business and value models

Platforms that enable digital ecosystems have caused a large number of changes that impact every business. Enabling new business models, many capable of disrupting markets, possibly associated with new forms of monetization, directly affect companies of all sizes and markets.

The potential of physical businesses expanded by the digital and orchestrated by the social is still far from being understood by market agents, and very few are managing to adapt, evolve and transform themselves into a function or because of it.

Here we present the three core values that enable phygital business models [dematerialize, customize and exponentiate] that change markets and point out the paths for the future of business, to which we add four intrinsic values [sequencing, speed, responsibility and {in}destructibility] of businesses that have the potential not only to resist the future but to recreate themselves in it, perhaps even to create their own future and its markets.

As a background, there are the problems and processes of phygital monetization in the cycle of creation, delivery and capture of value.

We wish the reader an experience that is light enough to be interesting and fun and, at the same time, deep enough to be structuring.

demateralization of business

the business and the cost value

Business models that exploit digital-enabled cost reductions to attract customers are probably the type that most impacts traditional businesses. A series of techniques were developed to reduce the costs of products or services based on the dematerialization [virtualization] made possible by digital platforms. For example, the transformation of printed books into digital versions or video streaming instead of physical media. Or from car ownership to digital access to it.

Cost reduction occurs both in the product and in the associated services. In the case of books, digital eliminates paper, printing and radically reduces information logistics costs. The digital book market is “almost” unrelated to print.

This dematerialization movement extends beyond products and services and involves spaces. Such as retail chains that expand the service capacity with virtual stores where investment in construction and maintenance has very different characteristics from brick and cement spaces.

Dematerialization enables business models where the final prices of products can be defined by the value attributed by consumers. How to pay thousands of dollars for a signed, exclusive virtual dress, which comes from the “factory” dressed in your image, only to be published as a photograph on social networks.

business customization

the business and the value of experience

The more people realize that phygital products and services can be better – in the sense of more efficiency and effectiveness in solving problems – and not only cheaper than their analog versions, the more the market becomes more vital, and the faster.

The phygital experience can bring the product or service to the user, rather than moving to the place where the product is, or where a transaction would have to take place. It seems simple once you have it; but it’s not easy to do it fluidly; and once it exists, no one wants to stand in line to pay a ticket. Or do anything. Almost by definition, a phygital business has no queues. But it has the potential for customer loyalty to businesses that incorporate phygital experiences in their relationships.

The value of experience can be summed up in giving the customer more convenience and control to solve problems. COVID19 accelerated the need for online or digital first experiences. A leap into the future that has forced many businesses to understand and offer digital experiences to their customers, and all of a sudden. To survive.

Another relevant aspect of digital-enabled business models is the ability to customize products and services, adapting features of what is offered to each customer. The same product can be quickly adapted in the digital context to meet very specific market niches. For the first time, large-scale customization is a real value proposition, from the factory to the supermarket.

business exponentiality

the business and the value of scale

One of the characteristics of [digital] networked markets is the potential for scale. For pure virtual applications and services, network effects can facilitate an exponential growth in the number of customers of a business in a very short time. Like years [for a digital social network] instead of decades [for an analog TV network].

Network effects are often associated with Metcalfe’s Law which, in its simplest form, states that the potential value of a network increases with the square of the number of users, which has already been validated in practice in networks like Facebook.

Networks are a unique enabling force: the nature of networked digital markets can lead a networked business, when it starts to grow at speeds well above the competition, to situations where “winner takes all.” Then the returns on effort are disproportionately larger for the leading platforms in their sector.

Such logic is the basis for more dynamic and revolutionary digital business models on a global scale, such as Twitter, Google and Uber. These platforms, in addition to their core businesses, enable the creation of complementary business models, combining cost value and expertise with a critical mass of customers. It is important to note that it is not always possible –in smaller markets with fewer resources- to aim for exponential growth. But there are lessons from high-growth processes that can be used in all types of businesses in phygital markets.

business sequencing

business sequencing

the business and the value of the process

From the 1990s onwards, software production incorporated a number of production processes and industrial quality for the creation of code, starting from the almost direct use of things like kanban and evolving towards the creation of digital models, such as scrum.

Adapting processes from the physical to the digital world is a two-way street; now, 30 years later, it is the physical objects industry that redesigns processes to incorporate what has been learned in digital products and services factories: just in time, for everything, now.

Redesigning production sequences can be understood in multiple ways. One of them is the understanding of the DNA of digital and analog processes [their “sequencing”], which can, combined with the re-understanding of the classic sequences of production of anything, now enabled by digital, give more flexibility to the productive processes, making the manufacturing of physical products more explicitly incorporates principles of digital production, such as making decisions about products as there is more information, data, in the business information lifecycle, about their purchase, use and evolution.

In the phygital world, factories can assemble modularized products after being purchased in the digital world. From simple objects to others as complex as automobiles, it is possible to start producing, in factories, after being sold in stores [online], according to the customer’s choice. At the same time, it is possible to steer the product creation process from what is interpreted of possible future customer behaviors, while enabling online conversations with them, customers, throughout the entire lifecycle of the business.

business speed

business and the value of time

The ability to reduce the time interval between the perception of desire, in people who consume, the production of products and their publication, or availability to the market in the digital world is much less than in the physical space.

Not that it is simple or quick to develop a software, for example, and publish it, but the complete cycle is much more agile than the physical product cycle. Since the first moment, observing and inferring the desires of people who use digital products is an almost simultaneous action. As a result, the time between realizing desires and starting production or adjustments is often shorter than what happens with satisfaction surveys of physical products at store doors.

Likewise, the time between publication and people interacting with the adjusted product or a new product is almost immediate. A new version of a network software is accessed by its users at the same time it is published.

That said, it is important to realize that in the phygital world many products are, or will be, associated with software components, from washing machines to automobiles that can be updated in time of use and therefore increase the speed with which they adapt to desires, consumer aspirations.

business responsabilities

the business and the value of risks

One of the most innovative business models comes from the 1980s: freemium. Free access to attract a critical amount of people that will make the product or service increasingly useful to a network [Metcalfe’s Law] of agents in which only a small percentage pays for use, because it demands certain resources or exceeds a given free limit.

A special feature of digital products and services –the stock not being depleted when consumed- makes distributing the service free of charge one of the keys to attracting customers. Even though most customers do not demand premium services – which must be paid for – they bring, through the network effect, more potential premium customers.

A critical element of these business models is stakeholder engagement; an engaged user of a freemium service will remain engaged until attacked by an outside force [so it says in the “Newtonian engagement principle”] that captures it.

Models such as freemium increase and decrease risk, or affect the responsibility to assume the risk for those who produce or sell. It is up to the business to take the risk of placing the product in the user’s hands, keeping it always up to date and monitoring what and how much was consumed, to charge only the extras, to the point where the extras are part of normal consumption and… presto!… another free consumer was converted to premium.

In these models that involve products as services, freemium business models can be particularly valuable starting points to reduce risks for the entire network.

business [in]destructibility

the business and the value of the restart

business [in]destructibility

By now it’s to be expected that many businesses have already realized that they will no longer exist in the phygital world, or will not exist in the way they have existed in recent years or decades.

What many still don’t realize is that there are at least two ways for the business to cease to exist in the phygital world. If another business takes your business’s place in the market with new offerings of phygital products and services, your business runs a huge risk of disappearing or becoming irrelevant in the market. There are millions of examples.

But… when the business itself destroys its current model and redefines itself in terms of digital platforms, and does so continuously, it becomes indestructible. Especially when it takes into account, in its strategy, the transformation of people’s aspirations, in the market, into business capabilities to meet them. There, it is essential to understand the behavior of current and potential customers so that the alignment of aspirations and capabilities results in solutions to people’s problems in the market. And sales.

Destroying a business to recreate it in the phygital world requires maturity, knowledge and, above all, strategy. And not just any strategy, much less those constructed a priori, such as Cebolinha’s [Maurício de Souza’s] plans to destroy Mônica. Strategies to redefine business have to be created incrementally and iteratively, in the time of operation, in the space-time of transformation, associated with the windows of opportunity in the markets, which are all, today, phygital. Destroy, recreate, now. There is still time.

© 2020 – 2021 all rights reserved

This text was written by the professors Silvio Meira and André Neves.

[] is the home of strateegia, a theory of practice for strategic transformation, about which we wrote a long, illustrated sentence, which is available in pdf, at the link []. Our strategic enablement work is done on a digital platform that can be tested for free at the link [].

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