#Disruption, #innovate your #business model, #re-invent yourself nowadays are keywords on almost any top management agenda. But how to anticipate “disruption”? How will I be able to identify the meaning of “Digital Transformation” for my business? This article introduces the concept of “Value Spots” (s.a. which we are successfully applying for a while now to structure our thoughts in the business modelling approach.

Understand the basic idea of „Value Spots“

The main idea is simple: Every sustainable business is doing something its customers are paying it for. That’s what we call the “Value Spot”. Unfortunately, often it turns out that this is not the primary business case. Probably this has been the case the past but it might have changed over time. Value creation migrates.

Assume a packaging producer. Did it create value by just producing the packaging in the past, it will for sure have shifted to providing the design services and just in time delivery to the location of application.

Major drivers for this change are increasing competition as well as commoditization of technology.

Major drivers for this change are increasing competition as well as commoditization of technology. Just look back 10 years. By then it would have been an enormous investment and a multi months project to set up several highly available datacentres in different regions of the globe. Today, with the right skillset, you will not need more than a credit card, an internet connection and a few days, if you start from scratch.

From my point of view, IBM gives an interesting example for a conscious change and migration capability. The company exists for such a long time, because its top management recognized to change and adopt according to value migration. It sells relevant business sections and rebuilds new capabilities continuously. 10 years ago it anticipated the trend towards mobile devices and sold its then very powerful PC and Laptop production to Lenovo to focus on the – by then – growth area of Software and Services. That was fine for a while. But already the next transition towards pay-by-use-models served by Softlayer, Bluemix and Watson (artificial intelligence platforms) is almost past due.

Those companies that are aware of their Value Spots will be better able to anticipate how their revenue streams will be impacted by the upcoming changes due to technological advances or increasing competition. The migration of the Value Spot as well as its impact on cash flow should be closely monitored and consciously planned.

Case Study: Identify and apply Value Spots

In 2004 we advised a medical device manufacturer. The company owns a strong market position with over 50% market share in its segment (micro invasive surgery). Despite this massive installed base, it did not generate profits. Margin pressure and the unfavourable developments of exchange rates were named as causes for this development.

For sure relevant factors. But our Value Spot analysis revealed the real cause. Only 25% of revenue came through the sales of new machines. The lions share came from the sales of supply materials. Hundreds of thousands of tubes were sold to all of the installed devices. Unfortunately, most tubes were sold at a loss of one or more EUR each! Due to the success of the machines the amount of tubes grew steadily, eating into the profit generated from the sale of the machines.

Moving the Value Spot from the machine to the tubes, we were able to restructure the production and within 12 months turn the loss per tube into a profit. Based on this growing profit stream, the prices of the machines could be lowered increasing sales success, again enforcing the sales of supplies. The company realized a massive profit gain and the share price tripled.

The competence to elevate yourself from the existing business model, to challenge and adapt it within the sphere of your organizational capabilities, is an art.

Shape your own Value Spot

The competence to elevate yourself from the existing business model, challenge it and define or create a new version, the next generation model, is an art and requires time and distance. External support may enrich this process with additional perspectives. To help you structure your own thoughts, maybe our proven model of the five Cs might be useful.

At the dawn of this century when the Internet started to impact retail and media, we have developed the concept of the five Cs to guide our customers through the change, given them orientation and hold. These days it delivered sound results. Slightly adopted I feel that it could be of benefit once more.

Diagram Link – The 5 C’s

Mapping your customer relation to the model, you should identify the level of interaction. The deeper the binding, the more complex the interaction and vice versa. The higher the share of attention, the more your customer will be conducting business with you. But with increasing interaction the demand for technological capabilities required to manage and maintain the relation increases. Why is that of importance? Because future business models tend to be subscriptions or usage based compensation models. This will reduce the primary sales amount, but leads towards continuous revenue streams. A high customer retention rate will help to secure these revenue streams.

An excellent example for such a successful transformation is MICROSOFT. MS lived well on the old license model. But the reasoning for upgrades got harder with each release. They simply were not able to add enough additional useful features to MS Office. Transforming to Office365 it not only changed the license model from a sell-once-and-hope-for-upgrade but to a continuous revenue stream. In the past a corporate user had on average 350 EUR every three years, respectively 115 EUR p.a., differing due to your corporate discounts. Now the users is charged somewhere between 5 to 15 EUR per month, resp. 60 to 180 EUR annually, depending on discount and license type. The additional software applications included with the subscription increase the customer convenience and retention. The marketplace adds additional commerce features.

Another example of an intelligent move is AMAZON. Could you ever image a customer of OTTO or NECKERMANN to pay 69 EUR annually just to be a prime customer? Most likely not. But several million AMAZON customers do exactly that. The basic service “Shopping” has been – based on analysis and customer insight – enhanced with a convenience service “free of charge delivery”. This increased customer loyalty and created an additional cash flow.

If you know your own (real) Value Spot, you will be able to evolve the basic service or product along the Cs and – as a business insider – be able to forecast impacts on cash flows. The exact points in time the impacts will appear might remain uncertain, but to identify goals for a change programme it is sufficient enough.

Transfer of technical capabilities

Knowing the goal, most good leaders will move fast to drive the change. But especially in the context of “Digital Transformation” and “IoT” the way forward will require some composure. The technological complexity is high, if not to say very high. Good, motivated, sufficiently skilled AND experienced employees are rare. And demand grows day by day as more and more companies recognize that they need to develop a digital competency. My personal assumption is that most companies failing during the next years will not fail due to bad business ideas or plans but flawed realizations, poor service delivery and missing grasp of architecture impact due to missing sufficiently competent employees.

Most companies that are failing during the next years, will fail due to a lack of competent staff

The alignment of the vision of value creation with the real technological capabilities is a crucial element of success for each transformation endeavour. If you over- or underestimate the capabilities, you will risk the company’s future. Too unpretentious goals will erode the value creation capability and therefor, over time, the profitability of the company. Too ambitious goals bear the risk of a flawed service offering, ruining the brand awareness with the same result.

How to choose the right degree of technological complexity?

Unfortunately, there is no standard receipe to this question, as the answer depends on the corporate culture, the strategic options, the current value chain position as well as the existing product or service portfolio. But again we may offer a few ideas:

Diagram Link – Building blocks of IoT

The diagram outlines the dependencies of technological capabilities of a standard IoT-stack. Looking at the diagram, it becomes clear that the complete building will break down, if any of the basic blocks will crumble. If you build too fast too high, you risk too fail. That’s why the correct alignment of your technological capabilities with your vision of value creation is key to a successful Digital Transformation.

Who messes up the correct alignment between the vision of value creation and the technological capabilities of the organization, risks the total failure of the endeavor.

Each of the blocks outlined is a highly demanding, complex capability. However, many of them are already available out of the box. You do not need to reinvent all of them but you may purchase them as a standardized service from AWS or comparable cloud vendors. When purchasing a “managed service” you are also freed of the responsibility to operate the service, which might be a hassle in itself.

Which of the services are differentiating? Will it be enough to understand and analyse the data or do I need to own the complete collection chain? Force yourself to focus on the value creating, on the differentiating activities. They will be complex enough. Healthy “make” or “Buy” decisions will decide about the success or failure of your mission.

Together with the make or buy decision the dilemma between reliance on third party services versus speed of development becomes important. From my point of view I always would favour speed. The early bird catches the worm (customer). Dependency can be assumed as manageable risk by using good architecture. DROPBOX would not have been able to grow that fast, if it would not have built on S3 (AWS Secure Storage Service) of AWS. When they grew big enough (March 2016), they could open a business case for running their own datacenter.

Each CxO, responsible of transforming his company towards digital, should align the evolution of the business model with the technological capabilities of the company. I would always suggest to prefer realization speed over technological depth. The final goal should always be to stabilize respectively increase your cash flow(s). Remember that your customers are the source of every cash flow, they are exchanging money for value, thus being consulting, convenience or commerce. Technology is relevant, as shown, but nobody will pay for it. As soon as cash flows are big enough, you have plenty of time to integrate or change your supply structures, reducing dependencies. In case you were not able to create a sustainable cash flow, you will just have saved time and costs by purchasing third party services.

You want to review your companies Value Spots or search to improve them?