A vision for disruption

A vision for disruption comes from being able to identify ways to satisfy customers better than competitors at a given point in time and over and over again. The battle for the market is the battle for the hearts and minds of customers. This is accomplished by satisfying current customers in exist­ing markets, finding new ways to satisfy current customers, and finding new markets. One part of this vision is superior stakeholder satisfaction— to satisfy customers, employees, and then shareholders, in that order. The other part is strategic soothsaying—to understand emerging technologies and trends and to identify ways to shape the future through creating self- fulfilling prophecies.

S-l: Superior Stakeholder Satisfaction

The first priority of hypercompetitive firms is superior stakeholder satisfac­tion. Disruption is a result of finding new ways to satisfy existing customers or better satisfying new customers by entering new markets. The prioritiza-tion of stakeholders in less hostile, static environments was usually share­holders first, employees second, and customers last. In recent years hypercompetitive firms have turned this prioritization on its head, as indi­cated by Figure 8-5.

FIGURE 8-5

While the concept of putting the concerns of the customer above the concerns of shareholders has certainly gained widespread attention in re­cent years, the cause of this shift in priorities and its implications have not been so clearly examined. The erosion of sustainable advantage has also shaken up the priorities of the corporation. Creating disruption by serving customers better and developing a series of temporary advantages has de­manded a different view of customers, employees, and shareholders

In static environments, where companies had sustainable advantages, customers were there largely to serve the company, and the company ex­isted to maximize shareholder wealth, as indicated in Figure 8-5. Compa­nies created advantages, such as barriers to entry, that meant they could, within limits, dictate to their customers what products or services would be available. Certainly, when Henry Ford told his customers they could have any color automobile they liked as long as it was black, customers had little choice. The forces that limited access to the market by competi­tors—and created sustainable advantage—tended to dampen the need for achieving high levels of customer satisfaction. No company could com­pletely ignore its customers, but many could place the concerns of their customers below those of shareholders. In the extreme case of a monopoly or near monopoly, customers had so little power in the market that they often had to be rescued by government antitrust action from the clutches of the corporate giants seeking to exploit their monopoly power. As will be examined in the conclusion, the need for this protection is rapidly declin­ing in hypercompetition.

In dynamic environments the company is largely there to serve the customers. With intense competition and fewer or weaker advantages such as barriers to entry, customers vote with their feet. Companies can only keep their market share as long as they can keep customers highly satisfied. Even giants such as IBM or Sears, with their massive market power, live or die at the whim of their customers. The decline of brand loyalty in recent years is just one indication of this phenomenon.

A survey of shoppers found that brand loyalty declined from 45 percent in 1988 to 37 percent in 1992. Faced with declining brand loyalty, Philip Morris was forced to slash prices on its well-known, best-selling Marlboro cigarette brand under pressure from private-label brands. Frito-Lay cut prices by as much as 15 percent as it began to lose market share to lesser brands and private labels. Gerber dropped prices on its baby food under intense com­petition from private labels and less well known brands.⁸

In static environments employees are cogs in the wheels of the organic zation. They are held by strong incentives for career growth and stable employment. The same entry barriers and other advantages that allow the company to hold onto customers also help the company to keep its em­ployees.

In dynamic environments employees are the frontline troops in achiev­ing customer satisfaction and understanding future opportunities for dis­ruption. The company that can motivate and empower its workers can ensure that it will continue to be in touch with changing customer tastes and have the ability to satisfy them. The uncertainty of markets and a greater reliance on knowledge workers demands greater flexibility and in­vestment in the workforce. This is ironically occurring at a time when concepts such as “job for life” are increasingly difficult to maintain. Work­ers are no longer replaceable gears in a machine that produces sustainable competitive advantage. They are, instead, an important part of developing temporary advantages and shifting to new ones.

In static environments the company usually exists to maximize share­holder wealth. But companies that have put their shareholders first in hypercompetitive environments have found that they have often lost mar­ket share and money over the long run. When a company sets a goal of generating profits for shareholders by exploiting its sustainable advantage, it frequently ends up milking the advantage for profits without adequate reinvestment designed to create the next advantage needed to seize the initiative. So, in the long run, stockholder value plummets. One has only to look at the dramatic plunge taken by IBM’s stock to realize that sustain­ing its distribution and brand-name advantages was not a high-profit strat­egy in hypercompetitive markets. IBM, in essence, milked its dominance in the mainframe computer industry without paying adequate attention to the future and the creation of new advantages. Shareholders that demand high returns in a short period of time, rather than realize that returns result from customer satisfaction and employee satisfaction, find that they serve neither their customers nor their shareholders well.

The current belief is that investors have two choices. They can either milk what they know, milking as much out of current advantages as possi­ble before they erode, or reap what they sow, investing tons of up-front capital to build a new advantage and then reaping the return once this sustainable advantage can be harvested. The former results in the negative consequences stated above, while the latter option requires very patient capital.

There has been a great deal of debate about whether U.S. firms are forced to milk what they know due to the pressure of stockholders and hostile raiders. Many have argued that the reap-what-you-sow approach positions firms better for long-run advantages. However, in hypercompeti­tion even the reap-what-you-sow approach is not appealing. With advan­tages eroding quickly, firms don’t have the time to wait for the harvest of their investments. Competitors move quickly to destroy the advantage that is sown, leaving firms with this supposedly better “long-term” per­spective in the dust.

In contrast, the most successful hypercompetitive firms offer a third ap­proach to investment, which might be called pay as you go. Investors fund a series of temporary advantages that provide a steady return because as one fades, another moves into its place. This ensures a steady payback, unlike the increasingly risky strategy of reaping what you sow, which often ends up throwing seeds on infertile soil and rarely returns as much as is invested because of the short window in which the advantage is unchal­lenged. But this third approach also allows investors to make a long-term commitment through a series of short-term investments and payoffs. This avoids the opportunistic milk-what-you-know approach, which often leaves the company drained dry and unable to continue to produce re­turns. As investments are increasingly concentrated in the hands of insti­tutional investors looking for profits and without the patience needed for the reap-what-you-sow approach, this third investment strategy is becom­ing even more essential to success in hypercompetitive markets.

Gallo built its market by being closely in tune with the needs of customers. Because it is a closely held family firm, it didn’t have to worry about answer­ing to shareholders and could move freely to reinvest profits into increasing customer satisfaction, often using the reap-what-you-sow method. It set the standards for wine making in the United States, gaining advantages in cost and quality that were used to provide higher customer satisfaction in the table wine segment. When the definition of quality shifted from good-tasting table wines to prestige wines with snob appeal in the 1980s, Gallo re­sponded with a fad product (wine coolers) and a longer-term move to up­scale varietals. Its very popular Thunderbird was developed after marketers saw retailers selling lemon juice to mix with port wine, so Gallo recognized the need and created a premixed version of the fortified wine. Its varietals and wine coolers were designed to capture the new customer tastes caused by the origin of the baby boomer generation. The wine cooler strat­egy, using this fad product to fill capacity in the main plant while batch- production processes were developed for varietals, was an example of find­ing a series of temporary advantages that constituted a pay-as-you-go approach.

Komatsu sought to improve its position against Caterpillar by improving the value it offered to customers. It did so by utilizing its main asset, its people. Cat had a history of tumultuous labor negotiations with its unions that led to a 204-day strike in 1983—one of the largest against any U.S. firm.⁹ Komatsu, in contrast, had a strongly stated corporate policy of striving for the mone­tary and professional satisfaction of its employees.¹⁰ Between 1976 and 1981, labor productivity increased at an estimated annual compound rate of 15 percent at Komatsu compared to just over 11 percent at Caterpillar.¹¹

These two examples illustrate the power of building superior share- holder satisfaction. Using employees and innovative investment strategies can place customers first without hurting performance for stockholders.

Superior stakeholder satisfaction creates disruption by eroding custo­mer loyalty to competitors’ brands, as can be seen in the cases of both Komatsu and Gallo. Both of these companies were once insignificant play­ers, but a consistent focus on developing new products and providing bet­ter customer satisfaction made them giants in their industries. In turn, this pool of customers and the resources they provided built both loyalty and resources for each company’s next initiative.

Losing market share to a competitor that builds its market share by sat­isfying customers better creates a powerful force for disruption. The loser realizes that it cannot continue in the same direction that had made it strong in the past. It cannot continue to work to sustain its advantage. It is forced to follow the initiating company to this new level of customer satisfaction or to find a new way of satisfying customers better.

Along the way, a competitor that has not placed a high value on its workers faces a disadvantage in achieving these higher levels of customer satisfaction. It is then forced to shift its view of workers and restructure its relationships with them. In the United States the Total Quality Manage­ment movement and the emergence of such innovations as self-managed teams are a recognition of the need to change the company’s view of its employees.

S’2: Strategic Soothsaying

To develop a series of temporary advantages, companies need to do more than satisfy customers today. They need to gain “future share.”¹² Strategic soothsaying is envisioning new customer needs before they can articulate them for themselves and then creating that future. Soothsaying requires that the company have the ability to do more than predict future trends. They must influence them by controlling the development of key technol­ogies and other know-how that will shape the future. Soothsaying also in­volves a passive reading of the technological and competitive environ­ment ahead, so that firms can react to disruptions from outside the firms. But soothsaying also involves the creation of self-fulfilling prophecies by actively influencing and shaping future events. By continuously engaging in strategic soothsaying, companies envision and create a series of ways to proactively disrupt the market and achieve superior customer satisfaction. They also take advantage of external disruptions beyond their control by conceptualizing them as opportunities, not threats.

In static environments, where companies are working to sustain their current advantages, long-range planning is used to project the present ad­vantage into the future. Long-range-planning models call for companies to build upon their strengths rather than undermine their current strengths by shifting to new ones. When the external environment was relatively stable, it demanded only modest course corrections. The requirements for seizing future share of the market are not radically different from those needed to sustain current market share. Long-range planning, as it is cur­rently practiced in many U.S. firms, has become a projection of the organization’s past strengths rather than an active engagement in identify­ing or creating opportunities in the future environment. This view of the future is focused on sustaining the past rather than disrupting it. Companies look at the challenges of sustaining their current strengths despite the changes of future markets rather than looking at how to change the orga­nization to take advantage of opportunities in the future.

In dynamic environments, in which every advantage erodes, the re­quirements to seize future share are very different from the qualities that were needed to gain current share. The key to successfully moving from temporary advantage to temporary advantage is to identify opportunities for disrupting the present and creating new advantages in the future. Long-range planning involves, not a projection of the strengths of the past, but a vision for stringing together a series of temporary advantages. This vision is the result of strategic soothsaying.

Customer satisfaction in hypercompetition is not a static goal. The re­quirements for creating customer satisfaction continue to evolve as com­panies search for new and better ways of achieving ever-higher levels of customer satisfaction. Advances in technology often offer new opportuni­ties for satisfying customers. At the same time, customer satisfaction itself is a moving target because customer tastes and demographics change.

The hypercompetitive firm looks for ways to gain not only current mar­ket share by satisfying current customers but also future share of the mar­ket by developing a view of the future customers or the future require­ments of customer satisfaction. The hypercompetitive firm disrupts competitors by being the first to find new ways to achieve customer satis­faction through engaging in strategic soothsaying. This is actively examin­ing the future for emerging opportunities to create disruption.

The Sears catalog is an example of a business that lost sight of future share. It grew into a giant by creating its catalog business, being the first to identify the catalog as an effective means of reaching rural buyers. But it tried to sustain this initiative when the market changed. Sprawling malls were at the doorstep of virtually the entire U.S. population. Busy, two-career families had a different view of catalogs. Those that were sharply focused, with twenty-four-hour ordering numbers that made it easy to shop at odd hours, continued to build share. But Sears, which plodded along with its old cata­log, found that what once had been an advantage was now an albatross. It ultimately shut down its catalog business. It had seized current share but lost its ability to seize future share because it stopped using strategic sooth­saying.

Gallo built its company by realizing the potential market for table wines in the United States and actively working to create that market (as a self-fulfill­ing prophecy). As college students of the baby boom became yuppies, tastes shifted from the inexpensive jug wines to the more upscale varietals.

In recognition of this change, Gallo built an oak aging cellar with a three- million-gallon capacity, planted vineyards with new varieties of grapes, and worked to dramatically reshape its image.¹³

Once Komatsu had gained a foothold in existing markets for earth-moving equipment, it continued a process of understanding its customers and cre­ating new products to satisfy their needs. Its 1979 F and F program (future and frontiers) charted an array of new products and new businesses that took advantage of current competencies. Through this program all employ­ees were asked to examine the needs of society and the know-how of the corporation to develop new products or business ideas. It produced thirty- five hundred suggestions, many of which became new growth areas to counter the stagnation of the world construction industry.¹⁴

Strategic soothsaying disrupts the market by identifying ways that exist- ing views of the market can be broken or identifying opportunities for the firm to break existing paradigms. This disruption of the current hold of competitors on the market forces them to move, either to follow into these new areas or to find a new way of satisfying customers.

By using strategic soothsaying, hypercompetitive firms understand emerging shifts in the market better than competitors. This understanding creates the opportunity for the soothsaying firm to respond to and shape the future evolution of the market. This ability to take an active role in reshaping the market disrupts the competitor, caught off guard by the changes, that may be expecting to sustain a current advantage, only to see it slip away.

As hypercompetitive firms use their vision of the future to move into new areas, competitors are forced to either respond or die. Competitors with a less highly developed view of the future will be at a disadvantage when such a shift in the rules of competition occurs. These competitors will not only have to respond to the reality of the shift but also have to quickly reshape their mind-set and view of the market. This psychological disruption is often as debilitating as the physical disruption that results from shifting the rules.

Source: D’aveni Richard A. (1994), Hypercompetition, Free Press.