Università di Pisa
Dipartimento di Economia e Management
Tesi di laurea magistrale in:
Strategia, Management e Controllo
Industry 4.0: business model innovation in the
automotive industry
Relatore
Candidato
Prof. Silvio Bianchi Martini
Nicola Zigoli
To My Family,
to My Sun.
“It matters not how strait the gate,
How charged with punishments the scroll,
I am the master of my fate:
I am the captain of my soul.”
- W. E. Henley
Index
Introduction... 7
Chapter 1 – The business model
1.1 Definition of Business Model ... 111.2 Differences between Business Model and Strategy ... 15
1.3 Functions and key components of a Business Model ... 19
1.4 Traditional business model ... 23
1.5 Strategies to respond to digital disruption ... 25
1.6 A business model design template: The Business Model Canvas ... 29
1.6.1 Structure of the model ... 29
Chapter 2 – Digital strategies and digital business models
2.1 What is Digital Strategy ... 35
2.2 Key Success Factors of digital business strategy ... 38
2.3 What is a digital business model ... 42
2.4 The VISOR framework ... 45
2.5 Paradigm shift toward digital business models ... 48
Chapter 3 – Changes in the automotive industry
3.1 The evolution of car infotainment systems ... 563.2 The evolution of competition within the automotive industry ... 63
3.3 How digital disruption may change the industry ... 69
3.3.1 Sharing Economy in the automotive industry ... 75
3.3.2 Internet of Things ... 78
3.3.3 Auto 4.0 ... 80
Conclusions ... 93
Bibliography & Sitography ... 95
Index of figures ... 98
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Introduction
Digital transformation critically has changed all the industrial sectors, disrupting most of them, giving new opportunities and transforming the existing business models in new digital business models. Lot of enterprises recognize how digitalisation, that defines the use of technology to engage with people to precisely address their particular needs, and digitization, which is the process of changing from analog to digital form, have influenced consumer behaviours: they can leave feedbacks about their experiences, they can look for the same item from many shops in few seconds reducing their searching costs, minimize the price paid and influence how firms approach to the market due to the fact that customers are more informed than ever thanks to digital technologies. The term Industry 4.0 refers to the fourth industrial revolution, after steam, electricity and information and communication technologies (ICT), this time is Internet and the interconnection between many different devices that is going to totally change how companies create, deliver and capture value.
Cornelius Baur and Dominik Wee, senior partners at McKinsey&Co, define Industry 4.0 as : “the next phase in the digitization of the manufacturing industry, driven by four disruptions: the astonishing rise in data volumes, computational power, and connectivity, especially new low-power wide-area networks; the emergence of analytics and business-intelligence capabilities; new forms of human-machine interaction such as touch interfaces and augmented-reality systems; and improvements in transferring digital instructions to the physical world, such as advanced robotics and 3-D printing.” Nowadays we can clearly see that the term Industry 4.0 doesn’t refers only to manufacturing, but is also used for transportation and logistics, healthcare, smart building, finance and even smart cities.
We know that automotive is not the only industry that have been influenced by the fourth industrial revolution, indeed it is known that technologies like Big Data and predictive analysis or Data Robotics are having a big influence on industries such as Finance, Supply Chain and Retail & Consumer goods but it is one of the leading industries when we are referring to technological development and complexity about production processes.
Thanks to the digital revolution each phase of the whole process such as design, engineering, manufacturing and pricing might be automated and integrated with the
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internal IT infrastructure in the next few years.
During the last thirty years the automotive industry has gone toward critical transformations that have changed not only infotainment systems (integrated systems that deliver entertainment and information content, addressed in chapter 3.1) but even the manufacturing process.
The IT infrastructure, which includes strong and structured databases, advanced algorithms and an Enterprise Resource Planning (ERP) system, must be fully integrated in order to avoid errors and ensure an efficient communication among different functions and operations that characterize the single enterprise enhancing the organization’s efficiency.
The aim of this thesis is hence to recognize how firms have changed and will adapt their business models through the analysis of the Automotive industry.
Figure 0.1: From the first to the fourth industrial revolution Source: motherboard.vice.com
From the first industrial revolution at the end of the 18th century, cars were built to
satisfy only one need: the need for moving. Until the development of digital infotainment systems (occurred at the end of the 20th century), the interaction between
drivers and cars was only about driving but, thanks to the rise of ICT, that interaction has soon evolved into something much more complex
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The digital impact of the so-called Industry 4.0, due to the growing availability of interconnected devices which are part of everyday life (f.i. smartphones) are nowadays partially integrated with most of cars available on the market but, in the next years, even third-part applications will be fully integrated in the car infotainment system to offer an ever better service to the customer.
Connected cars of the future will also offer advanced safety systems such as adaptive cruise control and mobility productive features thanks to the development of self-driving cars.
Indeed, thanks to Internet of Things and cyber physical systems, it is estimated that, in 2020, at least 60 billion intelligent objects will be online and interconnected. Another innovation brought by the growing digitalization of processes concerns the smart factories which will connect humans, machines and objects in real time, involving all the previous technologies.
Even if the digitalisation is disrupting and critically changing the way of doing business for a lot of companies from many industries, not every car manufacturer recognizes the importance of a switch from traditional business models to digital business models. (Wedeniwski, 2015)
Figure 0.2: The evolution of core processes in automotive business models Source: (Wedeniwski, 2015)
Processes need to be revised looking at them by a digital perspective, every single step of every function must include a connection to the digital world, thanks to which customers will be strictly connected with car manufacturers without intermediaries (Chesbrough, 2007).
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The fourth industrial revolution aims to make factories not only faster or flexible, but “intelligent” through the implementation of a smart network between all the components of the factory itself, from the assembly chain to the human resources, and it is clear that also data security plays an important role here.
Even Machine-to-Machine (M2M) communication and processes whereby machines and technologies can identify issues and take autonomous decisions are based on third platform technologies, integrated IT/OT (information technology/operational technology) environments and on the so-called Industrial Internet of Things.
Ultimately, in order to achieve that goal of change, it is fundamental to implement these changes at a strategic level, that is because strategy is the starting point of every revolution. Coherence between it and operational processes is the only way to achieve the goal of digital change (Hildebrandt, Kolbe, Firk, & Hanelt, 2015).
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Chapter 1 – The business model
1.1 Definition of business model
The concept of Business Model has gained growing significance during the last three decades. (Teece, 2011)
Before 1990s, when The Internet was not so diffused and the technological development was not so strong as nowadays, companies were not able to process and exchange large amount of data and strategies were mainly focused on cost leadership instead of differentiation. Due to globalisation and growing technological development enterprises have had to respond to the changes that these factors have brought into the competitive environment by adapting their corporate and business strategies to meet customer needs (Zott & Amit, 2001).
An increasingly turbulent and dynamic environment have encouraged firms to change their perspective into a service-based one, from a push to a pull logic because, thanks to digital technologies, customers are more informed than ever before and, if a company cannot satisfy their specific needs through customized offers, another company will be able to.
Customer oriented approaches and a growing importance of digital technologies within firms’ structures have led many scholars to develop specific frameworks which can analyze and describe how a firm generates, captures and delivers value in its competitive landscape (Amit and Zott, 2011).
As we can see from the graph below, through Google’s NGRAM viewer (an online search engine that charts frequencies of any set of comma-delimited search strings using a yearly count of n-grams found in sources printed between 1500 and 2010), since the second half of 90s the presence of Business model in literature has increased up to reach the presence of business plan. (Van der Meer, 2015)
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Figure 1.1: Presence of “business model” in literature from ‘70s to ‘00s Source: Google NGRAM viewer
The need to explain how and why digital technologies were becoming a fundamental factor for every business can be an explanation about the rise of business model as subject of many researches and business publication in that period.
During the years many definitions of business model have been succeeded, leaving space to different interpretations of what a business model really is.
In particular, four main common themes have been identified (Lambert, 2003) among diverse authors of what a business model represents:
An abstract framework which describes company’s strategy A strategic tool which supports decision-making
A model which explains how the company creates value
As an intermediate tier which connects business strategy and processes As we can see from the table below, there is still confusion and non-uniform definitions about the concept of business model. These are just some of the definitions provided by various authors but they are nevertheless capable of explaining the concept in its entirety if we consider them in an overview
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Authors Definitions Years
Timmers
Rappa
Zott & Amit Chesbrough & Rosenbloom Magretta Osterwalder Osterwalder & Pigneur
“an architecture of the product, service and information flows, including a description of the various business actors and their roles, of the potential benefits for the various business actors and a description of sources and revenues”
“a business model is the method of doing business by which a company
can sustain itself, that is generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain.”
“the content, structure and governance of transactions designed so as to create value through the exploitation of business opportunities”
“the heuristic logic that connects technical potential with the realization of economic value”
“stories that explain how enterprise work. A good business answers Peter Ducker’s age old questions: Who is the customer ? What does the customer value ? does it answers the fundamental questions every manager musk ask: How do we make money in this business ? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost ?”
“A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.”
“A business model describes the rationale of how an organization creates, delivers, and captures value”
1998 2000 2001 2002 2002 2005 2010
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Zott & Amit
“A business model can be viewed as a template of how a firm conducts business, how it delivers value to stakeholders (e.g., the focal firms, customers, partners, etc.), and how it links factor and product markets. The activity systems perspective addresses all these vital issues [...].”
2010
Table 1.1: Different definitions of business model Source: adaptation from (Zott, Amit, & Massa, 2011)
In order to meet customer needs and respond to structural changes brought by the digital transformation, firms are called to assess and enhance their value proposition by the development of coherent business models. About this, Teece (2011) proposes another definition of what a business model is, he asserts that it “embodies nothing less than the organizational and financial ‘architecture’ of a business”.
Nevertheless, Zott et al. (2011) affirm that scholars’ thinking seems to converge towards some common points:
The business model is considered as a new unit of analysis which spans or bridges traditional units of analysis, such as the firm or the network. Most business model scholars would agree, however, that it is a new, distinct concept, worthwhile of academic study and relevant in practice.
Business model researchers adopt a holistic perspective, not just on what businesses do (e.g., what products and services they produce to serve needs in addressable market spaces) but also on how they do it (e.g., how they bridge factor and product markets in serving the needs of customers).
The activity perspective (which takes into account processes, operations and transactions) combined with the first and second common points suggests a view of the business model as a firm-centric (but environment-oriented) activity system, indeed, many of the modeling tools that have been proposed to represent a business model can be conceptualized as systems of activities.
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A central role of the value, intended as value creation and value capture. “The focal firm recognizes that value is created through the focal firm in concert with its exchange partners”. The BM emphasizes “a dual focus on value creation and value capture” in the sense that it enables “the focal firm not only to enhance total value for all Business Model participants but also to appropriate a share of the value created”
1.2 Differences between Business Model and Strategy
Business model and strategy are interrelated terms which can generate some misconceptions. In the previous chapter we have defined what a business model is but
without mentioning strategy.
Strategy is the long-term direction of the company and the business model facilitates the strategy as it defines how a firm competes in the market. (Lewis, 2014)
Figure 1.2: Main characteristics of strategy Source: slideshare.net
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Strategy refers to the long-term direction of the company and it expresses, in competitive terms, which position the company expects to have in the market (Casedeus, Masanell, & Ricart, 2009). A competitive advantage is necessary to attain a desired strategy. The term competitive advantage refers to the ability to perform at a higher level than competitors through a better use of available resources. Porter (1985) asserts that there are two possible competitive advantage that companies can gain: cost leadership and differentiation. They can be combined with the competitive scope that can be broad or narrow, leading to the focused versions of the previous advantages.
Cost leadership strategy Firm sets out to have the lower production cost of the whole industry, no matter how. It includes economies of scale, proprietary technologies etc.
Differentiation strategy Firms wants to be unique in its industry through an unique value proposition for which customers are encouraged to pay a premium price.
A firm pursues a cost leadership strategy if: we can determine factors that allow the cost reduction, if we create value for customers and they recognize it and if the benefits of lower costs are not cancelled by the lower selling prices. A firm, instead, pursues a differentiation strategy if: we can determine factors that makes our product/service unique in the market, if those factors create value for the customers and they recognize them, if customers are willing to pay a premium price and if benefits from premium price are not cancelled by the higher production costs. Focus allows the firm to select a segment or a group of segments of its industry and just focus its strategy to fully meet that segments’ demand.
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There are different classifications of strategy, indeed we can find corporate strategy, operational strategy, a business unit strategy, each of them with a different purpose. In this thesis we will only deal with corporate level strategies that is addressed the whole company and business unit strategies which are referred to strategic business units (SBUs) that are profit centres which focuses on product offering and market segment. There are two fundamental aspects that differentiate strategy and business model:
Strategy’s focus is about competition, competitive advantage and value creation (value chain) while business model’s one is about cooperation, shared value creation (value network) and partnerships. (Lewis, 2014)
When we talk about strategy we do not take much into account customer’s role, which is central in the creation of a business model (value creation for the customer through value proposition).
In business model, value creation comes from a lot of interactions between different actors, indeed business model refers to activities performed by a firm, but takes into account also the environment in which the firm operates (Chesbrough & Rosenbloom, 2002).
The table below synthesizes the differences between the features of the two terms, taking into account different definitions, purposes and peculiar elements.
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Table 1.2: Differences between Strategy and business model Source: (Bettis, 1998)
Definitely, according to Casadesus-Masanell and Joan Enric Ricart in “From strategy to business model and onto tactics”:
Business Model refers to the logic of the firm, the way it operates and how it creates value for its stakeholders.
Strategy refers to the choice of business model through which the firm will compete in the marketplace.
• Business model defines through a plan how a company uses its resources, how it competes, how it develops business relationships, how it deal with consumers, and how the firm creates value and generates sustainable earnings.
• Strategy refers to the long term direction of the company.
Definition
• Business model describes means by which a firm tries to capture value from its business.
• Strategy is a long term plan designed to achieve a particular goal under conditions of uncertainty.
Purpose
• Business model includes key activities, resources, revenue and costs, value propositions, key partnerships, channels, resources, and customers.
• Strategy is about gaining a position of advantage over firm's competitors.
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1.3 Functions and key components of a business model
The functions, according to (Rosenbloom & Chesbrough, 2002) of a business model are:
Articulate of the value proposition Identify market segments
Define value chain’s structure
Estimate cost structure and potential profit
Define company’s relationships and position in value network Formulate competitive strategy
Now, each component will be deeply analyzed:
Value proposition is an useful tool to understand and to explain why a consumer should buy a product or a service, why our product or service is better than another from other companies and which added value our product or service will offer. A value proposition is a promise by a company to a customer, it should be clear and able to explain why our products or services are better (for a specific market segment) than others, it should be intuitive, always shown in every touch point between the company and the customer, and, last but not least, unique. (Fielt, 2013)
Market segments are groups of people who share common characteristics, lumped together for marketing purposes in clusters (What is a market segment, 2014). Each market segment is unique, and marketers use various criteria to create a target market for their product or service. Marketers approach each segment differently, after fully understanding customer’s needs, lifestyles, demographics and personality.
A market segment is a segmented category of customers who have similar likes and dislikes in an homogenous market. These customers can be individuals, families, businesses, organizations or a blend of multiple types. Market segments are known to
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respond somewhat predictably to a marketing strategy, plan or promotion, this is why marketers use segmentation when deciding a target market (What is a market segment,2014).
To meet the most basic criteria of a market segment, three characteristics must be present.
Homogeneity common needs inside the segment
Distinction every segment must be different from another
Common reaction predictable response to market
Value chain structure describes the ways through a company tailors its products and services to meet the needs of current and prospective customers. First definition of Value chain comes from Michael E. Porter in his book “Competitive advantage: Creating and sustaining superior performance”. The value chains of truly successful products and services give customers multiple reasons to buy. Itis a set of activities that an organization carries out to create value for its customers and return a margin of profit. Michael Porter created this concept in the 1980s. Also Porter defined the Margin as the difference between the value created and costs :
Value Created - Cost of Creating that Value = Margin
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Cost structure is the main cause of failure of new businesses in the first 3 years, more than 90% of them fail because they didn’t understand their costs or what it will take to provide a service or create goods they have planned in their value proposition. It describes all costs incurred to make a business model work. Basically, there are two main categories of cost structure : value driven cost structure and cost driven cost structure.
Value driven cost structures focus on a premium value proposition, it aims to create more value in the product itself, not necessarily producing the product through cost minimization. Examples of this would be Ferrari, Brunello Cucinelli, or Cartier.
Cost driven cost structures focus on minimizing the costs of the product or service as much as possible, through maximizing automation, extensive outsourcing and low price value proposition, f.i. Ikea, Walmart and Ryanair. Creating hypotheses about own cost structure can be a useful tool to analyze it and eventually change it. It is necessary to take into account both fixed and variable costs. Even revenue streams are very important, through them the firm will be able to invest and expand itself, developing and enhancing its business model.
Relationships with stakeholders (anybody who can affect or is affected by an organization, strategy or project) are maybe the most important thing when we talk about business modeling. Indeed we should take into account not only our customers but also our suppliers because from them depends our value proposition. Increasing digitalization of businesses results in their value chains being more multi-dimensional and complex, indeed according to Gartner’s theory there are four main drivers that are strongly influencing the digitization trend : Social media, Big data analysis, Mobile connection and cloud computing.
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collaborative and more digitized approach of the Value Network, the consumer is now positioned at the center of the network (Gartner Inc. , 2013). The Value Network adopts a plug and play approach whereby our suppliers, logistic providers and financial institutions are all dynamically connected; thus leading to a far more agile and reliable approach, with consumers at the center of the Value Network and drive all data flows. Through the value network concept, value is co-created by a combination of players in the network (Peppard & Rylander, 2006).
Figure 1.4: Consumer-centric value network Source: http://tendenzeonline.info Competitive strategies lead the creation of the business model.
Strategy and business model are often overlapping concepts, leading to misguides information. A business model is the expression of strategic choices taken for create
and gain value and reach company’s goals. (Lewis, 2014)
(Casedeus, Masanell, & Ricart, 2009) state that: “Strategy refers to the choice of Business Model through which the firm will compete in the marketplace.”.
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1.4 Traditional business models
The chosen definition of business model in this work is the one from Demil & Lecocq (2010): “[…]a business model, far from being a quantum of information that is revealed in a flash, is typically a complex set of interdependent routines that is discovered, adjusted, and fine-tuned by ‘doing.”
There are many kinds of business model which, more or less, share the same functions and components but implemented with a different logic and for different purposes..
Most recent literature on business models concentrates on describing business model as a whole due to its systemic nature (it involves every aspect of the firm) instead of one most visible aspect (Muehlhausen, 2013).
The following examples provide an overview for various business model types that have been developed:
Bricks and clicks business model Also called “click and mortar”, “womble store method”, “clicks and flics”, it is an extension of in-store shopping to include online ordering with in-store pickup or items found exclusively online. Some examples of this could be Argos, John Lewis etc. (Wikipedia)
Collective business models Organization composed of large numbers of businesses or professionals (similar to a franchise), which pools resources and information. In companies which adopt such a business model collectives aggregate buying power and don’t pay ongoing royalties like a franchise. Examples of this could be Carquest autoparts and Ace hardware.
Cutting out the middleman model Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with customers directly, for example through their website. Examples of this
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could be H&M, Zara etc.
Direct sales It is about bypassing the traditional sales channels, removing all intermediaries in a supply chain: includes company owned stores and door to door selling. Examples of this are Kirby, Dell etc.
Franchise It is about selling the right to use the business model in exchange for a percentage of revenues. Franchising is the practice of using another firm's business model, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. Franchisor's success is the success of the franchisees. An example of this could be Mc Donald’s
Razor and blades Consumer purchases a low-margin item like a inkjet printer or a razor handle. Companies which adopt this business model involve the sale of dependent goods for different prices, one good is sold at a discount, while the second, which is typically a replacement like a blade or ink is sold at a very high markup.
Obviously, there are many other configurations of business models but they won’t be analyzed within the present work.
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1.5 Strategies to respond to digital disruption: the McKinsey’s survey
The digital disruption is forcing many firms from different industries to implement the digital perspective inside their business model.
The picture below represents the enormous impact that digitization, and then digital disruption, has had in each of these industries.
Leaders of companies which are reticent towards digital technologies within these industries know they have a problem and know they must react to that problem but they have little guidance to determine the right course of action.
In a bid to help address the gap, McKinsey & Co. undertook a global survey of executives to capture how digitization unfolds across industries and how incumbents are responding. The answer is: “Not well.”
Figure 1.5: Actors of the digital disruption Source: https://image.slidesharecdn.com/
Their research aim is then to analyze the link between the performance of companies, their digital-transformational programs, and the dynamics of reaction among companies following digitization. They run a quantitative study and the variables used are:
OWNS NO OWNS NO
OWNS NO OWNS NO
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EBIT growth, ROI from digital initiatives, revenues linked to digitization, companies’ perceptions of digital disruption, the focus of digital strategy, the relationship between digital investments and total investments, , digital capabilities, how the digital strategy will be implemented, typical organizational challenges and, finally, the degree of management support.
According to this McKinsey survey (July 2017), 90% of companies indicated that they are engaged in some form of digitization, but only 16% said that their companies have responded with a bold strategy and at scale. Likewise, only 30% of companies are focusing on new ways to bundle demand or re-segment their market. Thus, leaders in most industries still have a window for putting the right digital strategy in place. But it will not stay open long (McKinsey & Co., 2017).
More than 60% of companies in McKinsey’s survey said that they have not made any fundamental changes to their corporate strategy, while 20% has engaged in a significant transformation of their business portfolios. This survey finds that even among companies that are engaging in a digital strategy, few are doing it in alignment with their broader business and corporate strategies. Only 25% of companies said they have fully integrated their digital and corporate strategies. McKinsey’s experts divided company responses to digital disruption into four categories: weak, medium, semi-bold, and bold. Each company has been assigned to one of these categories according to the intensity of its strategic response (from “no responses” to “changes to the long-term corporate strategy”) and level of investments in digital technology relative to its competitors (from “significantly underinvesting” to “significantly overinvesting”). Among the companies within the sample, 22% have had a weak response, 28% a medium response and 34% have adopted a semi-bold response by developing either a bold strategy or by overinvesting in digital.
Taking into account both the intensity of the response and the degree of integration of digital technologies within firms, we find that less than 8% have both responded offensively and integrated their digital strategy fully into the corporate strategy. The McKinsey’s analysis suggests that only a strong and integrated response ensures that revenue and profit will be higher than pre-digitization era.
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1. Incumbent companies are always better off reacting than not reacting because digital initiatives tend to exploit latent demand in any industry, creating a positive market expansion effect.
2. Bold responses pay off, in terms of EBIT, much more than no reaction or medium reaction, the degree of pay off depends on the industry type. In telecom and high-tech, for instance, bold, at-scale reactions have 2.5 times greater payoff than medium reactions. In manufacturing, it is 2.2 times greater, and in retail and media, it is 1.9 times greater. Given that we estimated a medium reaction is worth 1.5 points of EBIT growth a year and about 2 points in revenue growth per year, the effect of a bold, at-scale move is roughly 4.5 points in EBIT and 6 points in revenue.
3. To do better than just break even on digital disruption, companies must also integrate digital strategy into their corporate strategy. Companies whose responses in such a way produced from 3 to 4 points more annual revenue growth and the same EBIT growth as before digitization.
According to McKinsey’s survey, there are three common strategies among companies covered by the survey:
Develop new customer segment It is a prerequisite for success that companies focus on developing new customer segments rather than defending existing business lines through cost-cutting, automation, or service improvements for existing customers (they would be attracted by new services on the market instead of an enhanced old version).
Introduce new business models Lot of companies are experimenting innovative business models to disrupt and replace their own old strategies. For example, Schibsted’s print classified advertising was beginning to dry up. Conscious of risks bring by the digitization, Schibsted moved its entire classified business to a free, online marketplace. Today, more than 80% of the group’s earnings come from commissions on sales from its consumer
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commerce platform. In some countries such as France, Schibsted’s online marketplace is larger than the original online attacker, eBay Inc.
Redefine the value chain When digital entrants started threatening its payment services business, Commonwealth Bank of Australia (CBA) chose to face the disruptors with the development of “Pi”, a platform for payments opened to third party developers, and “Albert”, an Android-based point-of-sales terminal which is fully integrated with the Pi payments platform. Equipped with a card reader and an integrated printer, Albert can be extended with dedicated apps, enabling it to do much more than process payments. Although the platform and its ecosystem contribute to the disruption of the traditional banking value-add chain, it allows CBA to compete with digital entrants. While the mortgage side of the banking business is being disrupted by online search and home-financing platforms, CBA updated its digital value chain through an augmented reality app that gives customers the ability to read a property’s sales history and community information by pointing their mobile phone camera at the residence. That could be a strong weapon that CBA can use against its competitors.
Other strategies not mentioned in McKinsey’s survey and, obviously, less effective but widely used among companies are:
Block Strategy It is about inhibit the disruptor. Claiming patent or copyright infringement, erecting regulatory hurdles, and using other legal barriers can be examples of this.
Retreat into a Strategic Niche Strategy The focus is on a profitable niche segment of the core market where disruption is less likely to occur.
Invest in Disruption Model It is about investing in every component of the disruptive threat, from human resources to technologies or acquisitions.
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Milk Strategy Surrender to disruption, this “strategy” is about extracting the most value possible from vulnerable businesses before dismissing them. Exit Strategy Exiting the business entirely.
Companies that don’t want to react in a strong and proper way, embedding digital strategy in their corporate strategy, are destined to take a major hit on revenues and profits. The stronger the reaction is, the better they will be positioned to steal revenues from the latecomers (McKinsey & Co., 2017).
1.6 A business model design template: The Business Model Canvas 1.6.1 Structure of the model
The Business model Canvas (BMC) is not the only framework that can represent a business model, indeed, other frameworks such as Entrepreneur’s business model by Morris et al. (2005), Business model schematics by Weill & Vitale (2001) and Technology-Market mediation by Chesbrough and Rosenbloom (2002) are valid and are useful to represent the main characteristics of a business model but, for this work, the business model canvas framework has been chosen because of its popularity, intelligibility and simplicity of use.
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Source: Norland, K. (2017)
The figure above is a representation of the Business Model Canvas, a strategic management and lean startup template for developing new business models or making explicit an existing one. It was initially proposed and developed by Alexander Osterwalder (a Swiss business theorist, author and consultant) and a team of 470 co-creator in 2008; it is based on the business model ontology which is developed by Osterwalder (2004) during his PhD research and has become the main framework to represent a business model (Meertens, 2012). The Business Model Canvas consists of four pillars and each pillar contains a set of blocks:
PILLARS BLOCKS
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Pillars can also be described by four questions: “Who ?” (for Customer interface)
“What ?” (for Product)
“How much ?” (for Financial aspects) and “How ?” (for Infrastructure Management).
Customer interface pillar tells who the company’s target customers are, how it delivers products and services to them and how it builds strong relationships with them. It defines the way how a
company goes to market, reaches its customers and interacts with them.
Customer segments define the types of customers of the company, a group of customers with related interests and needs.
Channels describe the way the company keeps in touch with its customers, including communication, distribution and sales channel (direct and indirect if there are sales partners).
Customer relationships describe the relationship that a company establishes between
itself and its customers. Relationships are defined through all the interactions between the company and its customers, indeed they must be coherent with the rest of the business model. Different tools can be used to allow these interactions but a careful definition of the different tools involved and which kind of relationship the company wants must be done.
The product pillar defines the value proposition by defining in which business the company is in and which products and services the firm offers. It is an overall view that describes the created value for a specific customer segment, trying to fulfill customer needs.
Infrastructure management tells how a company creates value. It tells how a company efficiently performs infrastructural and logistical issues, with whom and as what kind of network enterprise.
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proposition and maintain its relationships.
Key resources that can be classified in physical, intellectual, financial and human resources are inputs in value-creation process and sources of capabilities which a company needs to provide its value proposition. Key activities describe the actions that a company must perform to achieve its goals. This framework helps configuring key activities according to company’s value chain or value network. Key partnerships describe the network of agreements with suppliers and partners needed to make the business model work through the outsourcing activities or the acquisition of external resources.
Financial aspects pillar defines the company’s revenue model and cost structure of the company. It defines the economical sustainability of the model and elaborates the earnings a business gets by subtracting the costs from the revenue generated from each customer segment.
Revenue streams describe company’s revenue flows resulting from a successful value proposition and pricing mechanism, they are tightly connected with the heart of the business: customers. Cost structure includes costs for the other elements of the model, it defines the necessary costs to create, market and deliver value to customers (Vincent, 2015).
The Business Model Canvas allows entrepreneurs, managers and consultants to capture, visualize, understand, and communicate ideas on a single sheet of paper. It enables analysis through measurement of relevant key indicators derived from business model components. In addition, the Business Model Canvas allows tracking and observing key components over time. The comparison of a company’s Business Model Canvas to other canvases from different industries is fruitful and stimulates business model innovation (Sinfield, Calder, & McConnell, 2012)
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1.6.2 Shortcomings
Business Model Canvas is one of the most used tools for strategic management, it is ideal for businesses of every size and allows anyone who reads it to have a clear vision about businesses of a company, but, as every tool, it is not free from shortcomings, indeed, from the many research findings (Fielt, 2013) and ( Kraaijenbrink, 2012) there are three common shortcomings found in the implementation of this tool.
1. Strategic purpose
The business model canvas does not take into account the mission, the vision and strategic objectives of the company. It states that no other purpose than revenue generating can be the goal of any business and, consequently, part of the business model. Non-profits organizations, governmental organizations, and social enterprises are totally excluded even if they need a tool that represents their business model. Without any reference to strategic purpose, if we simply look at a business model canvas, we could easily misunderstand company’s goal. Strategic purpose and vision are essential component of every business model because, even if models are consumer-centric, strategy influences all the other components of the model, interacting with them.
2. Competition
The second shortcoming of the business model canvas is that it does not include any competitive environment. Its focus is only about internal logics and processes, the only interaction with the environment is through partners, customers and suppliers, but competitors are either not mentioned. Every business model should be designed taking into account partners, suppliers and customers but the presence of competitors is fundamental to understand competitive strategies of the company indeed, any business model is meaningful relative to competitors. The comparison with competitors’ business models could be very useful to understand competitive strategies of a firm but this may
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require additional knowledge that often is not available. Even value proposition is affected because customers will always compare a company’s value proposition to those of competitors.
3. Different levels of abstraction
All the nine elements of the canvas are defined at the same level of abstraction. Some parts of the business model will receive more emphasis than others just because they are broken down into smaller and more specific parts (Bubbio, Gruppi, & Lagonigro, 2012). For example, if we examine e.g. customer relationships or channels are much more detailed than value proposition or revenue streams even if the second two must be included into a business plan, while the first two can also be defined later because they are a quite detailed elaboration of the marketing component.
The Osterwalder’s model includes the four pillars product, infrastructure management, customer interface, and financial aspects and the ‘building blocks’ of which these pillars are composed. Some of them are broken down into building blocks, giving a better definition of its components, others such as the value proposition are not decomposed into smaller components even if it is a fundamental block of the model.
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Chapter 2 – Digital strategies
2.1 Definition of Digital Business Strategy
The term Digital Business Strategy comes from the intersection of ICT and strategic management, it refers to the merge of digital technologies and business strategy. (Weill & Woerner, 2013)
Figure 2.1: Statistics about the extension of digital business strategy Source: (Fenwick, 2016)
The growing relevance and importance of digital technologies for strategic purposes has required the definition of new models that fully involve IT infrastructure in strategic development with a greater role than ever before.
“All of the functional and process strategies are encompassed under the umbrella of digital business strategy with digital resources serving as the connective tissue.” (Bharadwaj & El Sawy, 2013)IT strategy influence on business strategy was initially proposed by (Henderson & Venkatraman, 1993) in Strategic alignment: Leveraging information technology for transforming organizations.
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management of the ICT infrastructure), digital business strategy has become very important, it should be treated as business strategy the more firms and industries are becoming more digital addicted and rely on information, communication, and connectivity functionality as shown in the picture below.
Figure 2.2: The integration of business strategy within enterprise’s strategy Source: (Dieffenbacher, 2014)
Many firms support the relevance of Digital Business Strategy, indeed, from many industry reports
like the ones from Gartner, McKinsey, Boston Consulting Group etc. we can see that this concept is strongly linked to the development of a digital culture inside the organization and to the use of the data analysis to understand and anticipate consumer preferences.
Digital business strategy includes the development of products and services and their compatibility with other platforms, indeed, firms are investing in digital resources to create new IT capabilities and build new client-oriented strategies (Rai & Pavlou, 2012) and (Ray, Muhana, & Barney, 2005).
Digital resources used to develop a digital business strategy are based on a “digital infrastructure that consists of institutions, practices, and protocols that together organize and deliver the increasing power of digital technology to business and society” (Deloitte, 2009).
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strategies, include digital data that can be collected through social media and cloud computing technologies and rapidly analysed thanks to big data analysis. Firms today operate in much more favourable conditions than in the past because of the large availability of information, and, thanks to those, they are able to develop new digital strategies approaches (Bharadwaj & El Sawy, 2013).
The value of digital businesses: the Metcalfe’s law
Metcalfe’s law states that the value of a network is proportional to the number of connected users (n) squared = n2.
If we connect Metcalfe’s Law and business modelling we obtain that the more customers we get, the more valuable our business is to all of our existing customers, so
we get even more customers.
Before the fourth industrial revolution, companies created products or services for customers, now companies create value with customers and them create value with and for each other. This means that if we want to create a new type of digital business or we just want to change an existing one, we need both a strong infrastructure and a new type of network.
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2.2 Key success factors of Digital Business Strategy
Digitalization does fundamentally impact firms’ strategy development. Indeed digital business strategy creates the foundation for digital business models.
The term “Digital business strategy” comes from the merge of two already existing concepts as information systems and strategic management, it is the incorporation of IT strategy in business strategy. Conceptualizing competitive strategy under digital conditions raises the question of how business scope is impacted by digital technologies. (Bharadwaj & El Sawy, 2013)
When we talk about critical success factors we are defining few actions and areas of a firm which are of critical importance to the firm’s success, these factors don’t lead the company to achieve a competitive advantage but they can lead to competitive failure if not met.
(Holotiuk & Beimborm, 2017) have conducted a research aimed to identify information and actions (on an initial sample of 21 industry reports reduced by then over 80%) which are most needed to reach a defined outcome or goal.
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Source: (Holotiuk & Beimborm, 2017)
This framework is inspired by the “business model canvas” structure, it comprises 8 dimensions which are the dominant themes of the forty critical success factors identified among the industrial reports and the count for each time that a critical success factor appears in a report.
Dimensions with the higher total count are the two largest subsets of critical success factors, other categories are placed in descending order.
Examination of each dimension, from the biggest to the smallest one: Sales and customer experience
Digital business strategy’s aim is to fully integrate online and offline experiences through a coherent presence across all channels. As servitization becomes greater and predominant, customer expects that digital and intangible experiences would be greater than the simple utilization of the product, nowadays firms sell the product and the whole system of services that rounds around it. Through digitization, customers, who are the very center of every digital business model, are in direct contact with firms that can adjust their offer and meet customers’ needs thanks to real-time feedback.
Organization
The fast reallocation of resources is a key tool for every digital business. Dynamic and turbulent environment has critically changed rules of competition, and the reallocation of resources is fundamental to rapidly shift businesses as customer needs through new operating models, new business models and new value propositions to meet customer needs.
Organization needs digital competencies and digital governance to establish a dedicated team to support digital business opportunities developing them according to customer needs, many companies indeed create digitally centered sub-businesses like spin-offs with the aim of not alter their internal organization
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Culture and leadership
Digital culture among executives and functions leads to favorable conditions to have an organization opened for changes and fully dropped in the digital context. In the past functions and managers have worked separately each other through functional business orientation, not through a business processes orientation. It is clear that in the digital era it is impossible that an organization doesn’t work through cross-functional and collaborative layouts developing new sets of values coherent to the digital strategy. Leaders have to communicate digital values for the organization’s culture such as technology acceptance and forward thinking that must be understood and accepted to be successful. Trial and error approach is fundamental to develop a digital business strategy.
Capabilities and HR competencies
Digital skills are one of the most important competencies for firms. The fast growing of digital economy thanks to digitalization is increasing the demand for skilled technical workers. Internet-based technologies are also critical for interpersonal and communication skills, through the full knowledge of these technologies we can improve our mastery about them and develop digital solutions that are shared between all the members of the organization. Consumer-centric business models are a peculiar feature of digital strategy, indeed the capability to design new business models is fundamental for a firm and managers should be very skilled in identifying new human resources potentials. High digital education is very important also for managers, it a is key factor for firm’s success.
Foresight and vision
Thanks to digital disruption, which is still in progress, firms are required to anticipate technology-driven transformations and adopt different highly dynamic strategies.
The transformative vision of the future must be characterized by fast learning from consumer’s feedback and every other interaction with the environment itself to update or develop new products and services. Rapid prototyping
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processes are useful to apply trial and error approaches and monitor new products release on the market. The Porter’s five-forces model or SWOT analysis can be useful tools to test external threats and opportunities in the market and take advantage of them.
Data and Information Technology
Cloud computing and Big data analysis give huge opportunity to firms to understand and meet consumer needs ahead of the competition. Data represents a powerful competitive advantage because through the knowledge of consumer needs we can design our business model around them. Real-time data allows the firm to rapidly react to every change in consumer preferences and implement flexible solutions. Cloud computing allows companies to minimize or completely avoid up-front IT infrastructure costs because the physical environment is typically owned by a hosting company and cloud storage is accessible through a high-bandwidth connection.
Operations
One of the most recent theme about industry 4.0 is the so called smart factories, it is about automated processes that, thanks to a higher interaction between machines and humans, can speed up the entire production process. We also talk about Machine-to-Machine (M2M) communication and processes whenever machines and technologies can identify issues and take autonomous decisions through the concept of machine learning.
Partners
Win-win logic allows the formation of strong partnerships often leading to big innovations through the blending of different skills and competencies. An open system too allows the creation of networks of firms by easing the communication process between them.
To sum up, every single component that has been described above should be enhanced and supported by digital technologies and competencies that must be entrenched at
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each level of the organization. It is important to remind that digital business strategy should not be treated as IT strategy but firms should consider it in the same way as business strategy.
2.3 What is a digital business model ?
Firm from every industry are testing the effects of the digital transformation, through their own initiatives or due to competition.
Relationships between IT and business has shifted over the last 20 years: this shift regards the changeover from a focus on the structure of IT systems, through the design of IT-enabled business processes and, finally, to the design of business models for services provided with the help of digital platforms (Fenwick, 2016). The digital industry (smartphones, software, media etc.) was the first one to move toward the integration of business model with digital platforms, but soon firms from other industries such as energy, financial services and automotive had to adapt to these changes before the digital disruption overwhelms them.
The interconnected environment through which companies operate is characterized by new affordances, structures, and rules (El Sawy, IT-intensive innovation in the electronic economy: Insights from marshall industries, 1999)
Each business model consists of different elements for different industries.
A digital business model differs from the traditional one only if digital technologies trigger fundamental changes in creating, capturing and delivering value (Veit et al., 2014).
Each digital business model consists of three fundamental parts: content, experience and platform. (Vukanović, 2016)
The content is what a firm offers to its customers, what is consumed by them. It is composed by two parts, information and product, the first one includes information about the product such as description, price and use details while the second one is the product itself which can be an e-book, a movie, a software or everything else in digital form (El Sawy & Pereira, 2013).
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firm, that is the customer experience. It can include interfaces, tools, communities where the customer can share his opinions, reviews of the contents, advanced search features, and tips or client-oriented online business processes.
The platform is the last component of a digital business model, this layer is composed by internal and external perspectives (Brousseau, 2007). The internal one is about the structure of the firms, it includes IT infrastructure, customer data, available technologies within the firm, processes that do not concern the customer like customer analytics, human resources etc., while the external platform concerns about the way through which the content is delivered to customers, it is composed by proprietary hardware, private and public networks, smartphones and pc that customers use to search and buy the product, partnerships with logistics companies.
Platforms have a fundamental role because if they are developed in a way that allows the reuse of them, we can create standardized procedures which will avoid extra costs and internal complexity when specific customer needs must be met.
Figure 2.3: Structure of a digital business model Sloan Management Review, 2013
The characteristics of digital business models are different from traditional ones, and this becomes evident when we look, for example, at smartphone ecosystems. There are three characteristics that can categorize a business model as a digital one:
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cost (e.g. smartphone apps), and become exponentially more valuable as more users join (e.g. Facebook) through the application of Metcalfe’s law (Shapiro & Varian, 1999).
2. While value is traditionally created within a firm and then sold to clients, in digital business models value is determined in use (Vargo, 2008). Value is created through the use of the product, when the product itself becomes an interface for the digital world to access services (e.g. instant messaging, photo sharing and mobile payments).
3. Digital business models, through the use of digital platforms, should balance different interests both for developers and users, it should provide incentives for both the parts of the ecosystem (Iansiti & Levien, 2004)
These new logics are unavailable through the implementation of traditional business models. We need a new framework which analyzes and emphasizes the importance of customer contact points, the crucial relevance digital platforms and the need to manage an ecosystem composed by lot of actors.
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2.4 The VISOR framework
The previous three elements that are proper of a digital business model can be analyzed through a different framework, like VISOR (acronym for Vision, Importance, Supporting resources, Obstacles and Readiness), proposed by El Sawy and Pereira in 2013 to analyze these new models.
This framework consists of components that cover the different dimensions of a digital service that are divided into two groups. The first group (organizing model, service platforms and interface) determines the costs incurred by the firm to deliver value and the second group (value and revenue/cost) represents the value proposition.
Figure 2.4: Components of the visor framework Source: (El Sawy, 2013)
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Organizing model: Structure and processes of the ecosystem to create the products and services.
Service platforms: Engines to enable delivery of products or services. Interface: Interaction between the customer and the service platform.
Value proposition: Reason why a particular customer is willing to pay for a product or service.
Revenue model: Distribution of revenues and cost among the ecosystem participants
What is the “real” value ?
Pereira and El Sawy (2013)define value proposition taking inspiration by Osterwalder and Pigneur (2010) saying that “value proposition is providing a service or product to a particular customer segment that addresses an unmet need of the customers or an alternative way for them to access a product or service, and makes them willing to pay a premium price for that”. The value proposition is composed by:
1. Customers 2. Customer value
3. Customer understanding 4. Customer relationship
All the financial aspects are contained in the second component of the “real” value proposition, within the revenue/cost component, which is strictly connected to the value creation of the first component. Pricing aspects, distribution of revenues, cost structure and estimates of demand gained from a product or service are discussed among the different actors that has co-created the value.
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The other three macro-categories that form the “real” cost are: 1. Organizational model
2. Service platforms 3. Interface
The organizing model describes how actors, through the use of channels, value networks, characteristics of the organization, partnerships, relationships with stakeholders and connected activities plan business processes, define value chains and all the relationships to deliver the product to the customer.
Service platforms determine the technology and the required investments in IT infrastructure and other resources to provide the best support to business processes, relationships and logistical streams required for the delivery of a product or service. The interface is one of the most important factors of the whole model. From it depends the experience of the user while he interacts with the business. The interface should help in satisfy customer needs, enhancing value proposition through an effective use of links and services.
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2.5 Paradigm shift toward digital business models
Less than twenty years ago only Microsoft, as part of technology industry, was in the top-five publicly traded company for market capitalization with 365 Billion dollars. Now we can see thanks to the figure below, that those five companies are only from technology industry.
Industry 4.0 and digitization have critically changed rules of competition in competitive markets.
Figure 2.5: Top five companies per market capitalization between 2006 and 2016 Source: https://www.slideshare.net
This figure represents how the world of business is changing thanks to the technology development.
Thanks to faster connections, powerful infrastructures and more than 3.8 billion of the Internet users in 2017, digital competencies and data analysis are fundamental in strategic development of every business.
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business to the new way of digital business had confused many scholars and experts of business modelling because of the high level of complexity and rapid changes. Digital business has created a gap between business strategy and business processes, indeed translating business strategy into business process has become much more of a challenge. (Al-Debei, 2008)
Figure 2.6: Paradigm shift with the introduction of digital technologies Source: Al-Debei, M. ., (2008)
Thanks to Internet of things (IoT), many previously unavoidable production process, can now be skipped (Bruurmijn, 2017). This has created space for the company to review business models and now it is possible to deliver customized services at the price of a mass product.
Computing a big amount of data is a requirement that every IT system should have. All mutations must be recorded and accessible, at every moment, indeed to do that it is necessary to have a strong management information system. With information available 24/7 in real time we can respond even better to our customers’ requests, avoiding queues.
The digital business model finally puts the customer at the very center of it (Plé, Lecocq, & Angot, 2017), thanks to a platform that allows producers and customers to
Business Strategy
Business Processes
Business Processes
Gap Stable environment
Low level of competition Certainty
Relatively simple and static business processes Limited ways of doing business
Business Strategy
Dynamic environment High level of competition Uncertainty
Dynamic, IT-based business processes Multiple ways of doing business
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communicate each other, which gives the possibility to customers to clearly explain their needs and that gives the possibility to producers to meet these needs.
There are common paths which firms go through when they want to develop a digital approach to the market. The digital transformation has brought some changes in business models for firms who wanted to benefit from that transformation.
The most frequent changes in firms’ business model concern:
Market entry strategies
Growing digitization of products and services Ecosystem cooperation
Access to Sharing economy
Generation of value through digital platforms
Aspects of business operations like the forecast of demand, HR activities or material procurement must be reinvented due to the digital transformation.
Below there are some brief references of the most common digital business models, with weaknesses and strengths for every model.
Subscription business model
Pure “lock-in” strategy. Products or services that are traditionally purchased on an ad-hoc basis, the customer is locked-in through a subscription fee for continued access to the product/service.
Examples of this are Netflix, Apple Music, Xbox live.
The price has a central role to the customer, it should be more convenient for them to pay the subscription charge instead of pay the full price for the service. Even costing is fundamental to succeed with this model. Revenues should
