Developing digital business opportunities: What digital companies do differently
What do “digitally transformed” companies know about the future that other companies do not? 13 key dynamic capabilities for successful data-driven companies seem to be essential for digital success.
The success of companies that have transformed their analog business model into a digital business model, may seem like an enigma for the companies struggling to know how to make the transition. What do “digitally transformed” companies know about the future that other companies do not? This article will explore what research tells us about how successful companies develop the capacity to identify and adapt their business model in line with changing market conditions.
How companies create and capture value
Companies differ in how they make money through their strategy and business model. Some offer unique and differentiated products such as Tesla Motors, while others offer similar but low-cost solutions, like Ryanair. Some companies also successfully offer a hybrid version of the two, such as IKEA with low-cost Swedish design furniture.
No matter the type of strategic positioning, transforming an analog business model into a digital business model has proven to be very profitable for the companies who do[i]. New sources of revenue, a larger online customer audience, and data-driven analytics all promote higher scalable earnings. Examples are New York Times’ 3 million digital subscribers[ii] and Best Buy’s digital strategy tripling its stock price in 7 years[iii].
Capacity to change
The challenge that non-native digital companies need to overcome is figuring out how are they going to transform themselves, and into what? Making major investments into digital solutions may require diverting budget from the current business. Jeopardizing their current source of business without a predictable outcome and a clear plan on how to get there can make mangers uncomfortable. This is natural and reducing risk is part of their responsibility.
However, some companies have managed to overcome this obstacle. Some have managed to identify new digital opportunities and thrive as a result of it. And fortunately, success leaves clues. Recent research into successful companies reveals that they have developed a combination of dynamic capabilities[iv] that allows them to better predict the digital future and adapt to changing market conditions. I will present the findings and insight into the remaining sections of this article.
Implementing digital business opportunities
Being able to identify new digital business opportunities is a capability that can be learned, and companies can become better at it over time. However, identifying opportunities is only the first part. Companies also need to act on the opportunity and successfully implement it into the existing business. All 3 stages of these dynamic capabilities can be structured into sensing, seizing and transformation capabilities, each requiring a different set of internal skills.
13 key dynamic capabilities for successful data-driven companies:
- Early recognition of market dynamics and trends
- Integration of customers into the ideation phase
- Modeling the value proposition and value capturing mechanisms
- Involvement of external partners during the ideation phase
- Appropriate organization of development competences
- Agile working mode to develop business model
- Continuous customer integration into the development process
- Effective implementation of key IT-activities
- Future-oriented organizational design and transformation
- Sustainable provision and development of key competencies
- Enhancing the know-how exchange and internal communication
- Intensive customer support and interaction
- Scaling the business model through partnerships
In order for an organization to start developing these skills, a study by researchers at Friedrich-Alexander-University Erlangen-Nuremberg investigated 26 companies that have successfully adopted new data-driven business models, with the goal of identifying which common dynamic capabilities and activities were essential for their digital success. The results of their study point towards 13 distinct capabilities within each of these 3 phases to be key factors in successfully data-driven companies[v].
Once a digital business opportunity has been identified, seizing on that opportunity requires a different set of skills. Seizing requires the ability to appropriate organization of development competences, agile working mode to develop business model, continuous customer integration into the development process, and effective implementation of key IT-activities. The companies focused on building cross-department teams between the market specialists and IT specialists in order to develop optimal solutions for their companies. The development is agile and a continuous focus on feedback from customers during development is essential.
The last phase is the capability of transformation. It focuses on the ability to adapt and renew the organization and resource base in order to remain competitive. Future-oriented organizational design and transformation, sustainable provision and development of key competencies, enhancing the know-how exchange and internal communication, Intensive customer support and interaction, and scaling the business model through partnerships. These capabilities reinforce the digital culture and help the organization build the capacity for change further into the future.
In sum, companies seeking to transform their analog business model should seek to imitate the capabilities and skills of already successful businesses by developing the same 13 capabilities. These are universal for all companies and demonstrated effective for making the digital leap.
[i] Westerman, G. et al. (2012) ‘The Digital Advantage: How Digital Leaders Outperform their Peers in Every Industry’, MIT Sloan Management Review, pp. 1–24.
[iv] Teece, D. J. (2007) ‘Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance’, Strategic Management Journal., Mezger, F. (2014) ‘Toward a capability-based conceptualization of business model innovation: Insights from an explorative study’, R and D Management, and Foss, N. J. and Saebi, T. (2018) ‘Business models and business model innovation: Between wicked and paradigmatic problems’, Long Range Planning.
[v] Witschel, D. et al. (2019) Riding on the wave of digitization: insights how and under what settings dynamic capabilities facilitate digital-driven business model change, Journal of Business Economics.