Competitive Strategy in a Digital Economy
Competitive strategy in a digital economy requires leaders to look at competitive strategy through a new lens. The books and tactics that worked well in the past are all now missing a key component of the economy that we live in – which is digital technology.
Strategy is, and has been for many years, about shaping the future, and how companies attain desirable ends with their available means. But how companies attain their desirable ends is changing dramatically and if companies don’t leverage digital to do this, they might as well close down early.
In his 1996 Harvard Business Review article What Is Strategy? Michael Porter wrote; “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.” Back then competitive strategy required physical assets, lots of people, and capital.
Fast forward two decades, and we see start-ups with no physical assets, few people and limited capital disrupting entire industries. CEOs are faced with the challenge of protecting their backyards from start-ups and incumbents while simultaneously developing strategies that will give rise to their growth for the next five years or so.
Competitive strategy has been around for generations, but until early adopters such as Amazon started showing us a new way, competitive strategy didn’t involve digital. In the digital economy, competitive strategy is now heavily dependent upon technology.
Once a business strategy is established, it needs to be implemented through a business model, and a good business model answers Peter Drucker’s questions: Who is the customer? And what does the customer value? It also answers the question; How do we deliver better value and experiences to customers and make money from it? What Peter Drucker said remains true, but to secure a competitive advantage these days, firms can't expect to establish a competitive strategy or business model if digital isn't core to them.
Firm's need to proactively hunt down potential disruptors, no matter how small, underfunded or insignificant they might look right now. It's important not to limit competitive intelligence efforts to looking at predictable competitors, and to look for disruptive innovators – the ones that are offering “less for less” like Hyundai in cars, or IKEA in furniture.
A key strategic decision around digital business transformation is whether to attack or defend, or to combine elements of both. To ensure this decision is an informed one, it’s important to know or anticipate what the threats and opportunities are, or might be in the future, which makes new competitive intelligence more vital than ever for CEOs. Because the threats are not typically coming from their well known competitors, and the last thing a CEO wants is to be told that their customers are defecting to the offerings of a small start-up on the other side of the planet, that didn't exist until last year.
When considering strategy, leaders need to be asking questions such as;
“How will digital technology change the business we are in and the customers we make money from?”
“How will digital technology allow us to raise customer expectations and differentiate us from the competition?”
And “What are our “short-term, mid-term, and long-term aspirations?”
To be competitive in the digital economy, companies need more than traditional business models. Corporate strategy needs to embody digital – not treat is as an add-on to the business, requiring its own separate strategy. Unfortunately, many companies have ventured into digital in this manner, treating digital in the way that it treated IT.
When a company starts talking about their “digital strategy” it doesn't take long to discover whether they have fallen into the trap of treating digital as an add-on to the business, or a department (often IT or marketing) within the business, as opposed to being integral to the business.
Not all companies have the luxury of a CEO who sees digital as being integral to strategy. Some CEOs expect the CIO to create a separate digital strategy, or the Chief Marketing Officer to own it, and unless those folk can educate and change the mindset of the CEO, they have two choices. Either tow the line and do as the CEO asks within their own silo, or leave the company for another where the CEO is equipped with the right digital mindset.
What's more, strategy can no longer be a fixed game-plan. Strategy formulation needs to embrace an approach that adjusts to rapidly changing conditions. It needs to be able to evolve so that a company doesn't miss out on opportunities or create gaps for disruptors to attack.
We only have so look at Blockbuster, which was founded in 1985. A good solid firm, one would think in the 90's, as the company became internationally known, employed over 80,000 people, with over 9,0000 stores around the world. What CEO wouldn't be pleased and proud about achieving that?
Despite the fact that at one time Blockbuster was stealing over a million customers a day from Netflix, Blockbuster forgot what business they were really in and snubbed the Internet. While the firm had a series of six CEOs, it took the last one less than two years to lose everything Blockbuster had. The demise of Blockbuster was clear, and it was Netflix CEO Reed Hastings who made the most of their competitor's flawed competitive strategy.
At one time firms like Blockbuster snubbed the Internet, and now some firms are snubbing the need to have digital core to business strategy. They believe that a separate digital strategy will ensure they remain relevant in the digital economy. Some even believe that digital is only about marketing, but will, in a few short years, learn (too late) that marketing an antiquated business model isn't good for business – despite how elaborate, mobile and well executed the customer journey might be.
Two Strategic Dangers to Avoid
1. The danger for companies that treat digital so separately from strategy, is that they will simply digitise existing ways of working, make old products and services faster, cheaper, shinier, but they never fundamentally transform. They will become another victim of The Great Digital Illusion – and regardless of how “digitised” they feel, or how much they invested in it, they will have fooled themselves with fake transformation.
2. The danger for companies that do not have a competitive intelligence process in place is that they will be caught off-guard when new and previously unknown disruptors enter the market. Because while a firm might be responding ‘now' to its latest competition, it's very likely that there's another start-up just around the corner, which leverages technology in a completely new way. A way which renders current business models obsolete.
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