One
The New Market Model
For decades, IBM was the world’s leading computer manufacturer and widely considered the best-managed company in the world. It averaged over $6 billion in profits per year from 1981 to 1990. Earnings in 1990 were over $6 billion. In 1993 the profit number exceeded $8 billion. There was just one little problem: it was negative—a $14 billion profit swing in just a couple of years!1
When Lou Gerstner became CEO in 1993 he was given plenty of advice on how to turn around this once all-powerful, but then floundering, computer giant. The prevailing view, inside and outside IBM was almost unanimous: break it up. The emerging new information technology (IT) industry was so fragmented by smaller specialized companies, the argument went, that a fully integrated product line was passé. IT customers wanted the freedom to pick and choose the best products and services for their needs from an ever-growing universe of suppliers—mainframes here, servers there, software somewhere else.
This model was based on what many people imagined were the needs of IT customers. Certainly, as Gerstner observed, a lot of customers wanted to “break IBM’s grip on the economics of the industry,” achieved through bundled prices. They also wanted the distributed computing that PCs offered but which IBM had been painfully slow to deliver. As IBM was preparing for a breakup, it was “rocketing down a path that would have made it a virtual mirror image of the rest of the industry.”2
But this conventional wisdom was based on a superficial reading of the IT marketplace. Gerstner had a radically different view. As CEO of American Express, he had seen IBM from the customer’s view- point. Restructuring the IT industry had indeed delivered more choices and lower prices. But Gerstner understood that the new model left customers struggling to integrate their diverse hardware and soft- ware choices. This task was hugely complicated by a lack of uniform standards.
Gerstner was convinced that companies did not want to be their own general contractors. “I knew firsthand that integration was becoming a gigantic problem,” Gerstner wrote. “So when I arrived at IBM in 1993, I believed there was a very important role for some company to be able to integrate all of the pieces and deliver a working solution to the customer.”
Gerstner also took exception to another prevalent myth—that the IT industry would continue to move toward totally distributed computing. “Even before I crossed the threshold at IBM, I knew that promise was empty. I’d spent too long on the other side. The idea that all this complicated, difficult-to-integrate, proprietary collection of technologies was going to be purchased by customers who would be willing to be their own general contractors made no sense.”
Gerstner’s view was right, and the conventional wisdom wrong. The decision to keep IBM together was the cornerstone of its historic turnaround and, said Gerstner, “the most important decision I ever made—not just at IBM, but in my entire business career.” It formed the basis for IBM’s corporate strategy for the next decade and ushered in IBM’s highly successful migration from providing big boxes of equipment to delivering integrated value-added solutions in which services play an increasingly critical role.
On April 1, 1993, the day Gerstner became IBM’s CEO, the company’s market capitalization was just under $30 billion. On December 31, 2002, the day he left IBM, market capitalization was just over $130 billion. The numbers prove the soundness of IBM’s customer-focused strategy and execution under Gerstner’s leadership.
How could so many pundits—academics, securities analysts, business leaders, financial journalists—have been so wrong? The high- concept notion of distributed computing and a distributed IT industry captured the imagination of many observers. But those observers lacked one element that Gerstner possessed: the vantage point of the customer.
Bringing Strategy Down to Earth
The problems IBM faced in the early to mid-1990s have since become commonplace. The ground-level reality of competitive forces has made the rules for creating workable strategies tougher and more complex. Competitive intensity has never been greater. And it comes from everywhere, not just from within your industry. For the sea change in your competitive environment, you have to thank tectonic shifts in technology; demographics; customer preferences; economic and political realities, including transitions in government regulation and deregulation; and the financial markets—all in an increasingly globalized context. The cumulative result has been a shift from a commodity-based economy to an information economy, exemplified by the Internet. Increasingly, you acquire advantage over competitors not by controlling material resources but by doing a better job of amassing and deploying knowledge resources, especially strategic insights into changing customer needs.
In this new environment, formulating realistic strategies is an increasingly difficult task. And translating strategic thinking into marketplace actions requires a heightened willingness to take risks. But it also demands a much sharper focus on the real-world details of execution. Looking down from thirty thousand feet, planners see one kind of landscape. Leaders sighting customers at ground level, as Gerstner did at IBM, see a different reality. If you don’t understand your marketplace options from the ground up, and if the people in your business don’t systematically dedicate themselves to fulfilling customer wants and needs, you will lose out to competitors who do.
Technology alone has upended much of marketing’s conventional thinking. Consider Metcalfe’s law, aka the network effect, which postulates that the value of a product or service is directly related to the number of people it touches. Metcalfe’s law raises the importance of achieving first-mover status. For example, the more buyers eBay has, the more valuable it is to sellers; vice versa, the more sellers eBay has, the more valuable it is to buyers. As the first mover in Internet auctioning, eBay won in the United States and many other (but not all) countries and has sustained a substantial lead that no competitor has yet come close to matching. Two other recent Internet successes that depend at least in part on network effects are PayPal, the payment system, and Skype, for making free telephone calls over the Internet. Interestingly, eBay acquired both PayPal and Skype to facilitate payment and communication on a customer-to-customer and customer-to-company basis.
Likewise, Netflix, the first nationally successful DVD lending library, secured first-mover advantage and benefited from the same kind of lead in 2005, when Wal-Mart and Blockbuster introduced competing services that copied the Netflix model: customers order DVDs online, then receive and return them in prepaid mailers for a monthly subscription fee. Wal-Mart quickly folded its tent and made a promotional deal with Netflix. Online Wal-Mart does not have the low-price advantage over competitors that it has in bricks and mortar, and it has struggled to build business in that arena. Blockbuster has been able to make some in-roads against Netflix by pairing DVDs by mail with in-store promotions and giving customers the convenience option of returning DVDs received in the mail at any Blockbuster store.
Netflix has maintained market leadership by its steady focus on customer needs. For example, the “Friends” feature on its website encourages subscribers to form groups of movie lovers who learn about each other’s picks and pans through automated e-mails. And long before they are available on DVD, you can pick movies to put in your personal queue, to be sent when the release date arrives. But as the bursting of the dot-com bubble showed, first movers only waste money if they fail to deliver on customer needs with a sound business model. Etoys.com and Meals.com are just two examples of firms that failed for lack of a sound model (but later reemerged in different forms).
Another major trend is the growth of outsourcing. Spurred especially by the evolution of the information economy, major changes in organizational boundaries are being driven by reductions in transaction costs between one organization and another, and the identification of pools of skilled labor in low-wage economies.3 What started as outsourcing of ancillary activities such as payroll, security, and food service has led managers running businesses to identify critical core competencies and to outsource other activities. Many now regularly outsource such previously fundamental functions as manufacturing and R&D. But outsourcing a problem cannot mean putting it out of mind.
For example, I am writing this book on an Apple computer that the packaging emphasizes was “designed by Apple in California,” but it was manufactured in China, a fact that is buried in the small print. Whether Apple likes it or not, however, “manufactured in China” is now part of its brand identity. A globally connected information economy gives customers access to all sorts of information—and misinformation—about such “internal” matters as a company’s environmental, labor, and outsourcing practices. In summer 2006 Apple was forced to respond to accusations of unsafe and exploitive labor conditions in Chinese factories producing iPods.4 After investigation, Apple reported that the workplaces were in fact quite safe, but it had to admit that workers were coerced into working over sixty hours a week by the Chinese factory owners. Apple promised that it would no longer let this happen.
There is no single right answer to the outsourcing question. Indeed, the growth of outsourcing for everything from components to customer call centers challenges the leaders of every business to be ruthlessly honest about its capabilities versus those of outside vendors. What aspects of satisfying customer needs are best kept in-house? What aspects are best farmed out to others? For example, outsourcing your customer call center to an outside vendor halfway around the world may reduce your costs, but how sure are you that this supplier is treating your customers appropriately? Answering these questions is not a onetime decision, but another daily task of execution. Outsourcing a function may ease your headaches in the short term but may be devastating in the long term if it drains away competencies you may need later. On the other hand, a function that has historically been part of your operations and is a cherished part of your self-image may well need to be moved to an outside supplier to position your business for the future. And either way, your company will still retain the ultimate responsibility, in customers’ minds, for everything the outsource provider does or does not do.
To make things more complex, what makes sense to outsource will likely change over time. For example, some top marketing companies prefer to in-source as much as possible, including bringing in-house traditional “outside functions” such as advertising production, as Prudential Financial has done. Oracle also produces its advertising copy in-house. “At the end of the day,” Oracle’s Mark Jarvis told us, “the people who work here have more skin in the game” and a better understanding of the customer.
Reengineering the supply chain and outsourcing a host of activities—two of the favorite recommendations of today’s business consultants—can greatly help you create customer value, but they can also put your business at risk by creating new rivals. For outsourcing to work, you must build relationships and share information with suppliers and distributors. But one day these same organizations could change their strategic goals and become your competitors. Those managers who have rushed, lemminglike, to outsource key elements of their supply chains to low-cost, but increasingly sophisticated, firms in China, India, and Taiwan, take note!
The shift from a resource-based to a knowledge-based economy, which invites competition from both upstream vendors and downstream intermediaries, fast-moving technology, changing customer needs, and a complex regulatory and political landscape create an intense Darwinian struggle for survival. Some companies will die; others will thrive. The difference maker will be a customer focus that begins with internalizing the fact that whereas companies need customers to survive, customers do not need any particular supplier. In today’s world, customers always have more options than suppliers, and companies must compete for customers in the midst of global oversupply in every market sector.
Continues...
Excerpted from The Marketing Mavens by Noel Capon Copyright © 2007 by Noel Capon. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
