Firms should diversify networks to transform into digital superpowers

As market incumbents look for new ways to transform their operations, in response to digital disruptors, a new report has suggested that hybrid firms have a much higher market value, in comparison to companies with traditional business models. Companies who diversified their business models accordingly improved their valuation in 2016 by more than 60%, as well as generating twice the levels of growth of mono-business models.

Digital disruption has left Europe’s leading companies struggling to sustain growth and competitive advantage. As a result, the digital transformation consulting market has boomed to a value of over $23 billion, as clients of the consulting industry scramble to gain the upper hand in the race to digitalise. Now, new research has revealed how European companies can learn from US digital superpowers, in order to speed up adoption of business model innovations, drive new revenues, and get greater value from their core businesses.

This is a report with a difference, however, as international professional services firm BearingPoint has released what it believes is the world’s first AI-based analysis of the top 3,500 publicly traded companies in Europe and the US. The new digital competitiveness report was developed by the BearingPoint Institute, the research arm of the management and technology consultancy, in partnership with OpenMatters, an AI firm which specialises in business models and machine learning.

According to the study, the business models of top publicly traded companies typically fit into one of four categories. Around 64% of companies today were found to be Asset Builders, which extract, manufacture, distribute or sell physical goods, or access to them. Manufacturers, retailers and telecom providers all fall into this largest group, while 24% of companies – including banking, insurance, consulting and engineering firms – fit the next largest segment, of Service Providers. These hire and train skilled employees, before selling their labour as a service to consumers.

The third largest group, that of Technology Creators, is aimed at developing and protecting intellectual capital. This is often made up of intangible products, which have incredibly low marginal costs of growth, including software. The group understandably is made up mostly of software vendors, data and biotech companies, as a result. 11% of companies operate this model, while the final category, Network Orchestrators, is inhabited by just 1% of the firms analysed by BearingPoint’s AI. This group creates and maintains networks of people, things and information, facilitating interactions and transactions between them.

The key point from the landmark analysis is that diversification is an increasingly integral part of a company’s future survival. While previously, specialisation in the market where a firm was strongest was enough to maintain growth, today firms that adopt a portfolio of business models which are asset light and include network effects are perceived by investors and the market as most likely to generate future growth.They therefore have a much higher market value in comparison to companies with traditional business models. Companies who diversified their business models accordingly improved their valuation in 2016 by 65% in comparison to those who maintained a mono-business model. Furthermore, between 2011-2016 they managed to generate growth of 8% versus 4%.

Recommendations

BearingPoint’s research, therefore, determines that European organisations looking to compete in today’s fast moving digital economy need to understand the different business models, the fundamental role that network effect plays in the digital economy, and the overarching potential of building on open digital platforms. While this might seem a daunting prospect to many executives, the firm also concluded its report with a six-step approach on how businesses can adopt digital platforms with network effects and reconceive its business model – and which can be adapted to fit any existing business model and work within any transformation programme.

Firms should critically evaluate their business models. According to the paper, most industries have a traditional business model with a linear value chain, whereas digital natives create new models with novel use of technology, allowing them to adapt more swiftly.

In line with advice from &Samhoud, the research then suggests that firms apply lean start-up principles at a strategic level to determine the right business model portfolio to create higher levels of business value. 

Next, it is key for firms to understand the fundamental role of network orchestration in the digital economy. While the model existed before digital, ‘digital native’ start-ups have accelerated its adoption to great effect, and in order to further emulate their agility, market incumbents need a thorough understanding of this aspect of their business.

Third, organisations should consider network orchestration in combination with their existing business models, with a goal to achieve significant growth in the digital economy. They should then work to identify synergies between existing and new business models, in order to enable both incremental growth, and provide a clear route forward from existing practice to grow revenue and avoid risk of disruption.

Finally, BearingPoint recommends that companies base their business strategies and future planning on clear measures that are compelling, tangible and achievable. Clear goals will help build for long-term success, while basing them around continuous delivery of high-value business model innovation will ensure that a culture of agility develops within an organisation.

Commenting on the findings of the study, Eric Falque, Partner and Global Leader of the Go Digital initiative at BearingPoint, said, “European leaders need to think seriously about their future in the digital economy. Optimisation strategies have been the story of the past decade, but to be competitive, our research shows that new ‘business models’ generate growth by benefiting from today’s network based, ecosystem and data driven models.”

Angus Ward, Partner and CEO Digital Ecosystem Management at BearingPoint, added, “Organisations looking to maximise value in the digital economy must think like investors – reallocating their capital to change their business model portfolio and looking to include assets that are light, data centered and involve partner ecosystem innovation. Business model change doesn’t need to be radical or high risk, there are many ways in which it can be an evolution that increases value and changes the relationship with customers.”