The three paradoxes behind a successful digital business
Sirris has a long track record in industry and has for many years been coaching start-ups and existing companies with their move towards new digital activities. This intense contact has given us hundreds of stories about growing companies that have provided us with a greater understanding of recurring patterns.
One of the most intriguing aspects of this adventure has been a number of clear contradictions or paradoxes that characterise digital entrepreneurship. The most important ones for us are the software paradox, the strategy paradox and the valuation paradox. These are important because they provide an understanding of the fundamental mechanisms of digital entrepreneurship and the digital economy. They indicate which innovations and business models lead to success and frankly, which should be left behind.
The software paradox - critical versus (almost) free
On the one hand software is the driving force behind change and innovation, but on the other hand, building a healthy, flourishing business is always more difficult for software entrepreneurs.
In this respect, software supplements the historical position of economically critical resources that have lost their capacity to differentiate (largely) as a commodity. Just like oil in the twentieth century, software is essential for the present-day economy, but obtaining a margin through product differentiation is becoming an increasingly difficult challenge.
This has a substantial impact on the intellectual property strategy for software codes. The intellectual property of a commodity is by definition of little value.
In the software business there is a distortion in the relationship between value creation - by offering greater functionality and better performance - and its value capture, which refers to the part of the new value that the customer is willing to pay for. Product differentiation in the market is gradually becoming more difficult, which in turn leads to a weak ROI of R&D investments. This ‘commoditisation’ of software code is linked to the API economy and the open source movement.
The software paradox pushes the software business model from a (once-only) transactional model, to a model of recurring services. Software becomes a digital service. On-premises software has become 'software as a service' (SaaS).
The strategy paradox - Best product versus Customer intimacy
The most successful digital companies succeed in combining (operational) scale and (customer) acquisition speed with customer intimacy. They are able to rapidly upscale within their niche markets, as well as approach individual users on a personal level. These companies are good at 'hyperscale' and 'microcare’ at the same time. They overcome the apparent contradiction between both tactics with an agile, experimentally driven approach, supported by solid and extensive technology stacks.
The focus of these companies has moved from new product functionality to innovations in customer service and price setting. User retention is all-important along with speed of acquisition and on-boarding new customers. In order to achieve this, these companies are organised around customer processes and deploy digital levers such as user data and online lead-funnels. Value is not realised by detouring via the product, but by going directly to the customer wherever possible. This group of companies has transformed their digital service into an exponential service. The service has become the carrier for the exponential value transfer between the company and the customer group.
In doing this, these companies have short-circuited the traditional strategic antithesis between a ‘best of product’ strategy, aimed at volume in a segment of anonymous users, and a ‘customer intimacy’ strategy, aimed at maximising the margin with an individual (known) customer.
The valuation paradox - balance sheet assets versus digital assets
The majority of listed digital companies are valued at several times their actual book value. In the case of SaaS provider Salesforce this is ten times for example. The traditional link is also broken here between the value of the balance sheet assets and the company valuation in the digital economy. This points to the existence of a new type of asset: the digital assets, which for the time being have not been included in the books. The importance of these digital assets puts the focus onto the advancement of the latter, resulting a move of the key roles within the organisation. One of these key roles is allocated to the product manager: he is responsible for a single digital asset, which is the expansion of a loyal group of returning customers and their data patterns.
If you would like to find out more about this issue, please go to http://www.hyperscale-microcare.com/. The authors will be publishing a book on the subject this autumn.
We would also like to hear your opinions on the above issues!
(This article has also been published on Bloovi)