Why a great business model is essential for digital transformation

Technological advances are occuring at what feels like a breakneck pace. The AI race alone is a perfect example of how technology can surpass what we ever thought was possible at a startling rate. Since the launch of Chat GPT at the end of 2022, companies such as Microsoft and Google have been racing to launch their newest AI technology - rushing to prove to the world that they will not be left behind in this new technological era. With the rise of AI, many companies will need to shift their business strategy, and simply investing heavily in these new technological advances won’t be enough. Technology is only one part of the equation, and a great business model is superior to technology when it comes to a company's digital transformation. A great business model enables companies to pivot and adapt to changing market conditions and technological advancements, while technology is merely a tool that can help them achieve their objectives.

The Danger of Caution

MIT Sloan review published a survey of thousands of C-Suite executives in 2017 about how they responded to digital transformation in their industries. The researchers concluded “Winners tend to respond to digitization by changing their corporate strategies significantly. This makes intuitive sense: many digital disruptions require fundamental changes to business models.” Those who lost market share under pressure from digitization in the late 2000s and early 2010s, were ones who tended to shy away from making any big changes, like reviewing the solvency of their business models against new digital-first competitors. It’s understandable why these unfortunate company leaders reacted cautiously when the share of digital revenues was below 40 percent in any given industry, but they badly misjudged how close they were to their industry’s tipping point. Less than 10 percent of incumbent industry leaders took the time to reevaluate aging business models before more agile players had already taken 15 percent of the market. Take for example Blockbuster versus Netflix. Blockbuster’s business strategy was unable to adapt to the era of streaming services and they quickly lost their market share and closed their stores in 2013. Meanwhile, Netflix, whose business model also started out in the DVD rental space, quickly pivoted to streaming offerings, allowing Netflix to transform the movie and TV industry and become one of the largest streaming services today. It’s worth noting here that you don’t have to be first to be a market winner. Fast followers ranked in the top 25 percent of their industries and exposed the company to lower risks, with correspondingly lower revenues. Within the category of fast followers, excellence in execution became the differentiator of success.

The Era of AI

Now we’re seeing a new age of digital transformation - the rise of AI. This era will force many companies to adapt their business models, but when used correctly, generative AI has the ability to improve consumers' lives and help businesses succeed. A Harvard Business Review article published this month explores how companies should use AI to adapt their business strategy and improve user journeys. One company jumping on the capabilities of generative AI is Hubspot. In a recent demo, their CTO and founder, Dharmesh Shah, demonstrated how they are “mingling the capabilities of Open AI with Hubspot to create a new version of ChatSpot.” ChatSpot allows the Hubspot users that want to send an email to a sales lead through Hubspot to “perform research on the company, on the target business leader, and then draft an email that incorporates both information from the research and from what it knows about the salesperson themselves.”

A Stationery Business Model in a Mobile World

The underlying reason why these numbers line up is because life for buyers has changed dramatically over the past decade or so. If your business is more than 20 years old, your market analysis was designed before smartphones and ubiquitous connectivity redefined how people make decisions and purchases. If your business is more than ten years old, you couldn’t have factored in a world where IBM develops blockchain as a service (BaaS) and half of all US consumers have voice assistants. Harvard Business Review’s analysis of successful digital transformers found that they shared a few essential characteristics. The key takeaway here was, “A digital platform, or a digital solution, may enable a new epoch of transformative growth, but when you get under a company’s hood and look to see what’s really driving it, the engine of transformation turns out to be its business model.” What that means is that any successful digital transformation project begins with a clean slate investigation of what customers need now. This includes new research on: -Your customer value proposition (CVP) – this is how to help customers succeed in what they need to get done. Your CVP grows as you address a greater pain point, solve it more completely than competitors, and do it with lower costs. -Your profit formula – the breakdown of where value is created for your company as you build your CVP. Take a closer look at turning the dials on revenues, supply chain costs, margins, and time to market. Partnerships and digital ecosystems matter most here because no one company can excel at everything. -Your key resources – this is all of everything you have in your control to make the above happen. Do a thorough inventory of the skills, technologies, channels and brand assets you bring to the job. -Your key processes – this is where you take a closer look at productive capacity vs. realization and examine if you have the best management style to achieve your objectives. Each type of innovative project thrives under a different style of management and collaborative environment. Test and benchmark how you are doing what you are doing to see better performance results. Recognizing the need for digital transformation to stay competitive is the first step. The next step is to get a better view of the two paths that lie ahead – one where you can see companies that tried to digital transform too late ( Blockbuster, Borders Books, Compaq, and ToysRUs) and the other where there are companies that made it through (like Netflix, Amazon, PayPal andYouTube) by upgrading their business model in response to an entirely different business landscape. It takes just the right blend of strategy, design, and technology services to innovate, grow and delight the next generation of customers. Unfortunately, that's not something your company will be able to find in the app store. At Trackmind, we help companies stay agile in the marketplace. Reach out to our team to learn more about the services we offer.