Over the last year or so, we’ve been discussing digital futures and the ways they might affect business and life in the next decade. We’ve touched on some specific ways these technologies are already impacting businesses and will continue to do so, but now it’s time to look at the bigger picture: how exponential technological change will alter the very foundations of successful business models.
What is a business model?
Simply put, a business model is a set of assumptions about who your customers are, what you offer them, how your offerings deliver value to your customers, what it costs you to create those offerings, and how you generate and sustain profit. It’s a structured blueprint for an organization to follow in order to succeed at its core business.
At least it used to be. Today, that’s no longer necessarily true. In a marketplace that changes faster than ever, new technologies open new possibilities. They may allow you to pursue your core business more successfully, but they may also upend your preconceptions about what your core business really is. And that means rethinking not just the structure of your business model, but the concept of a “business model” itself.
Disrupting business assumptions
Exponential technologies – and the agility and innovation they enable – are changing the way we do business. Yes, these technologies are modular, they’re plug and play, they build on each other, they allow companies to spin off pieces of themselves into entirely new businesses, but the change is more fundamental than that.
When your business undergoes a digital transformation, it enters the exponential curve. Disruptive technologies vastly expand what’s possible, in ever-shorter timeframes, at continuously shrinking cost. They allow you to change your customer base, your competitors, your go-to-market strategies, and even your entire value proposition on a dime. Indeed, you may have to.
In his most recent book, The Zero Marginal Cost Society, economist and theorist Jeremy Rifkin points out that new technologies have so accelerated productivity that marginal costs – the cost of producing additional goods and services after fixed costs are covered – have dropped to almost nothing. What will it mean for your business when people have easy and almost free access to the skills and tools your organization has invested significant time and money to acquire? When individuals and small businesses can do what you do for far less than you need to charge, you’ll need to find new ways to survive, never mind compete.
When sensors make it possible to monitor every aspect of a device or system, businesses can use that data to address small problems before they grow into major malfunctions. This could eliminate unexpected maintenance costs – but it could also spell the end for business models based on replenishment/replacement cycles. In Deloitte’s Tech Trends 2015 report, Richard Soley, the executive director of the Industrial Internet Consortium, writes, “manufacturers of spare parts and providers of repair services might potentially disappear completely, as the focus of maintenance shifts from objects to outcomes. The list of possible ramifications is staggering.”
Indeed, running a single business model may not be enough any more. Your company may have to innovate rapidly through multiple business models, or even follow multiple business models at the same time. Consider Amazon.com, which started by disrupting the bookselling industry, then expanded into selling other items as well. Today, it’s simultaneously a massive e-tailer and one of the world’s largest cloud services vendors.
Most companies aren’t ready for this shift – and why should they be? It’s a dramatic departure from what we’ve accepted as business basics for decades. But they need to get ready, because academic studies suggest that the inability to adapt to the realities of the digital economy will put 40% of the Fortune 500 out of business in the next 10 years.
Companies in almost every industry, from hospitality to mining, are doing exciting things with disruptive technologies. According to a recent article in the MIT Sloan Management Review by George Westerman and Didier Bonnet, co-authors of Leading Digital: Turning Technology Into Business Transformation, what makes these initiatives successful is that the companies in question have shed these 20th century assumptions about what’s possible:
- Assumption 1: Our customers really value the human touch. In truth, it’s more efficient – and often more satisfying to customers – to automate customer service transactions except in areas where “high-touch” interaction is necessary.
- Assumption 2: We’ve reached the limit of how far we can automate our operational processes. Actually, machine learning, sensors, drones, and other exponential technologies have expanded potential areas of automation far beyond what was possible even a few years ago, enabling a radical redesign of highly complex processes.
- Assumption 3: Working as an integrated company will slow us down and stifle innovation. Bonnet and Westerman note that with digital technology, standardization – for example, using enterprise resource planning (ERP) systems – actually supports greater agility and delivers aggregate performance data to drive innovation.
- Assumption 4: The strategic assets that brought us success in the physical world will also be valuable in the digital environment. While many physical assets retain their value and can be leveraged in new ways in the digital economy, data itself, combined with sophisticated analytics, may now be many companies’ most valuable asset.
Strutting a super (business) model
Rethinking the entire concept of building and maintaining a successful business isn’t something you can do easily or quickly, but these four steps will point you down the runway:
- Use scenarios to create alternative views of the future and work backwards to build the steps that will get you there. Shell does this particularly well.
- Focus on continuous change, not continuous improvement. In the past, you had to adapt your business model in order to cope with change. Today, the very ability to change has to be an integral part of your business model.
- Take the short-term and long-term view simultaneously. John Hagel, co-chair of Deloitte LLP’s Center for the Edge, advocates rapidly moving back and forth between a planning horizon of six to 12 months and one of five to 10 years.
- Invest in digital platforms that allow you to simulate different business models and form new business entities at the speed and scale of our digital world.
Download the executive brief Building Better Business Models.