Digital Transformation: New Generic Strategies

As a marketing strategist and practitioner of business architecture, I believe Michael Porter’s three generic strategies of cost leadership, differentiation, or focus are as important now as when first promoted in 1980.

In practice, these have stood the test of time and practical application, though they have not recognized the birth of new generic digital strategies such as scale, network effect, and brand leadership that have recently proven successful.

In particular, the network effect enabled by the internet, changes the matrix as Strategic Advantage would recognize “Free” as independent of Low Cost Position, and the Strategic Target would reflect a universal or omnichannel approach rather than Industrywide or Particular Segment; see chart below.

Beyond cost leadership, differentiation, and focus, I would like you to consider that scale, network effect, and brand leadership are effective generic strategies for building unique and durable businesses.

Historically scale and size were tied to cost leadership because volume was linked to cost and pricing of the components; the higher the volume, the cheaper the finished goods. The ability to scale audience was linear with relatively high cost and limited reach using traditional media.

Today, scale as a generic strategy is highly visible on the Internet via socially-oriented site including Facebook, Snapchat, eBay, and OKCupid. The component resources and provision of the product is immaterial because the product are the customers. Or as Andrew Lewis said: ‘If you are not paying for it, you’re not the customer; you’re the product being sold.

Only with scale via a huge user base do these businesses succeed. Ultimately these businesses prosper with revenue from data about users, advertising, transactions, and subscription fees. GOBOSH — Go Big Or Stay Home.

Similar to scale is the network effect (aka, network externality or demand-side economies of scale); the effect that one user of a good or service has on the value of that product to other people. This business case is typified by phone, chat, financial exchanges, most apps (enhances a smartphone) and browser plug-ins. Unlike scale, a network can be small and still be successful as demonstrated with chat software like WeChat and Skype or gaming sites and software from xBox or Steam.

According to NfX “The short answer: over the past 23 years, network effects have accounted for approximately 70% of the value creation in tech.”

Newer examples come from Internet of Things (IoT) devices and networked sensors to capture and process data. This as a generic strategy depends upon knowledge, insights, and visibility to emergent behaviors; i.e., signals that the engine or pump is about to break.

Again, one might argue that to achieve cost leadership, differentiation, or focus one might include the network effect as a subset or component. To test this, consider the inverse: if you single mindedly pursued the network effect, would cost leadership, differentiation, or focus follow and be subordinate?

The final generic strategy to consider is branding. Clearly this is questionable in many regards as it is an intangible concept in both economic value (intangible asset) and physical substance (conceptual). Regardless, you see dominant brands such as Red Bull and Beats that prosper without cost leadership, differentiation, or focus on products or services. These brands assert a position of fame, affinity (badges), and experiences (club); there is little product differentiation, no cost benefit and high competitive substitution.

Suspicion of branding as a generic strategy most likely relates to the fact it is difficult or confusing and lacks precise models or processes.

Expressed as “the fame game” or a “celebutante” we need only look to the new breed of celebrity including Paris Hilton and Kim Kardashian who are famous for being famous. From this perch numerous business opportunities have emerged as their branding is worth millions. This is clearly a generic strategy that does not fit the Porter model.

For new and existing companies, these new generic strategies can be uses as guidance for digital transformation or as a way to pivot into new markets. What would your business look like and how would you operate if a billion people were engaged in some way like they are with Facebook, Google, and WeChat?

Is there value in creating one or more networks among employees, vendors, or customers? Could you apply network tools and sensors to your business and create new capabilities and value?

Is there value in your brand and can it be elevated to a point of dominance like Apple or Nike?

Continue the conversation with me. Let’s go do it.

Larry W. Smith

Twitter: @lwsmith10011