Q&A on the Book What’s Your Digital Business Model

The book What’s Your Digital Business Model by Peter Weill and Stephanie L. Woerner explores how companies can reinvent themselves to become successful in the digital economy. It provides a research-based framework, coupled with assessments and examples, for executives to think about how to compete in the digital era and decide what’s needed to migrate towards a digital business model.

InfoQ readers can download an extract of What’s Your Digital Business Model.

InfoQ interviewed Woerner about how digitalization disrupts existing business models, the six driving questions that guide digital transformations, what companies can do to change their business model towards ecosystem drivers, sources that drive competitive advantage, why commitment is the ultimate driver of success in the Internet of Things, what it takes for companies to reinvent themselves for digitalization, and the skills that are needed to lead a digital transformation.

InfoQ: Why did you write this book?

Stephanie L. Woerner: Right now is both an exciting and a daunting time to be a leader of a large enterprise. Digital disruption is already here, and doing nothing will lead to a slow death of a thousand cuts. We wrote this book to provide a common language, helpful frameworks, motivating case studies, and data on early financial performance to help executives make the difficult decisions to set up their enterprises for success in the next decades.

InfoQ: For whom is the book intended?

Woerner: We targeted senior executives, but we’ve found that most executives have found the book helpful in identifying how much threat their businesses face, the key dimensions they need to address to build a business for the digital economy and the capabilities needed to support that business.

InfoQ: How does digitalization disrupt existing business models?

Woerner: We have identified three ways digitalization disrupts existing business models. The first type of disruption happens when a new entrant—often a start-up like Airbnb—comes into an existing market and offers an exciting new value proposition. In banking, for instance, fin-tech start-ups have gone after profitable parts of banking’s business, like payments and loans.

The second form of disruption comes from a traditional competitor within your industry, but that organization changes its business model to become a much more formidable competitor. For example, Nordstrom has evolved from a traditional department store into an attractive omni-channel business, combining the best of place (tangible, product based, customer-oriented transactions) and space (intangible, service based and oriented towards the customer experience). In our research we see industries like banking, insurance, retail and energy companies trying to find the perfect mix of place and space.

The third form of disruption involved crossing industry boundaries. It’s what happens when challengers come from completely outside of your industry. For instance, Australian supermarket chain Coles has started selling home insurance, as well as offering other financial services.

InfoQ: What are the six driving questions and how do they guide digital transformations?

Woerner: We structured this book around six questions, one question per chapter —we think every executive needs to be able to answer about his or her business:

1. Threat: How strong is the digital threat to your business model?
2. Model: Which business model is best for your enterprise’s future?
3. Advantage: What is your competitive advantage?
4. Connection: How will you use mobile technologies and the internet of things (IoT) to connect and learn?
5. Capabilities: Are you buying options for the future and preparing for the necessary organizational surgery?
6. Leadership: Do you have the leadership at all levels to make transformation happen?

Each chapter provides a structure to help executives answer the question, with an assessment, data on what top-performing enterprises do, and motivating case studies of enterprises that have excelled. For example, companies have to be able to identify the level of threat they are facing so they can determine whether they have a burning platform situation, or whether they have some time. The business model chapter goes into detail about the two dimensions that are proving to be critical to success in the digital economy—deep customer knowledge and moving to a design that allows a company to participate in business ecosystems. Digital transformation is about change primarily, not technology, and these questions help executives grapple with the profound ways that business is changing.

InfoQ: In your book you mentioned that companies using an ecosystem drivers business model are the highest performers. What can companies do to change their business model towards ecosystem drivers?

Woerner: We found companies are trying to transform on two dimensions, increasing the knowledge of their customers (not just who they are and what they purchase, but also what are their motivations for purchasing and what kinds of problems are they trying to solve) and moving from value chains that can be controlled (either they or another enterprise must control it) to a more complex digital ecosystem, in which the dynamics are less about command and control and more about building, maintaining, and using networks. Ecosystem drivers have to have (and use) great knowledge about their customers and they have to develop their platform so that it is much easier for partners, suppliers and customers to plug-and-play on that platform. In addition, a company has to make itself into a destination for a class of customer problems or challenges. For example, when a person wants to buy a consumer product, Amazon is often the first place chosen, or when a person wants to learn about restaurants, attractions, and accommodations for an upcoming trip, he or she may start at TripAdvisor.

InfoQ: What are the sources that drive competitive advantage?

Woerner: We’ve identified three sources of competitive advantage. Enterprises can compete digitally with one or more of three capabilities: their content (products and information), their customer experience (the quality of the interaction between customers and the content, which is influenced by the content’s ease of use and the way it is bundled and presented to the customer—often multichannel and multi- product), and their digitized platforms (the way your content is delivered to customers through a set of internal digitized processes, data, and infrastructure, as well as external services).

InfoQ: How can we find out which source to use as the primary driver for the digital transformation?

Woerner: Building on the two dimensions that companies are transforming on, there are four business models.

Supplier: A company that sells its products and services through other companies. For example, a TV manufacturer sells through a retailer or insurance sold through an agent.

Omnichannel: A company that has developed an integrated value chain to deliver multi-product, multi-channel customer experiences that address customer needs and life events. Banks, retailers, and energy companies often aspire to be an omnichannel.

Modular Producer: A provider of plug-and-play digital products and services that adapts to any ecosystem. A payments service (like PayPal) or an identity management company (like Okta) are examples of a Modular Producer.

Ecosystem Driver: An organizer of an ecosystem — a coordinated network of enterprises, devices, and customers that creates value for all participants— which is the destination in a particular domain (such as shopping), ensuring great customer service.

Suppliers have to have content that distinguishes them; they need to sell innovative products and services at a competitive price. Omnichannels focus on customer experience while Modular Producers, who have to be technology-agnostic to stay competitive, must emphasize platform. Ecosystem Drivers have to be great in all three sources of competitive advantage. Suppliers, Omnichannels, and Modular Producers have to pay attention to the other sources of competitive advantage but they have to nail their primary driver of competitive advantage.

InfoQ: You stated in the book that commitment is the ultimate driver of success in the Internet of Things. Can you elaborate?

Woerner: We found four important components that bundled together comprise commitment to IoT. And the higher the commitment to IoT, the more growth (in revenues) from new products.

Companies high in commitment to IoT have:

1. Higher threat from digital disruption, and thus more motivation to commit to IoT as a growth or survival strategy.
2. A strong vision. Executive committee members spend more time working on how to deal with digital disruption and the CIO is focused on innovation.
3. More open APIs for internal and external use and more IP-enabled assets, giving the company more opportunities to connect and create digital services.
4. A robust set of organizational capabilities that support organizational change.

So companies that are higher in commitment are more focused on the need to do something different, have executives that put the time into innovation and strategy for dealing with the threat, and have both the technical and organizational capabilities to make the changes needed for the new business models that IoT enables.

InfoQ: What does it take for companies to reinvent themselves for digitalization?

Woerner: Companies need to build and strengthen capabilities on the two dimensions that are the basis of the four business models that we think are going to be important in the digital economy.

Companies need to increase their knowledge about their end customers, even if they are currently B2B companies (there’s a distinct chance that these companies will eventually want to engage directly with their end customers). We have found four capabilities that help companies move along this dimension:

1. Gathering and using great information about customers. There is so much data available, and without the guidance of a framework, it’s very hard to know which data to focus on and what questions to ask. Frameworks that help companies identify and assemble pertinent information include customer life-events, customer journeys, and customer segmentations.
2. Amplifying the customer’s voice inside the company.It means really putting the customer at the center of the enterprise and using digitization to make customers’ presence felt in every internal meeting and as part of every decision made.
3. Creating a culture of evidence-based decision making. As part of the learning about customers, rather than relying on gut instinct, companies need to start using their data to create hypotheses about what customers want and need and translate those hypotheses into action. They then collect more data to see if the hypotheses were correct. Not only will companies learn more about their customers, but they begin creating a culture of based on data and learning.
4. Providing an integrated, multiproduct, multichannel customer experience. To make actual customer needs and goals central to the business model, enterprises need to stop pushing product and instead meet the customer’s needs in the context of their life events.

Moving toward increased participation in an ecosystem is more challenging for most enterprises because it’s about recognizing that your business is part of a bigger ecosystem that serves a broader set of customers. Boundaries become more porous and companies may not have all of the products and services in-house to support their customers. Becoming more ecosystem-ready involves four capabilities:

1. Being distinctive—and the first place your best customers go to when a need arises. This gets to the core of how the enterprise will differentiate itself in a digital economy. This is one of the hardest things for the senior executive team to answer—it’s difficult to create a compelling vision and then provide the integrated customer experience to fulfill that vision.
2. Identifying and developing great partnerships and acquisitions. While customers may expect to do one-stop shopping, most companies can’t offer all the services and products themselves. Partnerships are a way to offer those complementary products and services to your customers. Acquisitions can be a wonderful way to fast-track a great strategy, and the digital era raises the stakes for picking and integrating acquisitions.
3. Service-enabling is what makes you great with APIs. Digital is a lot about connecting different products and silos in the enterprise to improve the customer experience. It’s also about making the enterprise part of a digital ecosystem to provide the best options for the customer at all times.
4. Developing efficiency, security, and compliance as competencies. In the digital economy, enterprises will have to learn to excel at innovation and cost reduction at the same time. Compliance is a fact of life and enterprises that can more effectively deal with data privacy, cyber threats, potential service disruptions, and the need for increasing levels of compliance with governments and other regulators worldwide will make compliance a competence, not a chore.

InfoQ: What skills are needed to lead a digital transformation?

Woerner: Company leaders must be able to focus the enterprise on new business models and new sources of competitive advantage. In addition, successful leaders will be adept at identifying what they will focus on and what can be delegated to others—i.e. prioritizing what will move the transformation forward. They must also be able to drive and reinforce the cultural change required and communicate the vision both internally and externally. Goal setting is an important skill—those goals concentrate attention throughout the company. The follow-up to goal setting, measuring progress toward those goals and managing investments, particularly innovation investments that support movement toward new business models, help keep the transformation moving forward.

About the Book Authors

Stephanie L. Woerner is a research scientist at the Center for Information Systems Research (CISR) at the MIT Sloan School of Management. Woerner is an expert on how companies use technology and data to create more effective business models and her research centers on how companies manage organizational change caused by the digitization of the economy. She has a passion for measuring hard-to-assess digital factors such as connectivity and customer experience, and linking them to firm performance.