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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.
TIME-BASED COMPETITORS OUTPERFORM THEIR INDUSTRY
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.
STRATEGY INNOVATIONS: A RETROSPECTIVE
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.<