Incumbent organizations—those with long histories—all struggle with the same issue in the digital economy: the conflict between transforming the business and operating the business. How does a company transform its business model midflight, while at the same time competitively operating legacy businesses in order to provide stability and cash flow. As the leading platform and network companies (Amazon, Alphabet, Apple, Facebook, Microsoft) grow, some hitting the $1 trillion market value mark, the question becomes even more pressing.
The answer to this question starts with understanding the interdependencies between mental, business and measurement models about which we have previously written.
- A leader’s mental model sets the strategic direction for a firm’s investments (capital allocation), values and measures. Leader’s thoughts (their mental models), turn into action (business models) and then key performance indicators (KPIs);
- All businesses models are a set of interconnecting needs and capabilities that include customer requirements, employee competencies, existing processes, product and service offerings and most importantly capital allocation which reflects the leader’s mental model; and
- Measurement models, or the KPIs that boards and leaders use to measure the progress and performance of the business model; for as we all know, you measure what you value and manage what you measure.
This interlocking loop comprised of thoughts, actions and measurements can either create a virtuous cycle of success, as in the case of today’s platforms hitting trillion dollar valuations, or set of unintended outcomes, as is the case with GE where retired CEO Immelt may have used “success theatre to mask the rot at GE.”
To create a virtual cycle leaders must start with their own thoughts (both conscious and unconscious) and the resulting actions. Put simply, if you and your board value products and services above platforms and networks than you will continue to make, market, and sell more products and services. This is not a sound plan. Historically, products and services were the primary drivers of value for top-valued companies (think refrigerator and Frigidaire and tissue and Kleenex). Today, however, products and services compete poorly with technology and networks. The manufacturers, distributors, and retailers of things or services are falling behind the value and growth of software and platform companies.
What’s the answer? Hybrid business models. Supplementing and augmenting legacy products and services with cutting-edge technology and platforms.
Artificial intelligence (AI) is one of the primary ways that companies are shifting legacy companies into the digital age. AI can help you better understand what is truly driving value in your company. This is hard work, because it requires you to be data driven, while our experience with boards and executives is that they are still very story driven, with or without the data. To build this capability, companies need to source data scientists who can help gather and clean your company’s valuable data (from board calls, corporate disclosures, strategy statements, financial outcomes, customer and employee reports, etc.) and use available AI tools from leaders like Google (TensorFlow), SalesForce (Einstein), and IBM (Watson). Once you get your team and tools together, it’s time to begin the journey of real transformation—using AI-driven insights to power platform business models.
More specifically, use the insights from your AI-based research to invert your mental model. Put platforms and networks first on your board meeting and with your team and therefore begin to shift your business model and measurement model. Instead of focusing on one-direction products and services, consider your key networks and consider ways you can serve them by facilitating interactions and transactions. Ask yourself the following:
- How can I use my existing products and services to seed the network? Think like Apple did: develop the initial mobile apps, then build a platform on which other developers can sell their apps, returning to the company 70% of revenues generated. Then use the data from those sales to find more developers to make more apps that will attract more suppliers and customers to your platform;
- How can I connect my existing networks so that they can benefit from shared experiences? Doing so will create a virtuous cycle of engagement that will in turn create trust. Encourage everyone to co-create the future products and services that they and that you can make available to others on your digital platform;
- How can I gather data from all those interactions and use AI to better interpret the wants and needs of my network in order to create a better platform and grow the base of suppliers and consumers.
Our experience with hundreds of boards and management teams has taught us is that the best way to get started is to educate the board and senior leadership team on the difference in business model economics. Platforms and technology firms generated significantly more profit, growth, and value compared to product and services companies. This is not an easy journey given that most board members were educated and served most of their careers before the technology boom. It’s hard for successful leaders to move beyond what they know best, even if it’s a subpar business model.
Changing mental, business and measurement models is frightening to almost all CEOs, leaders and boards. However, failing to embrace AI, platforms and technology is fraught with risk as large platform companies like Alphabet and Amazon gobble up the growth, profit, and value in industry after industry. The only way to move forward is to transition your business to platforms and networks. Remember this isn’t an “either-or,” it’s an “and.” So, start building a hybrid today by gathering data scientists and AI technology partners mine your data and build a platform. Then craft a strategy that ensures your future success against the big five platform players—Amazon, Apple, Alphabet, Facebook and Microsoft—so you are not just a bump in the road on their journey of cross-industry growth and value.