Business Models in the Digital World

Digitization, which is of course happening all around us, is opening up a whole new spectrum of opportunities to create value. But how do you navigate this new horizontal world?

Peter Weill and Stephanie Woerner offer some useful insights on these challenges in their 2015 Sloan Management Reviewarticle, “Thriving in an Increasingly Digital Ecosystem.” In exploring these insights, and some of their implications, leaders can gain a fuller understanding of the landscape they face.

Opportunities for companies in every industry are occurring on two critical dimensions: knowledge of the end customer and business design, i.e., breadth of product and service offerings. These dimensions combine to form four business models for creating value (see exhibit): Suppliers, Multichannel Businesses, Modular Producers, and Ecosystem Drivers.

Suppliers, in the lower left quadrant, have little direct knowledge of the preferences of their end customers, and may or may not have a direct relationship with them. These companies sell their products and services to distributors in the value chain. Due to the ease of digital search, they are vulnerable to pricing pressures and commoditization as customers look for less expensive alternatives. Washing-machine manufacturers are a good example of Suppliers, as are companies that create mutual funds sold by someone else.

If you are a Supplier, you need to make sure your operations are as efficient as possible, but that’s only the first step. As digitization continues, end customers will increasingly expect you to cater to their likes and needs. So if you don’t know much about your end customers and aren’t intent on solving their problems, you’ll need to find other ways to ward off commoditization. That means making sure that your product is highly differentiated or that it goes through a distribution channel other than one controlled by an Ecosystem Driver, another of the business models, which has a broad supply base. Otherwise, you risk losing all the value your enterprise has created.

Haier, the world’s largest manufacturer of white goods, has deployed various strategies to differentiate itself from competitors. It has developed a variety of niche products, including washing machines that accommodate the long gowns worn by women in Pakistan, and freezers that can keep food frozen for 30 hours in the event of a power outage in Nigeria. More recently, Haier used the Internet to open up its innovation process to people outside the company, enabling an unprecedented level of customization.

Multichannel Businesses, in the upper left quadrant, have deep knowledge of their consumers because they enjoy a direct relationship with them. Companies in this category provide access to their products in various digital and physical channels to ensure the seamless experience their end customers have come to expect. Many banks and brokerage houses are Multichannel Businesses, as are some retailers and insurance companies.