I have been giving you lots of frameworks and concepts. And after a while, it can all get kind of confusing.
- Is this new software critical for my business?
- Is this new business model going to seriously impact our industry?
- Is this like Amazon completely disrupting retail?
- Is this more like Mobike, which was nice but didn’t put the traditional bike companies out of business?
How do you determine what really matters in digital transformation and disruption? It can be confusing for executives, especially when software and tech vendors are always pitching new stuff and saying they are all critical.
My answer to this is my Moats and Marathons books, which are a complete framework.
But that’s pretty complicated. So I also use a cheat sheet, which I call my list of 7 digital superpowers. When I get confused about a business, I just check this list. If a competitor, new entrant or new tool enables anything on this list, I pay close attention.
And yes, I have added a new one, which is composability at global scale. I wrote about that in:
But first, some thoughts on what is going on…
Digital China / Asia (My Home Turf) is 4 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 and interconnected business processes.
We see this digital transformation / disruption sweeping across most industries and geographies. Businesses and industries are being transformed and often seriously disrupted by the new digital (and data) tools that keep emerging. But Asia tends to be a particularly fast version of this. Or at least more immediately impactful.
However, there is also the emergence of digital platform business models. As discussed many times, platforms are businesses that serve more than one user group. They can be physical platforms, such as shopping malls which serve both customers and merchants. These can be labor-based platforms, such as M&A bankers who serve both customers with assets and capital.
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 has been happening in digital Asia is the emergence of digital platform business models (Alibaba, WeChat, Online Gaming, VIPKid, Alipay, etc.).
A third phenomenon happening is the leapfrogging of development in China / Asia. If you talk about digital transformation in US retail, you will probably compare digital attacker Amazon vs. incumbent Walmart. And it’s a pretty good fight because US retail is already mature and hyper-efficient. Both companies are very advanced.
A fourth factor is the emergence of AI factories and zero-human operations, which is a big thing in China / Asia. That’s Ant Financial, ZhongAn Insurance, TikTok and pretty much everything ByteDance is building.
So that’s my first point. There are at least four really big digital phenomena happening in Asia: digital transformation / disruption, digital platform business models, leapfrogging development and AI factories.
But within all this, my cheat sheet is to look for companies that have any of the following 7 digital superpowers.
Digital Superpower #1: A Dramatically Improved User Experience
We see this a lot on the consumer side. Using digital tools, companies are re-inventing services, products or business models. And this can make the existing service or product obsolete, often very quickly. I discussed this recently in my look at Sun Art Retail, which may make traditional hypermarkets obsolete.
Bike-sharing was another example of this. It wasn’t sharing. It wasn’t a platform. It wasn’t even that ground breaking. It was just basic digital tools (GPS, smartphones, mobile payment) applied to bike rentals. But they dramatically improved the consumer experience. Hopping on and off bicycles whenever you wanted was just a big improvement. It added convenience and made it cheaper. Which is a common playbook here.
Some other examples:
- YouTube, Tudou, TikTok 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. Spotify later rebundled and disrupted iTunes.
- A counter example is the digitization of retail coffee (i.e., Luckin Coffee). Ordering a cup of coffee on your phone and picking it up is helpful but it didn’t really transform the user experience dramatically. I consider it an upgrade but not a superpower.
Anyways, on a fairly regular basis, a company 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.
One more important note. This can also be for non-consumer user groups. Such as merchants, content creators, advertisers, drivers and retailers. Web3 is a lot about dramatically improving the experience and value for developers, who have largely been screwed in the web2 era.
Digital Superpower #2: Creates a digital platform.
I never stop talking about this. The emergence of a platform business model in an industry that is traditionally vertically integrated (i.e., not a platform. A pipeline) is like going from a car to an airplane. It’s just a more powerful machine. It means adding a user group and creating value by enabling interactions. Uber and Didi did this to taxi companies. Airbnb did this to hotels. It can be brutal for incumbents. Maybe they get disrupted. Usually they get commoditized as platform participants.
Platforms can also have lots of softer advantages. In addition to network effects (Superpower #3), they can subsidize prices for one user group (e.g., Gmail is free because Google makes money on advertising). They can move horizontally into new industries (e.g., Alibaba jumping into entertainment). They can be protected by the chicken-and-egg situation (but not in web3). And all this can be devastating against sleepy, non-agile vertically integrated incumbents.
Digital Superpower #3: Captures network effects.
Most platforms claim to have a network effect. But many don’t. And many are fairly weak. All network effects are not created equal. Some are formidable (WeChat, Facebook). Some are easier to overcome (local ride-sharing, infrequently used services).
But some network effects can be a big deal and can create a dramatically superior service relative to smaller competitors.
Note: This also includes standardization NE, which can happen with or without a multi-sided platform.
Digital Superpower #4: Creates other competitive advantages.
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 the 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 behavior with variable rewards and other tricks. Digital slot machines get people to drop a lot more quarters in the machine.
If consumer products and services have traditionally been blunt instruments, digital is very precise. And it is often used to super-stimulate psychology. For example, Facebook and Instagram are currently wreaking havoc on the psyches of young women globally (look up the teen 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.
A lot of the digital story is about software surgically targeting and then 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.
And this is one of the big competitive advantages companies can create. 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 and creating habits is a digital superpower (for better or worse).
Another competitive advantage software is good at is building in switching costs. You see this on the consumer side but it’s usually stronger on the enterprise-side. Think Microsoft operating system and all the digital tools at your workplace. How hard would it be to switch to another operating system?
Another example is ride-sharing, where there is actually not 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.
There are lots of other competitive advantages. But these two are common.
Digital Superpower #5: Virality and other powerful customer acquisition and/or retention mechanisms.
Virality is a powerful customer acquisition mechanism, where the very usage of the product or service brings new customers onboard. So this is you sending a payment to someone. And they need to sign up to PayPal to receive it. Or you doing a Zoom call with someone. And they need to sign-up to participate. Or Groupon and Pinduoduo, where group buying gets consumers to recruit their friends and make joint purchases.
Basically, virality turns users into sales agents for your company. And when you’re talking about millions of users, this can be very powerful.
There are other mechanisms for acquiring users rapidly and cheaply. And retaining them is also important. Most of these are short-term. But virality and a few others are particularly powerful.
Digital Superpower #6: Fast and low-cost scalability based on digital economics.
The last one is pretty simple. The economics of digital, of data, and of things made of bits and bytes is just different. I have multiple podcasts on the strange but powerful economics of digital. One of the big results of this is the ability to scale very quickly, very extensively and at low cost. And without limits on capacity.
For example, the physical versions of my books are very difficult to sell globally. It requires warehouses, stores and staff. But the digital versions of my books are all available online. I can make edits on my laptop and upload a new version in minutes. It is then available everywhere in the world. That kind of scalability is amazing. Companies like Google, Netflix and TikTok have greatly benefited from this.
Digital Superpower #7: Composability (i.e., building blocks) at global scale.
One developer writes code and posts it for others to use under free license. Others can then write code that runs on top of this. Or that adapts it to specialized purposes. And so on. That is why composability is sometimes called building blocks. You build stuff like Legos, with everyone adding. Within web3, this is the big concept.
Think of how powerful this could be when it happens globally. This of how fast new products, services and technologies could develop. It is turbocharged innovation. Facebook and Microsoft may have tens of thousands of employees working on the next version of their products. But they don’t have hundreds of thousands of coders around the world working on them. And they don’t have tens of thousands of developers creating products that are complements, increasing their product’s value. In my SMILE marathon, I listed S as “sustained innovation”. Composability at global scale can be very powerful marathon in sustained innovation for a company.
Ok. That’s it for today. I have covered all of these in other talks and articles. So this is just a quick summary. Here are the runners up that didn’t make my list.
- Why I Really Like Amazon’s Strategy, Despite the Crap Consumer Experience (US-Asia Tech Strategy – Daily Article)
- 3 Big Questions for GoTo (Gojek + Tokopedia) Going Forward (2 of 2)(Winning Tech Strategy – Daily Article)
- Why Netflix and Amazon Prime Don’t Have Long-Term Power. (2 of 2) (US-Asia Tech Strategy – Daily Article)
From the Concept Library, concepts for this article are:
- Digital superpowers
From the Company Library, companies for this article are:
I write, speak and consult about digital strategy and transformation.
My book Moats and Marathons details how to measure competitive advantage in digital businesses.
I also host Tech Strategy, a podcast and subscription newsletter on the strategies of the best digital companies in the US, China and Asia.
This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.