1: Get Serious About Business Again
Welcome to the Customer Economy
Suddenly, business is not so easy anymore.
For a very brief period in the late 1990s, it seemed that all the problems of business had been solved. Everywhere one turned, enterprises were booming. Established companies were racking up record sales and earnings. Start-ups were deluged with capital. Everyone was doing well, and everyone was making money. Growth and success were taken for granted. Confidence was high. Customers were spending. The stock market was moving in one direction onlyup.
Anyone seemed to be able to win at business. Knowledge, technique, and experience were not needed, only energy, gumption, and attitude. The new American dream had nothing to do with working hard and long to build a business but featured instead hanging out with some buddies, coming up with a cool idea, and "going public" in a year or so. The business zeitgeist, as promoted by self-proclaimed visionaries, was that we were in a "New Economy," in which the business cycle had become a thing of the past. The Internet had changed everything, and mundane issues like cost and quality and inventory had become irrelevant.
Not anymore. The longest economic expansion in U.S. history is winding down, and the giddy days of the 1990s are now mere memories. As of this writing, the business media are no longer reporting on plants running over capacity, on companies scrambling to fill positions, or on venture-funded start-ups revolutionizing this industry or that. Instead, we are hearing about layoffs and store closings, energy shortages and soaring costs, decreasedadvertising and lower profits, missed earnings expectations and steep stock market declines. Business school applications are up, and IPOs are down.
Businesspeople's smugness has given way to anxiety. They can no longer take growth for granted or assume that this year will be better than last. Now they must worry whether customers will buy, costs will rise, or competitors will overtake them. They lie awake wondering if the fundamental premises of their businesses will remain valid. They are shocked to find that markets go down as well as up and that growth has to be created, not just harvested. Managers are learning again that most new ideas do not succeed, that many companies fail, that resources are always scarce, and that above all, business is not a game for amateurs.
Managers are rediscovering that business is about execution. It is not about having the right "business model" or capturing eyeballs, about creating a really cool work space or planning a launch party. Suddenly bereft of inflated stock market evaluationsa cushion that on the one hand allowed companies to make acquisitions for free and to pay their people with options instead of money, and that on the other made customers feel rich and free-spendingbusinesspeople are back to watching every penny. They have been reminded that it's not enough to get the order, you have to fill it; that having an idea for a product does you no good if you can't develop it; and that even Wall Street analysts will be fooled by a hot concept only for so long. Business today is no longer about grand visions and the arrogance of youth. The time is past for frivolous notions and flights of fancy. Business today is about nuts and bolts, the mechanics of making companies work. It is serious stuff.
Even if the current downturn proves to be brief, even if fiscal and monetary policymakers pull more rabbits out of their hats, there will be no return to the state of innocence of the 1990s. Just as a generation of investors was permanently scarred by the Great Depression, a generation of managers has been transformed by the collapse of the bubble of the late 1990s. They have become modest and serious, fearful of their environment and uncertain about their futures.
This is as it should be. The halcyon days of the 1990s were an aberration. Tough times are the norm. Only rarely do external events conspire to give us an environment in which businesses can operate nearly effortlessly. The 1950s were one such period, when the United States alone had an intact economy with which to take advantage of the postwar expansion. The late 1990s was another. But between such occasional interludes, business is very difficult indeed. In ordinary times, businesspeople must wrest market share from their competitors, motivate customers to part with scarce cash, earn success instead of having it handed to them, and wake up each morning knowing that all of yesterday's accomplishments count for nothing today. This was what we faced in the 1970s, in the aftermath of the energy crisis, and in the 1980s, when we confronted the onslaught of Japanese imports. It is what we encounter today and will continue to face in the future.
In short, today's managers have rediscovered that business is not easy. Management has always been and continues to be among the most complex, risky, and uncertain of all human endeavors. Indeed, how could anyone have ever thought otherwise?
If managing were simple, why do the majority of businesses fail? If physicians had the same success rate as executives, the medical schools would have been shuttered long ago.
If managing were simple, why do so many new products founder in the marketplace? From the Ford Edsel to the Apple Newton and New Coke, the business landscape is littered with the remains of can't-miss products that did.
If managing were simple, why do even companies that become successful stay that way for such short periods of time? Why did Pan Am go out of business, why is Xerox near bankruptcy, why did Digital Equipment fall victim to acquisition? Why have such former industry titans as Lucent and General Motors, Levi Strauss and Rubbermaid, become mere shadows of their former selves?
If managing were simple, how do leading companies allow themselves to be overtaken by upstarts? How could Nokia have stolen a march on Motorola? Why do giant banks now stand in awe of GE Capital?
If managing were simple, why do so many successful managers have trouble replicating their success when they change companies? Why did AT&T come to the brink under Michael Armstrong, who had been so effective at Hughes?
If managing were simple, why do so many managers fall prey to the nostrums of hucksters? Why are they such suckers for fads? If they were not overwhelmed by the complexities of their responsibilities, they would never be taken in by superficial and simplistic remedies. They would not be tempted to believe that all they had to do to tame the beast of business was to run their companies like Silicon Valley start-ups, or set outrageous goals, or embrace the Internet.
The challenges of management are eternal and extraordinarily difficult. How can a company devise products and services that satisfy customers, and then create and deliver them in a profitable way that satisfies shareholders? How can a company retain customers in the face of new competitors, and respond to new needs without sacrificing its existing position? How does a company distinguish itself from other companies with similar offerings and identical goals, and maintain its success as times change? Devising the answers to these questions is the eternal management agenda.
Periodically, the answers to these questions are codified, written down in management compendia, taught at business schools, and enshrined in the folklore of working managers. Peter Drucker's 1973 magnum opus, Management, was one such compendium. Tom Peters and Bob Waterman's 1982 In Search of Excellence was another. But although the problems are eternal, the solutions are not. Each generation of managers faces a world different from that faced by its predecessors, and so each must find its own direction.
It is told that Albert Einstein once handed his secretary an exam to be distributed to his graduate students. The secretary scanned the paper and objected, "But Professor Einstein, these are the same questions you used last year. Won't the students already know the answers?" "It's all right, you see," replied Einstein, "the questions are the same, but the answers are different." What is true of physics is true of business. Today's business world is not that of Drucker or of Peters and Waterman, and it calls for a new edition of the management agenda. The mission of this book is to set it forth.
Today's managers need a new agenda because they are doing business in the aftermath of an epochal shift. In the fourth quarter of the twentieth century, suppliers, who until then had dominated industrialized economies and set the terms for how business was done, lost their position of dominance to their customers. Over the past twenty-five years, customers in virtually all industries have revolted against the suppliers who previously held them in thrall. Consumers abandoned the companies to whose brands they had long been loyal and embraced generics, house brands, international competitors, and anyone else who offered a better deal. They did this in cars and household products, in banking services and TV stations. Corporate customers stopped tolerating abuse from suppliers who condescended to fill their orders. They refused to accept high prices, low quality, and dreadful service just to get what they needed. Instead, corporate customers now instruct their suppliers regarding the prices they will pay, the level of quality they require, and even the times at which they will accept delivery. Suppliers who don't meet these expectations become ex-suppliers.
Executives of the most powerful companies in the world now tremble before their independent and demanding customers. They know customers have the power and that they will use it. Welcome to the customer economy.
How did this customer power arise? Like most "sudden" changes, it resulted from the convergence of several long-developing trends. First, scarcity gave way to abundance, as supply overtook and exceeded demand. In the late twentieth century, capacity increased enormously in virtually every industry. Whether companies were selling steel, insurance, or toothpaste, they became able to make much more than customers were buying. For instance, today's worldwide automobile industry has the ability to produce nearly 20 million vehicles a year more than what the world market demands. A key reason for this remarkable development is that advancing technology has dramatically increased manufacturing productivity and thereby reduced the costs of entry to and expansion in many industries. Simultaneously, driven by Wall Street's demands for growth, companies expanded capacity in order to build market share. The trend was magnified when globalization led to more competitors pursuing the same customers. This increase in supply inevitably put customers in the driver's seat. Customers are no longer supplicants for scarce goods; roles have changed, and sellers have become supplicants for scarce buyers.
At the same time, customers have become more sophisticated and informed buyers. In theory, customers have always had choices, but until recently those choices were more theoretical than real. Consumers did not have time to run all over town comparison shopping, while corporate purchasing agents could not plow through the spec sheets and price books of every possible supplier. As a result, customers stayed with familiar vendors because that was easier, and that gave these vendors the upper hand. But customers' servitude ended when it became practical for them to take advantage of the alternatives that other vendors offered. Information technology (including, most recently, the Internet) enabled them to find and analyze competing products and to make intelligent choices. Customers discovered they had options and the power to exploit them. As both consumers and corporations increasingly came under pressure to save money, the inertia of staying with old suppliers became a luxury few could afford. As a result, customers now aggressively seek alternatives, compare offers, and hold out for the best option.
Customer power surged even more as many products became virtual commodities. It used to be that technology evolved slowly enough that products remained different from each other for long periods of time. I sold my product, you sold yours; each had strengths and weaknesses that made it the best choice for some customers and a poor choice for others. Now rapid changes in technology have dramatically shortened product life cycles. No sooner do I introduce a new product than either it becomes obsolete or you imitate it. The result is a lot of similar offerings that make it very difficult for me to differentiate myself from you; this further empowers our customers.
As an illustration, compare what it is like to buy a car today with the same experience fifty years ago. In the early 1950s, your choices were limited to the Big Three. Unless you were a car aficionado, you learned everything you knew about the car from the dealer, who held all the cards in your negotiations. By contrast, today, some twenty-five car companies compete for your business. A host of information sources, from Consumer Reports to Web sites, prepare you to bargain with the dealer from a position of knowledge and strength. Now you have the upper hand, and the automakers and their dealers know it.
In combination, these phenomena transformed supplier-dominated economies into ones ruled by customers. This then is the real "new economy." It did not begin in 1995, it has little to do with the Internet, and it certainly does not require pretentious capitalization. It is the customer economy, which has been growing and gathering steam for the last twenty-five years. The circumstances that have driven the customer economy are not yet played out; indeed, they are accelerating. There is no foreseeable end to increases in global competition, overcapacity, commoditization, or customer knowledge, or to the customer power that flows from them.
Managers did not sit still as the new customer economy began to displace the old supplier economies in which they had been reared and trained. Throughout the 1980s and early 1990s, they undertook an unprecedented program of managerial innovation. Behind the scenes and largely out of public view, American managers created and deployed dramatically new ways of operating their businesses. A new arsenal of management strategies was built to replace the assumptions and techniques that had prevailed at least since the days of Henry Ford and Alfred Sloan.
Even a minimal list of the business innovations of the 1980s and 1990s would have to include: just-in-time inventory management; total quality management and its avatar, six sigma quality; cross-functional teams; the use of portfolio management and stage gates in product development; supply chain integration, including vendor-managed inventories and collaborative planning and forecasting; performance-linked compensation; competency profiling in human resources; measurement systems based on EVA (economic value added) or balanced scorecards; customer-supplier partnerships; business process reengineering; and many more. It is difficult to overstate the extent and impact of these changes. A Rip Van Winkle who had fallen asleep in the 1970s and awoke today would not recognize the business world....
Copyright 2001 by Michael Hammer