Digital for real: business model

Over the last months (actually, more like years), we’ve studied the digital transformation of several companies in the Software Center. Professor Helena Holmström Olsson and I developed a model to illustrate how they actually transition from their legacy business rooted in atoms to a digital business based on bits (see the figure). It has four dimensions: business model, data exploitation, product upgrade and AI/ML/DL. In this post, we’re focusing on the business model dimension.

Based on our research with several of the Software Center partners, we identified that companies evolve through a similar pattern when it comes to transforming their business model. Especially in the embedded systems domain, the starting point is traditional product sales, eg a car, a truck, a radar, a pump or a base station. We often refer to this as “box sales” and the business model is highly transactional: I sell you the box and I will then try to sell you a new box in a few years’ time. There may be some revenue generated from services, such as product maintenance, but this tends to be a small fraction.

The next phase is where the product is offered as a service. Here, mostly the monetization of the physical product changes from a one-time transaction to a continuous revenue stream. There are several challenges with this, including this requiring the company to, in effect, finance the product for its customers, but it can be a very effective way to grow revenue as customers that wouldn’t have bought the product in the traditional model as, for example, they don’t need it full-time, may well want to buy it as a service.