Brief

Reinventing Your Business Model for Digital

Start by rediscovering the raw customer need that you are serving.

By Ouriel Lancry

First published on Μαΐου 30, 2018
min read


Everyone thinks about Netflix as a digital native. The company delivers content via any device, produces TV shows and films using reams of customer data, and is even headquartered in Silicon Valley. In reality, Netflix used to be the media industry equivalent of Sears―shipping DVDs by mail from large warehouses located across the country. Netflix’s business today is just the latest chapter in the short history of a company that has reinvented itself at least three times in 20 years. From its humble origins shipping DVDs by mail, it became the dominant platform for streaming movies, only to evolve further to challenge the most successful studios in the entertainment business with its original content. While each chapter seems to diverge from the last, all reflect a singular focus on the customer. As cofounder Marc Randolph put it, “We very, very early came up with the idea that Netflix would be about finding movies you love, which in fact has nothing to do with how you choose to receive them.” Featured topic More Digital Transformation Insights Digital transformation is a topic of rich and vital discussion in boardrooms and among executive teams around the world. Here are some insights on what it takes to lead and deliver a digital transformation. From the beginning, Netflix has been fully committed to delivering what their customers really want―the customer’s “raw need,” whether it arrived in your mailbox or on your smartphone, from the Disney archives or fresh from Netflix studios. This deep understanding of the customer’s raw need and passion for meeting it led Netflix to relentlessly pursue greater access, more choice, faster delivery, and personalized service. If something helped customers find movies they loved, Netflix was in. Over time, the economic model changed dramatically. The team abandoned the pay-per-rental structure for monthly subscriptions, while also moving on from its investments in physical distribution to bet the farm on streaming infrastructure. Blockbuster, Netflix’s original competitor, went bankrupt eight years ago. Netflix, however, is thriving and is expected to report revenue of $16 billion for 2018, with more than half of it coming from outside the United States. Today, as new technologies upend so many industries and reshape their profit pools, more and more companies face the need to reinvent their business model. Building a winning business model, however, has often proven to be a major obstacle. At a recent workshop hosted by the World Economic Forum, executives from well-established companies identified the design and development of digital business models as the single greatest challenge in their digital transformation efforts. A history of success can quickly become a heavy anchor as long-held assets begin to feel like liabilities. The customer’s raw need is easily lost in layers of baggage built over decades. Too often, today’s customer experience, today’s product, today’s economic model and today’s operations become the focus. Companies work tirelessly to improve what they do today, and then in an Internet minute are blindsided by a digital challenger who comes along and reinvents every element of the business model. In contrast, insurgents, unencumbered by history, have zeroed in on the raw need and found a better way to meet it. From Spotify to Airbnb, insurgents both innovate faster and demonstrate a much greater connection with the customer. Focusing on the customer need is not the sole territory of natives, however. For example, Domino’s has leapfrogged its pizza competitors by pursuing a simple mandate from the CEO, who wanted the customer to be able to order pizza while waiting at a stoplight. A clear raw need―convenient pizza―led to a business model enabled by technology. In prior eras, incumbents had a greater margin for error. They could lose track of the customer for a while and still catch up. The power of entrenched distribution channels or massive advertising budgets compensated for a lack of innovation. Today, innovation finds customers fast and scales quickly. This challenge can seem obvious looking in the rear-view mirror, but these insights are most valuable when they help us look ahead to situations in which the same dynamics seem destined to play out. One example is the automotive industry, where executives are rethinking the future. Massive disruption is on the horizon in transportation as incumbents struggle to keep pace in an industry fast evolving from manufacturing and selling cars into providing mobility. The dynamics of platform businesses such as Uber and Lyft, which create value by facilitating exchanges between others, threaten to massively consolidate the industry profit pool. Outsized brand-building and incentives budgets, R&D targeted at internal-combustion powertrains, expansive dealer networks, all once viewed as assets, have quickly fallen out of step with the market. Consider the slogan that has guided BMW’s mission and led to tremendous growth, “the ultimate driving machine.” This captures the focus on a product, traditionally largely hardware, built for personal ownership. In a market preparing for the rise of shared autonomous fleets, that mission becomes incomplete. Of course, a large segment of car lovers will continue to value personal ownership and the driving experience, but for many, what they need is much simpler. It’s carting the kids to practice, or meeting friends, or getting to work without burning time. For that large and growing group, transportation-as-a-service provides a solution that is more convenient and cost-effective than owning a car. Media and auto are just two of the many industries technology and insurgent competition are transforming. For leaders of incumbent companies, an unburdened view of the customer’s raw need is central to prevent being caught by surprise, to protect their position and to pivot toward future business models.

Everyone thinks about Netflix as a digital native. The company delivers content via any device, produces TV shows and films using reams of customer data, and is even headquartered in Silicon Valley. In reality, Netflix used to be the media industry equivalent of Sears―shipping DVDs by mail from large warehouses located across the country. Netflix’s business today is just the latest chapter in the short history of a company that has reinvented itself at least three times in 20 years. From its humble origins shipping DVDs by mail, it became the dominant platform for streaming movies, only to evolve further to challenge the most successful studios in the entertainment business with its original content.

While each chapter seems to diverge from the last, all reflect a singular focus on the customer.

As cofounder Marc Randolph put it, “We very, very early came up with the idea that Netflix would be about finding movies you love, which in fact has nothing to do with how you choose to receive them.”

More Digital Transformation Insights

Digital transformation is a topic of rich and vital discussion in boardrooms and among executive teams around the world. Here are some insights on what it takes to lead and deliver a digital transformation.

From the beginning, Netflix has been fully committed to delivering what their customers really want―the customer’s “raw need,” whether it arrived in your mailbox or on your smartphone, from the Disney archives or fresh from Netflix studios.

This deep understanding of the customer’s raw need and passion for meeting it led Netflix to relentlessly pursue greater access, more choice, faster delivery, and personalized service. If something helped customers find movies they loved, Netflix was in. Over time, the economic model changed dramatically. The team abandoned the pay-per-rental structure for monthly subscriptions, while also moving on from its investments in physical distribution to bet the farm on streaming infrastructure.

Blockbuster, Netflix’s original competitor, went bankrupt eight years ago. Netflix, however, is thriving and is expected to report revenue of $16 billion for 2018, with more than half of it coming from outside the United States.

Today, as new technologies upend so many industries and reshape their profit pools, more and more companies face the need to reinvent their business model. Building a winning business model, however, has often proven to be a major obstacle. At a recent workshop hosted by the World Economic Forum, executives from well-established companies identified the design and development of digital business models as the single greatest challenge in their digital transformation efforts.

A history of success can quickly become a heavy anchor as long-held assets begin to feel like liabilities. The customer’s raw need is easily lost in layers of baggage built over decades. Too often, today’s customer experience, today’s product, today’s economic model and today’s operations become the focus. Companies work tirelessly to improve what they do today, and then in an Internet minute are blindsided by a digital challenger who comes along and reinvents every element of the business model.

In contrast, insurgents, unencumbered by history, have zeroed in on the raw need and found a better way to meet it. From Spotify to Airbnb, insurgents both innovate faster and demonstrate a much greater connection with the customer.

Focusing on the customer need is not the sole territory of natives, however. For example, Domino’s has leapfrogged its pizza competitors by pursuing a simple mandate from the CEO, who wanted the customer to be able to order pizza while waiting at a stoplight. A clear raw need―convenient pizza―led to a business model enabled by technology.

In prior eras, incumbents had a greater margin for error. They could lose track of the customer for a while and still catch up. The power of entrenched distribution channels or massive advertising budgets compensated for a lack of innovation. Today, innovation finds customers fast and scales quickly.

This challenge can seem obvious looking in the rear-view mirror, but these insights are most valuable when they help us look ahead to situations in which the same dynamics seem destined to play out. One example is the automotive industry, where executives are rethinking the future.

Massive disruption is on the horizon in transportation as incumbents struggle to keep pace in an industry fast evolving from manufacturing and selling cars into providing mobility. The dynamics of platform businesses such as Uber and Lyft, which create value by facilitating exchanges between others, threaten to massively consolidate the industry profit pool. Outsized brand-building and incentives budgets, R&D targeted at internal-combustion powertrains, expansive dealer networks, all once viewed as assets, have quickly fallen out of step with the market.

Consider the slogan that has guided BMW’s mission and led to tremendous growth, “the ultimate driving machine.” This captures the focus on a product, traditionally largely hardware, built for personal ownership. In a market preparing for the rise of shared autonomous fleets, that mission becomes incomplete.

Of course, a large segment of car lovers will continue to value personal ownership and the driving experience, but for many, what they need is much simpler. It’s carting the kids to practice, or meeting friends, or getting to work without burning time. For that large and growing group, transportation-as-a-service provides a solution that is more convenient and cost-effective than owning a car.

Media and auto are just two of the many industries technology and insurgent competition are transforming. For leaders of incumbent companies, an unburdened view of the customer’s raw need is central to prevent being caught by surprise, to protect their position and to pivot toward future business models.