I spend my time helping corporates across different sectors and geographies improve their commercial performance by creating new portfolios of digital business models.
For over a decade now I've been researching, promoting and creating ventures around 'platform business models'. These have propelled the most valuable companies in the world to where they are today (and growing even stronger during the Covid crisis).
They are still poorly understood by non digitally-native leaders.
Incumbent leaders admire and fear the big tech giants, and would love to emulate or incorporate some of their 'secret sauce' into their own businesses, but don't know how.
They have been happy to invest large sums to digitise their existing business model and fund experiments, pilots and CVC investments in new areas, but have found it difficult to fully embrace the types of digital business models that work best in a hyper-connected world and to take bold steps in re-allocating meaningful levels of capital and resources towards them.
As every sector digitises - accelerated by the Covid crisis - the imperative to incorporate new digital business models becomes more urgent.
What I've found is a lot of confusion about what 'digital business models' are and which are most suitable to adopt or adapt. Most importantly, how a traditional company can create an effective innovation portfolio that effectively leverages the assets of the core business and creates a new whole larger than the sum of its parts.
I created an online executive education course on this topic, called the New Growth Playbook, which was based on an analysis of the financial performance of the business models of 1000 leading companies.
It has proved popular with senior execs looking to understand the key principles of digitisation, the disruptive digital business models of the digital giants, how to create a more powerful portfolio and the organisational structures needed to make it impactful.
But I've recently seen the need to create a simple framework that helps break down some of these concepts even more, especially as the world is moving so rapidly and there are many more points of reference.
It's summarised in the chart below, called the Five Main Digital Business Model Archetypes.
I've found it very useful to frame conversations with executive, operational, strategy and innovation leaders, and then adapt it to their particular sector or market as they consider what portfolio they need to build and where to place their bets.
Most incumbents in most sectors still invest the vast majority of their time, money and attention on #1 - digitising their traditional products, interfaces and distribution channels. Quite rightly so, as they need to service their existing markets and keep up with customer expectations and increased competition.
But they are now recognising, with greater urgency, the need to define new ways to create and capture value as digitisation bites deeper and erodes traditional profit pools.
The true digital business model archetypes (#2-5) all exploit platform thinking and platform economics, the principles of which are often new and alien to leaders.
Platform thinking is about taking advantage of flexible software and digital infrastructure to leverage, at scale, other economic actors (complementary third parties and/or developers) to create new value for customers and markets.
Rather than trying to design and build everything yourself - which is the default for most companies today - platform thinking encourages you to act as a coordinator or enabling intermediary between the needs of your customers, your own expertise and the expertise of others.
If you get this right, the economics are very attractive, as you benefit from the creativity of others and reduce your costs and risk of invention.
The ultimate platform business looks something like the diagram below, orchestrating all manner of products and services for many different customer types. Amazon or Alibaba are prime examples of executing against this, at enormous scale.
Facebook, eBay, TenCent, Microsoft, Google and 70% of $bn Unicorn start ups apply this model in different ways specific to the markets they are serving.
While they focus on facilitating the matching of different types of products and services (advertising, content and/or physical goods) with different types of customers, they all benefit from self-reinforcing Network Effects, which means that their offering to the market gets more valuable the more people who use it.
If you can get Network Effects right you end up out-performing all other business models (per the chart at the top of this article). Think Visa or Mastercard compared to nearly all banks in the world.
Companies can apply platform principles in many different ways, playing differnt roles and using one or more of the four true digital archetypes.
Firstly, you define the degree to which the solution you've identified to an untapped market need should be open or closed to third parties. This assessment is based on the characteristics of the market you are addressing: ie. the types of friction that exist within it, the nature of competition and existing solutions, your own internal capabilities and skills and your commercial aims.
Most successful digital businesses start by focusing on solving very specific problems for customers and, once successful, expand out with more functionality either from within their own organisation and/or from complementary third parties.
The fintech, Revolut, for example, started out by offering cheaper currency exchange to travellers, and has now expanded to a wider range of financial and non-financial services, looking to become a super-app in its own right.
Some businesses will seek to enhance and differentiate new products with platform thinking. Apple, for example, created some of its own apps for the iPhone, but realised that it could never anticipate all the needs of customers once they started using their sophisticated device.
So, they incentivised third party developers to create a myriad of apps that worked really well with the iPhone. Apple carefully curates the appstore so that its customers have a high quality experience and they make it easy for developers to monetise their creativity, creating very powerful Network Effects. Every new appstore consumer makes it more worthwhile for app producers to invest their own time, effort and money to create new apps.
While these sorts of concepts and principles are second nature to VC’s, big tech and tech entrepreneurs, incumbent organisations find them tricky and have, with a small number of exceptions, so far only dabbled with applying them.
There is a certainly a lot of activity going on within corporate innovation departments today, but not enough at scale to move the needle on the fundamental economics of their business models.
Let's look now at the main digital archetypes (#2-5) in a bit more detail:
#2: ‘Intelligent digital solutions’ are the next generation of digital services: personalised, low cost, AI-driven platforms combining different components to suit and flexibly respond to the unmet needs of specific niche but high value audiences. Today they are typically developed for a mobile-first experience.
Most fintechs, for example, start here, extending out with complementary capabilities once they’ve created a base of users. MoneyLion, a lending-centric digital bank is a good example of this, as is ZhongAn a digital insurance company in China, or Silvur, an app helping retirees manage their assets and income.
There are so many other great examples in the consumer world of course. Think of your favourite app that helps you achieve something valuable to you. Netflix is an example, or Spotify, which changed music consumption forever, is another in the entertainment space.
In the industrial world, GE's Predix platform for remote maintenance and management of large machines like trains, power plants, or wind farms or John Deere's software tools for farmers to improve agricultural productivity are just a few successful examples.
Early forms of 'Intelligent Digital Solutions' were Google's search engine or Facebook's social network, which were later augmented with advertising marketplaces, developer communities and then expanded into many directions to create rich digital ecosystems (ie. they have moved from #2-5 over their lifetime). Salesforce is another company that operates across the archetypes (#2, #3, #5).
To stay relevant to their customers incumbents will increasingly need to create intelligent digital solutions in addition to digitising their base products or providing a digital shop front to them.
#3: 'Developer Enablement' is about exposing your capabilities to innovation teams at third party organisations, so they can enhance their end user journeys and experiences.
Early examples of this archetype were software operating systems like Windows, iOS and Android. Now, as nearly any business functionality can be abstracted into software through APIs, some people call this category 'API-as-a-Service': the API acts as a bridge between your capabilities (data, products, functionality or content) and developers who want to embed them into their products.
Epic Games, the $17bn company behind Fortnite, for example launched Epic Online Services to help third party developers create more new games. This is a smart move to expand its network, opening up new avenues for monetisation.
I recently wrote a detailed analysis of a $7.2 Trillion market category emerging in financial services, where 'Banking-as-a-Service' platforms are enabling 'Embedded Finance'.
In telecoms, a start up called Twilio pioneered a ‘Communications-as-a-Service’ platform over ten years ago. It enables product developers within enterprises to embed communications (text, voice, chat) into their end user experiences: rider-driver interactions on Uber, for example.
Twilio is now worth $40bn, nearly as much as Vodafone Group (a longstanding incumbent). With a 30x valuation multiple compared to Vodafone's 0.9x you can see why this business model is attractive if you get it right.
Telcos failed to make a bold move in this space and now face further commoditisation. The same trend will affect other sectors, as their capabilities are exposed by APIs.
#4: 'Marketplaces' are intermediaries focused on matching buyers with sellers, at volume. eBay is the classic example. Amazon's Marketplace changed the fortune of that company (my video here explains it).
Marketplaces add value by reducing friction within value chains. VC's like this model a lot, as the margins are very high, and they exist now in many sectors. They are difficult to scale and then defend, but powerful if you can, especially if you combine workflow tools and community services to the marketplace mechanisms.
Naspers, a 100 year old newspaper company, became Africa's most valuable company by re-allocating capital towards a portfolio of global online marketplaces in multiple vertical sectors (case study in New Growth Playbook).
More and more marketplaces in B2B sectors are emerging, but have very different characteristics and unit economics compared to high liquidity B2C marketplaces. They need a very different approach in terms of design and operation.
#5: ‘Digital Ecosystem Orchestration’ means coordinating more complex interactions and transactions for a broader group of diverse market participants.
At one level, as we saw earlier with the BigTech examples, it can be about connecting multiple business model archetypes together into a self-reinforcing, synergistic portfolio. This is the ultimate benefit of platform thinking.
At another level, the Digital Ecosystem Orchestration archetype can be focused on addressing specific market opportunities, often adjacent to a company's core business. For example reducing friction in the process of buying, selling and owning a house; multi-modal travel from A to B; reducing costs in a health insurance system; or supporting lifelong learning and employability for certain demographics.
Ecosystem orchestrators look to optimise a wide spectrum of inter-connected services and solutions to help individuals and organisations complete complex activities more efficiently.
They typically combine elements of the other archetypes - intelligent solutions to support new workflows and marketplaces or developer communities to expand choice for customers.
For example, Intuit - originally a provider of bookkeeping software for SMEs - now gives customers access to a wide range of other useful services from third parties, including financial services. Recently it announced it would offer bank accounts as well as credit. This strategy has catapulted the growth of the company and is a direct threat to banks who serve SMEs.
Here's another example, from Russia at the intersection of real estate and finance: DomClick, a venture set up and owned by Sberbank (large bank), provides a single place for managing most of the process of buying and selling a house.
Today there are more than six different institutions you have to engage with when you want to sell your house and buy a new one: real estate agents, lawyers, surveyors, builders, decorators, furniture sellers, utility companies, removal services, all kinds of other product vendors as well as banks and insurance companies.
DomClick adds value to users in its own right and creates pull through for Sberbank’s mortgage and insurance products. There’s a lot of value to Sberbank in originating and maintaining new customer relationships and to customers from finance being embedded seamlessly into the real estate process.
As a result, this bank-owned platform is growing fast against traditional players in the market, demonstrating the potential for an incumbent to be successful in non core digital markets.
DomClick is just one of 20 non-financial digital ecosystems that the bank is looking to orchestrate (including food delivery), having seen the success of PingAn in China with the 'Ecosystem Orchestration' archetype.
(There are more case studies like these in the New Growth Playbook).
More attractive economics
Compared to the business models of many incumbents today, these new platform-enabled digital business models have much more attractive economics.
They focus on exploiting and monetising higher margin ‘intellectual capital’ (encapsulated in software) and ‘relational capital’ (connections between multiple parties) rather than more costly ‘human capital’ (human experts), ‘financial capital’ (money), or 'physical capital' (things).
In the chart above (from the New Growth Playbook) the left hand side shows the typical returns that business models based on monetising different types of capital and assets make, in terms of average valuation multiples and margins.
On the right, some examples of the degree to which certain leading companies have incorporated the new business models into their portfolios, compared to incumbents within traditional sectors.
The portfolios represent the relative allocation of time, money and attention of the company (or sector) as a whole. Amazon started off with a low margin retail business model, albeit online. Then incorporated platform thinking and took off - in multiple directions!
You can see that, for example in the finance world, PingAn (a Chinese insurance incumbent) has followed the digital giants in incorporating at scale platform thinking into its business model. As a result it is now worth more than CitiGroup and Europe’s largest bank HSBC and has overtaken all local competition.
PayPal started life as an 'Intelligent Digital Solution' and has grown the value of it's business model significantly using platform thinking.
The question then becomes: how could your company embrace these concepts (at scale), to create a brighter future for your customers, employees, partners and shareholders?
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