[Learn] How digital is reshuffling the cards for competitive advantage
The term “competitive advantage” has now entered everyday language. It is used to refer to something that one does better than others, and it comes up over and over again, about everything. In a way, this is a good thing because it shows that the economic and management culture is spreading in society. The other side of the coin is that the concept has been emptied of its meaning, reduced to a portmanteau word used as soon as the opportunity arises.
So what is competitive advantage? What exactly are we talking about when we say that a company has a competitive advantage? And more specifically, what is competitive advantage in digital?
What is competitive advantage?
Competitive advantage is the ability of a company to achieve higher performance than the average performance of its competitors in its market. In principle, it’s simple. First of all, the question of the market. It’s always complicated to define what a market is. There are a very large number of definitions. I suggest you use the following.
A market is the place where supply and demand meet for goods that satisfy the same consumer need. So we start by listing all the companies in the identified market and then we determine their performance for each. The question then arises of measuring performance. Several variables can be used to measure performance, the most reliable are the ROA (Return on Asset), the ROE (Return on Equities) and / or the ROI (Return on Invest). The ROA is the most frequent and it gives simple information to analyze: how many euros of assets are necessary to generate a euro of profit. You will find here an explanation of these indicators. Margin rates, or Interim management balances such as EBITDA, are also possible. My preference is for the ROA. Anyway, I advise against using variables such as turnover (turnover) or sales volume. These variables are sensitive to the size of the company, which makes the analysis less reliable.
A high level of performance is what competitive advantage achieves. In itself, in concrete terms, the competitive advantage is a positioning of the offer of goods or services on a market. And it is the positioning of this offer which leads to generate a higher performance than its competitors. This positioning is made up of three parameters:
- The price of the product or service
What is the public price of the offer, product or service, compared to competitors? What about this price compared to the costs? And in relation to the revenues of the target, companies or consumers depending on the B to B or B to C market?
- Features of this offer
What are the characteristics of the products or services? How do they position themselves compared to the competition? And in relation to consumer needs?
- Quantity, and therefore availability
How are you distributed? Are your products everywhere, in large quantities, or scarce, and often unavailable?
Sources of competitive advantage
There are two main sources of competitive advantage:
- Willingness to Pay: encouraging consumers to pay for a good or service. It consists of creating goods and services for which consumers are willing to pay a lot and which competitors cannot match (price, product characteristics, distribution, customer experience, etc.)
- Efficiency: find a way to reduce costs to be less expensive than competitors, which leads to being cheaper than competitors or being at the same price but with a higher margin rate.
These two sources form a continuum.
To describe this, refer to the diagram below which represents a simple market made up of 8 companies.
Each cross on this diagram is an offer made to the market by a company. Each offer is therefore formed by a price, characteristics and a quantity of the offer. The x-axis is the axis of the first type of competitive advantage, efficiency (roughly equivalent to the “cost dominance” axis at MEPorter); the y-axis is the second type of competitive advantage: “Willingness to pay”, the encouragement of consumers to pay a high amount to access an offer perceived as of higher quality. The red arc represents the continuum that links the two sources of competitive advantage.
All the points on this arc are therefore competitive advantages, but of different types, some more quality oriented, others more cost oriented. We can clearly see that 3 offers (1, 2 and 3) generate much more value than the others. 1 dominates by quality, 3 dominates by costs and 2 is a more differentiated offer than 3 (less than 1) for higher costs than 3 (less than 1). 1, 2 and 3 are excellent positions. The other crosses are positions for offers from other companies. They are riskier because they are less competitive. The aim of these offers is to join the red arc. There are a large number of possibilities for this, presented below.
And this is where the essence of the strategy is. The goal of each company will be driven by this analysis:
Companies whose offer does not provide a competitive advantage will have to build a strategy to build this advantage. They will therefore build a strategy so that their offer meets the red arc;
Companies whose offer is already on the red arc will build a strategy to stay there, and strengthen their position. We speak of a sustainable competitive advantage (defensible).
The company whose offer is point 4 can improve its quality, and therefore increase its prices; lower costs or adopt a high-end strategy. It can also try to challenge the position of the company offering offer 2. But of course not everything is possible! In any case, all companies that do not have a competitive advantage will seek to reposition their offer according to the 3 key parameters to increase their performance. It is the object of the strategy to conceive this change of position, and it is the object of marketing, the supply chain, IS, purchasing, … to participate in the implementation (we speak of execution). This article describes this process.
Competitive advantage in the digital age
With the digital revolution that we have been experiencing for a few years, often referred to as the 3rd industrial revolution, it would be tempting to say that everything is changing, that nothing old makes sense and that everything must be reinvented. Concretely, old concepts are still quite valid. Our entry into the digital era, however, leads to extending them, strengthening them, and making them evolve at the rate of the evolution of our societies. This is the case for competitive advantage. It is important to understand that although the definition of a competitive advantage remains stable, it is a position in a market that leads a company to perform better than the average performance of its competitors in the market, in contrast, the digital strategy to be implemented to build a competitive advantage is not universal. Indeed, the competitive advantage has several facets, and the entry into the digital age has affected each of these facets.
The effect of the digital revolution on competitive advantage mainly concerns two dimensions: how to build competitive advantage, and why.
First, here is a brief overview of the facets of competitive advantage in the digital age. The competitive advantage being a positioning in a market made up of three parameters, digital affects each of these parameters:
Price is a fundamental parameter in building competitive advantage. The switch to the digital age affected him mainly from two angles. First of all, the public price, that is to say the offer price on the market. Today, the level of consumer information is considerable and we all have access to price comparators to buy a product (refrigerator, car, washing machine, etc.) or a service (hotel, vacation, insurance, etc.) . This transparency has completely revolutionized competition. But digital has also affected the cost structure of companies upstream of this public price. The digitalization of markets is leading companies to allocate their resources differently: production, skills sought, technologies, communication, etc. and this structure directly impacts the margin rate, and therefore the public price.
- The characteristics of the offer
Digital has led to a considerable deepening of the understanding of consumer behavior. The data on consumer behavior is so massive that it is necessary to invest in methods of analysis (Big Data, data visualization) and automation of collection and analysis. It is therefore now possible to offer products and services which are supposed to have a better match with demand. However, better understanding consumers does not mean being able to satisfy them. In addition, consumers are versatile, they change their minds constantly. So better understanding demand means that we must be able to adapt supply dynamically in order to be as in phase as possible with demand. It is a considerable technological challenge, and a challenge launched by digital, because not meeting demand leaves room for new entrants who will satisfy her better.
Take the example of Amazon. When you consult a product sheet on Amazon, you see available quantities appear. These quantities are the actual quantities, in real time. This means that you place your order knowingly. This is linked to an extremely efficient ERP, and a fully responsive website. At many other trading sites, inventory consolidation is done every 24 hours (nightly). So the quantity displayed is not in real time. Your order can therefore relate to a product which is no longer in stock, but which is still indicated as available. You will then receive an email to confirm this and give you a new restock or ship date. Digital has transformed the supply chain and the provision of products.
Digitization therefore affects all three parameters of competitive advantage, but it also obviously affects what the company will do with it. Indeed, if the company is a pure player, your problem is to generate value creation online. But if you’re a multi-channel business, you want to sell online, and bring customers to your store. Finally, if you are exclusively a physical business, your problem is “how to use digital to increase the number of visits to my store, and therefore sales?”. And of course, to this will be added the desire to gain an advantage of the “willingness to pay” or “efficiency” type.
Thus, the competitive advantage in the context of a digital strategy has online and / or offline effects, and we are not just talking about a website or social media, but of potential articulations between what is happening on the web and what is happening in the physical world, to gain a profitable and defensible position in a market.
Jean-Philippe Timsit is professor of Competitive & Digital Strategy at ESC Rennes School of Business.
He specializes in competitive advantage and value creation, mainly in digital strategies, as well as in the areas of entrepreneurship and leadership. He regularly intervenes on these themes with companies through seminars, training and consultancy missions or with entrepreneurs in the creation phase.