Digitizing Your Business Model

Editor's Note: Take a look at our featured best practice, Organization Design Toolkit (103-slide PowerPoint presentation). Recent McKinsey research surveyed a large set of global executives and suggests that many companies, these days, are in a nearly permanent state of organizational flux. A rise in efforts in Organizational Design is attributed to the accelerating pace of structural change generated by market [read more]

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What, another clarion call urging executives to fundamentally rethink their business models through digital technology? The business media have had no shortage of these. Many such bulletins focus on radically changing the nature of competition in an industry, as Apple did for music and Uber did for taxis. While there is certainly merit in questioning your business model, revolutionary business model transformation remains elusive despite the buzz. In our survey, a mere 7% of executives said that their company’s digital initiatives were helping them to launch new businesses. And only 15% said digital was helping them to create new business models. Why is that?

Business model innovation is hard. But managers make it harder when they think about it only as radical industry reinvention. While revolutionary business model changes can be valuable, you don’t necessarily need to transform your industry. You don’t need to destroy your current business model. There is another way to make money from business model innovation. Sometimes it’s better to think a bit smaller so you can set yourself up for big results.

How so? In the same survey, 42% of the executives said that digital was helping them to enhance their existing products and services and 29% said that digital was helping to launch new products and services. These executives were making money by using digital to evolve, instead of revolutionise, their business models. To many people, this kind of change doesn’t feel like its real business model innovation. Yet huge opportunities exist in using digital technology to evolve your business model by rethinking your existing products, economic models, and digital assets.

Unbundling Existing Value Propositions

Take Japanese insurer Tokio Marine Holdings. A puzzling customer insight bothered the company’s executives. Many customers asked for insurance not on a yearly basis but for very short periods for very specific activities. The company’s existing sales methods couldn’t handle these special requests. After all, one of the big reasons that insurers sell long term policies is the high up-front cost of selling. It can be difficult to recoup the cost of initiating a policy when the duration is only a few days.

Mobile and location-based technology gave company executives a way to make the firm’s products more relevant to these customers without having to change the core business. 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 specialised 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 provide customised insurance packages to consumers on the spot. 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 number of days when they use a car borrowed from friends or family members.

Digitally Rethinking the Economic Model

Other companies are using digital technology to refine a key component of the business model – the economic model behind their products. For over a century, General Electric has had a focus on product innovation as a key driver of growth. The company is now rethinking the economic model, from being an industrial hardware manufacturer into an advanced analytics and data-science company.

GE is outfitting its core industrial products – from jet engines and gas turbines to CT/PET scanners – with sensors that monitor various parts of the machinery. Using advanced analytics, GE can provide real time information to improve efficiency, increase productivity, and schedule more effective preventive maintenance. With this new data, GE can adapt its economic models and pricing formulas to capture some of the new value it creates for its customers. It can increase the profitability of its service contracts or change the nature of its products, such as selling hours of aircraft availability rather than jet engines and service contracts. GE is moving to an outcome-based economic model, bringing the company closer to its customers’ operations.

Monetising Digital Assets

Sometimes, the data itself can become a product.  Entravision Communications Corporation is a Spanish-language media company with significant reach in the U.S. Latino audience, a market that collectively has over a trillion dollars in purchasing power. The company, started in 1996, operates more than a hundred radio and television stations and digital platforms. The company was unique in its ability to offer highly localised marketing in different geographies.

As Entravision processed a growing amount of both internal data and data from licensing agreements with partners, executives began to see the potential value of mastering this new currency. Using advanced analytics, the company started to obtain fine-grained behavioural insights, which were highly sought after by companies selling products and services to the Latino population.

The demand for deep insights into Latino markets began to grow beyond traditional media buyers, moving Entravision’s client conversations into analytics and predictive modelling. 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 such as Nestlé, General Mills, and Target, among others. In 2013, the business expanded further by launching the Luminar Audience Platform for buying targeted online audiences. The company now collects and analyses data for fifteen million U.S. Latino adults, representing around 70 percent of the U.S. Latino adult population’s transactions in brick-and-mortar, online, and catalogue. 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 Money from Business Model Evolution

Digital technology is changing the way companies work and the way customers expect them to work. Many opportunities exist to profit from digital business models. But building radically new ones can be expensive, difficult, and highly risky. There are many opportunities to do something perhaps less revolutionary, yet still highly valuable – evolving your business models using digital technology. But don’t start with the technology. Start with how you can deliver greater value to customers through technology.  You can unbundle your products like Tokio Marine, rethink your economic model like GE, monetise your digital assets like Entravision, or find some other way to digitally enhance your business. These evolutionary approaches can give you a jump start on digital business model innovation even as you search for the next big revolution.

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