There is an open debate among economists and business leaders on why digitization leads to a near winner take-all business model. We see the dominance of one search tool in Google and Netflix over other movie providers. In decades past, it was common to have a movie theater in each community and local bakers everywhere. In other business models, especially those driven by personal relationships and locality, we have seen many scores of offerings simultaneously. In fact, achieving scale for the seller was very hard. In markets that are not digitized, like the famous Spice Market of Istanbul, dozens of vendors sell the same items. Why? Because, it is a market driven by relationships and physical constraints, making scaling difficult.
Interestingly, in the digitization realm, there is not exactly one winner take all. We often see a place for a second player or follower, which is often lesser in size and or capability. However, the second player has a role and rarely, it might even overtake the leader as Facebook overtook MySpace.
Let’s not overlook the immense power of the digital king. Being the digital leader has massive benefits. It is driven by four major principles. Let’s examine these:
- Data Dominance – Digital models that dominate do so because the business model exploits data in a major way. Netflix knows something about our media interests. Google search processes and locates sites (presumably) better and faster than competitors. The business grows, evolves, and improves based on constant measurement and data-driven decision making. This was not the approach to business before the late 1990s. Digitization brought data and data is the blood of digitization.
- Customer Convenience –Successful digital models make it easier for the user to do business. Order food from Instacart – it’s a breeze! File your taxes on Turbo Tax or get a mortgage on Rocket Mortgage – all of these have perfected easy to use customer interfaces that also overcome problems of proximity. Not more need for bank branches or tax return centers. The business is geophysical in nature or somehow overcomes the proximity challenges, like Instacart does with delivery. One click and you can have almost anything from Amazon. If only Staples had put a real Easy Button on its whole business model, it might be a digital leader today. Digitization forces a business to examine the process of a transaction and in that the transaction is simplified, standardized, and improvements to customer experience are identified.
- Digital Allows Customization – This benefit is often overlooked. One can easily forget that Netflix was started as just an economic play to disrupt movie rentals by eliminating late fees. The data exhaust of user searches and orders allowed for customization to take hold. Marketing exerted itself over operations. Amazon sold books and CDs and is now a store of most anything. Specifically, it is trying to be the store of what you want. Customization is expensive without data. Digital models make customization attainable, and allows the digital leader to grow by earning more business from the same customers.
- Economy of Scale Kicks In Big Time – Once a process is digitized and supply and demand are appropriately connected, it becomes easy to add new supply and demand on the margin. Adding new products or suppliers at Amazon is easy. Adding a new supplier at a physical store is a decision to take something else off the shelf. Adding a new driver at Uber is easy. Hiring a worker at a taxi cab firm is a major decision. Growth happens marginally for digital firms and the costs of marginal decisions approaches zero, but the marginal revenue is much higher. This reality make the digital king hard to overthrow.
Why Do Second Place and Lesser Digital Players arise at all? There are success lessons in their very existence.
We see Lyft rise to compete against Uber and Bing to compete against Google search. Why? Often, the digital leader disregards some business, like smaller buyers and sellers. Or the success of the digital leader leaves room for a value player. Let’s examine some ways a second digital player can arise when a digital leader is in place.
- Suppliers support and demand an alternative channel – Jet and eBay offer suppliers an alternative to Amazon with some slightly different terms. Sometimes this comes with more attention or more status for the products being sold. Suppliers like multiple channels and choices. Still, empirically, we see that these are much smaller markets than the digital leader. LinkedIn is a great alternative to Facebook. It is, however, professionally focused, so it has some limits in its offerings over Facebook.
- Customers identify with alternatives – Remember when Pepsi sold its self as the Taste of a New Generation? Indeed, people often want to be different. You shop on Amazon? I don’t – that makes me special or my tastes special. At a core level, humans have different tastes and one of those is how and where we do business. It is part of human expression. Even the digital king can’t win over the customer who just wants to be different. And the attractiveness of being different is why the king of beers is losing customers to local craft beers.
- Second brands must focus on value (and might actually have it) – Just as Toyota once was a second tier brand in the US and had to focus on value, new and small entrants must do the same in the digital space. Second tier digital players often exist because they do offer a value that the digital leader does not offer. Jet has great prices. eBay does, too. However, the model is a little different from Amazon. Selection and shipping are different. If you conform to the model, you get value. Like YouTube, it has value over Netflix (just not the same content or in HD). Indeed, value is a reason for second tier digital players to arise. It also can restrict their growth, as new offerings must connote value. Often the interface, technology, and perception of it is constrained by a value focus.
- Focus on demand and supply that is not easily scaled – eBay is a great example of connecting the small scale seller and the small scale buyer. If you want to sell one item, eBay is the place for you. If you want to buy one hard to find collectible or replacement part, eBay is great. However, this business is not so easy to scale. A seller might have just one item to sell. Buyers might also be singular in demand. YouTube is an example of this. It allows any media producer to get started, but it is not a great fit for a media company making thousands of films. Digital leaders often ignore the hard to scale supply and demand. However, it is still a business opportunity and as eBay has shown a great place to build a digital marketplace.
Professor Walker provides keynote talks, seminars presentations, executive training programs, and executive briefings.
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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 professional sports teams and leading marketing
organizations through the Analytical Consulting Lab, an experiential class that he founded and leads at Kellogg.
His most recent and award-winning 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.
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