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.