Strategy and Digital Dynamic Capabilities

Two complementary strategy approaches

  • Porter’s industry-level competitive advantage analysis
    • industry contains lots of firms
    • firms would compete with each other
    • a firm want to be better, it should do better than the industry average
    • example: mobile industry pre-2007
      • strategic recommendations to companies below the average
        • raise price through differentiation
          • can do something in design, e.g. Samsung and Armani
        • lower cost to improve profitability
          • it was not very easy to do because what you could do for cost was already being driven down as much as possible globally

  • firm-level dynamic capabilities analysis
    • start by the firm
    • firms can actually disrupt, shape and transform entire industries
    • example: Apple transformed mobile industry in 2008
      • by digital innovation (AppStore)
        • combining and collaborating
        • have a company like Apple who can orchestrate that collaboration on a platform
      • apple provide a platform (inside) for developers (outside)

Dynamic digital capabilities

  • definition
    • firm-level strategic ability to combine inside and outside digital competences to address volatile environments and periods of rapid change
  • four types
    • democratized innovation
      • user-to-user or peer-to-peer collaboration produces positive network effects with public good benefits
      • founders no value
      • e.g. Wikipedia
    • crowdsourcing
      • user-to-company collaboration produces positive network effects, often through 2-sided markets so that free users are subsidized by paying customers
      • typically, a company is able to capture tangible, monetary benefits from the community in exchange for continued innovation and improvement
      • users can get profit
      • e.g. voting for your perference
    • platform innovation
      • company-to-user innovation where a company provides the platform for users and developers to distribute their software, applications or digital goods to their social or professional networks or to the marketplace at large.
      • e.g. Apple, because it provided a platform
    • recombinant innovation
      • company to company
      • e.g. Apple and Gracenote

From Pipelines to Platforms

History

  • cellphones transformed to smartphones
    • in 2008, the “dumb cellphone” became a smartphone with a networked platform of downloadable and shareable software apps

The economies of physical vs. digital goods

  • the shift from physical to digital goods triggered a shift from demand-side economies to supply-side economies
    • supply-side scale
      • if the company makes a lot of cellphones, the cost would be lower
      • e.g. Nokia
    • demand-side scale (or network effects)
      • the value to users actually increases with the network, rather than with manufacturing costs
      • e.g. Apple

Revenues per cellphone vs. revenues per app user

  • revenues per cellphone became revenues per user, with billions of apps downloaded
    • examples
      • Nokia: per cell phone
      • Apple: both iPhone and revenues generated from users (may not much money from per user, but the number of users is large)
        • ARPU: average revenue per user
        • take 30% fee from developers

  • digital mobile-enabled substitues in 2020
    • digital companies are more profitable because they are able to use demand-side economies, rather than supply-side economies

ABCD technologies

  • ABCD
    • AI
    • blockchain
    • cloud
    • data
  • linear thinking in the past, but now is exponential thinking
    • exponential growth in digital goods = zero transaction costs + networks + crowds
    • “dumb cellphone” value chain in 2007 was linear (as the first picture of this page)

The Platform Ecosystem

Five-Forces and industry structual analysis

  • Porter’s Five-Forces industry structure assumes that the profitability of industry competitors is determined by suppliers and buyers in a linear value chain or pipeline.

A platform is a nonlinear dynamic ecosystem

  • four types of platform ecosystem players and roles
    • owners of the platform that control IP and governance
    • providers that serve as the platform interface with users
    • producers that create offerings on the platform
    • consumers that use those offerings
    • example: Apple Appstore’s platform ecosystem
      • Apple = owners of the AppStore iOS platform that control IP and governance
      • Apple iPhone and iPad = providers that serve as the iOS platform interface with users
      • Apple iPhone iOS App Developer = producers that create offerings on the platform
      • consumers that use those offerings
      • Apple’s AppStore is a non-linear, dynamic and interactive ecosystem
      • Apple orchestrates and facilitates the network and users and developers and receives 30% of the app developers' revenues for managing the AppStore
  • ecosystem platforms like the AppStore and Google Play have created positive sum marketplaces and blue oceans out of traditional zero sum industries
    • where value is created for users, developer, providers and platform owners
    • three types of games
      • positive sum: economic, financial or social rewards are created as a result of playing the game
      • zero sum: the total rewards available from playing the game are independent of the procee of play
      • negative sum: economic, financial or social rewards are destroyed as a result of playing the game

AI Business Platforms

The Alibaba AI smart business process

  • overview
  • a four-step process
    • examples
      • applying the AI smart business four-step process for Ant Financial Micro Loans
      • applying the AI smart business four-step process for online bike sharing and sesame credit

Diagramming platforms on the business model canvas template

  • structure
  • example: Apple iOS AppStore platform

Additional Reading