Video streaming is just one example of a digital economy where competition is intensifying. Many so-called legacy companies are caught up in a battle with digital competitors, and so far, the born-digital companies have been eating their lunch. Walmart (and every other physical retail store, from Macy’s to Best Buy) is in a constant duel with Amazon, and banks and credit card companies are squaring off against PayPal and Apple Pay.
Meanwhile the digital giants are battling each other for market share and dominance: Amazon’s AWS versus Microsoft’s Azure cloud services. Consumer goods companies, retailers, and manufacturers have hundreds of e-commerce start-ups nibbling at the edges of their market share with niche products sold directly to consumers online. Think of P&G’s Gillette razors sold in stores versus the online subscription-based Dollar Shave Club that sells direct to consumers.
The common thread in these erupting battles is digitization. It has upended the very nature of competition today, and made twentieth-century ways of thinking about competitive advantage obsolete.
The old adage “stick to your knitting,” for example, a colloquial version of “build on your core competence,” tends to narrow a company’s imagination. Yet a bold imagination is a requirement for leaders today. Netflix, Amazon, Facebook, and Google would not be what they are if their CEOs and executive teams had not imagined a future that did not yet exist.
A clear view of the competitive landscape suggests that some of the early generalizations about “first mover advantage” and “winner takes all” are not holding up, especially as digital giants challenge each other.
First movers may be able to scale up fast, but others are certain to enter whatever large market spaces they create. For that reason, winners really don’t take it all, at least not forever. And if new competitors don’t enter the fray quickly enough, antitrust government regulators may step in.
As early and dominant as Amazon has been in e-commerce, it is hardly alone. Alibaba, Tencent, and JD.com are fierce global competitors, and traditional retailer Walmart is barreling into the online space in a bigger way since its acquisition of Jet.com and its majority stake in Flipkart, India’s largest e-commerce player. It has been gaining traction by linking its online sales with physical stores. In Brazil, B2W has held Amazon, a relative newcomer, at bay.
The outcome of these competitive battles is uncertain. But some fundamental differences in how digital companies compete have become clear. When one dissects the Netflixes, Amazons, Googles, and Alibabas of the world, we see that they have certain elements in common:
- They imagine a 100x market space that doesn’t yet exist. They imagine an end-to-end experience in a person’s life—as the individual travels, eats, shops for goods, or seeks medical care or entertainment— that could be greatly improved, and if it were, that a vast number of people would want. They think about how technology could be used to make the seemingly impossible happen. They focus on the end user even if intermediaries lie between them and the consumer. They know that if their offering is right for the end user, they can scale up very quickly, because word spreads almost instantaneously. Netflix believed that a huge number of people would prefer to discover and enjoy videos at their convenience in their homes instead of going to a movie theater and putting up with overpriced snacks and disturbing neighbors, or watching TV at prescribed times set by the entertainment companies or networks. In the age of $50 cellphones and ultra-low-cost Internet connections, as in India, the potential market explodes.
- They have a digital platform at their core. A digital platform is an expertly stitched together mix of algorithms that store and analyze data for a variety of purposes. It allows for fast experimentation and fast adjustment of prices, and makes it possible to reach a huge population globally at minimal incremental cost. Netflix can easily stream its repertoire across geographic borders. Algorithms in the categories of artificial intelligence and machine learning can correct themselves as they learn more about customers’ behavior and preferences, improving personalization and thereby increasing customer loyalty.
- They have an ecosystem that accelerates their growth. Ecosystem partners take many forms, such as third-party sellers on Amazon’s website, Uber’s independent drivers, or Apple’s app developers. They allow the company to expand capacity quickly, often with no capital investment on its part. They allow cross-selling to extend innovations to a broader audience. They can also enable a new moneymaking model or supply a capability that is missing. Most ecosystems share data, contributing to the ability to scale up fast. Netflix would not exist without the content it licensed from its ecosystem, such as the TV series Friends from WarnerMedia and The Office from NBCUniversal. Companies don’t compete against each other—their ecosystems do.
- Their moneymaking is tied to cash and exponential growth. Digital businesses know that after a period of intense cash consumption, if the offering is successful, returns will turn sharply upward as the incremental cost of the next unit sold or subscriber added drops. They focus more on cash than on accounting measures. Funders who recognize the law of increasing returns are willing to ease the liquidity issues in the early going to reap exponential rewards later.
- Decision-making is designed for innovation and speed. The downside of growth and a principal reason traditional companies experience diminishing returns is the increased complexity and bureaucracy that come with growth. But increased bureaucracy is not a given for companies that have a digital platform at their center. Teams close to the action can make decisions and take action without layers of oversight because they can easily access real-time information. They can move very fast. Accountability is built in because the digital platform makes a team’s progress visible to anyone in the company who needs to know. Overhead is kept to a minimum even as the company expands rapidly; Amazon’s general and administrative costs are just 1.5 percent of revenues. Recruiting people who are self-motivated and can thrive in a team-based environment makes the company innovative and agile.
- Their leaders drive learning, reinvention, and execution. Digital leaders have a different set of skills and competencies than traditional managers. They have a working knowledge of technology, an expansive imagination, and an ability to link their big-picture thinking with ground-level execution. Their use of data takes execution to a whole new level. And their constant communication with their teams, along with their decisiveness in shifting resources, makes the organization agile. The fluidity of their thinking drives continuous change and growth. They create the change that leaders of many other companies struggle to contend with.
So today’s digital giants and upstarts focus intensely on the experience of an individual consumer and open big new market spaces. They scale up fast, aggregate data, and draw relevant partners into their ecosystem. Their business models focus on cash gross margin, cash generation, and exponential growth. They get hefty amounts of cash to fund their growth from VCs and investors who understand the new patterns of money-making. And their highly committed leaders and employees work with purpose and focus relentlessly on what’s next, driving speed, continuous innovation, and disciplined execution.
Contributed to Branding Strategy Insider by: Ram Charan and Geri Willigan, excerpted from their book RETHINKING COMPETITIVE ADVANTAGE with permission from Currency, an imprint of Random House, a division of Penguin Random House.
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