Management guru CK Prahalad championed two groundbreaking concepts in his 2008 book The New Age of Innovation: Driving Co-Created Value through Global Networks co-authored with M.S. Krishnan. The first concept was a market segment size of One (N=1) where every customer is treated as a unique entity. The second concept was creating a global network of specialised resources (R=G), rather than doing everything in-house.
Digital technologies have enabled companies to operationalise these concepts, create new sources of competitive advantage and fundamentally alter the economic structure of their industries.
The current digital era has been defined by emergence of technologies, including mobility, social, big data analytics and cloud. The adoption of these technologies is gaining critical mass due to ubiquitous Internet access, affordable access to computing power on smartphones and increasing popularity of social media platforms which generate vast amounts of data about consumers, their likes, preferences and buying behaviour.
The convergence of digital technologies makes it possible for companies to create customer value by providing a unique personalised experience for every consumer and delivering products and services sourced from across the globe. Global market leaders in every industry are facing competition from start-ups that leverage the power of digital technologies to create new business models and reshape their industry.
So, how can David change the rules of the game through digital technologies?
1. Break Down Entry Barriers
The traditional entry barrier for retail is the high up-front investment required to establish local presence through a network of stores. Online retail nullifies this entry barrier by eliminating physical stores and managing a virtual supply chain for product delivery using third-party logistics (3PL) providers. Online retailers like Flipkart and Amazon are able to take advantage of their lower fixed cost structure to provide lower prices to consumers and gain market share.
2. Leverage Global Networks
Airbnb is a website which allows individual homeowners across the world to rent their apartments, second homes or even spare rooms to travellers. Airbnb, valued at $10 billion, has created a global network of 800,000 home listings in 34,000 cities servicing 17 million travellers. The unique business model enables homeowners to monetise spare real estate capacity and offers travellers cheaper, flexible and customised accommodation options. Global hospitality chains like Hilton, InterContinental and Marriott are dealing with this new competitive threat from individual homeowners in every city across the world.
Uber is driving a similar revolution in urban transportation, enabling individual car owners to compete with taxis and limousine service providers, and forcing these traditional businesses to resort to lobbying and legislation to combat the threat.
3. Disaggregate the Value Chain
Traditional companies focus on delivering end-to-end services, but digital technologies allow companies to focus on few specific processes in the value chain to build a business. In banking, full service banks are being challenged by payment specialists like PayPal and Xoom.
4. Eliminate Middlemen through Information Transparency
In the past, travel agencies enabled airlines and hotels to reach a wider set of consumers, all the while benefitted from privileged information access and preferred rates and discounts. Now, online travel sites like makemytrip.com and hotels.com connect service providers directly with consumers, thereby eliminating information inequity and middleman commissions to drive lower prices for end consumers.
5. Change the Basis for Competition
Video streaming technology changed the basis of competition in the movie rental industry, enabling Netflix, Amazon and YouTube to unsettle incumbents like Blockbuster. The eBook transformed the publishing industry by delivering the book electronically to user's devices at near zero cost, providing price advantage to consumers and margin advantage to publishers while disrupting the business model of traditional brick and mortar booksellers like Borders, and Barnes & Noble.
What does the future hold for Goliath?
The digital era presents a unique paradox for industry leaders. While it can cause disruption in the short term, it also creates an unprecedented opportunity for companies who can rapidly adapt to the new normal.
Incumbents need to overlay the power of technology onto their existing strengths - brand, market reach, loyal customer base and supply chain network - and reposition themselves for the digital age. Smart use of digital can enable them to access new geographic and demographic market segments, develop customised products and services through improved understanding of their customers and provide a richer customer experience while reducing the cost of service delivery.
In the fifties, it took 20 years for one-third of the Fortune 500 to be replaced, but this change now happens about every five years. This fast-changing era is propelled by technology-driven transformation. The impact is felt by individuals, corporations, industries and society itself - and there is a tremendous impetus to adapt to the changes or risk getting left behind.
The next few years will see an exciting "war of the worlds" as newer digital-powered companies scale up to pose a credible competitive threat, while incumbents adapt to changing realities and deploy counter strategies to challenge the upstarts and beat them at their own game.
(Sameer Arora is the Vice President & Head at Digital One, Syntel Inc)