Digital business

Germany’s digital skills

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In the IMD World Digital Competitiveness Ranking 2023 Germany ranks 23rd out of 64 countries with its overall performance (down from rank 17 in 2019). Although this is definitely not a promising result for one of the world’s largest economies, it gets even worse when digital/technological skills of the countries are ranked: Germany’s rank is 58 (out of 64)!

More than ever, we need to work on advancing our digital skills. Besides the rather obvious technological skills, the skills for a digital business and a digital economy need to be developed further. As we keep reiterating here, digitization may start with technology, the important part of any digital business, however, is its business model.

Conversational Commerce as another challenge in e-commerce businesses

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The challenge for e-commerce businesses is, how to incorporate Conversational Commerce (or Voice Commerce). It is still in a preliminary stage, and it requires Artificial Intelligence. It can be used along the customer journey, but can only work with corresponding conversation capabilities and an adjustment of several business processes (a search with Alexa works very differently than a search on Google, for instance).

Conversational Commerce is also a multi-sided platform. As platform owner your challenge currently is the business model.

Challenges in e-commerce businesses

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For teaching advanced courses on e-commerce businesses I identified five major challenges:

  • Development of a (real) value proposition: There are so many e-commerce sites nowadays, why (and how) add another one? The answer lies in a convincing value proposition. The best theory to apply here is Christensen’s „Jobs to be done“.
  • Selection of the right business model: The main decision is whether to build a (multi-sided) platform or to go for the reseller model. Most executives think the platform model is the only reasonable choice in the huge e-commerce market. However, platforms do have some disadvantages and the reseller model with its better focus on customer experience may be the better option.
  • Usage of Artificial Intelligence (AI): AI is more and more used by the big players in e-commerce. How and where does AI really make sense and what does it mean for the business model?
  • Creation of new markets: In digital business, innovations are often disruptive. But there are also non-disruptive ways of creating markets and innovations; the Blue-Ocean Strategy can show you how.
  • Learning from Amazon’s strategies: Amazon is the dominant player in e-commerce globally – and it is successful. So what can you learn from it?

From substitutes to complements

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We are used to think in terms of substitutes (one product/service replaces another). So our competitors are those with similar products and our pricing needs to be lower than our competitors’ (or our quality needs to be better).

In the digital world, however, complements (products/services which complement each other) play a much more important role. This has significant consequences on who our „competitors“ are, how to form our relationship to these „competitors“ (or partners) and how to set prices (complements influence each other).

Digital Business defined

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What makes a business a “digital business”? In order to justify a new category of businesses, such a category needs to be substantially different from the existing ones (otherwise what value would a new category have?). And in fact, I claim that digital businesses have two economic characteristics which make them profoundly different from “traditional” businesses:

  1. All digital businesses work with near-zero marginal costs in an important part of their business.
  2. Very often digital businesses are exposed to network effects, indirect and/or direct network effects.

Digital businesses deal with goods or services that are completely or partially digital. Even an online shop wich sells physical products operates on a digital platform. And the main feature of digital goods is that they have near-zero marginal costs. Zero marginal costs have a very profound and far-reaching impact on many business decisions.

Digital goods or services are offered in digital markets. Very often such markets show network effects, wich often play a crucial role for the business. More and more digital markets are not only built by two parties (buyer and seller), but by multiple parties. These multi-sided platforms require a significantly different management and represent definitvely a new type of business.

Data are the digital fuel

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As many have pointed out already, data are at the core of the digital economy. Data are the digital fuel, they drive digital businesses. The more and better data you have, the more and better services you can offer.

Whether it is personalization, predictive actions or matching, all require data. What is important is not so much the amount of data you collect from each single user, but the combination of the data of your (and maybe even partners’) users.

Founders of digital ventures

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I have been asked which competencies founders of digital ventures need. My response: Clearly, they need economic knowledge on digital businesses. As a founder I need to know:

  • how the digital economy works,
  • how to deal with network effects,
  • how to build platforms, and
  • how to select the right business model.