Why digital transformation will drive business model innovation

As a follow up to my previous post about the intersection of digital transformation and innovation, I wanted to conduct a thought experiment to illustrate why the real impact of all the impending change from digital transformation and innovation will be business model related.  While the implementation of new technologies is interesting and challenging, and creating new products and services is daunting, at least you can still do that primarily if not exclusively in your existing business model.  What happens when the business model is no longer viable?

Using GM as an example

To illustrate this point let's consider General Motors, or for that matter any car company.  These companies are the bedrock of the manufacturing prowess of the United States and other developed economies, and create jobs for the core company and for a long tail supply chain.  Does digital transformation and innovation have any potential impact on their business?  You be the judge.

Shift in car acquisition

If consumer tastes change and if autonomous vehicles (which are just specialized robots) become a more compelling offering, consumers will likely view transportation as a service.  Rather than acquire cars as assets with high prices and rapid depreciation, and ongoing maintenance, consumers are more likely to simply acquire rides.  Uber and Lyft are simply the transition point, where we use other people's cars to get rides.  As this movement gains steam, and autonomous vehicles gain traction, it's increasingly likely that individuals don't acquire cars, they pay for transportation or miles traveled.

This means that 1) the number of cars purchased is likely to fall, because the existing cars are used more efficiently and 2) individuals and families acquire fewer cars.  In this case the dealer network increasingly becomes obsolescent, and sales of new cars move to fleet sales.

Financing

If sales move from individual buyers to fleets, financing models change.  Most car companies make a profit from both the sales of the vehicle and also financing a loan.  If fewer individuals acquire car loans, financing profits fall.  If large corporations offer transportation services, the financing may simply be transferred to larger organizations, but those larger organizations will demand lower interest rates, making financing less profitable.  Thus the large automotive companies may take another hit from losing some financing margin.

Shifts in branding?

If you don't actually drive the car, do you care about its performance?  Most of us don't really take advantage of the zero-60 acceleration or tight suspensions of some higher end luxury cars anyway.  As the car becomes an automated commodity, how does BMW and Mercedes differentiate its autonomous vehicle from Kia or Hyundai?  The real battle will be on interior options and luxury on one hand, and utility and carrying capacity on the other hand.  How companies differentiate their cars and their companies will have to change.

 Supply Chain

During all of this transition to autonomous vehicles or ride services, digital transformation is also changing the supply chain.  Blockchain and IoT provide greater oversight into where components are made and sourced, and big data helps identify cost issues, leading to more pressure on the supply chain.  New technology entering the car to manage issues like lidar, steering, acceleration and so forth introduce new supply chain members which provide far more value than the traditional supply chain members.  Older members of the supply chain providing simpler components feel increasing pressure to automate and cut costs, while newer members bring far more technology savvy and agility.  The supply chain will be under increasing pressure to reduce costs while increasing technology and flexibility.

AI/ML
All the while artificial intelligence and machine learning are providing insights into consumer behavior and usage and identifying issues within the supply chain and the manufacturing process.  This means constant updates to how car parts and cars themselves are designed, manufactured and assembled.  Production lines are constantly reconfigured to adjust to new insights from AI and ML, which conflicts with older union work rules. 

What happens?

In the end GM and other car manufacturers may need to be able to survive selling fewer cars to a much smaller buying public made up mostly of corporations offering rides as a service.  They will differentiate through lower service costs and may lose much of their branding as autonomous vehicles become a white good, branded by the service provider.  The car companies will have to survive with lower profits from financing and flat to slowly decreasing sales.  The dealer network may become obsolete, and with enough 3-D printing and CAD modeling even the after market for car parts may become less attractive.

While this is a radical departure from GM's model today it is not that alarmist. Many of these conditions are already apparent and emerging or will occur shortly.  Digital Transformation, ubiquitous connectivity, the capacity to store, process and manage large data volumes and consumers shifting desires are already having an impact.  And this is just for the car companies.  We haven't even scratched the surface of the secondary and tertiary markets for fueling, insurance, driver's education, taxis and many other transportation issues.

Everything resolves at the business model.  GM can make money in any of these scenarios, but the business models for the way they operate today, and the way they may need to operate in the near future are exceptionally different.  Want to know why Ford and GM are getting out of the sedan business?  So they can make enough money on their trucks and SUVs to put a down payment on the dramatic changes that are necessary for them to survive.

Whether we are talking about digital transformation or innovation, everything resolves to the business model.  We need better tools and new ways of thinking about how the business model can and will evolve, and how to shift from the existing business model to the required new business models before these shifts occur.

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