Whether they’re being reinvented, disrupted or innovated, business models are a popular discussion topic in the boardroom today. That’s because business models are the key to extracting value from digital transformation.
Why digitization is disrupting your business model
This episode of the Economist Intelligence Unit’s Digital Economy podcast examines the impact of digital on business models, featuring insights from Charles Baden-Fuller, a professor of strategy at Cass Business School in London, and George Walkley, group digital and development director at Hachette UK, the world’s second largest book publisher.
Although there may seem to be an endless variety, business models can be boiled down to a few basic types: selling physical goods, selling services, acting as a broker, and the multisided business model (where users consume a service, such as Google Search, and Google sells access to users through advertising, analytics services, etc.).
Baden-Fuller’s research team maintains a “business model zoo” featuring companies that have built successful businesses from unique variations of these models. “What’s interesting about these businesses is many of them are actually delivering very old-fashioned products in new ways. It’s not all digital,” Baden-Fuller says.
At publishing giant Hachette UK, George Walkley says that digital’s impact is varied — and not always what you’d expect. “Our fundamental business model is actually relatively unchanged. We take someone else’s idea to a broader audience than they would have achieved single-handedly,” Walkley says. “But in many cases, the unit of value has changed. We’re looking at slightly different products, and the route through which we sell them has changed completely.”
In 2009, the company’s digital business accounted for a half million-pound turnover, compared to a company-wide figure of 350 million pounds. In 5 years, digital had grown to 70 million pounds, a growth rate that Walkley compares to “going into insane mode” in a Tesla. Still, traditional books remain the company’s biggest revenue source, delivering three-quarters of the firm’s income. “It’s very important that we don’t throw out that business in the race to do digital,” Walkley says. “However, we do also have to respond to the availability of new opportunities.”
Baden-Fuller and Walkley offered a few thoughts on how to best understand how business models are changing. “One of the things that we’ve learned about the digital revolution is that resources are not the key issue. Very large, well-endowed firms have gotten into trouble, and less endowed, agile firms have done extraordinarily well. It’s a cognitive, organizational challenge, not as much a physical challenge,” says Baden-Fuller.
Walkley says companies need to understand what business they’re really in. “I read a great interview a couple of weeks ago with the general manager of Nintendo in North America, who said very bluntly that his competitors are not PlayStation and Xbox,” says Walkley. “His competitors are Netflix and every other call on peoples’ discretionary time. I think having a really clear understanding of that is very important.”
Baden-Fuller also said that established companies should carefully study startups, noting that larger companies can draw many ideas and lessons from newly formed companies that are energized around a particular idea. “The challenge of digitization is an opportunity, as well as a threat,” he says. “People who are able to transform their company digitally often also transform their balance sheet and their income statement and their profitability, so it’s not all [a] downside.”
Read a full transcript of the podcast.