CHAPTER 4

REINVENTING BUSINESS MODELS

Do not quench your inspiration and your imagination; do not become the slave of your model.

—VINCENT VAN GOGH

We have shown how Digital Masters, such as Burberry, can create value from transforming customer experience. They can also, like Codelco, achieve huge operational efficiencies from transforming operations. But some companies transform even further. They rethink customer experience, internal operations, and economic formulas to reinvent their business models.

As we described in the introduction to this book, waves of digital change are occurring closer and closer together. Competitive landscapes are in perpetual motion. Many of the barriers to entry that once protected incumbent companies and sectors have fallen. Competition is global, and digital technologies have provided resources to go after new opportunities. The shelf life of existing business models is becoming shorter, questioning the very notion of lasting competitive advantage. Executives in every industry must be awake to the opportunities and threats of rapid digital evolution and be ready to reinvent business models as needed.

Business model reinvention sometimes involves radically shifting what you sell, how you sell it, or how you make money from it. Reinvention may involve reimagining the nature of competition in your industry or reconfiguring your value chain to deliver at a substantial efficiency advantage against your competitors. It can also be about making the transition from multinational to truly global operations, moving from products to value-added services, or moving into brand-new markets. It may also entail creating new digital businesses or services, either to augment your current business model or to replace it.

Executives see the value-creation potential in business model reinvention, for at least three reasons. First, reinvention can reorder value chains and create big shifts in the competitive landscape. It has already created or redistributed billions of dollars of value in sectors ranging from retail to air transport.¹ Second, well-executed business model reinvention and its operational underpinnings can be difficult to replicate. And third, today’s exponential technological innovation is continually challenging companies with opportunities (and threats) to fundamentally rethink the way they do business. For example, 3-D printing is already generating new models of manufacturing as well as new customer propositions in ways unimaginable a few years back.

But despite the buzz, business model reinvention remains elusive. In our survey, a mere 7 percent of respondents stated that their company’s digital initiatives were helping to launch new businesses. Only 15 percent said that new business models were emerging thanks to digital technology.² Many executives may not be looking for business model reinvention opportunities. Others may consider them too risky to attempt.

So why would you want to worry about business model reinvention? Because not paying attention is an even bigger risk. Executives in music, newspapers, and equity trading have already seen the radical upheavals that digital business model reinvention can bring to their industries. Industries ranging from insurance to education are starting to experience the same thing. Whatever your industry, you need to be on the forefront of challenging your current business model. Otherwise, someone else will.

INCUMBENTS BEWARE

The business model that operates the London taxi market had been stable for many years. Companies were mediating supply and demand through expensive infrastructure: 24/7 call centers and GPS equipment fitted in the vehicles. Despite this technology, getting a cab in London was still not an easy experience. Something was bound to happen.

When three business entrepreneurs and three taxi drivers (all cofounders of a start-up called Hailo) met in a Soho café in London in 2010, business model transformation was the last thing on their minds. Terry Runham, Russell Hall, and Gary Jackson—the three taxi drivers—had previously tried to get an e-taxi business off the ground, with mixed results. Ron Zeghibe, Jay Bregman, and Caspar Woolley—the three businessmen—had an algorithm, built originally for an e-courier business, which was looking for a new life. All six hit it off instantly. They all agreed that the current inefficiencies in the London taxi market could be turned into an opportunity.

The key insight from the taxi drivers was counterintuitive. Don’t worry about the customer experience at this stage. Worry about creating a system that works for the drivers. The rest will follow. The entrepreneurs saw the potential. They could create differentiation on the supply side, where they could erect barriers to entry. Every competitor wanted to lock in customers, and the competitors were fighting a me-too race with similar customer mobile apps. A different approach was needed.

Early on, the team focused on fixing two fundamental pain points that are core to taxi drivers’ lives—maximization of occupancy, and isolation. Most taxi drivers spent between 30 and 60 percent of their time with an empty cab. So offering a job in exchange for a small fee made sense. In addition, although taxi drivers form a small, close-knit community, they often feel isolated. So offering a social community, something that would engage drivers and tie them together, made sense. With this, Hailo created a precise value proposition for the supply side of this two-sided market.

Hailo uses analytics extensively to provide drivers with a better view of available jobs, how to get to those jobs efficiently, and how to track performance over time. The app also gives drivers real-time traffic updates. Drivers can send a burst alert when multiple jobs are available in a given area, such as at the end of a theater show. Hailo went even further by providing a complete logbook for individual drivers on the app. Drivers can measure the percentage of time they are occupied, the amount of diesel fuel they burn each day, their earnings per hour, and a realm of other management data. They can set daily personal targets and can compare their performance against their historical profiles.

To remedy isolation, the app provides a newsfeed where drivers can update their status and share information with other cabbies—a taxi-driver Facebook. Drivers can designate a group of their best friends, whom the cabbies can track in the city and chat with throughout the day.

Only a few months after the introduction of Hailo, average occupancy had gone up significantly. These dramatic results amazed the taxi community. Drivers claim that the use of Hailo has led to an average 30 percent spike in business.³ As a result, by 2013, over 60 percent of the London cab population had joined the network.

But what about the end customers in all this? Hailo developed a very simple and intuitive customer smartphone app. Once a customer locates a cab, he or she receives its registration number and the name, photo, and mobile number of the driver. On average, a Hailo cab is four minutes away, wherever a customer is in the city. Unlike their competitors, Hailo drivers also give customers a five-minute wait time before starting their meters. Up until early 2012, 99 percent of payments were in cash. Two-thirds of the taxis could not even process a credit card, and there was a customer surcharge of 12.5 percent. With Hailo, customers can register their cards and pay with a single tap directly from their phones. As of 2013, there were close to half a million registered customers in London alone.

How does Hailo make money out of all this? The profit model is simple; Hailo provides jobs in exchange for a 10 percent flat fee on the ride. There is no subscription fee. As one of Hailo’s founders noted, “Once you cover you costs, it’s geared towards profit.”⁴

Digital technologies have also enabled Hailo to have extremely low-cost operations. Hailo does not provide hardware, so there is no cost of installing expensive GPS-tracked mobile display units—the cabbies’ smartphones do that. Through bulk negotiation, the company helps drivers get great deals from phone companies. Unlike competitors, Hailo has no need for the expense of manning 24/7 call centers, because the algorithm in the software does a better job at scheduling each cabbie’s jobs than people could.

The firm has gone global, covering several cities around the world—often adapting its economic model to suit local conditions. The firm has built a very successful business model in eighteen months. Hailo founder Ron Zeghibe explained: “We understood that if we wanted to apply technology to this industry, we needed people who knew the industry inside-out. Listening and using their insights to build the DNA of the business is paying huge dividends for us. We are now in a position to go into any market against incumbents with a fair chance of overshadowing them.”⁵

What Hailo shows is that using digital technologies to combine excellence in both operations and customer experience, weaved into a differentiated business model, pays dividends. Transformative business models such as Hailo, or its San Francisco–based equivalent, Uber, are rarely just a technology story. Digital technology is, of course, core to the success, but it is wrapped in many other elements that together make a great business model: supply-side control, economic model, customer experience, and efficiency in execution.

FIVE ARCHETYPES OF BUSINESS MODEL REINVENTION

Although it has become part of today’s management lexicon, business model reinvention is still an emerging field with several interpretations and definitions.⁶ In the last few years, several books have contributed to a better understanding of business model development or innovation at the firm and industry levels.⁷ Some have also focused on the specific role of technology in business model reinvention. These books have looked either specifically at information-systems-driven business models, or at disruptions brought about by business applications of new digital technologies mainly from innovative start-ups.⁸

In this book, we have focused on how businesses conduct their digital transformations from the lenses of large global organizations. Leaders in large firms, looking to reinvent their business models, must put their wide-angle lenses on. Emerging technologies, start-ups, small new entrants, and firms in adjacent industries all warrant consideration. Not all technologies are individually disruptive, but in combination, they can have a substantial impact on your business over time.

In our research, we have seen all the models described in the literature at play. Some are more common than others, some are more radical than others, and some are more applicable across industries than others. All options present opportunities to create substantial business value. All have different risk profiles.

We’ve observed five broad archetypes of business model reinvention driven by digital technology. The first, reinventing industries, involves a substantial reshaping of an industry structure, as Hailo did for the taxi market, or responding to fundamentally new consumer behaviors. The second category is about substituting products or services—when your core products or services become directly substitutable by a new digital format. The third category, creating new digital businesses, involves the creation of new products and services that generate additional revenues. The fourth category, reconfiguring value delivery models, means recombining products, services, and data to change the way a firm plays in the value chain. The fifth is about rethinking value propositions—using new digital capabilities to target unmet needs for existing or new customers.

It is worth paying attention to all varieties. Business model reinvention drives opportunities to create new value. Both defense and offense are important. Assume both your competitors and potential new entrants—often from outside your industry—are already hard at it. So how do you look at reinvention? Let’s examine the models we’ve seen at play in our research.

REINVENTING INDUSTRIES

Reinventing an industry is a tall order for any firm. It does not happen every day, and it is a complex and risky endeavor to pull off. Companies often need to venture outside the comfort zone of the core business to deliver new forms of value. Reinvention can also require new competencies, new modes of operations, and new economic models.

Firms used to focus on developing competitive advantage from delivering a superior customer experience, optimizing internal operations, and developing access to wider distribution channels. With the power of the internet and new digital technologies, companies are now able to connect many participants with one another and create new platforms for them to interact and transact.⁹ Firms can also leverage assets they don’t own, and reconfigure their value chains—from buying IT services à la carte from cloud-based infrastructure providers like Amazon.com, to crowdsourcing their R&D with platforms like InnoCentive, to staffing key roles from global online job marketplaces such as oDesk.

Platform economics does not apply only at industry level; we will see later how Nike and Volvo, for instance, have used platform thinking to create new sources of revenue or new connections to customers. But all the business models we observed for reinventing an industry through digital technology involved some form of platform play.

A well-documented example of a company that succeeded in building an industry-changing platform is Apple. With the iPod, Apple delivered a convenient and user-friendly way of downloading music onto a brilliantly designed player. But the magic came later, when Apple launched its iTunes store—a service that created a tight link between hardware, software, digital music, and videos in one user-friendly package. The rest is history. Not only did Apple ensure that the iPod became a high-margin product of choice, but the iTunes store also allowed the firm to become a major distribution platform and establish a base price for single-track music. Such industry reinventions are rare, but when they occur, they fundamentally change the rules of competition.

Multisided platforms are not new. American Express, PayPal, and Square successfully linked merchants to consumers. Video-game console makers, like Sony’s PlayStation and Microsoft’s Xbox, linked game developers and users. More recently, Google Android linked handset manufacturers, application developers, and users.

What’s new is that the power of digital technology has substantially opened up the scope of opportunities for platform business models. Industries ranging from automotives to education to health care and even legal services are becoming ripe for transformation. In a 2013 article, Geoffrey Parker and Marshall Van Alstyne paraphrased entrepreneur and venture capitalist Marc Andreessen’s quote from our introduction chapter to say: “Platforms are eating the world.”¹⁰ They argue that we are in the middle of a significant shift in business models—a shift powered by the internet and a generation of connected users.

Companies in what is commonly called the sharing economy are rethinking the nature of large, asset-heavy industries, with implications for the business models of large firms. Rather than allow all revenues to go to a few big companies that create specialized assets for rental, new companies are brokering connections between customers and people who may want to share their assets for a time. From car-sharing to accommodation and vacation rental to temporary workers to collaborative financing and even dog sitters, collaborative consumption is making steady progress as an alternative consumer choice.

Think about hotels. Chains such as Marriott, Hilton, and others invest tremendous amounts of capital to build specialized properties that they rent to customers by the night or month. But other people have similar assets that they would happily rent out to make some additional income: a beach house, a spare bedroom, or a house in town while they’re on vacation. Why can’t a company make money by taking advantage of these private individuals’ desires to rent out their properties, and profit from the relative immaturity of such a market?

In 2008, Airbnb saw a vacuum in the traditional room-rental model. Airbnb is a trusted online and mobile-phone-based community marketplace for people to list or book accommodations around the world. The company started small, but grew very quickly. It went from 100,000 guest-nights booked in 2009 to 750,000 the following year and passed two million the year after. As of 2013, Airbnb was present in thirty-three thousand cities in 192 countries around the world.¹¹ Every night, it helped approximately 150,000 people stay in rooms rented through its service—a significant number compared with Hilton’s 600,000 rooms worldwide.¹² The business model is based on brokerage. Airbnb takes a 3 percent cut from the renter and 6 to 12 percent from the traveler, depending on the price and quality of the property. For this charge, Airbnb provides customer service, payment handling, and $1 million in damage insurance coverage for its hosts. Renters and hosts can rate each other, thus increasing the trust and the quality of the service.

Large corporations took notice. In 2013, Marriott, in collaboration with mobile and web app company LiquidSpace, started renting meeting spaces in its hotels, on demand, challenging the notion that you have to be a hotel guest to use its facilities.¹³ Large hotel chains around the world are now considering how to extend concepts of the sharing economy to other parts of their business models.

The sharing economy is making inroads into many other rental industries. Car-sharing start-up Zipcar was founded in 2000. Zipcar customers can rent cars for an hour or a day, using their phones or credit cards to reserve and gain entry to the car. Insurance and parking are part of the business model. Cars are conveniently located in parking lots distributed around town, rather than in a few rental facilities. Drivers can access a car quickly, without wasting time on rental paperwork and check-in processes. For drivers who need only occasional use of a car, the convenience and price advantage of Zipcar over traditional car rental or car ownership allowed the company to grow rapidly. It is now the world’s leading car-sharing network. By mid-2013, Zipcar had 810,000 members and offered ten thousand vehicles in several countries in North America and Europe.¹⁴

As in the accommodations industry, large firms got into the act. In 2009, automaker Daimler/Mercedes Benz started its Car2go service, renting Smart Fortwo cars on a per-minute charge, regardless of distance traveled or fuel consumed. As of 2013, Car2go operated over eight thousand vehicles in eight countries, with over four hundred thousand customers signed.¹⁵ Meanwhile, in 2013, car-rental giant Avis acquired Zipcar.¹⁶

Although it is unclear today whether such business models create extra value or just replace existing business, there is no question that over time, these types of digitally enabled asset-sharing models will become significant. They will certainly appear in more industries over time. If you can identify underutilized assets, find a way to optimize their usage through a time-sensitive access model, and find the right economic formula, you may be sitting on a valuable new source of revenue.

Reinventing industries through multisided-platform business models has gained significant attention from business leaders in the last few years. Understanding the underlying economics of such platforms is a prerequisite to exploring industry reinvention. Recent academic research has also advanced our understanding of platform economics.¹⁷ Multisided platforms can efficiently aggregate disconnected participants in fragmented industries—helping to reduce what economists call search and transaction costs, as Hailo did for taxis or Airbnb did for rooms.

Well-executed platforms can create significant barriers to entry through network effects. For instance, the more buyers eBay gets, the more it will attract sellers, which in turn attracts more buyers. The value to customers on one side of the platform typically increases with the number of participating customers on the other. In addition, the power of the crowd can displace traditional gatekeeping, for instance, when advice from fellow travelers replaces advice from travel agents.

Platform opportunities that reinvent entire industries do not pop up every day. But they do exist in many industries. Crafting a new industry-changing business model requires vision, creativity, careful planning, experimentation, and investment. Few succeed, but those who do gain a significant advantage.

SUBSTITUTING PRODUCTS AND SERVICES

In some cases, transforming the business model becomes essential, because the fundamental product or service that you are providing is being substituted by new digital technology. In such instances, you need to replace yourself. To do so, you may have to cannibalize your own revenues. But if the shift from your old offering to a new digital offering is real, there is no other way.

After digital photography replaced film, and smartphones replaced cameras, both Kodak’s and Fujifilm’s traditional business models became obsolete. Both companies saw change coming. But Kodak didn’t survive and Fujifilm did. Kodak stuck to its core for too long. Fujifilm managed the digital onslaught by diversifying. It used its expertise in chemical compounds to move into cosmetics, and in films to make optical films for LCD flat-panel screens.¹⁸

In looking at your business models, if you see steady declines in customers or profits, start rethinking quickly. You can experiment with new models that use your brand, while your existing business still makes enough money to subsidize the experiment. Your experimentation may scare away start-ups or give you an advantage over competitors who try to threaten you. But these fundamental shifts are better addressed early.

Beginning some two decades ago, individuals and businesses have enjoyed access to multiple new forms of delivering and receiving document and text communications—from e-mail to social media. But the experience has not been positive for all. Postal operators have experienced, at best, a slow decline in their core businesses—the physical delivery of letters. In Australia, for instance, the number of addressed letters mailed declined 17 percent from 2009 to 2012—a 20 percent revenue hole for Australia Post.¹⁹ The company has moved from 100 percent market share of written or text-based communications to less than 1 percent within one generation. For this radical case of digital substitution, a rethink of the postal services business model was clearly in order.²⁰

In response to the shift to digital communication, a number of postal companies around the world have pursued electronic-to-electronic (E2E) services. Accelerating the cannibalization of the existing business might seem counterintuitive. But these postal companies believe that the integration of physical and electronic channels could create a new platform that allows them to retain the role of intermediary and facilitator in communications and commerce.

The Nordic Posts of Denmark and Sweden were among the first to explore diversification into e-services in the 1990s. One of the most established and successful postal digital mailbox examples is e-Boks, in which Post Danmark holds a partial ownership, along with Nets, the Nordic banking payment system.

e-Boks started as a closed, one-way system supporting transactional business-to-consumer and government-to-consumer communications. The company intended to provide an authenticated, universal archive for consolidated household document administration. e-Boks enabled large business and government senders to fully digitize their transactional communications processes with consumers. e-Boks also made organizations’ preferences for digital or physical communications simpler to manage. To consumers, e-Boks offered convenience, security, and choice in a familiar online system (similar to online banking). The service integrated payment options, enabled media preferences by sender, and offered a lifetime online archive for important personal business documents.

e-Boks can be accessed on the web or via an app used by several hundred thousand individuals. Two-way communication in e-Boks now provides a secure channel for communication containing sensitive information, like social security numbers. Receivers’ replies can be downloaded directly into the sending company’s business applications. Similarly, contracts and agreements requiring a signature can be handled within e-Boks, generating an electronic record of acceptance or rejection that is legally binding under Danish law. At the same time, the portal solutions still provide consumers with a choice of channels.

e-Boks’ growth is closely linked to strong e-government policies establishing the legal status of digital communications, and active government support and adoption. State, regional, and local government agencies in Denmark are linked into e-Boks, as are most banks, utilities, and other major commercial organizations. As e-Boks added new areas of service, the number of people using the service increased, and network effects led to people’s increasing acceptance of the service. As of 2013, about 80 percent of the Danish adult population has signed up for e-Boks.²¹

Since processing steps like printing, folding, and envelope-stuffing make up most of the total expense involved in sending a normal letter, large organizations generally can reduce their distribution costs by up to 80 percent by switching to digital mailings.²² The digital mailbox has initially focused on personal business communications—account statements, bills and invoices, salary slips, tax correspondence, and health communications such as lab results. However, once the secure, permission-based platform for connecting senders and receivers is established, it creates further opportunities. New revenue streams from business senders can be created: new consumer-centric applications, permission-based marketing applications, and database management solutions.

Most postal companies around the world consider a “sender-pays” model—as with physical mail—the most viable pricing strategy in the near term. But they are exploring opportunities around click-through pricing, value pricing, and building modular subscription services for consumers.

When your core product or service is being replaced by new digital formats, there’s no going back. You have to choose the right way and time to disengage. Squeezing the old to fuel the new model is good practice and will allow you to defend your core business for a while. But proactively managing the transition is ultimately the only viable strategy.

CREATING NEW DIGITAL BUSINESSES

Large firms can find it hard to create new sources of growth with business model reinvention. The focus on growing the current business incrementally and protecting existing assets can curtail radical thinking. More often than not, start-ups and new entrants are the catalysts for creating new digital businesses. But it is not always the case.

Nike has traditionally built its business through a combination of strong innovative products, intensive brand building through multiple media platforms, and efficient operations. As the possibilities of new digital technologies emerged, Nike quickly capitalized on all three areas. The company transformed both its customer experience, by introducing new selling processes and connecting athletes worldwide, and its operations with new design and manufacturing methods.

Nike did not start by strategizing on its business model, but rather looked at ways it could provide even more value to its connected customers. Beyond its presence in public social sites, Nike decided to weave its technology and information together into a new business model. The Nike+ concept was born.²³

Nike+ includes multiple connected components: a shoe, a sensor, an internet platform, and a device such as an iPod, an iPhone, an Xbox, a GPS watch, or a FuelBand. The FuelBand, a product of this new concept, can geo-track a person throughout the day, giving users real-time updates on how many calories they have burned, or steps they have taken, providing real motivation for athletes. Nike + provides NikeFuel points, a proprietary metric for tracking fitness activity that you can share online. Runners can also share their routes and performance online with their friends on Twitter or Facebook. They can even get training plans from a digital coach.

At the same time, Nike gathers valuable data about how customers use its products, which allows the company to improve its brand marketing and, in the process, create a highly engaged community of users. As early as 2008, Nike was able to learn things that it never knew before: “In the winter, people in the US run more often than those in Europe and Africa, but shorter distances. The average duration of a run worldwide is 35 minutes, and the most popular Nike+ Powersong, is ‘Pump It’ by the Black Eyed Peas.”²⁴

Through Nike+, the company has extended its business model from providing only apparel to providing new hardware, technology, rich data and useful add-on services for its customers. The company is now attracting external partners to continually enhance the services on the Nike+ platform. Not bad for an already successful company of some forty-four thousand people. Mark Parker, Nike’s CEO, colorfully explains, “One of my fears is being this big, slow, constipated, bureaucratic company that’s happy with its success. Companies fall apart when their model is so successful that it stifles thinking that challenges it. It’s like the Joker said—‘this town needs an enema.’”²⁵

Nike has increased its market share and developed new revenue streams with a range of add-on products and services.²⁶ It understood the nature of its customers’ needs for engagement and asked, “How do we provide even more value?” In this way, Nike engineered a coherent digital platform that interconnects its products and services to the benefit of athletes worldwide.

RECONFIGURING VALUE DELIVERY MODELS

Often, reinventing your business model will not be about changing the rules of an industry, replacing your products or services, or creating a new digital business, but will be about reconfiguring your value delivery model. Using technology to connect all your products, services, and information in a different way can build stickiness with customers and competitive advantage. When done well, it creates switching costs and incentives for customers to favor transacting with you.

Many companies want to reconnect with their customers without endangering the third-party distribution model that has been successful for years. This is a dilemma that many traditional business-to-business (B2B) companies are trying to crack. It requires rethinking the traditional vertically integrated model.

Insurance companies, for instance, have built profitable businesses using agents to distribute their products and services to their end customers. But what happens when the percentage of the population that wants to work with agents drops? Or when you have become so disconnected from your end customers that you find it hard to understand their detailed needs? You need a new business model.

Many automakers are B2B companies. They produce cars and sell them to dealers. The dealers then sell the cars to customers. The carmakers are completely dependent on dealers to sell their products, yet dealers are costly and can be difficult to manage. Even worse, dealers own the customer relationship, and auto makers have very little contact with these end customers.

Swedish car corporation Volvo decided to do something about this traditional model. In 2012, the company relied on a network of twenty-three hundred dealers in one hundred countries worldwide to sell its products. Dealers managed all sales and after-sales services. Because they controlled the selling process, local dealers traditionally owned customer knowledge. The company conducted traditional market research, but had little or no direct knowledge of its end customers.

Volvo was facing increased competition. The nature of demand was also changing—cars were no longer sold as a single product but were sold as a transportation solution changing the nature of the customer experience. Packed with advanced IT and communications technologies, connected cars promised to provide customers with more effective and safer transportation with less harm to the environment.

How could Volvo develop a more direct relationship with end customers without disrupting its dealers’ relationships? The company decided to undertake a deep transformation of its business model from a B2B model to a “B2B2C” model, where Volvo would provide some services directly to end customers.²⁷ These services were designed not to compete with dealers. In fact, the services reinforced the attraction of Volvo cars, thereby benefiting dealers. To evolve to this new B2B2C model, the company relied heavily on digital technologies—mobility, social media, analytics, and smart embedded devices.

To increase engagement, the company started making active use of social media platforms such as Facebook, Twitter, and YouTube in addition to its web presence. The purpose when interacting on social media was not to sell—and compete with dealers—but to reinforce proximity with existing customers, open a two-way conversation, build trust, and increase loyalty.

Then Volvo did more. Addressing the need to add a push-to-talk button to its cars, Volvo is developing its connected-car concept. Volvo on Call, the company’s roadside assistance service, is delivered through local call centers operating under global framework agreements. A driver in a newer Volvo car can push a button to talk directly with an operator in the call center. Through GPS, the call center provides services such as finding the closest retailer, dispatching a tow truck, or calling the police. In addition, the On Call service triggers automatic alerts during an accident. The service is also available through a mobile app, which opens commercialization to customers owning an older car with no GPS or GSM (global system for mobile communications) technology embedded. The On Call service is included for several years after the purchase of a new vehicle and then is renewable, for a fee.

Of course, Volvo was not the first company to provide such a service. The US company OnStar was a precursor, which other companies then followed. What Volvo did was use the push-to-talk requirement to reconfigure its value-delivery model with dealers and customers. Volvo could get closer to customers without encountering strong resistance from dealers. Call centers are too costly for any dealership to do on its own, but are useful for selling cars. Dealers were happy to have Volvo corporation handle call center activities, so they did not have to do so. Having incorporated connected-car functionality throughout the car, Volvo started releasing new digital services such as stolen vehicle tracking, door control, heater starting, remote dashboard, and car locator services.

Rather than bypassing dealers, Volvo is using its new customer contact methods to provide information and services to dealers. The company created a central customer database and implemented a global CRM solution. Volvo now has integrated existing data from dealers with a constant feed of information from the car itself. New analytic capabilities allow Volvo to move closer to one-to-one marketing while also providing dealers with information about their customers. In addition, Volvo can launch new services such as maintenance reminders that tell customers when dealers have openings in their service schedules. It’s a win-win dual business model enabled by digital technology.

RETHINKING VALUE PROPOSITIONS

There is a lot of media excitement today around big disruptions created by new digital business models. While they are important, not all business model changes have to be disruptive to create value. Similarly, the changes don’t always have to take you into brand-new markets. In creating a new business model, you don’t even need to wait until your current model is threatened.

Business model transformations can also allow you to reinforce your presence in your current market. But these transformations can be no less dramatic. They can be about combining products and services in innovative ways: making better use of analytics, designing new economic models, or repackaging your offering. Of course, not all of these approaches are mutually exclusive, and some companies have combined these models to generate even more value.

A puzzling insight about customers was bothering Japanese property and casualty insurer Tokio Marine Holdings. Many of its customers needed insurance not on a yearly basis but for very specific activities in narrowly defined periods. The company decided to augment its traditional business model to address this unserved need.

Mobile and location-based technology gave company executives a way to make the firm’s product more relevant to customers for specific lifestyle situations. In 2011, the company partnered with mobile carrier Docomo to offer customers a series of innovative insurance products under the banner One-Time Insurance. These products were available through a specialized mobile app. The app provides users with targeted recommendations for certain lifestyle insurance products such as skiing, golf, and travel-related insurance. Through the app, the company can proactively send relevant and customized insurance packages to consumers on the spot.²⁸ In January 2012, the company also launched One Day Auto Insurance—a new kind of auto insurance that can be purchased on mobile phones. The product offers consumers the ability to insure a vehicle for a required number of days when they use a car borrowed from friends or family members.²⁹

While some companies, like Tokio Marine, have used new technology and data to enhance their value propositions, others have used the data they already possess to create new value propositions based on the data itself.

Entravision Communications Corporation is a Spanish-language media company with significant reach in the US Latino audience, a market that collectively has over a trillion dollars in purchasing power.³⁰ The company, started in 1996, operates over a hundred radio and television stations and digital platforms. The company was unique in its ability to offer highly localized marketing in different geographies. As Entravision processed a growing amount of both internal data and data resulting from licensing agreements with its partners, it began to see the potential value of mastering this new currency. Using advanced analytics, the company started to obtain fine-grained behavioral insights, which were highly sought after by companies selling products and services to the Latino population.³¹

The demand for deep insights into Latino markets began to grow beyond traditional media buyers, moving Entravision’s client conversations into analytics and predictive modeling. Thus, in 2012, Luminar was born. Luminar is a dedicated business unit that shifted from delivering internal analytics to offering big data as a service to external clients. The company has since gained clients ranging from Nestlé and General Mills to Target, among others.³² In 2013, the business expanded further by launching the Luminar Audience Platform for buying targeted online audiences. The company now collects and analyzes data for fifteen million US Latino adults, representing around 70 percent of the US Latino adult population’s transactions in brick-and-mortar, online, and catalog.³³ The company that traditionally saw itself as a broadcasting group now sees itself as an integrated media and information technology company serving the Latino market.

MAKING SENSE OF BUSINESS MODEL TRANSFORMATION

Successful business models do not last forever. Sometimes, the creation of new value requires you to venture into the unchartered territory of new business models. Business opportunities or competitive threats can be the catalyst for such change. Digital Masters are not paranoid. But they do assume that competitors, and new entrants, may use the potential of digital technologies to go after their business. You should make the same assumption.

First, you need a good grasp of your current business model (or models). You should also constantly be on the lookout for symptoms of business model change that should ring alarm bells in your organization. Are you experiencing a gradual decline in traditional revenue streams or margin erosion due to commoditization? Are new competitors emerging from unexpected places or adjacent industries? Are cheaper digital substitutes for your products or services making inroads in your market? Are traditional barriers to entry coming down in your industry?

You may choose to operate defensively or offensively. When in defensive mode, companies often use data and any other advantage they can muster to slow the decline of the old model. In addition, aggressive operational cost cutting can release cash and investment capacity to support the transition. But you can also decide to play offense. You can be a first mover in rethinking the business model of your industry. You can disrupt competitors, or other industries, by substituting a traditional product or service with a new digital offering. You can use new digital business models to create new sources of revenue. You can reconfigure your value-delivery model and play a different role in the value chain. Or you can look at opportunities to rethink your value propositions, serving your existing customers in new ways. The scope can be daunting, but the exercise is strategically worthwhile.

Don’t start with the technology. Start with how you can deliver greater value to customers, and think about how to deliver this value operationally at a profit. Then exploit the possibilities offered by digital technology to help you get there smarter, cheaper, and faster. Learn how other industries have solved similar problems or taken advantage of similar opportunities.

Multiple avenues will be possible. You will need to prioritize options that generate the greatest value to customers, that are operationally hard to copy, and that can provide you with a profitable economic model. You will also have to lower your risk by running controlled experiments on your new model. At the same time, gather the data that will help you learn and revise your assumptions. Often, the technology shifts that create new opportunities for business model change are the same ones that can disrupt your existing model.

Designing, experimenting, and implementing new business models is a task for top business leaders. It is a strategic activity. Functional heads will not have sufficient authority to drive new business model experimentation across business silos. The implementation of a new model requires vision, leadership, and governance. If the new model is ultimately designed to replace the old, you need to know when to shift resources and at what rate; the transition won’t happen overnight. If the old and the new are designed to coexist, you need to carefully manage potential conflicts and resource allocation between the two.

We’ve now reviewed the three investment areas that constitute the what of digital transformation—creating compelling customer experiences, exploiting the power of core operations, and reinventing business models. Let’s now turn our attention to the how—the committed leadership required to successfully conduct a digital transformation.