Digitalization and intelligent business

From CDs to MP3s, from film to digital photography, and from books to e-books – what if the digitalization of consumer goods over the last two decades was leveraged by the process of business?

This Harvard Business Review article uses the case of General Electric to describe several business model innovations resulting from digitalization. In the case of GE this means that its products are increasingly “smart”, namely equipped with digital sensors and controls that allow GE to track and build more targeted products. This “digitally-enabled, outcomes-based” approach generated for them an estimated $1 billion in incremental income, on a total of roughly $100 billion per annum.

Moving from efficient to intelligent systems is an important theme in business model innovation. Digitalization is not just a way to use data to improve performance. Digitalization affects all aspects of traditional business, so adapting to these changes is a matter of survival.

When deciding which process to turn from analog to digital, any business will typically start by considering which cumbersome processes in the business or industry are amenable to instrumentation and connectivity. Digitalization, however, not only streamlines steps in the value chain but also makes any costly process cheaper and reduces redundancy. By tracking and adding intelligence to its products, GE can leverage software to run the equipment optimally – this means increasing performance, specifically performance-monitoring, schedule maintenance, and management, all intended for a reduction of worker downtime.

Other examples include: Google’s powerful search engine, which has undercut the costs of information gathering; price comparison sites, such as Kelkoo or Skyscanner, which have undercut the cost of sourcing departments and travel agents; OnStar’s use of cloud technology and embedded intelligence for monitoring and maintenance, which undercut the costs of field maintenance crew. When going digital, one should aggressively target the cost structure.

One of the potential pitfalls of adopting digitalization is falling into the mindset of “big data looking for an application”. This can result from the assumption that since digital processes generate a lot of data, there must be value in it.

Instead of asking ourselves ‘how could the data we generate create value’ we ask: what are the customers’ needs, what are our solutions and what kind of data would enable us to deliver these solutions? As stated in the article: “[GE] had to abandon its traditional “box seller” mentality in favor of solution-based sales that focused on exactly how to enhance the customer’s operating performance”.

In addition, this continuous performance tracking via sensors enables GE to negotiate contract service agreements – these so-called performance contracts guarantee equipment performance targets and set pricing based on a clear understanding of financial value-of-use for the customer. Because GE has detailed insight in the performance of the equipment it installs for its customers, it can make accurate performance forecasts and translate these into profitable contracts.

By focusing on solving a need rather than creating one, data acts as a powerful tool rather than a distraction.

In industrial settings with deeply skilled B2B sales teams, it is possible to argue that digital transformation is not a substitute to traditional customer and B2B relationships and existing skill-sets.

Yet, how much of account management and customer interaction is just to maintain loyalty and lock-in? How many customers would prefer the online tools and interaction platforms to order products directly, or to solve issues by consulting online help? What if they just want to download the information they need, so they can make their own decisions?

An example of how digitalization is suppressing the need for traditional, highly-skilled sales teams would be AdWords, which significantly reduced the role of buying agencies by allowing advertisers to go direct. Another example would be E-Trade, a service through which retail investors are given direct access to specialized information that was previously only available to professional investors, such as specialized research and stock screeners. Digitalization here empowered the customer by getting rid of the middleman.

Another example is SAP’s cloud efforts, which only charges customers for the features they select, thereby significantly increasing its accessible market. Here again, digitalization empowers customers, as it allows them to customize the offering to their needs. The move from customer loyalty to customer empowerment is another key business model innovation theme, one that disrupts traditional business relationships.

Several businesses are adopting outcome-based revenue models. One risk associated with such contracts is to not be able to cope with potential downsides, such as the initial investment in tracking infrastructure.  Hence, small players (with a relatively small balance sheet) are at risk when venturing in this space.

However, detailed performance tracking allows for sophisticated assessment adjusted for all kinds of external factors, ensuring that the supplier is fully in control of the remaining factors addressed in the contract. As a result, performance contracting becomes less of a gamble and more open to small, specialist players, which we see emerge. For example, detailed tracking and Energy Performance Contracting (EPC) enable companies like Johnson Controls to guarantee energy savings to customers. Performance contracts illustrate a move from value capture to value co-creation, another key business model innovation theme.