It's not always clear what makes something 'digital.'
Even if we know the basics of business models, it may be hard to distinguish between analog and 'digital' versions. When people refer to 'digital businesses,' they are often referring to new value models more than specific uses of technology.
This is why digital modernization efforts, which upgrade tools and organize data, are not enough to truly transform businesses. New thinking, business models, and tools are also necessary. In this guide, we'll define the most common models for value creation. To avoid overwhelming detail, we won't attend to every business model or value proposition element, but you can learn more about those about in other parts of the Digital Fluency Guide.
Across industries, there are four basic models for value creation:
Each model for value creation answers the question, "What business are we in?"
In the chart shown above, we can see companies' multiplier, or price-to-earnings (P/E) ratio in publicly-traded stock markets, corresponding to their primary value model. Asset-focused businesses tend to be valued at about twice what their annual earnings are, while companies who focus on connections are valued at up to eight times their annual earnings. This is because as companies focus on value models with higher multiplier ratios, they are investing in and creating value through the power of network effects.
Regardless of your industry, network thinking can drive exponential business strategies.
Network effects can drive exponential growth in any industry across both analog and digital environments.
Digital businesses stand out because they effectively link those resources, using them to generate network effects wherein the companies get exponentially more valuable as more resources are connected.
What are our assets, and how do we best protect and leverage them?
Strategy: acquire, create, protect, and leverage assets
Resources: equipment, money, products, facilities, real estate
An asset creation model focuses on the production of things. Businesses with this model depend on the quality of their assets (food products, real estate, raw minerals, etc.) and their ability to reliably and efficiently deliver those assets to customers. These firms are constrained by their available inventory, buying power, and geographies. For example, an automaker can only make so many vehicles with the cash and lines of credit it has available. The value of an asset creation business is also limited by the supply of assets and demand for them in the market. For this reason, asset creation businesses tend to have a low degree of exponential multiplication.
How do we attract the best talent and deliver the best experiences?
Strategy: deliver high-quality services through human talent and labor
Resources: customers, leaders, employees, partners
Organizations focused on a service-based model succeed based on the capabilities of their employees. They invest heavily in recruitment, talent, training, and customer service capabilities to create value and differentiate themselves from competitors. By focusing on customer experience, these companies transcend the market value of any tangible assets they may be providing. Classic examples of this value model include restaurants, medical offices, and consulting firms.
Successful service businesses often invest in and emphasize positive employee experiences to attract and retain talented people. Leading firms with this value model make decisions based on a shared purpose between themselves, their employees, and their customers.
A business that provides services has a moderate market value relative to its earnings.
That’s Starbucks’ core strategy. Instead of focusing on the monetization of coffee (an asset), they offered a service: hosting an experience that's a third place between work and home. That's why the company is valued higher than just a coffee vendor—they’re not selling coffee, but an experience that happens to include coffee.
How do we create and share intellectual property? How do we design and build exponential value with machines and data?
Strategy: create, share, and/or sell ideas in the form of intellectual property, technologies, and/or data
Resources: copyrights, patents, technology tools like software, data, and data science models
Ideas-focused value models take knowledge and turn it into a reusable form. There are several key strategies that focus on idea generation, primarily the creation of intellectual property (such as brands, patents, and content), building reusable technologies (such as software or machine learning models), and the acquisition and processing of data.
Strategy: create, share, and increase the value of intellectual property
Resources: brands and trademarks, content, patents, business processes
Ideas can take the form of reusable intellectual property (or IP). There are many varieties of IP; some of the most common are the creation of brands and trademarks, written or audiovisual content, patents, or reusable processes and procedures.
Some organizations are valued based on the recognition and reputation of their name or other parts of their brand.
Well-known brands like Nike are worth exponentially more than unrecognized shoe manufacturers with a comparable level of quality. Similarly, luxury brands like Gucci are valued based on their reputation and exclusivity, not just on the quality of their merchandise.
The creation of a highly-replicable franchise, like McDonald's stores, encapsulates several of these kinds of intellectual property. Franchise models have evolved significantly in the digital era due to the availability of machine tools to further streamline and scale operations.
Some of the most common IP value models in the digital era are based on content. Traditionally, content would be created by a select group of writers, performers, or artists and then distributed through media companies; today's content models are more democratized. This is for several reasons:
Brands who create or aggregate intellectual property include the New York Times, McDonalds, Eurovision, Al Jazeera, DStv, Columbia Music, Sam Smith (musician), Netflix, Gucci, and Apple TV+.
Strategy: Invest in re-usable digital tools
Resources: software, mobile apps, hardware devices, tech-specific patents, integration tools
'Idea generation' value models sometimes take the form of technologies. Hardware and software can be created once and then provide 'evergreen' value for an extended period over which they receive more iterative updates. Hardware giants like Intel and Nvidia have multi-year innovation cycles based on massive research & development budgets. Software behemoths like Microsoft create interoperable 'stacks' of technologies that can be used for many different functions, especially in the business world. Meanwhile, smaller startups often focus on specific or niche technologies which can be integrated into a more extensive technology solution, as Shazam did when they created a music-recognition tool; Apple later acquired them.
Strategy: creating value by selling data as datasets or via products and insights gleaned from processing data, such as algorithms, data-driven investment strategies, business optimization, and/or product personalization
Resources: raw data, processed and aggregated datasets (big data), algorithms
Data-centric value takes the form of direct value (such as buying, aggregating, and selling or licensing datasets) as well as indirect value. This indirect value can take the form of insights from data (such as credit scores based on payment history or social media trend analysis) and algorithms, AI, and machine learning models (such as Google Image Recognition). This is in addition to the ways companies can use data to enrich other value models through personalization of offerings and apps, optimization of businesses, and improved decision-making on investments.
Strategy: enable and amplify the exchange of value between parties
Resources: people, organizations, marketplaces, and machines
The network orchestration value model generates exponential results by connecting humans and/or machines to each other. Common analog examples include business networking organizations, brokers, alumni groups, and even neighborhood associations. In the digital world, networks include social media, app stores, and other online marketplaces. Through matchmaking between parties and the creation of common core resources, such strategies have very high leverage since much of the value in the network is created through things, people, and ideas that exist outside of the network host. There tend to be three sub-models for the connections value model: connecting people, networking machines, and hosting multi-sided platform marketplaces.
Strategy: match people to each other
Resources: individuals, groups, matchmaking tools, directories, gathering spaces, 'social objects,' community norms
The networking of people is essentially a function of creating spaces for people to connect (such as communities), matchmaking (to help people find each other), and furnishing common resources (such as brokerage services or software aids). This could take the shape of a business association in the analog world, where various professionals join via membership, have concierge-like services and special events to connect with each other, and directories or publications that help members stay connected and informed.
In a network of people, there are often 'social objects'—common points of discussion or sharing that create or reinforce relationships. In a traditional business association, these may be reports of meetings or deals between members, or announcements, events, and discounts. In an academic network, they might be publications. In a neighborhood association, they might be social events or safety updates.
In the digital context, online social networks provide many of these same functions (such as membership and profiles). Using recommendation engines, social networks help people find each other. Gathering spaces often take the form of activity feeds where members can create posts or other social objects, private groups and/or direct messages, and ways to share. Similar to analog networks of people, certain gate-keeping, identity-checking, norm-setting (like appropriate tone for a professional setting, or avoidance of incitements to violence), and other community functions need to be practiced. In the digital world, such functions are partly or wholly run by machines. Using machine learning algorithms to recommend and prioritize content is a massive undertaking with substantial social and ethical implications. Online social networks vary in business model, where some are supported by ads or paid content, others by community efforts, and yet others by paid membership.
Strategy: connect machines to each other and orchestrate them to achieve exponential results
Resources: technology infrastructures like servers, data and processing tools, APIs, authentication and orchestration, algorithms and other rules
Networks of machines are an emerging value model which goes beyond having technology or datasets and focuses on the connection and orchestration tools of devices that operate most of the time without human direction.
Examples of machine networks include server farms, internet-connected in-car navigation devices, application program interfaces (APIs), content delivery networks (CDNs), botnets (malware ), and blockchain-based cryptocurrencies like Bitcoin (where lots of machines perform math, log activity, and then redundantly check transactions across a distributed ledger to prevent fraud).
Strategy: Host exchanges of value between parties
Resources: community, marketplaces, infrastructure, and data
Multi-sided platforms combine networks of people and/or machines and add a marketplace element for direct exchange of value between parties. The most commonly-known multi-sided platforms (or MSPs) are multi-seller e-commerce sites like eBay and the Amazon Marketplace and the mobile app stores hosted by Apple and Google.
What makes this value model distinct from just online sales or traditional marketplaces is the combination of digital infrastructure and datasets along with community elements.
Sort your company’s resources and activities into these four categories. Identify where your value model is currently focused. Nearly all companies have resources that include things, people, ideas and connections, but not all strategies leverage those resources the same way.