Data Driven Revolution (I)

The concept of competitive advantage was introduced by Michael Porter in the late 80s. A competitive advantage is an attribute or a combination of them that a company acquires or develops, and allows to outperform temporarily its competitors. This idea, linked with the Value Chain theory, created a framework for companies to define their competitive positioning, to develop efficiently processes and to provide better value propositions to their customers. Under these assumptions, an organization can follow two different strategies. A “low cost” or a differentiation approach.

While this framework has been since the 80s a rule of thumb in strategy management, during the last decades it seems that it is becoming out of date. Competitive advantages are becoming more temporary than ever, and constant innovation is a must in most of the industries. In this video, Philip Evans, Senior Partner in BCG, explains what are the drivers that are invalidating the classic Porter’s theories. In brief, two aspects have been the key for this periodical transformation: i) the democratization of transaction costs, thanks to the development of the Internet 2.0 and ii) the democratization of data analytics.

How these trends are changing the way a competitive advantage is understood? How companies are changing the way they compete in the market? Based on the two drivers above mentioned, it is possible to characterize the evolution of the organizations during the last decades, distinguishing between three different approaches: i) Product oriented, ii) Customer centric and iii) Data driven.

Product oriented companies are designed under the motto “sell everything it’s produced”. Companies have been competing for decades under these premises in many industries. These kind of organizations were intensive in tangible assets, and operated in markets characterized by the asymmetries of information between the supply and the demand. In this environment, efficiency and economies of scale were the main sources of competitive advantage.

Step by step, marketing activities were taking a more important role into organizations. The opinion of the customer increased its importance and companies started to develop consumer centric strategies, based on their personal needs and wants. Mass production and isolated transactions were substituted by personalization and long term approaches. The new social Internet, or Internet 2.0, has enabled the introduction of external information in the CRM systems, creating a 360° view of the customer. The communication between companies and customers has evolved from classic one-to-many monologues, to personalized many-to-many dialogues. Thanks to the dramatic decrease of transaction costs, every organization, no matter its size, is able to sell, create and share products, services and contents worldwide. In this new arena, the long tail has become available, allowing a higher personalization degree of products and services.

We will continue discussing about data-driven companies in the second part of this post.

Francisco Parra, Research Analyst @ Delfos Research.

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