Digital is tearing up the rulebook on competition. Retailers (e.g. Amazon) offer technology services. Technology firms (e.g., Google) offer financial services. Financial services firms (e.g., Rakuten) offer travel services. New and different competitors are emerging in every sector. This trend will continue for five reasons:
First, digital lowers barriers to entry. Firms can enter new markets without having to invest in expensive physical assets. For example, a company wishing to enter the banking market can do so without having to open branches.
Second, digital changes the sources of differentiation. For example, companies with a large stock of customer information (e.g., retailers) can use that data to enter new markets where data is a source of competitive advantage.
Third, digital offers unlimited ‘shelf space’. In stores, retailers have a limited physical space in which to display their products or services. No such limitation applies in the digital world, making it easy to enter new categories.
Fourth, digital lowers transaction costs, allowing companies to cut their own value chains. Amazon for example offers its hosting and supply chain capabilities as a B2B offer.
Finally, ‘digitally savvy’ brands outperform. Forthcoming research by my colleague Jacques Bughin demonstrates that brands that are digitally savvy (as evidenced by customer satisfaction in the digital channel, post-purchase comment, and other factors), enjoy a higher sales conversation rate. Over-time this should lead to fewer, stronger digital brands, some of which will be powerful enough to cross sector boundaries.
Together, these trends make it easy for companies to cross traditional sector boundaries. For many companies this is making the competitive landscape harder to understand, predict and react to. Companies need to expect the unexpected – an attack from left-field. But they also should take a deeper look at sources of competitive advantage and build competencies accordingly. For example we often hear that ‘data is the new oil’ but few firms have taken steps to build that competence, such as hiring a Chief Data Officer.
Look out for further Digital Megatrends soon.