CHAPTER 5

The Third Principle of Digital Business Strategy—Competition

In the book Who Moved My Cheese? An Amazing Way to Deal with Change in Your Work and in Your Life by Spencer Johnson, we follow the story of four characters: two mice, Sniff and Scurry, and two tiny people, Hem and Haw, who live in a maze, searching for cheese. The maze is representative of one’s environment, while the cheese is representative of one’s happiness and success. Through the allegory of the story, where the cheese supply booms and dwindles and moves, we are shown the importance of being ready for change, forecasting change, recognizing when change is occurring and handling change appropriately, and taking preemptive action wherever possible. In the age of digital business, we have more ways than ever before of analyzing the marketplace, and in this chapter we take a look at them.

The ability of a business to cause disruption, particularly a new business entering a marketplace with established players, is often largely dependent on its level of innovation. A new business attempting to enter the marketplace will always be facing challenges.

Because of the way e-commerce works, and the way e-commerce businesses gain customers, it is far more important that we understand this concept in a digital marketplace. It is not impossible for smaller businesses to enter the market by any means, but with larger businesses solidifying their brands by the day, it is imperative that smaller businesses looking to enter the marketplace understand that marketplace well to understand their potential avenue into it.

Competition in the digitized world revolves substantially around digital customer dynamics. To formulate our digital business strategy (now that we have updated our view of customer dynamics from Principle 2), we must update our view of marketplace dynamics. In doing so, we ensure that we utilize the data available to us to make decisions about our marketing proposition and to understand whether we have a competitive advantage or whether it’s time to change our strategy to gain advantage.

So what happens to a smaller business in a marketplace of brand giants? How does a new business gather enough acceleration and exert enough force within the marketplace to take a share of it? The answer is to change the industry. Through innovation, the smaller business can avoid going near the larger players at all, by entering and even creating new markets, and ensuring that they are well placed to become the bigger players within them, and we will look at an example of this being done in the following case study.

Case Study 5.1

O’Neills is a very successful sportswear manufacturer in Ireland. They sell as much sportswear as Nike and Adidas and some of the other major players in their marketplace. They are in fact the prime player for sportswear in Ireland and the reason behind this is to do with Gaelic football. Gaelic football is a massively popular amateur sport in Ireland with every town having their own team and their own Gaelic grounds.

This Irish sport requires Irish equipment. Their socks are dyed in Ireland; the footballs are made and hand-stitched in Ireland and every jersey is made in Ireland unlike nearly all other sports where the clothing and equipment are mostly manufactured abroad. Normally this is a low-margin, outsourced, highly commoditized activity.

As the prime player in the market, they are tasked with servicing the demand of their customers. They make all the clothing for the teams and for the supporters. Supporters can go on to their local club website, order the items they want, have them personalized, and then delivered back to the club within a week.

To grow the business, they naturally looked to expand beyond their existing market and into the UK. Although they were the prime player in Ireland, when we change the lens lock to the UK, the picture is very different. They had no brand presence whatsoever and therefore dropped down to the default advocacy position where they had to rely on the slow growth profile of building relationships, knocking on doors, and building up their customer base.

When creating their strategy for growing the business in the UK, they had to form an understanding of the customers and the competitors in this new market which are quite different from Ireland.

Their competitors in the UK were well-established, sizeable brands who had the relationships with the customers, their product offerings were similar to O’Neills’ products, and they had plenty of momentum carrying them forward.

When they started knocking on doors and talking to potential customers, O’Neills soon discovered that their unique value proposition was not well matched to their new marketplace, their brand was unfamiliar, and they were easily confused with other O’Neills companies. The UK clubs already had suppliers who would brand their clothing and equipment and deliver the goods back to them. They weren’t concerned that the items were made in Ireland. O’Neills soon discover that they don’t have a unique offering valued by their customers that differentiates them from their competitors. Trying to break into this new market taking an advocacy route was going to prove incredibly difficult as they didn’t have the force to displace their competitors.

An alternative course of action they considered was buying new customers with paid advertising. In this attention section of the quadrant, it’s all about product, price, and position. However, they quickly abandoned this particular route as it was going to lead to a bidding war. Because their products don’t have a unique differentiator that customers were willing to pay for, they would have to compete on price—a road to nowhere.

The last potential route into this new market they considered was to go for an authority play. Becoming an authority in this marketplace was going to require cultural realignment, time, and innovation. To be an authority in any given market, you need to have other people talking about you and referencing you. The way to do this is through innovation, but innovating in a way that is meaningful to your customers. It means finding some “white space” in which to move thus avoiding trying to displace your larger competitors.

By deciding on the strategy, investing in the right people, introducing processes and cycles of innovation, and getting to know their customers much more closely, O’Neills was able to find a space in the market that gave them the opening they were looking for.

Their innovation was around cut away sections of rugby jerseys that could be infused with menthol. The inspiration came from working closely with schools and helping to solve some of their pains. These cycles of innovation require the strategy and culture to support them and having the right processes in place to score, manage, and implement them.

Through accurate assessment of customer and marketplace dynamics and thorough diagnosis of the challenges they faced, the team at O’Neills was able to formulate a digital business strategy, realign the business, and drive the company to success.

O’Neills took the best of what they had in terms of resources and realigned these toward a new added value opportunity. This approach wasn’t traditional in its marketing, but rather effectual in its reasoning.

The synergy that exists between effectual reasoning and digitized marketing provides an opportunity to elevate the marketing concept and shift the mind-set of the marketer.

Effectual reasoning as a new paradigm is still in its infancy, and a better understanding of its constructs is required before it can be measured effectively. The cycle of effectuation starts with the means the entrepreneur has at their disposal (bird in hand principle), comprising who I am, who I know, and what I know. With the means assembled the entrepreneur then determines which effects (goals) are possible (what can I do?)—the second step in the cycle; this is in contrast to causal reasoning that underpins traditional management theory and is characterized by “taking a particular effect as given and focus on selecting between means to create that effect” (Read & Sarasvathy, 2012)¹. The top-down segmentation–targeting–positioning approach of traditional marketing contrasts with the bottom-up approach of entrepreneurial marketing that starts with a limited base of customers and expands from that point. As part of their “Engagement Project” Google describes how innovative companies (they cite GoPro, Starbucks, and Amazon) have flipped the traditional marketing sales funnel on its head to create an “engagement pyramid” starting with the 5 percent who are highly engaged and starting from that point. This is not just a question of repeat business from existing customers but also enables new customer acquisition through fostering online influence and advocacy and by tapping into the rich vein of customer knowledge to create new or improved existing products/services, what has been referred to as customer influence value and customer knowledge value, respectively. This contrasts with traditional media, which is designed to generate maximum reach and awareness with the hope that a small percentage of those who respond will drop through the funnel and convert to customers. The engagement-driven strategy is enabled by the high signal strength of new media channels where almost all engagement can be recorded and analyzed, contrasting with traditional media where response is difficult to measure.

In effectuation terms, this technology-enabled knowledge base extends the means the marketer has at his disposal and from which he can imagine goals that are possible.

During the third and fourth steps in the cycle of effectuation, the entrepreneur interacts with people in her network and gains commitments from self-selecting stakeholders who, in a partnership, cocreate and help to shape the new venture. Customers, with whom entrepreneurs interact frequently, are part of that network of stakeholders and can participate in the cocreation of the new venture, product, or service. The video games industry is very innovative in its use of crowdsourcing to develop and enhance games. EA Sports, a division of the global games company, Electronic Arts, partnered with IdeaScale, an open innovation platform, to create a community of nearly 12,000 users, which include their “game changers,” which resulted in the generation of more than 7,800 ideas (http://ideascale.com/casestudy/ea-sports). Riot Games uses the social network Reddit, to engage with its users who are able to use the platform to vote on the posts they find most useful. However, crowdsourcing is not just the domain of technology companies; Procter & Gamble claim that crowdsourcing on their Connect & Develop website (www.pgconnectdevelop.com) plays a key role in nearly 50 per cent of its products. In addition to customers, crowdsourcing can extend to suppliers, employees, and citizens—stakeholders in the value constellation. As stakeholders participate, new means are generated which in turn provide the opportunity to realize new goals, thereby continuing the cycle of effectuation.

The growth of social media platforms (e.g., Facebook, Twitter, and Reddit), global review sites (e.g., TripAdvisor and Reevoo), and crowdsourcing platforms (e.g., IdeaScale and mystarbucks.com) has created an opportunity for organizations to engage with an extended network of engaged users. However, to focus on the technology is to miss the point; what makes this so powerful is the rate of adoption by society and the way in which the technology enables people to do what people like to do—share ideas, tell stories, voice opinions, connect with each other, and consume news.

There are a number of principles, which underpin effectuation including affordable loss. This section explains each principle briefly and discusses the relationship with digitized marketing. The principle of affordable loss debunks the myth that entrepreneurs are inherent risk takers who gamble on the big “all-or-nothing” idea. On the contrary, a founding thinker of effectuation, Saras Sarasvathy, found that entrepreneurs limit risk by understanding what they can afford to lose at each step. This contrasts with causal reasoning, which sets an expected return and then takes steps to minimize risk. The increasing ability, afforded by technology such as software-as-a-service, that allows companies to make modest investments and scale up as demand grows enables this affordable loss principle to be realized. The high signal strength of digital engagement referred to earlier allows organizations to adopt a “test and learn” approach to their marketing, which was not previously possible with the long lead times and up-front investment associated with traditional marketing.

The lemonade principle of effectuation modelling refers to the way in which entrepreneurs embrace change and leverage the opportunities in surprises. This contrasts with the what-if scenario planning associated with causal reasoning, which tries to minimize the probability of unfavorable outcomes. Agile and adaptive companies embrace this principle.

Effectual reasoning and its underlying principles, enabled by technology, provide a framework for marketers in existing (not just start-up) businesses to be entrepreneurial, innovative, and agile.

¹ Red, S., Sarasvathy, S., Dew, N., Wiltbank, R., and Ohlsson, A-V. (2012), Effectual Entrepreneurship, Routledge, Oxon, chapter 5, p.4.