Analytics, Big Data, Big Data and Analytics, Digital Strategy

4 Steps to Digital Dominance + Warren Buffett on Google

9 May , 2017  

The recent 2017 Berkshire Hathaway shareholder meeting offered some insights into how Warren Buffett thinks about stocks, especially those of large digital companies. I thought it important to explore these, given the rise of Digital Enterprises. When we think of Digital Enterprises, leaders like Google, Apple, Amazon, and even Microsoft come to mind. What do Digital Enterprises do that allows such dominance? Let’s explore.

 

  1. Additional Income with (Barely) no Additional Cost: In fact, Warren Buffett mentioned that Google adds incremental revenue without increasing its cost. This is profound. It means the economy of scale is (nearly) infinite. Add a new customer, business, or feature, and the costs are nearly nothing. However, the fixed costs and complexity to overcome to achieve this near nirvana are high. Examples include the additional income that Apple gains from adding new apps (which they don’t even develop), Google earning from new search terms, and Amazon adding new merchants to its supply chain.

Take-Away: Examine your business for revenue growth. Does your revenue move linearly with labor? If explore how to you use automation to reduce labor and gain new revenue. Examine critical business processes for opportunities for improvement and efficiency.

  1. Digital Enterprises are Really Data Enterprises: As retailers struggle to become more digital in their offerings, it becomes abundantly clear that being digital requires the creation and use of NEW data. In the case of leading firms like Google, Apple, Amazon, and Microsoft, new data about product views, usage, search word bids, and even data stored and access on the cloud become the backbone to the business.

Take-Away: All revenue comes from the customer. With that in mind, you have to measure your customer. What do they do? What do they do even when they don’t buy? Measuring customers is easier in a digital platform, like an app or website. Use that data not just for marketing, but for operations, business growth, and even acquisitions.

  1. Move to Automation: In order to make new revenues without having much new cost, it is critical to have a business that does not scale with human labor. Instead, humans contribute the code, rules, and processes that allow automation and low-human touch businesses processes to drive the enterprise. This distinction is also made possible because a prerequisite to Automation is a mastery of Big Data Analytics. Amazon is doing this with its robots in the warehouses; Google is driving towards self-driven cars, and every major Digital Enterprise is developing and a natural-speech driven device. Digital Enterprises look to remove human labor from existing processes and replace those with data-driven automated processes.

Take-Away: Look at your most labor-intensive processes, and find ways to remove the labor. Voice recognition, app interfaces, self-service through mobile ordering, automation through design are all examples of labor-saving approaches.

  1. Lower Price!: Digital Enterprises, in spite of their great wealth, have lower prices to consumers. Microsoft lowered the price to write a letter or edit an accounting book. Google lowered the cost to get to a customer (or many). Apple has lowered the cost to listen to a song. Amazon has lowered the cost of many things. Digital Enterprises have the ability to operate at lower margins and thus fight a war for winner take all. It explains why Amazon’s operating margin of 1.73% in 2016 was acceptable to investors. It is operating well-below its competitors, facing competitors to exit the market or otherwise ramp-up investments to become equally digital.

Take-Away: When you have an operating advantage, exploit it. The parallel to sports is appropriate. In football, why should a team run the ball often, because the defense cannot stop it. Why should you leave an advantaged unused? If you can run your business better than your competitor, make it harder on your competitor! Lower price. Watch them struggle and then take their market share – for free. The approach also fends off future competition. Anyone want to take on Amazon Prime in home delivery, Apple in music, or Google in search? No. That provides the moat that makes Digital Enterprises so valuable. It explains why Warren Buffett considers Google more or less a modern monopoly. If Google, Amazon, and Apple are Goliath, do not bet on David this time.

Join Us!

We explore digital strategies and big data in our upcoming Northwestern University executive education program in Evanston, IL:  Big Data to Big Profits: Strategies for Monetizing Social, Mobile, and Digital Data with Data Science, led by professors Russell Walker and Edward Malthouse, will examine how firms can take big data to big profits through data monetization strategies and the best use of data science for growth and innovation across your organization. Join us!

In this program, we will examine:

  • How to create, measure, and manage valuable digital, social, and mobile touch points with customers
  • Strategies for monetizing big data in a digital environment
  • Opportunities for creating data products
  • How to lead a data science team
  • Methods to create new data for digital disruption
  • How to manage data assets for growth and innovation

About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University. He has worked with many enterprises and leading marketing organizations through the Analytical Consulting Lab, an experiential class that he founded and leads at Kellogg.

His most recent book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data through digital strategies. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

Follow me at @RussWalker1492, bigdatatobigprofits.com and russellwalkerphd.com

 

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By  -      
Russell Walker helps companies develop strategies to manage Risk and harness value through Analytics and Big Data. As Clinical Professor at the Kellogg School of Management of Northwestern University, Russell Walker has developed and taught leading executive programs on Big Data and Analytics, Strategic Data-Driven Marketing, Enterprise Risk, Operational Risk, and Global Leadership. He founded and teaches the popular Analytical Consulting Lab and Risk Lab, experiential classes, which bring Kellogg MBAs together with real-world projects in Analytics and risk evaluation. His is the author of the book From Big Data to Big Profits: Success with Data and Analytics (Oxford University Press, 2015) which examines data monetization strategies and the development of data-centric business models in the new digital economy. He is also the author of the award-winning text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management as a competitive advantage. Dr. Walker consults with firms on the topics of Big Data and Analytics, Risk Management, and International Business Strategy. Russell Walker can be reached at: russell-walker@kellogg.northwestern.edu @RussWalker1492 russellwalkerphd.com



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