Demand-Driven Business Strategy

Digital Transformation and Business Model Innovation

Cor Molenaar

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000532104
• Edition: 1
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Demand-Driven Business Strategy explains the ways of transforming business models from supply driven to demand driven through digital technologies and big data analytics.

The book covers important topics such as digital leadership, the role of artificial intelligence, and platform firms and their role in business model transformation. Students are walked through the nature of supply- and demand-driven models and how organizations transform from one to the other. Theoretical insights are combined with real-world application through global case studies and examples from Amazon, Google, Uber, Volvo and Picnic. Chapter objectives and summaries provide consistent structure and aid learning, whilst reflective questions encourage further thought and discussion.

Comprehensive and practical, this is an essential text for advanced undergraduate and postgraduate students studying strategic management, marketing, business innovation, consumer behavior, digital transformation and entrepreneurship.

1 Introduction

DOI: 10.4324/9781003226161-1

The rapid development away from supply- towards a demand-driven economy leads to the implication that to remain competitive in today’s world, businesses need to build upon what customers want, rather than what suppliers already have. New tools such as demand profit pooling and the demand chain model can be used to create a demand-driven business. Specifically, how firms can create value in a demand-driven economy by implementing a product-as-a-service business model. However, it must be taken into consideration that a shift in mindset and strategy should not be underestimated and takes a long time to be profoundly accepted and implemented. This chapter will outline the change in attitude and the consequences of a demand-driven strategy.

Just how did McDonalds know that it was time to introduce salads and to keep their stores open twenty-four hours per day? How did Apple know that consumers wanted to bring the best mobile phones and PCs together into a device that might ultimately reinvent both industries?

(Kash & Calhoun, 2010, p. 28)

And how can Amazon predict the sales four weeks ahead? The answer to these questions is that each of these companies had a deeper understanding of their consumers and used this information to change the way in which they operated business (Gupta, 2018, p. 21). In addition, these companies not just asked what their customers really wanted, but they recognized patterns and saw trends to develop a hypothesis about what their customers will want in the future (Kash & Calhoun, 2010, p. 28).

Airbnb, Uber, Google, Alibaba, Facebook are seen as the new market leaders, disruptive because they changed the processes from analogue to digital, from selling goods to connecting people and business. This is the base of disrupting processes and markets which will shape our lives and our businesses in the coming years. A change in budget spending, a different business model and new forms of collaboration between people, people and companies, and between institutions. An interactive network. Especially companies where information and services are the core business or where access of information is part of the sales process, customer needs and preferences will be the main focus point. Collaboration in a platform or a network to fulfill the demand of customers will be the fundament of business in the near future. From supply to demand, supported by data, machine learning and algorithms.

A platform and a value network are value creating interactions, demand-driven between external producers and customers it provides an open, participative infrastructure.

Shift in Mindset

Because of a digitalizing world, the urge toward “being digital” and part of the new platform world is more relevant than ever. There is a shift in mindset needed to manage this new world. This shift concerns the shift in business principles and business models while acknowledging that value creation is not based on supply of goods and services but on customer needs. A mind shift, from supply to demand. Customers specify their needs and will search for the right products or services. This is a mind shift, because no longer are product values dominant, rather they need criteria, and matching values will offer the right product or service.

The vast majority of traditional media, television, radio and newspapers act like pipelines, pushing content to consumers. YouTube, podcasts, search engines like Google and social media use interactive platform models. These platforms continue to encourage content producers and consumers to communicate with each other. The democratization of content production and the transformation of media capabilities from journalists to user producers have led to a shift from traditional media to social media (Choudary, 2015). Like other shifts to platform scale, emerging media platforms rely less on the ownership of resources (content) and rely more on their ability to coordinate the interaction between content producers and consumers. Interaction and need specifications will lead to a demand-driven supply. Knowledge of the need of a buyer will be the most important value of organization in the digital world. Because of a more connected world, it gives companies the opportunity to leverage on a new source of scale. This is an external ecosystem of users and partners who are connected over the internet to the businesses (Choudary, 2015). The ecosystem-based view of value creation is completely different from the traditional resource-based view of value creation. Control of resources isn’t an important source of competitive advantage anymore. In fact, this community creates value for itself.

What Do Customers Want?

These developments underline the fundamental shift in the relationship between supply and demand in the global economy. It is a shift away from the supply-driven economy (companies push goods to the market) to a demand-driven economy (the customer pulls goods from the market), which requires a new set of tools, skills and strategies (Bursa, 2015, pp. 1–2). This shift has been fast approaching since the beginning of the 21st century, due to an oversupply and technological developments, which changed the way in which consumers engage with business and vice versa (Kash & Calhoun, 2010, p. 28). To remain competitive in today’s world, businesses need to build upon what customers want, rather than what the suppliers already have, and this requires leveraging technology to analyze, predict and develop a supreme understanding of demand. However, although it may sound very simple to become demand-driven, it can be a difficult concept to execute (Gupta, 2018, p. 28). In order to survive, an entire shift in the business model is required. The major question for every boardroom looking at future success should be: How should a company reimagine their business model in order to succeed in the new demand-driven economy, and what tools are needed to predict the behavior of customers?

The introduction of digital technology has presented customers with transparency and new ways to search for information about products. Consumers are increasingly relying on online reviews on the internet or “word of mouth” from friends. The change in consumer behavior has likewise presented firms with a new way to connect with its customer base. Firms that are the most effective at connecting information regarding the customer’s path to purchase (supporting the buying process) are able to position themselves strongly in the future market. Large organizations such as Amazon and Uber realized that competitive advantage is no longer derived from low cost or product differentiation. Instead, competitive advantage is gained and sustained through a platform offering a system of connected and complementary products that raise consumer’s switching costs through strong network effects, meaning the value of the platform increases, the more people use it (Gupta, 2018). Network effects and knowledge of customer behavior and needs, provide the driving force behind any successful organization and platform, together with a demand-driven approach (what will customers want and why?).

Changing Organizations

Additionally, traditional companies (supply-driven) are facing new challenges as a growing proportion of their customer base are becoming increasingly impatient and standards for demand rise. As a result, customers are incrementally shifting towards digital firms, putting pipeline companies without similar digital capabilities at risk (McKinsey & Company, 2019). This presents a compelling case for firms that wish to remain prosperous to become more consumer centered. An illustration showing the shift in the digital age of business is the realization that today, seven of the world’s twelve largest corporations are platform businesses. However, despite these figures only a marginal percentage (2%) of companies have adopted a demand-driven platform strategy. Therefore, it appears that most pipeline business managers still believe that their product is valuable by itself and that users will interact with it because of this.

Customer-driven sounds similar to demand-driven; however, that is not the case. In case of customer centered, the interaction is still based on the supply of products. The communication is based on a single customer. Customer centricity was established in direct marketing in the 1980s and was adopted by organization. Customer relationship management (CRM) was a kind of customer file with contact history. Based on the contact history a direct communication was possible using the new digital tools. Loyalty became a key variable and was based on repeat sales and later on the level of contact with an organization, as we will see later (see discussion of RFM in Chapter 5).

Despite these moderate numbers of organizations which used customer demand as an energetic policy, there is enough evidence to suggest that more organizations will have to adapt to a demand-driven business model eventually. Thomas Cook, a former English travel agency, recently filed for administration due to unendurable debt and insufficient revenues. Thomas Cook followed a pipeline business structure and was successful for over a century; however, as the digital age emerged and customer preferences changed, they failed to adapt. The last decade has seen a rise in online bookings as customers prefer to book their own travels independently. The shift in consumer preferences directly negatively affected the sales of Thomas Cook. Despite this, limited action was taken to prevent continued loss. While Thomas Cook struggled, online platforms such as online travel agents Booking.com and Expedia were able to take advantage of a gaping hole in the market. Booking.com and Expedia could both offer customers a convenience and facilitate a demand-based platform that contained information about customers, behavior and buying preferences, and the availability of thousands of hotels, and offers a service to book direct.

Thomas Cook is not the only company to suffer as a result of lack of adaptability, agility. Worldwide the taxi industry has experienced a major disruption with the introduction of Uber and Lyft. Uber and Lyft revolutionized transportation by creating a completely new supply of cars and drivers by connecting drivers and reducing the transaction cost of finding a driver or rider. Taxi companies have as a result lost their market share by ignoring the changing needs of their consumers.

From Products to Services

As consumer interests are shifting from products towards experiences, companies must adapt in a similar fashion by creating unique customer experiences that complement their products, and by using data about customer needs and preferences. Companies such as Sephora allow consumers to scan a QR code next to products which takes them to a website with information, reviews and video-tutorials (Gupta, 2018). This has seen Sephora increase its sales by creating unique experience, as well as providing other firms with ideas of how to remain competitive in a pipeline business. On top of it, they gathered the customer information based on behavior and preferences. Demand-driven businesses have led to the adoption of disruptive digital strategies such as platforms and ecosystems. A platform is a business model that aims to facilitate value-creating interactions between external producers and consumers. Platforms are able to create value by providing an open interface for active participation. In contrast to pipeline businesses, which will be discussed later, the community and the resources of the platform’s members are the platform’s most valuable asset. As a result, the focus of matching platforms shifts towards facilitating interactions and increasing customer satisfaction (Parker et al., 2018).

The Power of Platforms

Platforms provide greater value to consumers than pipelines by offering greater convenience and variety of products, as shown by Uber and Airbnb. Furthermore, platforms possess the ability to open new areas of demand and supply that were previously unheard off. Previous barriers to entry, such as geography, which remains a costly obstacle for pipeline business, are vastly reduced by platforms that are able to extend their reach to both buyers and suppliers around the world. This is a major advantage concerning platforms. Also, a platform is not based on transaction but on matching of needs and supply. Therefore, customers will buy more frequently, as we will see later on. These processes of demand-driven structure (platforms) need to go from outside in, which means that market-facing processes will change to supplier-facing processes.

Lastly, demand-driven companies keep their focus on the outcome/results. Because of the implementation of demand-driven value networks, the focus shifts from selling to the channel, to selling through the channel. Besides that, the focus can also shift from product-based focus to a more value-based focus, in which service is more important. These shifts can make big differences in the organization. From customer demand to product supply and not the other way round.

Interactive platforms allow parties such as consumers and developers or the buyer and seller to connect. For example, Apple’s App Store connects app developers to iPhone users and Alibaba connects buyers and sellers through their online marketplace. Developing a platform provides firms with increased access to suppliers and sellers through aggregating the dispersed supply and demand within a market (Gupta, 2018). Platforms use technology to connect people, organizations and resources in an interactive ecosystem in which an amazing amount of value can be created and exchanged. As a result, platforms are transforming business strategies and the economy. Platforms are designed with the intention to enable value-creating interaction between external producers and consumers, based on needs and preferences. Platforms accomplish this by providing an open interactive infrastructure for participation, yet equally providing necessary governance. Furthermore, this kind of platforms can be referred to as a matchmaker, as its aim is to create value for its participants by matching users–needs and facilitate their subsequent exchange of goods and interactions (Parker et al., 2018). Platforms are often able to unlock spare capacity and harness contributions from a wider community which previously had only been used as a source of demand. A great example is Uber, who were able to unlock a brand-new supply of drivers who were previously viewed as just customers to traditional taxi companies just by connecting them with customers based on an app.

Disruption

This is a disruption, as the traditional markets are disrupted by new companies with a new approach to the market, the new network structure and the demand app...