This blog is about the digital business era. The blog posts are brief, foods for thought. They comment on articles, events etc. with a personal touch.

The Digital Operating Model

15-04-2015
Successful digital companies have operating models different from analog companies. These companies are operating at market conditions, but with a potential for high capital efficiency, which can make them darlings of investors.

Virtually all companies today use the digital channel as a vehicle for customer and consumer contact. The status check on “We’re online” would give a tick to most companies world-wide. And there are many great websites that attract consumers, manage relationships well, and make consumers want to re-visit again and again. The question is: What is the difference between an analog company with a stellar website, and a digital company? Why is the 2nd one more successful?


Purely digital companies are different


Purely digital companies often have operating models much different from analog companies. Their operating models are more social, asset-light, global, virtual and multi-sourced, than most analog companies. Their most valuable asset is relationships, next comes information. Goods and money are ranking below these two. These companies are operating at market prices, but with high capital efficiency. They have the potential of becoming darling shares of investors.

Their most valuable asset is relationships, next comes information.

Digital businesses have huge potential for industry disruption, as illustrated by the following e-tailer characteristics:
  • Openly advertise all-inclusive, competitive prices and product availability.
  • Lower prices than traditional retail and reasonably short delivery times.
  • Return and refund policies that are very transparent.
  • Higher variety of products than most analog businesses.
  • Recording the whole customer engagement history, making it available to both parties.
  • Highly convenient. They are open 24x7 and save you lots of hours in traffic, queues and search.

Only the very best traditional retailers can consistently compete on price and terms with the standard digital e-tailer business. The ones that can’t cope with this will diminish or die. That’s what disruption looks like!

But there is also a lot these digital businesses don’t have; relationships, empathy, kindness, attraction to other people, love, real life! Such factors suggest that traditional retail will never cease. In the coming transformation to a hybrid (e-/re-)tail lies the secret code of survival for some retailers – the ones that can combine the best of both worlds.
 

The Looks of a Digital Pure-Play


A digital pure-play is a company which focuses exclusively on the digital sales channels. They are generally leaders in digital operating models. They are unhindered by legacy and tradition, two factors which often prevents (analog) companies from doing what’s right. And they are unhindered by the multi-channel complexity that most analog companies have to struggle with every day. The successful digital businesses will often have the following highly visible characteristics:
 
  • Ideas that intuitively feel great, with brand names, graphics and taglines that that have strong consumer appeal. They have just the kind of message that millions of consumers will like on their preferred social media.
  • Based on smart life philosophy solutions combining smart devices, big data, social media, internet of things and cloud infrastructures. The keyword issolution which sets them apart from companies providing smart gadgets. They provide a life and situation aware product or service.
  • Super-focused on customer experience management, brand management and product life-cycle management disciplines.
  • The digital businesses are global and international in their approach. The address the world-wide consumer base recognizing cultural diversity. They do it with scalable value chain setups that can operate and deliver anywhere.
  • They are tech savvy and very good at determining when new tech should be included in their service portfolio. They bring digital services to market faster and simpler than most analog companies.

There are many good examples of digital pure-plays. The German musical instrument company Musikhaus Thomann is today one of the largest online retailers world-wide in their segment, with a revenue of almost 700 million USD. They still bring forward the ambience of a family business despite their enormous sales and operations.
 

The Operating Model of a Digital Pure-Play

 
The digital pure-play is different in more ways than show at first glance. The backend of a pure-play is concerned with operations. Without a super-efficient and effective operations setup, all their good ideas, intentions and consumer appeal will just wash out and be forgotten. Operations of a pure-play is often characterized by being:
  • Massively outsourced. They consider most activities outside customer, brand and product life-cycle management non-core and will not spend much time on managing non-core activities in-house. They generally don’t own assets, as it is considered detrimental to capital efficiency, and only necessary if a company can’t manage its partners.
  • Pure-play operating models. Models that have no duplicate processes with outsourcers; models that focus on shifting information constantly and on shifting goods and money only once. Models that operate at zero latency (i.e. you get paid when I get paid) and for that reason carry minimal financial risk.
  • These digital businesses excel in extra-enterprise integration and collaboration. The capability to shift seamlessly between manufacturers, logistics and distribution providers, website hosting partners, digital social media providers, etc. is essential to their dynamism and flexibility.
 
The operating model of the digital enterprise is already being used by the typical web-commerce companies, from small niche storefronts to massively global e-tailers. The principle is that the view on the website, pricing, delivery service, availability and lots of other factors are dynamically updated with vendor information, and that the inventories sit at the rear end of the value chain, with importers or manufacturers. The goods and money are not shifted through various levels of wholesale and retail as in traditional business, but only once, and that is when the consumer completes a purchase transaction.

This digital enterprise has fundamentally different requirements to its partners, as the value of each transaction is miniscule and the number of transactions can be extremely high. It requires the up-stream stakeholders to deal effectively and efficiently with fine-logistics, localization, returns, etc. and the down-stream stakeholders to mainly deal with consumers and information. One capability that is remarkably different from analog companies is their extra-enterprise integration flexibility. They can change business partners often and without any problems. Out-tasking and outsourcing are natural activities for the digital pure-plays, and pose no challenge or disruption to value delivery.
 

They're like Dolphins!

 
Watching a Dolphin swim, I cannot help admiring the ease and elegance with which it maneuver, and how fast it can snatch a bite just in front of a very old, very experienced true survivor turtle. In the same manner it is easy to admire the ease and elegance of the digital businesses that outpace and outmaneuver old, mature and consolidating companies. The digital businesses are superior, and their strength is measured in capital efficiency.
A key goal is to give you inspiration on how to deal with the digital business era. Another goal is to get feedback on ideas and thoughts. Have a great digital business era!
 
Confucius – you cannot open a book without learning something - /jan