There's a lot of talk these days about the importance of taking action to revamp the business model due to the rapid changes taking place in this era characterized by the pervasive and cross-cutting advent of digital.
To better understand their positioning in this transformation process, companies need tools to answer the following questions:
- Is the business model currently adopted correct?
- When is it time to change the business model?
- What are the first steps to take to move towards a better business model?
Disclaimer: digitize or upgrade the business model?
Companies often ask for an assessment of their degree of digitization in order to better understand their strategic market positioning. Therefore, an important distinction must first be made:
- La digitization is the conversion process that, when applied to the measurement of a physical phenomenon, determines its transition from the field of continuous values to that of discrete values. Today, this process is commonly summarized in the terms of transition from analog to digital
- The business modelalso called business model (business model) describes the logic by which an organization creates, distributes and collects value. In other words, it is the set of organizational and strategic solutions through which the company acquires competitive advantage.
In short, digitization consists in transposing an analog process into digital mode, while the business model represents the set of logics and dynamics that govern a business.
The business model is therefore the focus of this article. Within a business model both digital and analogue processes can therefore coexist, and within a business model it is not necessarily convenient to make all analogue processes digital.
Mapping and analyzing the business model: the business model canvas
One of the most efficient representations is the business model canvas, often used by early-stage startups to design the foundational mechanisms behind a business built around a new product, and below.
As you can see from this image, the business model canvas is nothing more than a structure of description and classification of the levers that define a business, reasoning in terms of type of customers, values, relevant activities, segmentation, sources of revenue, key resources, partners and cost structure, etc.. It is therefore a very agile structure that lends itself to support the various strategic reasoning on the subject.
The business model as a "reservoir" of value for the company
It is more relevant than ever for anyone who deals with strategy to open this discussion table, because especially for established businesses it would be very risky to neglect sales channels, business relationships and opportunities of all kinds that are available on the market as a result of the development of the connected world that has taken place in recent years. It should also be noted that this type of company already possesses a park of consolidated "assets" (for example: customer loyalty, market positioning, brand quality) that, if properly framed and exploited, will make the kick-off of an updated business model very easy and efficient.
A company's business model is therefore a manifestation of its ability to "navigate" or not navigate the change taking place. The business model, once adopted, defines and delimits the field of actions and strategies that can be implemented to make the business successful.
It should also be noted that the set of actions and strategies to make a business successful (right-hand side of the graph) is a subject of consolidated study and training in all economics courses of study.
The search for new business models (left side of the graph), being an extremely experimental subject by nature, is more understandable and conveyable through the experimental approach typical of the digital entrepreneur today.
In what kind of situations is it appropriate to intervene with changes to the business model?
A financial point of view often does not allow a clear understanding of the extent to which the business model adopted is responsible for the performance achieved by the company.
To make this statement clearer, think of a hypothetical company, which applies a business model A once and a business model B another time. In both cases, the company reaches 110 mln in sales.
As can be seen from the upper graphical representation, the company that has adopted business model A finds itself having already exploited most of the market space. Being therefore at the "end of the race", it must modify its business model to create new spaces for itself.
At the bottom of the graph, the same company that has adopted business model B has a wide road ahead of it and can focus on execution. In this second case, the business model adopted in fact still makes available a large number of actions and strategies that can be applied in order to gain new market shares, increase the performance of the products sold, etc..
Looking at the company in this way, it is very easy to understand when it is necessary to intervene on the business model and when to concentrate on the execution of the plans in place. From a business manager's point of view, however, it is not easy to abstract the reasoning to such an extent and in a correct way in order to understand whether one is in situation A or in situation B. Given the same financial symptoms, one finds oneself at a crossroads between two extremely different solutions: revise the company's business model, or put more emphasis and effort into executing what is already set? This question is actually extremely common these days for those who manage a business and deal with strategy, as there are still few objective tools to identify the correct solution. Providing the wrong answer to the above question could also lead the company to invest a lot of energy in the execution of a model that is no longer healthy, thus forming a sort of "pit" in which the company's energies are absorbed without producing results, giving rise to friction, discontent, misunderstanding of internal and external stakeholders and finally resulting in a loss of competitiveness of the company itself.
So why isn't a company's business model constantly challenged?
There is a strong legacy connected to more traditional business models: in fact, often the economic results are in any case satisfactory to sustain the company, or perhaps there is the habit of thinking that cost reductions, increases in efficiency and other interventions of this nature are a pursuable direction given also the literature, the training offer and the professionalism that deal with these aspects. On the other hand, the literature and the supply of professionals with a verifiable track record regarding actions on innovative business models is scarce. This is natural, given the rather recent advent of digital transformation issues.
Perhaps it is also for these reasons that, in a moment of difficulty of a company, it is likely that the reticence towards the need to rethink a model wins out, and instead the causes are sought in staffing choices, poor execution, etc..
There is a need to develop an awareness of the premises that led to the adoption of the original business model in the past, combined with an awareness of the change that has occurred to those premises due to digital transformation, and which make that model no longer relevant.
This is an extremely complex issue to deal with, as it requires reviewing some concepts deeply rooted in the organizational structure and in the current mentality, which is not always accustomed by nature to this kind of change. However, there are a number of tricks to deal with this issue that those who deal with strategy can take in order to understand quite quickly the goodness of their business model. Surely there are also different ways to get to the solution of this problem, and the one proposed is only one of the possible ways. It is certainly necessary to collaborate with professionals who have an extensive knowledge of a technological field and at the same time have a background in business aimed at strategic reasoning and with an experimental approach. For this reason at Quodigi we prefer Involve digital entrepreneurs, who have successfully brought an innovative product/service to the market, in the strategic reasoning.. In fact, these are profiles that have been closely confronted with the change taking place in order to find an outlet in the market, after having carefully studied and evaluated all the channels and methods available. These profiles can bring to the reasoning a knowledge of all the means and levers available in the digital world, and provide a complete overview of the tools available today. This involvement can be made virtuous through the application of certain guidelines in particular:
- Making a business model canvas: In fact, it is necessary to adopt a representation scheme with sufficient depth of analysis as a basis for work that can be shared with a team of interlocutors.
- Outline the relevant verticals : in order to focus the analysis, identify the most relevant technological areas to a specific business (e.g. IoT, Blockchain, Artificial Intelligence, Web Marketing, etc.) as guidelines for the investigation to be carried out. These verticals are the real "agents of change" that expand the range of possibilities available.
- Engage a digital entrepreneur to represent each of these verticals to better understand from an interlocutor who understands the dynamics of a business how new technologies can be exploited as levers to improve a specific business.
- Create a virtuous dialogue with digital entrepreneurs: it is much more difficult than it seems to make the executive of a big company talk about strategy "on the same floor" with a small digital entrepreneur. On the other hand, the better the mapping of skills in the union of these two stakeholders, the better the output will be.
Thanks to these measures, it will be possible to understand clearly and without a particularly onerous effort the quality of the current business model. Through the identification of untapped "channels", combined with market metrics already available to the company, it will then be possible to estimate the potential of adopting a different business model.
It should also be borne in mind that an analysis of this kind should be carried out as a matter of course at this time in history. If you wait for a relevant event to occur to trigger this investigation, you run the risk of not having time to deal with it properly. In fact, the modification of a business model requires a series of continuous and constant actions in order to achieve the desired change in your organization.