Rethinking Competitive Advantage: New Rules for the Digital Age224
Rethinking Competitive Advantage: New Rules for the Digital Age224
“Another book for the ages from a master! . . . Particularly insightful is his emphasis on how the end-to-end individual consumer experience will separate winners from losers in our new digital age.”—Fred Hassan, chairman, Caret Group; former CEO, Schering-Plough and Pharmacia
The old ways of creating competitive advantage for your business—such as building moats to ward off competitors—have become dangerous. Giants like Amazon and Alibaba are creating vast new market spaces through a deft combination of tools like machine learning and business savvy that reimagines customer experiences while generating immense shareholder value.
A handful of traditional companies, including Fidelity Investments, Walmart, and B2W, have adopted these new approaches to reinvigorate their businesses. Most, however, are stalled—and the clock is running out.
In this lively, accessible guide, Ram Charan, bestselling author and adviser to some of the world’s top CEOs and boards, redefines competitive advantage for the digital-first era, offering a set of new rules to get ahead:
• Create an ecosystem with third-party partners to revolutionize and personalize the customer experience.
• Empower teams focused on a single task, building a “social engine” that drives constant innovation, fast execution, and customer satisfaction.
• Attract funders who understand the big picture: that beyond a certain scale, major upfront spending will turn into a cash-generation machine.
Filled with stories that peek behind the curtain of digital behemoths as well as traditional companies that have transformed their organizations, Rethinking Competitive Advantage offers concrete advice and methods to help you conceive of new market spaces and moneymaking models.
Competing against digital giants might seem daunting, if not impossible. The necessary computing power is within any company’s reach. By borrowing from these digital winners’ playbooks, traditional companies and upstarts alike can gain an upper hand. Whether you’re in the C-suite or brainstorming the next big idea from your garage, Rethinking Competitive Advantage is the ultimate guide to creating competitive advantage today.
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About the Author
Read an Excerpt
Why the Digital Giants Are Winning
In February 2019, as Hollywood’s elite convened for the 91st Academy Awards ceremony, Netflix found itself in a war of words with famed director Steven Spielberg. Green Book, the movie Spielberg had backed, won the Oscar for Best Picture. But Spielberg made it clear that he didn’t think Roma, another strong contender that had been produced by Netflix, should have been in the running for an Oscar at all.
Spielberg’s argument against Roma was that it was streamed by Netflix directly to consumers after an exclusive run of just three weeks in movie theaters. Traditional films are shown in theaters for months at a time. Shortcutting a theatrical release, Spielberg argued, deprives moviegoers of an immersive big-screen experience and puts the entire theater system at risk.
As the Academy’s board of governors prepared to debate the issue, one governor remarked: “The rules were put into effect when no one could conceive of this present or this future.”
Actually, Netflix CEO and cofounder Reed Hastings conceived of this future nearly two decades ago, before broadband was widely used. Then Hastings did what leaders of every successful digital company do. He exploited new technology to create the future he imagined much faster than other people thought possible.
Imagining new market spaces and revenue pools that can scale up at unprecedented speed is just one way that born-digital companies—those that were digital from the start—have gained a huge competitive edge in recent years. Thinking differently about how to make money and fund growth is a second way. And using algorithmic technology to reorganize work and enhance decision-making is yet a third.
In today’s competitive age, traditional companies need to know what they’re up against and learn from the born-digital players how to build competitive advantage.
The New Nature of Competition
Back in 2000, even as Netflix built its competitive advantage by sending out DVDs by mail as opposed to having consumers visit retail video stories like Blockbuster, its leaders knew that broadband technology would someday be fast enough, cheap enough, and good enough for consumers to watch movies sent or streamed to their devices directly, anywhere at any time. The technology still wasn’t advanced enough in 2005 when Hastings told Inc. magazine’s Patrick J. Sauer: “We want to be ready when video-on-demand happens.”
In 2007, the time had come. About half of U.S. residences had access to broadband, and Netflix was ready to begin streaming movies into the homes of its customers. YouTube was experiencing rapid growth, and Hulu, owned in partnership between NBC and Comcast, sprang up around the same time. Netflix flourished because of a powerful combination of elements.
For one thing, Netflix charged a monthly subscription fee that gave consumers access to unlimited videos—a novelty at a time when most people rented one or a few DVDs or VHS tapes at a time. To be sure that consumers would not run out of new things to watch, Netflix licensed content from traditional media companies. Subscribers could watch popular new film releases without leaving home and for the first time could binge-watch their favorite old TV shows.
None of that would have been possible without a technology platform that could deliver a smooth viewing experience. But Netflix’s digital platform didn’t just transmit signals through broadband connections—it also gathered data about its customers’ viewing habits along the way. Algorithms got increasingly better at analyzing that data to help subscribers find content they liked amid a widening array of options.
Building its digital platform, securing broadband spectrum, paying licensing fees, and hiring technology experts to write and refine the algorithms all contributed to Netflix’s skyrocketing revenue and subscriber growth. These efforts also consumed cash, more than Netflix was generating in its quest for ultra-fast scaling and building its streaming capability.
It famously tried to sell itself to Blockbuster early on, but Blockbuster turned it down. Instead, Netflix managed to find shareholders and lenders who believed in its future and knew the reasons for Netflix’s cash drain. Earnings per share, or EPS, could wait. The waiting was extended as Netflix ventured into creating its own content, beginning with the series House of Cards, which went into development in 2009 and was released four years later.
It was a full decade later, in early 2019, before some of the largest media companies like WarnerMedia, Disney, and Apple mounted a serious challenge to Netflix’s dominance in streaming. And Amazon, another major player that had entered the space, shored up its presence. In the first quarter of 2019, a series of competitive actions and reactions kicked into gear.
In February 2019, the U.S. Justice Department cleared the merger of Time Warner and AT&T, which aimed to help the entities compete against digital players that both created and distributed content, and senior management immediately began to reassemble the pieces. The former head of NBC Entertainment, Robert Greenblatt, was put in charge of WarnerMedia, a new combination of HBO and parts of Turner Broadcasting, and tasked with designing a new streaming service.
A month later, on March 20, 2019, Disney closed on its $71.3 billion deal to buy a big chunk of Twentieth Century Fox, which included the film and TV studios and a 30 percent stake in Hulu. Disney already owned 30 percent of Hulu, so it now had a majority stake. Meanwhile, Disney had been winding down its licensing arrangements with Netflix and hyping its imminent release of Disney+, a streaming service separate from Hulu.
Five days later Apple announced it would launch a TV app in the fall that would distribute content from HBO, Showtime, and other sources for a monthly fee. Steven Spielberg himself stood on the stage when Apple CEO Tim Cook explained that the service would include original content Apple was creating.
That quarter Amazon secured rights to a TV series based on Lord of the Rings, with a whopping budget of $1 billion, according to some reports. The news prompted media analyst Rich Greenfield to comment: “There is an all-out war for the control of your media life. I think the reality is these big tech platforms, who have valuations and market caps and cash piles that are massive relative to traditional media, they are just getting started.”
The series of announcements so closely timed set Twitter ablaze. How many subscription services would people pay for? Would bureaucracy at WarnerMedia snuff out the creativity of HBO? Would Disney’s new business model mean a price cut for movie streaming? What would be bundled and what wouldn’t? And will Netflix, a current favorite with consumers, continue to flourish and lead the way?
Competitive Action and Reaction
Video streaming is just one example of a digital economy where competition is intensifying. Many so-called legacy companies are caught up in a battle with digital competitors, and so far, the born-digital companies have been eating their lunch. Walmart (and every other physical retail store, from Macy’s to Best Buy) is in a constant duel with Amazon, and banks and credit card companies are squaring off against PayPal and Apple Pay.
Meanwhile the digital giants are battling each other for market share and dominance: Amazon’s AWS versus Microsoft’s Azure cloud services. Consumer goods companies, retailers, and manufacturers have hundreds of e-commerce start-ups nibbling at the edges of their market share with niche products sold directly to consumers online. Think of P&G’s Gillette razors sold in stores versus the online subscription-based Dollar Shave Club that sells direct to consumers.
The common thread in these erupting battles is digitization. It has upended the very nature of competition today, and made twentieth-century ways of thinking about competitive advantage obsolete.
The old adage “stick to your knitting,” for example, a colloquial version of “build on your core competence,” tends to narrow a company’s imagination. Yet a bold imagination is a requirement for leaders today. Netflix, Amazon, Facebook, and Google would not be what they are if their CEOs and executive teams had not imagined a future that did not yet exist.
A clear view of the competitive landscape suggests that some of the early generalizations about “first mover advantage” and “winner takes all” are not holding up, especially as digital giants challenge each other.
First movers may be able to scale up fast, but others are certain to enter whatever large market spaces they create. For that reason, winners really don’t take it all, at least not forever. And if new competitors don’t enter the fray quickly enough, antitrust government regulators may step in.
Table of Contents
Introduction: Why I Wrote this Book and How it will Help You xiii
Chapter 1 Why The Digital Giants are Winning 3
Chapter 2 New World, New Rules 19
Chapter 3 Market Spaces of 10X, 100X, 1000X 31
Chapter 4 Digital Platforms at the Center of the Business 54
Chapter 5 Value-Creating Ecosystems 83
Chapter 6 Moneymaking for Digitals 108
Chapter 7 Teams Instead of Organizational Layers 129
Chapter 8 Leaders Who Create What's Next 159
Chapter 9 Rethinking Competitive Advantage in the Real World 175
Appendix: Are You Ready to Build Competitive Advantage in the Digital Age? 185