Opportunities to create new business models

Digital transformation: opportunities to create new business models Saul J. Berman Forces for business change Enabling the transformaticn are the devices for moble connectivity, such as smart phones and tablets, and the creation of social networks, such as Facebock and Twitter. These developments have ignited an exponential explosion in data, which, in tarn, requires powerful business anaytics to make sense of the information and take full advantage of it. Customers have a range of new choices, many of which are beyond the infuence of traditional marketing. Customer decisions about what to buy are increasingly intormed by social networks. Where personal and business contactl, product selections home video cligs, favorite news items, even teal-time location coordinates, are shared instantiy and widely. For B28 purchases. people who reach out to their personal networks for advice on the latest generation of washing machines are also likely to use others’ op nions on the Internet to check out their protessional networks for views about business procurement choices. The habits of consumers – such as seeking independent information and advict before making a purchase – have aiso become the habits of business buyers.[1] Mobility shifts time and location for customer engagement By the end of 2011, smart phones and tablets passed PC shipments.[2] Downioads of mobile applications, or “apps,” are expected to surge from 11 billion in 2010 to 77 billion in 2014 [3] These applications use location sensors and cameras, coupled with broadband “To succeed in digital transformation leading companies focus on two complementary activities: reshaping customer value propositions and transforming their operations using digital technologies for greater customer interaction and collaboration.
oonnectivity, to enable activities ranging from videoconferencing to real-time coupon delivery for nearby stores As a result, more customers are aWways connected, so companies can interact with them at any tme, With information aboun products be0orning as importart as the products themselves, amost every compary is now in the business of creating and delwering “content” – information that is personal, relevart and timely when accessed by the customer. Social networking is growing up Whim two billion people comected to the internet. sociai media is quekly becoming a key means of commurication and colaboration.[4] Young people may have speasheaded the chargpes, but people of all ages have joined the virtual revolution: 89 percest of the mitennial generation uses social networking siles, but so do 72 percent of baby boomers. And the gap is closing {5] The scale of social media impact can be staggening {6} For example, when Michelie Obama makes a putic appearance, her fashion choices are resyed instantaneously by fashion biogpers who compete to identity the sources of her shoes, dresses and accessories. These blogs include links to stores and designers that sell thote iterri. The American First Lady’t economic impact on the fashion industry has been caiculaced at 2 percert per day in stock valuations of clothing comparies associated with her. Over a year, stock appreciation carne to $2.7 bilion for the 29 companies tracked, or $14 milion for each of her 189 public appearances:[7] As much information is now being generated every two days as existed between the dawn of civization and 200S, according to toemer Google CEO Eric Schmidt. (8) Demand for video, as well as conetnent conrectivity, is expected to double the amount of mobile deta traftic every year through 2014[9] Advanced mathematical analysis, powered by intensive computing systems, provides unprecedented opportunily to mine and inserpret the dafa Transforming the business What do busenesses need to do to get ahead of the widespread torces tor change in our dighal ago? Key areas include reconfiguring the customer value propostion – what is being atfered – and reshaping the operating model – how it is delvered. Up is now, most organizations have focused on one of these areas through a set of specific initiatives Each has its own sot of challanges and opporturitios: – Products and services, information and customer engagernent can be reshaped using the new capabilties for mobility, interactivity and normation access. The chatenge then becomas how to monetize these new customes value propositions. – The operating model can be realgned so that customer prelerences and requrements inform every activity in the buying and selling chain. Dong this requires integrating all business activities and optimizing how data related to those activities are managed and tracked. The challenge is to determine the business requirements for achieving the full bernefit. Strategie paths to transformation We have found from our research and industry experience that the strategic foules to trandormation can be summarizod by throe basic approachor: – Focusing on customer value propositions. – Transforming the cperating model. – Combining those two approaches by simultaneously tanstorming the customer value ptoposition and organizing cperations for deivery in boday’s increasingly digital world, even comparies in primarly physical industries will not start their digital transformation journey from “zeco. Inetead, most ergantizations are aleady thding ways to use digital information by peoviding interactive web sites, improved customer service of enhanced cusicrner oxperiences. Similaray, they taze oreating basic operating capabilies such as online channels or dotal supply chain tracking. From this starting point. a company’s strategic approach to transformation typically folows one of the tree paths shown in Exthibit. 1. The best path tor a particular company depends on its nrategic objoctives, ind stry oontext. competitive pressures and customer expectations. In industries where the profuct is moetly physical and custamer requirements for information ave not yet advanced, such as minerals and mining. comparies mny ware to begin digital transtormation with operations (Path 1) in others, such as financial setvices, where new revenue-based services can be offered onine and through moble devices, an inital focus on the customer value proposition will provide ammeciale benetis (Path 2 ). However, rany companies, indeed entire inchustriess, need to redeline customer value proposibonts and opetating models smultarneusly, of in near tandem (Path 3), to succeed in digital transformaticn: Orgarizaticns that are able and enger to do so are in a unique position to seize industry leacership. Peshaping the customer value proposition Using indormation and analytics, organizations can restape the customer value propcoition on three levels by enhancing. extending or redefining the value of the cusiomer experience (see Exhibit 2). Exhlbit 1 Dig af transfocmation requies stratege develapment of the valus aropostion and the operating model. Enhance products and services for a better customer experience. in alf industries. comparies augment tradtional products with features and terrices that dittertntiate their brands on the basis of new 5ypes of irformation and interaction. Automotive comparies like Votvo or EMW. for example. enhance their customers andomotive experences by providing dighal media access and enhanced securty teatures, sich as sersors that detect activity in bind mpots. [11] The Danigh toy manulacture, Lego, bect known for its interiocking plastic biocks. has created new robotics products with the help of writual conmunities that alow customers to compete in company design challenges (12) Macy’s, the US department stcre, recently showcasod a fitting toom with a mirtor that digitally captures the refiecten of a shopper trying on a new dress or other clothing. Then, with a puah of a butson, the customer can add a pair of shoes or a scast to the image. “see” an accessoraed version of her outt and send the digial image to her triends for reat-time opinions (13) Extend otterings for new revenue streams. The next stap is to find new ways to monetize these features, adding new rovenue stroarns by extending trafisional producta and services through the use of digtaly delvered services, cortert or intormation. he some industries, such as media and entertainmont. comcanies muat entirely replace iost neverue strearre (see sidebac. A music lesson): Foe chers, muplomentary revenus is the peimary bencht. Teicmatics. for esample, provides audo mabers with revenue potential for everything tom endigency fesponse servicus and tratice and congestion alens 10 advanced diagnostics and incar applcanicns taioned to the driving owperience. Divert who pay for “Myford Touch” can adjust velume on their mp3 files. take phone cals and adfuet tomperat wee with integrated voice-control tuctrologrf 14fo foy companies are seizing comparable opportunites. For example. Webkir provides the young owners of ics chutied animsis with a code for ertering an online world, where they can “feed” and accesscrite corrpputerched versions of their pees. In addison to creating satahying play for kids. the foy compary gans reverue by seling aggregated dada to oher marketers.[15] A music lessonc media and entertainment The music induatry aat one of the frst to feel the brunt of the digitai revelution, with the standardized mps format for digtioed mutic ard twe asalatily at bractound correctiont for Irternet dintribufion, the neaity of industry dwefton became acpanert to alt. Tradticrai musix comparies are enpected to lose nore than 35 percert of valye between 2003 and 20+2 with total ievenues for the perisd eipected to drop tram USS 12 bilion to Savilion but at the sime tere ather parts of the misic econerten – more cosely afined ts the cuntomer – experienced signifcant grown. This indudes corsund eectorics concanies far make digtai music paryers, concent promolors and producers of oher he everts ito The lesson? industry ncumberts that arod the hard decsons aooul digtil barstarmmon are their cuntomers, digtal trantlomition can create sgrificant new ocpontunites. Redefine core elements for a fadicaly reshaped value proposition. Seiang the tall opportunity of the digzal revolution, some comparios tranafom the entire oustomer value proposition and operations for delivering the value. Ohen this is a response to techroiogicaly irnovative new ortrarts that spur traditional companieg to radcally reshape their customer value propositons. For example, while paper-based puteshers strupgled to find sustarable businest modelt in an era of free content and citison-jounalats. The Wall Steot Journaf estabished incremertal charges for its onine articles. This strategy attracted new customers who preferred reading on PCs and moble devices. The compary created bundles across its portfoio of physical subteriptions, orline platloms and aftilased publications, providing a vitual package of news, informaton and events ts customers would gay for.[16] in the healthcare industry, medical device manufacturees parther with medical providers and paterts to create dsease-tonitoring devices that can aho corrmunicate oritical information about a patient’s condion to remote caregivers. This commurication service has become more valuable than the modical monitoring device isseif Create new digital capatilies. Typically. organizations first create the basic structures to encage customers trough orine channels. Burberry, for exampie, used its iconic plad trench coat design to becorne a high-tashion house. It then created an innovative online channel. derigned especialy tor young custorners. and gained over 1 milich followers on Facebook. it was a paceselter in digtaly strearring tachion shows, enabling customers to order online during the events. Shoppers can, at ary time, easily click on the web site to engage a representative by phone or test chat. On the operational side of the business. supply chain imvestrments have conpressed order fulfilment time to weeks instead of the manths fypically required for highend fashion [17] Leverage intormation to manage across the organization. At the next level of operating transformation, companies levorage irtormation and relationships across channols, business units and supply chain partners. This rakes it possible to integrate digital and phytical components that provide the most valwe – to improve speed to market, for example, of to equip empioyees with information, enabing them to aurpass customer expectatione. Meredith Corporation. best knowe for ta special interest “shelter” magazines and iocal brosdcast stations, leveraged ineights about its readers and viewers by creating fulthervise markeeing capablties for As advertisers and ofter business cileres. The marketing unit has woked with ieading organizations from consumer peoducts to fnancial services on socal meda and mobile campaignt. as well as tradicral publehing [18] integrate and optimize all digtal and physical elements. Comparies focused on fully reshaping the operating model optmiee al elements of the valie chan around points of customer engagement. Tesco, the third-largest retailer in the world, has long been a leader in haovative uses of tochnology – from set-service checkouts to the creation af is “Tesco in a bou” capabily that enatses new stoms to be set up quickly anywhere in the worid with standardued business syatent \{19] lntegrated information also benefits Tesco customers who want moble and interactre shopping. Customers can use their phenes to scen barcodes of products they have fipht at horne – instead of sazting at their coenpeters and scrolling through product lists to mase seiecticna. The scanned items are added to cusiomers’ onine shopping baskets for horne delivery. Wain a menth of its launch, this. shopping phone app was downioaded 400,000 times. Tesco a’so provides an app for tracking loyaly points (customers dont have to carry a plastic card to the stcre), as well as apps for finding stores neasby Once ineithe, the app can provide aite numbers for products on cantomers shopping lests {20} Choosing a transformation path Determining the best path to transformation – whether an extensive rechaping of the customer value proposition, a transformation of the operating model, of a combiration of both – recquires a thorough understanding and evaluation of several factors: – Where products and sorvices are on the physical-to-digital conaruum in your industry. – Mobilty and social networking adoption levels and expectations of customers may lose fevenue opportunites, oustomer foyaty and market share. Essential capabilties Busnesses aming to generale new customer value propcsitions or transtom their operaling models need to develop a new portolo of capablises for fiexbility and responsiveness to fast-changing customer requirements (see Exthbt 3). Delver business model innovation. Foremost among capabilies for the digital age is the abilty to designt and deliver new butiness modelis. Comparies must coritantly expiore the best new ways to caphure reverue. struct.re enterprise activities and stake a position in new or existing industries. Subscription or perusage fees? Aceuire now thill or outsource certain functions? Coiltborate with competiors or beeak irto an entiray now indutsry? Answers to thete quettions will help determine thexible new business modelt tuited to the tast-changing era of digtay tranelomarion. And as quickly as each queston is andwered, it must be re-camined again. Ony the most deciolined approach to reastembing all the elemerits of butinest frequently, even contruousy, will enabie corroaried to keep up with customers and ahead of oompeteors. Drive customer and community collaboration. Anctwer key competency is tinding new ways 10 engage customers and conmunites. This requires interaction with euttomert across every phase of butiness activity – net gast sales. markuting and service. but also product design, supply chain management, human resources. If and finance. Engaging with customers at every point where value is created is what daterentiates a customer-centered butiness from one that simply targets cuttomers wel. Cuttomer irteraction in these areas otten leads 10 cpen colaboration that accelerases incovation uaing onitie communities Companies may orease their own vitual conmunites, or use groups already organized by customers (21) Going beyond tradtionat patnerthios with developers and suppliers, some oompanies make their designers and engineers avalable to cuttomers. Cuatomers of Threadiess, the conline totalet, create t-shirt designs using terrolases provided on the comparys wet “Companies with a cohesive plan for integrating the digital and physical components of operations can successfully transform their business models.” site [22] Novartis employees colaborate with pationt groups in online communises to develop new drugr \{23\} Integrate cross-channel. The ablify to integrate acrots all customer touch-points is essental for managing digital operations. Onine, customess switch back and forth between e-mal and social networks. They change plaforms and charnwis – osciparing prices on a smant phone one minue, trying on shoes in a bricks and-mortar shop the next, and later making a transaction on their PC or tablet. Experiences in one channel raise expectations across all of them. Corsistency bulds the brand promise and boisters cuntomer satistaction. Contruity and context prowide seamiess experiences acrusts all points of customer contact. Get insights from analytics. Creating and mantaining custsmer-certric enterprise changes the basis for decisions within an organization and among its partners. Iritight from anaytics brings predictive capabities to all functions so that all channeis can be algned arpund customer needs and piederences. For example, electonics retaler Best Buy leverages dats and analytict to transiom the way it manages is supply chain and engages with outnomers its sales pecple, epuipped wath data analysis tools. are able to suggest add-on purchases based on past customer behavior [24] Optimize the digtally enabled supply chain. Prysical components of the supply chan, euch as trucks, pallets, warehoutest, even indidual packages, are being equipped and interconnected with sentors and actuasors that enable data and analysit for on the spot action. Companies that capture and integrate that information gain the full benefts of a dig tally enabled fupply chain – the abily to dynamicaly manage costs for serving even the amalest segments of theie markets and the fexibily to delermine the best invertory aliotments based on supply and dernand prodictions [25] Enable the netwodked workdorce. All these capablites requie the right poopie and skils across the workiorce. A workplace that fosters social networking among employees. as woll as with customers and partners, requires values-based guidelines instead of rigid nules. In companies where butiness leaders set the example. employee particpation in online communites can bring a variety of viewpoints into the organiation and ceeate fertie ground for imnovation and business growth. Looking torward Businessee in every induatry are under intenee prenture to fethirik their customet value propoeitons and operations. Companies taking a proactive position in the digital revclution and leveraging the full paterfial of dasugtive technologies are. – Reshaping cuatomer value peopcsitiona. – Remodeling their business operatons to deiver hew custamer value propoesons etlectively, efficentiy and in irnovative ways. – Doing both al the same tire. which leads io the broadest industry transtontution. The path 10 digital translotmation will vary by industry, as will customer adsption and an organization’s legacy environment, However, every industry is under pressuze to change. and every organization noeds to have a plan in place. Those that are able to overcore the challenge of optimzing both physical and digita elements by implementing new business mosols based on customer demand can win frst choice of taleme partiners and resources [26]

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