What is Digital Business? Is it E-Commerce, the Collaborative Economy, or APIs? Yes.

Digital transformation has become one of the very top priorities for large organizations this year, as companies seek to adapt their products and services — even their very business models — to the modern marketplace.

But literally reinventing a company, changing fundamentally how it engages with and delivers to the marketplace, is perhaps the single largest challenge in business these days. What’s more, just about everyone realizes there’s too much to do but that one also can’t boil the ocean. This means there’s often of a vital question of where to focus first in digital transformation, and in what order to proceed.

Digital business in its own right has become a very broad topic with many sub-disciplines. Now the conversation has moved directly into the C-suite and to corporate boards of directors. These leaders are now on the front line of these changes, grappling with and making momentous decisions on where to spend precious company time and resources as they attempt to evolve the fundamental design and operating model of their organizations in order to sustain their future growth and existence.

As the story unfolds, it’s become clear that often the biggest hurdle is having a management team that is highly skilled and well versed in the prior way of working — the way the company used to do things and is largely still doing them — and not the very latest digital business methods. As I’ve noted before in discussions of digital change, the tendency to clearly understand the world through the present way of doing things acts as a corporate immune system, throwing off inbound innovation and inevitable change until confronted unavoidably with reality, often when it’s far too late.


What does Digital Business Consist of Today?

So the first question then is whether e-commerce is a necessary and sufficient description of digital business today. In our view, it’s certainly not for most organizations, even though most digital business units attached to the traditional enterprise have this as by far the largest revenue source today.

It turns out there are a number of essential digital business capabilities well beyond e-commerce that we find that business leaders are often unaware of, or at least don’t fully appreciate their strategic import. These newer capabilities are essential for building the digital ecosystems of customers, suppliers, and business partners at scale using growth models of the Internet startup world. Without these ecosystems, businesses have little digital network effect (one of the fundamental power laws that digital businesses must be expert at) or marketplace differentiation, which is absolutely critical for top performers in digital business to have.

This is perhaps the most essential point in understanding digital business: The inherent value and power of creating one lies in building a high-scale capability for the network to build out the value for your business. Enabling your ecosystem to co-create marketing, sales, customer care, and even the product development, all on top of the vast assets that a typical enterprise uniquely controls, is the name of the game here. Without such a set of ecosystems and the millions of points of self-reinforcement of a company’s value — again, it must be emphasized, primarily created by its stakeholders — is something no traditional business approach can possibly compete with.

Companies that go up against the eBay or Amazon of their industry using the early models of online business are simply not going to succeed. That’s because they missing the key pieces required today: They aren’t playing the platforms game, the ecosystems game, or the community game. And unless you’re playing all three at a strategic level, you’ll be just another point online service trying to do it all on your own.

In sharp contrast, digital leaders have learned to make the system do most of the work. For example, Amazon has millions of self-onboarded partners connected to its ecosystem at every level, from customers contributing data at scale (reviews, ratings, and much more), to hundreds of thousands of partners listing unique and hard-to-find products, to startups reusing their computing infrastructure to build hundreds of world class products, all of which benefits Amazon’s network effects. They also generate bottom line revenue. eBay, for instance, gets a surprisingly percent of its revenue from these unexpected digital business sources.

In fact, it’s often not well known that new forms of digital business frequently generate most of the revenue in leaders today. Just look at the revealing revenue numbers of top performers using strategic digital business approaches like APIs:

Expedia gets 90% of revenue from APIs. Salesforce gets 50%. eBay’s share of revenue from APIs is a whopping 60%.

Yet few executives preparing for digital business are even looking at these models, and this is the point here: We’re in our third major generation of digital business, and organizations have to get to the third generation as rapidly as possible.

It’s the same with highly disruptive digital business approaches like the collaborative economy. Companies like Uber and AirBnb have no assets such as taxis or hotel rooms whatsoever, but are quickly becoming a dire challenge for traditional hoteliers and taxi services not only have those resources, but are being dragged down by investing in and maintaining them on their own. These two companies are just a drop in the ocean of how many startups are vying for dominance in this vast new space.

So how are collaborative economy startups achieving these results? They have successfully gathered around them networked communities of suppliers that have these resources and then then orchestrate those suppliers in scale, wrap a product interface around them, and deliver them to customers. This dramatically reduce their costs to scale and deliver to the marketplace, because they actually have no inventory or overhead themselves. To get ahead of the stratups and competitors, any capable digital strategy today will examine how collaborative economy approaches can be integrated into the business in scale.

In fact, scale is the name of the game when it comes to digital business. Whoever can 1) build their ecosystems the cheapest and fastest, by enlisting as many of the resources on the network (the global Internet in this case) as possible, and 2) provide best-in-class services that delight customers through stellar user experiences on the channels and devices of the day will likely win.

And there is a powerful competitive lock-out that comes when the network has gathered around you: It confers real, highly differentiated capital in terms of hard-to-replicate community, accumulated data, and marketshare. Or in the parlance of startups, virtually impossible to dislocate network effect. In fact, very few companies that have reached the top of their industry segment with the largest community, the best data, or best partner ecosystem have been dethroned.

So, these days a viable digital business must go well beyond putting up a digital storefront. The reason is simple: This is now something any company can do easily today with a minor investment in an e-commerce provider, and a considerable and sustained investment in marketing. It’s not differentiated, is not a road to becoming a dominant digital player, and will not see anywhere near the kind of growth that a corresponding investment in a truly native digital business model could achieve. Look at the current returns of venture capital firms who are funding tiny companies starting with none of the strategic assets of large existing companies but just these more sophisticated digital concepts.

Related: Designing the New Enterprise: Issues and Strategies

The Key Elements of Modern Digital Business

Instead, enterprises must look more deeply at the current chess pieces of digital business strategy and integrate them into a combined transformation and growth strategy that captures the ground that matters most in the online marketplace: Hard-to-create data, products that get better the more your customers and partners use them, and delightful be-everywhere digital customer experiences. The key elements for success now include:

  • Proactive support for the entire digital customer journey. One can find a lot of recommendations to map out customer journeys, identify high value personas, and to segment audiences. These are certainly important to have and are useful views that must be maintained. But likely the most important rule of all is to never give customers a reason to go somewhere else to get help with a given part of their journey. They are likely to stay there. Unfortunately, companies that started support for the customer journey right at the ‘purchase’ stage often have a hard time widening their support for it that it has the most direct tie possible to revenue, and the others stages appear less promising as a result. But a look at leaders like Nordstrom and Burberry show that owning the total customer journey is required to be a digital business leader.
  • Omnichannel touchpoints, on all major and high growth emerging channels. This means going well beyond sales microsites and mobile e-commerce, which are still important of course, but far from sufficient to be a top-tier player today. Modern leaders in digital business need strong customer communities as well as social architectures across their digital touchpoints to a) capture co-created value, b) scale up and spread out customer support to the marketplace, and c) develop advocacy as a strategic asset. Open APIs are often required to be a digital leaders today, as the aforementioned revenue numbers from many top leaders show that APIs are often the highest of all growth strategies, and it turns out, are crucial to developing a healthy digital ecosystem and downstream network effect.
  • A strong, multidisciplinary digital business foundation. Yes, this does mean having leading e-commerce capabilities with the latest features and techniques, however it also means exploring opportunities to explore collaborative economy options — something traditional firms are starting finally to get good at — by turning existing customers and suppliers into lowest cost or highly differentiated offerings through sharing of goods and services, building affiliate and supplier networks, or offering open APIs, all strategic capabilities that leading e-retailers typically have, including well-known traditional retail leader Walmart, with their new Developer Network. Contemporary digital businesses also are integrating branding, marketing, sales, and customer care experiences under a unified Customer Experience Management capability to break the moribund silos that these functions typically engender as departments and often cause customer experience to significantly underperform.
  • Well-resourced supporting capabilities for digital business. These come in many forms, more than those listen in the diagram above, but the most important ones are: a) An involved and visionary set of executive leaders supported by the CIO and/or Chief Digital Officer, b) digital business architecture, governance, and security, c) an experienced and adequately staffed community management team for the relevant community ecosystems, d) change champions organized to support digital transformation and e) new big data analytics services to allow fast-feedback loops to manage the flows of data, transactions, and ecosystem growth.

So how can executive leadership deliver on this rather large and complex vision for digital business? Bolt-on digital transformation is known not to work, and fashionable new models for bi-modal and tri-modal tech change to allow an agile development process to move forward to quickly seize digital ground are now in vogue. But these are necessary but not sufficient to drive a sea change in most organizations.

Instead, successful leaders will get their priorities for change in order and use effective new models for managing strategic transformation that are beginning to emerge from the short list of success stories of recent years. Will this be easy, no, but it is essential and enlightened leaders will add these approaches to their arsenal and experiment more quickly and radically while there is still white space in a number of industries.

Additional Reading

How Leaders Can Address the Challenges of Digital Transformation | On Web Strategy

Businesses have digitized but not transformed | ZDNet

Defining the Next Generation Enterprise | On Web Strategy

Dion Hinchcliffe

Dion Hinchcliffe is a well-known business strategist, enterprise architect, book author, frequent keynote speaker, analyst, and transformation consultant. Dion works with the leadership teams of Fortune 500 and Global 2000 firms to drive successful change with new digital methods involving enterprise social media, digital business models, Internet ecosystems, workforce collaboration, and the future of work in general.

All stories by: Dion Hinchcliffe