Identify the Innovator's Dilemma
Now that you’ve conducted your SWOT analysis, you face two main organizational challenges when assessing your chosen digital transformation project:
The business model that has made it what it is today is under threat from digital disruption.
If the organization is going to create a viable new business model for the digital era, it must be prepared to disrupt itself.
As Clayton Christensen, author of the book The Innovator’s Dilemma (1997), puts it:
The processes and business model that makes an organisation good at the existing business actually make them bad at competing for the disruption.
This runs deeper than just where the immediate revenue is coming from. The organization will have been structurally built around people with skills optimized for the incumbent business model.
For more on the Innovator's Dilemma, Clayton Christensen develops his theory in the talk in the following video.
Your project, therefore, must tackle these challenges. In particular, you’ll need to think about what the new business models for the digital era will look like.
Adapt To the New Digital Revenue Models
Here are nine typical digital revenue models:
Transaction. A straightforward sales model.
Capacity leasing. Providing human, computing, or other physical capacities (think Uber or Amazon Web Services) on a rental model.
Licensing. Technology, brand, or intangible assets are licensed for periods without inventors needing to market or sell the product/service themselves.
Subscription. Products/services are subscribed to, usually for a time, which can be as short as a day, but often for longer, locking customers in with a reduced upfront cost.
Commission. Agents like Airbnb collect commissions (or a margin) for matching buyers to sellers for a given product/service; agents can be people or, more recently, scalable digital platforms.
Advertising. Such as on news media, YouTube, or Spotify's free service.
Trading. Buy low, sell high, if successful; traders monetize mispriced goods and services due to fluctuations in demand and supply using market knowledge.
Donations. These can be one-time or subscription-based.
Subsidies. Often found in public service organizations where traditional revenue models only make up part of the cost to provide the service.
Which of these business models best reflects how your organisation can generate digital revenue streams? Don't forget, you can combine multiple revenue streams to maximize your income opportunity.
Select the Right Approach to Change Your Organization
How do you make the shift from the existing business models to these new paradigms? There are five main approaches to consider - build, buy, partner, invest, or incubate.
Build
Perhaps the most obvious route is to establish the new business directly from the existing organization as a business unit or department.
Buy
Often organizations will acquire the challenger businesses that are disrupting their organization. This can have the additional benefit of bringing an established digital team.
Partner
Marks and Spencer, a well known British retailer with a successful grocery business (M&S Simply Food) has not yet started doing online orders for home delivery, unlike its competitors. In September 2020, they will launch their online service - in partnership with digital disrupter Ocado, a platform business with a strong logistics division.
Invest
Sometimes creating an entrepreneurial business within the confines of an established organization can stifle innovative flair - an alternative might be to invest in an external start-up, allowing it the freedom to develop while retaining ownership.
Incubate
As with investment, the incubated start-up exists within the organization and therefore has access to their resources, but still operates like a start-up.
As you explore the internal and external factors for your organization, keep these business models and approaches in mind. The right solution will depend on your situation.
Let's Recap!
The Innovator's Dilemma states that what makes your organization good at the existing business makes it bad at competing for the disruption.
Adapt one or more of the new digital business models to your digital transformation project.
Choose how you will transform your organization from the options of build, buy, partner, invest, or incubate.
In Part 1, you learned what digital transformation means - and how to identify the gaps in your organization that could benefit from a digital transformation project. I’ve prepared a short quiz for you to test what you’ve learned.
Once you’ve completed the quiz, head over to Part 2, where you’ll learn how to win (and retain) support within your organization to pursue your project.
