The threat to the giants
The corporate giants have dominated the business scenario
since long. In the UK, for instance, the top 10 banks and
building societies held 76% of deposit balances. In 1979
Citicorp created a sensation by becoming the first $100
billion bank. In 1999 the three-way merger between Dailchi
Kangyo bank, Fuji Bank and the Industrial Bank of Japan
created the first trillion-dollar bank ($1,000 billion).
The complacency of all such business dinosaurs is, however,
not for long. For time is here for them to come out of their
reverie. The environment in which 'the culture of the giants'
blossomed is fast disappearing in many industries. There
is a seismic shift in the industrial cost structure demonstrated
by the nifty little new comers. There is also a shift in
the industrial power structure, in the influence that different
groups of stakeholders bring to bear on production and the
processes involved in it. The customers in this buyer-driven
era are no longer just kings. They are dictators. And the
great power of organized unions and centralized government,
which dominated the industrial scene for decades, is rapidly
being diffused. These and other dramatic changes in the
industrial environment are undermining the competitive advantages
that traditional large corporations have enjoyed for the
best part of the century. And to survive the onslaught of
time they will have to become a lot different from what
they are today.
There are several forces that are working against industrial
gigantism today. Most significant of them are as follows.
A.
The arrival of the new,
internet-based firms that are more agile and innovative
than the genius
The internet is helping to put small agile newcomers on
a par with large corporations and is making them capable
to compete head on with them for new business. Just as Microsoft
cold appear from virtually nowhere to usurp the market of
mighty IBM, so a few years later Netscape appeared overnight
and threatened to undermine the market (and the size) of
Microsoft. Who will be next? And where will they come from?
In this world, small agile firms have an advantage over
giant organizations that are unable to take decisions quickly.
This process will accelerate as more and more companies
join the e-commerce bandwagon.
B.
A shift in power from the seller to the buyer
A variety of factors have helped to give the consumer more
and more strength in the typical transaction between buyer
and seller. It has taken a while for the consumers to realize
that big business no longer call all the shots. The convergence
of computing, communications and content in the shape of
personal computers hooked up over a network to the internet
has triggered a revolution in the way business is conducted.
Users of these technologies have 24-hour access to nearly
everything, everywhere. Internet-based search agents make
it possible for these users to track down the cheapest products
in seconds. And new internet-based intermediaries (the so-called
infomediaries) have created a new form of commerce whereby
the buyer sets the price, not the seller.
C.
Changing government attitudes towards giants
Governments have become less enchanted with big business.
They have stopped mergers from going ahead and have sought
to break up some of the larger firms to create more competition.
Through a program of deregulation they have also forced
the large incumbents to focus more on the needs of their
customers and to drop their prices.
D.
Industry convergence
Many large companies are moving into new markets (e.g. retailers
into financial services). They are doing this for one of
two reasons: either because their own markets give them
little scope for growth; or as a part of a drive to hang
onto their most profitable customers by offering them a
broader range of products and services. In both cases, these
assaults on new markets are being made with new products
or services at incredibly low prices.
E.
A very short-term focus
Institutional investors and brokers' analysts have become
very demanding of public companies. In the United States
in particular, they relentlessly demand an improvement in
results every quarter. If they fail to deliver against this
expectation, even the top managers are out, regardless of
their past track record. (as happened in the case of Eckhard
Pfeiffer, the ex-CEO of Compaq). Against this backdrop,
companies have become reluctant to make large, long-term
investments for fear of damaging their short-term results.
These five forces have led to the most competitive environment
in the history of commerce, and they spell big trouble for
the giants that may have become too big to respond quickly
to the threats that they pose. (See: Five major forces that
increase competitive intensity)
The
three-dimensional survival
If the big firms are going to thrive in this intensely competitive
environment, they are going to have to radically alter the
way they do things in three different areas or dimensions.
viz.
1. Dimension One - Changing nature of offering;
2. Dimension Two - Business model;
3. Dimension Three - Level of virtualization
(See: The cube route to success)
1.
Dimension One - changing nature of offering
The first dimension of the cube represents the change in
what's on offer in the market and the shift from products,
through solutions and on to intentions.
Products
Products (and services are developed by firms internally,
driven by inward-looking R&D, and focused on attracting
buyers through their price and 'features' (things like leather
interiors in a car, for instance, or individual TV screens
o the backs of airline seats.) A classic-product or service-based
organization has all the complication and expense of keeping
stock and trying to judge demand. It encourages firms to
organize themselves in a series of product-related vertical
'silos'. The loyalty of employees is to others up and down
the silo, which may not be in the consumer's best interest.
Solutions
Some organizations are looking to go beyond this and to
package a number of product and services together in order
to make life easier for their customers. In offering 'intangibles'
like convenience to the customers, providers are in effect
presenting them with solutions to their particular problems.
Thus the supermarket puts the pasta sauces next to the pasta
and the Parmesan cheese; the travel company sells travel
insurance and anti-malaria pills as well as a packaged tour.
There are three distinctive features of solutions:
* A number of products or services in more or less the same
category are bundled together at the point of sale
In financial services, for example, an institution may offer
to the same customer a home loan, an insurance policy to
cover the building, another policy to cover the contents
and a loan guarantee.
* The pricing of goods and services is based on the lifetime
value of the customer
A firm sometimes charges different customers different prices
for the same product and although this is illegal in some
countries, it is a feature whose demands will become more
pressing as firms move closer to becoming providers of solutions.
* The solutions offered to customers will increasingly be
unique.
When the providers bundle together products for customers
they will add features and details that personalize the
solution. For example, at Egg, the Prudential insurance
company's new banking service, customers are able to borrow
a specific amount of money over a period of their choice
and to pay back as and when they want, without penalty.
With Egg's service there are far fewer of the standardized
terms and conditions, written in incomprehensible gobbledygook,
that are a feature of most financial products.
Flexible manufacturing techniques are allowing a number
of industries (like car manufacturers) that have traditionally
turned out identikit products, to tailor their output to
their customers' requirements. BMW, for instance, now boasts
that that there are hardly any two of its cars on the roads
today that are identical. And models like the Smart car,
a joint venture between watch company Swatch and Mercedes-Benz,
is turned out almost like a fashion accessory with an amazingly
wide variety of colors and interior designs. The hope is
that one day soon customers will buy a new little runabout
almost as frequently as they buy a new outfit.
Intentions
Further along this dimension, beyond solutions, lie 'intentions'
- the fundamental and wide personal goals that many share.
These intentions direct the lives of the customers and determine
many of the things that they do or buy. In order to achieve
their intentions in the world as it is today, consumers
have to plan extensively for themselves across many areas,
ranging from finance, housing and transport to healthcare,
jobs and entertainment. Possible customer intentions that
may be faced during one's lifetime are illustrated hereunder.
(See: Customer Intentions)
As well as broad intentions, people also have narrower 'sub-intentions'.
In order to secure a comfortable old-age, for example, people
need to find a suitable home, to achieve a certain level
of financial security, or to maintain a healthy lifestyle.
Each of these in itself is a sort of intention. Satisfying
intentions of the broad or narrow variety requires putting
together a customized package of solutions, each of which
in turn consists of a package of solutions, each of which
in turn consists of a package of products and services.
(See: How the networks work)
2.
Dimension Two - the customer as dictator
Along the second dimension of the cube lie changes in the
business model, in the ways in which markets operate. It
is about the shift from a seller-driven market to a buyer-driven
market, via a customer-centric intermediate stage. Arguably
this is the dimension of change that is the most radical
and that has the widest implications for business in the
future.
Seller-driven
market
In today's business world, markets are fundamentally seller-driven.
The only things for sale are produced by firms whose value
propositions are based on a combination of price and service.
Products are manufactured with particular customer segments
in mind and then 'push' marketed, often through several
channels. Such seller-driven firms carry a large proportion
of unprofitable customers, and they fail to make the most
of opportunities presented by those customers who are profitable.
Typical UK brands, for instance, only realize a profit from
40% or less of their customers; with some banks this figure
is as low as 20 per cent! (See: Customer Contribution in
seller-driven banks) 
Customer-centric
market
New entrants can avoid some of these structural faults.
Virgin Direct, founded in 1995 as a joint venture between
Virgin and the Norwich Union insurance company, had the
luxury of 'molding the company to the customer, not the
other way round'. That indicates that it was able to develop
a more fluid and horizontal structure. Virgin Direct had
the great advantage of starting from scratch. For firms
built in the traditional way, to turn themselves around
is not easy. Oticon, a Swedish hearing-aid manufacturer,
found that its attempts to change its organizational structure,
incentive schemes and job descriptions became overwhelming
and took far longer than it expected.
To become more customer-centric, firms will have to break
out of their old product-oriented silo-shaped mould. They
will have to become horizontal organizations that cut across
product boundaries in order to package solutions for their
customers. Their organizational structure will have to be
built to service customers, not themselves. Technology is
now driving us towards markets that are entirely controlled
by consumers who dictate what they want and invite producers
to supply them - a frightening prospect for the seller-driven
firms. Firms that wish to meet the challenges of this market
will have to become radically different. Despite the difficulty
in translating intentions into actions, a few pioneering
companies have taken steps towards becoming truly more customer
centric. And they started by being good listeners. (See:
How they turned into good listeners first).
Buyer-driven
market
Beyond the customer-centric world lies the 'buyer-driven
world', a world that we are only just beginning to glimpse.
It is a place where technology is able to perform feats
that we can still scarcely imagine, a world where the consumer
is not so much a king, more a 'dictator'.
In such a market there is no easy way of anticipating in
advance what the customer wants. They will send their shopping
lists to an intermediary whom they trust, and the intermediary
will invite firms to bid for the business. The whole system
will be dependent on the ease and speed with which it will
be possible to disseminate information from any one individual
on the face of the earth to any other.
The combination of the technologies of the mobile phone
and the miniaturized computer will bring sellers, intermediaries
and buyers into a new sort of relationship in which information
will be continuously exchanged between them. Producers will
be helped by so-called 'collaborative technologies', such
as wireless broadband communications, real-time data access
and business simulation - technologies that will make it
easier to share information across enterprises. Manufacturers
will thus be able to work together speedily to make bids
that match up to customers' demand.
3.
Dimension Three - stop doing everything
The third dimension of the change is about the organization
switch whereby firms that pre-dominantly did everything
in-house (and for themselves) decide instead to outsource
almost all their operations and processes. In extremis,
such firms become virtual organizations.
Doing
all in-house
For much of the twentieth century, companies believed that
the way to be in control of their destiny is to own the
means of reaching that destiny. They owned their own plant
and equipment; they owned their own employees - in the sense
that all their employees worked full time for them, and
for them alone. They often owned their main suppliers and
their main distributors too. Or, if they did not, then they
frequently thought that they ought to.
Vertical integration, the idea that it is advantageous to
own organizations that are immediately upstream and downstream
from ones own operation, was immensely popular in the second
half of the twentieth century. Firms in the oil industry,
for instance, spent great energy vying to see how much further
up or down stream they could go than their rivals. The likes
of BP and Shell owned everything from the oil in the ground
to the drills, the tankers, the filling stations, and the
factories that turned the stuff into petrochemicals, gave
birth to even-bigger giant corporations.
Gradually, however, a bunch of pioneering firms showed that
ownership was not all that it was cracked up to be; that
it carried great costs and it was dangerously inflexible.
They showed that there was another way. Their view was that
the individual firm should concentrate only on their core
competencies, on those things that it did particularly well
and at which it had a competitive advantage. A main implication
of focusing on core competencies should be handed over to
someone else. Many of the pioneering firms were the early
franchise operators - fast food outlets like McDonald's
and Kentucky Fried chicken, for instance.
Outsourcing
Outsourcing is not an entirely novel concept. There have
always been certain functions, which have, for the most
part, been outsourced to others. One of the most obvious
is advertising. Most companies leave the production and
origination of their advertising campaigns to 'advertising
agencies;' - i.e. they outsource it to third parties. Likewise,
companies have been able to outsource financial functions
and of capital funding, for many years. It was only when
companies tried to grip with the fast-changing world of
information technology in the 1980s, however, that the benefits
of more widespread outsourcing became evident. For a while,
expensive mistakes were made. But when a few firms had demonstrated
that handing the management and development of IT over to
a third party made both financial and operational sense,
a bandwagon started to roll. Most firms were swiftly reassured
that outsourcing did not deprive them of some essential
parts of their being. The extraordinary growth of firms
like EDS and CSC in the early 1990s demonstrates how willing
companies are to take the plunge.
Once the idea of outsourcing has been accepted for IT, it
is easy to see how it makes sense in other areas as well,
particularly areas with a high level of specialization,
such as logistics. The Volvo-GM Heavy Truck company in the
United states, for example, has outsourced all the stocking
and distribution of its spare parts to FedEx Logistics Services.
This arm of Federal Express runs a toll-free line and a
warehouse in Memphis stocked with Volvo-GM truck parts.
Procter & Gamble, the consumer product manufacturer,
manages an inventory of disposable nappies on behalf of
Wal-Mart, the big American retailer. In both cases, the
level of services provided is far superior to that which
the buyers of the service were able to provide for themselves.
The idea of outsourcing has now spread to the areas of marketing
and finance. The London Stock Exchange, for example, has
handed over the running and development of its price-information
systems to Andersen Consulting. Thus, from an all in-house
philosophy, even organizations as sensitive to the need
for confidentiality and tight control over their business
as the London stick Exchange have moved to a 'selectively
in-house' philosophy.
Virtual
enterprise
Larry Sundram in the United States decided that he wanted
to set up an insurance company, but he started with a desire
to employ very few people. In the vent, it turned out to
be remarkable easy to satisfy the desire. Insure Direct
subsequently renamed Reliance Direct pays Xerox to print
all its documents, an advertising agency to do all its marketing
and promotion,and a call center to handle sales, claims
and queries. Larry sits 'virtually' alone in his office
holding all the bits together.
More than anything else, a virtual organization fosters
a different mind-set. It starts by questioning everything
that the firm continues to do for itself. It begins with
the assumption that it can get rid of everything, and only
starts to think about which elements of the business are
so critical that it has to keep them in-house. 'Virtualization'
is all about the removal of constraints of form, place and
time made possible by the convergence of computing, communication
and content. (See : Virtualization defined)
Virtual organization can now be found in almost every industry.
UK's Virgin, for instance, captured about 5 per cent of
the cola market with just five employees. It achieved this
by an extraordinarily tight focus on a single specialism
- marketing. The Italian motorcycle manufacturer Aprilia,
for example, does not make a single component of the bikes
that carry its name, despite the fact that it is one of
the most famous marques in the world.
Having spent far too long looking inwards, the corporate
monoliths are in for a shock now. To thrive in this ruthless
market, they will have to rethink everything that they do,
every step they take. There are many ways for them to move
forward within the three dimensions of the cube. But some
paths through the cube will prove to be dead ends, and from
these there will be no turning back. Another thing they
cannot do is to sit back and bask in their past glory.
The above article has been condensed/extracted from select
chapters of The Last Days of the Giants?, Baldock, Robert,
John Wiley & Sons, Ltd, 2001. All rights of the author
and publisher are reserved.
Authoritarian role of Chairman/CEO
