6 steps toward the right digital business model

The digital disruptors have arrived, the necessity of adapting to a changing digital economy is clearer than ever, and simply adjusting old business practices won’t be enough to keep up.

But how should companies craft a digital strategy that ensures they’ll remain competitive? In their new book “What’s Your Digital Business Model?” MIT Center for Information Systems Research senior research scientist Peter Weill and research scientist Stephanie Woerner say the solutions to a successful digital transformation lay in six questions:

1. What sort of digital threats and opportunities does the company face?
2. Which digital business model is best for its future?
3. What are the company’s digital competitive advantages?
4. How will the company connect using mobile and the internet of things?
5. Has the company developed the crucial capabilities to reinvent the business?
6. Does the company have the leadership to make it all happen?

The answers, Woerner said, can help an enterprise figure out which of four business models — ecosystem drivers, suppliers, omnichannel businesses, and modular producers — it falls under and decide which direction it wants to move toward. 

The first step is recognizing exactly where the digital disruption to a company’s current business model may come from. “If companies can name the threat they’re facing,” Woerner said, “then they can start to figure out what can be done to address it.”

From there, companies can work to identify their current business model and what their competitive advantages are, then use those advantages to get to where they want to be. The rise of the internet, Woerner said, has forced companies to move from operating in “places” — tangible stores and physical locations — to operating in “spaces,” characterized by more service offerings and other intangible products.

“Companies used to be very tightly integrated — one company put it all together. The internet allows you to disaggregate that,” Woerner said. “We found companies saying ‘What are we really great at?” And so we started by identifying three sources of competitive advantage [content, customer experience, and platforms.]”

Suppliers need to ensure they remain adept at producing high-quality content, while omnichannel business models must focus heavily on a stellar customer experience and modular producers, which offer “plug-and-play” services need to be able to integrate reliably with other business’ platforms, no matter the technology. 

Ecosystem drivers — companies like Amazon and Uber that aim to the definitive destination for a particular domain or service — must cover all the bases, Woerner said. “That’s why it’s so hard to do right,” she said.

Companies must also develop the right technological “muscles” to compete in the business model they want to move toward — better customer knowledge, multichannel experiences, partnerships and acquisitions, security and compliance capabilities, etc. And they must have great leaders at the helm to guide the transformation.

“Leadership is really the most important part of changing your digital business model,” Woerner said. “But we really wanted to get the framework and language out there, so that when you got to leadership, everyone would be on the same page.” 

Deeper understanding, integrated experiences

To write the book, Weill and Woerner convened a series of “virtual roundtables” with business leaders, asking them to identify the most important digital-enabled transformation projects they were working on. Two dominant themes emerged: Companies were working to increase their knowledge of their customers, and they were starting realize that their value chains were being drastically altered by digital.

Older companies were starting to notice that new, small startups were hitting the ground with a higher level of familiarity of their customers, Woerner said, driven by the increased connectivity and richness of data provided by platforms like social media.

“A lot of companies — especially those we call ‘big old companies’ that were not born digital — they were realizing that a lot of these born digital startups kind of had a head start in learning about the customers,” Woerner said.

The traditional value chains were also becoming more porous as technology opened new avenues for connection, she said. “Partnerships were coming into play where companies were seeing that they had to be able to offer more multi-product, integrated experiences.”

She pointed to USAA, a banking, insurance, and financial services company that serves the U.S. Armed Forces, as an example of a company that successfully navigated that terrain with the launch of Auto Circle to help members purchase vehicles.

“They really dug deep into what these, especially younger, military personnel were trying to do. They didn’t know a lot about what their options were and often weren’t getting the best value,” Woerner said. “They put together a product where they could look for cars in your area, come up with a set of dealers with the best prices, and because of partnerships, go out and bargain with the dealer so you didn’t have to go do that.”

The bank also offered customers financing and insurance for the vehicle they bought. 

Weill and Woerner recommend businesses experiment with becoming an ecosystem driver, which tend to see higher revenue growth and net profit margins than the other models. That attempt should be focused on the best customers. “Looking ahead, we see the trend moving toward individuals and business customers preferring only one, or maybe two, powerful ecosystem drivers in each domain.”