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Crossing the Digital Divide: Harnessing the Power of Networks to Quadruple Value
Uber did it. So did Airbnb. As did Dropbox, Zillow, and Wikipedia.
These companies destroyed incumbent brands and revolutionized established industries by using today's digital technologies (social, mobile, cloud, big data and the internet of everything) and the power of crowds (aka networks) to destroy older business models. And they are not alone. .
This type revolution is happening across all industries and it is the most recent of technological revolutions. Pioneers like Henry Ford and others ushered in the industrial revolution. Services firms like McKinsey, Bain and BCG created the services revolution. Software firms, like Microsoft and Oracle, changed the game again to create the Technology Revolution.
Now digitally enabled networks are bringing about a 4th revolution -- the Network Revolution -- on a scale and scope that is unprecedented based on our transition from the physical and material to the virtual and intangible. What does this means to you as a leader? Simply this: It's time to Uberize your company by leveraging today's digital technologies and the power of networks to create unprecedented value for your customers, employees and investors.
Research covering 40 years of industry and company data, performed by OpenMatters in partnership with Deloitte, indicates that companies that leverage digital technologies and the power of networks are valued at as much as 4 to 8 times more than the value of traditional product and service companies. Further, this research shows that the challenges brought about by digitally-enabled networks are pervasive and impact traditional profit margins and the marginal cost of expansion (from high to almost zero). In short, digital disruptors are leveraging the power of networks, and the big data derived from them, to change the game for everyone.
To better understand this "digital revolution," our research identified four business models that cut across all industries. These four models describe a process of evolution from physical and discrete to digital and continuous:
- Asset Builders: Companies that use physical capital to make, market, distribute and sell physical products. The fundamental approach for these companies is "make one, sell one." Examples include manufacturers (all industries), distributors and retailers.
- Service Providers: Companies that hire people who produce billable hours for which they charge. The fundamental approach for these types of companies is "hire one, sell one." This model substitutes an individual’s output (an hour of billable time or work) for a machine’s output (unit of production or delivery). Examples include consulting firms and financial institutions.
- Technology Creators: Companies that use capital to develop and sell intellectual property (IP). They hire employees who write code or create other IP-based assets that can then be sold multiple times. The fundamental approach for these types of companies is "make one, sell many." Examples include software and biotech companies.
- Network Orchestrators: Companies that use networks of businesses or consumers to make, market and sell their wares with the company acting as the organizer. The fundamental approach for these types of companies is "make, market and sell many to many." Examples include financial trading markets, on-line social networks and credit card processing companies. The key measurements here is the size of the network (e.g., number of participants) and their level of engagement.
We also researched how investors value each of these four business models. The results show that Technology Creators and Network Orchestrators are valued 2X to 4X more than Asset Builders and Service Providers. This means that, on average, the investors pay approximately $8 for every $1 in revenue generated by a Network Orchestrator while Asset Builders receive only $2 for every $1 in revenue (see figure below).
Given these numbers, it is clear that leaders must evaluate their business models and determine how to cross the digital divide. To help leaders pivot their companies, we developed a seven-step process. The seven steps are:
- Know the four business models including their respective value and benefits.
- Assess your leadership team's digital skills and capabilities.
- Assess your current business model.
- Inventory your tangible and intangible assets.
- Create your new digitally-focused, network-based business model.
- Implement your new digital-based business model.
- Monitor and rebalance your business model to stay on course.