liv­ery of a given process across clients, the provider can drive up value through re­li­a­bil­ity, de­vel­op­ment and qual­ity at the same time as they can drive down costs through shared tech­nol­ogy plat­forms. Dig­i­tal is a ma­jor en­abler be­cause the firm can build global de­liv­ery at scale, while also of­fer­ing rel­e­vant data and higher de­liv­ery qual­ity. Ser­vices through re­source shar­ing is a scale and plat­form game where the win­ner will be the

A busi­ness model ar­tic­u­lates how a com­pany cre­ates value for its cus­tomers and man­ages the costs of pro­duc­tion and de­liv­ery.

one who is able to drive scale in cus­tomers and uti­lize tech­nol­ogy plat­forms to de­liver. IBM has been there for a long time, so has ISS, Se­cu­ri­tas and all large En­ter­prise Re­source Plan­ning play­ers. Whereas the early 20th cen­tury was the era of mass pro­duc­tion of prod­ucts (from cars on­wards), the early 21st cen­tury is the time of mass ‘pro­duc­tion’ of ser­vices. Dig­i­tal is the game changer as it en­ables scale, qual­ity, data pro­cess­ing, ma­chine to ma­chine com­mu­ni­ca­tions and sen­sor based sur­veil­lance. And we are just see­ing the be­gin­ning!

net­work­ing ser­vices

As in­ter­est­ing, and per­haps even more im­por­tant, is the ex­plo­sion in net­work­ing ser­vices en­abled by dig­i­tal tech­nolo­gies. Net­work­ing ser­vices are of­ten found in es­tab­lished in­dus­tries such as trans­porta­tion, bank­ing, and the op­er­a­tion of mar­ket places and ex­changes. But now, dig­i­tal tech­nolo­gies have en­abled in­cred­i­bly ef­fec­tive de­vel­op­ment and op­er­a­tions for these types of ser­vices. Net­work­ing ser­vices is prob­a­bly the busi­ness model most of­ten as­so­ci­ated with dis­rup­tion be­cause it al­lows for com­pletely new ways of de­liv­er­ing value. Think about the fol­low­ing fa­mous dis­rup­tors: Spo­tify, Net­flix, Uber, AirBnB, Ama­zon, eBay, Face­book, and Google—to name a few. De­spite ap­pear­ing at dif­fer­ent times, they all have many sim­i­lar­i­ties. They all out­com­peted in­cum­bents with­out pro­duc­ing end prod­ucts or ser­vices. They cre­ated highly ef­fi­cient net­work­ing mech­a­nisms that al­lowed for large scale shar­ing and in­volve­ment by mul­ti­ple prod­uct or ser­vice sup­pli­ers. In a way, they cre­ated clubs that be­came huge and whose net­work ef­fects are a key part of their value. They con­nected peo­ple, com­pa­nies, and

Dig­i­tal en­ables scale, qual­ity, data pro­cess­ing, ma­chine to ma­chine com­mu­ni­ca­tions and sen­sor based sur­veil­lance.

places. Their users, or ‘mem­bers’, wanted to be part of the largest net­work be­cause it pro­vided the best con­nec­tiv­ity, the rich­est of­fer­ings, ac­cess to the most peo­ple and places. These net­work ser­vice firms also all com­pletely out­com­peted the in­cum­bents in the tech­nol­ogy-arena, pro­vid­ing plat­forms that reach huge global scale fast and drive cost to de­liver equally fast. And fi­nally, do not be sur­prised that Uber sub­si­dizes driv­ers. Net­work roll­out is the largest in­vest­ment in net­works, and they know so well that these are ‘win­ner takes all’ games!

prob­lem solv­ing com­pa­nies

An­other group of ser­vice firms known as prob­lem solv­ing com­pa­nies, is also be­ing trans­formed by dig­i­tal. These are the law firms, the man­age­ment con­sul­tants, the ar­chi­tects, the en­gi­neers, the health care ser­vices, the cer­ti­fiers, the an­a­lysts, and more. All these pro­fes­sional ser­vices are be­com­ing much more ef­fi­cient through the use of dig­i­tal tools, global data­bases, col­lab­o­ra­tion plat­forms, and com­mu­ni­ca­tion so­lu­tions. Dig­i­tal tech­nolo­gies can aug­ment, and in some cases, re­place pro­fes­sion­als. But more of­ten, they al­low one-man firms to be ef­fi­cient, by al­low­ing virtual net­works to form in­stantly and en­hance the ef­fi­ciency of the op­er­a­tions of global play­ers like EY and Deloitte in area of au­dit­ing, con­sult­ing and taxes, McKin­sey and BCG in top man­age­ment con­sult­ing, as well as DLA Piper and Baker & McKen­zie in the law and com­pli­ance sec­tor. They all know that if they do not quickly be­come fully dig­i­tal, they will de­cline rapidly and be over­taken by com­pe­ti­tion and be­come ir­rel­e­vant. Dig­i­tal is a ne­ces­sity in­side such firms and a re­quire­ment in their mar­kets. Their clients ex­pect to be work­ing with com­pa­nies that are one step ahead, not two steps be­hind.

man­u­fac­tur­ing firms

Fi­nally, are man­u­fac­tur­ing firms less in­flu­enced by dig­i­tal? Not at all. Most would say that man­u­fac­tur­ing, ro­bot­ics, au­to­ma­tion, 3D print­ing, sen­sors and dig­i­tal plat­forms will al­low for a fourth in­dus­trial rev­o­lu­tion that brings about mass cus­tomiza­tion—an econ­omy that tran­scends the tra­di­tional trade-off be­tween scale and cus­tomiza­tion. This rev­o­lu­tion also breaks down the tra­di­tional ideas driv­ing glob­al­iza­tion, al­low­ing for instant lo­cal pro­duc­tion and de­vel­op­ment at low cost. The chal­lenge for in­dus­trial firms is twofold. First they need to em­brace dig­i­tal fast, like GE is do­ing. Sec­ond, they need to em­brace dis­rup­tion and not be de­fen­sive, like the car pro­duc­ers were with elec­tric and self-driv­ing cars.

These are the four busi­ness mod­els which will be the most af­fected by dig­i­tal. In other sec­tors we also see that dig­i­tal al­lows firms to de­velop new busi­ness mod­els (like Ama­zon branch­ing out into cloud ser­vices), or trans­form busi­ness mod­els en­tirely (as IBM did in mov­ing from prod­ucts to ser­vices and now again into an­a­lyt­ics). We also see that dig­i­tal al­lows firms to dis­rupt them­selves (Net­flix con­tin­u­ously mov­ing to the next de­liv­ery plat­form is a good ex­am­ple).

In sum, the over­rid­ing chal­lenge for all firms is to rec­og­nize that dig­i­tal will trans­form the way they cre­ate value very fast, not ‘hope it will pass’ or ‘not be that im­por­tant’. We need to rec­og­nize that: All busi­ness mod­els will be dig­i­tal.

Dig­i­tal will ac­cen­tu­ate the core logic and make busi­ness mod­els even more im­por­tant.

Dig­i­tal will also af­fect the or­ga­ni­za­tional de­sign in dif­fer­ent busi­ness mod­els in spe­cific ways. Fi­nally the process of dig­i­ti­za­tion has to be aligned with the logic of the busi­ness. ■

Dig­i­tal al­lows firms to de­velop new busi­ness mod­els or trans­form busi­ness mod­els en­tirely.

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