Summary of 'When Data Creates Competitive Advantage... and When It Doesn’t'

Data and Competitive Advantage

Most executives overestimate the competitive advantage conferred by data. Data-enabled learning cycles are often weaker than regular network effects.

Key Questions to Evaluate Data-Enabled Learning

To determine the sustainability of competitive advantage through data-enabled learning, consider these questions:

  1. Value Added by Customer Data: How much does customer data increase the offering's value?

  2. Marginal Value Drop-off: How quickly does additional data's value decrease?

  3. Data Relevance Depreciation: How fast does the data become obsolete?

  4. Data Proprietary Nature: Is the data unique and not easily copied or purchased?

  5. Imitation of Improvements: How easily can competitors replicate data-based product improvements?

  6. Benefit Distribution: Does the data improve the product for the user and/or other users?

  7. Incorporation Speed: How quickly can data insights be integrated into products?

Data and Network Effects

Data-enabled learning creates network effects when learning from one customer improves the experience for others, and these insights are quickly incorporated into the product. This is similar to regular network effects, but with a key difference: platform users want more connections, while data-enabled networks benefit from insights that improve products.

Differences Between Regular and Data-Enabled Network Effects

  • Cold-Start Problem: Data-enabled networks have a less severe cold-start problem because data can be bought.

  • Continuous Effort: Data-enabled networks require constant effort to learn from data, unlike regular network effects that improve passively.

  • Benefit Saturation: Data-enabled learning benefits can saturate with fewer customers, while regular network effects continue to enhance value even with a large customer base.

Conclusion

Customer data will be essential for enhancing and personalizing offerings. Strong competitive positions require high and lasting value from customer data, proprietary data leading to hard-to-copy improvements, or data-enabled learning that creates network effects. Businesses combining regular network effects and data-enabled learning, like Alibaba, Amazon, Apple, and Facebook, will be the most powerful.