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.
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