3. Business Models and Digitisation

From this perspective (which is the perspective we choose to assume in this book), a business model can be seen as a simplified and clear representation of an organisation’s critical activities. By analysing its business model, an organisation can assess which activities are critical for creating and capturing value, and can thus also maintain competitive advantages. Put more simply, the organisation imagines the extent to which a certain business will be financially successful and thus viable. The business model describes those parts of the organisation that are necessary to generate products and identifies important supplier, customer, and market conditions. It is also important to remember that business models are dynamic, as relevant events within and outside the organisation constantly need to be evaluated and reflected.

For some products, it is pretty obvious at first glance what the value proposition is, but if you think about it, there are often several dimensions to associate with it. Take, for example, the value of foods such as cheese, cereals, and bread (and even those which are lactose-free, gluten-free, or made from alternative ingredients). Their obvious value is that they are fuel for our bodies because they provide us with energy and vital building blocks for muscle, bone, and more. If the value is obvious, however, then why do food producers and grocery stores bother to design packaging and advertise their products? They do so largely because they want customers to choose their products over those of their competitors. Here, the value proposition is crucial. How it is defined—and communicated—makes a difference. Food is much more than fuel, it is also enjoyment, community, and cultural expression (why else would holiday meals involve special dishes?). This type of analysis can be applied to most products, so a value proposition needs to undergo a thorough analysis before it can be formulated and communicated.

For example, consider the car as a product. A common value of all cars is that they enable us to transport ourselves from Point A to Point B. This is such a basic and expected value, however, that car manufacturers do not promote it in communications regarding why we should choose their car. Instead, they emphasise other tangible or intangible features, such as safety, speed, reliability, and accessibility, as well as more subtle qualities, such as a sense of exclusivity (you can become part of a small, select crowd of happy owners) and/or wisdom (you are a sensible driver).

IT and digitisation have a major impact on value propositions. The carmaker is a good example. The safety systems in a car are in part purely physical, such as bodywork and brake discs. But just as the design and production of a car’s security systems are accomplished through IT, the systems themselves are also controlled largely by digital technology. Sensors that perceive a risk of collision can activate automatic braking and if a crash occurs, then a digitally controlled belt tensioner and airbags are activated to relieve its effects (security). Similarly, a car’s digital systems contribute to more efficient fuel injection (acceleration and speed as part of the driving experience) and the optimal utilisation of drive systems (operational safety, performance, and accessibility). Digitisation contributes in a crucial way to enabling the value proposition of modern cars.

The digitisation of business models also adds another dimension: value propositions these days tend to have a greater service content. For the car manufacturer, this could be digital navigation systems (GPS) or the fact that a mobile phone wirelessly connects to the car’s audio system and is controlled through a few keystrokes on the steering wheel. GPS features can also be used to enable traceability as part of theft protection, or so that in the event of a collision, a signal to an alarm centre is triggered automatically. When abroad, a help desk function can assist with the remote entry of destinations into the navigation system. Within the not-too-distant future, the sound system may be controlled by eye movements via a head-up display accessed through a pair of glasses included in the car’s equipment.

When 6G data communication technology and the Internet of Things are fully operational, they will enable us to consume the car as a service, and the majority of us may rent or lease a vehicle instead of owning it. The price model, and how we pay for the service, can then be differentiated according to vehicle data (speed, mileage, braking wear and other aspects of driving style, climatic conditions, etc.) that is communicated to the service provider. Someone who drives without care will have to pay for it, but for someone who applies eco-driving, the cost will be significantly lower. We could all be part of a carpool, where self-driving, electric vehicles can be ordered via an app for collection at any address within a certain geographic area. This, in turn, would require substantial development of the value proposition, along with the digital, physical, and organisational systems that would enable it.

For the car manufacturer, the manufacturer of seats or airbags is an important subcontractor. Without these products, there is no car and thus no value proposition. However, if the products are relatively standardised, then the subcontractor can be changed, for example, to reduce purchasing costs. A car manufacturer, on the other hand, could be in a strategic long-term alliance with a consultant specialising in software development for controlling car engines. This requires in-depth knowledge of different car models, with the consultant being involved at a fairly early stage of the research and development phase.

Digitisation clearly affects the activities of the business model. When a car manufacturer purchases car parts such as seats and airbags, it is important that they are delivered at the same rate as the cars in which they are mounted. One of many ways to reduce the cost of resources is to have as little stock as possible, which is usually referred to as just-in-time production. To schedule deliveries with production, an enterprise resource planning system (ERP) at the car manufacturer can keep track of stock levels through radio frequency identification (RFID) tags, barcodes, and similar digital reading techniques. When they reach a certain critical point, an automatic order is made to their subcontractors. More proactively, the orders will be based on the actual production plan. If the subcontractor is also a partner, it is probably connected and logged into the ERP system, which enables it to access the necessary information and take both long-term and current plans and deviations into account. This type of seamless information flow between the subcontractors and manufacturers within manufacturing is also known as Industry 4.0. Here too, 6G technology and the development of the Internet of Things play an important role, as they enable every product in the production chain to carry with it information about where to go and how. The goal is a production chain with shorter conversion and lead times, fewer errors, greater flexibility, and less time-consuming programming.

It is not only cooperation in production processes that is affected, however. Digitisation also enables brand-new collaborative relationships. For example, millions of camera-equipped cars on the roads, which will give drivers support, can also be used to provide information about road conditions to those responsible for road maintenance on an ongoing basis. GPS data can, in aggregate, provide up-to-date images of traffic flow that enable better control of rush-hour traffic in metropolitan regions.

For our example, the car manufacturer, all internal activities to achieve a value proposition are dependent on resources in the form of various IT solutions. Design is achieved using computer-aided design (CAD). The testing of bodies, braking systems, motors, and so on, is conducted with the support of digital technology: first simulations, and then, in physical tests, different types of sensors collect measurement data for evaluation. Similarly, computer-controlled industrial robots have long been an important part of production, where they ensure quality and maintain time-efficient production. People are, in the car industry as well as in other industries, still an important resource for providing a value proposition, but they increasingly interact with IT in performing their roles.

Car dealers are an example of a business model that is not necessarily represented by a single organisation. Many car dealers are independent organisations who, through an agreement with the car manufacturer, have the right to convey the car manufacturer’s deals. In a way, therefore, the reseller becomes a customer, because they buy the car from the manufacturer. At the same time, it is a partner, because good dealers are an important resource that benefits from long-term collaboration. The car manufacturer’s value proposition is not primarily formulated for the dealer, but for the final customer, that is, the car buyer. Of course, there is a proposition from car manufacturers to dealers and vice versa—why else would they do business with each other?—but central to the car manufacturer’s business model is the value proposition for the car customer. This is an example of how an actor (the car dealer) can have multiple roles within a business model. This may indicate that the actor is of special strategic importance to the organisation.

Digitisation also affects customer relationships and channels. We found above that these are often divided into groups or segments. Such grouping/segmentation does not depend directly on IT; however, digital technology can be a great support for analysing lifestyle patterns. To achieve such an analysis, you often need to combine several extensive data sources, which is known as big data analysis. In our car example, big data analysis requires access to data and skills that the car manufacturer may be lacking but that some other partner may have.

IT can enable an organisation to manage customer relationships via several media. As we mentioned above, the customers of dealers who meet on-site in a car showroom are probably meeting in the most important customer channel for the traditional car manufacturer. Before the customer decides to visit, they will most certainly have sought out information about different car models. The websites of the car manufacturer and dealer, via price comparison sites and discussion groups on social media, allow potential customers to find documentation on equipment packages, properties, prices, and price models (e.g., buy or private lease). Both the car manufacturer and the dealer should therefore determine which digital channels they can affect either directly (their own websites) or indirectly (e.g., where do they appear in Internet search engines?)

There are also several examples of how digitisation enables new methods of meeting customers. Customer databases are important for creating additional sales, for example, through regular emails or post about service and upgrades to the car system. Car sensors refine the opportunities for additional, situationally tailored sales announcements, and instrument and communication systems in the cars enable new ways to present such offers. Tesla, the electric-car manufacturer, offers the consumer cars directly from the car manufacturer. Not having an existing dealership relation to cultivate and protect, and not seeing any existing dealers with extensive knowledge of the type of offering Tesla provides, their decision to break with the dealership tradition is less complicated than it would be for an established car brand.

Both car manufacturers and dealers can personalise customer relationships to a greater extent with the help of all embedded IT. This is already happening in the sales of commercial vehicles. Data legislation and/or customer reactions might prevent it (owing to privacy issues), but digital technology makes it possible. If the car, as we pointed out above when describing the value proposition, is connected to the Internet of Things, then data on mileage and driving patterns (acceleration, braking, speeds, and more) are regularly transferred to a database held by the manufacturer. This data is then sorted and analysed based on the fact that each car has a digital unique identity in the database. This means, for example, that service intervals can be adjusted to actual driving style and to the climate the car has mainly been used in, rather than simply to distance or time. The provision of customised preventive maintenance is well within reach. Furthermore, companies can communicate with the driver of the car and deliver weekly or monthly reports about how their driving affects the car and tips about how their driving style can be developed to tax the car less (although this may not be appreciated by all drivers).

As more and more individuals have access to various digital communication platforms (desktop, laptop, tablet, and smartphone), business models that are entirely based on digital information flows have emerged. Without IT, they would not exist in their current form.

In parallel with wired communication technology, the first steps toward wireless communication were taken. Innovations like the use of electromagnetic waves enabled the development of radio transmissions for one-way communication, often broadcast, and for communication between two units, for example via so-called “radio comms”. However, it took until the mid-1980s before the mobile phone, a combination of the innovations of the telephone and radio, was launched on the consumer market. At the time this market was quite small (among other things because the phones weighed about 3.5 kilos, had limited capacity and cost in current monetary value about ten times more than a standard smartphone does today) and the telephones were used to make voice calls. The mobile phone innovation developed rapidly in parallel with wireless technologies for data transmission and communication via the Internet. The most obvious leap for mobile phones was to smartphones, where the big breakthrough was Apple’s iPhone, which in 2007 was the first to successfully rely entirely on touch-screen technology, with fingers used as pointing devices (although touch screens of different types had then been around as user interfaces on different devices for over forty years). This brings us up to today, and to the emergence and growth of digital business models. We will now categorise and give examples of some of these business models.

As we noted above, few, if any, digital business models are entirely new. What causes them to emerge and be successful is that they either develop existing, or create entirely new, value propositions. Metaphorically, what these value offerings have in common is their character as bridging joints.

3.4.2.1. Bridging Joints

Listening to music was, for a long time (until the late 1970s and early 1980s), mostly a stationary experience, as the listener had to be in a certain place, where a record player or a tape recorder was available: availability was very limited. Cassette tapes and portable cassette players enabled music consumption to become more portable and thus increased accessibility. Listening was also individualised, as listeners were able to choose which songs a cassette tape would contain by recording a so-called “mixtape”. This analogue technology to some extent reduced the joints in the value offering, however, they remained in place because they represented the three separate business models involved in making the music portable: the record label (which offered the predefined products LP disc and pre-recorded cassette tapes), the manufacturers of recordable cassette tapes, and the manufacturers of portable cassette players. This made it necessary to spend a great deal of time in order to put together a music selection that was adapted to your own tastes.

Music consumption started becoming digitised with the introduction of the compact disc (CD), but joints remained, in the form of availability and time, although they decreased somewhat in scope. There were still three actors involved, however: music publishers, the producers of recordable CDs, and the manufacturers of portable CD players. The next digital innovation that further reduced the joints was the mp3 format and the mp3 player. Portable CD players disappeared and were replaced by mp3 players with a completely different capacity to store music, and accessibility increased with the ability to create an individual playlist on a simple laptop computer.

The joint of time remained, however, although it decreased slightly. In order to create playlists and download music to the mp3 player, one had to copy music from CDs to a playback program on a computer (for example, Windows Media Player), which could take considerable time. Another option was to use Internet-based sites that made music available. At first, sharing sites and so-called pirate sites (illegal downloads) appeared, but eventually, niche commercial services, such as iTunes, also emerged. The ability to download music from the web further reduced the joints, as supply and accessibility vastly improved. Music still needed to be downloaded to a computer before it could be transferred to the particular platform—the mp3 player—which made it portable, however, and this was something that still took some time.

When smartphones were successfully introduced in 2007, the need for mp3 players gradually disappeared, because the music player was now on the phone. In combination with the improved ability to transmit data over the Internet (4G communication technology was being introduced), opportunities were created to both increase accessibility and reduce download time (streaming), to organise and listen. Spotify identified this opportunity as a music intermediary, and that is central to its value proposition. Today, the joints of availability and time are, thanks to Internet-based music intermediary services and smartphones, by and large non-existent. Certainly, there are still three vendors involved—the music service, the Internet operator, and the telephone provider—but in such a way that the tripartite structure is not a problem for listeners. Today, we can listen to what we want, when we want, without delay, and without being tied to a dedicated music or audio platform. Another important contribution in this context is the fact that from the music consumer’s perspective, the physical borders between the actors, music publishers, and platform-makers that previously needed to be overcome, are largely non-existent. This is very different from the conditions during the era of the vinyl LP disc and cassette-tape recorder.

Digital business models are based on bringing together individuals in need of a particular product and the suppliers of the product in question. Brokers are found in many industries and existed long before society was digitised, but they were also more geographically limited. Record labels, record stores, records in a department store, and mail-order vendors are all examples of music mediators.

Thanks to their digital brokerage service, companies like Spotify can design a business model that differs from these earlier intermediaries on several key points. In the section above, we described changes in the value proposition achieved by Spotify. Even customer segments are changing because Spotify is not geographically limited, except by intellectual-property-rights restrictions, and can offer a range that appeals to many categories of music consumers. Customer relationships change when their offers are personalised and the customer channel is completely digital. Revenue streams come via advertising revenues and fixed subscription fees, which allows, among other things, a more even flow of payments. The service they offer also means that their agreements with music publisher partners differ from the business models of traditional music intermediaries. For Spotify and its direct competitors, the ability to offer (close to) the world’s supply of music is of central importance. Instead of a narrow selection of music, the norm is now that users should be able to find anything in the catalogue. As a result, the activities and resources of the business model differ substantially from previous music intermediaries. Skilled programmers and proprietary software are now key resources that cannot be easily replaced. Without them, there would be no Spotify.

Uber is an example of a transport service that links customers in need of transport with drivers who are interested in earning an income. This has also previously existed (and still does) in the form of taxi companies with a telephone exchange. What is new in Uber’s digital business model is that if the availability of vacant cars increases, then consequently the time it takes to get hold of one decreases—at least in a metropolitan region. The service also develops the value proposition by simplifying payment (deducted from a registered credit card) and makes the connection between driver and rider safer, since both can see each other’s rating before closing the deal. The customer knows what the trip will cost, roughly, and where cars are available before the order is completed. This creates added value for the customer, in the transparency of availability and cost, and possibly in the knowledge that the cab will accept the prearranged mode of payment. Uber offers fast, flexible, safe, and accessible transport. New conditions are thus created because there are new customer segments. Customers that may have been hesitant about hailing a regular taxi directly from the street can now use Uber’s services. As in the case of Spotify, customer relations are also altered. To become a customer, people have to register, and as a result, their orders are entered into a database, enabling Uber to analyse their travel patterns over time (and thus also convey more customised offers) and the aggregate travel patterns in real-time, to help direct cars to where customers are or can be expected to appear. The customer-channel aspect of the business model is concentrated on one channel, the app. Anyone who wants to join as a driver is a partner, which is reminiscent of how some taxi companies are organised. Uber cooperates fully with individuals, however, while some taxi companies collaborate with taxi owners, who in turn hire drivers. There are relatively few resources and activities required by the business model, but these are nevertheless absolutely crucial for operations. Without the software to mediate the service, and developers to optimise it, there would be no Uber.

Zalando is in many ways a traditional mail-order merchant in clothes and accessories, but its business model is mainly digital. The business is based on digital interfaces that offer products from other companies, and they do not produce or offer any product of their own. They therefore associate with a large number of suppliers and partners, and Zalando’s internal activities and digital resources are focused on optimising customer offers. Unlike the two examples above, however, Zalando’s business model also relies on physical resources, such as their central warehouses where goods are stored whilst awaiting transportation to customers. No matter what size and what brand, Zalando wants to be able to pass it on to the customer. They also compete on price by partnering with price comparison sites. This develops the value proposition as it increases accessibility and reduces the time required by a customer to find an item, and it may also enable the customer to buy it at a lower price. Like the other service providers, Zalando’s digital business model enables them to build knowledge of their customers, and thereby develop relationships with them on a seemingly individual basis. There are many customer segments, and the customer channel is largely Internet-based, although physical delivery—and returns—are also important.

Accessibility is fundamental to the value propositions of smaller, focused e-retailers who, unlike Zalando, specialise in one or a few products. No matter where a customer is located, they can (as long as there is Internet access, they have a functioning communication platform, and—for physical goods—can take delivery of shipments), find exactly what they are looking for and have it delivered, even if the retailer is currently on the other side of the planet.

3.4.2.3. Network Builders

We chose to highlight six examples in the section above, but of course there are many more out there, as well as additional dimensions of the impact of digitisation on business models. Our categorisation and our examples may be seen as narrow. Companies like Spotify, Uber, and Zalando also share network-building features, and the Facebook, YouTube and crowdfunding services are also mediators of information and financial resources. Such definitions depend on the perspective taken, and our starting point in the examples above was how the organisation is primarily seen.

An important point of our categorisation, connected to the examples of industries, is showing that digital business models generally belong to a traditional industry that has been around for a long time. With their digital business models, however, the above examples have clearly come to influence their respective industries in different ways. Spotify has changed the way we consume music, Uber our view of what a taxi service is, and Zalando has set a standard of accessibility that is difficult for many retailers to live up to. Facebook has largely removed the geographical boundaries of social networks. YouTube has had a particular impact on younger consumers, with many people foreseeing the death of traditional linear television, and with it a number of today’s dominant media companies who may soon no longer receive sufficient advertising revenue. Crowdfunding opens doors to private financing that few have otherwise been granted.

Regardless of the category of digital business model, there are still some basic common denominators worth mentioning. These have arisen because they significantly affect the experience of customers/consumers in their apprehension of time and availability. They also, unlike our initial car manufacturer example, have a non-linear character. This means, among other things, that an actor affects several different parts of the business model by being a customer at the same time as being a supplier, and participating in activities that create the value proposition itself.

This chapter introduced the business model concept and its relation to an organisation’s goals and strategies. With that as a starting point, we offered examples of how digitisation affects existing business models, from the content of the value proposition to partners, activities and resources. We illustrated the possibilities for new customer segmentation and development of customer relationships and customer channels, as well as how this affects revenue streams and cost structures.

We also discussed digital business models, which have emerged thanks to the ongoing digitisation of society. These have some common features, including the fact that they help to reduce the ‘joints’ of life through increased ease of access to products by reducing the time spent on accessing them. They can also be understood as mediators of products and/or as network builders.

• Osterwalder, Alexander and Pigneur, Yves (2012). Business Model Generation: A Guide for Visionaries, Pioneers and Challengers. New Jersey: Wiley.
• Osterwalder, Alexander; Pigneur, Yves and Bernarda, Gregory (2014). Value Proposition Design: How to Create Products and Services Customers Want. New Jersey: Wiley.

An important part of both strategic development and the operationalisation of the business model is to identify how customers should pay and how the organisation should charge for their products. The following articles and book discuss the concepts of business ecology, business model and price model, and how they relate to each other.