Castles, moats and fending off digital raiders

To survive in the digital economy, businesses should consider reconstructing their castle and widening their moat.

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Relax, this isn’t some kind of weird LARPing pitch - although if that is your thing … - but a different and illuminating way to look at what actually drives business growth. 

"The forces of digital disruption are undeniable. Here are two crucial planks of digital strategy all businesses need to know. 

It’s a concept which has support from business doyen and Oracle of Omaha himself, Warren Buffet. For Buffett, the wider a company’s moat, the more likely it is to survive the challenges of business – and there’s no greater modern challenge for any business than digital disruption.

But first, some definitions.

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For medieval castles, defence was important – and a moat was one of the last and most crucial lines of such defence. Bigger moats kept attackers out for longer. Smaller moats made battles tougher.

All kings built a castle – but the ones with the best moats survived the longest.

It’s the same in business - protecting your castle and growing (and maintaining) your moat are crucial parts of a digital strategy.

The sword of growth

All pre-digital companies which have survived this long clearly knew how to make money – but the challenge is maintaining acceleration relative to the fast-moving digital economy.

The question is: what powers your growth? There are two areas businesses need to focus on.

  • the value chain; and
  • demand-side economies of scale.

When attractive profits disappear at one stage in the value chain because a product becomes commoditised the opportunity to earn attractive profits with proprietary products will often emerge adjacently.

This rule succinctly describes the disruption of the taxi industry by Uber, the content and media production industry by Netflix and the hotel industry by Airbnb.

Businesses should spend time deconstructing their own value chains. Even if an alternative value chain seems unlikely or difficult to imagine it is still worth considering as part of a business strategy. No doubt there were plenty of early sceptics with Uber, Netflix and Airbnb.

Stepping back and examining their industry can help businesses work out the points of integration and commoditisation they face today.

In all examples the point of integration moves closer to the buyer. This also aligns with one of the key moves big tech companies make which is the emphasis on demand-side economies of scale.

The demand flank

Traditional economies of scale have helped businesses lower input costs on the supply sidef. What businesses need to do now relates to demand-side economies of scale.

This means the value of a good or service increases as the number of users increases. Although not new the telephone network is a great example as the value of telephones increased as more people bought them.

The internet has profoundly accelerated the application of demand- and supply side economies of scale by reducing distribution and marginal costs to near zero. This has created winner-takes-all markets because once demand-side economies of scale are activated, growth can be exponential.

Many businesses have focused on the supply side of the business to drive profitability and growth. Flipping this emphasis to focus on customers, their integration with a business, the data they create and the value they realise is beneficial.

Widening your moat

With the castle sorted, it’s time to shore up a competitive advantage with an effective defence.

In order to build a strong moat, it’s important for businesses to recognise some of the elements that don’t make for a strong moat – at least not on their own.

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There are strong digital moats you can emulate. Such moats defend companies like Microsoft, Google and Facebook.

These big tech businesses have become digital flywheels by using technology to harness and continually reinforce the self-perpetuating motion of demand-side economies of scale.

In the “medieval” period of business, it was often enough to strengthen castle – that meant becoming more efficient in designing, building and distributing your product to lower the cost of doing business.

But in this modern period digitisation is like the advent of the canon – high walls no longer protect. The focus of efficiency in the digital world is to lower the cost of customer acquisition and better serve those customers.

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Anthony Stevens is Founder & CEO at Digital Asset Ventures and former Chief Digital Officer at KPMG

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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