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Ctrl-alt-del: Rebooting the
Business Model for the Digital Age
2
Business Model Reinvention is a Necessity,
Not a Choice
Google’s advertising
revenue now exceeds
both magazines and
newspapers in the US.
Figure 1: Google Vs Magazine Vs Newspaper Ad Revenue in the US, USD, 2004-2013
Source: Business Insider, Digital 2014
Technology helped
us establish a direct
relationship with
customers.
- Caspar de Bono,
Financial Times
$ 50,000
$ 40,000
$ 30,000
$ 20,000
$ 10,000
$ 0
Google (US)
US Magazines
US Newspapers
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Millions
The collateral damage of the digital age
is felt most profoundly at the business
model level. Companies, across
sectors, are today being forced to
rethink every aspect of their business
model as a result of new disruptors.
What happened in the media industry
could be the herald of the future
evolution of many other sectors. The
pace of change took many media
players by surprise. In less than ten
years, US newspaper and magazine
combined ad revenues declined by
nearly half while Google’s ad revenues
increased by nearly 1,200%. Google’s
advertising revenue now exceeds both
magazines and newspapers in the US
(see Figure 1).
That is not to say incumbents are
powerless. The Financial Times (FT),
for instance, took its competitors
head-on. Unlike its peers, who chose to
depend on online advertising growth to
compensate for falling print revenues,
the FT decided early on to look for
new ways to support its operations. It
was among the first to charge users
for access to its online publications,
introducing a subscription model in
2001. In 2007, the FT introduced its
“metered” charging model, offering
registered users access to a certain
number of free articles of their choice,
before inviting them to purchase a
subscription. The metered model
has since been adopted by other
newspapers and has contributed
significantly to the FT’s success. Since
2007, the FT’s digital subscriber base
has tripled1
. In 2014, its circulation
reached an all-time high with 700,000
subscriptions and sales across print
and online. The FT has also been able
to more than double print prices in the
last ten years to make print profitable
in its own right2
.
3
Only 16% of executives
believe that their
organizations are
leveraging digital
technologies to develop
new business models.
Business model
reinvention can be
as good a route as
technology, product or
service innovations.
Figure 2: The Potential to Use Digital Technologies to Develop New Business Models Lies Unexplored
Source: Capgemini Consulting and MIT Sloan Management Review, “Embracing Digital Technology: A New Strategic Imperative,” October 2013
41%
40%
40%
29%
28%
27%
24%
16%
Enhance our existing products and services
Improve the customer experience
Expand our reach to new customers and markets
Improve internal communication
Launch new products and services
Automate our operational processes
Enhance the productivity of our workers
Develop new business models
% of respondents
Our digital initiatives are helping us to: (Select top three)
How did the FT do it? By constantly
questioning and reinventing its
business model. As Caspar de Bono,
FT’s Managing Director – B2B says,
“Technology helped us establish a
direct relationship with customers.
This was very disruptive and the FT
has significantly benefited from this
disruption3
.”
The FT, however, is a notable
exception. Our research with the
MIT Sloan Management Review
reveals that only 16% of executives
believe that their organizations are
leveraging digital technologies to
develop new business models (see
Figure 2)4
. Most organizations follow
traditional approaches to innovation
that focus on new products and
services, rather than on business
models. However, research suggests
that the returns from traditional
approaches have been diminishing
with time5
. As Serguei Netessine,
Professor at INSEAD Singapore says,
“Pharmaceutical companies spend
as much as 30% of their revenues on
R&D, trying to develop new products
or technologies. But the return from
this enormous expenditure has been
very elusive and it is a common
problem across industries6
.” Business
model reinvention can be as good
a route as technology, product or
service innovations7
.
4
How Can Organizations Reinvent Their Business
Models Using Digital Technologies?
Reinventing an industry through business
model innovation requires rethinking
almost every component of the business
model. This includes, among other facets,
resources, processes, cost, revenue
structures and customer value proposition.
However, this is only one route to business
model innovation. In this section, we
highlight five different approaches that
organizations can adopt.
Leverage Digital
Technologies to Change
the Dynamics of an Entire
Industry
Tesla Motors, an American automaker, has
gained widespread attention as it seeks
to reinvent the auto industry. Tesla makes
luxury electric cars and interacts with its
customers and partners in a completely
different way to the traditional automotive
industry.
Tesla is taking
unconventional steps
to transform the
automotive value chain
and reinvent an entire
industry.
67% of digital
masters are actively
transitioning physical
products and services to
digital.
GE is using technology
to rewrite the economic
model behind their
products.
It adopts a direct-to-consumer model for
taking sales orders online and engages
customers through a small number of
company-owned stores, completely
bypassing car dealers. Tesla’s Model S
sedan allows you to exchange a depleted
battery for a fully charged one in 90
seconds, using an automated robotic
platform8
. The company also has plans
to launch swapping-stations capable of
delivering the battery swap as part of its
supercharger network9
.
In 2014, Tesla opened up all of its patents
related to electric vehicles. Tesla believes
this move will stimulate innovation in the
electric car industry and would allow the
world to benefit from a rapidly evolving
technology platform10
. Tesla is clearly
unafraid of taking unconventional steps to
transform the automotive value chain and
reinvent an entire industry.
It is not just new entrants who are going
down this route. Incumbents, with
existing businesses, are also using digital
technologies to rewrite key elements of
their business model. Take the case of GE,
which is using technology to rewrite the
economic model behind their products.
Today, GE is outfitting its core industrial
products with sensors that monitor various
parts of the machinery. Using advanced
analytics, GE can provide real-time
information to improve efficiency, increase
productivity, and schedule more effective
preventive maintenance. With this new
data, GE can adapt its economic models
and pricing formulas to capture some of
the new value it creates for its customers.
It can increase the profitability of its service
contracts or change the nature of its
products, such as selling hours of aircraft
availability rather than jet engines and
service contracts.
The value for GE of these models is tied
to the number of hours its customers
are able to use the product. Rather than
selling an engine as a one-time event, GE
is moving to an outcome-based economic
model, bringing the company closer to its
customers’ operations11
.
Substitute Products and
Services with Digital
Alternatives
In some instances, rapidly evolving
customer preferences force firms to
introduce digital versions of physical
products and services. Our research
with the MIT Center for Digital Business
highlights that 67% of digital masters are
actively transitioning physical products and
services to digital, in contrast to only 38%
of non-masters (see Figure 3).
Deutsche Post DHL, one of the world’s
largest mail and courier companies,
faced a large-scale customer transition
to digital and a drastic decline in its
postal letter business. It launched an
online communication platform, known
as “E-Postbrief”, to provide a secure and
reliable email service for a nominal fee12
.
In 2011, SAP integrated E-Postbrief into
its business platform, allowing corporate
customers to seamlessly exchange data
with their partners13
. E-Postbrief saw a
positive uptake, with the service registering
one million users within months of its
rollout14
.
Deutsche Post DHL also launched
“MyWays”. Using a mobile app, anyone
can register to deliver packages with
products ordered online directly to other
end consumers15
. It has also developed
“SIMSme” (a secure messaging app),
an online advertising service and
“Dieredaktion.de” (a platform for
journalistic content)16
. Deutsche Post DHL
has also ventured into newer tech-driven
ways of delivery by using drones to deliver
medicines17
.
5
Figure 3: Role of Digital Technologies in Business Model Innovation
Source: Capgemini Consulting and MIT Center for Digital Business, “The Digital Advantage: How Digital Leaders Outperform their Peers in Every Industry”, November 2012
67%
77%
92%
38%
49%
46%
% of respondents agreeing with the statement
Digital Masters
We use digital technologies to increase the
added-value of our products and services
We are actively transitioning physical
products and services to digital
We have launched new businesses
based on digital technologies
Non-Masters
Starbucks started
Digital Ventures as a
cross-functional unit
to bring new services
to Starbucks customers
through smartphones,
tablets, and laptops.
Netflix is another example of a transition
from physical to digital. By recognizing
what benefits, or value, customers really
derive from its products - and making that
thebasisoftailoredofferings-Netflixhasre-
invented its business model several times
since its inception in 1997. In its infancy,
it started a pay-per-rental service that was
not particularly successful18
. Then, Netflix
calibrated its value proposition to launch an
online subscription model (called “DVD-by-
Mail”) allowing customers to rent unlimited
DVDs that would be mailed to them for a
fixed monthly fee. This strategy proved to
be a game-changer. Customers preferred
Netflix over its bigger competitors, such
as Blockbuster, that relied heavily on
physical assets.
Over the next few years, Netflix adjusted
its business model by ascertaining the
right price points based on customer
convenience and willingness to pay19
.
As consumer preferences evolved and
viewers started preferring laptops and
smartphones over DVD players, Netflix
created a new value proposition by
launching its “Watch Instantly” service
to allow customers to stream movies
online. Netflix continued its hunt for new
value propositions from its media content.
It started airing an original TV series in
2013, using a unique model of releasing
all episodes of a season at one go, giving
viewers the flexibility to watch them
anytime, anywhere, and on any device20
.
With over 50 million members in 50
countries, Netflix continues to reinvent its
business model21
. It recently announced
plans to launch its first original movie on
the streaming service and IMAX theatres in
August 201522
.
Create New Digital
Businesses
Digital masters also create new businesses
by harnessing digital technologies.
Starbucks, a brick-and-mortar coffee
chain, started a dedicated digital unit in
2008 – “Digital Ventures”. At the time,
its coffee business was not doing well.
Same-store sales were declining and
stock price had lost half its value in less
than two years. However, the shift to digital
was not an obvious choice for a company
whose core business had little to do with
digital. Starbucks Digital Ventures started
as a cross-functional unit to bring new
services to Starbucks customers through
smartphones, tablets, and laptops23
.
Note: Digital Masters are companies that leverage digital technologies to transform themselves completely
6
Digital masters excel at
enhancing value from
existing products and
services using digital
technologies.
Figure 4: Digital Initiatives from Starbucks
Source: Capgemini Consulting analysis
Starbucks
Digital
Starbucks Digital
Network
My Starbucks
Rewards
Starbucks Mobile
Payments
Platform-as-a-
Service
A premium
digital content store;
In-store free Wi-Fi
More than
$18 billion loaded on
Starbucks loyalty cards
A scalable and seamless
platform offered as a
service to retailers
Over 7 million weekly
mobile transactions
Netflix has successfully
reinvented its business
model several times
since its inception.
Rethink the Value
Proposition
Digital masters excel at enhancing value
from existing products and services using
digital technologies.
Entravision Communications is a Spanish-
language media company with significant
reach in the US Latino audience, a market
that collectively has over a trillion dollars in
purchasing power. The company, started
in 1996, operates more than a hundred
radio and television stations and digital
platforms. The company was unique in its
ability to offer highly localized marketing in
different geographies.
As Entravision processed a growing
amount of both internal data and data
from licensing agreements with partners,
executives began to see the potential
value of mastering this new currency.
Using advanced analytics, the company
started to obtain fine-grained behavioral
insights, which were highly sought after by
companies selling products and services
to the Latino population. The demand for
deep insights into Latino markets began
to grow beyond traditional media buyers,
moving Entravision’s client conversations
into analytics and predictive modeling.
Thus, in 2012, “Luminar” was born.
Since then, the digital unit has successfully
shored up a number of digital initiatives
– free Wi-Fi in stores, “Starbucks Digital
Network” (premium digital content store)
as well as “My Starbucks Rewards” – a
mobile payments system linked to the
company’s loyalty program24
. These digital
offerings have now become integral to
Starbucks’ brand as a digital enterprise.
As of March 2014, $18 billion had been
loaded onto Starbucks loyalty cards25
.
Starbucks sees over 7 million weekly
mobile transactions, accounting for 16%
of all its transactions26
. The company has
indicated it has plans to offer its mobile
payments platform to other retailers as
well27
. The platform can potentially become
a significant revenue opportunity for
Starbucks as it is scalable and seamlessly
integrates with a loyalty program, making
it attractive for merchants (see Figure 4).
The company has also been active on
social media. It has over 38 million likes
on Facebook and over 7 million followers
on Twitter28
.
7
Entravision, a media
company, created a
dedicated analytics
business based on its
internal expertise of
analytics and data
processing.
Volvo used digital
technologies to evolve
to a B2B2C model.
Luminar is a dedicated business unit that
shifted from delivering internal analytics to
offering Big Data as a service to external
clients. The company has since gained
clients such as Nestlé, General Mills,
and Target, among others. In 2013, the
business expanded further by launching
the “Luminar Audience Platform” for
buying targeted online audiences. The
company now collects and analyzes
data for fifteen million US Latino adults,
representing around 70% of the US
Latino adult population’s transactions in
brick-and-mortar, online, and catalog.
The company that traditionally saw itself
as a broadcasting group now sees itself
as an integrated media and information
technology company serving the Latino
market29
.
Similarly, tire manufacturer Michelin
has moved away from just selling tires
to providing the mobility and safety of
tires as a service. The company installs
telematic sensors within its customers’
vehicles and a team of data scientists
analyzes the performance of the
driver and the vehicle, to constantly
provide real-time advice on cutting
fuel consumption30
.
Re-Design Value
Chain Linkages
A key component of every business is
how the entire value chain of suppliers,
distributors, marketers and service experts
connects to deliver products and services
to customers. This group forms a delivery
network where each element serves to
add value over the previous one, before the
end-product finally reaches the customer.
Many companies want to have tighter
linkage with their customers, without
antagonizing the third-party distribution
model that they have carefully built and
nurtured over decades. This challenge is
evident in industries that are largely B2B.
Take the case of the automotive industry.
Most automakers are B2B companies
that produce cars and sell to dealers.
Dealers own the customer relationship
and automotive companies, more often
than not, have little direct connect with
the customer.
Swedish car corporation Volvo decided
to do something about this traditional
model. In 2012, the company relied on a
network of 2,300 dealers in 100 countries
worldwide to sell its products. Volvo was
trying to tackle the question of how it
can develop a more direct relationship
with end customers without disrupting its
dealers’ relationships. Its answer was a
transformation of the company’s business
model from B2B to B2B2C, where Volvo
would provide some services directly to the
end consumer. The services reinforced the
attraction of Volvo cars, thereby benefiting
dealers. To evolve to this new B2B2C
model, the company relied heavily on digital
technologies — mobility, social media,
analytics, and smart embedded devices.
The company used social platforms such
as Facebook, Twitter and YouTube to
dramatically increase their engagement
and create a two-way conversation.
Simultaneously, Volvo started developing
its own version of the connected car. It
introduced a push-to-talk service that is
connected to a call center that can help
provide breakdown services. By doing so,
Volvo enabled the creation of a direct-to-
consumer service that bypasses dealers,
without antagonizing them. Running a call
center is an expensive task for a dealer
and they were glad to have Volvo step
in, while at the same time, a call center
helps significantly in cross/ up-selling
cars. Volvo is using information gained
through this channel by redirecting it back
to its dealers. Volvo now has integrated
existing data from dealers with a constant
feed of information from the car itself. It
is a win-win business model enabled by
digital technology31
.
8
Devising a Successful Business Model
Reinvention Approach
Organizations need
to use a continuous
evaluation approach
in order to devise a
successful business
model reinvention.
Emergence of new
competition from
unexpected places is a
sign that organizations
need to start looking at
their business model.
Many companies typically stick to the
same strategy playbook that has served
them for years. However, successful
business models are only transient.
Incumbents need to constantly revisit
their business model to ensure it is not
outdated. There are five practical steps
that companies can follow to rethink
their business model.
Assess Current
Business Model
Enterprises should begin with a thorough
understanding of their current business
model. Senior leaders should ask
themselves some key questions. Which
one of our customer’s problem are we
helping to solve? Are we delivering
what our customers want? What type of
relationship does each of our customer
segments expect us to establish and
maintain with them? Through which
channels do our customer segments want
to be reached? What data do we possess/
can access that no one else can? There
are some practical frameworks, such as
the business model canvas developed by
Alexander Osterwalder and Yves Pigneur32
,
that senior executives can use to assess
their business model.
Spot Potential Disruptions
Organizations should constantly monitor
signs that might indicate potential threats
or opportunities. Are we experiencing
a gradual decline in traditional revenue
streams or margin erosion due to
commoditization? Are new competitors
emerging from unexpected places
or adjacent industries? Are cheaper
digital substitutes for the organization’s
products or services making inroads in
our market? Are traditional barriers to
entry coming down in the industry?
Define Nature of Response
Organizations can choose to operate
defensively or offensively. When in
defensive mode, companies often
use data and any other advantage
they can muster to slow the decline of
the old model. In addition, aggressive
operational cost cutting can release
cash and investment capacity to support
the transition.
Organizations can also choose to
go aggressive and be a first mover
in rethinking the business model of
their industry. They can try to disrupt
competitors, or other industries, by
substituting a traditional product or
service with a new digital offering. Or use
any of the other approaches we have
outlined in the earlier part of the paper to
innovate their business model.
Focus on the Value Delivery
Each approach to business model
innovation will open up several possible
avenues. Organizations will need to
prioritize options that generate the
greatest value to customers, that are
operationally hard to copy, and that can
provide them with a profitable economic
model. Organizations will also have to
lower their risk by running controlled
experiments on their new model.
Implement from the Top
Designing, experimenting, and
implementing new business models is
a task for senior business leaders. It is
a strategic activity. Functional heads will
not have sufficient authority to drive new
business model experimentation across
business silos. The implementation of a
new model requires vision, leadership,
and governance. If the new model is
ultimately designed to replace the old,
organizations need to know when to
shift resources and at what rate. The
transition will not happen overnight.
If the old and the new are designed
to coexist, they will need to carefully
manage potential conflicts and resource
allocation between the two. Business
model innovation needs to become a
core capability for organizations, with
knowledge, best practice, and the
right talent. Incumbents need to be the
agents of their own destiny – shifting
their business models to secure their
continued relevance in a new digital
world order .
Constant reinvention of
the business model holds
the key to continued
relevance in the digital
world order.
9
1 The New York Times, “With a Focus on Its Future, Financial Times Turns 125”, February 2013
2 Capgemini Consulting Digital Transformation Review 7, “Strategies for the Age of Digital Disruption”, February 2014
3 Capgemini Consulting Digital Transformation Review 7, “Strategies for the Age of Digital Disruption”, February 2014
4 Michael Fitzgerald, Nina Kruschwitz, Didier Bonnet, and Michael Welch, “Embracing Digital Technology: A New Strategic
Imperative”, MIT Sloan Management Review, October 2013
5 Reuters, “Drug industry treading water on R&D productivity”, December 2012; Applied Economics, “Diminishing marginal
returns from R&D investment: evidence from manufacturing firms”, Volume 45, Issue 5, 2013
6 Capgemini Consulting Digital Transformation Review 7, “Strategies for the Age of Digital Disruption”, February 2014
7 Harvard Business Review, “When Business Models Trump Technology”, November 2012
8 Company website
9 TechCrunch, “Tesla Shows Off a 90-Second Battery Swap System, Wants It At Supercharging Stations by Year’s End”, June 2013
10 Company website
11 HBR, “The Best Digital Business Models Put Evolution Before Revolution”, January 2015
12 Company website
13 Company website
14 The Wall Street Journal, “Making Email Pay Its Own Way”, November 2010
15 Company website
16 Company annual report
17 The Wall Street Journal, “Deutsche Post DHL to Deliver Medicine via Drone”, September 2014; Company website
18 Businessmodelcommunity.com, “Business Models, Business Strategy and Innovation”, 2009
19 Ibid.
20 Company website
21 Company website
22 theweek.com, “Netflix’s first original movie is coming in 2015”, September 2014
23 InformationWeek, “Starbucks’ Stephen Gillett: InformationWeek’s IT Chief of the Year”, December 2011
24 Forbes.com, “What Best Buy Will Gain from Starbucks’ Loss”, March 2012
25 Company website
26 Wired, “Forget Apple Pay. The Master of Mobile Payments Is Starbucks”, November 2014
27 Geekwire, “Starbucks CEO throws down gauntlet on mobile payments, says coffee company will have ‘major role to play’”,
October 2014
28 As of March 2015
29 HBR, “The Best Digital Business Models Put Evolution Before Revolution”, January 2015
30 Information Age, “Pay-as-you-go ERP underpins Michelin’s services strategy”, July 2013
31 “Leading Digital: Turning Technology into Business Transformation”, George Westerman, Didier Bonnet & Andrew McAfee,
Harvard Business Review Press, October 2014
32 Alexander Osterwalder and Yves Pigneur, “Business Model Generation: A Handbook for Visionaries, Game Changers and
Challengers”, 2010
References
Rightshore®
is a trademark belonging to Capgemini
CapgeminiConsultingistheglobalstrategyandtransformation
consulting organization of the Capgemini Group, specializing
in advising and supporting enterprises in significant
transformation,frominnovativestrategytoexecutionandwith
an unstinting focus on results. With the new digital economy
creating significant disruptions and opportunities, our global
team of over 3,600 talented individuals work with leading
companiesandgovernmentstomasterDigitalTransformation,
drawing on our understanding of the digital economy and
our leadership in business transformation and organizational
change.
Find out more at: www.capgemini-consulting.com
Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group. The information contained in this document is proprietary.
© 2015 Capgemini. All rights reserved.
Authors
For more information contact
With almost 145,000 people in over 40 countries, Capgemini is
one of the world’s foremost providers of consulting, technology
and outsourcing services. The Group reported 2014 global
revenues of EUR 10.573 billion. Together with its clients,
Capgemini creates and delivers business and technology
solutions that fit their needs and drive the results they want. A
deeply multicultural organization, Capgemini has developed its
own way of working, the Collaborative Business ExperienceTM,
and draws on Rightshore®
, its worldwide delivery model.
Learn more about us at www.capgemini.com.
About Capgemini and the
Collaborative Business Experience
Jerome Buvat
Head of Digital Transformation
Research Institute
jerome.buvat@capgemini.com
Subrahmanyam KVJ
Manager, Digital Transformation
Research Institute
subrahmanyam.kvj@capgemini.com
Didier Bonnet
Senior Vice President
didier.bonnet@capgemini.com
Digital Transformation
Research Institute
dtri.in@capgemini.com
The authors would like to thank Amol Khadikar from Digital Transformation Research Institute.
United Kingdom
Didier Bonnet
didier.bonnet@capgemini.com
France
Stephane Regnier
stephane.regnier@capgemini.com
Norway
Anders Rygh
anders.rygh@capgemini.com
United States
Chris Miller
christoper.miller@capgemini.com
Germany
Thomas Friedrich
thomas.friedrich@capgemini.com
Sweden/ Finland
Ulf Holmgren
ulf.holmgren@capgemini.com
Netherlands
Mark Burger
mark.burger@capgemini.com

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Ctrl-alt-del: Rebooting the Business Model for the Digital Age

  • 1. Ctrl-alt-del: Rebooting the Business Model for the Digital Age
  • 2. 2 Business Model Reinvention is a Necessity, Not a Choice Google’s advertising revenue now exceeds both magazines and newspapers in the US. Figure 1: Google Vs Magazine Vs Newspaper Ad Revenue in the US, USD, 2004-2013 Source: Business Insider, Digital 2014 Technology helped us establish a direct relationship with customers. - Caspar de Bono, Financial Times $ 50,000 $ 40,000 $ 30,000 $ 20,000 $ 10,000 $ 0 Google (US) US Magazines US Newspapers 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Millions The collateral damage of the digital age is felt most profoundly at the business model level. Companies, across sectors, are today being forced to rethink every aspect of their business model as a result of new disruptors. What happened in the media industry could be the herald of the future evolution of many other sectors. The pace of change took many media players by surprise. In less than ten years, US newspaper and magazine combined ad revenues declined by nearly half while Google’s ad revenues increased by nearly 1,200%. Google’s advertising revenue now exceeds both magazines and newspapers in the US (see Figure 1). That is not to say incumbents are powerless. The Financial Times (FT), for instance, took its competitors head-on. Unlike its peers, who chose to depend on online advertising growth to compensate for falling print revenues, the FT decided early on to look for new ways to support its operations. It was among the first to charge users for access to its online publications, introducing a subscription model in 2001. In 2007, the FT introduced its “metered” charging model, offering registered users access to a certain number of free articles of their choice, before inviting them to purchase a subscription. The metered model has since been adopted by other newspapers and has contributed significantly to the FT’s success. Since 2007, the FT’s digital subscriber base has tripled1 . In 2014, its circulation reached an all-time high with 700,000 subscriptions and sales across print and online. The FT has also been able to more than double print prices in the last ten years to make print profitable in its own right2 .
  • 3. 3 Only 16% of executives believe that their organizations are leveraging digital technologies to develop new business models. Business model reinvention can be as good a route as technology, product or service innovations. Figure 2: The Potential to Use Digital Technologies to Develop New Business Models Lies Unexplored Source: Capgemini Consulting and MIT Sloan Management Review, “Embracing Digital Technology: A New Strategic Imperative,” October 2013 41% 40% 40% 29% 28% 27% 24% 16% Enhance our existing products and services Improve the customer experience Expand our reach to new customers and markets Improve internal communication Launch new products and services Automate our operational processes Enhance the productivity of our workers Develop new business models % of respondents Our digital initiatives are helping us to: (Select top three) How did the FT do it? By constantly questioning and reinventing its business model. As Caspar de Bono, FT’s Managing Director – B2B says, “Technology helped us establish a direct relationship with customers. This was very disruptive and the FT has significantly benefited from this disruption3 .” The FT, however, is a notable exception. Our research with the MIT Sloan Management Review reveals that only 16% of executives believe that their organizations are leveraging digital technologies to develop new business models (see Figure 2)4 . Most organizations follow traditional approaches to innovation that focus on new products and services, rather than on business models. However, research suggests that the returns from traditional approaches have been diminishing with time5 . As Serguei Netessine, Professor at INSEAD Singapore says, “Pharmaceutical companies spend as much as 30% of their revenues on R&D, trying to develop new products or technologies. But the return from this enormous expenditure has been very elusive and it is a common problem across industries6 .” Business model reinvention can be as good a route as technology, product or service innovations7 .
  • 4. 4 How Can Organizations Reinvent Their Business Models Using Digital Technologies? Reinventing an industry through business model innovation requires rethinking almost every component of the business model. This includes, among other facets, resources, processes, cost, revenue structures and customer value proposition. However, this is only one route to business model innovation. In this section, we highlight five different approaches that organizations can adopt. Leverage Digital Technologies to Change the Dynamics of an Entire Industry Tesla Motors, an American automaker, has gained widespread attention as it seeks to reinvent the auto industry. Tesla makes luxury electric cars and interacts with its customers and partners in a completely different way to the traditional automotive industry. Tesla is taking unconventional steps to transform the automotive value chain and reinvent an entire industry. 67% of digital masters are actively transitioning physical products and services to digital. GE is using technology to rewrite the economic model behind their products. It adopts a direct-to-consumer model for taking sales orders online and engages customers through a small number of company-owned stores, completely bypassing car dealers. Tesla’s Model S sedan allows you to exchange a depleted battery for a fully charged one in 90 seconds, using an automated robotic platform8 . The company also has plans to launch swapping-stations capable of delivering the battery swap as part of its supercharger network9 . In 2014, Tesla opened up all of its patents related to electric vehicles. Tesla believes this move will stimulate innovation in the electric car industry and would allow the world to benefit from a rapidly evolving technology platform10 . Tesla is clearly unafraid of taking unconventional steps to transform the automotive value chain and reinvent an entire industry. It is not just new entrants who are going down this route. Incumbents, with existing businesses, are also using digital technologies to rewrite key elements of their business model. Take the case of GE, which is using technology to rewrite the economic model behind their products. Today, GE is outfitting its core industrial products with sensors that monitor various parts of the machinery. Using advanced analytics, GE can provide real-time information to improve efficiency, increase productivity, and schedule more effective preventive maintenance. With this new data, GE can adapt its economic models and pricing formulas to capture some of the new value it creates for its customers. It can increase the profitability of its service contracts or change the nature of its products, such as selling hours of aircraft availability rather than jet engines and service contracts. The value for GE of these models is tied to the number of hours its customers are able to use the product. Rather than selling an engine as a one-time event, GE is moving to an outcome-based economic model, bringing the company closer to its customers’ operations11 . Substitute Products and Services with Digital Alternatives In some instances, rapidly evolving customer preferences force firms to introduce digital versions of physical products and services. Our research with the MIT Center for Digital Business highlights that 67% of digital masters are actively transitioning physical products and services to digital, in contrast to only 38% of non-masters (see Figure 3). Deutsche Post DHL, one of the world’s largest mail and courier companies, faced a large-scale customer transition to digital and a drastic decline in its postal letter business. It launched an online communication platform, known as “E-Postbrief”, to provide a secure and reliable email service for a nominal fee12 . In 2011, SAP integrated E-Postbrief into its business platform, allowing corporate customers to seamlessly exchange data with their partners13 . E-Postbrief saw a positive uptake, with the service registering one million users within months of its rollout14 . Deutsche Post DHL also launched “MyWays”. Using a mobile app, anyone can register to deliver packages with products ordered online directly to other end consumers15 . It has also developed “SIMSme” (a secure messaging app), an online advertising service and “Dieredaktion.de” (a platform for journalistic content)16 . Deutsche Post DHL has also ventured into newer tech-driven ways of delivery by using drones to deliver medicines17 .
  • 5. 5 Figure 3: Role of Digital Technologies in Business Model Innovation Source: Capgemini Consulting and MIT Center for Digital Business, “The Digital Advantage: How Digital Leaders Outperform their Peers in Every Industry”, November 2012 67% 77% 92% 38% 49% 46% % of respondents agreeing with the statement Digital Masters We use digital technologies to increase the added-value of our products and services We are actively transitioning physical products and services to digital We have launched new businesses based on digital technologies Non-Masters Starbucks started Digital Ventures as a cross-functional unit to bring new services to Starbucks customers through smartphones, tablets, and laptops. Netflix is another example of a transition from physical to digital. By recognizing what benefits, or value, customers really derive from its products - and making that thebasisoftailoredofferings-Netflixhasre- invented its business model several times since its inception in 1997. In its infancy, it started a pay-per-rental service that was not particularly successful18 . Then, Netflix calibrated its value proposition to launch an online subscription model (called “DVD-by- Mail”) allowing customers to rent unlimited DVDs that would be mailed to them for a fixed monthly fee. This strategy proved to be a game-changer. Customers preferred Netflix over its bigger competitors, such as Blockbuster, that relied heavily on physical assets. Over the next few years, Netflix adjusted its business model by ascertaining the right price points based on customer convenience and willingness to pay19 . As consumer preferences evolved and viewers started preferring laptops and smartphones over DVD players, Netflix created a new value proposition by launching its “Watch Instantly” service to allow customers to stream movies online. Netflix continued its hunt for new value propositions from its media content. It started airing an original TV series in 2013, using a unique model of releasing all episodes of a season at one go, giving viewers the flexibility to watch them anytime, anywhere, and on any device20 . With over 50 million members in 50 countries, Netflix continues to reinvent its business model21 . It recently announced plans to launch its first original movie on the streaming service and IMAX theatres in August 201522 . Create New Digital Businesses Digital masters also create new businesses by harnessing digital technologies. Starbucks, a brick-and-mortar coffee chain, started a dedicated digital unit in 2008 – “Digital Ventures”. At the time, its coffee business was not doing well. Same-store sales were declining and stock price had lost half its value in less than two years. However, the shift to digital was not an obvious choice for a company whose core business had little to do with digital. Starbucks Digital Ventures started as a cross-functional unit to bring new services to Starbucks customers through smartphones, tablets, and laptops23 . Note: Digital Masters are companies that leverage digital technologies to transform themselves completely
  • 6. 6 Digital masters excel at enhancing value from existing products and services using digital technologies. Figure 4: Digital Initiatives from Starbucks Source: Capgemini Consulting analysis Starbucks Digital Starbucks Digital Network My Starbucks Rewards Starbucks Mobile Payments Platform-as-a- Service A premium digital content store; In-store free Wi-Fi More than $18 billion loaded on Starbucks loyalty cards A scalable and seamless platform offered as a service to retailers Over 7 million weekly mobile transactions Netflix has successfully reinvented its business model several times since its inception. Rethink the Value Proposition Digital masters excel at enhancing value from existing products and services using digital technologies. Entravision Communications is a Spanish- language media company with significant reach in the US Latino audience, a market that collectively has over a trillion dollars in purchasing power. The company, started in 1996, operates more than a hundred radio and television stations and digital platforms. The company was unique in its ability to offer highly localized marketing in different geographies. As Entravision processed a growing amount of both internal data and data from licensing agreements with partners, executives began to see the potential value of mastering this new currency. Using advanced analytics, the company started to obtain fine-grained behavioral insights, which were highly sought after by companies selling products and services to the Latino population. The demand for deep insights into Latino markets began to grow beyond traditional media buyers, moving Entravision’s client conversations into analytics and predictive modeling. Thus, in 2012, “Luminar” was born. Since then, the digital unit has successfully shored up a number of digital initiatives – free Wi-Fi in stores, “Starbucks Digital Network” (premium digital content store) as well as “My Starbucks Rewards” – a mobile payments system linked to the company’s loyalty program24 . These digital offerings have now become integral to Starbucks’ brand as a digital enterprise. As of March 2014, $18 billion had been loaded onto Starbucks loyalty cards25 . Starbucks sees over 7 million weekly mobile transactions, accounting for 16% of all its transactions26 . The company has indicated it has plans to offer its mobile payments platform to other retailers as well27 . The platform can potentially become a significant revenue opportunity for Starbucks as it is scalable and seamlessly integrates with a loyalty program, making it attractive for merchants (see Figure 4). The company has also been active on social media. It has over 38 million likes on Facebook and over 7 million followers on Twitter28 .
  • 7. 7 Entravision, a media company, created a dedicated analytics business based on its internal expertise of analytics and data processing. Volvo used digital technologies to evolve to a B2B2C model. Luminar is a dedicated business unit that shifted from delivering internal analytics to offering Big Data as a service to external clients. The company has since gained clients such as Nestlé, General Mills, and Target, among others. In 2013, the business expanded further by launching the “Luminar Audience Platform” for buying targeted online audiences. The company now collects and analyzes data for fifteen million US Latino adults, representing around 70% of the US Latino adult population’s transactions in brick-and-mortar, online, and catalog. The company that traditionally saw itself as a broadcasting group now sees itself as an integrated media and information technology company serving the Latino market29 . Similarly, tire manufacturer Michelin has moved away from just selling tires to providing the mobility and safety of tires as a service. The company installs telematic sensors within its customers’ vehicles and a team of data scientists analyzes the performance of the driver and the vehicle, to constantly provide real-time advice on cutting fuel consumption30 . Re-Design Value Chain Linkages A key component of every business is how the entire value chain of suppliers, distributors, marketers and service experts connects to deliver products and services to customers. This group forms a delivery network where each element serves to add value over the previous one, before the end-product finally reaches the customer. Many companies want to have tighter linkage with their customers, without antagonizing the third-party distribution model that they have carefully built and nurtured over decades. This challenge is evident in industries that are largely B2B. Take the case of the automotive industry. Most automakers are B2B companies that produce cars and sell to dealers. Dealers own the customer relationship and automotive companies, more often than not, have little direct connect with the customer. Swedish car corporation Volvo decided to do something about this traditional model. In 2012, the company relied on a network of 2,300 dealers in 100 countries worldwide to sell its products. Volvo was trying to tackle the question of how it can develop a more direct relationship with end customers without disrupting its dealers’ relationships. Its answer was a transformation of the company’s business model from B2B to B2B2C, where Volvo would provide some services directly to the end consumer. The services reinforced the attraction of Volvo cars, thereby benefiting dealers. To evolve to this new B2B2C model, the company relied heavily on digital technologies — mobility, social media, analytics, and smart embedded devices. The company used social platforms such as Facebook, Twitter and YouTube to dramatically increase their engagement and create a two-way conversation. Simultaneously, Volvo started developing its own version of the connected car. It introduced a push-to-talk service that is connected to a call center that can help provide breakdown services. By doing so, Volvo enabled the creation of a direct-to- consumer service that bypasses dealers, without antagonizing them. Running a call center is an expensive task for a dealer and they were glad to have Volvo step in, while at the same time, a call center helps significantly in cross/ up-selling cars. Volvo is using information gained through this channel by redirecting it back to its dealers. Volvo now has integrated existing data from dealers with a constant feed of information from the car itself. It is a win-win business model enabled by digital technology31 .
  • 8. 8 Devising a Successful Business Model Reinvention Approach Organizations need to use a continuous evaluation approach in order to devise a successful business model reinvention. Emergence of new competition from unexpected places is a sign that organizations need to start looking at their business model. Many companies typically stick to the same strategy playbook that has served them for years. However, successful business models are only transient. Incumbents need to constantly revisit their business model to ensure it is not outdated. There are five practical steps that companies can follow to rethink their business model. Assess Current Business Model Enterprises should begin with a thorough understanding of their current business model. Senior leaders should ask themselves some key questions. Which one of our customer’s problem are we helping to solve? Are we delivering what our customers want? What type of relationship does each of our customer segments expect us to establish and maintain with them? Through which channels do our customer segments want to be reached? What data do we possess/ can access that no one else can? There are some practical frameworks, such as the business model canvas developed by Alexander Osterwalder and Yves Pigneur32 , that senior executives can use to assess their business model. Spot Potential Disruptions Organizations should constantly monitor signs that might indicate potential threats or opportunities. Are we experiencing a gradual decline in traditional revenue streams or margin erosion due to commoditization? Are new competitors emerging from unexpected places or adjacent industries? Are cheaper digital substitutes for the organization’s products or services making inroads in our market? Are traditional barriers to entry coming down in the industry? Define Nature of Response Organizations can choose to operate defensively or offensively. When in defensive mode, companies often use data and any other advantage they can muster to slow the decline of the old model. In addition, aggressive operational cost cutting can release cash and investment capacity to support the transition. Organizations can also choose to go aggressive and be a first mover in rethinking the business model of their industry. They can try to disrupt competitors, or other industries, by substituting a traditional product or service with a new digital offering. Or use any of the other approaches we have outlined in the earlier part of the paper to innovate their business model. Focus on the Value Delivery Each approach to business model innovation will open up several possible avenues. Organizations will need to prioritize options that generate the greatest value to customers, that are operationally hard to copy, and that can provide them with a profitable economic model. Organizations will also have to lower their risk by running controlled experiments on their new model. Implement from the Top Designing, experimenting, and implementing new business models is a task for senior business leaders. It is a strategic activity. Functional heads will not have sufficient authority to drive new business model experimentation across business silos. The implementation of a new model requires vision, leadership, and governance. If the new model is ultimately designed to replace the old, organizations need to know when to shift resources and at what rate. The transition will not happen overnight. If the old and the new are designed to coexist, they will need to carefully manage potential conflicts and resource allocation between the two. Business model innovation needs to become a core capability for organizations, with knowledge, best practice, and the right talent. Incumbents need to be the agents of their own destiny – shifting their business models to secure their continued relevance in a new digital world order . Constant reinvention of the business model holds the key to continued relevance in the digital world order.
  • 9. 9 1 The New York Times, “With a Focus on Its Future, Financial Times Turns 125”, February 2013 2 Capgemini Consulting Digital Transformation Review 7, “Strategies for the Age of Digital Disruption”, February 2014 3 Capgemini Consulting Digital Transformation Review 7, “Strategies for the Age of Digital Disruption”, February 2014 4 Michael Fitzgerald, Nina Kruschwitz, Didier Bonnet, and Michael Welch, “Embracing Digital Technology: A New Strategic Imperative”, MIT Sloan Management Review, October 2013 5 Reuters, “Drug industry treading water on R&D productivity”, December 2012; Applied Economics, “Diminishing marginal returns from R&D investment: evidence from manufacturing firms”, Volume 45, Issue 5, 2013 6 Capgemini Consulting Digital Transformation Review 7, “Strategies for the Age of Digital Disruption”, February 2014 7 Harvard Business Review, “When Business Models Trump Technology”, November 2012 8 Company website 9 TechCrunch, “Tesla Shows Off a 90-Second Battery Swap System, Wants It At Supercharging Stations by Year’s End”, June 2013 10 Company website 11 HBR, “The Best Digital Business Models Put Evolution Before Revolution”, January 2015 12 Company website 13 Company website 14 The Wall Street Journal, “Making Email Pay Its Own Way”, November 2010 15 Company website 16 Company annual report 17 The Wall Street Journal, “Deutsche Post DHL to Deliver Medicine via Drone”, September 2014; Company website 18 Businessmodelcommunity.com, “Business Models, Business Strategy and Innovation”, 2009 19 Ibid. 20 Company website 21 Company website 22 theweek.com, “Netflix’s first original movie is coming in 2015”, September 2014 23 InformationWeek, “Starbucks’ Stephen Gillett: InformationWeek’s IT Chief of the Year”, December 2011 24 Forbes.com, “What Best Buy Will Gain from Starbucks’ Loss”, March 2012 25 Company website 26 Wired, “Forget Apple Pay. The Master of Mobile Payments Is Starbucks”, November 2014 27 Geekwire, “Starbucks CEO throws down gauntlet on mobile payments, says coffee company will have ‘major role to play’”, October 2014 28 As of March 2015 29 HBR, “The Best Digital Business Models Put Evolution Before Revolution”, January 2015 30 Information Age, “Pay-as-you-go ERP underpins Michelin’s services strategy”, July 2013 31 “Leading Digital: Turning Technology into Business Transformation”, George Westerman, Didier Bonnet & Andrew McAfee, Harvard Business Review Press, October 2014 32 Alexander Osterwalder and Yves Pigneur, “Business Model Generation: A Handbook for Visionaries, Game Changers and Challengers”, 2010 References
  • 10. Rightshore® is a trademark belonging to Capgemini CapgeminiConsultingistheglobalstrategyandtransformation consulting organization of the Capgemini Group, specializing in advising and supporting enterprises in significant transformation,frominnovativestrategytoexecutionandwith an unstinting focus on results. With the new digital economy creating significant disruptions and opportunities, our global team of over 3,600 talented individuals work with leading companiesandgovernmentstomasterDigitalTransformation, drawing on our understanding of the digital economy and our leadership in business transformation and organizational change. Find out more at: www.capgemini-consulting.com Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group. The information contained in this document is proprietary. © 2015 Capgemini. All rights reserved. Authors For more information contact With almost 145,000 people in over 40 countries, Capgemini is one of the world’s foremost providers of consulting, technology and outsourcing services. The Group reported 2014 global revenues of EUR 10.573 billion. Together with its clients, Capgemini creates and delivers business and technology solutions that fit their needs and drive the results they want. A deeply multicultural organization, Capgemini has developed its own way of working, the Collaborative Business ExperienceTM, and draws on Rightshore® , its worldwide delivery model. Learn more about us at www.capgemini.com. About Capgemini and the Collaborative Business Experience Jerome Buvat Head of Digital Transformation Research Institute jerome.buvat@capgemini.com Subrahmanyam KVJ Manager, Digital Transformation Research Institute subrahmanyam.kvj@capgemini.com Didier Bonnet Senior Vice President didier.bonnet@capgemini.com Digital Transformation Research Institute dtri.in@capgemini.com The authors would like to thank Amol Khadikar from Digital Transformation Research Institute. United Kingdom Didier Bonnet didier.bonnet@capgemini.com France Stephane Regnier stephane.regnier@capgemini.com Norway Anders Rygh anders.rygh@capgemini.com United States Chris Miller christoper.miller@capgemini.com Germany Thomas Friedrich thomas.friedrich@capgemini.com Sweden/ Finland Ulf Holmgren ulf.holmgren@capgemini.com Netherlands Mark Burger mark.burger@capgemini.com