Key steps of digital economy
Digital companies are on principle based on new business models that take advantage of the new possibilities of digital economy to reduce their prices and increase the value proposition for their clients, therefore taking over a part of the market from the old companies. The business becomes client-centric, which further amplifies the importance of any change that can increase the value and satisfy the clients’ new demands.
Serbia would like to accelerate digitalization and develop its digital economy, and rightfully so. The first steps can already be discerned - from investing in the infrastructure and the plan to bring broadband internet into every home, through accelerated adaptation of legislation, to starting various incubators and accelerators of start-ups and investing in them – all important and necessary phases. Still, the citizens of Serbia sometimes find it hard to understand all the good sides of digital economy, and there is a general fear, distrust and hostility towards the digitalization of daily life and business. After all, whenever something new, which hasn't been completely defined is being introduced, there is a certain resistance to change.
One of the main fears is that because of digitalization many jobs will be lost, as many tasks and processes will be automated. Robots, automats and computers will take over the world.
As in the case of any fear, the best thing to do is understand, if possible, where the danger is coming from, and which steps can and must be taken to better adapt to the new situation. This is the case both for individuals and companies and their organization.
Digital revolution has brought completely new possibilities of communication between companies and their clients, as well as many other changes. With the accelerated growth of Internet and especially smartphones, new business channels have opened, bringing considerable changes to our private life and business behaviors. Today, the passengers themselves buy most airplane tickets online, most often directly from the airlines. Air Serbia sells the majority of its tickets through its mobile app or webpage. The same goes for other airlines, which was not the case some 10-20 years ago. The middleman has been eliminated, and the ticket price reduced, and the product offered to the clients in a different way. Now there is one stable price for each specific flight which includes only carry-on luggage and it’s mandatory for passengers to check-in online. If one steps away from these rules, it incurs a fee for the service. Without these limitations, the ticket costs more.
It’s a similar case with online shops that may or may not also have a physical store on the market. The buyers choose, compare and purchase products and services online by themselves.
If we analyze this model, the conclusion is that airlines and online stores are moving some of their business processes to the buyer, thus reducing their expenses, while offering a lower price for the option of waiving certain services that used to be a standard part of the ticket or product price before.
Digital companies are on principle based on new business models that take advantage of the new possibilities of digital economy to reduce their prices and increase the value proposition for their clients, therefore taking over a part of the market from the old companies. The business becomes client-centric, which further amplifies the importance of any change that can increase the value and satisfy the clients’ new demands. The most utilized possibilities are:
- Digital channels (the Internet, smartphones, automats) – used for marketing and sales of products and services. These channels enable global market entry with minimal expenses. You can buy airline tickets anywhere in the world for any destination.
- Business processes are automated and adapted for digital channels and the customers themselves are performing certain business processes. The companies are digitalizing and automating the sales process and therefore diminishing expenses while increasing scalability. There are certain initial costs for these processes, but the number of performed transactions has no effect on the linear increase of expenses, if the projection is done correctly. A company can sell 100 or 10000 tickets and the expenses stay pretty much the same. In addition to customer communication processes, all the other processes are being automated which significantly decreases the expense of internal processes. A good example for this is cash credit processing in digital banking. While most banks enable their clients to apply for cash credit through digital channels, the internal processes remain the same as before, and they include a relatively large number of associates. The banks that really utilize digital banking have automated the entire process of application, analysis, approval and payment of cash credits. Therefore, the clients can get the money transferred into their accounts within minutes, while all the internal processes in the bank are automated and the credit is approved and paid out without the intervention of any bank employees. Amazon enables users to ask questions about products and other users to answer them, which accelerates support and also decreases expenses.
- Cutting out the middleman. In industrial business models, the standard supply chain is used. For the product to reach the buyer, it goes through one or more distributers or dealers before it gets to the retail stores. Going through this chain of supply significantly increases the price that the final customer has to pay, in comparison to the cost of manufacturing. Digital economy brings the possibility of cutting out many intermediaries in the supply chain and therefore can significantly increase the value for the final customer through price reduction and accelerated shipping. Alibaba and many other companies are building their success on this improvement of business processes.
- Manufacturing is no longer a clear competitive advantage. Most products are manufactured in service factories in China or Asia anyway, regardless of whether the design and the patent are owned by the company placing the order. For example, even though iPhones are designed in California, they are manufactured in China, which shifts the value to ideas, innovation, design, user experience and intellectual property, and manufacturing remains a service transferable to a partner, because it doesn’t bring any competitive advantage.
- The ecosystem has changed. From the supply chain through manufacturing to sales, support and IT services, the partners are changing, and new companies are entering these partnerships, bringing new value such as lower prices, different payment methods and risk sharing, but also joint innovation and products. Instead of buying a car, you can share one, instead of buying movies and music, you can buy a subscription, and instead of buying and maintaining an IT infrastructure and paying a team to manage it, you can purchase a cloud solution where you can use as much as you need, while retaining the option to downsize or upgrade your capacities as needed.
The difference in the business models of new, digital companies and the traditional ones, which use the industrial business model, is also in the expenses of manpower and staff profiles. New digital banks have a much smaller number of employees for approximately the same number of clients, and employ more programmers than bankers, because the physical handling of money is shifting more and more to digital channels communication and digital transactions. If we add optimally automated business processes to that, as well as new digital products which are adapted to the demands of clients, whereas in traditional banks, the business processes are very slow and attached to the physical document transfer from one desk to another, where they wait for signatures and stamps – clearly the difference is considerable.
If we are looking only at the number of people in charge of managing and organizing of production or sales and client/distributor contacts, or the teams managing the supply chain operations, together with the necessary executive structure to manage and plan company operations, and if we compare that with new digital companies, it’s clear that they have a huge advantage in reduced costs and improved speed, and less cumbersome company organization. That’s why it was possible to sell WhatsApp for $22 billion, even though at that time it had 700 million clients, being serviced by 30 engineers and 20 administrators.
Of course, we should consider that changing the business model, structure and organization of a company with an industrial model into the digital one, while optimizing organization and business is no easy task. This is, in fact, the most difficult part of digital transformation. Airlines have drastically changed some of their processes, banks are trying to switch as much of their business as possible to digital channels, supermarkets are enabling customers to check out and pay for their items themselves, online sales and automated many processes as well. The question remains which changes are applied at which speed. Some companies are making the mistake of simply adding digital channels and the adjective ‘digital’ into their name. We should consider, for starters, how these five possibilities can be applied for each company which wants to step in time with digital economy, and as soon as possible, because one by one the industry branches are being hit by the tidal wave of new, completely digital companies.
Branislav VujovicPresident New Frontier Group
Strive to become better
Branislav Vujovic is founder and also president of New Frontier Group and has overall responsibility for the New Frontier Group, with special focus on Innovation, M&A strategy, group strategy and investor relationship.