Mgmt236: Managing Strategic Change and
Digital Transformation
Class6: Digital Business Model
Dr. Xuesong GENG
Associate Professor of
Strategic Management
SMU Classification: Restricted
Prepare for Today’s Class
Topics:
Business model
Digital business models (CAC & LTV)
Platform business model
Blockchain technologies
Readings:
No cases this week
Discussion questions:
What is the difference between traditional business model and digital business
model?
How would digital technologies like blockchain help firm gain competitive
advantage?
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SMU Classification: Restricted
Digital Strategy and Transformation Overview
Strategy
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Positioning
Value proposition
Co-opetition
(joint) value creation & capture
Digital strategy
& Digital
Business Model
Digital
Transformation
map
Strategic
Change
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•
•
•
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Core
Process-model
Enablers
Growth path
Ambidexterity
Digital
Feature
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•
•
Data driven
3S (software,
service, social)
3S (synchronized,
smart, system)
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SMU Classification: Restricted
Strategic Transformation Map
Principles
Vision, Value, Core
Priorities
Challenges, Value creation and capture, Risk Profile
Data-centric &
Data-driven
Strategic Options
Goals, Scope, Product, Positioning, Competition, Business Models
Digital
business
models
Capabilities
Resources, Talents, Innovation, Technologies
Organization Enablers
Systems
Structure, Culture, Leadership
Initiatives, KPI, Process, BSC, Complexity
Change Processes
Change model, Roadmap, Growth Path
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SMU Classification: Restricted
Elements of Business Model
Source: Christensen, C. M., Bartman, T., & van Bever, D. 2016. The hard truth about business model innovation, MIT
Sloan Management Review, 58(1)
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Business Model: Capture Market Opportunity
Value Proposition
Revenue Model
Go to Market
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Consumer scope
Products
Service
Pricing
• Revenue streams
• Profit formula (CAC, LTV, cost structure)
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Distribution channels
Sales
Marketing
Service
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SMU Classification: Restricted
Revenue Models
subscription
Volume-based
Advertising-based
Licensing
Transaction fee
Loss leader
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SMU Classification: Restricted
Platform Business Models
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SMU Classification: Restricted
Freemium Business Models
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SMU Classification: Restricted
Google Business Models
Adwords: businesses bid on keywords
to display on search results
Adsense: publishers allocate space on
their site for display ads e.g. banners
or sidebars
SMU Classification: Restricted
Business Model of Dropbox
Subscription fee
$10×12=$120
Total user 4M
Revenue 12M
$120×0.1M
Paying user
4M×2.5%=0.1M
Conversion rate 2.5%
1 paying user to support 39
free users
(97.5/2.5=39)
π=-$0.75M (annual)
Cost 12.75M
Contribution per
paying user
$30.36
Consumer acquisition cost
(CAC) $89.64
39×0.11×12+1×3.18×12
Fixed cost:
engineers payroll
25×150k=3.75M
Free user:
4M×97.5%×0.11×12
Amazon S3, 9M
Paying user:
4M×2.5%×3.18×12
Variable cost
Customer support
payroll (little)
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SMU Classification: Restricted
LTV/CAC
Freemium to acquire new
consumers (cost is to support
free users)
Advertising to acquire new
consumers (cost is marketing
for customer acquisition)
Remarks
LTV
81.84 for each paying user (1203.18*12) per year.
Total=$274.34
81.84 per year (120-3.18*12)
Total=274.34
Attrition: 20%
Average life: 5 years
(1/20%=5)
CAC
$51.48 to support 39 free users
per year (39*0.11*12), and
support for 5 years
Total=$172.57
$130 (ad cost/new users
acquired), but only occur in first
year
Total=$113.04
Discounted at 15%
over average life of 5
years.
LTV/CAC
1.6X
2.4X
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SMU Classification: Restricted
Guardian Goes Digital
350k -> 23 mil
Revenue
Print
Online
Circulation
20
0
Display
8
16
Classified
32
0
Retail
40
0
Editorial
14
14
Print
52
0
Selling/promotion
12
12
Admin
9
9
13
-19
Ads
Cost
Profit
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Lego Universe vs. Minecraft
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Traditional vs. Digital Business Models
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
We went from saying “we want to own the full value chain and build a
second core business] to [we want digital to be more of a partner
business where we get a license payment, and to be more an enabler to
our core business – which is the physical brick”
 --- Jesper Vilstrup, Vice present of Lego Group’s digital business, 2012
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SMU Classification: Restricted
Take-away of Lego’s Digital Strategy
 The online business model is very different from
the offline and traditional business model
 Supply chain vs. platform (resource)
 Hardware model (“waterfall”) vs. software model
(“emergent”) (process)
 Planning, feedback loop, cost structure, pace, and KPIs
 Consumers’ network (value proposition)
 Revenue models and LTV/CAC (profit formula)
 The traditional Lego model does not help it
perform well in the online game business that
builds on the online business model.
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SMU Classification: Restricted
Digital Technology Landscape
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SMU Classification: Restricted
Process Rule-Based Automation
https://www.youtube.com/watch?v=jvwdqnjYZhk
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SMU Classification: Restricted
Process Involved in Shipping Container
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Blockchain Technology
A blockchain is “a technology that
allows people who don’t know each
other to trust ashared record of
events”. This sharedrecord,or ledger, is
distributed to all participants in a
network who use their computers to
validate transactions and thus remove
the need for a third party to
intermediate.
What is blockchain: https://www.youtube.com/watch?v=SSo_EIwHSd4
What is smart contract: https://www.youtube.com/watch?v=ZE2HxTmxfrI
Blockchain user case: https://www.youtube.com/watch?v=aQWflNQuP_o
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SMU Classification: Restricted
Information Flow in Logistics Value Chain
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SMU Classification: Restricted
Global Trade Digitalization Platform
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Dashboard for Customers
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Digital Solutions
Pain Points
GTD Benefits
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Digital Solutions
Pain Points
GTD Benefits
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Blockchain Technology As Digital Solution
 Blockchain technologies help cope with the business challenges that are
paper-based, people-based, and process-complex (e.g., supply chain
management or logistics processes).
 Blockchain helps build one truthful, verifiable, and real-time source of data,
enabling transparency and traceability of data all over the value chain.
 The data platform based on permission blockchain, in which participants need
not share sensitive information but able to access all necessary information,
will provide data benefits for all participants.
 Benefit of blockchain solution includes cost reduction, productivity and
efficiency improvement, fraud elimination, and improved collaboration.
 For example, 20% of cost is paper-based and delivery is only on-time
64%. Blockchain enables shipping company to track goods in seconds
instead of hours or days, and increase asset utilization of idle assets and
spare capacity.
 Global trade can increase by 15% and global GDP can rise by 5% with
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digital technology like Blockchain.
SMU Classification: Restricted
More Consumer-Centric in Digital Business Model
Social
Service
Software
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