By Doug Rao
03 January 2018
Technology has long played a role in determining a company’s competitive advantage. In recent years, however, this trend has become amplified. Advanced technologies such as improving chip processing speeds, cloud computing and mobile connectivity are allowing firms to reach consumers through new channels, aggregate data, build vast networks and innovate – widening the moat between themselves and competitors that are slow to adapt.
As such, we argue companies today can be organized along what we call the digital divide, which, at a high level, separates the firms with the potential to thrive in the digital era from those that are likely to struggle. Drilling down, we think there are five major categories of the divide:
The Right Side: These firms are helping drive today’s digital disruption. These are often large tech platforms that collect vast amounts of consumer data and use that data to improve user experiences, roll out new digital tools and solidify networks. It’s a virtuous circle that becomes increasingly difficult to compete against.
The Wrong Side: Companies in this category are structurally flawed for the digital era. Brick-and-mortar retailers are one example. Traditional brick-and-mortar retailers are high fixed-cost businesses and many have found it challenging to shift their distribution channels to an e-commerce model.
The Middle: In this category, you’ll find firms endeavoring to transition to the right side. Microsoft is a good example of a company that was once in the middle. Faced with competition from web-based applications, the company decided to move its popular Office software to a subscription model, providing users with new conveniences (such as the option to use the software across devices), while creating recurring revenue for the company. Microsoft also launched what is now one of the leading cloud-computing businesses in the industry.
The Support: These companies are helping firms succeed in the digital economy. Salesforce, for example, offers a cloud-based customer relationship management platform that companies use to improve client experiences. As more firms have come to rely on such tools, Salesforce has been able to consistently grow revenues.
The Outside: This group is the exception. Companies on the outside tend to sell products or services that don’t translate well online. Paint is a great example of a product that is not well suited to online distribution. Most customers, both retail and professional, prefer to buy paint in a physical location where they can see the paint colors and where a professional can mix the paint for them.
Looking ahead to 2018, we think the digital divide will continue to grow in importance in differentiating companies that can deliver sustainable earnings growth. We are also seeing exciting developments in other advanced technologies, such as artificial intelligence (AI). AI allows machines to simulate human intelligence processes, such as learning and reasoning. This will have vast implications for the economy, from the semiconductor firms that supply the immense computing power required by AI, to the multitude of new products and services that could be made possible by AI (self-driving cars, for one).
It’s a revolution that carries regulatory risks and uncertainties about which technology platforms will win out. But it’s also the lens through which we now think about every investment.
– – – – –