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Shifting Forces: Competitive Strategy in the Digital Age

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Digital transformation isn’t just driving the way we run our businesses, but also influencing how we handle milestones in our lives. When J.J. Watt signed an NFL contract worth $100 million, he wasn’t sure what to do next. So he googled the phrase “What do rich people buy?” Unimpressed with the search results, his first purchase was a car for his mother on her birthday.

Watt’s quote, though, led me to think about some of the core business strategies of the past several decades, and how they apply to today’s marketplace. Can leading players (in this case, market-leading companies) expect customer loyalty based on past results? In this post I’m looking at the five forces described by Harvard professor Michael Porter (not to be confused with my esteemed colleague of the same name.) In its simplest form, this analysis focused on both horizontal and vertical factors (buyers, suppliers, new entrants, substitute offerings, and established industry rivals) that impact a company’s ability to be competitive and profitable within an industry. Business students saw the five forces framework (and other Porter teachings, e.g., the value chain) throughout the curriculum. When a major shift occurred in an industry, such as the decline of a former market leader, often the pundits looked to the forces for perspective. But in an age when digital transformation impacts every aspect of our economy, recently I started wondering how this theory, published in 1979, holds up today for companies seeking to build or maintain a share of the market.
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How does a company deal with these forces these days? As technology adoption grows worldwide, barriers to entry aren’t as strong as they were. Human ingenuity, aided by computer technology, has enabled college students to launch companies such as Dell and Facebook from their dorm rooms. As mentioned in an earlier post, Uber didn’t need to buy cars to compete with the taxi companies, and Airbnb didn’t need to buy real estate to enter the lodging sector. Still, this ability to enter an industry more easily also makes it more difficult for a new entrant to dominate or sustain a position, as they are competing with others riding the same wave. In addition, innovation enables the creation of new “substitute” offerings more rapidly than ever, available online and not limited or blocked by the distribution channels of years past. Today, many successful firms are less focused on these issues, but not because new entrants and subs are less likely to arise. Companies are less focused on trying to block the entry of new competitors or competing substitute products because, due to technological progress, it’s nearly impossible to eliminate this challenge.
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Being an established industry competitor is less likely to be a safeguard than it was in the past. (Ask anyone from Blockbuster, Oldsmobile, or Borders.) In fact, 70% of the companies that were Fortune 500 companies in 1990 are now gone. And while suppliers can still hold much power in some industries, e.g., some commodities and high-tech components, the global marketplace and innovation have made the supply chain less relevant than it was thirty years ago. Of course, these forces aren’t dead: suppliers and industry leaders are taking advantage of the digital economy as well. Overall, though, it’s harder for firms tied to these two horizontal forces to rely on previous advantages to maintain their market position, and newer competitors are less likely to focus on them as a major part of their core strategy.

“Success isn’t owned, it’s leased, and rent is due every day.” – J.J. Watt, Defensive End, Houston Texans.

So what’s left for today’s company to address in this model? The one force that has grown in strength, significantly, offers the best opportunity to build a competitive strategy. The greatest focus should be on the strongest force in almost any industry today: the buyer. Technology has given customers the ability to search, comment, bargain, recommend, re-sell, and utterly make or break a product or service, from almost any location with an Internet connection. And they’re using that power. 89% of consumers began doing business with a competitor following a poor customer experience.** The company that builds and maintains market share is likely to be the one that fights for King Customer rather than trying to overthrow him. It’s the company that reviews and improves the digital experience for all stakeholders continuously, transforming the relationship, never resting on its past success in meeting or surpassing customer demands. 64% say customer experience is more important than price when deciding who gets their business. ** Like the aforementioned defensive end, successful industry players aren’t resting on their laurels, but constantly re-evaluating how to learn from and engage the buyer. Instead of destroying the competitor, industry leaders work every day to empower the end users even more, because that empowerment is what they expect and demand. Cloud computing, social media, the Internet of Things, and unnamed emerging technologies have altered the landscape, forever.

Adapt or Die” is the blunt response from Oracle executive Harish Venkat, who elaborated by writing that “Technology has shifted the balance of power in the traditional value chain from producers to intermediaries—and now to buyers. Investors have rewarded companies that have best capitalized on this value chain shift.” So what are the first steps? Start by recognizing the fundamental factors that impact the customer experience that you deliver. Nigel Fenwick of Forrester Research joins with Perficient experts Michael Porter (the other one) and David Stallsmith to outline the key strategic issues that firms must consider for digital transformation success. Because rent is due, today and every day.

**(Source: CustomerThink, 25 Customer Experience Facts)

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Daniel Rabbitt

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