In Part 1 (here), I laid out how Alibaba has evolved in China. It was for a retail marketplace, but you can see a similar pattern in many of China’s digital giants.
The next phase in this evolution is “new retail”, and it is changing this pattern in a big way (coming in Part 3). But first, I wanted to make a couple points about digital China and the digital superpowers we see companies developing.
“Digital China” is actually +3 big things happening at once.
The first big thing is digital transformation and / or disruption. New digital tools and data technologies keep emerging. There’s big data and AI. There are smartphones, sensors, mobile payments and GPS. There’s the Internet of Things and increasingly digitized business processes.
We see this phenomenon sweeping across most industries and geographies. And China is no different in this. Businesses and industries are being transformed and often seriously disrupted by the new digital (and data) tools that keep emerging.
However, there is also a second big phenomenon happening. It is the emergence of digital platform business models.
Platforms are businesses that serve more than one user group. They can be physical, such as shopping malls which serve both customers and merchants. Or mixer bars which serve men and women (usually). Platforms can be labor-based, such as M&A bankers who serve both customers with assets and capital. And so on. Platforms serve two or more different groups and balance between them.
But it is the emergence of digital platforms that is really rocking the world. This is Google, Facebook, Alibaba, Tencent, Amazon, Apple, EBay and many others. It turns out digital platforms are really powerful. They scale rapidly and easily (with small marginal costs). They usually cross geographies with little effort. And they can have some powerful advantages.
When a business or industry goes digital (phenomenon 1), this can often enable the emergence of a digital platform business model. For example, when GPS digitized location, ride-sharing platforms like Uber and Didi became possible. When social interactions became digitized, social media platforms like Facebook, Twitter and WeChat emerged. And so on. Much of what is happening in digital China is the emergence of digital platform business models (Alibaba, WeChat, Online Gaming, VIPKid, Alipay, etc.).
A third phenomenon happening is the leapfrogging of development of China.
If you talk about digital transformation in US retail, you will probably compare digital attacker Amazon vs. traditional incumbent Walmart. And it’s a pretty good fight because US retail is already mature and hyper-efficient. Both companies are very advanced.
A final factor is the active role of the State, which is a big thing in China. This doesn’t play out in retail that much. More on that in another article.
So that’s my first point. There are at least three really big phenomena happening at the same time in digital China: digital transformation / disruption, digital platform business models, and leapfrogging industry development.
Within all this, there are at least 4 digital superpowers a company can achieve.
People keep trying to come up with comprehensive frameworks for digital transformation. They come up with new terms (dematerialized, hyper-scaling, etc.). They generate lots of graphics. But there isn’t any grand unified theory for digital. It’s mostly chaos.
Lots of new digital and data technologies are emerging and businesses are adopting these in lots of creative ways. People just keep coming up with new tools, new ideas and new uses.
So the best approach I know of is to map out the individual use cases in a particular business. Make a long list of what the various tools could do in a convenience store. Or in a hospital. Or a McDonalds. And just keep updating these long lists as new tools and new ideas keep popping up. It’s a brute force approach. It’s not sexy. But it’s accurate.
But bubbling up out of all these use cases some powerful advantages occasionally emerge. I call these the digital superpowers. They are when certain use cases have combined in a way to give the company a really big advantage over its competitors. There are probably more than four but these are the ones I look for.
Digital Superpower #1: A dramatically improved user experience.
We are seeing this a lot on the consumer side in China right now. Using digital tools, a company re-invents a service or product and makes the existing service or product obsolete, often over-night.
Bike-sharing was an example of this. It wasn’t sharing. It wasn’t a platform. It wasn’t even that ground breaking. It was basic digital tools (GPS, smartphones, mobile payment) applied to bike rentals.
But it dramatically improved the consumer experience. Suddenly you could just jump on and off a bike anytime you wanted – and just leave it anywhere. It made riding bicycles dramatically more convenient (and cheap). And almost overnight, it made traditional bike rentals (including docked bicycles) obsolete. It also made selling bikes much harder. It was a digital superpower in action. The traditional bike manufacturers still don’t know what happened.
Some other examples:
- Youtube, Youku and Netflix made watching videos much more convenient and cheap (basically free). Selling cable packages and DVDs got a lot harder.
- Steve Jobs launched iTunes and let you buy just the one song you wanted – and without leaving your home (again, super convenient and cheap). Suddenly selling an entire CD at a local retail store became impossible.
- New retail is currently changing how people buy groceries in China. Customers are already ordering +60% of purchases on their phones from outside of the stores. They are getting 30 minute delivery. They are getting cooking and other services. Traditional, non-digitized grocery stores are in big trouble.
- A counter example is the digitization of retail coffee. Ordering a cup of coffee on your phone and getting it delivered is helpful but it didn’t really transform the user experience. I consider it an upgrade but not a superpower.
Anyways, on a fairly regular basis, somebody takes a product or service and uses digital tools to dramatically improve the user experience. It is often a game changer. And a digital superpower.
Digital Superpower #2: Creating a digital platform (and getting soft MSP advantages).
Another superpower is the emergence of a platform business model in an industry that is traditionally vertically integrated (i.e., not a platform). Uber and Didi did this to taxi companies. AirBnb did this to hotels. It’s brutal.
As mentioned, digital platforms can be particularly powerful. And in addition to network effects (Superpower #3), they have softer advantages as well. They can subsidize prices on one side (gmail is free cause they make money on advertising). They can move horizontally into new industries (Alibaba jumping into entertainment). All of this can be particularly devastating against a sleepy, non-agile vertically integrated incumbent.
Digital Superpower #3: Capturing network effects, including a data network effect.
Most platforms claim to have a network effect. But many don’t. And all network effects are not created equal. Some are formidable (hello Wechat, Facebook). Some are easier to overcome (local ride-sharing, infrequently used services).
But network effects can be a big deal. And this includes data network effects, like curation in e-commerce and personalization in online shopping. I think this is going to be really important in education (completely personalized education and testing). And in medicine.
Digital Superpower #4: Capturing other competitive advantages – especially switching costs and super-stimulated consumer behavior.
Ok. Final point.
Most consumer products and services are blunt, crude instruments against human wants, needs and psychology. Sugar tastes good (and is addictive) so Coca-Cola really loads it up in a can. Physical attraction is pleasant and powerful so companies put pretty women (mostly) on cars and other random products. It’s all done fairly crudely.
It turns out digital and software are particularly sophisticated at addressing such needs and wants. Slot machines have always been good at appealing to people who like to play games (emotional, habit forming) and who like to gamble (very addictive). But digital slot machines have supercharged this. The software can very specifically target consumer psychology and their behavior. Digital slot machines get people to drop a lot more quarters in the machine. It scarily addictive for certain people.
If consumer products and services have been blunt instruments, digital is incredibly precise. And it is often used to super-stimulate people’s psychology. For example, Facebook and Instagram are currently wreaking havoc on the psyches of young women globally (look up the depression numbers). Online news and Twitter are keeping entire populations in a near-constant stage of outrage. And porn is dwarfing all other forms of entertainment.
So much of the digital story is about software super-stimulating human wants, needs, impulses and behaviors. It is giving us what we want, like all consumer companies. But it is doing it with such sophistication and in such massive doses that the effects can be stunning. Next time you are on the subway, look around. Everyone will be glued to their smartphones for the entire trip. Marc Andreesen famously said “software eats the world”. I think it’s more about “software hacks humans”.
And this can create real competitive advantages for companies. A lot of consumer products and services are about creating habits (drinking coffee every day) and emotional impact (music makes you feel good, fashion makes you happy). Super-stimulating consumer behavior is a digital superpower (for better or worse).
Software is also particularly good at building in switching costs, another type of competitive advantage. You see this on the consumer side. But I think it’s usually stronger on the enterprise-side. Merchants, influencers and content creators all integrate these digital tools into their work flows. And in man cases, they build their businesses on these digital platforms. This creates significant costs if they want to switch to another company. For example, in ride-sharing, there is actually not that much power on the consumer-side. But on the driver side, you can offer services that let drivers build small businesses on the platform. Didi is currently building out its drivers services (car financing, insurance, government services, etc.). This will create switching costs for the best drivers.
Ok. That’s it for Part 2. Yeah, that was a bit of theory. But that’s kind of my thing.
In the final part, I’ll go into how new retail is changing a lot of this. And it’s pretty great. The folk at Alibaba are endlessly clever.
Thanks for reading. jeff
Also, that cartoon picture on the top is not by me. Capillary Tech put it up before talk I gave. It cracks me up.
I write and speak about digital China and digital competition.