Do We Need to Re-Think Business Strategy? (Part 1)

Strategy
Written By Ivo Ruckstuhl

Is digital rewriting the rules of strategy?

Strategy and Digital Transformation - Part 1: The case and the challenge

In my last article I have discussed platform and ecosystems strategies, a topic that is especially relevant in the age of digital transformation.

However, do we need to re-think business strategy in this age? Is digital rewriting the rules of strategy?

Changing rules of strategy?

Some proponents argue that since digital technology is changing the business context the rules of strategy have changed. Sunil Gupta from Harvard Business School [2] makes the case that 'traditional strategy' was all about 'focus' and either 'being better' or 'cheaper' (the generic strategic positions "cost leadership", "differentiation", and "focus" introduced by the seminal work of Michael Porter, Competitive Advantage [1]) while in the digital era, companies like Amazon are rewriting the rules. To illustrate his point, Sunil Gupta provided a 4x4 matrix:

Figure 1: New Strategy Rules, adapted from [2]

Figure 1: New Strategy Rules, adapted from [2]

  • (A) Traditional Strategy: Adding value with one product for an isolated customer - like selling a TV or car to a customer

  • (B) Complements: Moving from a single product to multiple products that are adding value together for a same customer - like a 'razor and blade' approach or a coffee machine and capsules create value together

  • (C) Network Effects: Increasing the value of a single product with the increasing number of customers through network effects - like WhatsApp (same-side network effects) or TikTok (same side and cross-side network effects)

  • (D) Network Effects & Complements: Adding value across multiple synergetic* products with network effects - like Amazon, WeChat, or Google

*I use the word "synergetic" here deliberately instead of "complementary" because the multiple products may not necessarily be complementary in the typical sense (from the customers' viewpoint) but rather create synergies for the companies' strategies as we will see later.

Business in the digital age

In (A), companies with traditional strategies serve an isolated customer with a single product. Moving to quadrant (B), the strategy is to create complements with a multi-product approach but still in an isolated customer journey. Whereas network effects (C) have been discussed in the last article, it is quadrant (D) that is probably the most interesting regarding the competitive landscape.

For example, when you look at the strategic moves of an Amazon from the outside, it seems that the company goes after unrelated businesses with its e-commerce offering (amazon.com), devices (e.g. Kindle), its cloud business (AWS), streaming (Amazon Music & Prime Video), movies (Amazon Studios), or supermarkets (Whole Foods Market). This is were Sunil Gupta [2] sees new rules of strategy emerge in the digital era: companies' activities in seemingly unrelated businesses and hence unfocused strategies at least on the surface. His insight is that enabled by digital transformation, the "razor" can be in one industry and the "blade" in another. This is a good way to think about it from a company's strategic perspective.

However, I am not quite sure that these different offerings are always complements from a product and customers' point of view.  Amazon's offerings described above certainly create revenue synergies for the company, drive customer lock-in, and offer some consumer convenience but they are not complements in the traditional sense. That's the reason for my caveat earlier (*).

Lock-in and growth

Simply put, the growth strategy of Amazon is to increase revenues and to put an infrastructure in place that enables great economies of scale (from e-commerce transactions, cloud computing, fulfillment/delivery infrastructure, etc.). Looking at it on a fundamental level and like Josh Kaufman in [3] summarized, there are only 4 ways to increase revenue:

The 4 Ways to Increase Revenue

As put to the point in [3], there are only four methods to increase revenue - which is to have a "growth strategy" in most people's definition - and for Amazon, growth is key in its strategy.

  1. Increase the number of customers

  2. Increase the average transaction size

  3. Increase the frequency of transactions per customer

  4. Raise your prices

Today (at least in the US market), it's number 3 of the list, "Increasing the frequency of transactions per customer" that is a major driving force behind Amazon's strategic logic. The goal is to have consumers constantly on the platform - not only for cross-selling but also to disengage their customers from their competitors.

That is also where Amazon Prime, the paid subscription program, comes into play.

  • Cross-selling: When Amazon Studios wins an award at a movie festival for one of its productions, customers also buy more books, shoes , etc. online.

  • Lock-in: Because delivery is free and fast, customers order even for small purchases and eventually buy everything from Amazon (one-stop shop)

  • Frequency: A primary logic behind Amazon's acquisition** of Whole Foods Markets is probably to increase the frequency of purchases. When people buy fresh groceries - which happens at least once or twice a week - it may also increase the frequency on their e-commerce platform. Amazon encourages this consumer behavior at Whole Foods with discounts and free delivery for Amazon Prime members.

  • Convenience and pricing: Amazon Prime customers are less price sensitive because they do not compare their items with other online stores out of convenience.

** Some observers may have challenged Amazon's acquisition of Whole Foods Market. Increasing the frequency of transactions per customer may not be the most obvious reason for the acquisition and was probably mostly missed at the time of the deal's announcement. Of course, there are several other strategic reasons for the acquisition such as collecting shopping data across offline and online behavior from the same individuals, innovations of instore technology (video, automated checkout and payment, etc.), logistics and distribution synergies, or the still small but potentially evolving online grocery shopping market.

Jeff Bezos said in 2018 [4] that it was a controversial internal decision to launch Amazon Prime because all numbers showed that it won't work. However, it worked out big time: in Q1 2021 Amazon reported 200 million paid Prime subscribers globally and an annual net revenue from subscription services of  USD 25.21 billion in 2020.

On the same occasion, Jeff Bezos mentioned that “Without intuition, Amazon would have missed out on outsized discoveries that led to its success. [...] a lot of the most important decisions simply cannot be made with data.”

Strategy as a learning process

This is also a key point for strategists: strategy is about the future - and data, by definition, is from the past. When there is uncertainty, you need to experiment (to generate new, previously unknown data), learn, and course correct. This approach has become much more relevant in the age of digital.

“Strategy is about the future - and data, by definition, is from the past.”
“Strategy needs to become a learning process - particularly in these times of of uncertainty, digital transformation, and innovation.”
— Ivo Ruckstuhl

In my next article - Part 2 of the series about Digital Strategy - I will continue the reasoning about whether or not digital is rewriting the rules of strategy. I will start with the challenge "are you playing to lose?" and discuss competition, conglomerates, strategies across industries, and business models. And you will get at least my answer to the question.

Ivo Ruckstuhl
Previous

Do We Need to Re-Think Business Strategy? (Part 2)
Next

Platforms vs. Ecosystems