Business models and value innovation

Business models & value innovation, and how digitization impacts them

Introduction

The rapid growth of digital technology and software application use is fundamentally changing the way customers interact with businesses while impacting on both the strategy and business models of firms. More and more established companies and start-ups are using digital, to create a new source of revenue, to provide more value to customers and of course, change business models. This has had a profound impact on the way businesses interact with customers, the way they collect and share information, as well as, compete with competitors. Therefore, the following will examine why many of the most disruptive and innovative businesses of recent times have harnessed ‘digital’ and used it as an enabler, or as a fundamental component, of the new businesses that they have created.

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The impact of digitization on business models & value innovation in the digital age

New and old technologies have, for example, enabled the emergence of the sharing economy, leading to completely new categories of business model innovations i.e. Airbnb and Zipcar. Similarly, the introduction of new technologies like blockchain can lead to business model innovation, by changing amongst others, the supply chain management (allows to track products from their origins), as well as, in the healthcare industry (combining access to patient records). Also, new design tools (3D printing) and digital fabrication created the emergence of new innovations in the service industry, i.e. medical services, and expanded the area of services and customized products which can be offered to customers.

Digital has often than not, required established organizations to reconceptualize their innovation strategies and business models. Often, these firms find that new entrants into their market are leveraging new business models, digital applications, and technologies, as well as crowd-sourcing models, using design thinking, lean start-up methods, rapid prototyping, and agile workflows. By applying digital technologies, for example, value innovation is near-costless and requires little or no research and development1The World Economic Forum (2016). ”The Global Information Technology Report 2016” [Online] The World Economic Forum. Available at: http://www3.weforum.org/docs/GITR2016/WEF_GITR_Full_Report.pdf - p. 4 [Accessed 19 May 2020] . Some good examples of companies disrupting their industries without investing heavily in R&D, include Zipcar, Facebook, YouTube, Airbnb whom all invented value propositions and business models based on open source technology stacks. Furthermore, digital technologies have also potentially allowed restructuring production systems resulting in major cost cuts, while increasing the quality and economics of scales for business operations. This via innovative strategies, such as inventory tracking, supply chain automation, and matching supply and demand, best embodied by online retailers such as Asos and Argos.

Digital infrastructure real-time monitoring has also reduced business operation downtimes, with new centralized processes available for back-office operations such as accounting and customer relationship management software. It also interconnects other areas of the business in the value chain; by being able to form better decisions on the organization and on customers, by analyzing business data.

Digital technologies/software applications have also reduced barriers to entry into markets and for setting up new start-ups. With the availability of Cloud Computing, it has presented significant opportunities for modern-day businesses to eliminate much of the capital expense to buy computer hardware. It has also allowed start-ups for an affordable monthly fee, to access IT infrastructures that not long ago would have been inconceivable and only available for budgets that could invest in multi-million data centers.

Gaining a foothold and advertising in new markets with minimal budgets through targeted digital campaigns has also never been easier. Google AdWords and Facebook Ads are such digital channels, where anyone and anywhere in the world can be targeted through digital campaigns within just a few minutes. The introduction of social media as a potential new marketing channel a few years ago, introduced verticals such as social selling, viral campaigns, and inbound marketing while allowing businesses to build social trust for their brand. This has arguably leveled the playing field between start-ups and large enterprises.

When running digital marketing and social media campaigns, it also provides the opportunity to acquire and leverage the knowledge of consumer wants and needs through marketing and big data analysis tools, such as Hootsuite, Google Analytics, or BigQuery. This allows organizations to better understand the preferences of the intended target audience, which prior to the digital revolution, was very time consuming and costly. As a result, firms can now create better services and products aligned with customer demands. It also enables better personalization of marketing campaigns tailored closely with customers’ needs and wants.

By understanding customers’ wants and their needs, start-ups, and businesses can also explore new routes to market via established e-commerce platforms such as Amazon, eBay or even Alibaba. These platforms provide even the smallest of start-ups, a one-man business, the capability to enter new foreign markets, making it possible to reach a worldwide audience in a matter of minutes without heavy marketing investment. The barriers to international markets are also removed through these online platforms, as well as, reducing or removing the red tape to enter new markets. This used to be an intricate part of global business, as often local business entities need to be established and international distribution infrastructure had to be built.

It has also never been easier for start-ups and businesses to implement a variety of payment solutions such as PayPal or Amazon Pay, without having to develop their own payment processing systems. Open-source e-commerce software such as Magento has made it simple to set up an e-commerce platform and a fully working webshop can be launched within a few hours. The great thing about platforms such as these is that they can scale to a business’s needs as it grows.

Airbnb, an example of a value innovator, digital disruptor and user of new business models

Airbnb, an online rental accommodation marketplace, perhaps best epitomizes a value innovator and digital disruptor, by using digital as a critical enabler and a fundamental component of its value innovation.

It deployed lean start-up, design thinking framework, and Blue Ocean Strategy; to effectively create and now dominate a completely new market segment within the sharing economy. It leveraged open-source software and free online classified platform such as Craigslist, to increase reach and market share without having to invest greatly in its own infrastructure while building its brand and presence through social media with no significant budget2Airbnb.io (2020). ”Open Source” [Online] Available at: https://airbnb.io/projects/ [Accessed 23 May 2020] , 3Wheeler, D. (2014). ”4 Digital Marketing Strategies: An Airbnb Case Study” [Online] Available at: https://www.searchenginejournal.com/4-digital-marketing-strategies-airbnb-case-study/95007/#close [Accessed 20 May 2020] , 4Virtue Zone (2018). ”Disrupting the market: is it essential for business success?” [Online] Available at: https://vz.ae/blog/disrupting-the-market-is-it-essential-for-business-success/ [Accessed 20 May 2020] .

For example, Airbnb’s basic website and architecture were designed by the founders themselves, practically saving thousands of dollars in development fees before even launching, which could have put the business idea in jeopardy5Turen, R. (2017). ”Airbnb: A case study for our times” [Online] Available at: https://www.travelweekly.com/Richard-Turen/Airbnb-case-study-for-our-times [Accessed 20 May 2020] . This basic website was enough to post their own apartment on it, by renting air beds and serving breakfast (the concept of Air Bed and Breakfast) to conference attendees as an alternative to expensive accommodation.

Furthermore, this enabled the new start-up to offer an alternative to re-thinking value creation, which created new behaviours in value consumption. It was able to disrupt the traditional travel industry by creating new sources of value without the extra costs. It also targeted the low-end foothold, people who wanted to travel but could not afford hotel rates. It didn’t own any property, as it used to access private resources such as homes, nor did it employ operating staff which lowered cost structure and enabled cheaper prices that appealed to the cheaper end of the market.

As the sharing economy is not capital intensive, it lowered the overhead for not only renting out spaces in houses but also required only basic computer skills to enter the market. Airbnb is a true digital disruptor, as it started at the low-end and now has scaled its business model upwards to the needs of higher-value clientele6Bailey, D. (2017). ”Why Airbnb Is Disruptive Innovation and Uber Is Not” [Online] Available at: https://www.inc.com/dave-bailey/why-airbnb-is-disruptive-innovation-and-uber-is-not.html [Accessed 23 May 2020] .

Summary

As the digital economy is experiencing rapid growth, business model, and value innovation in the digital age must be accompanied by technological/application innovation. For example, Airbnb would have not been able to launch its new business model without a website, or even experience the rapid growth in international markets without the internet and the world wide web.

Products and service innovation have already enabled technology-shared economic businesses. Firms and start-ups need to be proactive and reactive to digital disruption, by constantly tweaking or creating new business models in order to compete or stay competitive in the digital age.

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References
1 The World Economic Forum (2016). ”The Global Information Technology Report 2016” [Online] The World Economic Forum. Available at: http://www3.weforum.org/docs/GITR2016/WEF_GITR_Full_Report.pdf - p. 4 [Accessed 19 May 2020]
2 Airbnb.io (2020). ”Open Source” [Online] Available at: https://airbnb.io/projects/ [Accessed 23 May 2020]
3 Wheeler, D. (2014). ”4 Digital Marketing Strategies: An Airbnb Case Study” [Online] Available at: https://www.searchenginejournal.com/4-digital-marketing-strategies-airbnb-case-study/95007/#close [Accessed 20 May 2020]
4 Virtue Zone (2018). ”Disrupting the market: is it essential for business success?” [Online] Available at: https://vz.ae/blog/disrupting-the-market-is-it-essential-for-business-success/ [Accessed 20 May 2020]
5 Turen, R. (2017). ”Airbnb: A case study for our times” [Online] Available at: https://www.travelweekly.com/Richard-Turen/Airbnb-case-study-for-our-times [Accessed 20 May 2020]
6 Bailey, D. (2017). ”Why Airbnb Is Disruptive Innovation and Uber Is Not” [Online] Available at: https://www.inc.com/dave-bailey/why-airbnb-is-disruptive-innovation-and-uber-is-not.html [Accessed 23 May 2020]

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