The enormous changes in the global market environment explain today’s pressures for greater management effectiveness. Competitive capitalism is Darwinian in nature. Businesses succeed when they meet the wants of customers more effectively than their competitors. Corporate profitability depends primarily on the company’s ability to offer products and services which customers choose to pay for. But what products and services customers regard as attractive is a function of the market environment. What is an appealing computer, retail store or banking service today will not be tomorrow. Technological change, new competition and changing wants make yesterday’s solutions obsolete and create the opportunity for new answers.

The result is that most companies do not usually last very long. De Geus calculated that the average life expectancy of a Western company is well below 20 years.^[1] The period over which a successful firm can maintain a profitable competitive advantage is usually even shorter. Normally any innovation in product, services or processes is quickly copied and the surplus profit is competed away. Even where a company endures and grows, its true profitability normally erodes. Studies show that the average company does not maintain a return above its cost of capital for more than seven or eight years.^[2]

While the period over which the average business is successful is short, there are companies that do better. There are a few examples of companies that have survived and maintained successful economic performance over a much longer period. Currently examples would include GE, Coca-Cola, Nike and Hewlett-Packard. But quoting examples of excellent companies is a hazardous venture. Great companies have a tendency to go belly-up when the environment changes fundamentally. Few leaders have the perspicacity, courage or capabilities to overturn the strategies, systems and organisation which created their past achievement.

Environmental changes affecting the performance of the business can be categorised as macro or micro. Macroenvironmental changes are the broad outside forces affecting all markets. These include the major economic, demographic, political, technological and cultural developments taking place today. The microenvironment refers to the specific developments affecting the firm’s individual industry: its customers, competitors and suppliers. These developments reflect the impacts of the macroenvironmental changes on the specific industry (Figure 1.1).

Today this macroenvironment is experiencing unique historical changes which are fundamentally redrawing the business and social landscape. These changes have been given various names including the ‘post-industrial society’, the ‘global village’, the ‘third wave’ and perhaps most accurately the ‘information age’.

Social scientists describe three periods of economic evolution in the Western world: the agricultural era, which lasted from around 8000 BC to the mid-eighteenth century; the industrial era, which lasted until the late twentieth century; and finally what we will call the information age, which began in the 1960s and will last for decades to come.^[3] These dates are of course approximate and overlapping. The first era was based on agriculture, with physical labour being the driver of any wealth that was achieved. This eventually gave way to the second era sparked by the industrial revolution, when machinery replaced muscle power, and factories replaced agriculture as the dominant employer, leading to an enormous growth in both agricultural and industrial productivity.

Figure 1.1 The Business Environment

While the agricultural era lasted for over two thousand years, the industrial age lasted only two hundred. The 1960s began to see the end of the industrial era and the beginning of the new information age. Employment in manufacturing began to drop in all the advanced countries and the service sector became the new focus for growth. Blue-collar workers who operated equipment in crowded factories were increasingly replaced by white-collar workers working individually or in small teams using computers and scientific knowledge in office environments. Today, information technology has replaced factories and machine power as the source of productivity growth and competitiveness.

The transitional periods between the three great waves of change have not been smooth. In Figure 1.2 each wave is represented by an ‘S’ curve that shows an early period of turbulence, followed by a long spell of maturity, and then its eventual demise as new technologies take over. The last decades of the twentieth century witnessed the period of turbulence marking the birth of the information age and the death of the industrial era. The turbulence included record levels of mergers and acquisitions, the collapse of communism in the former USSR and its satellites, and economic crises in South East Asia. All these reflected old second-wave industries and social organisations being pushed aside in the competitive environment of the new information age.

Four aspects in particular of the new information age require fundamental strategic and organisational responses from management:

Figure 1.2 The Three Waves of Economic Change

The new information age has seen a dramatic shift to global markets and competition. Across more and more industries, firms that are not building global operations and marketing capabilities are losing out. Recent decades have seen an enormous growth of international trade in goods, services and capital. The General Agreement on Tariffs and Trade (GATT) and its successor organisation the World Trade Organization (WTO) have been the means of negotiating a general lowering of barriers to trade between countries and an opening up of markets. The stimulus to this liberalisation of trade has been experience. Governments have seen, often painfully, that protecting home industries and markets from competition does not work. It only leads to higher inflation, lower economic growth and domestic companies lacking the levels of efficiency and entrepreneurial skills ever to be internationally competitive. Other stimuli to the globalisation of markets and competition have been faster and cheaper transportation and a continuing telecommunications revolution that has made global communications cheap, simple and effective. Finally, the barriers to participation in world trade have often come down dramatically. Today any business can open an Internet web site and market to customers from the other side of the world, just as easily as to its customers around the corner.

The result has been the emergence of new transnational companies organised to maximise the opportunities to be gained from the new global market-place and to minimise the costs of serving it. Companies like Microsoft, GE, Intel, Merck, IBM, Starbucks and McDonald’s are selling in all the key markets. Their supply chains are equally global, with materials and components sourced from the cheapest locations, assembly and logistics organised from the most effective regional bases, and research and development located where relevant knowledge is most accessible.

In most sectors, small domestically-orientated companies lack the economies of scale to remain competitive over the longer run. The scale economies of the transnational companies lie not so much in manufacturing costs but in information and knowledge. Focused transnationals like Intel, Apple, Dell and Cisco win out because they can afford to spend more on research and development, on building brands, on information technology and on marketing. Once new opportunities are identified they can also marshal the resources that are necessary to capitalise and develop the market.

The information age is changing the nature of the profit opportunities available to businesses. Many markets that were once at the very heart of the economy have ceased to offer profit opportunities for Western firms. Other new markets are rapidly emerging that offer enormous profit opportunities to companies that can move fast and decisively to capitalise on them.

Manufacturing industries can be divided into two types. One type comprises traditional industries such as textiles, coal mining, heavy chemicals, steel and auto manufacturing, which are relatively labour intensive and make heavy use of raw materials. These industries are relocating rapidly to the developing countries, which have a comparative cost advantage. Such industries also generally suffer the problem of substantial excess manufacturing capacity because these new countries have invested too aggressively in seeking to gain market shares. The result has been falling prices and very poor returns on investment.

The second type of industries are the information- and knowledge-based ones such as pharmaceuticals, communications equipment, electronics and computers, aerospace and biotechnology. Here labour costs are typically less than five per cent of total costs. Most of the costs are information-related: research, design, development, testing, marketing, customer service and support. These are where the profit and growth opportunities occur for information-age companies. Contrary to the popular view, in most Western countries, manufacturing output has not declined in recent decades. What has changed is the switch away from traditional labour-intensive industries to those that are information-based. Second, there has been a sharp decline in manufacturing employment - notably blue-collar work, as these jobs have been automated or moved to the developing countries.

Overall employment has been maintained in information-age countries by the rapid growth of the service sector. Service-sector output has been growing at least twice as fast as manufacturing output in recent decades. In advanced countries services now account for two-thirds of economic output. As living standards continue to rise consumers spend relatively more on services rather than on goods. Health, education, travel, financial services, entertainment and restaurants are all growth markets. Informational technology has also become a massive service industry. Another reason why this will continue is that the output of information-based manufacturing industries is increasingly distributed in service form. For example, pharmaceutical companies or book publishers, rather than exporting drugs or books, will license the rights to produce them. Many items such as music and news are already being downloaded from the Internet rather than bought in the form of a physical product such as a CD.

Rapid scientific and technological changes continue to radically reshape many industries. But the most dramatic and far-reaching changes of the current era result from the revolution in information technology. Initiated by the development of the mainframe and the personal computer in the 1960s and 1970s, its full implications only really became apparent in the 1990s with the explosion in use of the Internet. By 2001, only a decade after the emergence of the World Wide Web, a fundamental change in business and society had occurred - a critical mass of people, over 200 million, at home and at work, were able to communicate electronically with one another at essentially zero cost, using universal, open standards. By the end of 2007, that number had multiplied exponentially to over 1.3 billion.

The Internet, together with the emergence of broadband cellular radio networks, has created an explosion in connectivity that is revolutionising almost every aspect of business. First, it changes the firm’s internal value chain - the way people inside the business organise to design, produce, market, deliver and support its products and services. In the past, businesses had to organise through hierarchies and bureaucracy because information was expensive, difficult and slow to obtain. Today, intranets, which instantly and costlessly connect individuals within companies for the exchange of information, make obsolete the need for hierarchical functions. Instead cross-functional teams and informal networking are encouraged, which in turn facilitate flatter, lower-cost organisational structures, faster responses and better customer service.

Second, the information revolution has changed the way the business works with its suppliers. Where partnerships are important, information technology can make them much closer. Extranets, which connect companies to each other, can seamlessly integrate buyer and seller into a virtual business. A typical example is the jeans maker, Levi. Over the Internet it continuously obtains information on the sizes and styles of its jeans being sold by its major retailers. Levi then electronically orders more fabric for immediate delivery from the Milliken Company, its fabric supplier. Milliken, in turn, relays an order for more fibre to Du Pont, its fibre supplier. In this way the partners take out cost throughout the supply chain, minimise inventory holding and have up-to date information to enable them to respond quickly to changes in consumer demand.

In a similar way, when the bar code of a Procter & Gamble (P&G) product passes across a Wal-Mart scanner, that information is immediately relayed to P&G, which invoices the retailer and makes another, which, in turn, is relayed to the distribution centre. This process has saved Wal-Mart millions of dollars in administration expenses.

On the other hand, where buyers see price as more important than partnerships, the widespread availability of information undermines the suppliers’ relationships with customers. For example, component buyers can post their purchasing requirements on Internet bulletin boards and invite bids from anybody inclined to respond. The information revolution has increased the information available to buyers and reduced the cost of switching suppliers. In general, the bargaining power of buyers has been radically increased.

Finally, the information revolution has significantly changed the nature of marketing and the marketing mix (see box, ‘Traditional Marketing Meets the Information Revolution’). Traditionally buyers chose suppliers for both the qualities of the products and the information they supplied. For example, retailers like Toys ‘R’ Us or PC World prospered by offering shoppers a wider selection of merchandise. But such formats are now undermined by search engines on the Internet, which can offer consumers much more choice than any store. This has created many new huge business opportunities for companies able to exploit the informational advantage of the Internet. These include specialist facilitators like Google which assist consumers in their search for information. Others have reconfigured the traditional industry chain to capitalise on electronic communications. Among the most successful in the late 1990s was Amazon.com, which in only four years created the world’s biggest book retailing operation, and which had net sales of almost $15 billion by the end of 2007. Its business has broadened significantly beyond books, and includes third parties selling a range of different products and services globally over the Net.

In many markets, information technology has led to disintermediation - the elimination of agents between the supplier and the consumer. Buyers have found that they no longer need retailers, agents or brokers; they can buy at lower cost, and more conveniently, directly from the manufacturer over the telephone or, increasingly, the Internet. Companies like Dell in computers and Direct Line in insurance rapidly grew to market leadership by exploiting this strategic window. When the seller deals directly with end consumers the opportunity is then created to build databases which record learning about individual consumer wants and buying behaviour. The seller can then create added value by tailoring messages and even products for individual consumers. The information revolution has thus begun to change marketing from mass communications and standardised brands to one-to-one customised marketing. For the innovators this has offered the opportunity for higher profit margins, greater loyalty and a bigger share of the customer’s spending.^[4]

The information age has brought a marked rise in customer expectations. Buyers have grown to expect higher quality, competitive prices, and better and faster service. The most important causes have been the globalisation of competition and the deregulation of markets. Once markets were opened up to today’s aggressive international competitors, companies that lacked a customer orientation or that had inefficient cost structures were soon in trouble. The new wave of Japanese exporters such as Sony, Toyota and Matsushita in the 1960s showed Western companies the new standards of quality required to stay competitive. Concepts like kaisen (continuous incremental improvement), Total Quality Management (TQM) and such schemes as the US Baldridge Awards and the European ISO 9000 certification had real effects in raising quality standards. During the 1970s and 1980s major excess capacity became a characteristic of more and more industries - for example, cars, steel, chemicals, electrical goods, agricultural products and banking. This further shifted the priority to gaining customer preference in hypercompetitive markets. Finally, the explosion of information technology gave management new tools for serving customers better: tools to continuously monitor customer needs and to improve the internal processes and supply chains that would enable them to meet, and indeed exceed, customer expectations.

Initially the response to meeting customer needs better was market segmentation. Companies brought out an increasing number of product variants to meet the diverse needs of their customers. Nike had 347 types of running shoe, Procter & Gamble had 207 brands and sizes of detergent, United Distillers introduced nine line extensions of its Johnnie Walker brand of scotch whisky, credit card companies offered green, blue, gold and platinum versions, each with minor differences in the service offering, and so on. Media too became more segmented: mass-circulation newspapers and magazines were replaced by a proliferating array of specialists. Digital technology also facilitated an explosive growth in the number of radio and television channels.

The problem with market segmentation was that it was expensive and limited in effectiveness. More variants meant higher manufacturing costs and spiralling inventory levels leading to lower profits and asset turnover. By 2000, the information revolution was beginning to offer a better alternative - mass customisation. Media and products could be tailored to the individual customer and made to order, using modern high technology communications and manufacturing systems. Information technology allows companies to record all the information they obtain from consumers through their personal, written, telephone or Internet communications with the company. Creating a database allows companies to learn about the buying behaviour and preferences of customers and to communicate individually and directly with them. Direct marketing creates the opportunity for a dialogue, allowing a precise specification of the customer’s wants.

Dell Computer Corporation was one of the pioneers in showing how direct marketing could be allied to a fast response supply chain to produce customised products delivered to the customer’s door 48 hours after the order.^[5] For the customer one-to-one marketing offers a precise fit to his or her individual requirements. For the supplier it means higher margins and lower investment requirements.

Companies survive only if they can adapt to this rapidly changing environment (Figure 1.3). This changing environment determines what products and services customers will find attractive. It also determines the technologies that will be available for companies to produce and market these products and services. By strategy we mean the business’s overall plan for deploying resources to create a competitive advantage in its markets. Organisation refers to the capabilities the firm possesses and how its staff are led, coordinated and motivated to implement the strategy.

Figure 1.3 Adapting to a Changing Environment

Today the changes in the marketing environment are so momentous that they require radical strategic and organisational change from virtually all companies. Gone are the days when managers could stick to tried and tested formulas to provide continuous growth and profitability. Globalisation, new industrial structures, rapidly changing technologies and new customer expectations are quickly eroding yesterday’s markets, while creating phenomenal new opportunities for those that can move fast and decisively to capitalise on the changing environment.

Today five main issues stand out for management:

As the environment changes, the opportunities to achieve profitable growth change too. Some markets cease to have potential and should be exited; others offer great opportunities and require high investment, innovative strategies and new organisations. Managers have to decide which markets to participate in. To do this they have to objectively assess, first, the future attractiveness of the markets in which they operate. Because they differ in intensity of competition and price pressures from customers, some markets will become much more profitable than others. In general, the greatest opportunities are occurring in services, such as entertainment, education, software and mobile telecommunications. Other markets are extremely unlikely to generate returns for shareholders. Many of the old labour- and raw-material intensive industries such as textiles, steel and heavy chemicals fall into this category. Second, managers need to assess their competitive potential. With today’s fierce global competition, unless a business can create a differential advantage, in terms of either low total cost or a superior product or service that can command a price premium from customers, it will not earn an adequate return.

The information revolution is making obsolete the marketing strategies of many traditional industry leaders. It destroys barriers to entry and transforms the structure of many industries. What is the role of a branch network when customers can bank more conveniently on the web? Who needs retailers and distributors when you can sell direct to consumers? Every aspect of marketing comes up for renewal.

The customer and product mix needs to be strategically reappraised. The information revolution has increased the need for firms to focus. Many firms have too many low-value customers who do not want long-term relationships. They also often have too many products bundled together by the classic informational logic of one-stop shopping. But one-stop shopping loses its premium for customers once information is readily available. Specialists can then generally offer lower prices or superior service by focusing their operations around a single product or customer group.

Pricing strategies also need reviewing. The globalisation of markets, the euro currency and information technology have all made prices more transparent and comparable. Businesses not offering value to customers are seeing their market shares eroding at accelerating rates. The information revolution is having its most dramatic impacts on promotion and distribution strategies. The company’s web site is increasingly becoming both the first port of call for customers looking for information and a crucial source of knowledge about customers for the company. More fundamentally, the Internet offers more and more companies of all sizes the opportunity to eliminate intermediaries and deal with consumers directly.

To implement a new marketing strategy requires the firm to create an operations strategy capable of delivering it. Companies need to construct a supply chain that can produce the right goods and services, at the right price, in the right place, at the right time. With today’s global competition and rising customer expectations, this right strategy usually means low prices, rapid delivery, reliable quality and up-to-date technology.

To meet these demanding expectations a new business model has emerged among today’s leading-edge companies built around coordination and focus. We will call this the direct business model (Figure 1.4). This model fundamentally reshapes the firm’s downstream and upstream activities. Downstream the business model is built around bypassing the dealer, selling direct to the customer and making to order. Generally the communications take place over the telephone or, increasingly, the Internet. Selling direct has the crucial advantage of enabling the firm rather than the intermediary to control the relationship with the customer. Information from customers enables the firm to add value and develop loyalty by customising the offer and the communications to the customer’s exact requirements. Information also gives the firm leverage over its suppliers because it owns the brand and the customer relationships. The direct business model also cuts distribution costs, eliminates inventories and reduces risks by enabling better forecasting of consumer demand.

Figure 1.4 The Evolution of a New Business Model