The Impact Of Digital Transformation On Business Models: Opportunities And Challenges

Digital transformation in business involves using new technologies like artificial intelligence (AI) and cloud computing to drive growth, streamline operations and increase our competitive edge. Its impact can be seen across every industry, driven by the growth in online business and the ongoing digitization of business and society.

It has also fundamentally affected many traditional business models. These have evolved rapidly thanks to the emergence of online giants like Amazon and Google, digitally-native niche players like AirB’n’B, Expedia and Netflix, and heavy investment by established industry leaders such as Walmart and Tesco.

Companies like these and thousands of others have taken established business models and integrated technology in ways that drive innovation and create new types of customer experience focused on convenience, value and efficiency. At the same time, new digitally-native business models have emerged, such as freemium and software-as-a-service. This article focuses on the ways that “traditional” business models have evolved, and new models have emerged, creating new opportunities but giving rise to new challenges.

What Is A Business Model?

A simple explanation is that a business model is the strategic framework implemented by a company in order to generate value through the delivery of its products and services. Businesses thrive by creating new and unique business models or refining existing ones to create revenue streams, develop efficient operations and build relationships with their customers.

For example, manufacturing businesses create products from raw materials, distribute them to retailers and customers, and generate revenue from sales. The model includes steps taken to drive efficiency throughout the manufacturing and distribution operations and create demand for its products through marketing.

By leveraging emerging technologies, businesses can refine elements of the model to increase the amount of value generated, reduce costs incurred by operations and processes, and even create new products and services more aligned with the changing needs of their customers.

Business Model 1 – Retail

This model involves selling products, either to an end consumer or in bulk (wholesale) to another retailer that will sell them. It includes traditional "bricks 'n' mortar" retailers that operate physical stores, e-commerce businesses that operate online, and many hybrid business models that exist in the spectrum between them.

Digital transformation has had a dramatic impact on retail over the past 20 years, with the explosion in popularity of e-commerce being the best example of this. Online-native retailers (such as Amazon, eBay or Alibaba, for example) put AI and analytics to work in order to target customers with personalized recommendations and shopping experiences, as well as smart pricing and intelligent logistics.

As a result, traditional retailers like Walmart and Tesco have invested heavily in leveraging digital technologies to enhance customer experiences, streamline their own supply chain operations and create omnichannel customer services.

Challenges include the growing need for businesses to get to grips with handling large amounts of sensitive customer data, including personal data and information on our buying habits and financial affairs. This brings challenges around regulatory compliance, data privacy and security.

Business Model 2 – Manufacturing

As covered in the introduction, this involves buying raw materials and creating finished products or components for products that will be created by others further along the chain.

It’s another traditional model that has been around for thousands of years but is now being swiftly transformed by the emergence of many new transformative technologies. These include the Internet of Things (enabling smart factories and predictive maintenance), robotic technology and 3D printing (sometimes referred to as additive manufacturing).

Collectively, these transformations are sometimes called industry 4.0, – referring to them effectively constituting the fourth stage of the Industrial Revolution, following mechanization, electrification and computerization.

Some of the biggest challenges here involve the large investments that companies need to make around infrastructure in order to benefit. There are also challenges around training or hiring in order to ensure they have people with the right skills to implement and operate these technologies. On top of that, there is a need to navigate the ethical and legal implications of large-scale deployment of automation in manufacturing businesses, in particular with regard to the impact it can have on human workforces.

Business Model 3 – Service-Based Businesses

These are businesses that provide services rather than products – from professional services like accounting, finance and legal to hospitality, healthcare, travel and tourism, events and personal services like hairdressing and personal training. Newer business models in this category include software-as-a-service offerings like Microsoft 365 and entertainment subscription services such as Netflix and Spotify.

Digital transformation has enabled many businesses that formerly were best known for producing products to transition to a service-based delivery. Notably, this includes software vendors as mentioned above, but also automotive manufacturers including Volvo and Porsche, home appliance manufacturers such as Nespresso, and fitness devices like Peloton and Fitbit. This allows businesses to build predictable, repeatable revenue streams rather than relying on one-time payments while also offering new customer experiences, such as receiving upgrades to new products and models as they are released. Businesses offering these types of subscription services -as well as professional services organizations like banks, accountants and law firms – can use data, AI and analytics to understand how customers use and interact with their services, predict and prevent customer churn, and personalize their offerings at scale.

A key challenge here is that customer behavior changes more quickly, and loyalty can be harder to maintain in the digital age. After all, switching providers or exploring new offerings is only ever a screen tap or mouse click away. To counter this, service providers compete to offer higher levels of customer service, as well as to develop reward and loyalty schemes to build “sticky” relationships.

Where Next For Digital Transformation And Business Models?

As the impact of digital transformation grows, we will increasingly see its effects in the emergence of newer business models, including freemium, ad-supported and crowd-funded businesses. Freemium models – where a basic version of a service or product is provided for free while more advanced features are reserved for subscribers – can be refined to create more personalized experiences. Ad-supported businesses will benefit from more accurately targeted promotions as well as more personalized messaging. All businesses will be able to better optimize their pricing strategies, offering different levels of service and support in response to demographic variations and the changing spending habits of their customers.

At the same time, privacy concerns, changes in regulatory and compliance requirements and the growing impact of cybercrime on businesses will be ongoing challenges. Whatever model a business adopts, it’s essential that these challenges are recognized. This means that predicting and reacting to them must become a central pillar of business strategy.

It will become increasingly important for all businesses to balance the drive to transform and grow with the need to consider ethical and regulatory responsibilities. The ongoing skills crisis in technology is likely to create further barriers, meaning that investment in upskilling and training is vital, too.

Ultimately, though, we can expect to continue to see business models evolve as the speed of technological development increases. This will require leaders to adopt a mindset of continual awareness, education and innovation. Embracing these changes while understanding the risks and challenges they pose is the key to thriving no matter what transformations are around the next corner.