Digitization has created a paradigm shift in the way competition arises, according to a McKinsey & Company article.
McKinsey & Company published an article entitled, “Strategic Principles for Competing in the Digital Age” as part of their continuing tracking of the changes digitization is creating in the business world. A section of this article details how technology is changing the way companies compete; how barriers to entry are not just breaking down, they’re being totally demolished. As the authors write, “…what was once radical is normal, and unprepared incumbents run the risk of becoming the next Blockbuster.”
According to McKinsey, there are seven trends that could redefine competition today, and companies that want to prevail in the digital world would do well to heed them:
1. New pressure on prices and margins: What started as a retailer’s nightmare is evident in the B2B world as well. Consumers can now go online and compare prices with a single click. And for companies that have recognized that mobile is dominating the digital world, those purchasing decisions can be made anywhere, anytime with a single swipe. It isn’t just the individual competitors that businesses need to face, but the online price comparison sites that actually sell nothing except price and feature information.
2. Competition can come from anywhere: Smart executives used to be able to anticipate, to a great extent, where competition would come from. Whether it was name recognition, cash reserves, or established supply chains; only certain companies could afford to become real competitors. That is no longer the case. Digitization has broken down the barriers to entry. That has not only allowed smaller companies to enter the market; it has also allowed recognized brands to expand their offerings into new markets without necessarily building distribution networks or hiring additional staff.
3. Winner-takes-all dynamics: The old adage, “he who hesitates is lost” certainly is true here. In the digital world, competitors can emerge quite quickly and command the lead due to the reduced transaction and labor costs. The article estimates that “online retailers may generate three times the level of revenue per employee as the top-performing discounters.” They know how to optimize data. Scaled-down labor and overhead costs enable them to utilize cash in strategically to broaden their market. And smart businesses have learned to use consumers and social media for marketing, cutting back on traditional and expensive marketing and advertising costs.
4. Plug-and-play business models: Successful companies understand that they don’t have to create and maintain all functions and services themselves. Think of how many companies utilize Amazon’s business logistics and cloud services rather than building their own. Third-party providers are becoming more prevalent throughout all aspects of business to fill in gaps and lower overall operating costs.
5. Growing talent mismatches: As McKinsey stipulates, “Software replaces labor in digital businesses,” with automation leading to the elimination of many job functions and titles. But the real struggle is finding people with the digital skills necessary to maintain and grow these digital businesses; positions like artificial intelligence programmers, data scientists, and digital strategists. And since successful digital companies tend to attract the best talent, those companies lagging behind will find a depleted talent pool.
6. Converging global supply and demand: Borders disappear in the digital world. Consumers want a unified experience, no matter where the company resides. They don’t want to concern themselves with currency differences. They expect to receive their purchase in a timely fashion, regardless of where it may be coming from. In the B2B market, companies are pressuring suppliers to provide services that are standardized across borders.
7. Fast-paced evolution of new business models: There used to be a “learning curve” or “growth curve” when it came to starting a business. Now, not just businesses, but business models are evolving at a record pace, and disrupting established business models in the process. Think how quickly the music business progressed from cassettes to CDs to MP3 players to Spotify. Zipcar has totally disrupted and transformed the car rental market. Uber has changed car service forever; and Airbnb has thrown an enormous monkey wrench into the hotel and tourism industry.
For those companies that accept and embrace digitization, there are many opportunities. It’s time for companies to decide where they stand in the digital divide.
Read the full report here.