Digital transformation is business model transformation enabled by information technology. What kinds of digital transformation are there? Can you learn from others? Where do you start? A review of business model transformations in the past 40 years tells us a lot about the potential of IT to innovate your business model.
A business model consists of a value proposition, value creation logic, a model of your value network and a profit model. Sometimes, key resources such as the technology for value creation are included in the business model too. In this blog, I view technology as the enabler of a business model, and not as part of a business model.
To understand technology-enabled business model transformation, it is useful to look at one case of technology-enabled business model reinforcement.
Business model reinforcement
In the 1960s and 1970s, organizations reinforced their business model by automated data storage and processes. The goal was to gain efficiency in executing the same business model.
This is a valid goal of IT implementation. For example, in the 1980s, Walmart installed point-of-sale terminals and implemented a satellite-based communications network among its stores to optimize its distribution system. It forced its suppliers to implement cross-company information systems to maximize manufacturing and distribution efficiency . This did not change its business model: providing goods cheaply to local markets through an efficient supply and distribution network.
Business model reinforcement may involve radical business process reengineering and restructuring of the business , but it does not change the business model. Compare this with the examples of business model transformation, given next in roughly chronological order.
Digital transformations in the past 40 years
Providing information and support for ecosystem members
McKesson Corporation is a distributor of pharmaceuticals and health care products to independent drug stores. In the 1980s, it provided mobile health-care order entry systems to its customers, independent drug stores, so that they could survive competition with big drugstore chains . They also supplied drug stores with software to help set prices and provided suppliers and manufacturers up-to-date sales information. Later they extended this with insurance claim processing software that speeded up payments.
In this process, McKesson changed its value proposition from providing products to providing information and sales support for ecosystem members. It created an extended enterprise encompassing its customers, suppliers, manufacturers, insurance companies, and consumers. The enabling technologies of this business model transformation were portable computers, data analytics, and computer networks.
The 1990s saw the rise of online shops, with Amazon as prime example. Physical shops had to adapt their business model to include online channels and adapt their value network to speed up the fulfillment process. Enabling technologies were the Internet and the Web.
Amazon turned into two-sided platform when it opened its store for 3rd party sellers in 2000. Social networks were created shortly after. YouTube ignited, Google acquired Android and Apple opened is App Store. Established product and service companies added community platforms to their service offering. Enabling technologies of these and all other online platforms are the Internet, the Web, and mobile computing.
Manufacturers are moving from selling products to selling solutions. For example, Knorr-Bremse Rail Vehicles has moved from selling brakes for commercial rail vehicles to selling integrated braking systems for freight cars, commuter trains, trams and metros . After-sales services now include predictive maintenance, also called condition-based maintenance, which uses sensors, networks and big data analytics to predict maintenance needs. Payment can be based on satisfaction of key performance indicators which are monitored in real time.
Some companies have taken performance-based contracting to the logical end and sell performance rather than products. This is called servitization. Rolls-Royce sells thrust rather than jet engines, Atlas Copco sells air per cubic meter rather than compressors, and Orica sells broken rock (exposed rock surface) rather than explosives.
A common thread in these innovations is that they supplement products with services, services become part of the customer process and the profit model is based on outcomes. Enabling technologies are sensors, wireless networks, and big data analytics  .
Business model transformation trends
Two trends stand out in the above short history. First, companies have expanded their value proposition by adding service and platform value creation logic to their offering. In some cases, they have replaced product creation logic by service creation logic (servitization).
Second, all transformations have been enabled by IT-based networks. Each transformation is additionally enabled by other IT, but networks are the common enabler in all of them. This means that each transformation creates new value from the ecosystem in which the company is embedded. For example, they create value-adding extended enterprises consisting of independent companies that cooperate to create value for the customer.
What can you do to asses the transformation of your own business model? To start with, ask four questions about your business model:
- What is your value proposition?
- What is your value creation logic (product, service, platform)?
- What value network do you use to produce your offering?
- What is your profit model?
Once you have made your business model explicit, you can explore the design space by exploring the possibilities of IT as technology to create value, create networks, coordinate and share data. Each of the four elements of a business model is a good entry point for business model transformation. The above short history gives examples of transformations that have taken value creation logic and the value network as entry points. More traditional entry points are the value proposition and the profit model .
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