IS YOUR BUSINESS MODEL DIGITALIZATION-PROOF?

A business model is an abstract description of the value added by a business enterprise. It has three core components: the value proposition (in which ways are customers provided with benefits?), the value chain architecture (how is value creation organized internally and externally?), and the profit equation (how does the business generate revenues?). Although all three components of a business model are probably affected by digitalization, it is mainly the value proposition that receives the most attention. This is because how you organize value chain activities or generate returns is irrelevant if a company fails to deliver customer benefits better than the competition.

THE DIGITALIZATION STRESS TEST

There are three main threats posed by digitalization to the benefits delivered by a company:

1. Benefits are based on the opportunistic exploitation of “information advantages”
2. The client problem previously solved by the company in analog times no longer exists in the digital space
3. The client problem still exists, but it can’t be solved using digital solutions

Companies have a number of “information advantages” over clients. They know the production process of their products and thus also have a better understanding of the resources this requires. As a result, they tend to be in a much better position to judge not just profit margins, but also a variety of quality criteria. As information becomes more “symmetrized” in the new digital space, it becomes increasingly difficult – if not impossible – to exploit such information advantages, because it might only take seconds for potential customers to research the experiences of previous customers, or even people previously or currently at the company. As a result, benefits based on the opportunistic leveraging of information advantages are massively threatened by digitalization.

The second reason why benefits become eroded is that the problem previously solved by the company along analog lines may completely disappear. The conditions of the digital space can thus result in the customer pain no longer existing.

THE LAWS OF DIGITAL TECHNOLOGY

Five of the laws of digital technology appear to be relevant within this context. In new digital territory, due to information symmetrization (law #1) the demand for companies capable of bridging information asymmetries will decline sharply. Examples of benefits that revolve around the reduction of information asymmetry are restaurant guides, tourist handbooks, TV listings, or consumer test magazines. Interface centralization (law #2) will erode demand for intermediaries who span different interfaces.

A typical example of such a function is a taxi control room, which ultimately does nothing more than provide an interface for customers (often via telephone) and an interface for taxi drivers (often via radio) so that customers and taxi drivers can be linked to one another. The emancipation of space and time (law #3) will erode demand for spanning physical space. Processes in the old analog world that were linked through the same space require at least one of the parties to be mobile, especially if two parties are in different locations anyway. Students and teachers have to go to schools, patients go to medical practices, employees go to work. If digital transformation can result in these processes becoming possible without sharing the same location, mobility requirements are reduced. Benefits stemming from lower transaction costs come under pressure in the new digital space, because transaction costs tend to be significantly lower in such a business biotope compared to the analog territory (law #4). For example, the benefits offered by retail chains, which deliver lower transaction costs by pooling wares in physical terms, are threatened by digitalization. Finally, law #5 relating to “new galaxies of insights” will make some forms of information gathering obsolete. For example, in the new digital space, companies are much less dependent on market research, since they can observe the behavior of their customers in detail themselves.

ANALOG VS. DIGITAL

The third threat posed to business models in the old analog world results from customer pains – that were previously solved along analog lines – now being solved by digital solutions.

There are numerous examples of this, such as entertainment products, education, and financial solutions. The competitive standings of analog and digital stakeholders are fundamentally different because firms in the new digital space operate according to the conditions of digital rules. Four of these can have a major impact on competitive standing: the marginalization of incremental costs, speed explosion, new galaxies of insights, and the emancipation of space and time.

Stakeholders in the new digital space have practically zero incremental costs. The bigger the key market – i.e. the greater the sales potential – the more stakeholders in the old analog world of business are at a disadvantage in cost terms. Compared to companies operating along digital lines, stakeholders in the new digital space also always have speed advantages. The more important time factors are to competition, the greater the competitive advantage enjoyed by digital companies. In the new digital space, previously unknown connections get discovered (new galaxies of insights) and obviously, this also applies to customer behavior. The more important it is to understand customer behavior (gain customer insights) in order to deliver benefits – for example due to a strong customer need to solve individual problems, as is the case with the healthcare market or dating services – the greater the competitive advantage of the digital players. After all, digital players operate according to the conditions of an “emancipation of space and time.” The more restraints there are from a customer standpoint when it comes to space (location of the customer) or time (such as opening hours), the more digital players are at an advantage.