Changing perspective on competitive advantages in the digital economy
The move from atoms to bits, driven by the digital economy, is transforming the way corporations produce value. To understand how things have changed, we first need to understand the sources of competitive advantages in the past.
Ronald Coase in his 1937 paper, The Nature of the Firm, argues that firms’ advantage lies in minimizing information and transaction costs. Increases in scale can improve access to information, allow for a better negotiating position with suppliers and customers and make possible investment in proprietary processes and technology which raise efficiency and quality. On the other hand, he also noted that with increased scale comes increased organizational costs. Successful companies then, must realize value in the reduction of informational and transactional costs that exceeds increased organizational costs and still earn profits in excess of their cost of capital.
Michael Porter (1985) similarly argued that in order to attain competitive advantage, companies need to look at the entire value chain to capture value out of each part of the process, from procurement to production to sales and marketing. Intrinsic to the value chain framework is a scale advantage. Bigger companies can invest in building multiple competencies along the value chain and in doing so capture increasing value through bargaining power, informational advantages and costs consolidation.
Michael Porter’s and Ronald Coase’s ideas have set the standard for strategy for over a generation. However that’s changing.
In the digital economy that’s emerging, information and transaction costs have become far less of a factor. Start-ups can outsource many of the same capabilities and infrastructure that big companies once had a monopoly on. What’s important these days is not so much the information you can capture, but the information you can create.
The digital environment fundamentally changes mass markets with dominant players to a series of smaller, micro, differentiated markets.
Market momentum then comes when you create the linkage of creation, customization, and communication.
Source: Greg Satell blog on digital economy