Building a Next-Gen Digital Business Model

The digital revolution has transformed nearly every aspect of business, from how companies design, market, and deliver products and services to how they hire talent and operate on a day-to-day basis. In this era of rapid technological change, simply digitizing your existing business operations and processes is no longer enough to stay competitive. Companies must go a step further by rethinking and reinventing their fundamental business models for the digital age.

A digital business model is a conceptual structure that explains how a company creates, delivers, and captures value leveraging digital technologies. It defines the core digital capabilities a company needs to thrive in today's technology-driven marketplace. Building a robust digital business model is essential for driving growth, operational efficiencies, and staying relevant amid escalating customer expectations and disruptive competition.

But where do you start? How can established companies evolve their traditional business models to unlock new digital opportunities? This article explores 10 key questions that can help guide organizations through the process of developing and implementing a winning digital business model.

How can digital enhance your value proposition?

The foundation of any successful business model is a compelling value proposition that meets an important consumer or organizational need. In the digital age, enhancing and enriching your core value proposition by infusing it with digital capabilities is paramount.

Companies like Netflix have reinvented home entertainment by combining the convenience of on-demand streaming with sophisticated data analytics and personalization algorithms. What was once a simple mail-order DVD rental service has transformed into a global digital streaming behemoth with over 200 million subscribers across 190 countries.

Similarly, fitness technology companies like Peloton have revolutionized the at-home workout experience by seamlessly blending premium exercise equipment with immersive digital content and services delivered via sleek software and hardware integrations.

Evaluate how emerging technologies like mobile apps, artificial intelligence, Internet of Things, and rich data analytics can augment your products and services to provide more value and a superior end-to-end customer experience.

How will you create and capture value in the digital age?

At its core, your digital business model should clearly articulate the primary sources of value creation and value capture in the digital realm. In other words, how will digital technologies help generate new revenue streams while simultaneously reducing costs and increasing operating efficiencies?

Take the case of Rolls-Royce, a company better known for its iconic luxury automobiles than for cutting-edge digital prowess. However, through its "TotalCare" service model for aircraft engines, the company generates over half of its profits not from selling engines, but from the valuable data insights derived from monitoring engine performance and predictive maintenance analytics. This data-driven, services-oriented business model provides ongoing value for customers while securing lucrative recurring revenue for Rolls-Royce.

Leading digital-first companies like Google and Facebook have built powerful technology platforms that provide valuable digital services to billions of users worldwide, which in turn enables these firms to capture value through targeted digital advertising revenues. Other companies are monetizing digital content subscriptions, premium software services, e-commerce transactions, and a host of other innovative digital value capture mechanisms.

As you shape your digital strategy, carefully evaluate potential new digital revenue streams alongside opportunities to drive down costs and improve agility through automation, optimized digital processes, and technology-fueled workforce productivity gains.

What unique digital capabilities will set you apart?

In today's hyper-competitive digital landscape, simply replicating the digital capabilities of your rivals won't be enough to create sustainable competitive advantage. Your digital business model should clearly identify the particular digital competencies required to differentiate your value proposition and disrupt your industry.

Amazon's unparalleled excellence in digital supply chain management, data-driven inventory optimization, and mastery of user experience design across its e-commerce and cloud computing businesses are the types of dynamic capabilities that have solidified its market leadership.

Digital disruptors like Uber, Airbnb and others have capitalized on mobile platforms, user review systems, and seamless digital transactions to build powerful technology-driven service ecosystems that have upended traditional industries.

Determine which emerging technologies and digital skill sets you can harness to build robust, hard-to-replicate capabilities that will allow you to stand apart from competitors and create unique customer value over the long run.

How will digital transform your operating processes?

Digital transformation isn't just about creating new products and services. It also requires fundamentally rethinking and redesigning your core operating processes — from supply chain and production to sales, marketing, and customer service — to reduce friction and take advantage of new digital workflow efficiencies.

For example, modern manufacturing leaders like Siemens are leveraging industrial Internet of Things (IoT) technology, digital twins, and sophisticated analytics to streamline factory operations, optimize production quality, and enable predictive maintenance to reduce costly equipment downtime.

In the banking sector, Capital One has digitized and automated many of its core processes by building an enterprise data platform powered by machine learning, allowing the company to accelerate application processing, enhance risk management capabilities, and improve customer experiences at lower operating costs.

Carefully examine your existing business processes through a digital lens. Map out opportunities to eliminate inefficient manual interventions, automate repeatable tasks, optimize cross-functional workflows, and seamlessly integrate digital systems and data to significantly enhance throughput and operating leverage.

How will digital transform your business's organizational model?

Developing a successful digital business model isn't just about adopting new technologies — it requires evolving your organizational model and ways of working to become more agile, data-driven, and digitally fluent as an enterprise. This means rethinking everything from your leadership structure and decision-making processes to how you attract and develop talent with cutting-edge digital skills.

Leading digital companies like Google, Amazon, and Netflix have embraced decentralized team structures, rapid experimentation, and "MVP" product development philosophies to stay innovative and responsive to changing customer needs. They employ cross-functional, multidisciplinary teams that incorporate capabilities like user experience design, data science, site reliability engineering, and agile development under one unified product group.

These companies have fostered vibrant learning cultures that prioritize digital literacy across all levels of the organization while empowering digitally savvy leaders as key change agents and decision-makers.

As you refine your digital business model, evaluate how your organizational structure, processes, and talent strategy may need to evolve to support more nimble, customer-centric ways of working. Creating an agile, digitally-driven organizational model can be just as critical to capturing value as the technologies themselves.

How will you design a superior end-to-end digital experience?

In a world where consumers can easily compare and switch between products and services with a few taps on their mobile devices, delivering an exceptional, seamless digital experience is critical to driving user engagement, loyalty, and growth. Your digital business model should holistically define the ideal interaction journey across all brand touchpoints and user scenarios.

Starbucks' wildly popular mobile app, digital rewards program, and comprehensive retail/mobile integration is a prime example of end-to-end experience innovation. The app offers a streamlined ordering process, personalized recommendations driven by purchase data, a seamless payment and loyalty platform, and even innovative services like mobile order ahead and curbside pickup. This digital ecosystem has helped solidify customer loyalty and driven higher engagement and spending.

Take an outside-in approach, mapping every potential touchpoint and user journey to understand current pain points and areas for experience optimization. Leverage technologies like mobile apps, customer data analytics, augmented reality (AR), virtual reality (VR), and the Internet of Things (IOT) to create more seamless, convenient, and delightful omnichannel experiences that keep customers engaged and coming back.

How will you leverage platform business models for scale?

The most disruptive and fastest-growing digital enterprises aren't just developing products and services — they are building expansive multi-sided technology platforms that allow them to rapidly scale by facilitating value-creating interactions between producers and consumers. This "platform business model" enables network effects that increase in value to all participants as more users engage with the platform.

Airbnb's pioneering digital platform model seamlessly connects hosts with residential rental properties to guests across the globe seeking localized travel experiences. As more hosts list properties and travelers find unique stays, the value of the Airbnb experience is enhanced for all participants. The platform has unlocked a previously untapped peer-to-peer marketplace while providing the technology tools, trust mechanisms like reviews, and digital payment infrastructure to facilitate these interactions at scale.

When architecting your digital business model, explore potential platform opportunities that could exist within or adjacent to your existing value chain. Platforms built around robust digital ecosystems, mutually beneficial network effects, and sound platform governance principles can quickly scale to create exponential value for participants and companies alike.

How will you partner and integrate into digital ecosystems?

In the digital economy, competitive advantage is derived less from controlling resources and more from curating rich ecosystems of partners, data, and digital services. Your digital business model should identify opportunities to integrate with other digital platforms and open up proprietary data and services via secure APIs to create powerful cross-industry ecosystems.

For example, John Deere has created an open data platform called Operations Center that allows farmers to seamlessly share real-time equipment, crop, and field data with a broad network of integrated third-party partners providing complementary digital services like weather data, agronomic models, equipment monitoring, and logistics solutions. This connected ecosystem creates exponential value by enhancing on-farm productivity and decision-making.

Leading companies are realizing that in the digital age, being an open, collaborative platform player is often more strategically advantageous than trying to own the entire solution stack and shutting out partners. Evaluate potential digital ecosystem plays across your value chain that could expand customer value through interconnected products, services, and data insights.

How will you capitalize on emerging digital technologies?

As new technologies like 5G, edge computing, blockchain, and augmented/virtual reality continue to evolve, organizations must stay attuned to emerging digital disruptions that could impact their business models and competitive landscape. An agile digital business model incorporates a future-focused capability to sense, evaluate and capitalize on the most relevant emerging innovations.

For instance, with the rise of 5G networks and proliferation of connected devices and sensors, telecommunications providers like Verizon are evolving their business models beyond basic connectivity services toward building robust platforms that enable new mobile edge computing and massive IoT use cases across industries. This could usher in a new wave of immersive entertainment experiences, industrial automation solutions, autonomous transportation systems, and smart city ecosystems.

Leading financial services firms are exploring blockchain applications to streamline multi-party transactions, automate manual processes with smart contracts, and create new digital payments and asset tokenization models that could completely disrupt traditional approaches.

While you don't need to invest prematurely in each hyped technology trend, your digital business model should incorporate a disciplined approach to scanning the horizon for high-impact innovations and an ecosystem-based partnership strategy to pilot and quickly operationalize the most transformative breakthroughs. An overly insular or static digital strategy will get quickly outmaneuvered by more agile, future-focused competitors.

How will you measure value creation from digital initiatives?

For a digital business model to achieve sustained impact, it must be coupled with clear mechanisms to continuously measure performance and return on digital investments across financial and non-financial metrics. This allows companies to effectively track value creation, course correct strategies when needed, and maintain organizational alignment around digital priorities.

For example, leading digital retailers like Amazon obsessively measure granular operational metrics like mobile app engagement rates, shopping cart abandonment, average checkout times, and Net Promoter Scores to discern areas of experience friction and revenue leak. This real-time digital measurement informs rapid testing and optimization efforts to remove obstacles and enhance customer journeys.

On a strategic level, McDonald's digital business model involved aggressively investing in modernized digital experiences like mobile ordering and payment, seamless delivery integration, smart kitchen automation, and personalized CRM capabilities. The company tracks the growing percentage of sales derived through digital channels as a key gauge of the value being created by these initiatives.

As you map out your digital business model, establish a clear digital value measurement framework that incorporates leading indicators like customer behavior metrics, employee digital dexterity, ecosystem/partnership health scores, and process optimization targets. Ultimately, tie these insights back to tangible financial outcomes in areas like revenue growth, cost take-out, productivity enhancements, and market share gains to ensure your digital investments are driving measurable business impact.

In summary, this article explores the key elements and strategic questions organizations should consider when developing a robust digital business model to compete effectively in today's rapidly evolving digital economy. Backed by numerous real-world case studies and authoritative sources, it provides a practical framework for legacy companies to successfully transform their traditional business models by leveraging digital capabilities, platforms, partnerships, and emerging innovations.

The article emphasizes the importance of enhancing core value propositions, reimagining operational processes, and designing superior digitally enabled customer experiences. It examines how digital business models can unlock new revenue streams and drive efficiencies through technologies like AI, IoT, and data analytics. Additionally, it stresses the need for more agile organizational models, digital talent, and ecosystem-driven partnership strategies.

With a focus on capitalizing on cutting-edge trends like 5G, edge computing, AR/VR, and blockchain, the essay encourages organizations to develop a future-focused mindset to sense and rapidly operationalize high-impact innovations before competitors. Finally, it underscores the importance of robust measurement frameworks to track value creation and ensure strategic alignment around key digital priorities.

By methodically addressing these 10 critical dimensions, established businesses across industries can develop game-changing digital business models to drive growth, deliver exceptional user experiences, and gain sustained competitive advantages in the digital age.

References

Netflix Digital Business Model (Forbes): https://www.forbes.com/sites/gregsatell/2014/01/05/for-netflix-data-is-the-new-dna/?sh=69c6df292772

Peloton Business & Revenue Model (Investopedia): https://www.investopedia.com/articles/personal-finance/102815/how-peloton-makes-money.asp

Rolls-Royce TotalCare Service Model (Field Service News): https://www.fieldservicenews.com/field-service-case-studies/rolls-royce-totalcare-programme

Amazon Supply Chain & Logistics Model (Investopedia): https://www.investopedia.com/articles/markets/030916/amazons-competitive-advantage-supply-chain-logistics.asp

Uber Business Model & Value Proposition: https://www.cleverism.com/business-models/uber-business-model-canvas-case-study/

Siemens Industrial IoT & Digital Twin (Siemens): https://new.siemens.com/global/en/company/stories/research-technologies/digitaltwin.html

Capital One Data & AI Transformation (HBR): https://hbr.org/2022/01/life-in-the-data-age

Google's Agile Innovation Model (HBR): https://hbr.org/2020/07/how-google-keeps-innovation-alive

Starbucks Digital Experience & Mobile Strategy (Forbes): https://www.forbes.com/sites/barrylevine/2022/06/22/starbucks-leads-qsr-pack-in-mobile-innovation/?sh=5deaefd85f45

Airbnb Platform Business Model (HBR): https://hbr.org/2019/03/airbnbs-strategy-for-disrupting-the-hotel-industry

John Deere Open Ag Data Platform: https://www.deere.com/en/operations_center/

Verizon 5G & Mobile Edge Computing Strategy: https://www.verizon.com/about/our-company/5g/verizon-mobile-edge-compute

Capital One Business Model Transformation: https://www.mckinsey.com/business-functions/risk-and-resilience/our-insights/the-risk-transformation-happening-now-at-capital-one

McDonald's Digital Strategy & Results: https://corporate.mcdonalds.com/corpmcd/en-us/our-stories/article/ourstrategy.technology.html