By Hubert Etienne and J. Mark Munoz
The rise of the cyber-economy has made it considerably easier to start a business. One can register a company online, develop a virtual prototype with high-quality software, target customers via sophisticated machine-learning models, and have products manufactured and shipped all around the world by professional manufacturers. Crowdfunding platforms complement venture capital and business angel offers, while online consulting companies provide all the support functions and services. For many B2C industries, vertical integration has been minimal, subcontracting easy, and entry barriers have been broken down, thereby allowing actors to specialise in what they do best. As a result of technological innovations, the new economy has become radically more complex and competitive.
Companies must embrace digital transformation and adapt to new consumption behaviours to survive. This calls for a rethinking of their business models while facing the risk of disruption, handling activist consumers and their expectations, and adopting daring transdisciplinary approaches to tackle business complexity. To do this, three paradigm shifts are recommended. We discuss these below.
When disruption is the norm, leading a market means digging its grave
Modern business strategy is still largely based on Michael Porter’s view and concept of competitive advantage, which ranges from owning an exclusive technology to having preferential access to strategic resources or economies of scale. According to Porter’s famous analysis, the state of competition in an industry is articulated around five basic forces: the bargaining power of suppliers, that of consumers, the threat of new entrants, the threat of substitute products or services, and competitive rivalry.1 Without rejecting the relevance of this schema, we recommend taking on new perspectives to meet the changes that have occurred in the markets since the 1980s.
Porter’s representation is founded on a kind of conservative ethics, which assumes the maintenance of an equilibrium between the forces at play. However, whatever attractors a dynamic system is driven to by its internal forces, these are defined in such a way that promotes neither social good nor competitiveness.2 Once constituted as an oligopoly, a small number of large actors still have an incentive to compete between themselves to gain market share against each other. However, they have a stronger interest in protecting the system to which they are well adapted. With rising barriers against new entrants and the absorption of exogenous disturbances, such as innovations, they benefit from preserving the overall stability of the system.
Recent industry disruptions have warned us that the barbarians are at the gate, and if you do not let them in, they will tear the castle down. Airbnb provides an edifying example of such a phenomenon. It built a business model orthogonal to most of the hospitality sector’s KPIs, and more resilient due to lower capital needs. Following its recent IPO, the company is now valued as high as the three biggest hotel groups globally. Revolut is another example of a company that is challenging well-established institutions with its innovative business model. Entirely data-driven, the six-year-old fintech company provides 12 million users with access to a quality of services that cannot be replicated by retail banks.
When disruption is the norm, every system is in crisis and stability can only refer to the speed of the system’s degeneration. A market’s growth does not tend towards its maturity but its death, a reality that CEOs should expect, prepare for, and even accelerate. Accepting that your company may fail, as Jeff Bezos has recently claimed Amazon may, is a positive but insufficient first step. From this perspective, new entrants only represent a threat if you are not planning to be the next one out. Post-mortem analyses should thus be used not only to investigate the extent of the lethal options, but also to explore the possibilities for their implementation.
Only the dominant players have something to lose with a change of system. This is why most actors would not expect them to dig their own graves. However, a company should be distinguished from the market it operates in. Instead of tracking the next move on the market, players should prepare the next market to move on, leveraging their strength on the closing market to bring customers into the opening one. By doing so, they ensure a favourable entrance for themselves into a market they have designed according to their strengths and their competitors’ weaknesses. By shutting the market down, they also cut the ground from under their competitors’ and potential new entrants’ feet. This market shift would consequently reduce the relevance of their ongoing innovation projects.
Uber have demonstrated an example of this process. First, it disrupted the taxi market, then it changed the fundamentals of this new market by introducing options for self-driving cars and planes. The key challenge consists of convincing customers to move, not just from one product to another, but from one market to a new one. In contrast to the conservative aspect present in Porter’s schema, this evolutionary approach could help companies progress towards more customer-oriented and ethically driven markets.
Respond to activist consumers with an ethical competitive advantage
Porter’s model relates to an equilibrium of forces which have significantly changed over the past decades. The increase in competition has negatively impacted suppliers’ power while multiplying the substitutive options. Consumers have greatly benefited from this evolution and now occupy the centre of the competitive rivalry.
Customers have gained an important collective power through three main channels:
- a rise in supply, increasing the number of substitutes and dragging prices down
- better access to information through consumer watch, aggregation and comparison platforms, and information access facilitators (e.g., Yuka)
- world-scale platforms gathering users by affinity and enabling them to trigger and coordinate collective actions
In light of the immense challenges of our times, consumers have also changed their consumption behaviour. As famously theorised by Thorstein Veblen,3 a purchase always claims two ends: one practical, associated with the function of the product, and one socio-ontological, defining the buyer. The more numerous the options, the more decisive the choice. The new generation of customers associates this second function more directly with a contribution to a political cause. Activist consumers now take ethical considerations into account in their consumption choices, voting with their wallets for companies engaged in fair trade, supporting short circuit production, or paying particular attention to animal welfare.4
Consumer pressures have already forced industries to enact drastic changes. These pressures have been used to advocate for ending child labour in the sportswear market, banning the use of fur from haute couture, or shifting towards more environmentally responsible practices. Until recently, with the Wall Street Boys’ raid on GameStop’s stock, a professional trader would never have expected that taking a short-selling position against a company could trigger a worldwide collective backlash costing billions of dollars to some of the largest investment funds.
In addition to the pressure directly exercised by consumers, companies also receive indirect pressure from brand ambassadors supporting their marketing campaigns. These ambassadors often use their influence to support causes. As social influencers, they also have their own brand image to manage, thereby incentivising them to stay away from potential company scandals. The French football player Antoine Griezmann recently broke his contract with Huawei because the firm is suspected of supporting China’s repression of the Uighurs. Avoiding scandals is essential for companies, but their actions in this regard may differ from those they might take in order to deal with justice systems. Unlike a lawsuit, which can be delayed over years and a fine provisioned for, a public scandal leads to immediate sanctions, directly impacting the company’s revenue and stock price and constituting a negative goodwill over the long term.
Given that the socio- ontological function of consumption has become a first-choice criterion for customers choosing between a vast number of options, companies should respond to this demand. Larry Fink acknowledged this new imperative in his letter to the CEOs of BlackRock portfolio companies, encouraging them to be explicit about their firms’ ‘purpose’.5 Today’s employees and customers do not solely want to avoid having a guilty conscience when working for or buying from companies that are abiding by the law and respecting some ethical standards. They also want to leverage their work and consumption power as an entry key to a community of people, engaged in a collective adventure and supporting a certain vision of the future.
Addressing this demand calls for a greater effort than merely advertising the company’s good practices and managing scandals via traditional crisis communication. Companies need to turn away from business pseudo-neutrality, pick up a fight, and explicitly define strong values they aim to support. They should also respond to consumer demands for emotional engagement with brands, setting up multidirectional communication with effective feedback loops to develop trust and increase engagement. Beyond a firm’s culture or identity, companies need to embrace a specific vision for the future of society and back their plans with a viable public relations political philosophy, as originally theorised by Edward Bernays.6 Although his motivations were ethically questionable, Bernays’s analysis was correct, as he understood that American women would not buy cigarettes without a reason, unless smoking was associated with political activism and supported a certain conception of society. Consumption behaviours demonstrated by favouring certain branded products over others increasingly tend to be interpreted through the prism of Ernest Renan’s definition of a nation as a ‘plebiscite of everyday’.7
It is becoming vital for B2C businesses to attract a community of consumers to a common project while developing a trust relationship to increase their engagement. It is necessary to foster their purchasing potential for profitability and ensure their continuous loyalty, thereby hedging against any potential scandals. It is also essential to collect their data to understand the evolution of the market and of consumer expectations. Such knowledge is crucial to best prepare for the opening of the next market and convince consumers to follow a future shift in direction.
The classic SWOT matrix does not allow comparisons between companies on such grounds. Instead, we suggest adapting Fogg’s behaviour model for persuasive design to business strategy.8 It is based on two axes: ability and motivation. Motivation would refer here to the appeal of the company’s ethics: how much do customers appreciate the project that the company supports for the future of humanity? Ability would reflect the customers’ ease when supporting the company’s project with their purchasing power (i.e., depending on the product’s quality, price and distribution coverage). When combined and projected on to a graph, these two parameters define an ethical competitive advantage that allows comparisons between companies in the market. The x-coordinates can be captured by aggregating proxies such as prices and quality scores among a set of substitutable goods. The y-coordinate may then be determined as the spread between the theoretical indifference curve of the parameters aggregated in x and the empirical distribution of purchased goods per class of consumers based on their purchasing capacity. Employer appeal may also be integrated into the graph in a third axis leveraging employees’ satisfaction surveys, employers’ rankings, or the compensation elasticity of job demand.
Competing in the age of complexity requires a cross-disciplinary perspective
Advertisers have been using the mechanisms of mirror neurons and the mimetic desire theory9 to trigger tailored consumption desires for decades. Digital platforms are now leveraging persuasive design and computer-generated cues to profitably shape user experiences. When buying a plane ticket, it is nearly impossible to make an online booking from a platform not supported by machine learning algorithms that use behavioural economics to recommend prices based on dynamic pricing strategies. As products and services become increasingly sophisticated, companies need to navigate new challenges and find creative ways to lead the market.
Although differing in their product and service offers, B2C companies all need to better understand consumer behaviours and expectations in order to be successful. Data sciences are being increasingly used to this end, so it has become crucial to secure a trust relationship with consumers to allow freely consented data collection. Data analysts can then process and evaluate a large amount of data to detect relevant market signals in order to support strategic decision-making. However, this shift in approach only deals with the first issue of complexity, in reference to the technical sense of the word.
The second issue of complexity relates to accessing a deeper layer of abstraction in order to produce information that can help advance the sophistication of products and services. This challenge requires social scientists to leverage philosophical, sociological, psychological or anthropological theories to interpret the structured data and give it meaning. The age of business complexity thus calls for both data scientists to analyse the data and social scientists to understand it.
Most companies will probably not hire social scientists, but those that do are best positioned to lead their market through groundbreaking insights. Social scientists will be valuable not only for supporting the analysis of consumer behaviours (e.g., identifying psychological patterns, anticipating concerns, or explaining cultural differences between regions), but also for building effective communication between brands and consumers to ensure trust and enhance the company’s philosophical vision. As identified by Porter,10 governments have their role to play in such an ecosystem, notably in supporting the education and hiring of these social scientists.
Contemporary business has elevated the level of operational complexity on different fronts and across multiple levels. Within such a scenario, a paradigm shift is timely and necessary. To survive in these uncertain times and in uncharted market territories, companies need to be prepared to alter their market focus, communicate in inventive and emphatic ways, and strategise using a cross- disciplinary perspective.
About the Authors
Hubert Etienne is a Ph.D candidate in philosophy at Ecole Normale Supérieure and Facebook AI Research. He is a lecturer in data economics at HEC Paris and a lecturer in AI ethics at Sciences Po, Polytechnique and ESCP Europe.
J. Mark Munoz is a Professor of Management and International Business at Millikin University and editor of the book Global Business Intelligence.
- Porter, Michael E., ‘How Competitive Forces Shape Strategy’, Harvard Business Review, March 1979.
- On the ethics of equilibriums and attractors in economic systems, see Dupuy, Jean-Pierre, Pour un catastrophisme éclairé. Quand l’impossible est certain, Paris, Seuil, 2002.
- Veblen, Thorstein, The Theory of the Leisure Class: An Economic Study in the Evolution of Institutions, New York City, NY, Macmillan, 1899.
- A recent McKinsey study rated the ‘Millennials and gen Z effect’ as the third-most-important disruptive trend to have modified the good consumption model: Kopka, Udo; Little, Eldon; Moulton, Jessica; Schmutzler, René; and Simon, Patrick, What got us here won’t get us there: A new model for the consumer goods industry, McKinsey industry white paper, July 2020.
- Bernays, Edward (1928), Propaganda, Brooklyn, NY, Ig Publishing, 2004.
- Renan, Ernest (1882), ‘Qu’est-ce qu’une nation?’ in Renan, E., Discours et conférences, Paris, Calman Lévy, 1887.
- Fogg, BJ, Persuasive Technologies. Using Computers to Change What We Think and Do, Burlington, MA, Morgan Kaufmann, 2003.
- Girard, René, Mensonges romantiques et verité romanesque, Paris, Grasset, 1961.
- Porter, Michael E., ‘The competitive advantage of nations’, Harvard Business Review, March 1990.