Today, I would like to summarize the famous management consultant Ram Charan’s book “Rethinking Competitive Advantage: New Rules for the Digital Age” published in April 2021.
“Why & how did the dozen or so digital giants such as Amazon, Facebook, Google, and Alibaba grew so big so quickly? Will their dominance continue? Do other companies have a chance competing against them?” Introducing such questions, the authors expressing that they will answer these questions, sharing the following information: These digital giants have permanently changed the consumer experience and the way employees do business. More opportunities, lower prices, instant access to information – all of these are the current, common expectations for consumers as well as corporate buyers. Additionally, they are all digital technology-driven, especially in the use of algorithms. Algorithms (the mathematical rules by which data is processed) have always existed. When computers were able to process data fast and at low cost, Amazon’s Jeff Bezos, Facebook’s Mark Zuckerberg, Google’s Larry Page and Sergey Brin were able to use computers to solve a vast array of problems. But how and why did they succeed? And how did they disrupt the existing order? Ram Charan was curious about this and began researching the subject.
Creating competitive advantage in the digital age is different, says Charan. A competitive advantage in the digital age is the ability to be the repeatedly, preferred choice of the consumer with continuous innovations for the consumer and to create tremendous value in the business.
Competitive advantage includes how a company perceives the consumer experience, selects its leaders, organizes the work and how it accesses its ecosystem, as well as data and finance.
The author summarizes the two aims of the book as follows: ‘To completely explain the sources of a digital giant’s formidable competitive advantage and to help other companies see a path to building theirs. From my observations of digital companies, I have identified a set of new rules for creating a competitive advantage. These new rules explain what any company– whether it is a digital giant or a traditional company – must do to prosper in this digital age. For legacy companies that are becoming digital, this book will point out the pieces that leaders often miss when they focus on technology alone.’
Charan continues that the shock of the coronavirus outbreak was unexpected. However, he adds, even in an ordinary period, the question is if other companies have a chance against today’s digital giants? His answer is a big yes. Amazon’s star has skyrocketed during the coronavirus outbreak as it was a digital company. So did Walmart, because it was ahead of many other classic retailers in digitizing its business.
But, no competitive advantage is sustainable unless it is maintained and developed after it has been gained. Tools are becoming more and more functional to gain a competitive advantage. Algorithms and expertise are available at a relatively low cost. Cash is the new measure of success, and funds continue to flow to companies that embrace it. Knowing the new rules of competition will raise your perspective and help you set the course in the complex and rapidly changing market.
WHY ARE THE DIGITAL GIANTS WINNING?
Imagining the existence of new digital platforms (market places) and revenue pools that can grow at an unprecedented rate is just one of the reasons why digitally-born companies have a competitive advantage, says Charan. He adds, that thinking differently about how to make money and finance the growth is second and using algorithm technology to improve decision making by reorganizing business is a third reason. In our current competitive age, traditional companies need to understand what they are facing and learn how to create a competitive advantage from innate digital companies. Some fundamental differences in the way digital companies compete are now clear.
Ram Charan, who reviewed Netflix, Amazon, Google, and Alibaba, summarizes some of their commonalities:
● ‘They imagine a 100x market size growht that doesn’t yet exist.’
● At their core, they possess a digital platform.
● They possess an ecosystem that accelerates their growth.
● They gain cash and depend on exponential growth.
● Decision making mechanism is designed for innovation and speed.
● They encourage the leaders in business to learn, reinvent and execute.
Therefore, today’s digital giants and start-ups are focusing heavily on the individual consumer experience and form new, large market places. They are rapidly scaling up, collecting and combining data, and engaging relevant partners in their ecosystem. Their business models focus on cash gross margin, cash generation, and exponential growth. They receive massive cash engagements from venture capital (VC) and investors who understand new financial models to finance their growth. Their leaders are extremely determined and committed with employees who work towards a specific purpose and immediately focus on the next step; speed, continuous innovation, and disciplined practice are the main reasons for their success.
It is impossible to disagree with the following view(s) of Charan: Consumer tastes and expectations will continue to change; Companies must constantly monitor, improve and redesign the latest consumer experience.
Established companies have the emulated resources, brands, customer base, talent pool, and data that digital start-ups envy. However, none of these are sufficient for competitive advantage in this day and age. Ultimately, every company will encounter a digital competitor who plays the game by different rules.
A NEW WORLD WITH NEW RULES:
Traditional companies are now thinking twice about how they use digital technology; some hiring chief digital officers, creating data analytics departments and consulting companies to guide them in digital transformation. Some are investing in their digital start-ups. Emphasizing that these companies need to determine how to allocate resources quickly enough to survive an unavoidable decline in the existing business Charan gives the following information:
Successful classical businesses suffer from this competition in two ways. The first is new digital competitors that offer a superior offer to their customers. Second, traditional competitors cut prices to stay afloat thus destroy the profitability of the entire industry.
The company looking for a way forward and out must start by understanding the new rules of competition. The author lists the new competition rules of successful digital companies as follows:
1. The key to exponential growth is a personalized consumer experience.
2. Algorithms and data are essential weapons.
3. A company does not compete. It creates an ecosystem.
4. The financial measure is mostly cash generation.
5. People through culture and work design create a “social engine” that drives personalized innovation and implementation for each client.
6. Leaders constantly learn, imagine and overcome obstacles to create change.
Charan explains the obstacles to progress under the following headings:
An over-reliance on outdated theories: Self-efficacy has a shelf life. Competence should be based on consumer contact experience. Traditional retailers have been late to adapt to the demands of the digital age.
The psychology of incrementalism and short-term thinking: Chasing an annual bonus. Phrases such as “We are good this quarter”, “We beat our opponent in the last quarter”. However, the CEO of Netflix is personally concerned with the number of subscribers and loyalty. He follows the APGs on this daily and takes the necessary actions and he also focuses on long-term decisions.
The blind spot when it comes to customers: Most business plans don’t take into account the shelf life of competitive advantage. There is no clear definition of why consumers prefer them. They cannot predict future competition. Qualitative research is required to interpret the numbers in consumer research and to see the change.
Acceptance of existing limitations: For digital giants, it isn’t important what industry they are in. By focusing on the consumer, they focus on the new consumer experience wherever they see an opportunity to do so and focus on trying to make the best of an end-to-end consumer experience. This experience often touches more than one traditional industry. Amazon started with retail, but today it is a major player in the logistics, cloud computing and advertising.
Belief in mass markets and segmentation: We must abandon this belief now. Personalized experience design and production at low cost through algorithms should now be applied to every product and service.
ADVANTAGES OF DIGITAL COMPANY LEADERS:
Charan later elaborates on the advantages of digital company leaders as follows:
1) 10X, 100X, 1000X GROWTH IN THE MARKET: It is in the DNA of leaders of digital companies to seek business opportunities that will quickly scale and grow. They think that they can grow 10x, 100x, or even 1000 times compared to the existing market.
One of the biggest advantages that leaders of digital born companies have is their ability to imagine something that doesn’t exist and how a consumer can take advantage of it. By leveraging algorithms, companies address the realities of consumer experience and work out how to make it better.
Leaders at legacy companies have a hard time with ‘big picture thinking. They settle for a reasonable incremental improvement, which is wrong to accept. One way to create a completely new market place is to build a new ECOSYSTEM by bringing together the necessary parts from existing sectors. The experience that a consumer wants to have requires seamlessly knitting different activities without being noticed. Will the company be able to meet or even create a new need of the consumer and keep the expectations lively by creating a new ecosystem; can it satisfy all of them all the time?
2) DIGITAL PLATFORMS ARE AT THE CENTER OF THE BUSINESS: Unless you put algorithms and data at the center of your business, you won’t be able to create a personalized end to end experience for each individual. A digital platform in itself is not a permanent competitive advantage, but given the talent it adds to a company, not having a digital platform is a competitive disadvantage. Some classic business leaders misunderstand digital capacity building. They take it as a success for the company to use algorithms to improve some of its internal processes or create a separate online sales channel, which can provide cost advantages and retain some sales lost by physical stores, but lag far behind the reach of digital giants. For example, Macy’s and JCPenney set up online sales sites connected to their main business model to compete with Amazon in e-commerce, but they did not improve their logistics model or customer experience. As a result, their profits dwindled and they had to close many stores.
The bottom line is this: Understanding the power of the digital platform that will be at the center of your business is as important as knowing supply chains and finance.
A digital platform is a set of algorithms that collect and analyze data. Each algorithm is a specific set of steps to solve a problem. It is a software version of what our brain does automatically. People store the raw data they get and make a series of decisions to make predictions.
In digital born companies, data is at the heart of the business, says Charan. And he recommends that if you want to maintain a competitive advantage, you must ensure the data flow you need and ensure it is compliant with the facts of business. What is important for the algorithm to make the decision or to support the decision of the managers is the quality, reliability, and timing of the data.
He then continues with his suggestions: Difficulties in data collection can be overcome by asking some basic questions: 1) What kind of data do we need? 2) What kind of data do we have? 3) How much is enough? 4) Is it in the correct format?
Data acquisition is difficult for start ups as they are just building their customer base. They can get data from third parties but it is expensive. Legacy companies have a lot of data at their disposal. But they are buried in silos, poorly formatted and incomplete. Today software vendors can take that data and turn it into a single piece of data for less than a million dollars.
The problem here is the laws regarding the protection of personal data; but more importantly, it is the loss of confidence as a result of abuse of consumer confidence. Today in many countries how consumer data is stored, processed and shared is under legal control. Especially after the Facebook and Cambridge Analytica crises digital giants face big restrictions, but of course, they will continue their work and there will always be those who control them.
3) ECOSYSTEMS THAT CREATE VALUE: A company does not compete alone. Its ecosystem competes, says Ram Charan. Worried that your company will be surpassed by a digital competitor? Think again. It’s not the rival company that threatens you, it’s the ecosystem it creates. In the digital age, those who use digital technology for the benefit of the consumer and have an ecosystem that allows more than one income stream have a competitive advantage.
The concept of ecosystem is not new of course. In its early days, Apple outstripped other mobile phones as it built and developed an ecosystem of software developers creating iPhone apps to meet every consumer niche and need. In the PC era, Intel allied with Microsoft and developed an ecosystem of manufacturers using Intel chips. Getting their technologies to work together has helped all players grow. It currently uses an ecosystem of several thousand partners who install Microsoft products and services for corporate customers and build their customer base. These partners allow Microsoft to focus on building its core business, not doing other work. Apple is known for building an ecosystem of music producers around the iPod and an ecosystem of app developers around the iPhone. Therefore you can expect it to build another ecosystem around the Apple Watch. What you may not realize is how vast this ecosystem can be and how dedicated Apple is to create it.
Managing an ecosystem requires a certain set of leadership skills. Few companies have this skilled manpower and they are not readily available in this market.
4) MONEY MAKING FOR DIGITALS: ‘Moneymaking is measured for by big cash generation, not earnings per share. Funders understand the difference’. Digital born companies can burn large sums of money in their early years in a high-speed race for customers, revenue growth, content and reach. Their earnings per share, ‘the stock market’s favorite metric’, may be zero or negative for years, maybe even decades. Yet these companies are finding the capital they need because some investors know that the metric to make money in the digital age is different.
The success of digital giants lies in generating cash gross margins. This is what Ram Charan calls the law of increasing returns. As digital companies grow, they increase their gross margins as a percentage. Gross profit is like the MRI of the company’s monetization model. Jeff Bezos and Steve Jobs have repeatedly emphasized that attention should always be on the cash generated gross profit. At 39%, Apple’s gross profit is the highest of the world’s computer and cell phone manufacturers.
The intense focus of digital giants on why they use cash, where, how much, and for how long to invest reflects their business conduct. The amount of cash they want to spend can be a huge part of their income and cash gross margins. Even when they generate a lot of cash, they often turn to outside sources for additional financing. In addition, they immediately withdraw from unprofitable areas and turn to more promising areas in terms of generating cash. They spend their money on matters that are important to the consumer. They use data to experiment, test and analyze before investing their money.
The costs are initially different for a digital company. Money is spent on gaining customers through marketing and promotions, hiring software engineers to build and maintain their digital platform, collecting data and improving the ecosystem. There is a major difference between digital born companies and traditional companies in two areas: operating expenses and general administrative costs. Most companies have capital expenditures (capex) and they use metrics such as IRR (internal rate of return) and ROI (return on investment) to evaluate these expenditures. For a digital company, capital expenditure (capex) is similar to operational expenditure (opex). To establish digital businesses, permanent investments such as machinery and factories are not required. The costs of building the future are the fees paid to software developers and other experts, the money paid to external software and services and the marketing investment to achieve scale. Expenditure on such things is written off as an expression of profit and loss, such as operating expenses. These expenses affect earnings per share (EPS) but increase cash by paying fewer taxes. Negative EPS may frighten some business people, but digital business leaders know that growth requires better service and better service requires more operational spending, says Charan. He adds: “But they also have to minimize their costs and bureaucracy. They must find and improve cost anomalies with algorithms. They should prevent wastage. The author notes that companies generally set a cost reduction target of 30-50%. Fewer organizational layers and less bureaucracy reduce costs in digital companies.”
Ram Charan uses the term “money-making” model rather than a business model. The monetization model explains how the various components of monetization work together, but what a business model is, is somewhat complicated. Yet the moneymaking model is simple, concrete; He states that revenue growth, gross margin, and positive cash flow are always linked to market realities.
5) TEAMS INSTEAD OF ORGANIZATIONAL LAYERS: Thanks to the corporate culture, employees create a “social engine” that drives personalized innovation and implementation for their customers.
‘One of the greatest but least recognized competitive advantages that today’s digital giants have over traditional players is a powerful social engine that drives their exponential growth. This social engine, which includes the company’s people, culture, and way of getting work done, has tremendous energy and speed. It eliminates bureaucracy and achieves what many companies find so difficult, such as the ability to constantly adapt and innovate with their consumer. Social engines run on discipline while freeing people’s imagination and simultaneously creating value for all customers, ecosystem partners, shareholders and employees.
Emphasizing that success in digital companies depends on human quality, Charan states that the most important feature of digital platforms is that they make real time information transparent and accessible to other people so that teams can correct themselves without the need for supervision. Later his comments about young people are noteworthy: “Young people want to take part in autonomous teams that take a job from beginning to end and undertake the implementation; the success of digital companies is here. Because young people want to feel responsible for their work. They don’t want to deal with bureaucratic approval mechanisms among countless layers. Social responsibility and sustainability are important for young people. Companies that are far from these are not attractive to talented young people.”
Coordination and control are ages old problems at large companies, Charan says. “But digital giants and even start-ups have shown that technology has come a long way in solving these problems. You could say that zero organization is required when technology makes information transparent to anyone with authority. Technology can make data transparent in real time, but people still need to gather at the beginning of the day to put the pieces together. This is where agile management practices such as Scrum come into play. Like 15minute walk in meetings…
If there is a secret formula that makes the various components of a company’s social engine, such as the minimal organizational layers, integrated autonomous teams, transparency and individual career opportunity, even more powerful, it is simultaneous dialogue, writes the author.
So as Charan suggests, imagine an integrated team of experts whose natural inclinations are to learn, grow and strive. They focus on a crystal clear task they believe in and have specific performance metrics. Their work is not hindered by politics or bureaucracy and is assisted by a leader who clears the way. When aiming to make this kind of social engine work well, it can accelerate the growth of a digital company.
6) LEADERS WHO CREATE WHAT IS TO COME: Leaders constantly learn, imagine, and overcome obstacles to create the change that other companies must contend with. Leadership is essential to the success of a business.
We are now in a time where leaders are being tested against each other and ever changing conditions; Charan makes a very important point: Digital leaders have an advantage, not because they are younger and more tech savvy, but because they are navigating a digital company on the inherently appropriate route in the digital age.
Stating that a leader who matures in a stable business environment, and especially those in a dominant company, may find it difficult to adapt to the dynamics that exist today. Charan explains the differences between digital company leaders and traditional company leaders:
‘The most significant differences I see in the leaders of digital companies versus the leaders of traditional or legacy companies have to do with cognition, skills, and psychological orientation.’ What is particularly important is how these elements combine to connect big picture thinking with pragmatic issues such as making money, execution and speed.
Today’s fast-paced digital economy is not a good time for the timid. But leaders who take bold steps without the necessary skills are also reckless. When leaders fail, it’s often because they can’t handle the challenges of the job. Misplaced resource allocation and failure to recruit and train required talent are common shortcomings.
Ecosystems will inevitably compete with each other. Leaders have to harmonize the whole organization and relationships and share information without hesitation with eco-partners instead of acting alone as they are used to.
The aging of leadership is a fact. Many leaders in traditional companies have opted for “incremental growth” rather than focusing their cognitive skills on rapid and exponential growth. Many leaders opted for price increases or acquisitions to increase their revenues rather than create new market spaces. Many lack the technical skills and knowledge to survive in today’s environment or no longer have the desire to take risks.
There are approximately 20 digital giants in the world. When they first started the business, they had no competitors. But now they have to know how to grow, how to overcome the stress of earnings per share. Even those with very good money making models grapple with the problems of regulation and how to overcome the constraints of their business culture. ‘I feel confident that a new generation of leaders will arise to meet the challenges of today’s digital world, because the necessary criteria is very clear, as long as we give them the chance to develop’ says Charan probably from many different sources, emphasizing that organizations that understand digital leaders are different will carefully select them and enable them to thrive. Companies that do this will gain a competitive advantage over those that don’t.
“Most companies start not with a blank page, but with some key benefits that can be adapted to the digital age. Integrating existing talent with digital technology and discarding those that are no longer useful can pave the way for 10-fold growth,” says Charan. “Retrain people, reorganize and build a new ecosystem. Humans make the change. New elements of competitive advantage emerge all the time and the competitive landscape changes. This is what drives the progress of humanity and the improvement of our standard of living. You can be a part of it.”
Yes, the new world, the new rules, the difference of digital leaders, and perhaps some of the terms you’ve just read: ecosystem, exponential growth, digital platform (market place), social engine, algorithms even cash flow and gross profit! When you think about it, you might realize that there are not many new inventions when you compared them to your past work experience. Thoughts and behaviors that formed the basis of these have been present, but they were expressed differently. Because we were able to computerize 40 years ago, then we will succeed in digitalization in any case. We need to learn to think algorithmically, just like knowing how to calculate with “aristo” ruler, to type 10 finger or be computer programmer, systems analysts in my youth and being familiar with coding today… the social engine is teamwork, it is necessary to be fellows with young people.
When it comes to the market places, the Grand Bazaar (Kapalicarsi) in Istanbul is the best example of this, but the modern day ones are digital! If your gross profit level is market equivalent or higher, trust that business, it will go on if you do things correctly. But still net profit must be your target.
I always tell my team that I aspire their dreams. In other words, there is no place in the market for those who do not dream about their job and duty and do not dream of growing exponentially. The ecosystem is a beautiful structure, but first of all adopting a win win attitude is a prerequisite. Afterward it’s like my motto; I earn money while selling goods rather than buying goods, I prefer all dealers (suppliers) to prefer me when selling goods.
The real benefit of the book, which I’ve summarized very briefly so far by eliminating examples, can only be fully appreciated after reading and digesting.
Book Link: https://ram-charan.com/books/rethinking-competitive-advantage/
Note: This article is open source and can be cited by mentioning the author. Does not require copyright.