HOW A NEW KIND OF BUSINESS MODEL CREATES DIGITAL WINNERS Featured

30 September 2022

Back in the “olden days”, it was obvious that a firm needed to choose between two types of business architecture. Yet during the 2010s, something strange was happening. Firms were beginning to use digital technology to achieve organizational ambidexterity at scale. Such firms could generate complex interactive operations with very large numbers of customers.

Back in the “olden days” of 2005, it was obvious that a firm needed to choose between two types of business architecture, as business guru Geoffrey Moore explained in his famous 2005 article in Harvard Business Review, “Strategy and Your Stronger Hand.” “There were really only two organizational [business models] to choose between,” Moore wrote. You either had high-value complex, interactive operations with a small number of customers, or high-volume operations with a large number of customers, each paying very little. 

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Figure 1 Two types of business architecture: complex operations and volume operations STEPHEN DENNING

 

Yet during the 2010s, something strange was happening. Even as Moore was writing, a third business model that scaled was in gestation. Firms were beginning to use digital technology to achieve organizational ambidexterity at scale. Such firms could generate complex interactive operations with very large numbers of customers.

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Figure 2: A digital winner business architecture emerged in the 2010sSTEPHEN DENNING

 

In due course, firms with this ambidexterity became the digital winners of the new era—Amazon, Apple, Facebook Google, Microsoft, and Tesla. The result was huge profitability.

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Figure 3: 10 year total return of S&P500 vs AMZN, AAPL, GOOG & MSFTSTEPHEN DENNING; SEEKING ALPHA

Three Different Business Architectures

To understand the interactive volume model of the digital winners, let’s start by comparing it to the older models of “complex operations” and “volume operations.”

1. Complex operations
Complex operations, such as IBM, Cisco, SAP, and McKinsey, catered to small numbers of wealthy customers with difficult problems. They provided unique solutions for each customer situation. They worked with customers who were willing to pay a high price for personally interactive service from experts. Value was created by interacting with customers, understanding their needs, and developing solutions to meet those needs. Vendors had customers in the thousands, not millions, with a small number of transactions per customer per year, for a very high price.

2. Volume operations
By contrast, volume operations focused on delivering standardized solutions for large numbers of customers for a relatively low price. Firms addressed generic customer situations—simple repetitive jobs being done for all customers. Think Nestlé, Procter & Gamble, and Kellogg. Customers got a standardized product. Value lay in meeting a common need. Vendors sought millions of customers with tens or even hundreds of transactions per customer per year, typically for a few dollars per transaction. Interactions with individual customers were costly and to be avoided. The firm crafted its products based mainly on quantitative surveys and market tests.

3. Interactive Volume Operations
Then in the 2010s. the third type of business model emerged: interactive volume operations. Some firms began providing interactive solutions for millions of customers for a very low price, or even free. Think Facebook or Google providing myriad solutions at no direct cost to the customer, while monetizing their knowledge of customers through advertising. Or Amazon has a unique interactive relationship with millions of customers, about whose wishes and interests Amazon knew a lot, and could use that knowledge to offer new products in a frictionless manner. The business model often enjoyed massive network effects.

The interactivity came, not from interacting with human beings, but rather by interacting with the product or service itself.

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Figure 4 Role of interaction in each business architectureSTEPHEN DENNING

 

Although the interactive volume business model could operate with huge numbers of customers, its mode of operation was very different from the traditional volume model, which was based on generic, standardized inert products, where the focus was on eliminating any variation. Learning about the customers was carried out by quantitative research and market testing.

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Figure 5 How each business architecture delivers value STEPHEN DENNING

A Key Feature Of The Interactive Volume Model: A Different Mindset

The huge financial gains made by the digital winners tempted traditional firms to emulate their success with “digital transformations,” which involved large investments in technology and IT staff. Yet the initiatives were generally disappointing. That was because the new way of operating wasn’t just a matter of technology. It involved a radically different management mindset.

Thus, both the older volume operations and complex operations models had a traditional business mindset. The goal of the firm was to make money for the company and its shareholders. And the structure of the firm was a vertical hierarchy of authority, with units operating in silos.

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Figure 6 The role of management mindset is different STEPHEN DENNING

The Role Of The Three Models

All three models play a role in today’s economy.

1. Complex operations
Columbia University management professor Rita McGrath points to Steve Blank’s book “4 Steps to the Epiphany,” and his blog: in the ideal complex systems, when customers had a problem, they tended to be “aware that they had a problem, had been actively looking for a solution, had put together a not-so-great solution, and had or could acquire a budget.” Credibility was key. “For their part,” writes McGrath, “complex systems buyers want to know why they should trust you to solve their problems versus available alternatives.”

2. Volume operations
The goal in volume operations was to eliminate any barriers to consumption by users and encourage repeat purchasing and word-of-mouth referrals. This meant removing any variation or customization. In this model, designers and engineers were unlikely to share traits with millions of customers. Market research was quantitative and experimental market tests. Significant parts of the economy are still operating in the volume operations model.

3. Interactive volume model
Nevertheless, the interactive volume model can be an unexpected threat to the volume customer model. Even the famed management theorist Clayton Christensen said at the time of the release of the iPhone in 2007 that it “wasn’t truly disruptive.” It was “a product that the existing players in the industry are heavily motivated to beat,” and that “its probability of success is going to be limited.” Five years later, in 2012, Christensen was still saying that the iPhone would soon succumb to price competition and modular knockoffs. “History,” Christensen said, “speaks pretty loudly on that.”

Christensen’s “loud lessons” from history, in which one firm’s products compete against another’s, didn’t apply to firms that are innovating in the digitally interactive mode. An entirely new game was being played. In this new game, innovation could transform many other products and disrupt the dynamic of the volume operations model.

This article was originally published by: FORBES

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