Digitisation changes competitive advantage because it changes market definition. Digital disruption is breaking down barriers to entry for companies in their existing markets but also into new ones as well.
Companies can begin to think about this by imagining what a competitor might do to disrupt their market.
What is competitive advantage?
Value is created in only two ways: either a business participates in attractive markets and/or it builds its competitive advantage. An attractive market is one where the average market participant earns returns above their cost of capital (think banking in Australia); a firm has competitive advantage if it earns superior returns to the average players in the market (think Woolworths from 2000-2010).
Thus strategy can be boiled down to two simple questions:
- Where do I choose to compete (markets/product/customers)?
- How do I chose to compete (differentiation or cost)?
Is it better to have greater competitive advantage than be in an attractive market?
What is the impact of digitisation?
Competitive advantage is severely tested by digital disruption. Two examples from different industries will serve to illustrate this.
The first is professional publishing: Ten years ago, professional publishers dominated particular market segments (like dentistry, law or areas of banking) by owning the largest magazine and using that as a platform to sell other services such as conferences. Now there are platforms for offering workflow tools that help these same clients use the knowledge better.
The second is heavy equipment manufacturing: Historically, this has relied on knowledgeable direct sales supported by total cost of ownership.
Increasingly, the internet of things is moving performance data from the manufacturer to the operator thus threatening the manufacturer’s relevance. In both cases, the effect of digitisation is to challenge the concept of the market in which we operate in. It forces us to re-look at our competitive advantage.
In these examples, products and services are unbundled. The volume of data increases exponentially; price declines and value shifts.
The challenge for organizations is to turn these changes into opportunities.”
Reassuringly, recent research from MIT suggests that incumbents are far more successful at responding to disruption than had originally been thought.
Deloitte Australia on Digital Disruption – Short fuse, big bang?
Five ways to successfully face digital disruption by Jeanne Ross, Center for Information Systems Research
How to deal with digital disruption?
Insights from Martin Blake (NSW Chairman, KPMG Australia), Jasia Fabig (Head of Practice Development at NAB Advice) and Shehan Wijetilaka (CEO, GROW Strategy)
One powerful exercise I have found with management teams is to ask them to imagine how a competitor might disrupt them or their industry. i.e. How to disrupt yourself.
Take a day out for the exercise and make sure you have different voices in the room when you do it. This surprisingly simple exercise can allow you to begin an internal conversation about what to do next and how urgent is the challenge.
Conclusion by Don Peppers
A man forgot his mother’s birthday and rushed round to the florist to ensure she received something nice. The next year the florist e-mailed him a week before the birthday to ensure he did not forget again.
The point is that this florist’s business no longer consists simply of trying to find more customers for the products she has available to sell. Her business now also consists of trying to find more products for the customers whose needs she knows and remembers.
So the question for you is this: When the next disruptive technology renders your own business model obsolete, will you have accumulated insight into your individual customers’ real needs to be able to survive?