Digital Transformation: Disrupting With Diversified Business Models

Paul Lewis

As a previous CFO I work with used to say frequently, “It’s all about cash flow.” Good ideas and good businesses are about making money and spending just enough to grow that money incrementally and predictably over time. “The faster we achieve positive cash flow on any particular project, the more investment money will be available to innovate again,” was a mantra I heard time and time again.

Getting to financial steady-state for new organizations and/or maintaining incremental positive growth for mainstay companies is becoming more difficult, however, because:

  • Competition from Internet/mobile-born startups are quick to innovate and can change priorities on a dime
  • Changing consumption demands from a changing consumer market will make or break product success far faster than ever
  • Explosion of massive automation techniques, like robotics and artificial intelligence, is reducing the human effect of customer service
  • Globalization and ubiquitous information sharing are creating real-time service comparison and global rating systems
  • Startup adjacent markets like bitcoin are competing with centuries-old financial markets

These “disrupters” could be summarized into one simple word: choice. Your clients want choice in products, service, payment method, company, length of engagement, etc. They are perfectly happy to replace you if they are not satisfied.

Consumers are also choosing to break up long-term and broad business relationships to create several short-term, diverse relationships. Instead of being loyal to a single bank consuming all the retail, investment, and insurance offerings available, they would rather spread their wealth across many institutions, and they will purposely and quickly move to another institution if you’re not keeping up with your side of the bargain on customer service.

Collectively, these digital disrupters are chipping away potential growth, especially if executives are relying on the traditional tools in their tool belt: Introducing new products at the same rate and incrementally improving customer service, prices, sales, and promotions.

The best way to compete with disruption? DISRUPTION!

Competing against these disrupters requires a new disruptive business strategy – digital transformation – which is largely divided into these three categories:

  • Operations and processes: Take a ground-up re-evaluation of the services you deliver to dramatically change the time to market delivery of your products (from months to hours)
  • Customer experience: Purposely identify and understand new customer behaviors and buying expectations with a consumer mindset of replaceability
  • New business models: Shift from “sell product” to “sell service” to “sell usage” to “sell outcome” to “sell network”

I’ve already written about operations and processes and customer experiences in the last couple of months, so let’s dig a little deeper into new business models.

A quick reminder in the last few minutes: The customer expectation is choice, as evidenced by competitive pressures from digital disrupters.

Many of the digital disrupters, including your digital competition, likely have a significantly different business model. We could go in depth in terms of the various characteristics of your business model, including value proposition, customer segments, partner relationships, key assets and activities, etc., which would certainly show major differences:

  • Major hotel chains have trillions of dollars worth of property, while online room rental capabilities have none
  • Big-box retailers cater to a diverse set of customer demographics, while drone-based delivery retailers focus on urbanites
  • Large manufacturers require hundreds of partners to deliver an array of complex machines, while a niche manufacturer only needs a 3D printer and time on its hands
  • Major technology companies rely on a solid brand for continued patronage, but new entrants need some samples that fit into the trunks of their car

We could go in depth on each of these characteristics, and they do need to be addressed by the executives, but let’s focus even more on the financial models of your offerings relative to customer choice and cash flow.

For the most part, your financial model (how you earn revenue and how you spend it) largely fits into this generic description:

  • Sell product or service; make money – spend money to make product or deliver service – invest profit to make new product or service
    • It’s tried and true, and you can create and deliver a variety of products and services that fit this model. The more profit made, the faster debt is paid, the happier investors become.

But what happens when your customers are looking for choice and find the exact same product or service available from your competition in dramatically different financial models, including ones that suit their particular financial needs much better? Let’s explore those other models:

  • Sell product – make money THEN sell service – make money
    • Not a huge difference from the generic model, but it does create potential for new and recurring revenue. Adding the ability to sell add-on post-sale services not only creates new revenue, but also a level of “stickiness” with the customer due to the ongoing interaction. Instead of buying once and hoping they come back for a newer model later, the continued interaction keeps the brand front and center. The negative of course, is that a poor or declining customer experience will have a dramatically negative effect. It’s almost impossible to bring back a customer with a poor experience.
  • Sell product AS a service – make money over time
    • This model is the big shift from CAPEX to OPEX for all participants. For a customer, it’s replacing the financial burden of an upfront cash outlay with ongoing expenses over a period of time (a contractual term or when they stop the service). For the company, it means changing the spending model by taking on the upfront risk of product or service creation and availability, with the potential return of more profit per product over time. This model is preferable for customers looking to manage a predictable cash flow.
  • Sell product AS a service – make money based on USAGE
    • While still an OPEX model, the difference in that the burden of profitability is entirely on the shoulders of the company to create enough customers with enough usage over time to compensate for the upfront initial investment in the product creation and expenses over its lifespan. The potential return, however, is a far higher potential of profit if usage becomes popular. This model has created many cash cows. For customers, the expense is directly controllable and they can spend as little or as much as they need at their discretion.
  • Sell product AS a service – make money based on OUTCOME
    • As an extension to the usage model, the outcome model helps balance the risk between the seller and the consumer for the cost of the product. The burden of the product investment is still with the company, and the usage over time will still dictate the amount of potential profit, but that risk is now reduced with each customer interaction by jointly taking on the risk for the ongoing or end price. This is the model of “everybody roll up your sleeves” to create an average transaction price that’s lower for the consumer.
  • Sell platform services – make money from all participants:
    • This is a dramatic shift from creating and selling products to creating a network of buyers and sellers for a particular set of products or services. From the consumer perspective, and even your brand recognition as a whole, you may be seen as a provider, but this model is only about making offerings available from a variety of different sellers and earning revenue transactionally as part of the buying experience. The burden of product investment remains with the sellers. The burden of creating a marketplace (both the platform and relationships with all parties) becomes exclusively yours. The time and investment required to create these platforms will be a significant burden, and the potential of failure is significantly high. However, once the network is thriving, net new revenue can be earned by creating new and innovative value for each of the participants in the network and creating logarithmic profits by the simple organic growth of the network alone. The value for the customer, of course, is creating the ultimate venue for choice.

Just to be clear: I am not advocating a shift or a move to a new business or financial model for your existing offerings. And even if you strategically decide a new model would be valuable, I am not suggesting the various models described represent maturity or evolution. My recommendation is to evaluate your current growth against your competitors’ and your customers’ desires in order to create diversity in your business financial models to offer choice to your various customer segments. Ultimately, it’s choice that will be the winning digital transformation business strategy.

Everyone has a perspective and a point of view. Spend time reading, forming an opinion, and talking about it. Being right isn’t important. If you are never wrong, you aren’t trying hard enough.

See how IT can help organizations shift to real-time operations. Read the EIU report.

This blog originally appeared on Hitachi Data Systems Community.

Paul Lewis

About Paul Lewis

Paul Lewis is the chief technology officer in Hitachi Vantara for the Americas, responsible for the leading technology trend mastery and evangelism, client executive advocacy, and external delivery of the Hitachi vision and strategy especially related to digital transformation and social innovation. Additionally, Paul contributes to field enablement of data intelligence and analytics; interprets and translates complex technology trends including cloud, mobility, governance, and information management; and represents the Americas region in the Global Technology Office, the Hitachi LTD R&D division. In his role of trusted advisor to the CIO community, Paul’s explicit goal is to ensure that clients’ problems are solved and opportunities realized. Paul can be found at his blog, on Twitter, and on LinkedIn.