The majority of the companies nowadays are in some stage of digital transformation. Some are very tactical, improving their website and app maybe or automating basic customer interactions. Others are fundamentally changing how the business operates. Business model innovation and digital transformation are two buzzwords and they are increasingly interlinked. How should you and I think about business model changes as we become more digital?
The majority of the companies nowadays are in some stage of digital transformation. Some are very tactical, improving their website and app may be or automating basic customer interactions. Others are fundamentally changing how the business operates. Business model innovation and digital transformation are two buzzwords and they are increasingly interlinked. How should you and I think about business model changes as we become more digital?
Digital transformation projects often start at companies that were disrupted by digital-native businesses. These disruptors built customer-centric operations, they interact with their customers only online and on mobile, provide better customer experience, and tend to scale much faster than a traditional business.
When a traditional business sets out for such digital transformation, I see two dominant approaches. Digital at the edges or digital at the core.
What does that mean?
Let’s look at the first one. Digital at the Edges.
Well, the edges of the enterprise are customer and supplier relationships. How you interact with customers and suppliers and how they experience working with you. This is definitely the most impactful area of digital transformation and I tell you why. Companies that set out to digitize their customer and supplier relationships do the ultimate value creation. Drive revenue up and costs down.
Remember, the primary purpose of any digital transformation has to be one of two things: Increase the customer’s willingness to spend more and the supplier’s willingness to charge less. Drive revenues up and costs down.
The customer will spend more if the digital interaction is better than traditional ones. Easier purchase options, better customer service, faster delivery, visibility into the supply chain, and digital options for the products all increase willingness to pay.
In the same way, the digital experience can increase the supplier’s willingness to charge less. Digital purchasing portals can significantly reduce the cost of sales for suppliers and often mean higher sales volumes for them. All of those allow for lower unit costs. A win/win.
So automation, customer and supplier analytics, commerce, and purchasing portals all improve the digital business model at the edges and drive revenues higher and costs lower. I had a separate video specifically on the massive shift in digital experience. Check it out. So Digital Transformation at the Edges works, the playbooks are relatively straightforward and both the customers and suppliers are familiar with it. If you are not digital at the Edges you are way behind not just the digital natives but most of your industry. most companies get this and keep expanding digital tools here.
Let’s look at the Second Way of digital transformation - Digital at the Core.
This is where I believe digital-native companies have a big advantage. They typically built up their core business functions like finance, HR, and product development with digital tools as well. Disruptors start with an agile mindset and consider back-office processes the necessary minimum to connect suppliers, operations, and the customers.
This is the area where bigger questions are needed. What would be the minimal set of processes to run the business. What is the absolute minimum to get what the customers need from suppliers through operations and product development? In a business model shift, you should question everything in the core that gets in the way of converting supplier resources into products to sell.
Traditional businesses are bulky at the core and lean at the edges. They have the most resources, cost, and complexity in core operations. Digital natives are the opposite. Core processes are lean and simple and most of the resources and sophistication are at the edges especially in customer interactions, marketing, and fulfillment. Ask yourself how many people in your company never speak to the customer or never touch the product or service you provide. If the majority of the resources are here, your business will fail.
Often the core processes at traditional businesses are complex with multiple systems, significant manual processing of data. The digital speed at the edges gets slowed down in the middle. After years of digital transformation, the edges look digital and the core is analog. Overall the business will have a higher cost structure, slow cycle time, and will not be able to fulfill customer expectations.
Businesses have to digitize the edges and the core in parallel.
So how do you lean out the core and put your investment at the edges or into your products?
A great way to look at the necessary business model changes in digital transformation is by using the Business Model Canvas. It is a simple tool used by thousands of businesses to understand, design, or simplify their business model. There are many videos on the tool itself.
When you use the business model canvas for digital transformation you ask the same questions in every segment of the canvas. How can I reduce costs here or improve the willingness to buy or sell of the participants?
For example, in your customer segments - what can you do to increase willingness to buy? In the partnerships - how can you reduce the cost from suppliers? What can you do in your digital interactions to reduce their cost of sales? Let’s look at resources. How can you improve the employee experience with remote work, online collaboration, digital employee services? This would allow you to get better talent in a highly competitive labor market.
The same way you would look at the internal processes. How could digital tools massively reduce your cost or someone’s willingness to buy or sell?
That’s all there is to business model innovation. Companies often get caught up in process diagrams, enterprise architectures, completely reinventing everything about their business on paper. Research shows that incremental innovation across multiple areas is a better strategy than order of magnitude innovation in only one area. As a Harvard Business Review article put it, swinging for the fences will yield lower returns. The rest of the organization tends to become a bottleneck.
I wish you great success exploring the digital transformation at the edges and the core and finding cost and revenue growth from many incremental changes.