Alphabet reported its fourth quarter earnings, which fell short of investors’ expectation. The bread-and-butter is still Google advertising, but the operating margin continued to fall (from 2017). However, analysts expect this number will increase in the next year due to the high-margin cloud business. That’s the trouble, as Google intends to ..cut off this arm if it is not the second-biggest till 2023. To make it happen, the “search monopoly” needs to overcome the breakneck-growing Microsoft Azure.
- #analysis Economic Moats. What is it? (cxl)
What are moats?
They are one type of competitive advantage, but more durable than other ones.
Five types of moats
- Low cost production – mainly by optimizing manufacturing and supply chain management. Ex: Walmart achieves the lowest inventory control and management cost/store among retailers because it has more stores in an area.
- High switching cost – customer data. Ex: If an American wants to change phone providers, they will lose their current numbers, same for Gmail customers.
- Network effects. Amazon and Uber are representatives for this type with a two-sided network effect. Read more about network effects here
- Intangible assets – patents and brand. Ex: Hubspot, who defines & owns inbound marketing, is the first name people think about when looking for IM solutions
- Efficient scale – limited demand and geographic dominance. Ex: In the US, freight roads own all the tracks, then an aspiring new entrants need to build its own railway to compete, which is costly.
Moats building in 21st industry
- Inbound marketing: above example
- Software adoption: Salesforce has a strong brand and exclusive integrations with Google Analytics 360. Sales reps are also likely to be familiar with Salesforce because it’s the most widely used CRM, reducing onboarding costs for companies that use it
- Customer data.
Western digital firms should learn from the main 3 lessons when entering the world’s most dynamically evolving country and follow these to capture a slide of that market.
The report from HBS converged foreign digital firms into three clusters. The first one is the lack understanding of the business environment -low barrier and highly competitive. Secondly, these firms had ineffective strategy making and communication, especially with the local government. Finally, it’s their underperformance operation and execution, including ill-fated attempt to impose global business model to unsuited Chinese market.
While the problem is insurmountable, the size and dynamism of Chinese digital market suggest firms should follow all these recommendations. Firstly, they should penetrate the market with a holistic view: work with the government, recruit Chinese for SVP position and partnership widely. Also, they need to accumulate incremental advantages across different areas overtime. Moreover, multinational companies must bring experimental approach to their strategy and innovation, when new ideas can become obsolete before being produced. This can be done only by setting up local team, local product and technical teams or even a tailor-made business model.
Huy Luu's business blog 