Digitization is not new – many digital technologies have been around for more than a decade now and have profoundly changed the way we live. Yet, few established businesses seem to have a clear vision of how to best navigate the change brought about by digitization. Many legacy companies have launched digital initiatives merely as a “window dressing” on top of existing organizational systems instead of reimagining their business models to reap the full potential of the new digital reality.
With the Covid19 pandemic not only serving as a stress test to past digital transformation efforts but also as an accelerator of new efforts to digitize our economies, it becomes clear that established firms will have to step up their digital game in 2021.
In her book The Digital Transformers Dilemma, BMI Lab co-founder Karolin Frankenberger analyzed 100+ legacy businesses that managed to “Uber themselves before they got Kodak’ed” (The Digital Transformers Dilemma, 2020). Based on her insights, we explore how established companies can execute a digital transformation successfully – and what role business model innovation plays on this journey.
What is digital transformation?
First, a brief recap: Digital transformation is the integration of digital technologies into all existing – or new – business domains, radically transforming the way a business operates and creates value for its customers. Digital transformation is not the same as digitalization. Although terms like digital transformation, digitalization, and digitization are often used interchangeably, being clear on the terms helps grasp all relevant dimensions.
Digitization is the process of translating information from an analog (e.g. paper) into a digital format (e.g. PDF).
Digitalization is the process of enhancing business operations using digitization (e.g. selling products in a webshop).
Digital transformation goes beyond digitization and digitalization. It is about reinventing your business for a digital world (e.g. using the user data gathered in your webshop to provide customers with more targeted offerings).
What does digital transformation mean for your business model?
To leverage the full power of digital technologies, businesses must transform in fundamental ways. Sprinkling a bit of “digital glitter” over long-established core processes will not do the trick (The Digital Transformers Dilemma, 2020). Instead, the whole business model needs to be revamped from the ground up – a true digital transformation.
The Digital Transformers Dilemma – Your business must transform twice to survive
In ‘The Digital Transformers Dilemma’, BMI Lab co-founder Karolin Frankenberger and her co-authors came to the following conclusion. Legacy businesses, that is companies that already operated successfully in the pre-digital area, are currently facing a dual challenge. On the one hand, they need to digitize their core business to maintain profitability, while on the other hand they must also venture out and explore new ways of value capture in a digital environment.
Source: The Digital Transformers Dilemma
Karolin Frankenberger and her colleagues visualize these parallel efforts as two s-curves.
1st S-curve – Digitizing core
2nd S-curve – Developing new digital business opportunities
Striking a balance between the two curves presents a challenge for many legacy businesses – the digital transformers dilemma.
1st S-curve – Energizing the core business
To stay competitive in their core business, legacy companies have to digitize their core processes and functions. Digital tools can improve the efficiency of core business activities, such as production or sales processes, supply chain management, marketing routines, research & development, or back-office functions. The first S-curve will likely drive the majority of revenue for some time to come and is therefore key to maintaining profitability during the transformation process.
However, focusing all digital transformation efforts solely on the first S-curve will not be enough. Simply enhancing core business will leave new value pools and disruptive potential to competitors or new entrants. To reap the full potential of digital technologies, legacy businesses must reinvent their future in a digital world.
2nd S-curve – Developing disruptive new solutions
Digitization is shifting the foundations of traditional value creation. Any digital product can be duplicated at close to zero marginal costs and instantly delivered to any customer worldwide. To exploit this economic opportunity, legacy companies must explore how to leverage their existing capabilities in a digital environment to create novel customer offerings.
Investing in new digital initiatives that are different from the core offering is a daring venture. It can therefore be tempting to follow the lead of digital superstars like Amazon without considering that these companies never had to manage the challenges of transforming a traditional business. Rather than trying to mimic Silicon Valley, established companies should develop a clear overarching strategy that builds on the core of the organization.
A dual business approach – Managing the tensions between the curves
Transforming a legacy business is a way that keeps its traditional core intact – upgrading core activities on the 1st S-curve, while reaping the full digital potential on the 2nd S-curve – can easily trigger a misplaced sense of rivalry.
Source: The Digital Transformers Dilemma
With the 1st S-curve covering financially for the 2nd S-curve, yet the 2nd S-curve being celebrated as a symbol for visionary innovation, managing tensions between the parallel efforts requires a holistic view.
Accepting that the success factors on both S-curves differ significantly is key to accomplishing a well-orchestrated interplay between exploitation and exploration. In the long term, the 2nd S-curve is likely to eventually evolve into the 1st S-curve with the original 1st S-curve dwindling in importance. But in a rapidly changing world, a new 2nd S-curve will surely await, requiring businesses to constantly rebalance two fundamentally different quests.
Driving digital transformation through business model innovation
To adapt to the fundamental changes and discover the new business opportunities brought about by digitization, companies must re-evaluate and innovate their business models. Here, the Business Model Navigator methodology is the ideal basis for exploration. In the next few paragraphs, we will introduce you to the most important steps to follow and tools that you can use to identify and validate new business ideas resulting from the digital transformation of your company.
Status quo – What does your current business model look like?
The first step towards exploring new business opportunities is analyzing your company’s current business model.
Recommended tool: The BMI magic triangle is a simplified business model description covering four dimensions.
WHO: is your customer and what are his main needs?
WHAT: is your value proposition and offering to satisfy his needs?
HOW: are you delivering the value proposition to the customer?
VALUE: how does your company capture value?
Next, describe how digitization affects each dimension of the business model and outline the necessary resources, capabilities, and competencies needed to leverage these changes. These insights will help identify opportunity areas for new business ideas at a later stage.
Ecosystem – What are external drivers?
In the next step, you will need to determine the external factors that will influence digitization in your industry.
Recommended tool: The BMI Ecosystem map is a useful framework for this exercise. It includes several categories of potential external drivers.
Stakeholders
Competitors
Trends
Technologies
Regulation
Culture
List all external drivers that you think will impact the way your company will do business in the “digitally transformed” future. A special focus should be set on new technologies and resulting trends in the own or adjacent industries.
Opportunity – Which areas promise new business opportunities?
Based on the results of the previous two steps, you can now identify the opportunity areas for a new business model. This process should be guided by two questions:
How much value can I create for customers?
How much value can I capture for the company?
Prioritizing these two factors, you should come up with a list of two to three opportunity areas.
Idea – What could a new business model look like?
For each opportunity area, you can now ideate on business ideas.
Recommended tool: The BMI Pattern Cards are an interactive application of the St.Gallen Business Model Navigator methodology. The cards visualize the 55+ patterns which are the basis for 90% of all business models. By comparing and confronting the patterns with your current business model, you can generate new ideas.
Gather your team, pick 6-10 patterns for each opportunity area and brainstorm on how the pattern could be applied to your company. With this exercise, you should get dozens or even hundreds of ideas on how to exploit each opportunity area. Your team is currently working remotely? Here are three ways to use the BMI Pattern Cards online.
Concept – How do you make your best ideas work in detail?
To identify the ideas with the highest potential for your business, you now proceed with clustering and prioritizing the ideas from the previous step. The following criteria can help you make the selection.
What is the potential to satisfy a customer’s need?
What is the potential to create financial value for your company?
How does the idea link to your company’s resources/competencies?
How does the idea fit into your digital transformation strategy?
Develop a business model concept for the ideas that score the highest.
Recommended tool: The BMI Idea Sheet allows you to quickly document your idea on all four dimensions of a business model by answering a couple of questions related to the dimensions.
Validation – Does your idea meet customer demands?
Lastly, you will need to confirm whether your prioritized business ideas meet customer and market demands. There are several ways of validating your ideas.
Interview customers. The validation process always starts with talking to the customer to identify whether you have identified the right customer needs and problems and whether your idea could be a solution to his problems. For a guide on how to do this, check out our Interview Guide.
Check financial viability. You also need to establish whether your idea can be profitable. With our Reverse Financials tool, you can easily create a top-down estimation of your business model’s annual profitability.
Test the model. Once you have established a Problem/Solution fit, you can continue developing and validating your new business idea following the steps outlined in our BMI testing methodology.
Example of successful digital transformation
For her book, Karolin Frankenberger and her co-authors interviewed leading executives and operational managers of 100+ established organizations that embarked on the journey of digital transformation and succeeded. These corporate cases not only helped refine the book’s theoretical framework but can also serve as inspiration for aspiring digital transformers. Here is one of our favorite success stories: Saubermacher and their Wastebox (The Digital Transformers Dilemma, 2020).
Saubermacher’s story
Founded in 1979, the family-owned Saubermacher is one of Austria’s most traditional waste disposal companies. Their core competencies revolve around two areas: logistics and the treatment of waste. While the treatment of waste had always been a very capital-intensive business, the logistics segment was characterized by low margins, opaque processes, and low customer satisfaction.
Their challenge
After digital technologies became increasingly widespread and turned entire industries upside down, a hand full of senior executives, including Chief Market Officer Andreas Opelt, began wondering where new (digital) industry entrants could potentially and most easily force their company out of the market.
They concluded that out of their two focus areas, logistics was more prone to offer room for digitization – an opportunity for Saubermann to improve their own offering by proposing a radically new digital business model before any new entrant could do so.
Their solution
After a thorough analysis of the global waste disposal market, a first idea was born: the new digital initiative would become the “Uber of waste disposal logistics”. They envisioned a customer- and supplier-friendly solution for coordinating waste management via a digital platform, connecting construction companies with waste disposal firms to optimize construction waste logistics.
This is how the initial idea was developed within Saubermacher.
After the idea and business model had been challenged and improved by an internal “Dragons’ Den”, the initiative was shifted to a separate business unit.
Working independently and without technology requirements from the parental organization, a small, cross-functional team developed the first prototypes and continued refining the business model.
New leadership was hired, with a focus on leaders who would embrace risk and failure.
15 months after the initial idea had been born, the first minimum viable product (MVP) was launched, and sales associates joined the team.
Two years after the conception of the idea, Wastebox had already turned into the largest construction waste disposal logistics provider in Austria.
Their results
In 2018, Wastebox was bought out by Veolia, a leading resource management conglomerate, with the aim to finance its expansion to other European countries. Thus, Wastebox had quickly become a business success for Saubermacher – but even more than that.
“The new digital business model had an official mandate to be a testing bed of new ways of working rooted in agility, cross-functional cooperation, and rapid prototyping, “describes Andreas Opelt, Chief Market Officer of Saubermacher. Many learnings from the innovation process later became the parental organization’s new standards, such as digitized processes and transparent key performance indicators (KPIs), which were updated regularly to reflect market developments.
“Interestingly, the learnings did not stop there, “resumes Andreas Opel. As Wastebox continues to scale up, it increasingly relies on knowledge from the parental company. “With the core business being energized through the new digital business and the digital business building on proven success factors from the core, you can truly say that the two S-curves at Saubermacher do not live in isolation but cross-fertilize each other.”
Key learnings
Established businesses embarking on the journey of digital transformation are facing a dual challenge: they must digitize their core business to stay competitive, and at the same time identify new ways to capture value in a digital environment.
While the Business Model Navigator can help to map out the current business model and prioritize which core processes should be digitized first – supporting the 1st S-curve, it unleashes its true potential when employed in the 2nd S-curve. The BMI methodology is the ideal process for identifying new opportunities for your business to thrive in the digital era.