Strategic Advantage and Finding Opportunities
Date: 2021-01-11
Source: https://craigwright.net/blog/economics/strategic-advantage-and-finding-opportunities
Size creates its own form of advantage. Walmart leveraged the long-tail effect in the same way that Amazon has done using the Internet. In the case of Walmart, the rural population, out of a total population of just under 179.5 million people, consisted of just under 58 million people (United States Census Bureau, 2020), which statistically formed a Pareto or long-tail distribution. As was noted in preliminary research by Brynjolfsson, Hu, & Smith (2006), such a strategy has frequently been adopted. Current research focuses on the effects of the Internet, and how it can bring access to long-tail distributions and create markets. But, Walmart successfully discovered a long-tail opportunity when it accessed markets that other providers such as Kmart rejected (Dyer, Godfrey, Jensen, & Bryce, 2020).
The
use of the Internet to sell niche products allowed Amazon to undercut Walmart. In
selling to underrepresented markets, the strategy used mirrored the one of the late
Walmart founder. In taking the conservative approach following the death of its
founder, Walmart abandoned the strategy that had made them successful. Many
people argue that it is about a strategy of high-margin, low-cost sales
(Jindal, Gauri, Li, & Ma, 2020). Although it is a simple argument to make,
it is not accurate. Many other competitive organisations have followed similar
strategies and failed. The primary strategy pursued in creating the market now
held by Walmart came with reliability—combined with the access to a broader
range of individuals that were not being serviced. With Kmart rejecting
investment in towns with less than 50,000 individuals, Walmart was able to
capture one third of the American population without competition.
The
ability to service a large population brings outsized returns. If Walmart had
targeted larger communities, it would have placed them in direct competition
with five other major organisations. Even if Walmart had captured 30% of such
markets, they would have captured 30% of 120 million people, or 36 million
consumers—rather than the 60 million consumer base that they ended up being able
to capture through a long-tail strategy. With the ability to target double the
number of consumers the competition was able to capture, Walmart was able to
leverage the higher value and larger investments and to grow faster. The
capture of a broader overall market through the provision of long-tail-based
sales then allowed Walmart to capture more of the market within the other
communities that they had not focused on. And so they grew further.
So,
the promoted strategy seems to be a good alignment to what was implemented by
Walmart. But, when you analyse the subsequent changes in strategy, and how they
have allowed competitors such as Amazon to grow, it becomes possible to see
that the underlying strategy of Walmart that made it successful is different to
what is reported in most management journals. Compound growth matters. With
size comes the ability to grow faster and invest more. Organisations can
leverage money for research and development more effectively. Walmart’s benefit
came from its size, and its size came from its capture of a market that had not
been targeted. Walmart did not enter a crowded industry. Walmart entered an
underserved industry, that was undeveloped. It leveraged the growth in regional
and rural centres so that it could take other
low-cost opportunities. Amazon applied the same strategy in creating a long-tail
effect that captured sales of unique products that would generally not be worth
stocking in supermarket stores. The key being demonstrated here is to offer
high value to the widest variety of consumers possible.
It
is also where Bitcoin excels. The ability to offer digital cash at a meagre
transfer fee, such that online merchants and others can accept non-reversible
transactions and small casual transactions, opens up opportunities that have
not been imagined before. Bitcoin’s ability to operate without the possibility
of transaction reversibility creates a new market. Even though there are many
markets associated with transactions on Bitcoin, and on the blockchain, the
level of transactional costs on a network such as facilitated by PayPal or the
traditional banking industry, because of the requirement to mediate disputes, is
excessively high. For low-value transactions, using Bitcoin, such costs can be
mitigated entirely. Here lies the strength of the non-trust-based model
deployed through Bitcoin.
Right now,
people consider micropayments to consist of exchanges in the range between fifty
cents and 5 dollars. For the same reason, people are thinking about the
previous business methodologies, like how Walmart was considering its own entrenched
position—before it was facing competition from Amazon and other Internet-based
providers. The difficulty people have is to understand what models will be
created. With the ability to facilitate micropayments as low as a fraction of a
cent and, in the future, likely as low as a hundredth of a cent, per
transaction, Bitcoin offers entirely new transactional models, ones that, in
practice, have never existed before. Coase talked about transactional costs and
externalities (Farrell, 1987). The creation of new markets always occurs when
transactional friction or, rather, the cost between exchanges is lowered. It
increases the ability to reach stable equilibria, and arbitrage across providers
that can offer value.
As Farrell
(1987) noted, the introduction of low-cost transactions increases the ability
to distribute and widen the transacting base, which lies at the heart of the
argument concerning decentralisation. Whether we are talking about the ideas of
Adam Smith or Friedrich Hayek, distributed markets where individuals can
negotiate safely and securely, with knowledge that they do not need to be
concerned about fraud, lower transaction costs. When such markets are coupled
with the ability to offer low-cost transactions at high speeds, that are
finalised whilst simultaneously costing a fraction of a cent, we start to
understand that the fundamental nature of the Internet can change. Doing so
allows us to move away from an advertising-based model and towards the
provision of goods and services, and especially information, in a manner that
provides consumers with both what they want and what they need. Google uses the
existing Internet infrastructure with its ad-based model; for such reason,
Google, Twitter, and Facebook are broken. Micropayments on Bitcoin solve the
problem.
References
Brynjolfsson,
E., Hu, Y. J., & Smith, M. D. (2006). From Niches to Riches: Anatomy of the
Long Tail. Sloan Management Review, 47(4), 67–71. SSRN: https://ssrn.com/abstract=918142
United
States Census Bureau. (1961, June). *1960 Census: Supplementary Reports:
Urban and Rural Population of the United States, by States: 1960 and 1950*. U.S.
Federal Statistical System, Bureau of the Census. https://www.census.gov/library/publications/1961/dec/pc-s1-4.html
Dyer,
J. H., Godfrey, P., Jensen, R., & Bryce, D. (2020). *Strategic Management:
Concepts and Cases* (3rd ed.). Wiley Publications.
Farrell, J. (1987). Information
and the Coase Theorem. Journal of Economic Perspectives, 1(2),
113–129. https://www.aeaweb.org/articles?id=10.1257/jep.1.2.113
Jindal,
R. P., Gauri, D. K., Li, W., & Ma, Y. (2020). Omnichannel battle between Amazon and Walmart:
Is the focus on delivery the best strategy?. Journal of Business Research, 122,
270–280. https://doi.org/10.1016/j.jbusres.2020.08.053