QUES­TIONS FOR Stephanie Wo­erner

A dig­i­tal busi­ness model ex­pert de­scribes the key ques­tions to­day’s lead­ers need to ask.

Rotman Management Magazine - - CONTENTS - In­ter­view by Karen Chris­tensen

You have said that dig­i­tal trans­for­ma­tion is ac­tu­ally not about technology. Please ex­plain.

It’s re­ally about change — and technology is just one as­pect of that change. Be­fore the in­ter­net, busi­nesses op­er­ated pri­mar­ily in a phys­i­cal world of place, but to­day, all in­dus­tries are shift­ing to­wards a world of dig­i­tal space. Ev­ery or­ga­ni­za­tion must ex­am­ine how it will move from place to space and en­gage its cus­tomers dig­i­tally. This will re­quire new kinds of skills, re­sources and ca­pa­bil­i­ties. In the end, the ques­tion is not, ‘What kind of technology do we need?’ but, ‘What makes our en­ter­prise great, and how can we use dig­i­tal to op­ti­mize that?’

You have found that dig­i­tal dis­rup­tion comes in three va­ri­eties. Please de­scribe them.

The first type of dis­rup­tion hap­pens when a new en­trant— typ­i­cally a start-up like Uber or Airbnb— comes into an ex­ist­ing mar­ket space and of­fers an ex­cit­ing new value propo­si­tion. In bank­ing, for in­stance, we are see­ing fin­tech start-ups go­ing af­ter cer­tain as­pects of the big banks’ prof­its. At the mo­ment, they’re re­ally go­ing af­ter loans, which are par­tic­u­larly prof­itable for the banks.

The sec­ond form of dis­rup­tion comes from a tra­di­tional com­peti­tor within your in­dus­try, but that or­ga­ni­za­tion changes its busi­ness model to be­come a much more for­mi­da­ble com­peti­tor. For ex­am­ple, Nord­strom has mor­phed from be­ing a tra­di­tional depart­ment store into an at­trac­tive omni-chan­nel busi­ness, com­bin­ing the best of place (tan­gi­ble, prod­uct based, cus­tomer-ori­ented trans­ac­tions) and space (in­tan­gi­ble, ser­vice based and ori­ented to­wards the cus­tomer ex­pe­ri­ence). Bank­ing, in­sur­ance, re­tail and en­ergy com­pa­nies are all strug­gling to find that per­fect mix of place and space.

The third form of dis­rup­tion in­volves cross­ing in­dus­try bound­aries. It’s what hap­pens when chal­lengers come from com­pletely out­side of your in­dus­try. This form of dis­rup­tion is the most dif­fi­cult to pre­dict. For ex­am­ple, think about the con­sor­tium of Ama­zon, Jp­mor­gan Chase and Berk­shire Hath­away that is try­ing to fig­ure out what it can do in the

health­care space. Th­ese are not health­care com­pa­nies, but to­gether, they have some very strong ca­pa­bil­i­ties, and they be­lieve they just might be able to do some­thing to im­prove health­care in the United States. Peo­ple were very sur­prised when they an­nounced what they were go­ing to fo­cus on.

Tell us about your Dig­i­tal Busi­ness Model Frame­work (DBM).

Our re­search shows that dig­i­ti­za­tion is com­pelling com­pa­nies to change their busi­ness mod­els along two key di­men­sions. First, they are mov­ing to­wards a bet­ter un­der­stand­ing of cus­tomers, in­clud­ing their needs and life events. It’s not just about de­mo­graph­ics or pur­chase his­tory any­more — but in­stead, what are their mo­ti­va­tions for buy­ing, and what kind of prob­lems are they try­ing to solve?

The sec­ond key di­men­sion in­volves mov­ing from a con­trolled value chain ori­en­ta­tion to a net­work ori­en­ta­tion, or a web of re­la­tion­ships. This en­tails rec­og­niz­ing that you may not be able to pro­vide ev­ery­thing your cus­tomers need, and that you can add value by part­ner­ing up with oth­ers who can pro­vide com­ple­men­tary ser­vices. Th­ese are the two key di­men­sions of ‘cre­at­ing the next-gen­er­a­tion en­ter­prise’ — and if you put them to­gether in a stan­dard two-by-two ma­trix, you get four busi­ness mod­els.

Please de­scribe those four busi­ness mod­els.

The first one is the Sup­plier, and this is a tra­di­tional busi­ness model where a pro­ducer sells through other en­ter­prises. For ex­am­ple, TVS made by sup­pli­ers like Sony and LG, which are sold via a re­tailer like Best Buy; or firms that sell in­sur­ance via in­de­pen­dent agents (e.g. Chubb Group). Firms in this quad­rant have, at best, a par­tial knowl­edge of their end cus­tomer and typ­i­cally op­er­ate in the value chain of an­other, of­ten more pow­er­ful en­ter­prise. This model is not go­ing to dis­ap­pear, but as en­ter­prises con­tinue to dig­i­tize, sup­pli­ers are likely to lose more power and be pres­sured to con­tin­u­ally re­duce their prices — per­haps ac­cel­er­at­ing in­dus­try con­sol­i­da­tion.

The sec­ond is the Omni-chan­nel. Th­ese are busi­nesses that pro­vide cus­tomers ac­cess to their prod­ucts across mul­ti­ple chan­nels, in­clud­ing phys­i­cal and dig­i­tal chan­nels, de­liv­er­ing greater choice and a seam­less ex­pe­ri­ence. Great omni-chan­nel busi­nesses like Wal­mart and the big banks con­trol an in­te­grated value chain that of­fers multi-prod­uct, multi-chan­nel cus­tomer ex­pe­ri­ences to ad­dress life events. The chal­lenge for th­ese com­pa­nies is to move fur­ther up the ver­ti­cal axis of the DBM, act­ing on in­creased knowl­edge of cus­tomers and their goals and life events.

The third model is the Mod­u­lar Pro­ducer. Th­ese are Busi­nesses that pro­vide ‘plug-and-play’ prod­ucts or ser­vices that can adapt to any num­ber of ecosys­tems. To sur­vive, they have to be one of the best pro­duc­ers of their core ac­tiv­ity. For ex­am­ple, Paypal can op­er­ate in vir­tu­ally any ecosys­tem, be­cause it is ‘hard­ware ag­nos­tic’, mo­bile en­abled and plat­form-based. While there may be many mod­u­lar pro­duc­ers in an in­dus­try, typ­i­cally only the top three or four make sig­nif­i­cant prof­its, while the oth­ers strug­gle, as it’s ul­ti­mately a com­mod­ity busi­ness.

Fi­nally, there are Ecosys­tem Driv­ers, which es­tab­lish a dig­i­tal ecosys­tem — a co­or­di­nated net­work of en­ter­prises, de­vices and cus­tomers that cre­ates value for all par­tic­i­pants. This model has higher rev­enue growth and net profit mar­gins than the oth­ers, and not sur­pris­ingly, it is the tough­est busi­ness model to achieve. Ecosys­tems are par­tic­u­larly pow­er­ful in re­tail (e.g. Ama­zon), but health­care (e.g. Aetna), on­line en­ter­tain­ment (e.g. Net­flix) and wealth man­age­ment (e.g. Fidelity) all have pow­er­ful ecosys­tem-driver busi­nesses. Go­ing for­ward, cus­tomers of all kinds will in­creas­ingly pre­fer the ef­fi­ciency of a ‘go-to’ dig­i­tal ecosys­tem driver to con­duct trans­ac­tions in ev­ery do­main.

Does ev­ery com­pany need to pick one of the four mod­els?

They need to pick at least one but in fact, most large en­ter­prises em­brace more than one of th­ese mod­els. For ex­am­ple, not only is Ama­zon an Ecosys­tem Driver, it also pro­vides ser­vices to other busi­nesses, in­clud­ing ful­fill­ment (it han­dles the ware­hous­ing, pack­ing and ship­ping of one bil­lion items) and technology ca­pa­bil­ity (through Ama­zon Web Ser­vices), mak­ing it a Mod­u­lar Pro­ducer as well.

Most banks op­er­ate in sev­eral quad­rants—and of­ten in all four. The typ­i­cal big bank acts as a sup­plier, sell­ing mort­gages and in­vest­ment prod­ucts. Most also work hard to im­prove their omni-chan­nel of­fer­ings by reimag­in­ing the branch to be more of a cus­tomer ac­qui­si­tion, sales and ad­vi­sory lo­ca­tion, with most trans­ac­tions done dig­i­tally. Th­ese same banks op­er­ate as mod­u­lar pro­duc­ers, of­fer­ing var­i­ous ser­vices in­clud­ing pay­ments and for­eign ex­change to many other en­ter­prises. And fi­nally, many banks have made for­ays into the ecosys­tem-driver model by of­fer­ing more com­plete ser­vices for life events such as buy­ing a house, own­ing a car or pre­par­ing for re­tire­ment.

Talk a bit about how an omni-chan­nel busi­ness like Wal­mart in­ter­acts with an ecosys­tem-driver like Ama­zon.

Here’s an ex­am­ple: My col­league re­cently or­dered some bar­be­cue coals on Ama­zon, not notic­ing who the seller was; and, a few days later the pack­age ar­rived in a box from Wal­mart.com. That’s the power of a great ecosys­tem, and it of­fers in­sight into how Wal­mart is both com­pet­ing against and part­ner­ing with Ama­zon by pro­vid­ing prod­ucts as a mod­u­lar pro­ducer to Ama­zon’s ecosys­tem-driver model.

You rec­om­mend that com­pa­nies make an ef­fort to move up and right on your DBM frame­work. Why is that so im­por­tant?

Com­pa­nies need to fo­cus on two things: learn­ing more about their cus­tomers and chang­ing their busi­ness de­sign to em­pha­size more part­ner­ing and more por­ous bound­aries. At the mo­ment, most busi­nesses find them­selves on

the left side of our frame­work. Among the larger com­pa­nies we stud­ied, 46 per cent were sup­pli­ers, 24 per cent were omni-chan­nel, 18 per cent were mod­u­lar pro­duc­ers and 12 per cent were ecosys­tem driv­ers.

Re­tail and IT ser­vices have the high­est per­cent­age of ecosys­tems, while man­u­fac­tur­ing and ser­vice in­dus­tries are still early in their move up and to the right on the frame­work. In­ter­est­ingly, smaller en­ter­prises (with rev­enues less than $1 bil­lion) are al­ready fur­ther up and to the right on our frame­work than larger en­ter­prises, with 31 per cent in the ecosys­tem-driver model and 36 per cent in the om­nichan­nel model.

To move up and to the right, you can be­gin by en­hanc­ing the col­lec­tion, con­sol­i­da­tion and gen­er­a­tion of in­sights about your cus­tomers — re­sult­ing in bet­ter cus­tomer ex­pe­ri­ence and more tar­geted and suc­cess­ful of­fers. Then, you can start to move to the right by mov­ing from pro­vid­ing ser­vices di­rectly to the cus­tomer to be­com­ing part of a web of re­la­tion­ships that pro­vide a broader set of ser­vices, via part­ners.

Lead­ing in­sur­ance com­pany USAA did this bril­liantly by help­ing its cus­tomers find their per­fect car, but they didn’t stop there. They linked peo­ple to car deal­ers with the de­sired car in stock, helped them ne­go­ti­ate the price, pro­vided fi­nanc­ing and some­times fa­cil­i­tat­ing de­liv­ery. The av­er­age sav­ings for a USAA mem­ber is $3,385 off the rec­om­mended re­tail price. That is a prime ex­am­ple of how a dig­i­tal model can cre­ate value for peo­ple.

You have iden­ti­fied three key sources of com­pet­i­tive ad­van­tage in a dig­i­tal busi­ness en­vi­ron­ment: con­tent, cus­tomer ex­pe­ri­ence and plat­forms. Please de­scribe each.

Con­tent is more than just news sto­ries. It is what­ever you pro­vide to your cus­tomer. If you’re sell­ing phys­i­cal prod­ucts, that would fall un­der con­tent, as would in­for­ma­tion. With Ama­zon, part of their con­tent is the prod­uct it­self, and part of it is all the in­for­ma­tion around the prod­uct, like user man­u­als, and cus­tomer re­views. What­ever the cus­tomer is con­sum­ing, that is con­tent.

The cus­tomer ex­pe­ri­ence is ev­ery­thing that wraps around your con­tent to make deal­ing with your com­pany a de­light. Do­ing this well re­quires con­tin­u­ally mon­i­tor­ing what cus­tomers are do­ing and what they say they want. That means in­vest­ing in good user in­ter­faces and cre­at­ing op­por­tu­ni­ties for col­lab­o­ra­tion with cus­tomers.

Fi­nally, your plat­form is the method by which you pro­vide your con­tent to cus­tomers. Com­pa­nies need to de­velop and re­use — i.e. share across the en­ter­prise, rather than rein­vent­ing for each area — dig­i­tized plat­forms. With­out plat­forms, the IT units in com­pa­nies might im­ple­ment a new so­lu­tion in re­sponse to ev­ery busi­ness need — cre­at­ing a maze of sys­tems that meet cur­rent needs but don’t scale en­ter­prise-wide. Worse yet, the cus­tomer ex­pe­ri­ence suf­fers as the cus­tomer gets a frag­mented, prod­uct-based ex­pe­ri­ence rather than a uni­fied, multi-prod­uct ex­pe­ri­ence. Think about your on­line bank­ing ex­pe­ri­ence to­day, where you can see all your ac­counts in one place — and how you used to re­ceive in­di­vid­ual pa­per state­ments for each ac­count.

Any part­ing ad­vice for lead­ers?

Given the level of tur­moil be­ing caused by dig­i­tal dis­rup­tion of all va­ri­eties, ad­dress­ing it has be­come a busi­ness im­per­a­tive. It is time for lead­er­ship teams to eval­u­ate the threats, un­der­stand the op­por­tu­ni­ties — and start cre­at­ing new op­tions for the fu­ture. Stephanie Wo­erner is a Re­search Sci­en­tist at the Cen­tre for In­for­ma­tion Sys­tems Re­search at MIT’S Sloan School of Man­age­ment. She is the co-au­thor of What’s Your Dig­i­tal Busi­ness Model?: Six Ques­tions to Help You Build the Next-gen­er­a­tion En­ter­prise (Har­vard Busi­ness Re­view Press, 2018).

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