Market creation - beyond market competition
As the possibilities and economics of digital are constantly changing, businesses must respond with innovation and speed, while they adapt, embrace renewal, and even shape industries. As a result, digital strategies need to continually adapt to and seize new opportunities as their landscape morphs with time. Companies must continuously re-map their landscape, while they decide where to play, and accordingly adapt the journey of their digital transformation. New markets must be explored and created, while existing markets must be further exploited. Innovations can become the basis to re-imagine offerings, rethink value-chain, while new business-models can emerge. Hence, digital strategy can pursue opportunities beyond the current value-cost trade-offs that compete in existing markets, to those that shape market boundaries and industry conditions they face, in pursuit of differentiation and low cost.
“Blue Ocean Strategy” by W. Chan Kim & Renee Mauborgne defined the market universe as composed of two types of oceans – red oceans and blue oceans. Red oceans are all the industries in existence today that most organizations fight over. Blue oceans are all the industries yet to be created, where profit and growth increasingly come from. In their book they called market-competing moves as red ocean strategy – from market-creating moves – what we call blue ocean strategy. Market creation, that makes market competition irrelevant, has become of paramount significance in this era of digital disruption.
Your market creating strategy must include both disruptive and non-disruptive creations, as they complement each other. They separately and together reveal new value-cost opportunities, which bring growth. A breakthrough solution for an existing industry problem generally results in disruptive creation. On the other hand, identifying and solving a new problem or seizing a new opportunity, most often gives rise to non-disruptive creation. And, redefining and solving an existing problem draws on elements of both disruptive and non-disruptive creations. The fact of the matter is that often successful market-creating strategies don’t rely on technology innovation alone. Instead, focus on value-innovation as the driver for your market creating strategy. Value-innovation anchors the innovation to the value it delivers to customers and business viability, rather than the novelty of the technology.
As you mature with digital, sustained success in the ever-changing environment will require actively managing a portfolio of initiatives across time. You cannot do everything. And you cannot even do all the things you should do simultaneously. You have to make conscious choices to prioritize and stage initiatives. In fast-paced digital markets that your company lacks the ability to shape, for instance, the best strategy may be to focus on complements—providing the shovels for the digital gold rush—to take advantage of the exponential decrease in digital costs. The opportunities and risks that digital presents shift over time in waves. Competitive advantage flows to the businesses that see and act on those shifts first and ride the waves of disruption. Responding to digital disruption isn’t about creating a list of digitization priorities; it’s about identifying where you are vulnerable and where you can create value.
Market creation lessons from Amazon
Jeff Bezos’s initial idea was to exploit the Web to deconstruct traditional bookselling. With just a well-designed website that piggybacked on the inventory and the index of book wholesaler Ingram, Amazon offered a catalogue ten times larger than that of the largest Main Street superstore, at prices 10 to 15 percent cheaper. In 2006, Bezos opened Amazon Web Services (AWS)—cloud computing—as a standalone service. This started as the simple rental of raw computing capacity but evolved into a complex stack of computing services. (Amazon even sells the service to competitors such as Netflix.) According to Gartner, in 2013, AWS had five times the capacity of the next 14 competitors put together. From deconstruction to community curation to hyperscaling: at no point did Amazon sit back and wait for trends to emerge. Rather, it seized the strategic opportunities presented by each successive wave of disruption, ruthlessly cannibalizing its own business where necessary. E-books were inevitable, so it launched the Kindle; customer information and scale in data processing are critical, so it sells cloud services to its own competitors. And at no point did Bezos restrict one business to protect another—Amazon is now run as four loosely coupled platforms, three of which are profit centers: a community host, supported by an online shop, supported by a logistics system, supported by data services. Unlike many of his rivals, Bezos saw business architecture as a strategic variable, not a given. He did not harness technology to the imperatives of his business model; he adapted his business model to the possibilities—and the imperatives—of technology. The focus is always on value-innovation, rather than technology innovation.
Bold strategies to get ahead of disruption
Companies need to act more boldly than the average incumbent if they wish to outperform their industry. And the reaction must be more than simply bold: It must be appropriate in the face of digital entrants. Because digital entry is usually disruptive, the incumbent must also be disruptive — and quickly — to both limit the loss of competitive ground against digital incomers and take advantage of other incumbents that are slow to respond. To do better than just break even on digital disruption, companies must also integrate digital strategy into their corporate strategy. Bold, at-scale responses pay off twice as much as semi-bold reactions and three times as much as medium reactions. Incumbent companies are always better off reacting than not reacting. Digital initiatives tend to exploit latent demand in any industry, creating a positive market expansion effect. So, incumbents take on an offensive posture, by preemptively transforming itself to self-disrupt on their own terms, rather than respond to react to external disruption.
Digital disruption is unavoidable, and companies need to react. Those that do not — or that do so in half-hearted ways — are likely to take a major hit on revenue and profits. Those that respond boldly, at scale, and in a way that is fully embedded in their corporate strategy will be positioned to steal revenue and profits from the laggards, and emerge from disruption with higher trajectories in both areas. Companies must break free from the norms of existing value-cost trade-offs. They must pioneer bold strategies that open up new value-cost frontiers through step-change in the kind and degree of value that is offered. This is how new market space is created. Here the strategy is in pursuit of both differentiation and low cost, thus making the existing market space irrelevant. In an era of disruption, companies must become fluent in market creating moves.