Cameron D. Miller, Associate Professor of Management, Whitman School of Management, Syracuse University
Richard D. Wang, Associate Professor of Strategy, Management Division, Babson College
Strategic Management Journal (2024)
Product digitization can erode a firm’s ability to differentiate through physical product attributes and prompts them to increase emphasis on non-physical product attributes to sustain their competitive advantage.
How firms respond to product digitization? Specifically, how does the response differ between firms that emphasized physical attribute-based differentiation as compared to ones that did not?
What We Know
Digital technology has transformed the underlying economics of many industries, forcing managers to alter firm strategy in order to accentuate the benefits and mitigate the threats of digitization. Most existing research has examined the impact of digital technology on various segments of the value chain—production, distribution, and marketing—however the competitive strategy implications of the switch from physical to digital product form remains relatively under-explored. When the products are sold in physical forms, firms could invest in superior physical product attributes to raise customers’ willingness-to-pay and entice purchase, thereby outcompeting the rivals’ products. However, product digitization can erode firms’ ability to differentiate via physical product attributes, thus threatening their competitiveness. So how do firms respond to the product digitization threat? Insight on this question is important to managers faced with digital change and to researchers examining how digital technologies cause industries and product markets to evolve.
To answer this question, we examine travel guide publishers’ response to the introduction of Amazon Kindle e-book. Travel guide publishers have a long tradition of differentiating books by using cover and paper quality to increase customers’ willingness-to-pay and entice purchase. Moreover, the context has a number of characteristics that allow us to empirically identify how publishers respond to digital change in ways that would be difficult to do in other settings.
We theorize that publishers who emphasized physical product attributes as part of their differentiation strategy in the pre-digital age will respond to the product digitization threat by increasing their emphasis on non-physical product attributes—namely, book content—as the differentiator. We find that these publishers increased the number of new books that they release significantly more than those publishers who did not use a physical differentiation strategy. When matching country guidebooks that are released on a regular basis, we find those that used the physical differentiation strategy pre-digital increase the content in the guidebooks more than those that had not used the physical differentiation strategy.
We also expect impediments to this sort of strategy change. We predict and find evidence that the extent of the shift is less among publishers that face higher internal supply costs associated with content generation. We also predict and find evidence that the shift is less likely in product categories that have low demand diversity, as publishers have less room within in these categories to offer additional content.
Unlike other contexts where new entrants often drive new product growth, we find incumbents can be an important source of new products in the digital age. Consistent with our theorizing, we find that indicate that incumbents that were most threatened by product digitization were the most active in launching new products. At the aggregate market level, we find that travel guide publishers that joined Kindle and who used the physical differentiation strategy in the pre-digital age accounted for 73% of the total growth in new book titles in the digital window we examine.
To attempt to identify causal effects, researchers often use difference-in-difference regression models. When modeling count data, negative binomial or Poisson specifications are often used and the coefficients of the models can often be interpreted as semi-elasticities. However, the coefficient on a difference-in-difference term in such specifications cannot be interpreted as a semi-elasticity. Building on the work of Shang, Nesson, and Fan, 2018, we demonstrate how to use negative binomial or fixed effect Poisson models to calculate and derive inference from difference in semi-elasticities and difference-in-difference in semi-elasticities. By doing so, we can provide economically meaningful interpretation of the empirical results.
Implications for Practice
Many companies invest in superior physical product attributes to increase a customer’s willingness-to-pay and entice purchase—like cover art on an album or paper quality of a book. However, when products become digitized—such as music streaming displacing CDs or e-books replacing printed books—the effectiveness of physical product differentiation is diminished. Our finding on publishers emphasizing content as the new differentiator suggests that as firms look for alternative strategies to overcome the threat, they turn to the benefits of digital technology, such as relaxed channel constraints and new ways to promote products. Notice that the content-based differentiation strategy might not be feasible without the boundless online “shelf space” that allows content expansion; nor the “experience good” challenge to be surmounted effectively without digital recommendation engines. Thus, our study provides managerial guidance that firms should evaluate both the opportunities and the threats from digitization integratively, as the benefits to certain aspects of the value creation activities can shape the optimal response to the threats to other aspects.
Implications for Society
How does digital affect the number of products and the format of products that you can consume? Although we focus on firm strategy rather than on consumer welfare, our results do provide some insights into these questions. In our empirical context, we find that the introduction of Kindle spurs a significant increase in the total number of new products. However, most of these products come only in the e-book format. In fact, we find that, consistent with a cost-leader strategy, the publishers that did not use high-quality physical attributes in the pre-digital era switched a number of their re-occurring titles from print to digital after the release of Kindle. Therefore, it appears that consumers need access to Kindle or some other e-reader to benefit from the content increase.
Implications for Research
Our findings highlight how firms’ pre-digital positioning influences their response to digital. Publishers, both physical differentiators and non-physical differentiators, who had committed to using more primary content in their books did not respond to Kindle with as much new content as those who relied less on primary content. This finding parallels prior research on music labels that find that pre-digital strategic positioning influences their response to digitization. To have a more complete understanding of digital change, more work is needed to understand how various pre-digital strategic choices influence the eventual strategy firms pursue in the digital strategy and what tradeoffs firms may make when maintaining or abandoning their pre-digital strategic positions.
Miller, C.D., & Wang, R.D. Digitization and product differentiation strategy change: Evidence from the book publishing industry. Strategic Management Journal, forthcoming
We study product digitization as an impetus for firm strategy change. Product digitization can erode a firm’s ability to differentiate through physical product attributes and prompts them to increase emphasis on non-physical product attributes to sustain their competitive advantage. We expect this effect is pronounced among firms that have pursued a physical differentiation strategy prior to the digital age. However, we expect that countervailing forces exist such that the internal supply cost of and the external market demand for the non-physical differentiator mitigate this effect. Evidence from publishers in the Amazon Kindle e-book ecosystem supports our hypotheses. This study bridges the growing digital strategy literature and the classical competitive strategy literature. We discuss how our findings are relevant to a range of industries.