- September 14, 2019
- Posted by: Ramkumar
- Category: Digital Transformation
Three concepts of digital business
In this blog, we shall explain the three core concepts of Digital business which follows a completely different trajectory from that of a normal business models that we have seen till date.We shall observe these changes through basic mathematics concepts that have stood the test of time like extrapolated trendlines, normal distribution curve and scale effects that taper as the volume increases.
A traditional business operates by the concept of demand and supply.As the supply of goods become scarce, the cost of transaction becomes significant.In the case of digital, other rules and relationships apply.Hence the same demand and supply curve used to extrapolate and predict the trajectory of a traditional business cannot be applied to the digital business.
Tipping point in Digital business
- As human beings, we are more comfortable to predict something when we already know about the subject and its past trends.This is the reason we are comfortable to predict the future of a mature business using the past patterns using smooth trend lines.In the case of a digital business, these assumptions on gradual market growth are not relevant.
- In case of a digital innovation, there is a tremendous buzz and excitement in the market about the emerging technology and its applications, but no traction in market would be observed initially.
- After a brief hiatus, there will be a significant explosion and adoption of digital services which will be seen by a steep curve.One prominent example would be the fast adoption of mobile internet after years of no traction in the market.
- The digital business reaches its tipping point because of two reasons – Rate of Adoption and Ecosystems.In the case of a Technology adoption lifecycle, a new technology would be adopted by small group of innovators/early adopters which is then followed by mass adoption.This is a tipping point where the adoption changes from early adopters to early majority.In the case of a digital business, this curve is very steep because new innovations spread very faster.
- The ecosystem barriers that exist to an innovation is because the industry players do not benefit from the new innovation or various players in the industry have not been able to establish new rules on how to interact with each other.
- For instance, the traditional advertising business still buy media space inspite of the knowledge that the subscriber and reader rates are falling.The traditional advertising agencies did not want to switch to digital medium because they were not able to establish a value chain for digital advertising. In addition, traditional advertising players did not have the skills and financial incentives to make this shift.
- This reluctance was observed and exploited by tech players who found ways to simplify the design, target, pricing and analytics of digital advertising which has resulted in the tipping point of Digital marketing.
- Hence as the industries move towards digital, board/management needs to be aware of the tipping points, the ecosystem barriers and the extent to which they are at risk of being digitally disrupted.
Power curves in Digital business
- In the traditional business model, the Demand and supply dynamics explain the scarcity of goods and high transaction costs.The transaction costs is incurred when searching for a product, choosing the best alternative among the options, negotiating the price and the fulfillment. Under these conditions, demand curves take the shape of the normal distribution curve.
- For instance, if we are looking to book a ticket for a show and it is not available for a particular slot, then we look at the best possible alternatives which would be paying a higher price ticket for the same slot or choosing a cheaper ticket for a less convenient time slot.
- These simple rules of Transaction costs and scarcity of goods is not applicable in digital world.In the digital world, there is no scarcity of goods as almost all the types of goods can be copied and distributed easily at no incremental cost.So when a traditional business service like banking is disrupted by a digital world, customers immediately adopt the digital offering and the concept of scarcity does no longer apply.In this digital world, the best performer gets the lion share of revenues.
- The power distribution curves are more steeper in digital world.For instance in music business, traditionally 20% of the market had 80% market share but in the digital world, 10% of the titles has more than 90% of the market share.
- Hence firms need to relentlessly focus on the superior quality of the digital offerings.They need to have an in depth knowledge of the customer, its preferences and their needs in order to deliver superior goods and customer experiences.
Network effects in Digital business
- In a digital world, the scale effects play an important role but the player who has larger network effects take the lion share of the market.In scale effects, as the company expands, the cost to deliver a product/service is less due to the distribution of fixed costs over a large volume of goods/services.This scale effects starts to reduce and taper off as companies become big and matured.
- Network effects happen when there is a mutual reinforcement of increasing supply and demand which means that the supply influences and increases demand which inturn increases supply leading to a flywheel effect.These effects start at a very small rate but will accelerate once a critical mass is achieved.
- Scale effects have largest impact in shorter term where as network effects start only after a certain mass is reached.Scale effects are observed in all companies which are looking to expand their size where as network effects is observed only in the market winners.
- Like power curves, the winner of the network effects takes all the market share.The biggest example is Facebook and Google which have the combined strength of Network and Scale effects.
- The implications of network effects is that it is an all or nothing game.Hence the management must be willing to take the risks and should be ready to accept if it meets with failures.
- The well established business curves – The normal distribution curve and Scale effects that worked in the traditional business does not show the same characteristics in the digital business.Hence using a wrong curve could lead to wrong decisions.
- A deeper understanding of customer needs and measuring the customer satisfaction using analytics is extremely important as in the digital world, the winner takes all the market share leaving very few for the runners up.
- Hence businesses having high risk appetite will succeed. The choice of not taking risks during adversity leads to demise of a business.