Digital Business Modeling

Transcription

1 SAP White Paper Digital Transformation Digital Business Modeling A Structural Approach Toward Digital Transformation Version 2

2 Executive Summary EVERY COMPANY WILL BECOME DIGITAL (OR VANISH) It has become common sense that the digital transformation does not only affect a few enterprises that were born digital, but rather all enterprises. This challenge confronts all business leaders with the necessity to reimagine their business in terms of digital. However, currently the tools for this endeavor are in their infancy. TECHNOLOGY AND BUSINESS INNOVATION DRIVE DIGITAL TRANSFORMATION The digital economy creates a stronger bond between technological and business innovation than ever before. There are five digital key elements that represent the strategic hotspots of this development: people, businesses, things, data, and cloud. These elements encompass recent innovations such as social media, enterprise platforms, the Internet of Things, real-time analytics, and their connection through a network of services worldwide. They have started to deeply change the life of everybody all over the world. SYSTEMATIC APPROACH TO DIGITAL BUSINESS MODELING To respond to the challenge that results from this development, we do not only need tools to systematically develop technology but also approaches toward systematic digital business model design. Business model innovation has become a growing topic, and methods for business model design, such as the business model canvas, have attracted increased attention among strategic leaders. Yet business and IT currently lack a common language to consistently discuss, analyze, and design opportunities from the digitalization of business. MOVING TOWARD SYSTEMATIC DIGITAL BUSI- NESS DESIGN WITH DIGITAL VALUE DRIVERS To complement these methodologies that address the specific challenges of the digital transformation, we introduce the concept of digital value drivers, which illustrate the effect of digital key elements on the business model components (value proposition, customer segments, revenue streams, channels, customer relationships, key partners, key resources, key activities, and cost structure). The resulting matrix schema allows practitioners to systematically explore the influence of digital technologies on the business model for example, by providing illustrative examples of successful implementations of these value drivers in digital companies. MOVING TOWARD A MODELING LANGUAGE FOR DIGITAL BUSINESS We propose a graphical representation for digital value drivers to make the concept applicable for actual design activities. Using this representation helps companies: Better understand the fundamental characteristics of digital business Learn about the nature and opportunities of digital technologies Pave the way toward successful digital transformation Finally, we envision that digital focus areas guiding digital transformation turn digital value drivers and business model patterns into powerful instruments to systematize digital business strategy and design. 2 / 58

3 Table of Contents 2 Executive Summary 4 Overview 5 Introduction to Business Modeling 7 Digital Key Elements 11 Digital Focus Areas 16 Connecting Business to Digital 37 Graphical Representation and Examples 44 Collaborative Digital Business Design and Outlook 49 Conclusion 51 Appendix 58 References About the Authors Marco Cigaina is a program manager in SAP s Business Transformation Services focusing on innovation management, research, and integration of stakeholders in the innovation process. He has a degree in engineering from Politecnico di Milano University with a concentration in enterprise information systems. His experience includes technology and business intelligence consulting, enterprise architecture, and program management for strategic initiatives. He is the author of Innovation Management Framework: Enabling and Fostering Innovation in Your Company [Epistemy Press, 2013]. Uwe Riss is a senior researcher at SAP s Research & Innovation Hub St. Gallen focusing on business model innovation, knowledge work, and information management. He has a degree in mathematics from the University of Marburg and a PhD from the University of Heidelberg. He has worked as a project lead in various European Commission research projects. He has written more than 50 articles for scientific journals and conferences, contributed to several patents, and earned an SAP Research Award of Excellence. 3 / 58

4 1. Overview Digital business is an increasingly important topic for all companies. However, business and IT lack a common language necessary to discuss, analyze, and design opportunities that allow enterprises to take advantage of the digitalization of business. This paper defines a modeling approach for digital business that is simple, consumable, pragmatic, and easy to apply (in analogy to the business model canvas [Osterwalder and Pigneur, 2010] for digital business). The structure of the paper is as follows: Chapter 2 introduces broadly applicable business model descriptions. Chapter 3 defines some key terms as a foundation for the rest of the discussion and proposes a minimalistic model of digital capabilities. Chapter 4 introduces the concept of digital focus areas. Chapter 5 suggests an approach to explore, analyze, and design the value and impact of digital capabilities on business models in a systematic way and introduces the concept of digital value drivers. Chapter 6 provides some real-world examples of companies digital business models, analyzed according to the proposed approach. Chapter 7 discusses the foundations of how to use the proposed concepts in the context of collaborative sessions and provides a research outlook. Chapter 8 concludes with some general ideas on the applicability of the proposed approach. This second version of the paper introduces a list of digital focus areas that help understand at which points a digital strategy can be applied to a business model. It also provides a consolidated list of digital value drivers in order to avoid redundancies that the previous list included and fills systematic gaps in the schema. In particular, this provides practical advantages in the application of the modeling language. Explanations for the changes in the schema of digital value drivers between this and the previous version of the paper are given in the appendix. 4 / 58

5 2. Introduction to Business Modeling A company s business model is a high-level representation of the specific manner in which the organization generates added value for its customers and sustains itself. The purpose of such representation is to illustrate the company s core business logic. It has to explain how the company succeeds in satisfying its customers needs in comparison to other companies striving for the same goal. One of the most successful business model representations currently used is Alexander Osterwalder s Business Model Canvas [Osterwalder and Pigneur, 2010], which has been widely taken up by practitioners and will also be a reference point in this paper. The business model canvas consists of nine components: value proposition, key activities, key resources, key partners, customer relationships, channels, customer segments, costs, and revenues. A specific adaptation of this canvas is the enterprise view (see Figure 1). We will mainly use the term business model canvas as the more general term, as we do not refer to the specific features of the enterprise view. The key component of the enterprise view is the company s value proposition (indicated by What? in the figure). It joins the customer focus (indicated by Who? ) and the company focus (indicated by How? ) [Gassmann et al., 2015].The former focus describes the value delivery and includes: Customer segments describing which customers are addressed by the value proposition Channels (for communication and delivery) Customer relationships describing the means by which the connection to customers is maintained Figure 1: Enterprise View How? What? Who? Key partners Key activities Customer relationships Customer segments Value creation Value proposition Value delivery Key resources Channels Value capture Cost structure Revenue streams My company My customers My partners Why? 5 / 58

6 The latter focus describes the value generation and consists of: Key activities describing the essential activities in the company that contribute to the value proposition Key resources as the crucial resources to conduct these activities Key partners as the collaborating organizations, which may be logistic partners or suppliers that provide essential resources or services for the solution that do not come from the company itself Value creation and value delivery are supplemented by value capturing, which completes the description considering costs and revenues. All components are internally related, although the respective relationships are usually not explicated for the sake of readability. In addition to the enterprise view, companies can also use the network view (see Figure 2), which displays all partnering companies forming a sustainable business network. The partners in the network take part in value generation and exchange processes that are relevant to the selected business model. Both views together provide a survey of the most relevant components of a complex business. The major purpose of the network and enterprise views is to provide a conceptual framework that allows us to talk about a company s business logic in a well-defined manner. Using the respective terminology helps focus on the value aspects of digital transformation. In order to simplify the discussion, we will concentrate on the nine components of the enterprise view only. For a full discussion, however, we recommend using a complete representation that consists of all the elements [Osterwalder and Pigneur, 2010; Doll and Eisert, 2014]. Figure 2: Network View Partner network Customer network Competition My company My customers My partners My competition 6 / 58

7 3. Digital Key Elements Before we develop our approach for digital business modeling, we will introduce some basic terms (see the Basic Digital Business Terms table). Basic Digital Business Terms Term Description Digital business While, in a nondigital business, IT s role in the business model is mainly value generation, a digital business is characterized by the fact that IT affects all business model components, including value proposition and value delivery, significantly and in an integrated way. In this respect we distinguish between two different models: A digital business model, in which digital technology plays a significant role in the value proposition and throughout the entire business model (in particular, service portfolio or customer experience or both) in the described way A digitally enabled business model, which denotes any business model in which at least one of the components is significantly enabled by and based on digital technologies These definitions are not exclusive: the more that business model components are based on digital technologies (that is, the more they are digitally enabled), the more the model turns into a digital business model. Digital economy Digital capability Digital transformation Digital strategy In particular, all digital business models are also digitally enabled but not vice versa. A digital economy is an economy of digital businesses. Digitalization affects multiple aspects of the economy for example, companies organization and offerings, production systems and logistics, consumers behavior and experience, labor markets, commerce and exchanges, and more. A digital capability is the ability of digital-computing technologies to generate value for a business. We also refer to the digital capability of a company, which means the digital-computing technologies used by this company to employ digital business. Digitalization of business is the process of transforming a business into a digital business. A digital strategy is the part of the company s strategy that aims at digital transformation. 7 / 58

8 Digital Business Modeling When implementing a digital strategy, companies often face the dilemma between incremental and disruptive innovation [McQuivey, 2013]. Incremental innovation follows a pragmatic approach that aims at improving existing solutions; disruptive innovation aims at developing powerful visions. To avoid the dilemma, successful digital companies aim at innovating the adjacent possible [McQuivey, 2013]. Although this approach also aims at incremental improvements, all of them are related to each other so that the sum of integrated innovations can result in a disruptive solution. As a synthesis of different views that IT analysts, 1 vendors, and practitioners are commonly using, we will discuss, analyze, and design digital capabilities through a minimalistic, object-oriented, and functional representation based on five key elements (from now on referred to as digital key elements see Figure 3): People Businesses Things Data Cloud As mentioned in the Overview section, business and IT lack a common language that allows us to consistently discuss, analyze, and design opportunities that take advantage of the digital transformation. This hampers the systematic approach toward digital innovation, and we consider it to be one of the most important obstacles for implementing a digital strategy. On the business side, we can start from the business model canvas as an established approach to model the way an organization creates, delivers, and captures value. On the IT side, we need a similar minimalistic and yet semantically rich approach to model digital capabilities. Figure 3: Digital Key Elements People Businesses Data Cloud Things FOOTNOTE 1. In particular, we refer to Gartner (Nexus and digital lenses concept) and IDC (third-platform concept). Recently, the term SMACIT (social, mobile, analytics, cloud, and the Internet of Things) has become popular to describe the convergence of these technologies. 8 / 58

9 These digital key elements do not regard digital capabilities from a mere technology perspective but, first of all, take a business perspective: People of the digital age are creative, informed, and knowledgeable; they are the source and the foundation of the digital economy. In our model, we use the term people as an abbreviation for digitally connected individuals and communities who leave their marks (data) in the digital world. People use digital capabilities via different types of devices (desktops, laptops, tablets, smartphones, wearable devices like smart watches and e-glasses, and so on), experiencing various kinds of human-computer interactions. We look at mobility as a key access point to digital capabilities. Through the same devices, people digitally connect to other people. We regard online communities and social networks as digitally enabled network-based relationships of individuals. We look at digital social business as value creation from human-to-human digital connections. For business modeling purposes, we sometimes refer generically to the people key element; however, whenever useful, we distinguish individuals from communities. Businesses in the past were self-optimizing entities in a static environment, but nowadays they are compelled to continually evolve their dynamics to regularly self-disrupt and renew themselves in a constantly changing environment. This particularly concerns the networks in which they work together with other organizations to generate value. Due to digital technologies, the dynamics of these networks have visibly increased. In our model, we use the term businesses as an abbreviation for digitally connected businesses or groups of businesses that combine their digital capabilities to create new solutions. Businesses digitally connect to other businesses, to individuals, and to assets, with different types of digital means for example, the public Web, XML standards, and connectors to marketplaces. Things in the past were dumb objects, but nowadays we find them increasingly becoming part of the digital world, interacting smartly with people, businesses, or other objects. In our model, we use the term things as an abbreviation for digitally connected objects, or smart things. Smart things are typically equipped with sensors that produce data and might even have their own application logic. They also exchange data and might connect to networks. Smart things can automatically react to contexts without customer interaction. This can include customers smartphones insofar as they serve as smart sensors (for example, for the customer s current location). In our model, we include robots, auto nomous vehicles, drones, and so on, in the category of things. In addition, we also consider any technologies for digital manufacturing (for example, 3D printing) that use digital information to produce physical objects as being part of this category. The Internet of Things enables individual physical objects to connect to and interact with other objects, people, and businesses creating value from information exchanges. In particular, we regard machine-to-machine (M2M) interactions as value creation from things-to-things digital connections. 9 / 58

10 Data, from a technology perspective, deals with records in databases and data management processes. We suggest looking at data as a business asset [van t Spijker, 2014] that can be leveraged for new business models. In our model, we use the term data as an abbreviation for real-time, complete, detailed, consistent, transparent, and accessible information and any algorithms employing this data for analysis, planning, and prediction including cognitive computing. This includes sophisticated analytics procedures that process small or large amounts of data and generate consumable information. We consider Big Data and smart data as being included in the data category. Cloud, from a technology perspective, is just an infrastructure, but we suggest looking at it as a value-creating service type with specific characteristics: A service that handles abstract resources (that is, digital contents or information associated to a physical resource or product or a natively digital product) A service that is on demand (that is, available per request) A service that is scalable (up and down, depending on the demand) A service that you can pay per use (that is, you can pay based on consumption) A ubiquitous service (that is, accessible from anywhere) In this way the cloud becomes a service model and a logical shared environment in which people, businesses, and things connect in order to exchange and accumulate data as well as to offer and consume digital services. 10 / 58

11 4. Digital Focus Areas We mainly look at the strategic business value and impact of digitalization through the business model canvas. In this respect we define digital focus areas as the areas of relevant transformational potential of digital technologies for each component of the business model canvas. It is important to note that the epicenter of the digital paradigm shift concerns the actual interaction of the company and the customer that is, the value proposition and the customer-relationship components. However, the seismic waves of these epicenters go through the entire business model. In this section, we describe digital focus areas by highlighting the value and impact of digital technologies per business model component, starting from the epicenter and advancing to the periphery of the business model. The digital transformation generally affects all parts of a business model. Before we discuss the individual focus areas in more detail, we will quickly explain how the effects of the paradigm shift go through the entire business model: Customer relationship This is one of the two epicentral components in the business model from which we can start a revision. The central goal is to extend and intensify the relationship by digital means and place more emphasis on this element. Relationships with customers have gained importance because value co-creation between the company and its customers has become a central element of innovation. 2 Value proposition and customer segments The value proposition is the second epicentral component and closely related to customer relationships. The boundary between customer relationships and value proposition becomes blurry due to the growing importance of value co-creation. Customer segments mainly adapt to these changes. Channels The floor for an extended and intensified customer relationship usually requires the use of new digital channels to reach global markets and foster relationships with customers. Key activities The changed interaction, the new value proposition, and the use of digital channels require new activities for example, in terms of channel and community management or new kinds of analytics to enhance the value proposition. Key resources and partners New key activities are often based on new resources such as data or analytic algorithms or may require new partners from which they can be obtained. Revenue and pricing In various cases the new interaction also requires a new pricing schema for example, adaptive pricing. The latter is also a means to keep customers in the interaction when they try to find the optimal point for a purchase. Cost structure Digital technologies often lead to cost optimization, such as zero marginal costs of digital contents, reductions due to increased transparency, the ability to predict costs, and various network effects. This is only a rough guideline, and the effects on the business model elements are more complex and include more aspects, as we will show in the following sections where we provide the details. However, it is always helpful to keep this red line in mind. FOOTNOTE 2. [Prahalad and Ramaswamy, 2004] defines value co-creation as: The joint creation of value by the company and the customer, allowing customers to co-construct the service experience to suit their context. 11 / 58

12 4.1 VALUE PROPOSITION IN THE DIGITAL AGE: OUTCOME-DRIVEN VALUE PROPOSITION With respect to products and services, we can usually distinguish a physical part (hammers, cars, plumbing, medical examination, and so on) and an informational part, which can include the descriptions (for example, product details, usage manuals, instructions), monitoring data (for example, a car cockpit, results of medical examinations), and a control interface (for example, the Wi-Fi interface of an air-conditioning device, control of medical apparatus). Media-related products (for example, music records, videos, books) can be completely digitalized (dematerialization). The more the physical part of products has to be monitored and controlled, the more digital technologies come to the fore. The ability of digital technologies to support the informational part of products and the related information flow raises the potential to transform a product into a service (everything as a service, or XaaS), a model in which the ownership of the physical part of products is not mandatory and the usage of the product is facilitated by digital technologies. For example, the ability to book, locate, and access a car (a product) via a smartphone enables cars to be made available as resources for urban car sharing (a service). Digital technologies extend their impact on the end-to-end customer journey. The ability to collect and process information in real time as well as to a high level of detail gives companies the possibility to provide customers with precisely what they need and when they need it. In contrast to static products, digital services are adaptable to the specific situation (in real time). Services require less knowledge transfer, because the service provider mainly handles adaptation to specific circumstances. For example, the ability to connect data about location, weather conditions, and preferences of a driver enables the possibility to propose specific and appropriate offerings when a car approaches a gas station. 4.2 VALUE DELIVERY IN THE DIGITAL AGE The growing role of value co-creation also increases the importance of value delivery Customer Relationships: Disintermediation, Perpetuation Product business goes hand in hand with a focus on the act of purchase, whereas service business rather fosters a long-term engagement. Moreover, value propositions become more complex due to value co-creation: they are no longer static promises of fulfillment regarding the job-to-be-done but consist of an interactive collaboration between digital service provider and customer; value co-creation further perpetuates customer relationships, which might gain a more important role than the value proposition. The fact that digital interaction can often be realized directly further intensifies this that is, without intermediation of a partner, because companies can easily establish digital services and interaction with their customers and partners. 12 / 58

13 4.2.2 Channels: Global Reach and Omnipresent Information Exchange Organizations can expose, communicate, and deliver their value propositions regardless of customer locations and time of day. Integration capabilities (together with mobile access) allow companies to establish channels to customers at any time and place. These channels are maintained over a longer period of time as a precondition for intensified customer relationships. Typical examples are the various customer forums that companies have established to support customers in providing mutual aid, often in a better way than the company could itself provide it. Such forums also give potential customers information about the qualities of the solution and help them in making purchase decisions Customer Segments: Individualization The ability to collect and process a multitude of data around customers allows companies to offer personalized solutions and experiences and to create segments of one. Even if it does not go to this one customer one segment extreme, we can generally say that customer segments become more finely granular. 4.3 VALUE CREATION IN THE DIGITAL AGE Key Resources: Access, Virtualization, Extension of Resources Access to networks of digitally connected people, businesses, and things as well as data processing capabilities represent new resources. Digital technologies facilitate discovering, getting, and managing different types of resources (materials, information, assets, intellectual property, financials, skills, and so on), even without owning them directly, but by mastering the information flow associated to resource planning, coordination, and management. Through digital technologies, hybrid pools of owned and outsourced resources can be handled virtually as own resources (virtualization). Thus, companies can significantly extend the set of resources that can be leveraged in their business models Key Partnerships: Digital Resource Providers Digital technologies open up opportunities for providers of new digital resources. This may also affect established companies that already possess digital resources but now decide to offer them to other parties. For example, computing centers can be offered for cloud services and the access to smart items can be offered to third parties that are interested in providing their own services via this channel Key Activities: Information Excellence, Network Management Due to the increasing importance of information management for modern organizations, companies need excellent capabilities (skills, processes, methods, tools, and so on) to manage information adequately in their competitive landscape. This enables knowledge workers to make informed decisions that are based on the insights coming from software intelligence arranged by data scientists. Parallel to the growing importance of data and its management, we find the increasing significance of networks. These networks of either people or businesses have to be managed actively to attract and keep participants. Therefore, the management of these networks has become an important area of activity in a company. 13 / 58

14 4.4 VALUE CO-CREATION IN THE DIGITAL AGE: PLATFORM ECOSYSTEMS Value co-creation points to the fact that customers do not consume value (provided as products or services) but are actively involved in the interaction that generates value and even returns value to the supplier, which goes beyond mere monetary compensation. In the course of digitalization, this interaction has often become so intensive that the roles of service providers and service consumers cannot be clearly distinguished anymore. For example, digital technologies allow creating platforms that establish a transparent marketplace populated by various types of business partners, such as service providers and parties interested in these services. Such a setting attracts users and complementors, initiates new solutions, and establishes a business ecosystem. The entire constellation is generally self-reinforcing. For example, a growing group of potential customers makes a platform more attractive for service providers, while a larger and more transparent selection of service providers increases the interest of potential customers of such services. In this way platforms provide a powerful realization of digital business. Referring to the business model canvas, the players involved in value co-creation cannot be clearly classified as partners or as customers and actually belong to both categories: on the one hand, they take part in value generation and make resources available as, for example, data; on the other hand, they have to be attracted and require a value proposition. Therefore, we have decided to introduce a focus area that spans both components, as indicated by the two orange boxes in Figure VALUE CAPTURE IN THE DIGITAL AGE Cost Structure: Cost Optimization Digital technologies enable cost optimization opportunities. Transparency on business process performance enables a more accurate cost control the ability to analyze any aspect of business in real time enables more accurate planning, more timely reactions to unplanned events, and the ability to anticipate those events based on predictive models. Zero marginal costs of digital contents can significantly change the cost structure compared to the equivalent physical, informationintensive product (think of the cost to produce a new copy of an e-book compared to the cost of producing a new copy of a hardcover book). Digital technologies enable network effects that drive economies of scale with a potential impact on the company s cost structure Revenue Streams: New Revenue Streams and Pricing Models Digital technologies enable new types of revenue streams. On the one hand, we find direct revenue streams as, for example, by the monetization of data or by making solutions consumable (for example, improving the customer experience). On the other hand, there are also indirect effects that lead to new revenue streams. For example, digital technologies lead to a reduction of transaction and coordination costs that makes services economical that were not profitable before. Data collected around the customer enables new types of pricing models that are highly tailored and dynamically adapted based on the customer profile and context. 14 / 58

15 4.6 OVERALL MAP OF DIGITAL FOCUS AREAS Figure 4 recaps the digital focus areas associated with the business model canvas components. Figure 4: Digital Focus Areas Key Partners Key Activities Value Proposition Customer Relationships Customer Segments Information excellence, network management Disintermediation, perpetuation Digital resource providers Platform ecosystem partner side Key Resources Access, virtualization, extension of resources Outcome-driven value proposition Channels Global reach, omnipresent information exchange Individualization Platform ecosystem customer side Cost Structure Revenue Streams Cost optimization New revenue streams and pricing models Value creation Value proposition Value delivery Value capture Co-creation 15 / 58

16 5. Connecting Business to Digital In this section we explore the main relationships between digital key elements and the components of the business model canvas in the form of a matrix schema (see Section 5.1). For each element of this schema, we provide a description and examples that help understand its central characteristics. 5.1 CONNECTING BUSINESS MODEL COMPONENTS TO DIGITAL KEY ELEMENTS THROUGH VALUE DRIVERS In the context of business model design, we are interested in how digital capabilities generate value. In this respect, we investigate what we call digital value drivers. Hereby we mean specific value-generating effects that come along with digital key elements in a business context. Moreover, we can associate value drivers with certain components of the business model canvas. We can do so through a matrix that has the business model canvas components as one dimension and the digital key elements as the other dimension while digital value drivers appear in the matrix elements (see Figure 5). Analyzing a variety of digital business examples, we have derived a list of digital value drivers that we have categorized according to the business model components and the digital key elements that they address. For each digital value driver, we provide key questions that one can use as a basis for collaborative sessions for designing digital and digitally enabled business models. Footnotes will point to changes in comparison to the first version of the paper. Figure 5: The Digital-Value-Drivers Matrix Concept Value proposition People Businesses Things Data Cloud Customer segments Revenue streams Channels Customer relationships Key partnerships Key resources Key activities Cost structure 16 / 58

17 5.2 VALUE PROPOSITION The term value proposition denotes the promised value that results from applying the offered solution. In the following table we describe the particular elements that a digital company can offer to improve customer experience and create additional value. This might include completely new solutions and also digital enhancements of existing solutions. Digital Key Element Data Value Driver Description Examples Data-based solutions Data collection and processing can be an essential component of new as well as enhanced solutions. Such data can be an addition to a material product or constitute the complete solution. This may also concern the use of customer data that help tailor customer-specific solutions. Data-based solutions may also include the use of machine learning and high-performance computation to process relevant data. Google offers targeted ads based on sophisticated matches between user-related information, indexed Web contents, and advertisers data. Accordant Media delivers analytic results to its customers based on data analysis. Data.com offers up-to-date, accurate data about companies and contacts, from names, s, and phone numbers to employee counts and more. CancerLinQ offers personal medicine that meets the patient s specific needs. The New York Times offers various subscriptions for certain news channels specified by the customer. 17 / 58

18 Cloud On-demand services Cloud services make on-demand services available. Since digitalization moves the information-related parts of physical products to abstract resources (dematerialization), this makes it possible to offer digitalized resources and services everywhere and at any time. Netflix on-demand video streaming allows customers to view videos at home and everywhere else. People People network based solutions Connections between digitally connected individuals or communities or both can be leveraged to create new services. LinkedIn has a value proposition that is based on relationships among professionals, which are used to establish connections to recruiters and other interested parties. Businesses Integrated solutions Cloud-based networks enable scenarios based on data-sharing and composition of services, which are usually provided by digitally connected business networks. Uber: since the location of the customer and the driver offering transportation are known from their smartphones, the customer, the driver and Uber can easily work together, which makes the process for the customer faster and more transparent. PayPal makes online payment an integrated part of online purchase processes. In this way the process becomes much faster. Things Smart solutions Smart things make it easier to collect information that is necessary to provide the customer with an optimal solution. Samsung s Smart Home lets customers monitor, control, and secure their homes from anywhere. 18 / 58

19 5.3 CUSTOMER RELATIONSHIPS Customer relationships describe all interaction with the customer before and after the (contractual) business transaction for which the company is actually paid. Such interaction may include the exchange of information and the establishment of mutual trust. Digital technologies are used to establish or maintain these relationships. The longer an interaction persists, the more valuable it becomes. Generally we can observe that the importance of customer relationships for business is increasing and counterbalances the anonymity of the Internet. Digital Key Element Data Value Driver Description Examples Accelerated decision support and value delivery High-performance data accelerates decision making and value delivery. Data collection and processing can accelerate customer procedures along the whole customer journey, from discovering and evaluating solutions to purchasing and requesting support. Porch offers an online platform for home improvement services. It features customer reports and statistical information, aggregating data on millions of home improvement professionals and projects in the United States. BASF addresses the information overload problem for agronomists and growers who need to decide which kind of chemical product to go for. Fashionmetric offers custom clothing. Cloud Digital customer relationships This gives companies the ability to support customers through digital means along the customer experience. Digitalized customer service and support help retain customers and attract customers to the company Web site for up-selling. 19 / 58

20 People People network based customer relationships Closer digital interaction with customers and customer communities allows companies to get a better understanding of their needs and establish a better relationship with them. Social networks can be used in business-to-customer or business-to-business-to-customer relationships to increase customer intimacy or understand end-user needs better. Social networks can leverage the acquisition of new customers, decrease churn rate, and increase customer satisfaction. SAP Community provides customers with information directly provided by experts and gives them the opportunity to exchange their experiences with other customers. Amazon customer product reviews and ratings provide a lot of additional information that helps other customers to find a product that serves their wishes best. Customers have the opportunity to express their satisfaction about a solution on the platform where they bought it. Through the compilation of various customers experiences and viewpoints, other customers get a comprehensive overview of the solution s qualities. This yields an additional value to those customers, who need advice in product selection. 20 / 58

21 Businesses Business network based customer relationships Business networks can be used in business-to-business relationships to increase customer intimacy, understand customer needs better, acquire new customers, decrease churn rate, and increase customer satisfaction. Digital business allows companies to extensively integrate their services. For the customer, however, mostly only one company establishes the communication to the customer and handles the relationship. Airbnb bundles a number of services, but the customer only deals with Airbnb. This makes the relation much easier than dealing with all service providers individually. Amazon provides a trusted platform offering products of various partners. Star Alliance manages customer profiles across different companies and jointly offers the Miles & More customer loyalty program. Companies can also share their customer profiles. In this case, they get a more detailed picture of their customers, and customers get easier access to solutions because the access to customer data is available. Things Door-opener devices By using certain smart devices, customers establish a relationship with a company and get access to additional services offered via this channel. A smart device can ease customers access to services that are often specifically designed for this device. Such binding may encourage customers to first inspect the company s offerings instead of those of competitors. Apple provides smart devices that leverage the use of services offered by Apple itself, further supported by better integration compared to other providers services. With suitable user interfaces, they make it quite easy for customers to purchase these services. 21 / 58

22 5.4 CHANNELS Channels describe the ways and media through which customer relationships are established and maintained. This includes shops as well as delivery services provided by logistics partners. In particular, every business interaction between the company and (actual or potential) customers requires a channel. Digital technologies enable new digital communication, interaction, and delivery channels. Digital Key Element Data Cloud Value Driver Description Examples Customized channels Ubiquitous access Channels let companies communi cate with customers and promote, sell, and deliver products or services that can be customized based on data and digital technologies. Organizations can expose, communicate, and deliver their value proposition independent of customer locations and time of the day. The integration capabilities (together with mobile access) allow companies to establish channels to customers at any time and place. Retail Web sites adapt content, responding to a user s previous navigation. Customers have mobile access to home banking services. Smartphones act as channels to the customers. Additionally, these channels can be used to enrich and enhance the customer experience with modern human-computer interfaces to improve access. 22 / 58

23 People Community channels Communities of people provide opportunities to broadcast or get access to information. They also open up possibilities for collaboration with customers. LinkedIn collaborates with companies that offer their services to the LinkedIn community, making use of profiles that are available there for example, for recruiting. LinkedIn also provides ways to communicate information to specific audiences. Businesses Platform channels Digital business networks for example, electronic marketplaces give companies access to the customer pool. In particular, the platform is a cloud-based channel that provides customers access to services and products from various sources and information to decide on a purchase. ebay provides a platform that offers customers a variety of products offered by a large number of providers. The extra information helps customer to select the right product. Things Smartthings channels Smart things can be leveraged as channels to communicate, sell products or services, and deliver products or services to customers. New relations and value-adding scenarios are established. Apple s ipod is a channel to sell music streaming. A self-supplying refrigerator establishes a direct channel between the device and the service provider. The customer only monitors the process. Connected cars approaching a gas station receive offers from merchants. An industrial smart pump recommends maintenance services to operators. 23 / 58

24 5.5 CUSTOMER SEGMENTS Customer segments describe the various groups of people or organizations that are addressed by a value proposition. Such specification may be related to specific behavioral demands of the respective customers or reflect geographic segmentation. In addition, a new class of customer-segment value drivers has been introduced that is related to value co-creation, as explained in Section 4.4. They are mirrored by corresponding entries of key partners (see Section 5.7 under Value Co- Creation ). In order to express this double-sided character, we added the respect flavor (customer or partner) of the digital value drivers in brackets. Digital Key Element Data Cloud People Value Driver Description Examples Microsegments Global reach Digital consumers Detailed data with respect to customers and the aggregation of data on platforms enable companies to target microsegments and even individuals (segments of one). Based on the aggregation of customer data from various sources, a company can generate a profile that helps to offer an individual solution. This allows companies to extend the customer segments to those customers with very specific demands, addressing a long-tail market. Due to the universal availability of the Internet and the cloud, it is easy for a company to extend a digital offering to other geographical regions on a global scale. Any individual with a personal digital device is a potential customer. Online communities can be treated collectively and in parts as customer segments. Amazon offers rare books to the segment of customers interested in them. American Jeans offers jeans all over the world shipped from the United States, reaching a global market through its Internet platform. City-parking payment systems are being digitalized, relying on a broad diffusion of smartphones. 24 / 58

25 Businesses Global reach by business networks Partners in business networks are often focusing on specific regions. The universality of the business networks makes it possible to work with different partners in different geographical regions. Logistics service providers provide local services, partnering with globally active companies. Things Extended reach by smart things New customers for services can be reached via smart things for example, based on subscription. This can even take place in an almost autonomous way. A refrigerator that is aware of its contents is able to automatically process a shopping list or even perform a purchase automatically or semiautomatically. Value Co-Creation People People networks (customer side) People joining social networks or other platforms are customers because they have to be attracted to join the community. Doing so, they add to the value of the network, which might help attract other customers. LinkedIn and Facebook offer access to their platforms for free for basic users. However, they have to compete with other platforms with respect to their specific target segments. Businesses Business networks (customer side) Companies have become customers of business platforms. In most cases, the benefit of joining the platform is not monetary but consists in the access to a large customer audience or partner network. For the Porch platform for home improvement services, it is important to attract service providers because a high number of providers makes this marketplace interesting for individual customers. 25 / 58

26 5.6 REVENUE STREAMS Revenue streams describe for what and how customers pay. This concerns new assets that originate from using digital technologies and novel ways of pricing due to digital business that optimize the value for customers. Digital Key Element Data Cloud Cloud People Value Driver Description Examples Data monetization Digital service monetization Cloud technical infrastructure monetization Community access monetization New Revenue Streams These are revenues coming from direct or indirect monetization of data. An intensive exchange of data between companies and customers as well as among companies opens up opportunities for generating new revenue streams selling this data to partners, either directly or after some enrichment by intelligent data aggregation services. Delivery of dematerialized resources enables revenue streams based on digital services. Cloud capacities that are available but not used can be offered on the market, generating new revenue streams. These are revenues coming from controlling the access to digital people communities. The Google search business model is based on the exploitation of customer data, which allows Google to offer more targeted advertisement to customers. itunes gets worldwide revenues from media downloads. Amazon Web Services are an example for this strategy. Cloud capacities that it does not use for regular business are offered to partners. LinkedIn has a business model that is based mainly on the exploitation of customer data, which customers provide in exchange for access to the platform. In addition, the company offers charged communication services as part of a premium bundle. 26 / 58

27 Businesses Businesses network access monetization Revenues can come from controlling the access to the digital business network. Digital business models do not only allow collaborating with companies as partners but also with individuals. Through its platform, Uber monetizes its connection with individual drivers as partners for their business. Only by this digitally enabled partnering is it able to offer its services. Things Smartthings access monetization Revenues coming from controlling the access to a smart thing can be offered to third parties. This access can also be used to trigger services. Amazon Kindle Direct Publishing provides a fast-to-market access to authors with their Kindle device. Industrial pumps equipped with sensors trigger maintenance services. Pricing Models Data Adaptive pricing Companies can analyze available information in real time to continuously adapt the price to the market situation. Airlines adapt the prices for flight tickets according to the analysis of interested customers. Cloud Pay-peruse pricing for digital services These are revenue streams based on pay-per-use pricing models for digital services. The price decrease resulting from this can help to sell services that the customer could not afford earlier. Infrastructure-as-a-service services are paid for depending on usage of computing resources. In this way it becomes feasible for new customer segments to use these services. People Groupbased pricing An online community may allow people to pool together in order to get a higher discount. Bundling orders can make certain solutions more attractive to customers for whom they were out of reach before. Alibaba allows customers to form groups that can jointly purchase certain quantities of goods, getting a better price. Business Businessto-business (B2B) e-marketplace pricing B2B e-marketplaces enable aggregation of prices for a set of products from multiple suppliers (aggregation), volume discounts by forming groups of buyers (reverse aggregation), or auctions. PlasticsNet offers a specialized e-marketplace for buyers and suppliers in the plastics industry that allows for such a schema. 27 / 58

28 Things Smart things dependent pricing Depending on the particular smart device of the customer, pricing can be adapted for example, based on its use and the context. Roaming revenues can be considered as an example of context- and device-dependent pricing. 5.7 KEY PARTNERS Key partners are those organizations with which a company collaborates to generate value and realize its business goals. With the aid of partners, the company complements its own capabilities. Digital Key Element Data Cloud Value Driver Description Examples Data and content providers Cloud providers Partners might totally or partially collect, aggregate, analyze, and elaborate data to support their own value generation or delivery. Infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and software-as-a-service (SaaS) providers are potential new partners. Nielsen and Bloomberg provide useful business data. E-book authors provide content for publishers platforms. Cloud service providers such as Amazon, Microsoft, IBM, and SAP Third-party digital services can be integrated into a company s own offering to customers. The collaboration with cloud providers gives the company virtually unlimited computing resources (power, storage, and so on). 28 / 58

29 People Community providers Community providers maintain communities for general or specific purposes that they make available to their partners. Facebook established a large community that provides an access point for its partners. Businesses Business platform providers Business platforms help companies establish relationships and build up partnerships or supplier networks or both. Suppliers of materials are digitally connected via SAP Ariba solutions. AribaWeb is an open-source framework for rich Internet applications. Things Smartthings partners These are providers of hardware, software, and services who are partners for the Internet of Things. Internet-of-Things platform providers, smart-device producers, and so on Value Co-Creation People People networks (partner side) Individuals are no longer mere consumers but, following the idea of value co-creation, they become partners who can actively contribute to a network or platform. Macy s uses customer reviews to describe products offered online. In this way customers become partners who help it to distinguish its platform from competitors. Businesses Business networks (partner side) Partners are connected via a digital platform, providing physical products or services or both. In doing so, they increase the value of the platform and serve as partners of the platform provider. Ariba Network aggregates information provided by suppliers of materials. The more partners are taking part, the more valuable the platform becomes. 29 / 58

30 5.8 KEY RESOURCES Key resources describe all means that companies use to realize their business. Resources can also come from partners, or their own resources can be offered to partners, if the company does not use them exclusively. In digital business, such resources particularly concern the shared use of data but may also mean the access to digitally organized networks. Digital Key Element Data Value Driver Description Examples Data as a resource Access to public and a company s own, relevant, real-time, detailed, high-quality data is an asset that can be leveraged by the company or for a partner business. Ownership of or exclusive access to specific data can be a decisive competitive advantage. Data collected from retailers regarding individual purchases Amazon s recommendation system, based on previous purchases and generally available data, motivates customers to return to the company s Web site. This particularly concerns the knowledge of actual and potential customers. Cloud Access to diverse resources and crowds Due to its ubiquity, the cloud enables access to distributed resources. This includes access to individuals and their particular resources (crowd). Uber s drivers, Airbnb s hosts (physical service) People Access to a network of people People who are digitally connected can be leveraged as a resource for example, if the access to these people can be offered to other companies. Professionals registered in LinkedIn are a resource for LinkedIn s value proposition to professionals, recruiters, and advertisers. 30 / 58

31 Businesses Access to a network of businesses Physical assets, intellectual property, financial resources, workforce training, and contingent workforces sourced from digitally connected organizations via business networks can dynamically enhance a company s own resources. Digital enables hybrid resources as combinations of its own and digitally sourced resources. SAP Ariba solutions, SAP Fieldglass solutions Things Access to a network of smart things Putting sensors, communication lines, and actuators in existing assets and devices turns physical objects into data sources that can be used in a company s own business model. Tires with sensors are a resource for Michelin s fleet solutions. TomTom traffic observation network 5.9 KEY ACTIVITIES Key activities describe what companies do in order to realize their value proposition using their key resources. Digital resources and digitally enhanced value propositions often require specific key activities. Digital Key Element Data Cloud Value Driver Description Examples Data management Cloudbased process execution This covers data management activities and processes. Data scientists are key human resources for those activities. This is the execution of IT-enabled processes, potentially outsourcing part of the processes. Creation of custom algorithms for predictive analytics Cloud-based enterprise resource planning 31 / 58

32 People People network management Taking care of individuals as well as of entire online communities has become a key activity in the digital economy. Processes and activities that enable interaction and collaboration between individuals and groups can be critical for a company s own digital business model. A key activity of Facebook is to keep people on its platform for example, providing interesting information or encouraging data provision. Businesses Business network management Processes and activities that enable interaction and collaboration between companies and organizations can be critical for a company s own digital business model. Design, implementation, management, and operations of business-to-business networks Things Smartthings network management Processes and activities that ensure the interaction of a network of smart things and its management. An example is Apple s automated software update for mobile apps. 32 / 58

33 5.10 COST STRUCTURE Cost structure refers to the main costs of specific digital features that result from key activities or the maintenance of channels and customer relationships. Digital Key Element Data Cloud Cloud Cloud Value Driver Description Examples Transparency- and predictionbased cost optimization Lower marginal costs of digital assets Cost reduction by pay per use Cost reduction by digital makeor-buy flexibility Real-time, complete, detailed data makes business transparent and gives insights that are critical to optimize costs. Data can also be used for predictions that help optimize costs. Costs are optimized due to the fact that digital contents have a low marginal cost for reproduction and delivery. Using pay-per-use services can considerably lower operational costs. The use of digital services makes it easier to collaborate with other companies. This simplifies makeor-buy decisions and finding the most cost-saving way of operation. Supply chain network optimization Cost-optimization based on predictive maintenance E-books versus paper books Video streaming versus DVDs Use of cloud providers Electric cars rented online by driving hours based on the usage of smartphones Business process outsourcing. People Peoplenetwork effect Many online communities and people networks have the potential for economies of scale. In most cases, the marginal cost of adding one more user or customer to a people network is close to zero. Fixed costs per Facebook or Twitter user decrease with the number of users. 33 / 58

34 Businesses Businessnetwork effect Many business networks have the potential for economies of scale. In most cases, the marginal cost of adding one more partner to a business network is close to zero. Fixed costs per digitally connected supplier decrease with the number of suppliers. Things Smart automation Smart devices can help to save time and effort for example, if they transfer data instead of employees collecting this data. The Los Angeles Department of Water and Power uses smart metering to reduce costs SYNOPTIC VIEW OF DIGITAL VALUE DRIVERS The following table provides an overview of the identified digital value drivers. Synoptic View of Digital Value Drivers Business Model Component Value proposition Customer relationships Channels Customer segments Data Cloud People Businesses Things Data-based solutions Accelerated decision support and value delivery Customized channels Microsegments On-demand services Digital customer relationships Ubiquitous access Global reach People networks based solutions People network based customer relationships Community channels Digital consumers Integrated solutions Business network based customer relationships Platform channels Global reach by business networks Smart solutions Door-opener devices Smart-things channels Extended reach by smart things Value co-creation (customer side) People networks (customer side) Business networks (customer side) 34 / 58

35 Revenue streams Data monetization Digital service monetization Cloud technical infrastructure monetization Community access monetization Business network access monetization Smart-thing access monetization Pricing Adaptive pricing Pay-per-use pricing for digital services Group-based pricing Businessto-business e-marketplace pricing Smart things dependent pricing Key partners Data and content providers Cloud providers Community providers Business platform providers Smart-things partners Value co-creation (partner side) People networks (partner side) Business networks (partner side) Key resources Data as a resource Access to diverse resources and crowds Access to a network of people Access to a network of businesses Access to a network of smart things Key activities Data management Cloud-based process execution People network management Business network management Smart-things network management Cost structure Transparencyand predictionbased cost optimization Lower marginal costs of digital assets Cost reduction by pay per use People-network effect Businessnetwork effect Smart automation Cost reduction by digital makeor-buy flexibility 35 / 58

36 5.12 CONNECTIONS BETWEEN DIGITAL VALUE DRIVERS Finally, we have to point out that there is a multitude of relationships between value drivers. Most of them are cause-effect relations. For example, if one of the key activities consists of the analysis of customer data, it means that this customer data must be available. This means that they either come from a data provider as a key partner or that they are a key resource owned by the company itself. Both alternatives describe a relation between two value drivers, respectively. These relationships become particularly apparent when we go to company examples implementing these value drivers. In Section 6.2 we will show how relationships can be made explicit. By pointing out relationships, we demonstrate how digital technology is connecting value drivers and how the different key elements play together. 36 / 58

37 6. Graphical Representation and Examples In this section we start with the introduction of a graphical representation of value drivers reflecting the matrix schema presented in Section Such representation will allow us to systematically show the influence of digital technology in the business model canvas. This graphical representation also depicts the relationships between value drivers as a central element of understanding dependencies. How relationships can be made visible is described in Section 6.2. The purpose of the following description is to show a path for applying the developed concepts in a practical way. Although we can only provide a first idea, this description might be helpful to understand the usefulness of value drivers for practical design. 6.1 GRAPHICAL REPRESENTATION OF DIGITAL VALUE DRIVERS For use in collaborative sessions, we can apply graphical tiles to visually represent digital value drivers in a particular business model canvas component. For this purpose, we suggest new icons for digital key elements. Figure 6 shows how to use these icons as graphical tiles to represent a digital value driver (the example shows global reach, which is a digital value driver in the intersection of cloud with customer segments). Figure 6: Example of Using Icons As Graphical Tiles Business Model Canvas Component Icon Digital Key Element Icon Value proposition Data Customer segments Cloud Revenue streams People Channels Businesses Customer relationships Things Key partners Key resources Key activities Cost structure Global reach / 58

38 We recommend creating printed cards to display these tiles, the respective value driver descriptions, and corresponding key questions, which can be used in collaborative design-thinking workshops. Figure 7 shows a prototype of such a card. Figure 7: Possible Design of Digital Value Driver Cards (Gamification for Digital Business Modeling) 38 / 58