The concept of digitization is fundamentally altering the nature of competition all over the world.
Conglomerates and incumbent firms face critical decisions when it comes to deciding whether digital is just “a strategy” or “the strategy” for the future. Especially in the Philippines, the big conglomerates have been dominating their respective sectors for decades and due to their sheer size, competition was minimum. But will this advantage continue to last for Philippine companies or is a new wave of digital start-ups going to threaten the throne of the incumbent firms?
Take the grocery industry for example. In the US, incumbent players such as Wal Mart and Target are being attacked from all sides by small and big companies that pick small pieces of their business and try to improve it by introducing new technologies. Despite new entrants, big players remain competitive simply by having great access to real estate or distribution channels that keep prices low. However, digitization is blurring the lines between sectors, placing fresh demands on both leadership and organizational strategy.
While technology has been present for decades, customer expectations are very different now. Customers are increasingly researching online before they purchase offline in a store and if completing the whole transaction online at a cheaper price, some tend to prefer doing the whole process online. According to a recent survey by MasterCard, three out of five or 59% of the online population in the Philippines access the internet to shop.
This shows the growing importance of the internet as a distribution channel. Top categories for online purchases are flights and hotels but clothing and grocery items are starting to catch up. What does this mean for the competitive landscape in the Philippines? Incumbents are no longer invincible!
While the consumer behavior will only change slowly over time, the cost of delivering IT solutions is reducing all the time and can sometimes be done now in just weeks or months. Digitization is blurring the lines between sectors and allows new entrants to come from unexpected places without necessarily needing access to prime real estate or expensive branch networks. This allows retailers to go into the media business or travel agents into the insurance business. While the Philippines is nowhere near a South Korea or Australia in terms of technology adoption, the change will happen no matter what; and that’s a good thing. Take the local telecommunication industry as another example. The barriers of entry are extremely high but fiercer competition and new entrants would drive prices down, improve service and force all participants to be more efficient.
The large, existing players still have a great advantage and a head start compared with new entrants in almost any sector. They control distribution channels, have spent decades building strong partnerships and often are able to hire the best talent. But due to their size, many large firms are very slow in adopting new technology and are not creating the right scale of investment in their IT infrastructure. Keeping up with the pace of technology evolution is very hard unless there is a dynamic strategy and infrastructure that will allow to adjust to new trends but also to connect with other companies that are experts in their field and allow you to be competitive without creating the necessary in-house capabilities.
In the next five years, Philippine companies need to understand the opportunities that come from new channels or low-cost entries in the market. For many companies, digital transformation should be part of the core strategy and not something they are considering over the next few decades. Margins may still be great, but new entrants are coming and attacking those early on rather than defending them when it is almost too late is often the better strategy.
Moritz Gastl is the managing director of MoneyMax.ph, a financial comparison website aiming to help Filipinos save money through diligent comparisons of financial products.