Competing Against Time: How Time-Based Competition is Reshaping Global Markets

Competing Against Time: How Time-Based Competition is Reshaping Global Markets

by George Stalk


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Today, time is the cutting edge. In fact, as a strategic weapon, contend George Stalk, Jr., and Thomas M. Hout, time is the equivalent of money, productivity, quality, even innovation. In this path-breaking book based upon ten years of research, the authors argue that the ways leading companies manage time—in production, in new product development, and in sales and distribution—represent the most powerful new sources of competitive advantage.

With many detailed examples from companies that have put time-based strategies in place, such as Federal Express, Ford, Milliken, Honda, Deere, Toyota, Sun Microsystems, Wal-Mart, Citicorp, Harley-Davidson, and Mitsubishi, the authors describe exactly how reducing elapsed time can make the critical difference between success and failure. Give customers what they want when they want it, or the competition will. Time-based companies are offering greater varieties of products and services, at lower costs, and with quicker delivery times than their more pedestrian competitors. Moreover, the authors show that by refocusing their organizations on responsiveness, companies are discovering that long-held assumptions about the behavior of costs and customers are not true: Costs do not increase when lead times are reduced; they decline. Costs do not increase with greater investment in quality; they decrease. Costs do not go up when product variety is increased and response time is decreased; they go down. And contrary to a commonly held belief that customer demand would be only marginally improved by expanded product choice and better responsiveness, the authors show that the actual results have been an explosion in the demand for the product or service of a time-sensitive competitor, in most cases catapulting it into the most profitable segments of its markets.

With persuasive evidence, Stalk and Hout document that time consumption, like cost, is quantifiable and therefore manageable. Today's new-generation companies recognize time as the fourth dimension of competitiveness and, as a result, operate with flexible manufacturing and rapid-response systems, and place extraordinary emphasis on R&D and innovation. Factories are close to the customers they serve. Organizations are structured to produce fast responses rather than low costs and control. Companies concentrate on reducing if not eliminating delays and using their response advantage to attract the most profitable customers.

Stalk and Hout conclude that virtually all businesses can use time as a competitive weapon. In industry after industry, they illustrate the processes involved in becoming a time-based competitor and the ways managers can open and sustain a significant advantage over the competition.

Product Details

ISBN-13: 9780743253413
Publisher: Free Press
Publication date: 02/27/2003
Pages: 304
Sales rank: 1,013,799
Product dimensions: 6.00(w) x 8.90(h) x 0.80(d)

About the Author

George Stalk, Jr., is vice-president and director of The Boston Consulting Group in Chicago, Illinois, coauthor of Kaisha, The Japanese Corporation, and author of "Time—The Next Source of Competitive Advantage," which won the 1989 McKinsey Award for the best Harvard Business Review article of the year.

First Chapter

Chapter 1: The Dawn of a New Competitive Age In the competitive environment of the latter twentieth century, innovations in competitive strategy have life cycles of ten to fifteen years. Each innovation is followed by major shifts in competitive positions and in corporate fortunes. As these shifts occur, concerned managements struggle to understand the nature of their competitors' newfound advantage. However, like a military secret the new source of advantage soon becomes understood by all and is thus no longer an exploitable innovation. A new innovation must be found.

Today's innovation is time-based competition. Demanding executives at aggressive companies are altering their measures of performance from competitive costs and quality to competitive costs, quality, and responsiveness. Give customers what they want when they want it. This refocusing of attention is enabling early innovators to become time-based competitors. Time-based competitors are offering greater varieties of products and services, at lower costs and in less time than are their more pedestrian competitors. In so doing they are literally running circles around their slower competition.

Companies are obtaining remarkable results by focusing their organization on responsiveness. Each of the companies in Table 1-1 uses its response advantage to grow at least three times faster in the U.S. than other companies in the industry and with profitabilities that are more than twice the U.S. industry average.


The five examples in Table 1-1 illustrate the competitive force of timely responsiveness to customer needs.

Wal-Mart is one of the fastest growing retailers in the United States. Its stores move nearly $20 billion of merchandise a year. Only K Mart and the floundering giant, Sears, are larger. Wal-Mart's success is due to many factors not the least of which is responsiveness. Wal-Mart replenishes the stock in its stores on average twice a week. Many stores receive deliveries daily. The typical competitor -- K Mart, Sears, or Zayre -- replenishes its stock every two weeks. Compared to these competitors, Wal-Mart can

* Maintain the same service levels with one-fourth the inventory investment

* Offer its customers four times the choice of stock for the same investment in inventory

* Do some of both

Wal-Mart is growing three times faster than the retail discount industry as a whole and has a return on capital that is more than twice as high as the industry average.

Atlas Door is now the leading supplier of industrial overhead doors in the United States. In concept, these doors are simple. They are just very wide and high. However, the variations of width and height are almost endless. Consequently, unless the buyer is lucky and requests a door that is in stock, he or she might have to wait several months until the desired door can be designed and manufactured -- that is, unless they order from Atlas Door. Atlas can fill an order for an out-of-stock door in three to four weeks, one-third the industry average.

Customers are rewarding Atlas Door's responsiveness by buying most of their doors from them, often at 20 percent price premiums. Atlas Door's leading competitor, the Overhead Door Corporation (a division of the Dallas Corporation) has slipped into second place and continues to lose share. Atlas Door is growing three times faster than the industry, and it is five times more profitable than the average firm in the industry.

WilsonArt is the brand name for a line of decorative laminates manufactured by Ralph Wilson Plastics, a unit of Premark. Decorative laminates were pioneered by Formica, a company whose early success made its name a household word. Today, WilsonArt is the largest domestic manufacturer of decorative laminates, although Formica is the largest worldwide producer. Wilson Plastics is successful in the U.S. because, compared to its competitors, it is much more responsive. If a user's desired laminate is not available through a local distributor or at Wilson's regional distribution center, Wilson promises to manufacture and deliver the desired product in ten days or less. Some competitors need more than 30 days to respond to an out-of-stock situation. Demand for WilsonArt decorative laminates is growing three times faster than overall demand, and the profitability of Ralph Wilson Plastics is four times greater than that of the average competitor.

Thomasville Furniture is a new breed of competitor in a U.S. industry plagued by slow and unreliable suppliers. Thomasville has a quick-ship program. A buyer is promised 30-day delivery if the article desired is not in stock at the company stores. The average industry response to a similar out-of-stock situation is longer than three months. Thomasville is growing four times faster than the industry, and the company is twice as profitable as the U.S. industry average.

Citicorp introduced Mortgage Power three years ago. It promised the buyer and the realtor a loan commitment in fifteen days or less. The typical loan originator requires 30 to 60 days to make a commitment. Demand for Citicorp's mortgage loans is growing more than 100 percent per year in an industry with an average growth of 3 percent per year. In the second year of the program, Citicorp was the largest mortgage loan originator in the United States, and management is looking to triple its share in less than five years. Astonishingly, on February 8, 1989, Citicorp announced that henceforth mortgage commitments would be made in fifteen minutes.

Clearly, the time advantage is enabling time-based competitors to upset the traditional leaders of their industries and to claim the number one competitive and profitability positions. When a time-based competitor can open up a response advantage with turnaround times three to four times faster than its competitors, it will almost always grow three times faster than the average for the industry and will be twice as profitable as the average for all competitors. Moreover, these estimates are "floors." Many time-based competitors grow faster and earn even higher profits relative to their competitors.

When a company capitalizes on a strategy innovation, its competitors must change. In times of change, executives have two basic choices: Sit out the change until its utility becomes clear or seize the initiative and take action before other competitors do. Generally, companies that actively seek and promptly exploit the newest strategy innovation grow faster and more profitably than do more slowly reacting companies. The challenge to executives is to recognize and act upon the new sources of advantage in their industry before competitors do and to be willing to adapt again when the current source of advantage is exhausted. To do so requires an appreciation of the shifts that have occurred and are occurring.


Until recently, innovations in business strategy were episodic. A major discovery, usually technology based, would upset the balance of an industry, and corporate fortunes would shift. For example, in transportation the railroads drew hoards of customers from river boats and horse-drawn overland transportation companies in the 1880s only to lose customers in the midtwentieth century to trucking firms. Similarly, coal companies replaced wood companies in the market and were themselves upstaged by oil companies.

Historically, the risk of an episodic change has required that management always be prepared for the unexpected, though it seldom was. Today, episodic changes in business strategy are fewer and they are being supplanted by evolutionary change -- a continuum of change, not only in physical technologies but in managerial technologies as well.

Time-based competitive advantage is the most recent in a succession of the managerial innovations that have had impact on business outcomes in the last 40 years. The others include experience curve strategies, portfolio strategies, the strategic use of debt, de-averaging of costs, and restructuring for advantage.

Experience Curve Strategies

One of the innovations in strategic: thinking, implemented in the 1960s, was the use of cost behavior insights as a cornerstone for corporate strategy. An example of an early insight is experience-curve cost behavior. The theory of the experience curve is that the costs of complex products and services, when corrected for the effects of inflation and arbitrary accounting standards, typically decline about 20 to 30 percent with each doubling of accumulated experience.

The fact that costs decline with accumulated volume has been recognized for a long time. In 1925, officers in the U.S. Army observed that as accumulated production volume of airframes increased, per-unit costs declined. In later investigations, the Army more specifically described the nature of this dynamic: They calculated that the fourth plane assembled required only 80 percent as much direct labor as the second, the eighth plane only 80 percent as much direct labor as the fourth, the sixtieth plane required only 80 percent as much direct labor as the thirtieth, and so on.

During World War II, the understanding of this cost behavior was critical for planning resource requirements in the aircraft industry. After the war, the aircraft industry continued to plot learning curves. For example, the learning phenomena for the Martin-Marietta-built Boeing B-29 and the Lockheed-built Boeing B-17, as described in a 1957 article, are shown in Exhibit 1-1. Learning curves continue to be used to predict program costs, to set schedules, to evaluate management performance, and to justify contract pricings. Moreover, the concept has been disseminated beyond the aircraft industry.

By the mid-1960s, experience effects were becoming well known and integrated into the strategies of companies. Examples of the decline in costs and in prices with experience are shown in Exhibits 1-2 and 1-3. In Japan the price of beer in constant yen has declined a little less than 20 percent with each doubling of accumulated experience. Electric power generation costs in the United States decline about 20 percent with each doubling, in part because the direct cost per megawatt of electrical generating capacity declines to about 20 percent with each turbine manufacturer's cumulative megawatts of turbine capacity.

Such price declines reflect underlying cost declines. Costs decline with accumulated experience because

* Workers and management learn to perform their tasks more efficiently

* Better operational methods are adopted such as improved scheduling and work organization

* New materials and process technologies become available that enable costs to be reduced

* Products are redesigned for more efficient manufacturing

Costs have been found to decline continually for extended periods. Some costs go down in a steady fashion. Others decline slowly, then very fast and then again slowly as innovations in design and production technologies are exploited.

Being able to predict next year's prices is enormously important to management. Being able to predict prices in five and ten years hence is a major strategic advantage. The managements of certain aggressive companies have realized that well-documented cost behavior could be factored into their pricing strategies. They set pricing and investment strategies as a function of volume-driven costs. At times, they reduced prices below current costs in anticipation of the decline in costs that they knew would result from expansion of volume. Capacity was added ahead of demand. The earliest companies to adopt experience-based strategies ran roughshod over their slower-adapting competitors. They often preempted their competitors by claiming enough of a growing demand so that when their competitors attempted a response, little volume remained, and the leaders' costs could not be matched.

Texas Instruments (TI) was an early user of experience-curve cost dynamics, and they grew rapidly against competitors whose managements did not understand the phenomenon. TI was an early technical innovator in silicon transistors and later semiconductors. The company was a management innovator as well. TI's management observed that with every doubling of accumulative production volume of a transistor, diode, and eventually a semiconductor, costs declined to 73 percent of their previous level. They managed a business with an inherent 73 percent learning curve and relied on this insight to set cost-cutting programs to ensure the continued decline in costs. In the market, TI slashed the prices of its products to stimulate demand so as to drive up the accumulated volume of production and drive down costs. TI hammered its competitors in diodes and transistors, moved on to prevail in semiconductors, and ultimately in hand-held calculators and digital watches.

Later, however, the management of TI encountered severe competitive problems in its watch and calculator businesses. Overreliance on experience-curve-based strategies at the expense of market-driven strategies is often cited as the underlying flaw in TI's approach. This is an oversimplification. TI's determined effort to drive costs down allowed no room for product-line proliferation. That single-minded focus created an opening for hard-pressed competitors such as Casio and Hewlett-Packard to sell on features rather than on price -- a strategy that eventually became the standard for the industry when costs and prices declined to the point that consumers cared more for function and style than for price.

Though other firms may not rely on them so completely as Texas Instruments, strategies exploiting experience cost behaviors are still relevant. In today's semiconductor industry, for example, experience effects continue to drive managements to seek volume. Moreover, in most industries, even when executives do not explicitly base their strategies on managing experience effects, they implicitly recognize experience effects when they set market share targets. Market share is a surrogate for volume -- the fundamental driver of experience effects. The company with the greatest market share obtains the most volume on the margin and on the margin increases its accumulated volume faster. For example, the manufacturing costs and profitabilities of the major Japanese tire manufacturers reflect the differences in market share (Exhibit 1-4). Competitors tend to sort out this way until one can break the equilibrium.

Portfolio Management

Just as experience-based strategies were becoming widespread, a new strategic insight emerged. At the time, in the late 1960s and the early 1970s, companies were generally organized into profit centers that could be managed for the most part as independent businesses. This structure enabled corporate management to set performance goals such as profitability for the executives of the operating units and to allocate capital against clear business returns. The General Electric company (GE) and Westinghouse pioneered profit-center management prior to World War II, and GE became recognized as the leader in the use of this management concept.

The difficulty with the profit center organization structure is clearly described by business strategy analyst Bruce D. Henderson.

In large scale, diversified, multiproduct companies it was impractical for central management to be familiar in depth with each business, each product, each competitive segment, and each unit's implied strategy. This led to more and more reliance on short-term suboptimization of results....The inevitable short-range viewpoint induced by quarterly profit measurements as the prime control often confined profit center management to tactical resource management only.

In other words, individual businesses are more or less left to fend for themselves in the profit center structure. For example, in a profit-center corporate structure, a high-growth operation will generally receive capital commensurate with the returns it is generating. This can often mean that such a company does not get all the capital it could use because a high-growth operation must invest resources before demand, which increases its expenses and reduces profitability. Conversely, a slow growth operation in a profit-center corporate structure can generate large volumes of excess cash which more often than not, gets reinvested in the operation because it is profitable, whether the operation needs the investment or not. Bruce Henderson went on to write about the profit center structure:

There...was little real management judgment possible at the corporate level with respect to overall strategy except with regard to financial policy. This conflict between strategy and structure may account for a company such as Westinghouse having been the pioneer and technical leader in products that ranged from automobile generators to television tubes to silicon transistors and integrated circuits yet enjoying no success in these products. On the other hand, when the developments were clearly strategic enough to threaten the core business of the company, Westinghouse became a world leader in such developments as alternating current machinery and later atomic power. (Thus, the threat overrode the controlling influence of the profit center structure.)

Innovative competitors came to view their collection of businesses not as profit centers but as members of a portfolio of businesses, each of whose elements have different cash generation potentials as well as different strategic objectives. Some businesses are mature with healthy competitive positions and can generate more cash than needed to sustain their position. Others are growing rapidly and need more cash than they can generate to strengthen and preserve their emerging competitive positions. Thus, a business that needs cash for strategic growth could be fed from another, slower-growing, cash-rich division. In other words, instead of regarding the corporation as a collection of individual businesses where reinvestment is driven by the profit performance of each unit, the collection of businesses is managed as a portfolio of businesses -- a portfolio that should contain some stable properties, some high growth/high risk properties, and some properties that are to be disposed of when the opportunity arises.

The use of cash should be proportional to the rate of growth of a business. The rate of cash generation is a function of the profitability of a business, which, because profits are the residual of costs and prices, is itself a function of the competitive position or market share of not only the business but of its competitors. If a business can achieve a two-to-one market share advantage over its largest competitor it should have predictably lower costs for the same value added.

The growth-share matrix was developed as a tool to enable management to visualize the balance of cash use and cash generation of its entire collection of businesses so that trade-offs could be made among the various opportunities to apply cash (Exhibit 1-5). The vertical axis is the rate of growth of demand. The horizontal axis is a measure of cash generation or a proxy for cash generation, such as relative market share. Relative market share is defined as the share held by the business divided by the share held by the largest competitor. Generally the chart is divided into four quadrants by two intersecting lines. The vertical line passes through the point where relative market share is one. To the left of this point, the business should be competitively advantaged and to the right -- competitively disadvantaged. The horizontal line passes through the growth rate desired by management. Businesses are then located within the matrix depending on their market growth rates and their relative market share position. Depending on the quadrant they fall in, they are categorized as cash cows, dogs, stars, or question marks:

* Cash cows occupy the lower left quadrant. Companies in this quadrant are growing slowly and, therefore, do not require much cash to sustain their growth. However, because the companies have strong market positions, they should be advantaged in costs and profits and generate much cash.

* Dogs occupy the lower right quadrant. Growth is low but so are relative positions. Because these companies are competitively disadvantaged, they are unlikely to be generating much excess cash and may, if severely disadvantaged, actually consume cash even when profits are reported. As such they are cash traps and can eventually even create negative value.

* Question marks appear in the upper-right quadrant. These businesses are in fast-growing markets but have not yet achieved competitive advantage. As such they are not generating cash and are in need of much cash to enable management to enhance advantage and move the business to the left as far as is possible. Without the needed cash for growth, it will slow, and the business will slip into the lower-right quadrant to become a dog.

* Stars are the upper left quadrant. These businesses are growing rapidly and therefore need much cash. But because these businesses are competitive leaders they are also generating a substantial portion if not all of the cash they need.

The trick was to have a portfolio rich with cash generators and with high opportunity cash users while maintaining a positive cash balance. Surprisingly, this is not much of a trick in the long run. Most companies develop balanced portfolios over time by default as severely disadvantaged businesses are closed or sold off under the continual pressure for profits and cash. The real challenge is to consciously manage the movement of businesses within the portfolio. Management must allocate the corporation's resources to move question-marked businesses into the star position before the growth slows, to keep the stars advantaged so that when growth slows the stars become cash cows, and to manage the cash cows for cash. The dogs need to be worked out of the portfolio.

Strategic advantage can be achieved against a competitor -- often a profit-center-oriented competitor -- who is not coordinating its collection of businesses as a portfolio. Such a competitor will tend to underinvest in a high-growth business and overinvest both in a low-growth business and in businesses having poor competitive situations. Thus if a portfolio-oriented competitor has a high-growth question mark or star, it can out-invest a profit-center-oriented competitor, not because it necessarily has more money but because it is not constrained by internal resource allocation schemes from pushing its question marks and stars.

In the 1960s and early 1970s, a classic portfolio battle was waged by Dow Chemical against Monsanto. In this battle, Dow actively managed its portfolio for advantage, and Monsanto did not. While Monsanto's management was not afraid to move into businesses with good growth potential, they had a tendency to underinvest in their growth businesses as can be seen in the growth/growth chart in Exhibit 1-7a. In this chart, the various businesses of Monsanto are located on one axis according to growth in overall demand, and on the other axis, by their rate of expansion. Monsanto was expanding its businesses, but beyond this, no pattern seems to exist at first glance. However, if all businesses with market demand growing at a rate less than 15 percent are ignored, a different picture emerges. In 11 of the 14 businesses with market demand growing at a rate faster than 15 percent, Monsanto was expanding only three businesses faster than demand. The other 11 were growing slower than demand and, therefore, losing share.

Thus, for businesses with slow-growing markets, Monsanto's management was gaining share in more than twice as many businesses as it was losing share. But in Monsanto's fast-growing businesses, resources were not forthcoming at a rate sufficient to meet the growth of demand. Slower-growing businesses continued to receive resources for growth in excess of what was needed to hold position and generate profits, which could have been used to fund the fast-growth businesses. These growth patterns are characteristics of managements that seek near-term profits and allocate resources according to profit-center methods. Monsanto's portfolio at the time of this battle with Dow is shown in Exhibit 1-7b. As might be expected, the mix of businesses was heavily skewed towards question marks and dogs. This skew reflects the pattern discussed previously of losing share in high-growth businesses. The portfolio was not very profitable.

In the early 1970s, Dow was much more aggressive than Monsanto in pursuing growth businesses. Dow's businesses are shown in the growth/growth chart in Exhibit 1-7c. Note that, compared with Monsanto in Exhibit 1-7a, Dow did not have as many high-growth business opportunities as did Monsanto. Monsanto had seven businesses whose growth in demand exceeded 20 percent, while Dow had only two. Dow was growing overall, but its mix of businesses included many with moderate growth, and some that were stopped dead. In fact, eight businesses were not growing at all despite reasonable market growth. However, of the 23 growing businesses, 20 were growing as fast or faster than demand. These patterns are characteristics of managements driven by market share. Their theory is go for dominance or get out.

Dow's portfolio is shown in Exhibit 1-7d. The portfolio was much stronger than Monsanto's with the weight of the businesses to the left of the competitive parity line. The underlying profitability of this portfolio is good and the effect of the aggressive growth policies of Dow's management can be clearly seen.

The Strategic Use of Debt

As the experience curve and the portfolio were becoming widely understood and used for developing management strategies in the late 1960s and early 1970s, some companies began to use debt aggressively to fund investments in their competitive positions. Often these companies were smaller than the leading competitors of their industry, and their managements found that the judicious use of debt could offset structural competitive disadvantages, enabling them to grow faster than their leading competitors despite the fact that they generated less profit per dollar of revenue.

Corporations grow when they have good products, competitive prices, and growing demand. Cash is needed to grow a business. The cash available for growth is a function of the profits generated by the business and the financial policies chosen for the use of that cash. Pricing, debt policies, and dividend policies are the key financial policies influencing growth. Differential financial policies are often an important element of the strategy employed by one competitor in outperforming another. Differing financial policies can enable one competitor to grow faster than another even if the faster-growing competitor is fundamentally disadvantaged.

The impact of differing financial policies on the competitiveness of companies can be shown with an example. One company, Company A, is the leader, and the other company, Company B, is the follower. The leader has much greater total sales and is much more profitable than the follower. However, despite having lower profits, Company B is pricing under the leader and growing much faster than the leader and the market.

Company B can accomplish this because its management has chosen more aggressive financial policies than the management of Company A. The management of Company A is very conservative in its financial strategy. Management likes high profits, the good debt quality ratings that come with high profits and no debt and high dividends per share. Company B, as a follower, wants high growth and has chosen financial policies -- high debt-to-equity ratios and no dividends -- that fund this growth in the face of the lower profits created by price cutting and comparatively high costs of production.

Company B, the follower, is growing more than twice as fast as the leader and is undercutting the prices of the leader by 15 percent, even though its costs are 25 percent higher. The effects of the financial policies of Company B that make this possible are shown in Table 1-2.

Company A wants to grow 10 percent per year. To meet this target, Company A must increase its asset base by 10 percent, or by $6 million, per year; it finances this increase entirely with retained earnings. Its prices and costs yield operating profits of $36 million. After taxes and dividends, $6 million is left for growth.

Company B's financial policies enable it to grow at 25 percent per year. Because of low prices and higher costs, Company B's operating margin is 37 percent, or less than two-thirds the operating margin of the leader. After interest payments and taxes, Company B has only $1.25 million of profits available for growth. Since this is not enough to meet management's growth targets, no dividends are paid and an additional $2.5 million is borrowed from the banks to obtain the $3.75 million needed to grow the asset base at 25 percent per year.

For now, Company B is strategically using debt to fund its attempt to gain share over Company A. If the management of Company A does not cut prices, increase customer value, which is effectively a price cut, or change its financial and investment policies to check the growth of Company B, it could find itself slipping into the follower position with higher costs, lower profits, and a poor business position.

Dow funded its attack on Monsanto's businesses with debt. Dow's absolute debt-to-equity ratio in the early 1970s was 1.1:1 compared to Monsanto's ratio of 0.46:1. On the margin, Dow borrowed 2.2 dollars of debt for every dollar of profit generated while Monsanto borrowed only 0.3 dollars of debt for each dollar of profit generated. Thus, in this period of high growth, Monsanto's management was actually constraining growth with conservative financial policies that decreased debt risks but increased competitive risks.

Debt as a strategic weapon remains a powerful influence on competition today. Many North American companies are yielding an unfair competitive advantage to their Japanese and European competitors by refusing to remove the "debt umbrella" they hold over their less-strong competitors. By refusing to match the financial policies of their competitors, these North American companies often negate the other competitive advantages they have such as costs, technology, market share. As Bruce Henderson has observed,

It is important to realize that competitive superiority can be converted into either higher return on equity or lower risk under extreme conditions. In turn this relationship can be converted into either lower prices or higher return for the same risk. Where competitive position is price (or investment) sensitive, debt can become a major strategic weapon.

Use more debt than your competition or get out of the business. Any other policy is self limiting, no-win, or a bet that the competition will go bankrupt before they displace you?

Needless to say, with increasing debt comes increasing financial risk. However, increasing financial risk must be weighed against the risk that a competitor will use debt to fund faster growth to a leadership position. If management insists on conservative financial policies, it risks losing market position. Later, in the 1980s, there emerged the risk of losing company control to corporate raiders who exploited this same debt and portfolio logic at the expense of "safe" managers.

De-averaging of Costs

The advantages inherent in managing experience effects, the business portfolio, and the strategic use of debt continued to be recognized in the mid-1970s. However, management's attention also now turned to the quality of its cost-accounting information and to the impact this might have on its ability to manage its businesses strategically. In the mid-1970s, a more refined understanding of how costs are driven by varying levels of complexity in an organization enabled innovative companies to achieve competitive advantage through both aggressive and defensive strategies. Aggressive compames determined that the economics of their operations were very sensitive to the amount of complexity in their system and that their management information systems, particularly their accounting systems, did not accurately capture this sensitivity. They knew that these information systems hampered their ability to set prices reflecting the value provided. They also recognized that their competitors' information systems usually had the same shortcomings.

The major shortcoming of most cost-accounting systems is that large portions of costs, typically overhead costs, are averaged and added to the costs that can be clearly identified with a specific product or service to obtain the total cost of manufacturing a product or providing a service. Then prices are set on the basis of these average costs, which don't reflect the actual cost of producing the product in question.

When overhead is averaged across all products, high-volume and simpler activities tend to be assigned costs at levels higher than they actually were, while low-volume and more complex activities tend to be credited with costs far lower than their actual ones. This is because higher-volume activities generally require much less management support than lower-volume activities. In fact, low-volume activities are very disruptive to organizations because they disturb the rhythm that can be established when processing high-volume activities. More attention means more costs. Moreover, when overhead is averaged, and prices are based on these averaged costs, the high-volume businesses actually appear to be less profitable than lower-volume businesses at the same price levels. This effect is magnified when the low-volume products carry a price premium, as they are likely to do.

For example, the management of a manufacturer of steel wheels for railroads almost put itself out of business with accounting disinformation. Early in the history of the corporation, the top two high-volume products accounted for 100 percent of the total production volume. With only two products, production costs could easily be identified with each product. After eight years of growth and capacity expansions, the company found itself with excess capacity. To fill the excess capacity, new product designs were developed and sold. Initially the new business was very attractive since the gross margins were higher than those of the old product line. Consequently, more new products were sold. Over time, the proportion of production that the top two products accounted for declined to less than 50 percent.

Although the manufacturing process for train wheels is fairly straightforward -- molding, casting, machining, then balancing -- the addition of new products will increase the complexity of the operations. Products have to be scheduled, processes have to be changed over from one product to another, workers have to be retrained to manufacture to the specifications of the new products. Increasingly, this manufacturer's productive time was consumed by management tasks and waste. One measure of the impact of increasing complexity on the performance of the factory was the decline in production yield.

Yield, expressed as good tons cast divided by total tons cast, is a measure of first-time yield for the manufacturing process. Because of the casting step, train wheel manufacturing is very energy intensive and costly. Therefore the more good tons that can make it through the process, the lower the overall manufacturing costs will be. The process yield had never been very stable, but it had been high -- hovering about 91 percent. From 1970, as additional products were added, the process yield declined to 83 percent. The addition of new products increased the material loss experienced at each changeover of the casting and machining processes. The costs of these losses were captured in aggregate, but the cost system did not properly relate these costs to individual products because it averaged the costs over all products. The profitability of the new products continued to look good even as overall process yields declined and labor productivity deteriorated by 40 percent.

The deteriorating yields and labor productivities eventually produced losses that forced the company to seek a new strategy. The core effort behind developing strategy options went to deaveraging, to find the true costs of manufacturing. Using the true costs, the individual product lines profitability could be assessed accurately. The assessment found that only 20 percent of the products were profitable. More than 60 percent were not generating profits at all. Another 20 percent could be profitable if prices were raised between 10 and 35 percent. Products were dropped accordingly, prices on many of the remaining products were raised, and the performance of the manufacturing operation improved markedly. The increasing concentration of the product line resulted in improving process yields and an improvement of labor productivity of about 40 percent.

Clearly, a competitor can, after unraveling accounting misinformation, price very aggressively on high-volume business and raise prices on low-volume activities. If competitors do not respond, they lose share in the high-volume segments and gain share in the low-volume segments. Eventually, the competitor's market position and profitability will deteriorate and the innovative competitor will prevail.

Another example of the impact of inaccurate costing is that of a large North American manufacturer of circuit breakers, which sought to distinguish itself from its competitors by supplying a full line. Between 1965 and 1975, its product line ranged from the smallest to the largest power circuit breakers available on the market. The number of products it offered increased two and onehalf times during this decade.

As with train wheels, the costs of the design and manufacturing processes for power circuit breakers are very sensitive to complexity. The costs that are most sensitive are the management or overhead costs. This dynamic can be seen in Exhibit 1-12. Each dot in the exhibit is a plant. Some plants have as few as four to six products, others as many as thirty or forty. The plants with thirty or forty product families require two to four times more overhead support than do the focused plants and are therefore more costly to run. Generally, the greater the complexity the greater the costs, unless the volumes and prices of the additional units of complexity are enormous. They were not.

This manufacturer had many competitors, none of them as large as it was. However, in each segment of the power circuit business, the company had a competitor that, while smaller in total sales, was larger than the company in that segment. This large unfocused company was competing with many smaller but focused companies -- not a sustainable position. As can be seen in Exhibit 1-13, as the company proliferated its product offering in the face of focused competition that was operating at a lower cost, it was not able to recover its higher costs through higher prices. As a result, profits declined. Profits were not to improve until the company focused its product line and redesigned its factory to reduce the impact of complexity on the cost of manufacturing.

Restructuring for Advantage

In the 1980s restructuring became the dominant source of advantage exploited by management. Only now, the advantage management sought was not over its traditional competitors but over a new and, in the short term, more menacing threat -- hostile takeovers by corporate raiders. Corporate raiders seek profit opportunities in companies whose managements are not diligent in structuring, managing, and financing their portfolios. Raiders can generate profits by forcing such managements to restructure -- dispose of unsuccessful businesses, de-layer managements, match cash generation with debt service, and take other unpleasant but necessary actions to "lean out" and balance a company's portfolio.

Returning to the Monsanto story, since 1981 Dick Mahoney, the CEO, has been cleaning the company's portfolio. Mr. Mahoney and his colleagues have sold businesses with annual sales of almost $4 billion. Most of these businesses were at the core of the company but lacked competitive advantage as part of Monsanto. These businesses included petrochemicals, paper chemicals, benzene, oil and gas, polystyrene and others. This cleaning is helping Monsanto turn in its best return on equity, about 16 percent, since 1974 and a price-earnings ratio that is better than the average of like companies.

Restructuring is a weak competitive innovation, however, because durable competitive advantage is not the objective. Rather, the objective is, at best, to revalue undervalued companies and, at worst, to preserve jobs and status of existing management. Nevertheless, the techniques employed are throwbacks to earlier strategic insights -- portfolio management and focus -- and thus underscore the fundamental power of these insights.


In the early 1980s, leading Japanese companies and some small North American and European companies demonstrated the power of two new dimensions of competitive advantage: low-cost variety and fast response time. These leading companies are compressing the time required to manufacture and distribute their products. More importantly, they are also significantly cutting the time required to develop and introduce new products. These newly developed capabilities not only reduce costs, they also enable the Japanese and certain Western companies to offer a broad product line, to cover more market segments, and to rapidly increase the technological sophistication of their products. These innovative companies are becoming time-based competitors.

Most of the Japanese companies are developing the new capabilities in response to other Japanese competitors, but in so doing, some are surpassing their Western competitors in product variety and sophistication. These Japanese competitors are using fast response time and increased variety to grow faster and more profitably, thus substantially altering competitive relationships.

The responsiveness gap some Japanese companies have opened over their Western competitors is simply astounding. Basic response times for the fundamental value delivery systems of world class automobile competitors in the West and in Japan are shown in Table 1-4. Japanese companies require between six and eight days to get an order from the field to line set, the point at which managers know the exact time the order will be manufactured. This compares to 16 to 26 days for the better Western automobile companies. Manufacturing itself takes the best Western companies 14 to 30 days per order compared to 2 to 4 days for the fastest Japanese manufacturers. Most important of all is the time required to develop and introduce new automobile designs to the market. The fastest Japanese automobile companies can accomplish this in two and one-half to three years. Western automobile companies require four to over six years to introduce new designs -- two to three times longer than the fastest Japanese companies.

The implications of being two to three times faster than the best Western companies are fresher product offerings that have a higher degree of technological sophistication. One estimate is that the automobile designs of all Japanese companies in the 1988 model year were about three years old. Using the same estimating procedure, the average age of the designs of the North American products was about five years or almost twice as old. The Japanese are fielding the freshest products to consumers.

The designs are not only fresh but can also be more sophisticated technologically. The key technological differences between a Chevrolet Beretta and a Mazda 626 are compared in Table 1-5. Both cars were introduced in the 1987-1988 model years and have base prices in the $10,000 to $11,000 range. However, the fully optioned Mazda 626 is far more technically advanced. For the Mazda, the consumer has the choice of the technologies offered in the Beretta plus the choice of engines with three or four valves per cylinder, turbocharging or supercharging, four-wheel drive, electronically adjustable transmission and suspension, and electronically controlled four-wheel steering. Some experts believe that the technological leadership in automobiles priced at $30,000 or less is securely held by the Japanese, and these data certainly support such a contention.

Time compression is the fundamental change enabling the Japanese to increase the variety and technological sophistication of the products and services they offer. Time is the secret weapon of business because advantages in response time lever up all other differences that are basic to overall competitive advantage. Some Western managements know this, others are learning, and the rest will be victims.

Many executives believe that competitive advantage is best achieved by providing the most value for the lowest cost. This is the traditional pattern for corporate success. Providing the most value for the lowest cost in the least amount of time is the new pattern for corporate success. An increasing number of companies are achieving success by establishing competitive response advantages.

The strategic implications of compressing time are significant. As time is compressed, the following changes occur:

* Productivity increases

* Prices can be increased

* Risks are reduced

* Share is increased

The impact of compressing time on productivity can be seen in Exhibit 1-14. In most manufacturing facilities, cycle time is inversely proportional to work-in-process turns. As work-in-process turns increase, cycle times decrease. Also, the data show that as work-in-process turns increase, productivity increases. Generally, for every halving of cycle times and doubling of work-in-process turns, productivity increases 20 to 70 percent!

As the time required to satisfy customer orders is compressed, prices can be increased. The companies shown in Table 1-6 have achieved response advantages over their competitors that range from two-to-one to nine-to-one. With response advantage, these time-based competitors can consistently charge 20 to 100 percent more than the average price. Customers of time-based competitors are willing to pay more for their products and services for both subjective and economic reasons.

As time is compressed, risks are reduced. A cost of business that is rarely made explicit is the cost of over- or under-forecasting demand. The farther into the future demand must be forecast, the greater the probability that the forecast will be wrong at the time of sale. This is apparent in the fashion businesses. Exhibit 1-16 shows the accuracy of forecasts for women's skirts and men's slacks as a function of the lead time required for placing an order. When new fashions are ordered from the Far East, nine-month lead times are sometimes required. A purchase order must then be based on a forecast of demand made nine months before the time of sale. Department store buyers estimate that the actual demand for skirts often ranges from 40 percent more to 40 percent less than forecast. The excess product resulting from a high forecast must be sold at marked-down prices, which is costly. However, a far greater cost results from a low forecast -- the opportunity cost of not having goods that could have been sold. Because forecasts made closer to the point of the sale are more accurate, clothing with more volatile demand may be ordered from domestic suppliers; whole lead times are shorter -- from two weeks to four months, instead of nine months. Demand for skirts is more volatile than demand for men's slacks because the fashion element is much more important. Similarly, the domestic manufacture of high fashion apparel can be economically justified because of reduced forecasting error, while less fashion-intensive articles remain offshore in low-labor-cost countries.

As time is compressed, share increases. Many successful companies often find themselves unable to grow in their historical markets using traditional approaches such as price cuts. One supplier of a custom industrial product, for example, could not increase its share of customer purchases using traditional means -- price cuts in one form or another -- but did so after improving its response time by 75 percent on every order, including semi-custom fabrication. As customers became confident that they could rely on this company as a sole supplier, its share of their purchases increased from 30 to 45 percent.

Time-based competitors belong to a new generation of companies that manage and compete in different ways. They are obtaining remarkable results by focusing their organizations on flexibility and responsiveness, using the following methods.

* Choosing time consumption as the critical management and strategic parameter. The managements of these companies know precisely how much time is required to give their customers what they want and to perform other vital activities in their companies.

* Using responsiveness to stay close to their customers, increasing the customers' dependence on them. In the early 1980s, being close to customers became a popular slogan. However, the necessary metric was not disclosed. This best metric is time -- how long must a customer wait from the point he or she asks for a product or service to the time that need is met, whether the need is for a product, service, an answer or a "fix" to a problem. Time-based competitors use their flexible value-delivery systems to expand variety and to enhance their responsiveness to customers' needs. The variety expansion can be in one of, or a combination of, two dimensions -- style and/or increased technological sophistication. A comparative advantage in either dimension can propel a competitor to a leadership position in its industry regardless of its responsiveness. When combined with a response advantage, however, fashion and technological advantages can be used to lock up the most attractive channels of distribution to the most profitable customers.

* Directing their value delivery systems to the most attractive customers, which forces their competitors toward less attractive customers. The most attractive customers are those who cannot wait for what they want. The least attractive customers are those who will wait because the price they want to pay is low compared to the prices the more impatient customers will pay. Money is made on patient customers only if costs are low, while money is made on impatient customers from higher prices and low costs. Time-based businesses let their competitors have the patient customers while they embrace the impatient ones.

* Setting the pace of innovation in their industries. Time-based competitors that have extended their response advantage throughout their organization -- including new product development and the introduction process -- almost always take the technological and product leadership positions in their industries within about a decade.

* Growing faster with higher profits than their competitors. When a time-based business can open up a response advantage that is three to four times faster than its competitors, it almost always grows three times faster than overall demand, at twice the level of profitability of the average competitor. Moreover, these rates are floors since often the differences are greater.

* Baffling their competitors. Many time-based competitors are not effectively challenged by their slower brethren. Managements of these companies are by definition slow to change and as such are left behind as faster competitors change their business for them. When the slower managements do respond, they must do so from a disadvantaged position and, as a result, incur all the costs of becoming more responsive without securing many of the benefits.

To become a time-based competitor, three tasks must be accomplished by the management of a company's management.

1. Make the value-delivery systems of the company two to three times more flexible and faster than the value-delivery systems of competitors

2. Determine how its customers value variety and responsiveness, focus on those customers with the greatest sensitivity, and price accordingly

3. Have a strategy for surprising its competitors with the company's time-based advantage


In approaching the opportunity to use time as a competitive advantage, executives must first determine if an opportunity exists to become a time-based competitor in their industry. Then they must decide whether they are going to lead their competitors by seizing the initiative. The early leader grows in a shrinking window of opportunity, although the first window is always larger than those of the followers. Further, when the windows finally close, the leader almost always holds the most attractive competitive position and earns the highest profits.

The journey to becoming a time-based competitor is demanding. It begins with a vision of what could be. The vision needs to be sufficiently clear and attractive to motivate the organization to rethink the structure and activities of its entire value-delivery system so as to maximize its performance.

Initiating and executing a program that improves the responsiveness of an organization is not easy. Such a program must compete with other programs for attention. Moreover, senior management cannot easily delegate the job to subordinates, because improving responsiveness requires breaking down the organization's resistance to change and reducing across functions well as within them. Finally, sustaining the rate of improvement and the accompanying benefits demands a philosophical change. Senior management must shift its focus from cost to time, and its objectives from control and functional optimization to providing resources to compress time throughout the organization. Senior management, as keeper of the vision, must believe that time is the organization's number-one competitor.

Copyright © 1990 by The Free Press A Division of Macmillan, Inc.

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