Porters market forces
I had a public speech on the topic about the competitive eCommerce project on 29.01.2019 in Prague on eCommerce expo Reshoper. My presentation was more of a personal opinion than the exact summary of the topic, so that’s why I decided to cover it in the blog post.
In general, when it comes to competitiveness, every economist usually recalls Porter’s Five Forces. In my opinion, this model is great, but it is a bit outdated regarding the internet companies. Most of the time, it favors large companies over small ones, and perhaps due to the reason that it was developed in 1976, it is not that good with innovations. I agree with Elon Musk, who said that in the current economy the main determinant of competitiveness is the speed of innovations. When we look at the top 20 of the largest Internet companies, after 20 years only 6 of them stay in TOP20, and every 5 years the rankings change significantly. In eCommerce, considering the competition in the long run, the global players in the category and the marketplace should be considered. Both types of companies are enormous and therefore, it is necessary to take this into account while thinking about the long-term strategy. I admire one thought from book called “The Innovator’s Dilemma”, it said that a big company can only be defeated in the area where it is now weak. That’s why I have come up with a few tips that are helpful to identify where the weak spot of big global players in your industry or marketplace might be located.
TOP 20 internet companies, changes in recent years
1. Strategy based on a comparative advantage and achievable goal
When setting a goal, it is important to be able to objectively evaluate whether you have enough of comparative advantages in order to achieve that goal. Particularly, in my case when I was starting GymBeam, I have already had the experience of reaching the 1. place at the domestic market and in a smaller category than sports nutrition abroad, so it was quite a challenge for me, and at the same time, I still did not have enough experience, finances, quality of human capital in order to choose a category as big as a household appliances or perhaps even a globally successful SaaS. Based on market size, geographic location, customer expectations about the time of product delivery in the category over the long-term, and an objective assessment of the baseline, we decided to choose the category and markets to reach. After 5 years, I have to say that it was a good move. This category is an adequate challenge for us, and we are also delighted to be successful in it.
2. Category trend
When you talk to successful eCommerce CEOs, so many of them will tell you that one of the keys to their success were macrotrends. Many of them will come from fields that are rapidly growing, and even from fields that had not existed before. When we look at the TOP10 of the largest companies in the world, many of them are doing business in sectors that did not existed 30 years ago, or even in the shorter term as regarding the internet companies or unicorns startup companies and I believe that the changes will be even more significant.
Top 10 biggest companies in the world
3. Mass change of view on segment and timing
A very good starting position in the business is if you start in a field that is currently, for an irrational reason, not considerably saturated by both competitors and customers, and you expect it to change in the foreseeable future. Based on certain macro circumstances, it was possible to assume that at the beginning of cloud services, they were not used because of distrust, and it was obvious that this would change in the future due to rational grounds. Similarly, regarding the segment of sports nutrition, it was only a matter of time when in our region it will no longer be perceived as a niche for a narrow group of bodybuilders with products for enormous muscle growth but rather a mainstream FMCG products for average people who are committed to a healthy lifestyle. This change did not happen at once but it is rather gradual and can be still observed. As a result, many new customers are attracted to this market every year, which is a great starting point. To my mind, insect-based food will be used widely in the future. The problem with this segment is that it has not yet begun to transform, so we cannot predict the time when change will take place, whether it will be 5 or 100 years. I think, that this change is still too vague; on the other hand, the change of opinion on the segment of sports nutrition has been very easy to identify in our region in 2013, according to the changes in Western Europe and the USA, and I think it is constantly occurring, so it is not finished yet. Similarly, it happened in 2008 with cloud services.
Different perceptions of the product and timing
4. Business model
From my point of view, companies can be divided into three types of manufacturers, lifestyle brands and retailers. Based on new technologies, production and brand can be covered significantly cheaper than they used to be, and therefore, I think the margin is shifting to B2C distribution. And it’s not just a margin, but also a “private label products” that are growing overall and where retailers actually make brands. These brands are able work more efficiently because they can work with customer data better and work more flexibly with customer demand.
hybrid business model of manufacturer, brand and retailer
5. Demand planning “before in time”
I believe that one of the areas that it is still possible to win over large companies today, is the area of customer demand forecasting. I have observed that today’s technology as well as big players, predict customer demand less effectively as customer solution can be actually proposed for a particular segment. This is an area where, if the company starts to develop a sophisticated system for its segment, it is possible to secure its position for the future, on the basis of historical data about customers and custom crawling of the Internet.
6. Tech stack
A very fundamental mistake that is typical for some startups is the repetition of procedures and solutions after large companies. Large business companies usually had other business conditions, so their replication not only would not help to achieve the same result but may even make it worse. An area where it is definitely not worth to copy after big companies is the IT infrastructure. I think that with the use of today’s technology a more efficient solution can be provided. Global leaders did not have the technologies that have been made available only in recent years, and it is currently unprofitable to do the system re-engineering. This may be an opportunity to build a more efficient ecosystem.
7. Building customer equity
In the best possible way, each company would imagine model subscription, since it is able to secure long-term revenue, cash flow and stability. Unfortunately, in many industries, this is not possible, because of the nature of the product. However, in my opinion, each company should try to approach this model and try to build customer equity and repeated revenues. Modern technology offer an opportunity to order so easily and it can make such sophisticated purchase predictions, so that it is possible to recommend the product at the right time to the customer, and it is very accurate (Target can predict the pregnancy of the customer in 4 months with 89% probability, Amazon sends off 15% of products before ordering). I assume that the most advanced method of segmentation is the multidimensional labeling of products and customers/potential customers with parameters/tags. In the case of quality segmentation, machine learning algorithms, technical solutions and commodity procedures are beginning to be established and the collected results of pre-tested hypotheses with business logic to ensure the flow of new customers and to minimize leave of current clients are valuable. It is a great opportunity for a company to secure its market position.
Building of customer equity, photo from Reshoper, Prague
8. Pricing
I think that global players and marketplaces are main competitors for each companies in the long run. Model marketplaces have many benefits, but they also have one major disadvantage, and that is pricing. I think that a good company can greatly benefit from it, especially in times when technology offers sophisticated data collection methods for correct pricing and methods for an individual pricing for different clients.
9. Focus on CX
Modern technology can easily provide customers and therefore the company should create the best ratio between CX and margin. Based on this, the the growth of regular clients’ base can be regulated against profit. I believe that good companies can provide an excellent user experience with similar acquisition costs as companies with an average or below average user experience. The customer experience is created by the whole company and the ability to identify what the customer really requires in terms of product and service together with the distribution of this product is vital.
Moreover, company called Foresters quantified the correlation between the growth of company values and the CX index (a quantification of user experience quality). It compared the company’s change of value on the stock market at the 7-year horizon in companies with measured CX index. It was discovered that companies which were measured with high CX grew faster than the average stock market, while companies with low CX index not only did not grow fast enough but also their value dropped in the 7 years. From my perspective, the importance of CX is growing because people always have their mobile devices in their hands with an access to a simple product and service evaluation, recommendation or repeated purchase.
Further with the rise in the standard of living, customers will prefer products and services with high CX rather then affordable ones.
10. Establishing base for entertainment
Everyone who deals with marketing performance is aware that the price of attention is constantly and steadily rising. When we look at very competitive markets and industries to such an extent that most companies, after buying a marketing placement, cannot make enough money to make it profitable for them, and as to other companies, it cuts almost the whole margin. To my mind, one of the ways to deal with this is not to buy attention but to earn it. To earn it through building a system in the company to ensure constant amazement, entertainment, education and attraction of existing and potential clients. Today’s customer is exposed to a great deal of influence and feelings and forgets very quickly. Therefore, it is necessary to constantly remind about your company in the simple and natural way. Frequently, these content marketing methods bring to a bigger business, for instance such as the Michelin Restaurant Guide, in the case of a company that manufactures michalin pneumatics. In many industries, the traditional business model that was worked on for years has changed for a business model where content is more monetized than original business. For example, it is Star Wars or Disney, since they are already earning more money on merchandising than on the original business with broadcasting rights and cinema tickets. I even think that today’s economy is starting to spin the business, based on increased popularity of social media and customer convenience, where some companies start with building up the audience and only then think how to monetize by selling products. This may be an example of Kylie Jenner, who is likely to become the youngest billionaire thanks to being able to monetize her instagram audience through a brand of cosmetics.
Company vision
However, I think that all these strategy tips should not only be top-down but also bottom-up. Since many times company management comes up with a great strategy with which the current team cannot identify and work on. I really like Peter Drucker’s statement, which says: “Culture eats strategy for breakfast” and therefore, I think many great top management strategies have not been fulfilled because the rest of the company has not been able to identify with them. I also believe that after defining the strategy, it is necessary to demonstrate the vision and mission of the company. The company’s vision and mission should be clearly shown to the entire company and afterwards decomposed into smaller units such as annual OKRs, a Roadmap project, or an annual business plan.
Culture eats strategy for breakfast