Digital Business Models

How corporates can reinvent their customer lifecycle and open up new revenue streams Corporates have long neglected opening up new profit pools and

Sebastian Schoemann

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Partner at A.T. Kearney

Corporates have long neglected opening up new profit pools and Digital business models – missing out on opportunities to sustain and grow their business. Now is the time to recognize how to reinvent their customer lifecycle of connected products with Digital business models. We introduce an approach how to win with systematic innovation, suitable execution modes and smart pretotyping to master the art of Digital business models. Corporates underestimate the potential and need for Digital business models

How corporates can reinvent their customer lifecycle and open up new revenue streams

The last years have seen digitization having a big impact on how consumers buy and experience products and services. Every day, we see over 2 bn customers, creating a network effect through connectivity between customers that has create a new normal. On top, we expect 33 bn connected products by 2020, exponentially amplifying network effect. The rise of connected customers and things opens new promising business fields to acquire new customers and generate recurring revenues. New players enter industries challenging incumbents and business models – just like Netflix disrupting movie and television business, Airbnb disrupting hotel sector and Uber disrupting traditional taxi companies. Corporates start to feel threatened as it gets harder and harder to sustain and grow the business.

Digital business models make use of the momentum created by Digital disruptions. For startups and Digital giants, it is a common scenario to develop and reinvent its business model. For well-established companies it is rather uncharted territory. Experience shows that it is often not the case corporates lack ideas, but rather focus and systematic prioritization of business models that are both attractive and feasible. When they identified the most attractive and feasible ones, successful execution of those is the next challenge. Business model innovation is not a one-time thing, but a continuous process. Corporates must make it part of their business routine to stay ahead and use their unfair advantages.

Digital business models are worth the effort

“Digital Business Models are a new rationale of how an organization creates, delivers and captures value in a Digital future.”

Corporates need Digital business models for two main reasons: first, to access new growth opportunities and recurring revenue streams and, second, to defend against increasing competition. Digital business models help corporates to disrupt themselves before someone else does. Players like Bosch Siemens Home Appliances have already started using Digital as an opportunity to interact with their customers on a much more frequent basis via Home Connect. The lock-in effect empowers them to stay relevant as well as defend their market share and customer base against increasing competition from traditional and new players.

Digital business models are also opportunities for growth by enabling a shift in the lifecycle paradigm. In the traditional world, many corporates earn one-off revenues from transactional interactions with the customer. For example, car manufacturers like Audi and BMW earn revenue from the sale of a car and, a few years later, the sale of a new car – sometimes making money from services in the meantime. Digital business models enable a shift in this lifecycle paradigm from one-off revenue towards recurring revenue along the entire lifecycle. For example, Tesla uses its connected car to sell car-related Digital services like over the air upgrades as source for recurring monetization.

We coach you along the way to win with Digital business models

Winning in Digital business models requires a systematic and structured end-to-end process – starting with innovation of the right ideas over selecting the best execution mode to smart execution via pretotyping methodology.

Innovation of Digital business models is about focus on the right idea

We kick-start Digital business model innovation with a fast follower logic. Today there are already many outstanding ideas in the market to learn from – just like the ideas for eBay and YouTube being not new. Others tried it before yet failed due to wrong timing and/or wrong execution approach. Corporates can build on those already existing ideas rather than reinventing the wheel. We recommend a focus on exploring and learning from others. Therefore, we canvas different, yet adjacent industries and build ‘disruption maps’ to learn from. This allows us to derive potential use cases and business opportunities from major trends in the market for any corporate.

As a next step, we enrich the list of business opportunities with ideas from the corporate and design thinking exercises. We continue with a systematic assessment of each business opportunity by relevance and feasibility with a deep understanding of value chains and control points – making sure that the corporate only focuses on a business opportunity where it has a right to win. Knowing where the corporate has an ‘unfair advantage’ over others helps to know what to do and what not to do. We continue with detailing the systematically prioritized new business opportunities: We setup a Digital business model that enables access to the available profit pools with recurring revenue streams focusing on how to create, deliver and capture value around a unique value proposition.

Look at Netflix success story: Netflix started out with a snail-mail subscription service in 1999 to overcome the lacking infrastructure for streaming video in the required volumes; already back then the idea was not new and competitors were lurking. Once the technology improved, Netflix built up a critical control point – a large customer base – giving them an unfair advantage and right to win over existing competitors like Blockbuster and cable providers. With a clear value proposition and business model, Netflix was in a sweet spot to scale its offering around the globe.

In the end, a stringed focus on systematic innovation of Digital business models enables corporates to find relevant and feasible business opportunities and monetization approaches.

Digital business models demand a suitable execution mode to be successful

Once we know what new business opportunity to pursue – all it takes is the right approach to execute because there are horses for courses. Each Digital business model has different requirements. Getting them right is a key success factor. Therefore, we focus on three things: Understanding the requirements, finding the right execution mode and establishing the organizational backbone.

At first, we focus on the assessment of business model requirements for execution because dedicated execution modes for corporates exist: some require heavy lifting by the core business, others can be built up independently. We have conducted a systematic study and benchmark of >30 corporates (e.g. Amazon, Alphabet, BSH, GE, P&G, BMW) to find the most successful execution archetypes. Let’s take a deeper look at some examples how BMW executes Digital business models:

  • BMW Connected drive strongly builds on the key control points of BMW, i.e. requiring access to the car itself as an existing asset. Therefore, BMW has used a task force team to rapidly develop prototypes and industrialize the solution over its line organization.
  • The car sharing service Drive now was a completely new business model that required startup dynamics to build the idea fast and then scale it up with new control points. In this constellation, an independent team is best suited to bring this new Digital business models to success.
  • Other, more adjacent ideas like B2B smartphone-powered road safety analytics or a B2C app for transit optimization, involve higher technology and market uncertainty. On top, BMW has little relevant control points in its core business that would give it an unfair advantage in these segments. A venture approach via BMW iVenture fund enables BMW to be part of technology disruption.

Pretotyping ensures to build the right “it” before it is actually built

Just like BMW did in the examples, we always approach execution of new Digital business models based on what they require to be successful. Only after we know the most suitable execution mode, we can prepare to launch: The mission of building Digital business models requires new people, capabilities, processes and metrics. We know that early mistakes cost the most. To avoid those, we recommend kick-starting the journey by setting up and piloting the structures together with the new team – with Digital business models it is better to operationalize on the example than to conceptualize theoretical solutions to the last detail.

As soon as we have innovated the right Digital business model and prepared the execution, we can start the last phase: pretotyping. Pretotyping is a hands-on method to make sure that you build the right it before you build it right. Building, testing and scaling new Digital business models, requires value propositions to be validated, but also built-in scalability. By implementing methods like pretotyping, we supercharge the development of new business.

Pretotyping enables quick and cheap tests prior to extensive prototyping. And we believe that the only effective tests are in the real-world with a concrete pretotype used to collect data from actual users and built to test behavior, not intentions. Pretotyping follows a strong hypothesis-driven approach: We always begin by defining a concrete hypothesis to test the initial level of interest. For example, we could test the hypotheses that 10% of McDonalds customers will buy a McSpaghetti. For this pretotype, we would fake the option of a McSpaghetti on the menu for buying in one location, tracking how many customers would actually place the order, therewith demonstrating behavior – not intentions. We would then track and analyze the data points. Based on real data, we can either confirm our hypothesis and run a second, more large-scale test or refine our hypothesis and try again. By simulating its core experience with the smallest possible investment of time and money, we can already test initial appeal and actual usage of potential new product.

It is not rocket science – start today but be smart, brave and open about it

In the end, pretotyping entails shorter time to market, steeper learning curve, innovation close to the customer, cheaper failures and reduction of idea selection bias. Once you have found the right it, you can continue to build your first MVP and prototypes and start the first real pilots in the market.

Corporates that became interested in innovating and building new Digital business models can start today – but they need to get a few things right. Too often, corporates use their traditional methods and thinking for this new challenge and fail. Therefore, we recommend changing the approach and be smart, brave and open about Digital business models.

The first success factor is to be smart. Many corporates use the well-known way of committee thinking, leading to situations without clear responsibilities and ownership. Rather hold the whole team accountable and involve the co-founders of the project to solve problems, provide decision options and drive success. Also, don’t look everywhere but make sure that you have strategic focus – concrete search fields are crucial to select relevant partners and start-ups. Lastly, we often observe that corporates do not take the best people. Instead, we recommend being smarter and make sure to take the best team with the right capabilities, people with different capability profiles compared to corporate stars excel in an entrepreneurial setup. Being smart about ownership, focus and capabilities increases likelihood of success.

The second success factor is to be brave. With Digital business models you have to be patient with profits and keep the focus on scaling. This implies that the use of traditional success criteria is an inadequate representation of success, but we recommend using start-up-like metrics (e.g. product-market-fit). Especially in the beginning the focus must be on proving value and growth hypotheses of the underlying scaling path. In consequence, you must cultivate an environment that incentivizes experimentation within a field and embraces learning. Experimentation and pivoting are key to find the right Digital business model for a business field. That way you can empower and encourage the team to always bring 100% impact. Of course, this also requires brevity with regards to investment and willingness to put money without immediate return. Yet, in the end, being brave is the only way to win with Digital business models.

We can coach you based on our proven track record and entrepreneurial spirit

The last success factor is to be open. Especially as a traditional corporate you cannot do it all alone – you must partner up with other ecosystem players to deliver relevant value to the customer. Finding the right partners requires to listen to the market and customers for inspiration and to systematically understand the partnering need for specific control points to broaden the coverage of a certain value chain from a customer perspective. With Digital business models you also have to be open to continuously challenge yourself and your ideas, ever day in all you do. If you do so you will quickly attract the right Digital talents from within or externally and will manage to build and scale winning Digital business models.

Don’t miss out and start today – for more information reach out

Winning with Digital business models is not rocket science, yet a lot is to learn from the mistakes that others have already done. Our proven track record in a B2B and B2C environment across different industries (e.g. steel, white goods, telecommunication, insurance, banking and automotive) has given us in-depth insights into the common pitfalls. We know how to do it right and are ready to coach you from innovation to building the first pretotypes and scaling your Digital business models. Our entrepreneurial mindset and operations DNA make us a great fit to partner up on this important and exciting journey.

It is time to start now and disrupt your business before a startup comes around and does it for you. We can coach you and look forward to engaging in discussion with you.

Find out more on our microsite or reach out to any of the authors (Sebastian Schoemann, Sabine Spittler, Johanna Scheerbarth, Annalena Dierks) for more information.


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