In discussions with business leaders and executives about digital transformation, the conversation on delivering change and moving toward new ways of working always meet with a great deal of enthusiasm and create a lot of excitement. Alternative approaches to define innovative business models are easily imagined, inspired by well-known market-makers such as Netflix, Uber, Airbnb, and Tesla who redefined their domains by working closely with clients to blend technological advances with new revenue models to reimagine solution delivery. It is easy to see why organizations look to these exemplars as potential role models in their strategy sessions.
While much can be learned from these iconic companies, it is essential to consider how they achieved their market position and what characteristics are essential to their success. Although there is much to unpick when reviewing why these companies had impact, in my experiences working with a variety of Large Established Organization (LEOs), there are at least 3 areas of conversation that always appear right at the top of the list of priorities in these discussions:
The aim with all three of these objectives is clear: Focus on delivering better outcomes for the client where value is appropriately recognized and shared. For LEOs, this must occur while recouping their existing investment in operating procedures and management practices, and delivering on commitments to clients with products already in use. Hence, they must try to introduce changes to their relationships with clients and key stakeholders using alternative business approaches that reshape relationships that have long been established. A challenging task. But not an impossible one.
Examples such as Rolls-Royce’s “power-by-the-hour” and Michelin’s “tyres-as-service” highlight that a different arrangement is possible between product providers and consumers by focusing on the service that is being delivered and the outcomes that align both parties. Adopting “servitization” as a way of delivering value is often the source of a great deal of discussion in boardrooms and drives a varied range of experimentation in innovation labs. It is seen by many as an essential strategy approach in any discussion about our digital future.
Yet in most LEOs, progress toward delivering meaningful results in servitization is painfully slow. They do not have the luxury of starting with a clean slate to establish their value proposition and to define their market. However well imagined the result, with obvious incentives for all stakeholders, organizations are left with that annoying sense of being unable to answer a key question: How do we get there from here?
Let’s consider an example. Higher education in the UK is dominated by a single transactional business model. A student applies to a university as they complete their studies in school, is accepted based on the required grades and perhaps other criteria related to the course, and then pays the £9,250 per year that is the maximum allowed fee for an undergraduate degree set by the UK government. Over many years, all of the systems and mechanisms in Higher Education have been established to manage and support this process.
In contrast, imagine a servitized approach to Higher Education. The application process would require the university to agree on a meaningful outcome with the student about their education, perhaps based on their desired future career goals or learning needs. Payment would be based on achieving that outcome using a fair model of compensation that may involve on-going education and a recurring payment approach in line with the student achieving their outcome. This model optimizes the learning outcomes for the student and ensures the university is focused on understanding, managing, and delivering on those needs. Such an approach defines a fresh perspective on value creation and sharing across all stakeholders.
It is a model of education that is starting to appear. Elements of this approach can be seen in several of the online learning solutions now appearing. They use digital technologies to monitor student performance, analyze learning styles, and personalize the learning journey appropriate for each student’s context. To a large degree, the digital technologies are available, scalable, and readily affordable. So why is this servitized approach not more widely used?
Of course, there are many barriers to overcome to make this shift, and it would be foolish to oversimplify the digital transformation challenges that must be addressed by LEOs (such as universities) to deliver this change. Substantial efforts, including within our own DIGIT Lab Research Centre, are exploring the wide range of factors to be faced to achieve this transition. However, there is one particularly significant element that should be highlighted to help understand the way successful digital business models are created: The Digital Flywheel.
In what has become one of the most well reported stories in the Amazon folklore, it is said that the business model of Amazon was first sketched by Jeff Bezos on the back of a napkin at dinner one day in 2001. What he drew became know as the “Amazon flywheel”. It was a simple model of a virtuous circle that must be created to drive the relationship between products and clients to enable a 2-sided marketplace. More products will bring more clients. More clients will attract more product providers.
Hence, the investments by Amazon over its early years were entirely focused on establishing, growing, and accelerating this flywheel. The fast, easy-to-use website brought more clients. Reliable product delivery together with ultra-low sales commissions and delivery costs attracted huge numbers of product providers. A transparent approach to allow users to provide rankings and to share feedback built trust between product providers and consumers. And in this way Amazon got the flywheel spinning.
The flywheel concept was not invented by Amazon. It has a long history in areas of marketing and is particularly well-defined in digital marketing companies such as Hubspot. In this context, the flywheel is used to focus attention on delivering a high-quality customer experience. The mechanical origins of the flywheel is a very energy-efficient mechanism that requires increasing speed of rotation to create and distribute energy. For marketing organizations such as Hubspot, they recognize the importance of building this energy, and why time and resources should be optimized to drive three aspects of the flywheel:
The aim is to guide efforts toward business strategies that support these three activities. For example, increasing the speed of the flywheel may require building capacity of inbound marketing and introducing freemium models to gain adoption for learning more about potential customers and raise awareness to improve targeting for marketing campaigns. The flywheel is used as the touchstone for prioritizing activities and measuring the impact of such investments.
In recent times, several organizations have picked up on these ideas to apply the flywheel concept as a central theme of their digital strategy. From this perspective, the flywheel is seen as the basis for defining a set of experiments to ensure rapid generation of data providing insights into producers and consumers, and expanding knowledge about ways to maximize the value creation across all stakeholders. These experiments are organized according to their value in accelerating and expanding the flywheel.
In practice, the implications of this approach can be significant. Starbucks is an interesting example of a company that has been highlighting the importance of its “digital flywheel” as a core element of its digital transformation strategy. Rather than focus on the transaction of “selling a cup of coffee”, much of their attention is aimed at building a digital relationship with each customer. Consequently, their investments drive customer acquisition, target spend-based rewards, provide personalized offers, and increase the convenience of ordering. Underpinning these activities is a unified cloud infrastructure to power these digital interactions through efficient data gathering, management, and decision making.
At Arthur D. Little, they take one step further in describing the utility of a flywheel approach as a core element of digital strategy. They see the flywheel as a way to define the business purpose and clarify the digital drivers necessary for growth. As part of a LEO’s digital transformation approach, they emphasize the role of a digital flywheel to define a clear purpose, increase engagement, and provide tangible results. In their customer engagements, they use the flywheel as a framework to organize a set of workshops aimed at analyzing the company’s current situation, reviewing its vision, and prioritizing investment. As simple as this sounds, the discipline this approach provides can support a rigorous strategy review across a range of important dimensions.
For organizations embarked on a digital transformation journey, a key challenge they face is to redirect their strategy toward activities that create value for all stakeholders and drive positive outcomes for clients. The move to outcome-based approaches demands a tighter focus on service delivery and more detailed insight into client behaviour to align incentives and drive coordination. Companies such as Amazon and Starbucks use the concept of a digital flywheel to optimize their activity around the dynamics of customer engagement and on building a closer relationship between all stakeholders in their ecosystem. Viewing your digital strategy as a flywheel can help you to prioritize investment and measure your progress. Why not give it a spin?