Digital Business Models: An Introduction
This article is part of a content series on the topic of "Digital Business Models" that I created for a course at the Vorarlberg University of Applied Sciences.
Dear students,
welcome to our journey through the world of digital business models. I've been granted the opportunity by the university to reimagine this course. As a result, you'll find that this course diverges from traditional structures, aiming to offer a unique learning experience that is relevant even in the age of artificial intelligence (at least that's my goal, you'll tell me at the end of the event whether it worked).
Due to the changed course structure you will explore content outside the course times (e.g. through this accompanying content series) and when we meet at the university, we will take advantage of other learning opportunities, such as exchanging ideas with interesting (female) founders or having a movie evening together followed by a discussion. I look forward to exchanging thoughts with you on digital business models!
To add a face to this faceless article, here's a short video message from me.
In case you're wondering, who is this guy doing this course anyway and what makes him qualified to do it? You can find out more about me and my background here or check out my CV on Linkedin. And if you have any questions, please do not hesitate to contact me by mail.
But now let's get directly to the topic of digital business models. First of all: What is a business model anyway? Academics love definitions, so let's check out a few of them.
As a preliminary note, there is not ONE universally accepted definition of the term "business model". There are different approaches to describing business models and we will get to know some of them in this course. Personally, I find Peter Drucker's perspective particularly compelling. Although he didn't specifically use the term "business model" but rather "business theory" - which is not really surprising, as the term business model did not become popular until the late 1990s - his thoughts captivatingly encapsulate the essence of what a business model represents:
„… assumptions (…) about markets. They are about identifying customers and competitors, their values and behavior. They are about technology and its dynamics, about a company’s strengths and weaknesses. These assumptions are about what a company gets paid for (…) Every organization, whether a business or not, has a theory of the business.“ - Peter Drucker (1994, Harvard Business Review)
I really like the "assumptions about markets" part. What about you? Okay, if you're thinking to yourselves now, isn't there anyone who has said anything about this since 1994, as a lot has happened in the meantime, internet and all that, then of course I can also provide you with a more up-to-date definition. Alexander Osterwalder, one of the creators of the Business Model Canvas (which you've probably heard about in other courses), defines business models as follows:
“A business model describes the rationale of how an organization creates, delivers and captures value” - Alexander Osterwalder (2013)
But wait a minute (I hear you say while reading)… this definition is also not from the last decade and isn't the course called DIGITAL business models? Okay, fair enough, challenge accepted and here is a current (or at least from this decade) definition of digital business models:
Digital business models are a conceptual extension of business models and are delimited by the explicit use of digital technologies, data, and, in general, the extraction of potentials from digitization for business conduct. The focus lies on delivering digital offerings and digital experiences to customers via digital platforms and on the overarching goal of creating scalable business solutions in ICT-enabled ecosystems.” (2020, check it out in the paper by Guggenberger, Möller et al. yourself; and by the way, ICT stands for Information and Communication Technology)
So Business models are about understanding how an organization does business from an overarching perspective. Unfortunately, all my beautiful slides are no longer needed due to the new course format, but back in the days when I was still presenting slides, I always used a slide with an analogy to explain this overarching perspective (but maybe the trick works digitally too 🤷♂️). Let’s check: Look at this beautiful piece of art by Wenzel Hollar (1607-1677). What do you see?
Do you see the trees, the path, the workers in the fields? Or do you see a giant head in the landscape? What, a giant head? Half of the students always focused on the details and lost sight of the big picture, therefore did not recognize the giant head in the picture (once you see it, you cannot unsee it). The business model, like the big head, stands for the big picture. However, the big picture is made up of many detailed smaller components (e.g. trees, streets, workers) and it is easy to get lost in these details. Also within the business model, I can drill deeply into specific key components, such as channels, e.g. closely analyzing the algorithms of different social networks to identify which types of posts drive the most engagement. The details can be handled to such a professional degree that someone can spend a whole working life getting the details right. And not that the details are unimportant, you have several courses on these details for a reason... but this course is about the big picture, about the “the rationale of how an organization creates, delivers and captures value” (Alex Osterwalder).
Okay, I hear you thinking, but why do I have to deal with these business models for a semester now? Well, digital business models have disrupted numerous industries in recent decades (hello booksellers! What was a video rental store again?). And we are nowhere near the end of the story. Managers in all sectors must therefore at least get their heads around digital business models in order to understand how they will be affected. Even if it seems like the core offering does not change for some companies (e.g. selling razors), parts of the business model might change, such as the distribution channel, providing an attack vector for new competitors (e.g. selling razor online via subscriptions, hello Dollar Shave Club). And that can be quite dangerous, as we can see from some examples. I'm sure you know the Netflix story, I've heard it a dozen times too, but it's always mind-blowing to me when I hear it again. In 2000, Netflix wanted to sell itself to the video rental giant Blockbuster for $50 million (back then Blockbuster hat 9000+ stores). Blockbuster laughed at the founders, rejected their offer and sent them home. The rest is history… as of today, Netflix has a market capitalization of $263 billion and Blockbuster is out of business. Netflix co-founder Marc Randolph writes on Twitter (er, sorry, on X) about this incident with Blockbuster:
Digital business models have experienced positive development in recent decades. If you look at the list of the top 10 companies by market capitalization in February 2024, you will see that most of them pursue a digital business model at their core (e.g. Google) or enable digital business models with their products (e.g. Nvidia enables AI applications with their chips). Nvidia has added about $600 billion in market capitalization so far this year and now has a market valuation of 1.78 trillion (!) US dollars. To put this in reference, the total market capitalization of the DAX, Germany’s premier stock market index comprising 40 of the nation’s biggest companies, stands at around $1.846 trillion. This figure includes the market cap of leading players such as SAP with $211 billion, aerospace company Airbus at $126 billion, automotive leader Mercedes-Benz at $74 billion, heavyweight Volkswagen at $69 billion, chemicals giant BASF valued at $43 billion, sportswear icon Adidas at $32 billion, and the financial institution Deutsche Bank at $25 billion.
Okay, I hear you thinking, Nvidia's market capitalization just shot up because of the AI hype and that will come back down when the hype dies down. Fair point. Some market observers have their doubts too. A commentary with the self-explanatory title "Nvidia is crazy, when will the crash come?" in the Financial Times reads: "To get to a $740 share price simply requires that the company maintain a monopolist-like operating profit margin of 55 per cent for the next decade, while also growing sales tenfold, from $60bn a year to more than $600bn. For context, the entire industry sold $527bn worth of chips last year, according to the the Semiconductor Industry Association (...) So Nvidia shareholders are making a bet that the law of large numbers does not apply, and that competition, innovation, and pricing pressure will not come to bear until at least the mid-2030s. Good to know."
But, even if there are hypes, bubbles or crashes, the development towards more digitalization and the advancement of digital business models is inevitable in my opinion. But after all, we are at a university here, so I am happy to have a critical discussion about this statement! And we will have enough time for an exchange of opinions. To make sure we have something to discuss when we meet at the university, please make sure you read this accompanying content series (by the way, you don't have to subscribe to my weekly MadeMeThink newsletter in order to get your course content, you will always receive the links relevant to you via our internal mail system).
I look forward to an insightful exchange of thoughts on digital business models...
Disclaimer: The thoughts published on MadeMeThink are my personal opinion and should not be considered as investment advice or a recommendation for any type of action. I am not a financial expert. The startups, organizations or corporates highlighted in this publication have caught my interest. This mention is not an endorsement or recommendation to engage with them. Readers should always do their own research.