Digital Business Models: 'The art of the possible'
In the previous newsletter, I shared my views about the need for intentional digital transformation. In this, I introduced the '9 Levers of Value' framework to underpin a holistic digital transformation. In this edition, we delve deeper into this framework and consider the ways in which digital transformation can help extend and/ or expand the business model.
The business model outlines "where to play" for an organization - and covers products/ propositions, market/ customer segments and channels/ routes to market. Most organizations already have investments to improve visibility of existing products and operations. This includes CRM systems for opportunity/ lead management and demand forecasting, order/ sales management systems of record for tracking sales, production/ inventory management tools to fulfil the demand generated.
However, digital transformation also presents multiple growth opportunities. This can be classified into the below options using a variant of the Ansoff Matrix:
1. Expanding the Serviceable Addressable Market (SAM)
For an existing product with a defined Total Addressable Market, organizations are usually constrained in terms of capacity or coverage. This limits the market size to the Serviceable Addressable Market. Capacity issues are harder to resolve - given lead time in production capacity enhancement or value/ supply chain constraints preventing expansion.
However, technology can address coverage challenges - by creating online/ e-commerce channels. This is increasingly being demanded by customers as buying behavior shifts online (projected to reach ~41% of Global retail sales by 2027). While traditional categories such as books/ toys/ electronics/ apparel/ grocery have seen a steady shift to e-commerce, this is now expanding across other categories such as automotive (with Hyundai and Tesla) as well. Retailers with brick and mortar presence continue to augment it with online channels - Big Box store Costco saw strong online growth, and Reliance Retail expanded the JioMart offering to cater to B2B (Kirana stores) in addition to B2C.
All the examples above help organizations drive growth through increased market coverage, while the Total Market Size (Automotive/ Retail) remained unchanged. This strategy is especially relevant for large and stable industries.
“Ecommerce isn’t the cherry on the cake, it’s the new cake” – Jean Paul Ago, CEO L’Oreal
2. Increasing the Total Addressable Market (TAM)
One of the most important metrics considered by venture capital investors when evaluating a business is the Total Addressable Market. It is much harder to create a market than to capture market share. The lofty valuations commanded by Technology companies including Platform/ Social/ Cloud/ SaaS is primarily due to them addressing a large, global market that offers significant room to grow.
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Digital transformation can enable companies to create entirely new revenue streams, adjacent to their core proposition. Several product companies have added services/ subscriptions to enhance the value of investments made in their products, and in the process, creating large and attractive new markets. Some examples include - Automotive companies adding subscription services (such as Tesla with the Autopilot service and several other auto makers offering connected car subscriptions), and Consumer Electronics companies adding subscription services for storage/ content/ services (such as Apple creating a multi-billion services business, Microsoft Xbox Gamepass with 34 million subscribers, Fitbit Premium fitness service, and Amazon Ring security service).
These examples show organizations that have added ("attached") services/ subscriptions to successful products to create entirely new markets. These services can counter the effects of a maturing product lifecycle and create a large as well as more profitable revenue stream for these companies.
"The global imperative for digital transformation has never been greater as digital increasingly becomes intrinsic to how we live and interact. Every business must put a sharp focus on accelerating their transformation to connect with their customers through compelling, personalized experiences that drive long-term loyalty and growth." - Shantanu Narayen, CEO Adobe
3. Disrupting the industry business model
Finally, digital transformation offers opportunities to disrupt entire industries by offering a unique combination of product/ proposition and market coverage.
One option could be to create a new digital offering. Such a model allows companies to overcome limitations such as physical presence to address a dramatically larger and newer market. Examples include Direct to Customer (D2C) brands to quickly launch and scale. Some other examples could be legacy media companies such as Wall Street Journal, New York Times, Washington Post embrace digital channels to reach entirely new audiences.
Another option could be to create a platform business model. Well known tech companies including Uber, Airbnb, Netflix, Spotify can also be proof points, as they have created a new technology-led platform business model. Another example are the Super apps available in several markets (and slowly but steadily developing in India) where they have built a bouquet of services to customers that include direct as well as marketplace/ ecosystem partnerships. Such a strategy will be even more relevant in India with the coming ONDC revolution.
The Internet will help achieve "friction free capitalism" by putting buyer and seller in direct contact and providing more information to both about each other. - Bill Gates
AI and GenAI as enablers
As companies increasingly embrace digital business models, they also generate significant amounts of data across the customer journey. The data will need to serve as the fuel for AI to analyze and improve through a feedback loop. GenAI is also increasingly being used to enable personalized communication and customer engagement at scale. However, AI and GenAI can only be an enabler but not a substitute for a future-ready business strategy. Organizations need to review and rethink their business model from a digital perspective right away!
"Disrupt or be disrupted" - John Chambers, Chairman Emeritus, Cisco
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Gogi - I quite liked the "tech led business model transformation" chart ... it is a very good way to illustrate the impact of the digital world across markets as well as one's business proposition ... Kudos to you and your team ... at this rate one can become addictive to your weekly insights !! ??