Four digital business models and the capabilities they demand

Stephanie Woerner is a research scientist in the Center for Information Systems Research at MIT Sloan School of Management. She is also the co-author of What's Your Digital Business Model? Six Questions to Help You Build the Next-Generation Enterprise, due out next month.

In part one of this SearchCIO Q&A, "MIT Sloan: Finding your digital business model," Woerner laid out four types of digital business models companies are using to generate digital revenue and thus become viable players in the digital economy. They are as follows:

• Supplier model: Companies sell products through intermediaries; because of this, they often don't know much about their end customers. Closest in structure to traditional business models, the supplier model requires companies to optimize their supply chain for efficiency, compete on cost and find ways to digitize their products.
• Omnichannel model: Omnichannel companies bundle products and services aimed at solving customer problems. In the omnichannel model, the company owns the customer data and enables customers to do business with it across multiple channels.
• Modular digital model: Companies offer technology-agnostic services that can plug into many businesses. PayPal is an example of this type of digital business model.
• Ecosystem driver: These are companies -- Amazon being the quintessential example -- that host the technology platform on which business partners and customers participate. The ecosystem driver owns the customer data and also extracts a cut of every transaction between platform partners and customers.

Here, Woerner expounds on the four digital business models and delves into some of the attributes companies need to build to become successful digital players.

You describe the 'ecosystem driver' as one of the toughest digital business models to get right. Amazon has mastered it. What other companies are in this category?

Stephanie Woerner

Stephanie Woerner: We are seeing a number of financial services companies in this category. What they're doing is defining the destination. They're not thinking of themselves as financial services companies. They're saying, 'OK, maybe we're not going to be the top gorilla; maybe what we're going to do is define the destination and be the best there is there.'

We also see real estate companies and some insurance companies taking on this digital model: They are saying, 'We know where there is a problem that needs to be solved, and we can bring together a lot of players and be the platform to solve it.' Fidelity might be an ecosystem driver for a lot of retirement. Fidelity, by the way, plays in all four categories of digital business models, as do a lot of the largest companies.

Homebuying is an area that is still very much up in the air.

What about companies like Zillow and Rocket Mortgage?

Woerner: Zillow is digital, and you can find all the properties, but have they put together all the financing yet? Do you have the title insurance [and] the home inspection? I think it's still kind of contested terrain.

In retail right now, you'd have to say Amazon is winning. However, you could see a more specialized ecosystem. You could see one of the more upscale retail outlets put together a smaller ecosystem, highly curated, that goes after a subset of the best-of-everything customers and provide that for them.

So, we see companies trying to define where they could be an ecosystem driver and finding maybe it's only going to be for a small subset of their customers.

To be an ecosystem driver, technology is fundamental. Do you think technology will be rate- limiter for big companies -- even a deal breaker?

Woerner: It will be if they don't have their technology ready and if they don't have a platform. If they don't have a platform, they're going to have a really tough time. At that point, a company might really want to be looking at other digital business models -- either omnichannel or whether it wants to create a service that can plug into a lot of other ecosystems, to be a modular producer. I am doing a project on the modular digital business model this year, trying to see what some of the capabilities are that modular producers have to build in order to be successful.

And this model will be tough to get right, too, because it is so dependent on a platform and creating API-enabled services that can fit everywhere. Modular producers have to be technology-agnostic, and it takes a special mindset to do that.

General Electric, with its Predix platform, is trying to be an ecosystem driver for the industrial internet. Yet, building this digital capability has created a lot of shareholder anxiety, and GE's had a rocky go of it. Can you give companies some pointers on how they can improve their chances of building successful digital business models?

Woerner: We have identified eight capabilities that companies have to build. Some of them are around the business design. One of the things that's interesting about GE is that they actually tried to be an ecosystem driver, but it's hard to see who their partners are. Really, the best ecosystem drivers are always thinking about who their acquisitions are [and] who their partners are. With GE, it seemed like they tried to go it alone. I could be wrong about that.

Another attribute is that you take customers very seriously -- the customer voice has to be heard. And, again, with GE, I am not quite sure what the role of the customer was. That is something I think about.

Companies have to figure out how to amplify the voice of the customer inside a company. Do you know what your customers actually want? Are you able to listen and gather, not just great customer data, but also gather and identify customer problems to solve? And if you can't do that, that will be a real stumbling block for you.

Harvard Business School's Clay Christensen, the disruptive innovation theorist, makes this point in his lectures. Companies need to look at their products in terms of what jobs they get done for customers.

Woerner: Yes, we see companies that are making progress toward this. One, they have great customer data, and they actually figured ways to consolidate their customer data into one place. Or, they have done it through technology in a way where, eventually, they'll have to consolidate or they'll keep propagating spaghetti. But in the short run, they know where their customer data is and how to access and use it, which leads to using that customer data for evidence-based decision-making.

What are some of the other attributes companies need to have to develop successful digital business models?

Sometimes, you have to say, 'Well, you may have to cut your expectations. What is it that you do best, and can you concentrate on that?'

Woerner: You really have to start thinking about doing some experimenting and then testing whether you are able to scale those experiments.

And when you're thinking about changing your business design, you realize there are these partnerships and acquisitions that you have to think about doing, but you also have your platform where you have to be able to service-enable services -- create services -- that you are willing to use internally and externally.

So, when we are talking to companies, we don't really suggest they API-enable every service and then open them up to the outside, but ask them to identify the best services they could API-enable and then advise them to open up these services to everyone in the company to see what kind of innovation they can get internally. Then, they can start thinking about how they open up those services externally. Do you want to have them open like the Google Map API that anybody can use? Or, do you want to hold your services more tightly, have a little bit more control and only open them to specific partners? You need to be thinking about that kind of strategy.

And if you want to build a destination that other people are going to play on and plug into, you have to ask yourself, 'Why are they going to come there?' You can't just say, 'We're going to be the platform for'... . You have to think about how you're going to make yourself a destination that customers and partners are going to want to come to. So, there is a piece of strategy there.

And once you become digital, you have to be great at security and compliance and regulations. We've seen what happens.

How do you advise companies whose competitors are lapping them in the digital arena? Do you deal with companies where you have to say, 'You just will not be able to catch up.'

Woerner: Because of our sponsor model and of who comes to us, we often talk to companies that are striving and working hard to make very hard choices. So, sometimes, you have to say, 'Well, you may have to cut your expectations. What is it that you do best, and can you concentrate on that?'

The data that we have shows a lot of consolidation coming, and we can see a lot of companies going out of business. If they don't have a good business model that's going to make money and cash flow, I am not quite sure how they stay ahead, unless they  can convince the market that it should continue to invest in them.

But most of the time, we have great sponsors and patrons, and so we're working on interesting problems that can be solved, like consolidating data. And we have companies that can do that because they are dedicated to staying alive.

Woerner and CISR Chairman Peter Weill will be presenting their research on digital business models at the upcoming MIT Sloan CIO Symposium on May 23 in Cambridge, Mass.