Porters market forces
On January 29, 2019, I had a public speech on the topic Business strategy for a competitive eCommerce project at the Reshoper conference. My presentation was less exact and more based on my experience and personal opinion, so I decided to write a post on this topic on my blog.
When talking about competitiveness, Porter’s 5 market forces model is the first thing that comes to mind for many economists. In my opinion, it’s great, but a little outdated for the Internet economy considering it was created in 1976. I think it overestimates the size of the firm and understates the importance of innovation. I am a supporter of the opinion which says that for the current economy the main determinant of competitiveness is the speed of introducing innovation. If we look at the 20 largest Internet companies, we will find that after 20 years only 5 of them will be in the TOP twenty. The order changes significantly every 5 years. In eCommerce, trading platforms and global players need to be seen as competition in the long term, even if they do not currently compete with local e-shops. Both types of these companies are huge and continue to grow, so it is necessary to take them into account in the long-term strategy. I really like the idea from the book “The Innovator’s Dilemma“, which says that big companies can only be defeated in areas where they are weak. Below are some of my tips to help identify the weak points of global eCommerce players or trading platforms.
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 assess whether we have enough comparative advantage to achieve it. When I started GymBeam, I already had the experience of reaching #1 in the domestic market and expanding into smaller categories like sports nutrition, but I still didn’t have the experience, funding, or access to human capital to venture into a larger category like electronics or SaaS. It was an adequately big challenge for me. The principle of setting yourself an adequately sized challenge is a good one to apply to team management as well, which can help you achieve long-term motivation, as small challenges are boring and too big ones demotivate. When selecting the category, I took into account market size, geographic location and customer expectations for speed of product delivery. By assessing our starting point, we decided to choose the category and markets that were the best fit and made the most sense for us. After 5 years, I have to retrospectively assess that it was the right move. The category was an adequate challenge for us.
2. Category trend
Many successful companies come from sectors that have benefited from macroeconomic trends. They are from sectors that have grown rapidly in recent years or have not even existed relatively recently. If we look at the top 10 largest companies, we find that a number of them come from industries that did not exist 30 years ago. Many unicorns and startups come from industries that have even existed for significantly less than 30 years. I believe that the further we go, the more these changes will intensify.
Top 10 biggest companies in the world
3. Changing perspective on market segmentation and timing
A very good starting point in business is to start in an area that is not currently heavily saturated with competition or customers for some irrational reason, and it is expected to change anytime soon. Based on certain macro circumstances, it was predictable that cloud services were not being used initially due to mistrust and it was obvious that this would change in the future for rational reasons. Similarly, as far as the sports nutrition segment was concerned, it was only a matter of time before it was no longer perceived in our region as a niche for a narrow group of bodybuilders with products for enormous muscle mass gains, but rather as mainstream FMCG products for ordinary people who want to live a healthy lifestyle. This change did not happen all at once, rather it happened gradually and its growth can be observed even today. As a result, this market attracts many new customers every year, which is a great starting point. For example, in my opinion, insect-based foods will be used to a high degree in the future. The problem with this segment is that it has not yet started to transform, so we cannot predict when the change will take place, whether it will be in 5 years’ time or in 100 years’ time. I think that this change is still too vague, on the other hand, the change of views on the sports nutrition segment was very easy to identify in our region in 2013 by the changes in Western Europe and the US, and I think it is still in process, which means that it is not finished. It was similar in 2008 with cloud services.
Different perceptions of the product and timing
4. D2C Business model
From my point of view, companies can be divided into three types: manufacturers, lifestyle brands and retailers. Thanks to new technologies, it is now possible to manufacture products and build a brand much more efficiently and cheaply than in the past. Therefore, a significant part of the margin seems to be shifting to B2C distribution. Not only is it about margin, but also about the growing segment of ‘private label products’ where retailers are actively shaping brands. These brands operate more efficiently because they are better able to analyse customer data, respond quickly to customer needs 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 in which it is still possible to win against the big companies today is in the area of predicting customer demand. I observe that today’s technology, as well as the big players, predict customer demand less effectively because the predictions are often too general. A solution that is specifically designed for a particular market segment or group of customers can be much more accurate and effective in predicting their needs. If a company starts to develop a sophisticated system for a specific segment, it can secure its future position based on historical customer data and its own internet searches.
6. Tech stack
A fundamental mistake, which is typical for some startups, is the repetition of procedures and solutions after the model of big companies. Big business companies usually had different business conditions, so copying them not only does not help to achieve the same result, but can even make it worse. An area where it definitely does not pay to copy big companies is IT infrastructure. I think that, using today’s technology, a more efficient solution can be provided. The global leaders did not have the technology that has only been made available in recent years, and it is currently unprofitable to do system re-engineering. This may just be an opportunity to build a more efficient ecosystem.
7. Building customer equity
In an ideal world, every company would have a subscription model because of its ability to provide long-term revenue, cash flow and stability. Unfortunately, in many industries this is not possible due to the nature of the product. However, in my opinion, every company should try to move towards this model and try to build customer equity and recurring revenue. Modern technology offers easy ordering and can sophisticatedly predict purchases. They can recommend a product to a customer at the right time, and very accurately (Target can predict a customer’s pregnancy in 4 months with 89% probability, Amazon will ship 15% of products before ordering). I suppose the most sophisticated segmentation method is multi-dimensional labeling of products and customers/potential customers with parameters/brands. For quality segmentation, machine learning algorithms, technical solutions and commodity practices are implemented. Collected results of pre-tested hypotheses with business logic are valuable to ensure the inflow of new customers and minimize the outflow of current clients. This is a great opportunity for securing the company’s position in the market.
Building of customer equity, photo from Reshoper, Prague
8. Pricing
I think global players and marketplaces are the main competitors for individual companies in the long run. Model marketplaces have many advantages, but they also have one big disadvantage, and that is pricing. I think that a good company can benefit greatly from this, especially at a time when technology offers sophisticated data collection methods for correct pricing and methods of individual pricing for different clients.
9. Focus on CX
With new technologies, we can easily achieve a better CX to margin ratio. Based on this, it is possible to regulate the growth of the regular client base against profit. I believe that good companies can deliver 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 entire company and the ability to identify what the customer really wants in terms of product and service along with the distribution of that product. It is extremely important and essential. In addition, a company called Foresters has quantified the correlation between company value growth and the CX index (quantifying the quality of the user experience). It compared the change in the company’s stock market value over a 7-year horizon in companies with a measured CX index. It found that companies that had a measured high CX index grew faster than the average stock market, while companies with a low CX index not only did not grow fast enough, but their value declined over the 7-year period. From my perspective, the importance of CX is growing as people have easy access to product and service reviews, recommendations or repeat purchases via mobile devices. As living standards rise, customers will prefer products and services with high CX over more affordable products.
10. Establishing base for entertainment
Anyone involved in performance marketing realizes that the price of attention is constantly rising. When we look at highly competitive markets and industries, we see that many companies are investing in advertising in such a way that they cannot make enough profit to cover their costs. As a result, they are reducing their margins. One way to deal with this, in my view, is not to buy attention, but to earn it. You can earn it by building a system in your company that ensures you are constantly enthusing, entertaining, educating and attracting existing and potential clients. Today’s customer is exposed to a multitude of influences and feelings and forgets very quickly. Therefore, you need to constantly remind your company in a simple and natural way. Content marketing often precedes the business model. In many industries, the traditional business model that has been built on for years has been transformed into a model where content brings in more profit than the original business activities. This is the case, for example, with Star Wars or Disney, which now make more money from merchandising than from the original business of broadcast rights and cinema tickets. I even think today’s economy is starting to spin the business based on the increased popularity of social media and customer convenience. Some companies start with building an audience and then think about how to monetize it by selling products. An example is Kylie Jenner, who became a billionaire by being able to monetize her Instagram audience through a cosmetics brand.
Company vision
I think all these strategic tips should not only be top-down, but also bottom-up. A lot of times the leadership of a company will come up with a great strategy that the current team can’t identify with and so they can’t work on it. I really like Peter Drucker’s statement that says: “Culture eats strategy for breakfast.” That is why I think that many of the great strategies of senior management have not been implemented because the rest of the company has not been able to identify with them. After defining the strategy, I think it is necessary to show the vision and mission of the company. The company’s vision and mission should be clearly communicated to the entire company and then decomposed into smaller units such as an annual OKRs, a project roadmap, or an annual business plan.
Culture eats strategy for breakfast