Digital transformation requires business model innovation (2 of 3)

2018-01-18, 14:45 Posted by: Peter Tyreholt

I have spent the last five years helping companies on their journey in digital transformation and before that I spent 15 years in scaling start-up's which tried to change their industry with digital (even though we did not call it that then ;-)). In this I see two big failures by companies today:

  1. Not creating room for the new and in that not changing culture and way of working
  2. Doing the same but with digital and not really innovating their business model and market position

In my first blog post I covered the first part of number two above, the front stage of the business model. I will now go into the second part of number two, the backstage of the business model.

As described in the previous blog post companies needs to reinvent their value and market position but it is equally important to reinvent how you create and deliver the value and business. Some of the most disruptive forces comes from that you can deliver a higher value to a fraction of the current cost. I use the business model canvas (BMC) as a tool to illustrate some of the business model effects by digital transformation.

I will now elaborate on the effects in the backstage of the business model which are the Key Resources, Key Activities, Key partners and Cost Structures.

Key Resources

  • Platforms (networks) - It sounds simple but it is often the most challenging thing to create, not the technology but the business model. Platforms are really disrupting industries when you create direct connections between the asset owner/creator to the user/buyer of it. Most of the companies I have worked with are looking at this in some form but the real challenge here is the chicken or egg problem with getting the different actors on the platform, being relevant/valuable for all actors and being open/cross industry which also include your competitors. Unthinkable for many product companies! …but vital for platforms and services.
  • Low utilized resources (own or others) - this is the sharing economy at heart and will really hit the industries which has costly equipment with low utilization rates. You have your Uber (initially black limos) and AirBnB (rooms) which are illustrating this movement but almost all industries/markets have this problem and when you can increase a utilization for a valuable resource you can both create a new market space and in so also creating a more sustainable world.
  • IT/digital infrastructure - this is probably the most important reason why startup's have a big chance on the incumbents. When coming to companies that has had a product for many years and especially if they have expanded with acquisitions (which most Swedish brands have) you see the difference between them that included IT costs in the merger and they who didn't. In the latter group any digital initiative will quickly become 10x bigger due to the different ERP, CRM etc systems across the global company. Most IT investment before 2010 are not really built for the modern world where everything works together.
  • Data & analytics - Data the new natural resource which will create all the future value. It is true but it will also require a lot from most organisations to come to that stage where you can work data driven and innovate new customer value and completely new business models on this natural resource! It is interesting to see how connected resources and data is making traditional resources worth very little. I was previously in a map and navigation company living through the disruption of that market where traffic information and maps was extremely costly to create and maintain and then google and waze did that at a fraction of the cost of the commercial map data sets.

Key Activities

  • Automation of processes - This I think is one of the most underestimated values where AI and ML becomes better than humans one task at the time and when you are able to integrate and automate across the organisation and your customers that will save huge amount of time and make you really more competitive. A very basic example is Continuous integration (or deployment) when developing software which quickly reduce the waste when developing software and speed the time to market.
  • Continuous development - I have worked a lot with product companies and they are really not build for having continuous development and deployment of software. The minimum effort is to be able to adapt to the new mobile OS and devices coming each year but most customers does not see that as good enough. They expect it to improve and remove issues over time. One product company that has taken this to the extrema is Tesla who are fixing recalls and releasing new features like autopilot over the air.
  • Convert data to value - Just looking at the fastest growing job titles on Linkedin you have ML engineer, Data scientist in the top. This is really difficult because in the end you want to enable each and everyone in the organisation to test their idea on data and to take data driven decision. But that is really not enough, you also need to work on innovating new business and value propositions from the data where many times the value could actually be to a completely new customer group.

Key Partners

  • Value chain reductions - Different kind of platforms where you can connect directly between actors in the industry, digital services that has direct connection with the end user and so on changes the value chain and remove unnecessary steps.
  • Ecosystem(s) - Often today you products and services can't operate by them self. They need to be in and integrated with the right ecosystems.

Cost structure

  • Technology costs - This is a big hurdle for many companies that the technology cost with IT and software increase drastically and for many traditional managers with no software background it feel like a black hole; always late and always over budget. This is often related to wrong management and culture to do complex projects where the aim is always more and a big bang release - which never works. Think big, start small and iterate quickly is a mantra I live by here.
  • Labour costs - Could in the long run be drastically reduced but many times early in the process they will increase. 

The above is just some example of effects that can be used to innovate the backstage of the business model, which are you using? Which important effects do you think are missing?

Peter Tyreholt

Head of Advisory Services

Cybercom Göteborg

comments powered by Disqus