MIT Sloan: Finding your digital business model

In an economy where the world's most valuable brands are masters of the digital realm, business practices that helped companies succeed in the past must be adapted -- and, in some cases, radically transformed -- for a digital age. Enterprises understand the threat and opportunity a digital economy presents. Yet, according to enterprise digitization expert Stephanie Woerner, many businesses lack a framework to help them assess where they stand now and where they should be headed. They lack a digital business model.

Woerner is a research scientist in the Center for Information Systems Research, or CISR, at MIT Sloan School of Management. She is  also co-author with CISR Chairman Peter Weill of What's Your Digital Business Model? Six Questions to Help You Build the Next-Generation Enterprise, due out next month. Based on five years of research and interviews with companies around the globe, the book explores how businesses must change in order to succeed in a digital economy, and it lays out four distinct digital business models.

Woerner and Weill will be presenting their findings at the MIT Sloan CIO Symposium on May 23 in Cambridge, Mass. Here, Woerner gives us a preview.

How do you define digital business model?

Stephanie Woerner

Stephanie Woerner: The working definition we have is pretty simple: Digitally, how are you going to make revenues?

CIOs have been hearing about digital disruption since the debut of the iPhone. Yet, many companies are still struggling to meet your definition of digital business model. What's holding them back?

Woerner: A couple of things. They're probably not organized for digital. So, for instance, silos hold companies back. If they haven't actually done the work to create a digitized platform and make the connections between the silos, that is going to be a real problem.

Data silos, people silos, all kinds of silos?

Woerner: All kinds of silos. Data silo is a specific kind of silo that we find to be very important. A lot of companies, for instance, have their customer data in different parts of the organization.

And a lot of organizations are organized around products. If you have your data about your customers by product, you won't be able to create a rounded view of your customer, because you don't have your data organized in the right fashion to get that kind of information.

Being organized in silos also contributes to a mindset about what's important in the organization. It could be that if you're organized around products, rather than the customer, and your incentives are based on products, you're going to have a product view first, which may not give you the impetus to make the changes that you need to make to become more digital.

We see this movement to a digital business model as silo-busting, and we see that organizations are going to have to undergo some big transformations to compete in the digital economy. And one of the first things they must decide is, what is their digital business model? How do they want to make their digital revenues?

This seems like a good segue to your research on digital business models.

Woerner: The framework is based on over five years of research, with a number of interviews and surveys from over 1,000 respondents. We identified for the digital economy two dimensions that were going to be very important. One was, how well do you know your customer? Do you know their identities and what they bought? Do you know what they bought from your competitors? Do you know what is motivating them to make a purchase from you? And, finally, do you know what kinds of problems they are trying to solve?

The best companies are really going to know what's motivating their customers and what kind of problems they are trying to solve. And they can begin to address that by creating bundles of products and services that will solve these problems.

The other dimension is what we think of as business design. Is the company organized in a classic value chain where you are trying to make efficiencies, have a bounded set of partners and suppliers, and you know where they are in the value chain? Or, are you going to operate on a platform where there will be a lot of relationships -- often multiple partners for the same type of product or transaction -- and where you include your customers as part of that business design, in what we call the ecosystem?

From there, we came up with four business models.

What are they?

One, the supplier model, is where you are selling products through intermediaries. So, think of Sony selling its televisions through retail outlets. They often know very little about end customers; you will see a number of B2B organizations still in the supplier mode.

The second model is omnichannel, where the organization owns the customer, puts together products and services -- often bundled products and services -- that are going to solve the customers' problems. They have to make it so the customer can interact on any channel seamlessly and move between channels.

The third type is modular producer, and we still haven't seen a lot of modular producers. These are the organizations that the ecosystem driver -- the company that owns the digital platform -- will partner up with on its platform. We think of PayPal as being a quintessential modular producer. Lots of companies use PayPal to get payments and do the transactions.

Another type of modular producer would be companies that host loyalty programs. Every big hotel, for example, has some type of loyalty program, and they may not want to run it themselves, so there are companies that do that sort of thing and participate on the hotel's platform.

And, finally, you have the ecosystem driver, where you have this company that hosts the platform and actually owns the customer and all of the customer's data. They play the role of matchmaker, where they create linkages between customers and partners who can offer products that customers are looking for, if the ecosystem driver isn't going to offer them. Ecosystem drivers take a clip of every transaction that goes across. They extract rents. The quintessential ecosystem driver is Amazon. But we see companies in other areas trying to be ecosystem drivers.

For instance, research we've done on Aetna shows that the company is trying to become this ecosystem driver of a platform where customers come because Aetna is interested in building a healthier world. So, the platform is not just for the insurance market, but also offers customers the ability to find out about trainers and dietary information, as well as getting information about insurance payment options and things like that.

Now, the potential of the CVS merger has sort of changed that. We're not quite sure what's going to happen there. Does it mean that CVS wants to be an ecosystem driver and use their stores for offering medical treatment at small clinics? Or, is there going to be more of a meeting of the minds?

That's interesting because CVS is sometimes framed as having transformed into one of the nation's largest healthcare providers.

Woerner: Right! Are they going to be the ecosystem driver and have Aetna be the insurance provider on its platform? You can see it going either way.

All four models require companies to have digital revenue. In the supplier model, where companies sell their products through intermediaries, what is the digital revenue generator?

Woerner: Everything is going to be more online. The supplier model is the closest model we have to something that we have seen today. The products may not be digitized, but, for instance, you may be looking to put sensors on your products, so you begin to digitize them. But you're still going to be selling them through intermediaries.

Most suppliers probably still fall into this category today. What's going to happen there, because of digitization, is they're going to have to really work on making the platform more efficient and taking out costs. And then to really succeed in a supplier model, you're going to have to be thinking long term about incremental innovations and about ways that you can get to know your customer better, so that you can actually change or alter your products or create new digital products that loop you in the game.

Do you think blockchain will figure into the supplier mode?

Woerner: We're wondering about whether it is going to change the dynamics of partnering, whether it's going to change the dynamics of purchasing and linkages. Are you going to make it so costs become more transparent? We're doing a little bit of research. We don't have a lot of information yet about that, but it certainly is one of the areas that we're looking into. We currently have a project on partnering that, where it is appropriate, we are asking about blockchain. I have to say most companies are still in the experimentation stage.

Where are you seeing the omnichannel digital business model, which allows customers to interact with the company across multiple channels? 

Woerner: We see a lot of retailers and financial services. And they're often selling physical products, but they're doing things like bundling those products together. They're making it easier to access the purchase of those products, direct to the customer. Many of the retailers are making their inventory and supply chains more transparent, so that you can buy in one channel and return in another. You always know where you can get the product.

Also, a lot of the retailers are looking at how to augment their products with digital: Can you create custom measuring so you might be able to get customized clothing? You could try on things at home and get measured, and you could then go to the store or order online. We're seeing more customization in this model.

And you also have some companies in the omnichannel digital business model that have a number of brands. I haven't seen this yet, but you could imagine, say, Williams Sonoma and Pottery Barn thinking about creating products and services across brands. Those are big issues they could deal with.

Also, you'll see the omnichannel model in B2B. You could think about a large company, for instance, Schneider Electric, which can provide all of the electrical parts to their customers in a building and can count cross-selling as one of the measures of success in their omnichannel. In the beginning, we saw a lot of B2C in this digital business model, and we're now starting to see a lot more B2B companies.

Which one of the models is the ultimate digital business model?

Woerner: The ultimate is the ecosystem driver. All these models are relevant models for the digital economy and profitable models. But I like to think about the risk/reward outcome for these models. The ecosystem driver outperforms all the classes for performance that we measured, which would be customer experience, time to market, profitability and growth.

However, it's a hard model to get right. Our research has shown a lot of consolidation in that model, and I think the way to think about it -- if you actually can execute and make it work -- is that there is the opportunity for a lot of reward. But it will be hard to get everything right. You have to have great products and services, you have to a great platform to deliver them, and you have to have a great customer experience. So, it's a model where you have to have great products, and then you have to sell them in the most cost-efficient manner.

Editor's note: In part two of this SearchCIO interview, "Four digital business models and the capabilities they demand," Woerner delves into the challenges associated with the "ecosystem driver" and "modular" digital business models and talks about the attributes companies must develop to achieve success in the digital economy.