An elaboration on the themes of Mercer’s bestselling book, The Profit Zone

Mercer Management Journal

Number 10 1998

Market Share Is Dead: Long Live Business Design
Once, business leaders who increased revenue, decreased cost, fielded technically superior products, and expanded their market share could expect to reap enviable increases in shareholder value. No longer. Achieving sustained value growth requires a strategy framework that reflects today’s marketplace of rapidly shifting customer priorities. It requires the discipline of Business Design, which helps companies find and capture tomorrow’s “profit zones.”
Table of contents, page 4; executive summaries, page 69.

Management Consulting

Achieving Shareholder Value Growth Through Business Design

Management Consulting

Mercer Management Journal
Number 10 1998

Achieving Shareholder Value Growth Through Business Design
7 Letter to readers
by James A.Quella and James W. Down

9

Achieving sustained shareholder value growth Strategy in the age of Value Migration®
by Adrian J. Slywotzky, David J. Morrison, and James A. Quella Once, business leaders who increased revenue, decreased cost, fielded technically superior products, and expanded their market share could expect to reap enviable increases in shareholder value. No longer. Achieving sustained value growth requires a new strategy framework that reflects the times: Business Design. 16 Value Migration in the communications industry

23

“Changing the hand instead of the glove” An executive roundtable on shareholder value growth
A discussion by five top executives from a variety of industries highlights some of the issues facing business leaders as they strive to achieve sustained value growth. One conclusion: Companies can’t just continue to do what they do now, only better. They have to reinvent themselves—to “change the hand,” as one panelist says, “as opposed to changing the glove.”

31

Identifying the opportunities of the future Strategic AnticipationSM through marketing science
by Eric Almquist and Gordon Wyner A winning Business Design is founded on an insightful understanding of rapidly shifting customer priorities. In 1995, Mercer Management Consulting used two rigorous marketing science tools to conclude— correctly, it turns out—that much of the conventional wisdom about the future of multimedia “broadband” networks was wrong. 37 Targeting the profitable rail passenger

4

41

A blueprint for shareholder value growth Winning through strategic Business Design
by Rick Wise The discipline of Business Design, with its customer-centric rather than product-centric view of business and its explicit focus on shareholder value growth, recognizes and embraces the demanding requirements of today’s volatile marketplace. 46 A fusion of technology and customer relationships 48 Tomorrow’s Business Designs in financial services 55 Replicating a successful Business Design

57

Reaping the fruits of Business Design Value growth realization through rapid organizational change
by Diane MacDiarmid, Hanna Moukanas, and Rainer Nehls A company may have created a Business Design perfectly suited to capturing future value-creation opportunities. But unless the company can get its organization to rapidly move from its current Business Design to the new one, it will miss what these days is often little more than a fleeting opportunity. 65 The overhaul of an auto components supplier

69

Executive summaries
Abstracts of the main articles of this issue in English, French, German, Spanish, and Portuguese.

To join a discussion on how companies can achieve sustained shareholder value growth, visit our Mercer Management Journal Forum at www.mercermc.com. 5

Mercer Management Consulting helps leading enterprises anticipate rapidly changing customer priorities, economics, and environments and then design their businesses to seize the opportunities created by those changes. Our proprietary Business Design techniques, combined with our specialized industry knowledge and global reach, enable us to help clients develop innovative strategies for achieving sustained shareholder value growth. Mercer Management Journal Editorial Board Matthew A. Clark, co-chair Carla Heaton, co-chair João P. A. Baptista James W. Down Jean-Pierre Gaben August Joas David J. Morrison Patrick A. Pollino James A. Quella Adrian J. Slywotzky

Editor Paul Hemp Designer Trina Teele

Mercer Management Journal is published twice yearly by Mercer Management Consulting, Inc., for its clients and friends. The contents are copyright © 1998 by Mercer Management Consulting. All rights reserved. Excerpts can be reprinted with attribution to Mercer Management Consulting. Article summaries can be found on our web site: www.mercermc.com. For information on reprinting articles and all other correspondence, including change of address notification, please contact the editor at: Mercer Management Journal 33 Hayden Avenue Lexington, Massachusetts 02173 781-674-3276 Paul_Hemp @MercerMC.com

To our readers,
Market share is dead? Certainly, the link between market share and attractive gains in shareholder value—once strong and certain—is increasingly tenuous, if not severed entirely. The traditional management focus on building market share, increasing revenue, decreasing costs, and building superior products just doesn’t guarantee the results it did only a short time ago. In more and more industries, the lion’s share of shareholder, or stock market, value is owned by enterprises that have a relatively small share of industry revenue. In our work with clients, we bear daily witness to the fact that the time-honored approaches to strategic planning no longer work in today’s discontinuous world. If the future is no longer a linear progression of the past, then linear, deterministic, incremental thinking no longer suffices. In this environment, strategy can no longer be built from the inside out, tweaking yesterday’s assumptions for tomorrow’s business plan. And with the cycles of value creation rapidly shortening, companies that continue to play by the old rules risk over-investing in an outdated business model, while ceding to upstarts the opportunity to build tomorrow’s. Errors are costly and hard to overcome. Today, strategy requires a new, outside-in perspective, one provided by the discipline of Business Design. This approach demands that managers ask themselves three deceptively simple questions: How do I anticipate and identify the “profit zones” where customers will allow me to create value in the future? What Business Design will allow me to capture that value? How do I harness the power of my entire organization to seize this opportunity? And these questions aren’t for pondering when an executive finds the time. Given the rapidly shortening cycles of value creation, even a business that is prospering must constantly reexamine its current Business Design. Otherwise, managers will wake up one day to find that the design has become obsolete and that someone else has seized what these days is often little more than a fleeting value-creation opportunity.

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This issue of the Mercer Management Journal is in essence a manifesto. From the first article, which argues that today’s marketplace demands a new, more dynamic approach to strategy, to the last, which shares some of our thinking on how to rapidly move an organization from yesterday’s Business Design to tomorrow’s, this Journal outlines a powerful new approach for strategy development, one that we call Value-Driven Business Design. As such, the issue is best read in its entirety. Mercer Management Consulting is uniquely positioned to assist clients in achieving sustained growth in shareholder value. Not only has our proven process of Value-Driven Business Design consistently helped clients to identify and benefit from new opportunities, but no other firm can claim our continued thought leadership on the topics of profitable growth and shareholder value growth. Over the past several years, our best-selling business books have set the agenda. Grow to Be Great declared, at the height of the downsizing and reengineering movement, the imperative of growth. Value Migration® laid out the threats to growth. The Profit Zone offers perspectives for business leaders on how to achieve value growth in the face of these threats. The Journal, too, has helped develop this continuum of thinking. Last issue, for example, we examined one of the key tools for achieving sustained value growth: Customer Relationship Management. Future issues will address other value growth topics. Just as this issue of the Mercer Management Journal introduces our newest thinking on the topic of value growth, it also introduces a new editorial design. We think we’ve succeeded in making the Journal easier to read and more engaging. We hope you agree. Sincerely yours,

James A. Quella Vice Chairman

James W. Down Vice Chairman

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Achieving sustained shareholder value growth
Strategy in the age of Value Migration®
by Adrian J. Slywotzky, David J. Morrison, and James A. Quella

W
Once, business leaders who increased revenue, decreased cost, fielded technically superior products, and expanded their market share could expect to reap enviable increases in shareholder value. No longer. Achieving sustained value growth requires a new strategy framework that reflects the times: Business Design.

ars were traditionally won by those who marshaled the largest fighting force. It was a zero-sum game. The goal of the advancing army was to keep driving the opponent back, capturing the ceded territory. Size mattered, perhaps more than fighting prowess: You won if you were the last person standing. The assumption that size counted was central even to the largescale computerized war games that officers used for training and strategy. The Vietnam war dramatically illustrated that military strategy could no longer rely on the old rules of the game. Despite overwhelming firepower and mass, the United States and South Vietnamese troops were unable to prevail over the North Vietnamese army, whose clear objectives were informed by a superior understanding of geography, local resources, and psychology. Building on the lessons of Vietnam, Desert Storm was the first really modern war. The United States and its allies, despite being the smaller on-site force, harnessed advanced technology—from satellites to smart bombs—to provide unparalleled information to generals. This enabled them to conduct a complex, highly choreographed, multi-fronted war that rewrote the rules for military strategy. These new rules require that oldline generals make the transition to a new way of thinking: — from a static to a dynamic view of battle, where thinking several moves ahead is now essential rather than merely desirable; — from a monolithic, mass-based approach, waged on a limited number of fronts, to one that focuses on fighting several simultaneous battles, each using a different mix of troops, artillery, and air power;

Mercer Management Journal

Copyright © 1998 by Mercer Management Consulting, Inc.

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In the last 30 years, the focus of strategy has shifted, from organization economics, which emphasized the improvement of organization and command-control functions; to relative economics, which made use of tools like the “experience curve” and the “five forces” model; to efficiency economics, characterized by downsizing and reengineering. Now, the focus has shifted again.

— from a focus on simple territorial objectives to more subtle and sophisticated definitions of success. As a result, military strategy has become simultaneously more critical and more difficult. We are on the cusp of an equally profound reshaping of the role of and requirements for business strategy. Able commanders such as Jack Welch of GE, Bill Gates of Microsoft, and the late Roberto Goizueta of Coca-Cola, having mastered the new strategic order, have achieved stunning victories for their shareholders and employees. When Strategy Didn’t Matter It may seem hard to believe, but for much of the post-World War II period, customer and marketplace strategy didn’t matter. In the 1950s and early 1960s, customer demand often outstripped capacity, and the resulting high systemic growth rates “lifted all boats.” This was especially true for the U.S. economy, which enjoyed a strong relative competitive advantage during the period. Moreover, regulation, global trade management, and outright protectionism created relatively stable industry environments within which large-scale players had hegemony. As the 1960s progressed, the “if you build it, they will come” euphoria was supplanted by a need for more rigorous business thinking. Dominant strategic approaches centered around organization economics: improving organization structure and command-control functions. With the advent of the 1970s, and the balancing of supply to demand, the focus changed again. As exemplified by the “experience curve” and the “five forces model,” the core of business thinking became the identification and building of structural advantage based on a rigorous understanding of relative supply economics. In the early 1980s—and even persisting to some extent today— global competition, corporate raiders, and activist shareholders drove another shift, toward a focus on efficiency economics. Downsizing and reengineering became the mantras of business; balance sheet and income statement restructuring became management’s core concerns. Throughout these periods, strategic thinking was a narrow, esoteric discipline practiced by a few corporate staff types. It was

10

Achieving sustained shareholder value growth

also largely operations-driven: How can we achieve a low-cost position through manufacturing economies of scale? How do we optimize capital allocation trade-offs between business units? How do we manage a portfolio of businesses? In this world, the rules for success were fairly predictable: Target a high-growth market. Develop superior products through a disciplined R&D capability. Build high relative market share through rapid roll-out, aggressive capacity expansion, and powerful marketing and sales. Harness scientific management practices—planning, budgeting, and control systems—to sustain and enhance this position. The inevitable result would be revenue growth, scale economies, barriers to competition—and growth in shareholder value. As in traditional warfare, scale would win. The Rules of Strategy Have Changed Forever Beginning in the second half of the 1980s, the rules of success began to change. Manufacturing scale and product share were no longer, on their own, enough to drive value growth. Strategic success was now defined by a company’s ability to gain and act upon a superior understanding of customer economics. Valuegrowth companies of the 1990s have become the ones that can anticipate rapidly-changing customer priorities and design their businesses to seize the opportunities created by those dynamic changes. Look at the period from 1990 to 1996 and compare the top fifteen companies ranked by absolute dollars of revenue growth, operating profit growth, and shareholder value growth (see Exhibit 1). Only two of the top fifteen revenue growers were

Exhibit 1 Revenue and profit growth don’t always correlate with value growth

Top 15 Revenue Growers 1990-1996 WAL-MART FORD MOTOR TOYOTA ALLIANZ GENERAL MOTORS NIPPON TELEPHONE & TELEGRAPH CHRYSLER METRO AXA-UAP CREDIT SUISSE SIEMENS HEWLETT-PACKARD VOLKSWAGEN SONY MATSUSHITA

Top 15 Operating Profit Growers 1990-1996 INTEL FORD MOTOR GENERAL ELECTRIC AT&T NOVARTIS PHILIP MORRIS CHRYSLER GLAXO WELLCOME COLUMBIA/HCA MICROSOFT HEWLETT-PACKARD HONDA PROCTER & GAMBLE WAL-MART MERCK

Top 15 Shareholder Value Growers 1990-1996 GENERAL ELECTRIC COCA-COLA INTEL MICROSOFT TOYOTA MERCK ROCHE EXXON ROYAL DUTCH SHELL PHILIP MORRIS HONGKONG SHANGHAI BANK PROCTER & GAMBLE HEWLETT-PACKARD CISCO SYSTEMS JOHNSON & JOHNSON $113BB $100BB $100BB $90BB $68BB $62BB $58BB $57BB $52BB $46BB $44BB $44BB $43BB $41BB $41BB

CAGR 21% 27% 57% 50% 18% 18% 31% 11% 14% 12% 27% 16% 37% 102% 18%

Only includes those companies that had values for both 1990 and 1996. SOURCE: Mercer Management Consulting Value Growth Database

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Increasingly, we see three sorts of struggling enterprises: firms with empty revenue or market share, characterized by continued profitless growth; bottle rockets, the companies that enjoy rapid stock market success and then crash back to earth; and asset monsters, businesses that earn insufficient returns on their capital employed.

also top value growers. Only seven of the top operating profit growers were also top value growers. Clearly, biggest is no longer necessarily best. More and more in our research, we see three sorts of struggling enterprises. The first, firms with empty revenue or market share, are characterized by continued profitless growth. Many consumer electronics and PC sales and distribution companies are prime examples. The second, bottle rockets, are companies that climb rapidly to vertiginous heights of stock market success and then just as rapidly fall back to earth. Netscape—relying on ubiquity and evanescent product superiority as its sources of sustainability instead of working to build in sources of continuing strategic control—is an example. The third, asset monsters, are asset-intensive firms that earn insufficient returns on their capital employed, either because of flaws in their original business model or because they are blindsided by rapid change. These companies find that achieving market share goals—sometimes even with profitable growth—demands more fixed assets and working capital than can be deployed at attractive returns. Big steel and store-based computer and software retailers are historical examples. Some utilities, because of deregulation, will soon join their ranks. We’re not suggesting that the challenges faced by such companies are new. But their incidence is increasing, which suggests that traditional strategy approaches no longer apply. So what happened? The old rules were overthrown by five quiet revolutions: — The globalization of regional players, which has led to worldwide overcapacity, price pressure, and product commoditization. — The blurring of traditional industry boundaries, catalyzed by the emergence of economically advantaged substitute technologies and materials (for example, plastics and aluminum vs. steel), which has led to increased customer options and overcapacity. — The industrialization of distribution channels, driven by information technology, branding, and consolidation plays, which has led to a shift in the balance of power from suppliers to the channel. — The rise of entrepreneurial support systems, powered by the explosion of seed and mezzanine financing, which has led to

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Achieving sustained shareholder value growth

a lowering of barriers for the creation of innovative new business models. — The democratization of information, which has led to a broader group of more educated customers, greater pricing transparency, and the creation of new information-based competitive business models that, by their very nature, can be highly customer-responsive. The direct impact of these revolutions is rapidly changing customer priorities and a broader set of competitive alternatives (see Exhibit 2). These revolutions have contributed substantially to the decreased importance of scale and market share. For example, increased availability of capital has made it easier to achieve scale. Information technology has enabled knowledge-based and service-based value-added to become more important in many industries than product-centric factors such as cost and capabilities.
Exhibit 2 Shifting customer priorities and new Business Design alternatives drive Value Migration®

Change Drivers
Changing Role of Information Industrializing Distribution Channels Entrepreneurial Support Systems

Boundary Blurring

Globalization

Value Sector Rivalry
Changing Customer Priorities Dynamic Customer Decision Making Emerging Business Designs

Value Migration®

A by-product of these revolutions is Value Migration®. We define this as the flow of shareholder value from increasingly outmoded Business Designs—the entire system by which a company delivers utility to its customers and thereby generates sustained value growth for its shareholders—to other Business Designs better calibrated to satisfy critical customer priorities. In computing, value flowed from traditional integrated players such as IBM and Digital Equipment to value chain specialists such as Intel, Microsoft, Oracle, and EDS (see Exhibit 3). Value Migration is not new. It occurs whenever new Business Designs arise that better satisfy changing customer priorities.

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IBM
160 140 120 100 80 60 40 20 0 1977 1987 1997

Intel/Microsoft
160 140 120 100 80 60 40 20 0 1977 1987 1997 Intel Microsoft

Digital
30 25 20 15 10 5 0 1977 1987 1997

Oracle/EDS
30 25 20 15 10 5 0 1977 1987 1997 EDS Oracle

Market capitalization through December 31, 1997, in billions of (1995) dollars. Source: Mercer Management Consulting Value Growth Database

Exhibit 3 Market value increasingly flows from outmoded Business Designs to newer ones better calibrated to satisfy critical customer priorities

Value migrated from Ford’s vertically integrated, single-carfocused Business Design to GM’s price-laddered design in the 1920s. It moved from corner grocery stores to supermarkets in the 1930s, from fragmented merchandisers to national catalogue retailers, such as Sears, in the 1890s, and to national merchandise chains—again, Sears—in the 1920s. Business Designs have been moving into and out of phase for decades, creating and destroying fortunes in the process. While not new, the pace of Value Migration® is accelerating. In industry after industry, we see value creation cycles, the lifecycle of any given Business Design, shortening. Every Business Design—if it remains static as customer priorities shift—travels through a three-phased lifecycle (see Exhibit 4). In Value Inflow, a company’s Business Design is both well-calibrated to its chosen customers’ priorities and well-differentiated from competitors; in this stage, it is a magnet for value and a beneficiary of Value Migration. In Stability, customer priorities have begun to change, but no major competitive alternative has emerged. Business Designs in the stability phase usually have good operating results, but growth has slowed and customers are starting to bid down prices. In Value Outflow, changing priorities have engendered new, highly attractive Business Design alternatives, and the original Business Design falls victim to Value Migration. Consider the pharmaceutical industry. Twenty-five to 30 years ago, Business Designs for a new pharmaceutical product could

14

Achieving sustained shareholder value growth

Value Migration®, the flow of shareholder value from increasingly outmoded Business Designs to others better calibrated to satisfy critical customer priorities, is not new. But the pace of Value Migration is accelerating. In industry after industry, we see value creation cycles—the lifecycle of any given Business Design—shortening.

expect to enjoy a long economic life. Why? Speedier Food and Drug Administration review cycles meant that the remaining patent life at launch could be as long as 12 to 15 years. In addition, the generics industry was embryonic; it took more than a decade for generic substitution to erode a product’s market position. By the 1980s, the growing complexity of drug approval reduced remaining patent life at launch to 10 years, and the generics industry had come of age. Today, it is not uncommon for a branded pharmaceutical to lose half its share of prescriptions to generics within nine months of patent expiration. What was once a nearly 30-year value creation cycle has been compressed to little more than a decade. In this increasingly dynamic business environment, the role of top management has changed. It is no longer enough to focus on operational excellence alone. In order to sustain the firm’s value growth, managers must answer the following questions: How much life remains in our current Business Design? Where will we be allowed to create shareholder value? How do we seize these opportunities as rapidly as possible? Despite the sea change in the rules of business success, many companies still struggle to apply traditional strategy processes and frameworks to these new problems. They build projections based on extrapolations of the current situation rather than evaluating the likelihood of discontinuous change. They use “core competency” thinking to identify the foundations for future [continued on page 18] growth. And when all else fails, they

Exhibit 4 Business Designs have a finite lifecycle
Market Value to Revenue Ratio
2 - 10

Rein ven

tio

n

1-2

DANGER POINT Value Inflow Stability Value Outflow

<1

The company captures a disproportionate share of value because its Business Design is superior in satisfying customers’ priorities.

The company maintains its value either because its Business Design remains powerful (though mature) or because no credible alternatives exist.

Value flows away from the company toward Business Designs that more effectively meet evolving customer priorities.

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Value Migration® in the communications industry
Business Designs, not technology, are driving the shift
by Richard S. Christner

The communications services industry has, in recent years, been an area of steady shareholder value growth. Since 1991, the combined market value for firms competing in communications services has increased by about 120 percent, slightly higher than the increase for the S&P 500 Index. But the majority of new value growth has come not from the traditional service providers— AT&T, MCI, Sprint, GTE, the “Baby Bells”—but from nontraditional providers. Indeed, those companies’ share of

industry market value grew from under 25 percent in 1991 to over 45 percent by the end of 1997, reflecting the migration of value to them from traditional providers (see exhibit). These non-traditional service providers are generating value growth primarily in three areas. The unprecedented rise of the Internet is driving value growth in data communications services. Beneficiaries have been non-traditional service providers such as WorldCom, America Online, Qwest, and @Home.

The need for more flexible communications connectivity than traditional wireline provides is driving value growth in digital wireless services, including those that are satellite-based. This change is behind the value growth of providers such as Nextel and PanAmSat. The explosion of communications volume—resulting from the reduction of cost-per-communication to nearly zero in areas such as E-mail and voice mail— is driving value growth in context services, which organize and provide meaning to a cus-

$361BB

$402BB

$465BB

$456BB

$615BB

$664BB

$803BB

Providers’ shares of communications services industry market value

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1991 1992 1993 1994 1995 1996 1997

Nontraditional Providers
• Data - Internet - Broadband • Wireless/ Satellite • Context

Baby Bells and GTE

AT&T, MCI, and Sprint

Market values include long-term debt. SOURCE: Mercer Management Consulting Value Growth Database

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Achieving sustained shareholder value growth

tomer’s communications. Winners in this category are Yahoo! and Premiere Technologies. These three areas of value growth reflect new areas of technology innovation. For example, new packet-switching and compression technologies have allowed some non-traditional providers to greatly expand the amount of information transmitted on an existing line. But even though new technology has given upstart providers a source of competitive advantage, traditional providers are quickly able to replicate this technology. Technology alone is insufficient to generate significant creation of shareholder value. Instead, according to a recent study of the communications services industry by Mercer Management Consulting, it is the non-traditional players with innovative Business Designs that have captured the majority of value growth over the past six years. Nextel has prospered by refocusing on a well-defined set of customers: business workgroups. WorldCom’s end-to-end fiber network, assembled through several acquisitions, gives it the advantage in providing low-cost, seamless service

to business customers. Yahoo!’s focus on providing navigation and context assistance for Internet users has given it shareholder value multiples higher than firms with greater revenue that merely provide access to the ‘Net. The danger for established service providers is to ignore the power of newly created Business Designs such as these. As regulatory barriers come down, many Baby Bells and long distance providers are focusing on strategies built around improving their current Business Designs, through cost cutting and expansion of scale. Like the steelmakers, airlines, and automakers before them, these companies risk missing the true competition and the true opportunity. Instead, the established players should look toward redesigning their businesses for the customer priorities, technologies, and economics of the future. The stakes for developing a Business Design that will capture future value creation opportunities are high. The communications and related technology industries show an increasing propensity toward “winner-take-all” competitive battles, where the player with

the superior Business Design gets an overwhelmingly disproportionate share of the value growth. For example, America Online’s Business Design focused on creating an online “community” that was easy for even technology novices to join, on building subscriber volume through free trial software, and on generating revenue through advertising and transaction fees. CompuServe, AOL’s early rival, had a Business Design that focused on providing information to more sophisticated users and generating revenue through subscription fees. AOL’s superior design helped it reverse CompuServe’s early lead and leave later-comers like Prodigy, Microsoft Network, and AT&T, along with CompuServe, in the dust. This battle was won very early by choices AOL made in its Business Design. The winners in the next battles for communications services are creating their winning Business Designs right now.

Richard S. Christner is a vice president of Mercer Management Consulting based in Washington, D.C.

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reengineer to make up for the shrinking operating profit growth delivered by a declining Business Design. These are fundamentally company-centric, “inside-out” approaches. Wanted: A new paradigm for sustained value growth So how should companies think about creating sustained value growth? As part of our ongoing research into the topic of value growth, we studied companies that have successfully delivered increases in shareholder value. These “grandmasters” of value growth—ABB, Coca-Cola, Disney, GE, Intel, Microsoft, Schwab, SMG (the maker of Swatch watches), and Thermo Electron—collectively created $700 billion in value over the last 20 years. Together, this group represents more than 10 percent of the value creation in the U.S. equity market over that period. We found that all of the grandmasters excelled at a discipline we call Value-Driven Business Design. It demands three broad capabilities: — Strategic AnticipationSM: the identification of future “profit zones,” those places where customers will allow companies to earn attractive returns. Identifying and occupying these zones requires a robust understanding of customers’ changing priorities, economics, and behavior; an “outside-in” approach

Exhibit 5 Companies that master the discipline of Business Design are well rewarded

Indexed to 1980 Values
4,000

CAGR 1980-1997 Business 23.3% Design 1 Grandmasters

3,500

3,000

2,500

2,000

1,500

1,000

S&P 500
500

12.3%

Market Share 7.7% Leaders2
0 1980
1

1982

1984

1986

1988

1990

1992

1994

1996

ABB, Coca-Cola, Disney, GE, Intel, Microsoft, Schwab, SMG, and Thermo Electron. Without Microsoft and Intel, the Grandmasters had a 19.9 percent compound annual growth rate. Market share leaders include American Airlines, Bethlehem Steel, Digital Equipment, Ford, GM, IBM, Kmart, Sears, United Airlines, and U.S. Steel.

2

SOURCE: Mercer Management Consulting Value Growth Database

18

Achieving sustained shareholder value growth

to strategy development; and a disciplined effort to understand the implication of these insights. — Business Design: the development of the enterprise blueprint that will best capture the identified profit zone(s). This requires making internally consistent and mutually reinforcing decisions along a number of critical dimensions: What customers do I wish to serve, and what will I have to offer them? How will I capture my fair share of the value I create for customers? What features do I need to build into my business in order to protect my profit stream? What activities should I own versus outsource? How do we increase the likelihood of success through our organizational systems? — Value growth realization: the strategy, systems, and processes to galvanize the organization to create the new Business Design. The grandmasters also shared the fundamental recognition that no Business Design is forever, and that continual vigilance and reinvention are essential ingredients of sustained value growth. The rewards of this approach to strategy are staggering. We compared the value growth of grandmasters with that of market share leaders still playing by the old rules. From 1980 to 1997, the grandmasters have generated 23.3 percent compound annual growth in shareholder value, compared with 7.7 percent for the market share leaders and 12.3 percent for the S&P 500 (see Exhibit 5). Our research also showed that Goliaths need not always be felled by Davids. The story of General Electric is instructive. In 1981, when Jack Welch took the helm, GE was worth $13.1 billion. It
Exhibit 6 GE’s value growth through business redesign
$239.6BB

GE Shareholder Value

$13.1BB

1981 Shareholder Value/Revenue: 0.5x

1997 2.7x

SOURCE: Mercer Management Consulting Value Growth Database

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Legendary value creators excel in three broad areas: Strategic AnticipationSM, the identification of future “profit zones”; Business Design, the development of the enterprise blueprint that will best capture the identified profit zone(s); and value growth realization, the galvanizing of the organization to create the new Business Design.

was a diversified manufacturer of both industrial and consumer products, from light bulbs to jet engines to locomotives to plastic resin. GE’s shareholder-value-to-revenue ratio—its market capitalization divided by its annual sales—was 0.5. By 1997, GE had grown to become the most valuable company in the world, with a market value of $239.6 billion and a shareholder-value-to-revenue ratio of 2.7 (see Exhibit 6). How did Welch achieve this feat? He worked smarter as well as harder. Over 16 years, he reinvented GE, transforming it from a classic product-oriented manufacturer into a services company where products are viewed as just a component of the total solution provided to customers. Welch’s capacity for Strategic Anticipation is exceptional; based on his customer-driven understanding of where the profit zone will be tomorrow, he has guided the company through an evolution of Business Design phases (see Exhibit 7). His talents for Business Design and value growth realization are no less impressive. In the early 1980s, Welch saw that occupying the profit zone for most of GE’s businesses meant capturing dominant share in chosen product markets. In response, he gave the organization a challenge: Be Number 1 or Number 2 in a sector or exit the business. As the mid-1980s arrived—and based on his frequent interactions with the CEOs of GE’s customers— Welch saw the profit zone shifting. Increasingly powerful customers facing more intense competition were beginning to seek price concessions. In such an environment, GE’s sustained profitability and value growth would be challenged if it continued to view itself as a manufacturer—even one with a Number 1 or 2 market position. While good products would continue to be essential to building good customer relationships, the new profit zone would be solutions, services, and outsourcing.

Early 1990s

Exhibit 7 GE’s evolving Business Design focus

Services and Solutions for Profit Growth • Capturing “beyond the product” profit by improving customers’ systems economics through solutions selling • Product plus: - Financing - Maintenance - Service

Early 1980s #1 or #2 • Achieving market share leadership to increase profit per product sold • Exit any product area where GE is neither #1 nor #2

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Achieving sustained shareholder value growth

Shareholder Value ($BB)
$300

Shareholder-Value-to-Revenue Ratio
3

$250

GE

2.7

$200

2

$150

$100

1

$50

0.7
United Technologies
0.2
0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1981 1997

0.5

$0

1981

1997

United Technologies

GE

SOURCE: Mercer Management Consulting Value Growth Database

Exhibit 8 Working smarter: GE vs. United Technologies

To occupy the customer solutions profit zone, GE thought beyond the product to the entire economic equation of the customer’s use of the product. Harnessing product and process knowledge to optimize these systems economics for customers was key to unlocking downstream profits. Welch aggressively expanded GE Capital Services, which provided financing to customers of its own, and others’, products. By 1995, through both acquisition and internal development, GE Capital had amassed $186 billion in assets, making the company as large as the third largest bank in the United States. Simultaneously, Welch ramped up GE’s maintenance and outsourcing businesses. These moves were all essential to delivering complete solutions to customers. The reward for these reinventions has been extraordinary, as can be seen from a comparison of GE with United Technologies, another traditional manufacturing company that could have made similar choices. From 1981 forward, GE delivered 19.9 percent annual shareholder value growth, while United Technologies delivered 13.5 percent. Importantly, the power of GE’s customer solutions Business Design has won it a much higher shareholder-value-to-revenue ratio (see Exhibit 8). Living by the new rules Our study of leading value creators offers critical lessons for business leaders. To achieve sustained value growth in today’s marketplace requires four mindset shifts:

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— From inside-out to outside-in. Understanding customers is the cornerstone of effective strategy. With Business Design lifecycles shortening, winning strategies are rarely based on yesterday’s core competencies. — From revenue to profit. Top-line growth is not always good. Sometimes a more focused approach to customer selection creates a smaller, yet more profitable and more valuable, enterprise. — From product and technology to Business Design. Great products and technologies are insufficient to guarantee success. They must be embedded in a comprehensive Business Design that is calibrated to deliver competitively superior utility to customers. — From market share to value share. Size still matters, but the metric has changed. Business leaders must create strategies that not only create shareholder value, but also enable the company to capture an increasing share of its sector’s total market value. The rate of change in customers and industries demands that we abandon traditional approaches to planning and strategy. Extrapolation of the past no longer works. To win, business leaders must inform their current investment decisions with an “outside-in” perspective on where customers will allow suppliers to make a profit in the future. Just as the generals of the Gulf War decimated a much larger force by waging war in a different way, so must business leaders—the ones, at least, who hope to achieve victory—embrace a new paradigm for business strategy. Adrian J. Slywotzky is a vice president of Mercer Management Consulting based in Boston. He is the co-author of The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow’s Profits and the author of Value Migration: How to Think Several Moves Ahead of the Competition. David J. Morrison is a vice president of Mercer Management Consulting based in Boston and the co-author of The Profit Zone. James A. Quella is a vice chairman of Mercer Management Consulting based in New York.

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Achieving sustained shareholder value growth

“Changing the hand instead of the glove”
An executive roundtable on shareholder value growth

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A discussion by five top executives from a variety of industries highlights some of the issues facing business leaders as they strive to achieve sustained value growth. One conclusion: Companies can’t just continue to do what they do now, only better. They have to reinvent themselves— to “change the hand,” as one panelist says, “as opposed to changing the glove.”

o one is more familiar with the challenge of achieving sustained shareholder value growth than senior executives who wrestle with it in the decisions they make every day. They know that simplistic solutions and outdated strategies will do little for them as they work toward that goal in a competitive, rapidly changing global marketplace.

With that in mind, Mercer Management Journal conducted a “virtual” roundtable discussion designed to glean value-growth insights from top executives in a number of industries. The discussion took the form of individual interviews in which the executives responded to a set list of questions. The participants included: Dr. A. B. Fred Bok, chairman and chief executive officer, Philips Business Electronics, one of nine product divisions of Philips Electronics N.V. The division sells information products, systems, and services. Philips, with 1997 revenue of 76.5 billion Dutch guilders ($37.3 billion) and 265,000 employees, is based in Eindhoven, the Netherlands. Donald L. Boudreau, vice chairman for consumer banking at Chase Manhattan Corp., one of the largest banks in the United States. Chase, the product of the 1996 merger of Chemical Bank and Chase, had 1997 revenue of $30.4 billion. The company, which has 68,000 employees, is based in New York.

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Kenneth W. Freeman, chairman and chief executive officer of Quest Diagnostics Inc., one of the leading clinical laboratories in the U.S. Quest Diagnostics, known as Corning Clinical Laboratories before it was spun off from Corning Inc. last year, had 1997 revenue of $1.5 billion. The company, which has 15,000 employees, is based in Teterboro, New Jersey. Raymond W. LeBoeuf, chairman and chief executive officer of PPG Industries Inc., one of the world’s leading glass and paint manufacturers. PPG, founded in 1883, had 1997 revenue of $7.4 billion. The company, which has 31,900 employees, is based in Pittsburgh. Didier Pineau-Valencienne, chairman and chief executive officer of Schneider Electric S.A., a worldwide leader in the electrical distribution, industrial control, and automation industries. Schneider, founded in 1836, had 1997 revenue of 47.4 billion French francs ($8.2 billion). The company, which has 61,500 employees, is based outside Paris.

Mercer Management Journal: Thank you for taking the time to share your thoughts with us. As a starting point, where does sustained shareholder value growth fall on your list of priorities? LeBoeuf (PPG): Along with sustained and consistent earnings growth, it’s right at the top of our priorities. We recognize that shareholders can move with great swiftness, that investment capital is highly fungible, and that a company like ours can’t be satisfied with just comparing ourselves to peers in the businesses in which we operate. We’ve defined our peers today as “everyone out there competing for capital.” And when you look at it that way, you find that the Microsofts, the Intels, the General Electrics, the Pepsicos, the Emersons fall onto investors’ comput-

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“Changing the hand instead of the glove”

“Our customers are no longer satisfied with merely competitive products. They

er screens as being competitors that you’re going to be measured against on an ongoing basis. So, coming back to your question, shareholder value becomes preeminent in terms of driving a company. MMJ: Is it getting harder to achieve this kind of growth?

also want services and solutions adapted to their problems. . . . Products alone no longer drive our business.”

—Didier Pineau-Valencienne

LeBoeuf: If you take the macro, long-term look at it, you’d say, “Well, it gets increasingly difficult as you mature in the businesses in which you operate.” But I think there are some reasons to believe that it can get easier, in the sense that your people are more directed toward these issues today than they’ve ever been before. So for driving shareholder value, in terms of marshaling your resources—principally your people—I think we’re in better shape today than we were 20 years ago. But, again, if you look at it in terms of certain external forces, of course it’s more difficult, because everybody’s getting better at doing it. More people today are focusing on the shareholder as being a principal, if not the principal, scorekeeper in evaluating your performance as a corporation. MMJ: How widely accepted is a value growth philosophy in Europe? Pineau-Valencienne (Schneider): Only in the last two or three years has the concept of shareholder value begun to spread in France, where many enterprises have long operated under state control—although, like other large French corporations, Schneider adopted this approach earlier because of its shareholder base, which includes Anglo-Saxon investors, in particular. Bok (Philips): Europe is clearly behind the U.S. Penetration is not high here; it is just beginning. I think it will take three to five years to get sufficient penetration among the more important firms. In faster-moving industries—electronics, for example— change is happening relatively fast, as management thinking is globalizing. In more traditional and in more regional European industries—textiles, some engineering-driven industries, etc.—I don’t see change happening for a while. The biggest change factor there will be demographic, as the older generation retires and younger individuals take over. MMJ: One of the challenges of achieving sustained shareholder value growth these days is the rate and relentlessness of change, as value migrates from one company or industry to another. How are you affected by that?

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“A lot of older companies, in particular, think they’re solving the problem by trying harder and running along the same curve faster. And all they’re doing is flattening the curve faster.”

Boudreau (Chase): The rate of change has been dramatic. If you go back twenty years, someone wanting a loan to buy a car went to a bank; if you wanted a mortgage you went to a bank. Bank cards were defined by banks. Begin to fast forward that. Little changes began to take place, some of which seemingly facilitated banks doing the business better. But, as often happens—and will continue to happen as technology continues to redesign business systems—those changes cleared the tracks for non-entrenched players. What that’s doing is repositioning in the minds of customers who the providers are for financial services. You used to have to go to a branch to do a lot of stuff that today no longer requires going to a branch, or even to a bank. So we can hang a lot of bunting on branches, but customers aren’t coming back to us there. To stay there is a destruction of shareholder value. MMJ: How does a business cope with this kind of change? Freeman (Quest Diagnostics): We think an awful lot about what the world will look like in five to ten years, and how we need to anticipate that and get in front of it. But, at the same time, we often get tangled up in the web of: “Okay, well, who is the customer, really? What business are we in?” There’s a lot of dialogue about what it is that customers may or may not want. Probably not unlike a lot of industries, we have a complex web of customers. We’ve got patients—every person in America is, ultimately, potentially a client of ours. We’ve also got the physician who, in most places, has to say, “I’d like you to have lab tests performed,” before we can actually perform them. And then also, at the same time, we have customers called “the payors”—federal and state governments, insurance companies, managed care companies, etc. So, not unlike a lot of industries, where you’ve got wholesalers and retailers and the end consumer, we’ve got to please all elements of the chain to be successful. Pineau-Valencienne: There is one important thing that we’ve learned: Our customers are no longer satisfied with merely competitive products. They also want services and solutions adapted to their problems. So that means we need to understand the customer and the customer’s business and the customer’s markets, all with the aim of understanding the customer’s present and future needs. Products alone no longer drive our business. Boudreau: The old system in our industry was sort of a branchcentric notion. The new paradigm, the one that we’re so busy implementing, is what we call “an information-based business

—Raymond W. LeBoeuf

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“Changing the hand instead of the glove”

“The other way to approach [change] is to anticipate where the end game is going to be played, what it’s going to look like, and then to . . . make the journey with your franchise and your customers.”

system.” It essentially has every element of our business supported by an information capability that is constantly reflecting the insights we gain about our customers and is continuously iterating that through every aspect of our doing business. This gives us the ability to recognize a complete customer relationship at any point a customer shows up. One of the things that this information-based business does for us—without question, in every application—is to empower our people to do more to satisfy customers. And it costs us less at the end of the day to have done so. We make better decisions, we make them in a more timely way, and we make customers happier. That gives us a retention benefit, which, again, is a way to maintain shareholder value. MMJ: We have talked about the changing business environment. What degree of change must a business itself be prepared to make? LeBoeuf: One of the things that has allowed a 115-year-old company like ours to survive is our ability to re-pot ourselves every so many years, to know when the trendline we’ve been on is beginning to plateau and to move ourselves from that trendline onto the next one. If the trendline you’re on flattens out, and you’ve done nothing but continue to move along it, or just try to move along it at a faster pace, you’re going to die. Conventional orthodoxies can be absolutely deadly. They keep you on the same line. A lot of older companies, in particular, think they’re solving the problem by trying harder and running along the same curve faster. And all they’re doing is flattening the curve faster. Boudreau: There are a couple of things that can happen when you get into an industry that is rapidly changing, with new customer expectations, new competitors, new channels, new ways of putting packages together. One is, you can redouble your efforts to recreate the past and try to withstand the market forces. And essentially, while this works over the short term, it ends up dissipating shareholder value, because what you end up doing is eroding the franchise. The other way to approach it is to anticipate where the end game is going to be played, what it’s going to look like, and then to take the position that you’re going to make the journey with your franchise and your customers. Rather than railing against change, you begin to say, “We’ve got to be part of it, and try as best we can to get in front of it, and to not only participate in it but lead with it.” Freeman: I think that you always need to strive to do what you’re doing better, just to keep up with a kind of natural inertia in a competitive situation. So you still have to keep working to do

—Donald L. Boudreau

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“I think that you always need to strive to do what you're doing better, just to keep up with a kind of natural inertia in a competitive situation. . . . But that's not nearly enough. The other piece you have to do is redefine the game . . . change the hand, as opposed to changing the glove.”

things better: standardizing your processes, deploying best practices, all that sort of stuff. But in a situation like this, that’s not nearly enough. The other piece you have to do is redefine the game. And redefining the game can come in a number of different ways. You can start thinking about how you segment the market. You can think about geographic market participation. You can think about acquisitions. But all of those are relatively conventional answers, and to some degree I think can redefine the game for only a short period of time. The bigger challenge, I think, is to actually change the offering—to change the hand, as opposed to changing the glove. MMJ: How does a management team go about identifying future opportunities for shareholder value growth? Pineau-Valencienne: As a company thinks about change, it’s important to remember that the concept of shareholder value cannot be disassociated from what we call “competitive growth,” or profitable growth. Increasing shareholder value through a purely financial approach—for example, through cost-cutting alone—is a sign of short-term vision. You may increase your share price in the short term, but you won’t get sustained growth in shareholder value. I prefer the concept of “francs of value created for each franc of competitive growth.” This concept is motivating for employees and fits into a long-term vision. LeBoeuf: One of the things that we’ve tried to do is move from being a more reactive, inside-out company to a more proactive, outside-in company, with more of a marketplace focus than in the past. If you go back twenty to twenty-five years, we were an “invent it, manufacture it, and then it will sell” company. Very much inside-out. We looked at: What was the next invention? Could we make it? And if we could make it, “I’m sure somebody’s going to buy it.” Then, in the early ’80s, we saw that that wasn’t good enough—that the customer was damned important. And we became more of a customer-obsessed company. Now we’re trying to recognize that the customer and the marketplace aren’t always the same thing. The customer is a part of the marketplace, but the marketplace transcends the customer. We try to be out there understanding the marketplace in which our customers deal, and in which we deal, and try to anticipate the dynamics of that marketplace as we move forward. We think the next move on the trendline will be built around the marketplace. So we’re trying to be a proactive, market-sensitive company, and be out there not just with our customers, but also with our customers’ customers, and right down through the chain.

—Kenneth W. Freeman

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“Changing the hand instead of the glove”

“In technology industries, it is difficult to create an organizational bridge from the way technologies are nurtured to the way strong customer relationships are built.”

Boudreau: We don’t believe just listening to the customer is going to be good enough going forward. That’s important, but sometimes the customer isn’t able to articulate exactly what new product or service improvement they want or need. What we should be doing continuously is understanding what consumers are trying to do in terms of achieving a financial goal or mitigating a concern. Our job, it seems to me, is to frame up a response that meets that requirement in a cost-effective and convenient way. If we do this well and continuously, it will give our customers a Chase brand experience that will provide us with a competitive advantage. MMJ: How do you get value-growth thinking placed front and center among your company’s priorities, get it integrated into the organizational consciousness, and create a dynamic environment for change? Bok: In one way it’s simple, really. The key to success is clarity. A CEO needs to pass along a clear vision of what he wants his management team to do, then hold them accountable for it and incentivize them on it. Because in Philips Business Electronics we structure our business units as entrepreneurial companies, there is transparency about how each unit performs. However, one big challenge that can arise from value-oriented strategies is business unit leadership. If a company is value-growth oriented, it may follow value opportunities to new business designs that challenge its management team’s perceptions of their businesses. How do you convince them to follow aggressively? Another challenge is how a company organizes itself for new business designs. In technology industries, it is difficult to create an organizational bridge from the way technologies are nurtured to the way strong customer relationships are built. Managing both cultures—technology-centric for product performance and customer-centric for relevance in the marketplace—is a key success factor. Boudreau: The guy running our mortgage business isn’t a mortgage banker. He’s got an engineering background. The guy that’s running the credit card business wasn’t in the credit card business two years ago. Again, he’s an engineer by background. The reason they were so valuable is that they showed up with a lot of questions and were willing to search for the answers—as opposed to being stocked with answers because they had grown up in the way the business used to be done. In addition, my managers know that thinking about the future isn’t someone else’s job. It’s what we all get paid to do all the time. And it never ends. It

—Dr. A. B. Fred Bok

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seems to me—and I suspect we’re not unique—that you need excellent people, and then you need a framework and a set of expectations that empowers them to make decisions. And if you don’t take that step, if you try to operate the way it used to be— with a hierarchy, where every decision has got to get signed off by the level above—you won’t succeed. A command-and-control management structure is an anathema to an information-based, empowered system. In the old days, only the people in mortgages worried about mortgage questions. In the world we’re in today, customers contact us by PC, by phone, by fax, by ATMs—even still in branches. We’re going to have channels that’ll be all over the place. There is no way you’re going to say, “Only ask these questions in this channel, or these questions in that channel.” Those days are over. Freeman: We’ve looked at some radical changes in how we do business—for example, creating a retail arm and going “direct to the consumer.” And, as you might expect, there are a lot of reasons why people think it can’t be done. But that’s not a reason to stop working at it. My guess is, and my belief is, that if the ideas that we’re working on, to get out of the value migration trap, aren’t outlandish enough that a fair number of people say up front, “It can’t be done,” then the odds are we’re not thinking radically enough. If you would like to join a discussion on how companies can achieve sustained shareholder value growth, visit our Mercer Management Journal Forum, at www.mercermc.com.

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“Changing the hand instead of the glove”

Identifying the opportunities of the future
Strategic AnticipationSM through marketing science
by Eric Almquist and Gordon Wyner

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A winning Business Design is founded on an insightful understanding of rapidly shifting customer priorities. In 1995, Mercer Management Consulting used two rigorous marketing science tools to conclude— correctly, it turns out—that much of the conventional wisdom about the future of multimedia “broadband” networks was wrong.

ockey great Wayne Gretzky has explained his phenomenal success on the ice by saying that, while other players skate to where the puck is, he skates to where the puck is going to be. Similarly, we have seen that those companies that are most skilled at identifying where new business opportunities are going to be tend to be rewarded with substantial growth in shareholder value.

Our experience suggests that the customer can represent the most reliable compass to help a business leader plot his or her company’s course. But gaining an understanding of the future through customers is not easy. Businesses have a long history of missing upcoming trends because they—and the consumers they query—fail to envision the future environment in which a new product or technology will be introduced. A 19th century farmer would have said he needed a stronger and faster horse, not a tractor. Mercedes-Benz concluded in 1900 that the worldwide market for automobiles would never exceed 1 million, primarily because of the limited number of available chauffeurs. Similar faulty predictions were made in the early history of computers, photocopy machines, telephones—and, more recently, in the “broadband” marketplace. The broadband opportunity Back in 1995, it was clear that the communications, information, and entertainment industries were entering a period of blistering change and convergence. Technological advances had made it possible to send enormous quantities of digitized information over fiber-optic cables, and the planned broadband networks promised both to bring new multimedia services to consumer households and to usher in head-to-head competition between telephone and cable services.

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The signs of change were many: America Online was becoming a darling of Wall Street; the Internet had reached a 2 percent household penetration level and was starting to make business press headlines; MCI had just invested $2 billion in media giant News Corporation, one of a number of multimedia megadeals; and local phone companies were projecting they would have broadband services to 20 percent of U.S. households by the year 2000. It was clear that Value Migration®—the shifting of profits and stock market value between companies or industries—was about to accelerate. But its rate, direction, and magnitude were clouded in uncertainty. In this volatile environment, Mercer Management Consulting undertook to find out where customers would allow companies to make a profit in the coming years and which Business Designs would prevail. Industry experts and technology pundits had already built up a body of predictions concerning the broadband marketplace: — Video-on-demand services would boom. Substantial demand for enhanced pay-per-view services would largely justify the cost to build out the broadband network. — The Internet would remain a power-user curiosity. The Internet would not—in the short term—achieve meaningful penetration outside of a limited group of sophisticated, high-end users. — Video telephones would not be a short- to medium-term opportunity. Consumers would not embrace videophones—which had died a thousand deaths since the New York World’s Fair of 1964—until quality was high. — One-stop shopping from well-known brands would prevail. Consumers would seek to minimize the complexity of the numerous communication, entertainment, and information services offerings by relying on branded consolidators, either cable or telephone companies. To evaluate these assumptions, as well as to identify areas of opportunity within the broadband universe, Mercer turned to customers. The firm’s 1995 study, “Colliding Worlds: Separating the Virtual from the Reality,” combined customer research, competitive economic analysis, and game theory to address the problem.

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Identifying the opportunities of the future

Information Acceleration™ drops consumers into an all-encompassing future marketplace. Once they are conditioned to the future, Strategic Choice Analysis® gauges their preferences. In the 1995 broadband study, consumers were asked to consider how they would use the new technology—not in the context of 1995, but in a richer, more “futuristic” environment of 2000 to 2005.

Marketing science for Strategic AnticipationSM This was clearly a challenging task. Estimating the future demand and profit power of new and emerging products and technologies with which consumers had no familiarity wouldn’t be easy. We were fortunate to have at our disposal a number of proprietary marketing science tools that enabled us to develop a fact-based, robust picture of future customer segment priorities, behaviors, and values. These tools enabled us to condition customers to a future world and then—in the context of this new world—to evaluate their decision-making process. The consumer demand research started with a national sample of 850 randomly chosen consumers, all with household incomes greater than $10,000. Mercer introduced these consumers to a world of broadband capability, showed them examples of new broadband-related services, and asked them to choose between available offerings at various prices. This research project relied heavily on two research techniques: Information Acceleration™ and Strategic Choice Analysis®, both developed at academic institutions and adopted by Mercer over the last 15 years. Information Acceleration “accelerates” consumers into an allencompassing future market environment. Sitting at an interactive multimedia workstation that uses video, graphics, sound, motion, and text, consumers are able to experience an array of new products and services. They see and hear simulated testimonials, advertisements, in-store displays, sales presentations, product literature, and other elements of the marketing mix. Glenn Urban, of MIT’s Sloan School of Management, developed Information Acceleration based on methodologies he created for forecasting demand for consumer packaged goods. This approach is now licensed exclusively to Mercer. Once consumers are conditioned to the future, the use of Strategic Choice Analysis provides the tools to develop a powerful consumer decision model. This model allows us to estimate market sizes, provider shares, product penetration, demand elasticities, and profitability. Discrete choice theory, the backbone of Strategic Choice Analysis, was developed at several academic institutions in the 1960s; the first practical applications were in the field of public transportation, including estimating the demand for San Francisco’s Bay Area Rapid Transit system. Mercer drew on the literature of discrete choice theory to develop Strategic Choice Analysis, which we have used in over 300 mainstream marketing applications across the transportation, financial services, and communications industries.

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In Mercer Management Consulting’s broadband study, consumers were asked to consider how they would use the new technology—not in the context of 1995, but in a richer, more “futuristic” environment of 2000 to 2005. First, consumers were placed in a future of electronic media and made familiar with how these media might change their lives. They were then introduced to numerous multimedia and electronic broadband applications—from home banking to video-on-demand to timeshifted television—at different price points and asked to choose whether they would buy any of these new services or stick with the ones they currently had (see Exhibit 1).

Future Conditioning • “Accelerate” consumer into the future • Illustrate the new competitive landscape

Future Services • Voice and videophone • Traditional cable, video-ondemand, near video-ondemand, time-shifted TV, interactive TV • Information, shopping, banking, chat, and other online services

Consumer Choices From among future offerings: • Six brands • Different prices • Performance options (e.g., picture quality) • Bundling options

Future Market • Size • Provider shares • Product penetration • Demand elasticities

Information Acceleration™

Strategic Choice Analysis®

Exhibit 1 Creating the virtual future ”broadband” marketplace

Because brands have a significant influence over buying decisions, we also asked the consumers to choose among six providers whose names were familiar to them, ranging from their local telephone companies to national cable providers. They were asked to make their decisions based on price, performance options, and various product bundles—as well as brand. While these tools—Information Acceleration™ and Strategic Choice Analysis®—can be used independently, their power is enhanced when they are used together. This is particularly true when evaluating a market like broadband, where the future is uncertain, the required investment is huge, the products and services are unfamiliar, and the potential Business Design options are plentiful. Identifying “profit zones” in the broadband marketplace The three years that have passed since this research was completed enable us to evaluate just how prescient these tools can be—and how valuable they can be in providing executives with the information needed to invest in attractive customer-driven opportunities ahead of the curve.

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Identifying the opportunities of the future

The Mercer broadband study predicted that much of the conventional wisdom was false, and that investments based on those assumptions would not pay off. In particular, the study debunked four important myths.

At the conclusion of the study, we predicted that much of the conventional wisdom was false, and that investments based on those assumptions would not pay off. Three years later, a review of our broadband work shows the validity of some of our most controversial conclusions, which debunked four important myths. Myth 1: Video-on-demand services would boom. In 1995, industry experts believed that there was substantial pent-up consumer demand for services such as video-on-demand (movies shown whenever the viewer wants, with selection available from thousands of titles), “near video-on-demand” (movies shown at regular intervals, with selection available from a few hundred available titles), and time-shifted television (personalized rescheduling of existing TV programming). In this view, cable companies and telephone companies would compete to bring a panoply of broadband products and services to customers over the companies’ own proprietary broadband networks. We saw a different picture. While demand existed for these services, its level was insufficient to allow attractive returns on the investment required to build more than one broadband network in a typical geographic area. At the time, U.S. consumers spent about $60 billion a year on local network products, such as cable TV, local telephone, and online services. Mercer’s research showed that they would be willing to pay another $40 billion, or about $45 per month per household, for the new electronic communications, information, and entertainment services. However, the technical cost to upgrade both telephone and cable networks to full two-way broadband capability was estimated to be as high as $1,600 per household, making the investment decidedly unattractive in both the short- and mid-term. Thus, while broadband appeared to be at least a $40 billion industry, it actually represented a “no-profit zone” if both cable and telephone competitors invested in new, full-service networks. Neither group would be able to recover their cost of capital investment, creating a “bloody stalemate” (see Exhibit 2). In contrast, the research suggested that interim, lower investment technologies—specifically, cable modem and Digital Subscriber Line (DSL), both of which use existing copper telephone wires—would offer appealing investment economics, giving consumers most of the capabilities they wanted while still allowing long-term value creation for both cable companies and telephone companies.

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Net present value of cash flows per household

Exhibit 2 The risk of broadband investment: a “bloody stalemate”

$0

Cable Company Bloody Stalemate

Local Phone Company

-200 Capital

-400

Industry Growth Industry Growth Price Decline Lost Share Gained Share Cost Savings Gained Share Lost Share Price Decline

Capital

-600

-800

-1000

-1200

-1400 SOURCE: 1995 Mercer Management Consulting Broadband Study, “Colliding Worlds”

These predictions have proven themselves true. Investment in broadband infrastructure has been radically scaled back in response to underwhelming economics in trials. Cable modem and DSL services are both getting off to a strong start, with over 200,000 cable modem subscribers signed on in less than one year, and virtually all telephone companies offering or planning DSL capabilities. Myth 2: The Internet would remain a power-user curiosity. In 1995, many held that Internet services would achieve just 8 to 10 percent penetration of U.S. households by 1997. Our research, however, predicted that consumer online services would boom to a $5 billion subscription market, with 30 to 40 percent household penetration by 1999, particularly if faster modem speeds were available. This prediction, too, has proved true: Today, 27 percent of households have Internet access and consumers are demanding ever-faster modem access. Furthermore, Internet users have come from a broad spectrum of socio-demographic groups, as predicted in the study. Myth 3: Video telephones would not be a short- to medium-term opportunity. Mercer’s broadband work evaluated the impact of three key drivers of the demand for video telephones: improved picture quality (achieved through faster transmission speed), widespread use (to create a critical mass of users who can communicate with one another via videophone), and inexpensive equipment. By 1995, several companies, including AT&T, had failed with $1,000 videophones that offered a small, poor-quality, black-and-white picture. But our research indicated substantial opportunities for ISDN-quality or cable-modem-quality videophone service, even though these offer pictures that, unlike

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Identifying the opportunities of the future

Business Design dimensions Customer selection and value proposition

Targeting the profitable rail passenger
by Olivier Fainsilber

The challenge for Eurostar—the company that operates the high-speed trains between London, Paris, and Brussels—was to capture high-margin customers and maintain their loyalty in an increasingly competitive environment. Just 18 months after the inauguration of service through the Channel Tunnel, Eurostar had achieved 60 percent market share—higher than air transport—on the Paris-London route. Now, it wanted to secure that customer base, increase penetration in attractive market segments, and penetrate new high-margin segments. To do this, the company could no longer count on its original service mix. It had to identify new ways to appeal to high-value customers by identifying and meeting their priorities. This required changes in one of the five dimensions of the company’s Business Design—customer selection and value proposition. The company began by identifying the priorities of new and existing customers and determining what amenities would satisfy those priorities. A frequent traveler program? Taxi service on arrival? “Fast-track” check-in? On-board entertainment? And once the desired amenities were identified, how should they be bundled? Before rolling out costly changes on a large scale, Eurostar wanted to quantify their impact and verify

that they would deliver the hoped-for increase in ridership and margins. Eurostar chose to use a sophisticated modeling technique, Strategic Choice Analysis®, to test service enhancements in a realistic competitive context. With Strategic Choice Analysis, a proprietary tool of Mercer Management Consulting, customers are presented with realistic choices and then state their preferences among a number of fully packaged service offers. The model not only measures the number of travelers who are attracted by the enhancement, it also quantifies how much they are willing to pay for it. The end result is a “decision support system” that allows marketing managers to test the impact of an array of price and product changes, as well as to simulate the impact of competitor reaction. Based on its use of Strategic Choice Analysis, Eurostar decided to change from two to four classes of service, each with a distinctive positioning aimed at a specific customer segment. In the first full year since the changes were instituted, Eurostar has registered a 20 percent increase in ridership and, more importantly, a 40 percent increase in revenue, dramatically enhancing margins.

Olivier Fainsilber is a principal of Mercer Management Consulting based in Paris.

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the “TV quality” images of full-service broadband networks, have movement that is somewhat jerky or fuzzy. These projections were based on several plausible assumptions: hardware costing about $100 per set, service costing $20 to $40 above local phone and cable service per month, and 60 percent of households having videophone capabilities. As it turns out, PCbased videophone software packages now can be purchased for about $300, and most observers today predict the rise of video telephony via an Internet/PC/cable-TV platform within two years. Myth 4: One-stop shopping from well-known brands would prevail. Mercer’s research found consumers were largely indifferent to the benefits of one-stop shopping. Absent a pricing incentive, only 1 percent of consumers chose to bundle communications, entertainment, and Internet/information services with one provider. In addition, we found that even established brands in one category would have difficulty moving into other categories. For example, we predicted in 1995 that telephone companies— well-established incumbents with solid brand identity—would fare less well in the coming years, perhaps because their brands are associated with audio, not the video and multimedia that will dominate tomorrow’s information and entertainment landscape. Since then, AT&T’s online service has captured only a 7 percent share of the online market, while America Online has been able to capture more than 35 percent. Fortune magazine declared on its cover this spring: “Surprise! AOL Wins.” Despite these challenges of brand translation, the research did underscore the growing importance of brands. As competition intensifies and product alternatives proliferate, consumers— bombarded with an array of competing offerings, marketing messages, and sometimes conflicting value propositions—are increasingly relying on brand recognition to guide their buying choices. A strongly managed brand can be a particularly potent weapon in differentiating a company from its competitors. But even the best-established brand can be undercut by a powerful new Business Design, as Wang learned only too well when word processing moved from proprietary machines to open systems. Thinking about tomorrow’s customer The half-life of customer priorities is shortening, driving shorter Business Design lifecycles. The collision of communication, information, and entertainment systems has crunched the time in which customers expect their needs to be fulfilled. And this is happening in an era in which increased competition, new

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Identifying the opportunities of the future

Increasingly, companies are demanding solid analysis— not anecdotal evidence or hunches—to help them envision the future. Advanced marketing science techniques, designed to reveal customers’ needs and preferences in a futuristic business environment, provide forecasts that can help executives identify how value in their business sectors will migrate— and where they should invest to capitalize on those shifts.

Business Designs, and innovative channels are providing customers with substantially more purchase options. It’s also taking place at a time when organizations in many industries are becoming aware that a few extremely valuable customers typically bring in the lion’s share of their profits. In this environment, the organizations that can best anticipate the needs of their most valuable customers are at a distinct competitive advantage. Those that can develop scenarios that envision the future with enhanced certainty will gain not only the information and confidence needed to make informed business decisions but also a strong advantage over the competition. Well-known examples include Charles Schwab & Co., which recognized in the 1980s that investors had become more knowledgeable about their investment options than before and that many, who were not really utilizing their brokers as information resources anyway, would prefer discount brokerage services to paying for a middleman. In the future, this ability to discern— and design businesses around—evolving customer needs will be an even more critical skill. Charles Schwab, however, relied on intuition and personal experience in developing his innovative Business Design. Increasingly, our clients are demanding solid analysis—not anecdotal evidence or hunches—to help them envision the future. That’s why marketing science is so important. The payoff can be the difference between moving into a “profit zone” or taking aim at the wrong target while others with greater capacity for Strategic Anticipation seize the best opportunities. The work that Mercer did in anticipating broadband information and entertainment market applications overturned conventional wisdom with intelligent analysis. Such analysis is possible in many other markets as well. Advanced marketing science techniques, designed to reveal customers’ needs and preferences in a futuristic business environment, provide forecasts that can help executives identify how value in their business sectors will migrate—and where they should invest to capitalize on those shifts. And invest they will. The reality of entrepreneurial capitalism is that if an organization doesn’t develop the new Business Design that will take advantage of an emerging profit zone, someone else will seize the opportunity. This reality will increasingly turn managers into entrepreneurs.

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Like Wayne Gretzky, so gifted in visualizing where the puck is going to be, we must envision the Business Designs that will capture 21st century value opportunities. We know that somewhere out there a Business Design exists that will turn broadband into a new $40 billion profit zone. The company that identifies that design will reap tremendous riches. Eric Almquist and Gordon Wyner are vice presidents of Mercer Management Consulting based in Boston.

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Identifying the opportunities of the future

A blueprint for shareholder value growth
Winning through strategic Business Design
By Rick Wise

A
The discipline of Business Design, with its customercentric rather than product-centric view of business and its explicit focus on shareholder value growth, recognizes and embraces the demanding requirements of today’s volatile marketplace.

puzzling phenomenon exists in today’s business world: companies that by traditional standards should be big winners but, in fact, have struggled to maintain a leading position. They include firms in high-growth markets such as computer retailing and consumer electronics; ground-breaking product developers such as Apple and CompuServe; market share leaders in industries ranging from retailing to autos to insurance to steel to airlines. They are firms that, despite their seeming advantages, have been battling in the middle of the pack in terms of profit and shareholder value growth—if they haven’t been left completely behind. Then there is another phenomenon: remarkable companies that have emerged as first-rate creators of shareholder value from what would seem to be unpromising origins. They include Coca-Cola, for years a lumbering giant in the slow-growth beverage market; Dell Computer, a firm whose products feature offthe-shelf components instead of ground-breaking technology; General Electric, historically a sprawling collection of businesses, many in second-tier market positions. Most conventional strategy frameworks provide little insight into these unlikely successes and failures. Clearly, dominant market share isn’t the determining factor. Consider GE, which boosted its market position as a necessary, but only intermediate, step on the way to superior shareholder value creation. Being in a rapidly growing market doesn’t govern the outcome, as Coke’s experience demonstrates. Neither does ‘‘first mover” advantage; Dell was a latecomer to the personal computer market. Focusing on “core competencies” isn’t the answer either. Both Coke and GE—which ventured beyond their original businesses and got into, respectively, bottling and financial services—ignored that maxim.

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Business Design represents much more than a variation on old strategic themes. Three key elements differentiate it from traditional approaches: an explicit and relentless focus on shareholder value growth as the objective of corporate strategy; a decision-making framework that extends beyond the traditional product-centric view of business; and an “outside-in,” marketdriven approach to strategy setting.

A strategy framework for turbulent times So why have the time-honored approaches to strategy become less relevant? The answer should come as no surprise. Fundamental shifts in the business environment have changed forever the rules of business success. The traditional strategy frameworks were oriented toward a simpler economic time, one of stable, scale-oriented industry environments, high systemic growth rates, and meaningful opportunities for product differentiation. Traditional strategy tools—with their emphasis on market growth and relative market share, on core competencies, on “time to market” and “experience curve” economies—provided valuable guidance in this world. Today, a company follows the old rules at its peril. Markets are fragmenting and blurring, which has led to increasingly lumpy profit distribution across customers and a complex array of new market opportunities. Once-powerful barriers to competition are eroding, the result of technology becoming more widely available, entrepreneurial talent and capital becoming more plentiful, and service and knowledge becoming increasingly important sources of added value. These days, the traditional strategy principles can, instead of providing guidance, become hindrances that lock a company into a low-profit market zone and yesterday’s critical skills. Instead, business success must be driven by a strategy framework that recognizes and embraces the requirements of today’s marketplace. These include a customer-centric rather than a product-centric focus; an expansive rather than a narrow view of the business landscape; a dynamic rather than a static perspective on the future market environment; and, most importantly, an emphasis on the multiple and interrelated strategic dimensions that drive shareholder value growth. We believe that the discipline of Business Design—the entire system by which a company delivers utility to its customers and thereby generates sustained value growth for its shareholders—is just such a framework. GE (which evolved from a product company to a product-andaccessories-and-financing-and-service company), Dell (which melded manufacturing with direct distribution in a hybrid model highly relevant to its target customers), and Coke (which remade itself from essentially a syrup maker into a “value-chain manager”) understood the central notions embedded in the Business Design framework and applied them successfully. All

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A blueprint for shareholder value growth

While achieving shareholder value growth may seem an obvious corporate goal, many strategy practitioners lose sight of it. By contrast, the discipline of Business Design addresses several factors repeatedly cited by market analysts as key to their valuations of stocks: operating profit momentum, asset efficiency, and predictable performance.

have enjoyed phenomenal growth in shareholder value through their Business Design-oriented approach to strategy development. Business Design—developed for today’s challenging business environment and refined through dozens of real-world trials in client strategy situations—represents much more than a variation on old strategy themes. Three key elements sharply differentiate it from traditional approaches: 1. an explicit and relentless focus on shareholder value growth as the objective of corporate strategy; 2. a decision-making framework that extends beyond the traditional product-centric view of business; and 3. an “outside-in,” market-driven approach to strategy setting. A singular focus on shareholder value growth While achieving shareholder value growth may seem an obvious corporate goal, many strategy practitioners lose sight of it. If they explicitly articulate any strategic objective at all, they emphasize those simplistic objectives such as market dominance or economies of scale or ‘‘first to market” advantage that have only an indirect causal relationship with shareholder value growth. By contrast, Business Design addresses several factors repeatedly cited by market analysts as key to their valuations of stocks: operating profit momentum; efficient deployment of the assets needed to sustain that momentum; and predictable, sustained performance. Companies that fail in one or more of these areas are legion. “Bottle rockets” enjoy rapid initial growth but, after a dizzying take off, quickly crash. ‘‘Asset monsters” make tremendous capital investments relative to the profits they generate. ‘‘Roller coasters” give shareholders an unwelcome, stomach-churning ride. Even worse, businesses that ignore shareholder value creation and its drivers may find themselves in the unenviable position of actually destroying value the faster they grow—People Express and, more recently, Boston Market being two examples. And market share? Although it may contribute to a company’s success in fueling each of the three drivers of shareholder value growth, it is dangerous to assume that overall market share has a

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While traditional strategy approaches focus narrowly on one or two productcentric strategy elements, Business Design stresses the importance of making decisions across five broad and interrelated dimensions, each of which plays a critical role in robust strategy formulation—and, by extension, shareholder value creation.

leading relationship with any of them. Often, it is simply the outcome of having successfully built a better value-creation engine. A company’s multiple dimensions Another way in which Business Design differs from traditional strategy frameworks is its recognition of the complex set of choices facing the modern executive when making blank-sheet business decisions. While traditional strategy approaches focus narrowly on one or two product-centric strategy elements, Business Design stresses the importance of making decisions across five broad and interrelated dimensions, each of which plays a critical role in robust strategy formulation—and, by extension, shareholder value creation (see Exhibit 1): — Customer selection and value proposition. Where is the greatest market opportunity in terms of long-term profit growth, and how can I meet the critical priorities of this customer segment? In the cellular phone service market, for example, dramatic variations exist in the needs and profitability of different segments: Contrast business executives, for whom a cell phone is an invaluable tool, with the larger but less profitable segment of “soccer moms,” for whom it is a seldomused security device. — Value capture. What “profit model”—our research has identified dozens of them—will I harness to capture value from this customer? Successful Business Designs rely less and less

Customer Selection and Value Proposition Where is the greatest opportunity in terms of long-term profit growth, and how can I meet the critical priorities of this customer segment?

Value Capture/ Profit Model What profit model will I harness to capture value from this customer?

Organizational Systems What organizational capabilities are critical to my translating the other dimensions into marketplace success?

Exhibit 1 The five interrelated dimensions of Business Design

How will I maintain dominant control of my profit stream to prevent it from migrating to competitors, customers, or out of my industry altogether? Strategic Control

What are the most critical activities and product/service offerings I need to control to create value for the customer and capture value for myself? Scope

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A blueprint for shareholder value growth

on the traditional approach of selling products at a mark-up that creates a profit margin. Some capital equipment manufacturers such as Otis Elevators use an “after-sale” profit model, in which the product is sold at close to break-even and margins are earned on long-term service contracts. Swatch captures value through a “product pyramid” profit model, where low-end wristwatch brands act as a break-even firewall to competitors and the high-end brands deliver the profit. — Strategic control. How will I maintain dominant control of my profit stream to prevent it from migrating not only to more powerful competitors but also to customers or even out of my industry altogether? One of the most effective examples of strategic control is the “de facto standard” model, utilized successfully by companies such as Oracle and Microsoft, in which the combination of a large, installed base of users and an active third-party developer community create huge barriers to displacement by competitors. — Scope. What are the most critical activities and product/ service offerings I need to control in order to successfully address the previous issues—that is, to deliver my critical value proposition and create value for the customer; deploy my value capture mechanism; and maintain strategic control? Nike, whose success is built on product design and image, focuses on controlling shoe design and marketing; the company outsources the traditional product-centric activity of shoe manufacturing. — Organizational systems. What organizational capabilities are critical to my translating the above into marketplace success? When Hewlett-Packard decided to develop a computer systems “solutions” business—aimed at addressing customers’ needs rather than simply selling them products—it adopted a “global account management” system. This provided managers with information on customer profitability, rather than simply product and geography profitability, which was critical to achieving Hewlett-Packard’s objective. Decisions made in each of these five dimensions are not mutually exclusive. Instead, a choice in any one area has an impact on the range of options available in another. For instance, choosing an “after-sales” profit model requires both serving a customer set that values service and developing a scope of activities that emphasizes maintenance and spare parts. Consequently, crafting

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Business Design dimensions Scope of activities

A fusion of technology and customer relationships
by Ted Moser

One of the big challenges facing a company today is the growing need to redesign its business every five to seven years in order to achieve sustainable profit and shareholder value growth. The fast-growing market for “smart cards”—plastic cards that store extensive information on an embedded microprocessor—provides a striking illustration of how two companies, Philips Electronics, based in the Netherlands, and De La Rue, based in the U.K., did just that. By exploiting value-chain “fusion” in their market and successfully broadening the scope of their activities—one of the five dimensions of Business Design—they were able to participate in a new wave of value growth. Neither Philips nor De La Rue had been big winners in the first wave of value creation in smart cards. The market had been limited primarily to the French telephone and banking industries, and the first rule of the game had been to build scale with high-volume telephone cards. Philips, with only a highend chips targeted at the banking, mobile phone, and pay TV segments, had missed out on much of the early market. And De La Rue, whose core business was in currency printing and magnetic stripe card production for banks, lacked in-house chip technology.

In 1996, both companies recognized the rules of the smart card game were about to change. The rest of the world was waking up to the benefits of the cards, and the market was poised to shift from a French payphone-dominated business to a global one where banking relationships would be paramount. Banking customers were looking for a “transition partner,” a supplier that could continue to supply them with magnetic stripe cards—which weren’t going to disappear overnight—while layering on smart cards. Both Philips, with its high-end chip, and De La Rue, with its banking customer relationships and magnetic stripe cards, had the chance to play the next game. But they realized their existing Business Designs were not broad enough to fully exploit the new opportunity. Recognizing their complementary positions, the two companies started talks that culminated in May 1997 in the creation of what has become one of the world’s leading integrated smart card manufacturers, De La Rue Card Systems.

Ted Moser is a vice president of Mercer Management Consulting based in Paris.

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A blueprint for shareholder value growth

a successful Business Design requires that all the parts work in harmony and are mutually reinforcing. How, then, does one select a Business Design from the clutter of choices? By focusing on the overall objective: shareholder value. One of the most powerful attributes of Business Design is the way in which these five dimensions are linked to the three primary drivers of shareholder value. Customer selection and value capture—which define the size of the market to be served and the underlying business economics—affect a company’s ability to achieve operating profit momentum. A company’s chosen scope of activities affects its asset efficiency. Strategic control and organizational systems affect its ability to perform consistently and predictably. From the outside looking in Finally, Business Design differs from conventional strategy frameworks in its emphasis on a market-driven, ‘‘outside-in” approach. Most strategic analyses of a company start with an ‘‘inside-out” approach that assesses the firm’s assets and core competencies and then looks for an efficient way to turn those into something customers will buy. Business Design starts with customers—an understanding of their current priorities and the trajectory along which those priorities are likely to evolve—and works inward (see Exhibit 2). Market-driven issues of customer selection, profit model choice, and the identification of strategic control points serve as the basis for determining the required capabilities and organizational structure. Because the external world of customer priorities and marketplace economics is, at best, a volatile one these days, the outsidein approach requires a dynamic and flexible decision-making [continued on page 51] process.

Exhibit 2 Different approaches to strategysetting
Inside-out

Assets/Core Competencies

Inputs, Raw Material

Product/Service Offering

Channels

The Customer

Outside-in

Customer Priorities

Channels

Product/Service Offering

Inputs, Raw Material

Assets/Core Competencies

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Tomorrow’s Business Designs in financial services
Do today’s mega-deals really represent the wave of the future?
by Corey Yulinsky

“It’s about cross-marketing.” —Sanford I. Weill, Chairman, Travelers Group “Our goal is to be category killers.” —William F. Aldinger, Chairman, Household International The events of April 1998 provide perhaps the most compelling demonstration of the velocity with which Value Migration® is sweeping through the financial services landscape. The mergers and acquisitions wave that has joined several of the largest U.S. banks and other financial services providers—CitiCorp and Travelers, Nationsbank and Bank of America, BancOne and First Chicago, among others— reflects managers’ desire to find sustainable sources of value creation. The comments of Messrs. Weill and Aldinger are two perspectives on how to tap those sources. At the heart of these consolidations, however, lies a troubling question: Do the mega-institutions represent the emergence of one or more new Business Designs that capitalize on the opportunities inherent in enlarged scale and scope—or will some, if not all, of these institutions turn out to be little more than warehouses of outdated Business Designs? In general, the flurry of big transactions is fueled by the belief that consolidation is the best response to a financial services environment being radically redefined by the changing economics of customers and the growing number of choices they enjoy. But the mergers, seemingly similar in nature, in fact conceal a variety of different perspectives on where the future “profit zones” of the financial services industry lie and which of numerous competing Business Designs will be able to identify and occupy those zones. The recent consolidation represents the second phase of a change that began in the 1980s, when the changing economics of information and regulatory trends combined to “de-integrate” the unified, vertically integrated Business Design of commercial banking. The rise of “category killers” offering specialized financial services products presaged the emergence of the multiple Business Designs that can now be observed in embryonic form. The equity markets have granted substantial value to the new category-killer Business Designs at the expense of traditional ones. For example, MBNA, a leading credit card company, has a market value of more than 81/2 times its book value, while an index of the top 20 retail banks has a marketvalue-to-book-value ratio of 31/2. (It is worth noting that several of these category killers, such as First USA and The Money Store, have been acquired by more traditional players at substantial premiums.) These new designs are marked by several common characteristics: focused attention on how customer priorities are shifting, a profit model that targets high-value customers, and an “information-based business system” that enables a company to go to market in a much more dynamic and adaptive manner. The most impressive value creators emerging are those that have followed what we characterize as the “recombinant” approach—that is, taking some of the capabilities developed and exploited more narrowly by the category killers and

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A blueprint for shareholder value growth

Type of Offering “Aggregator” “Distributor” “Manufacturer”

Exhibit 1 Future “profit zones” in retail financial services will match scope of offering with customer segments

More Sophisticated Wealth Managers (Higher Value) “Re-intermediator” “Anywhere, Anyhow, Any Brand” Customer Segments (illustrative) “Mass customizer” “Scale Manufacturer”

“McBank” Less Sophisticated Wealth Managers (Lower Value)

Advice and Information/ Experience

Access/ Convenience/ Experience Customer Priorities Addressed

Product Functionality and Performance

regrouping them in new ways to meet broad customer needs. Schwab is a powerful example: Its intense focus on how its customers’ needs are evolving has enabled it to move with them, providing a relationship-based approach that features an information-enriched set of offerings delivered through an integrated, multi-channel network of phones, the Web, and retail offices. Ultimately, Schwab will be just one example of a new set of Business Designs that will compete for dominance in financial services, each one representing new combinations of ways to meet evolving customer priorities and capture emerging profit zones. A simplified framework for thinking about the new financial services landscape includes five Business Designs (see Exhibit 1): — Re-intermediators will, in many ways, return to a classic banking role: gathering— or “aggregating”—informa-

tion that can be used to tailor financial solutions to individual customers, and distributing a variety of “best-in-class” third-party products that meet their high-end customers’ evolving needs. — Mass Customizers will focus on the aggregator role, acting as intelligent agents to seek out a mix of third-party products that meet the needs of their customers. More reactive to customer requests and less interactive in helping those customers identify their needs than Reintermediators, Mass Customizers will appeal to a broader audience. — Anywhere/Anyhow/Any Brand firms will be multiproduct, multi-brand distributors of third-party products, operating integrated multichannel networks that provide a broad array of packaged solutions.

— Scale Manufacturers will be the low-cost providers of products in traditional and non-traditional categories— some grown from today’s category killers, some emerging from new technologies, and some transformed from the operations of today’s vertically integrated institutions. — McBanks will provide standardized, low-cost access to financial services to fill the market “white space” that will grow as large institutions focus their capital and capacity on the highest-value 10 to 15 percent of U.S. households. Each of these models is defined by the five dimensions of Business Design. Take, for example, the Scale Manufacturer Business Design. Its customer selection and value proposition will focus on the price-conscious customer who seeks basic financial products and services. Its means of value

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Exhibit 2 Value in the financial services industry has been migrating from traditional product-centric Business Designs to customer-centric innovators, though few institutions have yet shown innovation on a large scale
10

Innovators
9 MBNA 8 Schwab

Reinventors

7 Capital One 6 State Street

Market Value Book Value
5 Progressive 4 3 Top 20 Brokerage Composite 2 1 Top 20 Life Insurance Composite Top 20 P&C Insurance Composite First Data Top 20 Bank Composite Morgan Stanley/Dean Witter Bank One/First Chicago1 1 UBS/Swiss Bank Travelers/Citicorp
1

NationsBank/BoA1 Bank of Tokyo/Mitsubishi

Traditional Business Designs
0 0 10 20 30 40 50 60 70 80 90

Consolidators
100 140 +

Market Value (Billions)
1

Proposed merger Book value: FY-end 1997. Market value: April 1998. SOURCE: Mercer Management Consulting Value Growth Database

capture will involve transaction fees and product margins. It will gain strategic control through scale, pricing based on the credit risk of individual customers, and superb customer information. Its scope of activities will be limited to a menu of standardized products and services delivered through multiple channels. Its organizational systems will emphasize low-cost operations across the value chain, information-based capabilities to manage individual customer value, and highly focused channel, product, and customer management. Other Business Designs will exhibit very different qualities in these five areas.

It appears clear that the seemingly revolutionary mergers of April 1998 are only the beginning of widespread consolidation in the financial services industry. The necessary components for new value-creating Business Designs—customers, channels, products, brands, information-based capabilities— are being assembled under increasingly larger roofs. But whether the players are building something new, or simply something big, remains to be seen. Management teams need to transform these mega-institutions from the traditional vertically integrated “one-size-fits

all” model to vibrant new Business Designs, ones that enable them to better serve the customer and migrate into the radically different profit zones that will define the future of financial services. To date, very few financial institutions have demonstrated innovation on a large scale—that is, transformation of the traditional value chain (see Exhibit 2). It is this potential that should galvanize senior management to drive the creation of the next wave of Business Design.

Corey Yulinsky is a vice president of Mercer Management Consulting based in New York.

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A blueprint for shareholder value growth

Just as buildings that fail to bend will be felled in an earthquake, organizations with a rigid executive hierarchy and decision-making process will crack and crumble on the shifting sands of Value Migration®. Instead, strategy must be set in the context of an integrated business system that emphasizes an iterative development process, one that adopts a “what-if ” attitude and repeatedly raises and addresses thorny issues. And this process can’t occur time and again in each of the company’s separate functional and product “silos.” It must be part of a shared strategy development framework that crosses corporate boundaries and informs the entire corporate culture. Things got better for Coke: Business Design in practice For a clearer understanding of the Business Design approach, it is instructive to look at the example of Coca-Cola, one of the great corporate success stories of the past 20 years. In the mid1970s, Coke was a company that enjoyed a powerful brand and strong market share. But it was seemingly constrained by the limitations of an industry unlikely to experience rapid growth or the technological breakthroughs that can create new demand. Coke also was burdened by a network of independent bottlers and distributors that served as a drag on growth and innovation. That network had been set up over the previous 60 years as an efficient way to expand Coke’s presence in the U.S. and around the world. And for years the system worked well: The bottlers, generally aggressive entrepreneurs, bought their syrup from Coke, sold lots of soft drinks, and shared in the brand’s success. As time went on, however, that entrepreneurial spirit waned and the focus of many bottlers turned from growth to simple cash flow. Furthermore, Coke’s bottlers, awarded their territories years ago based on the effective distribution radius of a horse and wagon, didn’t have the capital or sophistication to distribute efficiently, to invest in new bottling technologies, or to launch new products smoothly. Meanwhile, the world was changing. Large regional supermarket chains, with stores extending across the territories of more than one Coke bottler, were emerging as a powerful force. Serving the chains required coordination, consistent pricing, and key account management. Coke couldn’t get its local bottlers to work together to address the priorities of the supermarket chains. Yet, the large chains could squeeze the margins of the fragmented Coke

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To surmount its problems and turbocharge its profitability and growth, Coke reinvented its business, making changes in each of the five Business Design dimensions. It amounted to a crushing counterattack against Pepsi—one that was carried out on numerous fronts and was accomplished through brains rather than brute force.

bottlers, and ultimately Coke itself. Pepsi-Cola, with more control over its own bottling network and able to offer the supermarket chains lower prices, began chipping away at Coke’s market share in the grocery segment. To surmount these problems and turbocharge its profitability and growth, Coke, under the leadership of the late Roberto Goizueta, reinvented its business, making changes in each of the five Business Design dimensions. It amounted to a crushing counterattack against Pepsi—one that was carried out on numerous fronts and was accomplished through brains rather than brute force. In the area of customer selection, Coke continued to fight Pepsi for parity in the supermarket, a critical foundation of its business. But it sought market share dominance in other markets that really mattered in terms of profitability: restaurants and vending machines. In part because of the brutal fight for shelf space between Coke and Pepsi, consumers today pay on average about 2 cents per ounce for Coke in grocery stores. By contrast, Coke costs from 5 to 7 cents per ounce in vending machines and can cost as much as 10 cents per ounce in restaurants. By targeting vending machine and restaurant consumers, Coke not only focused on more valuable customers but, because these segments were underserved, gained an opportunity for volume growth in a flat market. In order to go after these higher-value customers, rationalize its antiquated distribution system, and better coordinate its sales and pricing strategies with the chain stores, Coke also adjusted the scope of its business. It “forward integrated” into soft drink bottling, taking controlling positions in the majority of its independent bottlers. In doing this, it provided the bottlers with the capital and direction to invest in vending machines, the scale to efficiently manage a more complex distribution network, and the guidance to serve large national accounts. These moves allowed Coke to choose a value capture mechanism based on “managing the value chain” (see Exhibit 3). By focusing its bottlers on higher-profit market segments and making their operations more efficient, Coke created higher systemwide profits that could be both recaptured by the company in higher syrup prices and duplicated overseas through global deployment of the new system.

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A blueprint for shareholder value growth

Exhibit 3 Coca-Cola’s “managing-the-valuechain” Business Design

1980 Syrup Bottling Logistics Distribution Grocery Fountain Vending 1996 Syrup Bottling Logistics Distribution Grocery Fountain Vending
Coke’s participation/control

Consumer

Consumer

The Profit Zone

Coke was able to establish strategic control not only through domination of the high-profit vending segment but also through its low-cost distribution system—something achievable as a result of consolidating control over its previously unruly and fragmented independent bottling network. Finally, Coke revamped its organization system, emphasizing skills critical to bottling management, such as plant operations, regional marketing, and distribution. In reinventing itself, Coke ensured that there would be links not only between the various Business Design elements but also between its Business Design and the three levers of shareholder value creation. Operating profit momentum was achieved by creating new sources of high-margin business: vending machines and the highly profitable overseas market. Asset efficiency was achieved, despite Coke’s move down the value chain into the capital-intensive bottling business, through the creation of Coca-Cola Enterprises. The assets of CCE—a separate, publicly traded entity, now 45 percent owned by Coke—don’t show up on Coke’s balance sheet; instead, Coke earns a dividend on CCE stock, which it holds at book value. Finally, Coke was able to enhance its earnings predictability through the control it acquired over its distribution channel, its domination of the high-margin vending machine segment, and its generation of the resources needed to support a global super-brand. Coke’s various initiatives had an astounding impact on the company’s shareholder value. In an industry that since the early 1980s has seen soft-drink consumption grow at rates of 3 percent domestically and 8 percent internationally, Coke’s market value has soared to three-and-one-half times Pepsi’s, despite Pepsi’s faster revenue growth (see Exhibit 4). Coke achieved this growth not by relying on conventional market share wisdom but by redesigning its business.

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Exhibit 4 Coke’s and Pepsi’s performance trajectories, 1980-1997
Shareholder Value ($BB)

$180

1997
$160 $140 $120 $100 $80 $60

Co

ca -C

ola

1997
$40 $20

Pepsic

o

1980
$0 $0 $5 $10 $15 $20 $25 $30 $35

Revenue ($BB)
SOURCE: Mercer Management Consulting Value Growth Database

The continuous process of value creation The elements of Coke’s story, while particularly dramatic, aren’t unique. The benefits of Business Design can be enjoyed by any company. Tangible benefits are the most conspicuous. Business Design is an approach to strategy setting that explicitly addresses how companies can create shareholder value in today’s volatile business environment. By focusing on shareholder value creation levers and how they can be pulled through clearly articulated Business Design decisions, the Business Design framework can yield significant increases in shareholder value for companies. But the discipline of Business Design also offers organizational benefits. For one thing, it can help an organization establish a shared and relevant strategy development framework. Business Design, more an art than a science, requires that everyone from line managers to top executives adopt a ‘‘what-if ” attitude and consider numerous scenarios for the future. This dynamic process, by creating a common understanding of the company’s position and direction, can foster a broad buy-in of the resulting strategy. Perhaps more important, the discipline of Business Design can help create a culture in which a company is constantly in the process of reevaluating itself. As noted above, one conspicuous characteristic of the outside-in approach to strategy development is the flexibility that it demands. A company’s strategy isn’t based on a static snapshot of the firm’s capabilities but on a con-

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A blueprint for shareholder value growth

Business Design dimensions Scope of activities

Replicating a successful Business Design
by Ambrosio Arizu and Javier Gómez de Olea

At the end of the 1980s, forward-looking electric utilities in Western Europe could see that shareholder value was about to migrate from their mature Business Design to more vibrant ones. While the anticipated deregulation of electricity industries across the continent would provide some new opportunities for creating value, it would also put pressure on prices in a sector where consumption was growing at only about 3 to 4 percent. In this environment, a large Spanish utility began looking for ways to capture increased profit and shareholder value. Knowing that consumers value credibility and financial stability in providers of utilities and other crucial services, the company bet that its wellknown name would enhance the reputation of a business that it backed. The company also realized that its Business Design, which had proven successful in the electricity business, could be leveraged to adjacent markets that had greater growth potential. The current design was optimized to serve millions of clients in a network-based industry in which there were just a handful of competitors. This focus seemed to be well suited to the soon-to-be deregulated Spanish telecommunications market. Taking advantage of that opportunity required changing

the scope of the company’s activities, one of the five dimensions of Business Design. The company first invested in a few small telecommunications businesses, such as paging, to understand how transferable its Business Design would be to other endeavors. When it met with success, it continued to venture into new areas of the telecommunications industry. Today, the onetime electric utility’s telecommunications portfolio includes major stakes in wireless, long distance, and cable television businesses. The company has been rewarded for broadening the scope of its activities. Its market value today is 3.5 times what it was three years ago, the increase far outstripping its investments in telecommunications. The company’s market-value-to-revenue ratio, which was just 0.5 three years ago, is 1.7 today—a reflection, at least in part, of the company’s successful transfer of its Business Design to an adjacent, high-growth business.

Ambrosio Arizu is a vice president and Javier Gómez de Olea is a principal of Mercer Management Consulting; both are based in Madrid.

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stantly evolving business environment. Today’s winning Business Design will need to be reinvented again and again over the years. Coke, having successfully adopted and implemented its ‘‘manage-the-value-chain” design, must now redesign itself again to face a renewed threat from a revitalized Pepsi-Cola. The chairman and chief executive of another winning company, Michael Eisner of Disney, has said a business must be prepared to change itself every seven years. We would argue that there may be only one problem with this bit of advice: In many cases, such a timetable for reinvention might have to be cut in half. Rick Wise is a vice president of Mercer Management Consulting based in Boston.

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A blueprint for shareholder value growth

Reaping the fruits of Business Design
Value growth realization through rapid organizational change
by Diane MacDiarmid, Hanna Moukanas, and Rainer Nehls

T
A company may have created a Business Design perfectly suited to capturing future valuecreation opportunities. But unless the company can get its organization to rapidly move from its current Business Design to the new one, it will miss what these days is often little more than a fleeting opportunity.

oday’s winning companies—ones that are achieving sustainable and above-average growth in shareholder value—have at least two things in common: They have identified where and how customers will allow them to make a profit in the future, and they have redesigned their businesses to take advantage of that opportunity. Neither is easy. But enterprises that successfully carry out these, and just these, undertakings have only begun to tackle the real work. Unless a company can quickly catalyze changes in its organization that correspond to the changes in its Business Design, it will miss what these days is often little more than a fleeting opportunity. A beautiful blueprint, whether it be for a home or a business, isn’t worth much until it is transformed into something tangible. The sooner a Business Design is realized, the sooner it will be able to capture the value created by changing conditions. The longer the Business Design sits on the shelf, the more likely it will be made obsolete. Indeed, a key challenge for managers in today’s environment is getting their organizations to begin to change in support of a new Business Design even as that design is being conceived. Given the shortening cycles of value creation, change must be anticipatory and continuous: As a company’s latest organizational system is being implemented, the next version—one that will support tomorrow’s Business Design—must be under development. The ability to achieve this rapid and continuous change represents an enormous competitive advantage. The failure to develop this capability means ceding millions of dollars of shareholder value to competitors.

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Managers must start the process of organizational change even as the new Business Design is being conceived. And as a company’s latest organizational system is being implemented, the next version—one that will support tomorrow’s Business Design—must be under development.

Focusing on the organizational system Despite the paramount importance of aligning an organizational system with a company’s Business Design, the process is often ignored. Executives often view it as a less-than-strategic endeavor, one that merits little high-level management attention. Or they assume that the compelling economic logic of the new Business Design will translate spontaneously into a new organizational system. For these executives, the external business environment, with its demanding customers and ruthless competitors, is the place where the daunting challenges lie. But ask top managers about their biggest headaches, and most will tell you they originate closer to home. Indeed, most executives—more than 80 percent, according to surveys of corporate leaders conducted by Mercer Management Consulting—believe that the failure to achieve shareholder value growth is caused by internal, not external, factors. Identifying future profit opportunities and creating a Business Design that seizes those opportunities are certainly keys to achieving shareholder value growth— but they represent only half of the equation. When asked in the surveys why their organizations have failed to increase shareholder value, the executives repeatedly point to the same five problems: — people who are ill-equipped to assume the new roles and mindset necessary for success; — organization structures that impede decision making and slow response time; — processes that appear disjointed to the customer and produce outputs below a competitive standard; — organization infrastructure that is outdated, inefficient, and not supportive of the Business Design; and — leadership that does not vigorously champion needed organizational changes. Each of these five elements of the modern business organization—people, structures, processes, infrastructure, and leadership—must work together to support a company’s Business Design and increase shareholder value (see Exhibit 1). The moment a new Business Design is contemplated, executives must determine which element or elements of their organiza-

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Reaping the fruits of Business Design

Exhibit 1 The elements of an organization must work together to support a company’s Business Design

Leadership The direction-setting force • Vision/strategy articulation • Decision making • Governance • Institutional performance measures and goals

People The human capital of the company • Performance and rewards • Training and development • Career development • HR processes and capabilities • Motivation for change

Infrastructure The “connectors” across people, processes, and structure • Communications • Information systems • Production and logistics networks Structure The way positions are organized to ensure clarity and drive collaboration • Roles and responsibilities • Job design • Reporting relationships

Processes The way work is organized to create value • Work flows • Inputs/outputs/key decisions • Economics

tions are most critical to the new design—that is, which organizational system levers to pull first and hardest. Consider, for example, a financial services company that is moving to an information-based Business Design, one in which value capture will derive from giving employees, using a common database of information, substantial latitude in tailoring product offerings to individual customers’ priorities. Clearly, an effective infrastructure—including an information system that provides customer data across product lines—must be instituted. Without this upfront investment, the benefits of the new Business Design won’t be realized. At the same time, managers can’t seize on a single element and address only the issues related to it. The other elements of the organization must also support the Business Design. For example, the rapid, customer-focused decision making that is the hallmark of an information-based Business Design won’t materialize just by building a state-of-the-art computer system. The company also needs to focus on training and motivating its people to handle this additional responsibility. And the traditional command-and-control leadership model, with several layers of approval required for most decisions, will be incompatible with an approach that asks employees far down in the organization to take responsibility for the decisions that create value for the company.

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The arguments against change—or at least for postponing it—are universal: “Our customers are satisfied.” “We need to get everyone on board first.” “We don’t have the information technology and data we need.” “We have to reorganize our structure before we do anything else.”

Matching the organization to the Business Design Companies that are able to quickly align the elements of their organization with their Business Design can reap huge dividends. Charles Schwab, British Airways, and Nucor—three companies in very different businesses that implemented effective organizations in support of their Business Designs—have together created nearly $23 billion in shareholder value in the past decade. Charles Schwab, the discount brokerage, pursued a strategy in the 1990s built around a “switchboard” profit model. By positioning itself as the intermediary between thousands of investment products and millions of customers, it is largely immune to shifts in the popularity of any particular fund type while controlling a vast database of customer names, behaviors, and holdings. The validity of its Business Design has been borne out by the sharp increase in its market capitalization. Despite a sharp drop in its share price since the beginning of the year, the result of growing competition, Schwab’s current market capitalization is about $9 billion (three times its annual revenue), up from $150 million (one-third its annual revenue) in 1987. For its Business Design to succeed, Schwab knew that it would have to flawlessly execute millions of transactions daily; because the company was handling customers’ investments, lapses in quality or timely processing would be fatal to its customer relationships. To meet this critical strategic requirement of its Business Design, Schwab emphasized nearly error-proof processes, a superb information system infrastructure, and welltrained people to deal with customers. British Airways transformed itself into the premier airline for transatlantic business travel by focusing on a select segment of customers—business executives—and ensuring that its operations worked flawlessly to meet the requirements of this demanding, but very profitable, customer base. The new Business Design brought the company continuous profit and shareholder value growth during a period when the airline industry in general had become a “no-profit zone.” The Business Design adopted by British Airways required efficient and cost-effective processes, including scheduling, reservations, ticketing, in-flight services, and baggage handling. It required people who were acutely customer-focused and capable of resolving issues for ticketholders on the spot, using a combination of knowledge and judgment. British Airways also adopt-

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Reaping the fruits of Business Design

Often, one of the least promising environments for organizational change exists in companies that, by most appearances, are doing well: In such a setting, it can be difficult to create the sense of urgency necessary to overcome inertia. Satisfaction with the status quo, however, will soon become such a company’s greatest enemy.

ed a decentralized and streamlined structure aimed at moving decision making closer to the customer and speeding organizational response time. Nucor set out to be a low-cost producer of a relatively narrow range of steel products. Its Business Design called for using lowcost “mini-mill” technology and relying heavily on scrap steel for its raw material. Today, its market capitalization is more than $4 billion, significantly higher than larger, traditional competitors such as U.S. Steel and Bethlehem Steel. To support its Business Design, Nucor created an organizational system that included a flexible and low-cost work force, streamlined manufacturing processes, a low-cost infrastructure, a leadership team that continually articulates strategy and goals, and a bare-bones organizational structure. Fewer than 30 people at corporate headquarters run a business with revenue of more than $3 billion. Confronting the barriers to organizational change The success stories of Charles Schwab, British Airways, and Nucor make realigning an organization in support of a new Business Design seem, if not easy, at least logical and straightforward. Anyone who has tried to do it knows otherwise. After all, organizations are run and staffed by human beings, whose response to change is often more emotional than rational. The arguments against change—or at least for postponing it—are universal: “Our customers are satisfied.” “We need to get everyone on board first.” “We don’t have the information technology and data we need.” “We have to reorganize our structure before we do anything else.” Besides the natural human inertia that makes change difficult in any organization, most companies have particular cultures and values that, to varying degrees, are resistant to certain kinds of change. Often, one of the least promising environments for organizational change exists in companies that, by most appearances, are doing well: In such a setting, it can be difficult to create the sense of urgency necessary to overcome inertia. Satisfaction with the status quo, however, will soon become such a company’s greatest enemy, blinding it to the changes that are relentlessly making its current Business Design obsolete. But it is not only the organization itself that makes change difficult; it is also the nature of the change usually required to align an organization with a new Business Design. Just as the new

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design will have an impact across the entire company, so will the organizational change, which usually must be transformational rather than incremental. And a company will need to achieve this change while continuing to run its day-to-day business under the existing Business Design and organization. Indeed, a change program is at greatest risk of being derailed around the time that the company is making the transition from the old Business Design to the new one (see Exhibit 2).
Exhibit 2 Moving from an old Business Design to a new one poses numerous challenges

Old Business Design High-Risk Period

New Business Design

Time

Because the change will take place while business-as-usual continues, there will be competition from within the business for resources, particularly managers’ time and attention. This can result in the change program being put permanently on the back burner. Conversely, some companies become so absorbed in the transformation process that they become too internally focused, losing sight of the external marketplace environment and, especially, the customer. But perhaps the greatest barrier to organizational change is the need for the process to begin before it is entirely clear where the company is headed and what the new Business Design and organization will look like. It can be difficult to get people to embrace change when you ask them to move to a new place— but are unable to tell them, in the beginning at least, precisely where that is and what will be required of them. And yet this receptivity to change in the face of uncertainty is just what is needed when aligning an organization to support a new Business Design. It is at times like these that a visible and committed leadership team will earn its stripes. Executing parallel tasks In today’s rapidly shifting business environment, developing a Business Design and changing an organization to support it

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must be continuous and parallel tasks. Just as product developers work with marketing and manufacturing people during the design stage to ensure that a new product will meet government regulations and be cost-effective to make, so must strategists crafting a Business Design work with executives to ensure that the organization will be ready and able to carry out the design as soon as it is completed. A rule of thumb in the pharmaceutical industry holds that each day of delay in the Food and Drug Administration approval process for a new drug costs the drug manufacturer $1 million. Consequently, work must begin on facilitating that approval even as the drug is being developed. Likewise, aligning an organization in support of a company’s Business Design only after that design has been developed, reviewed, revised, approved, and packaged will doom the effort: The value-capture opportunity will have passed. The alignment process must parallel the development of the design (see Exhibit 3).
Strategic Anticipation Business Design Value Growth Realization

Exhibit 3 Redesigning the business and changing the organization must be done in tandem

Business Design

Organizational Change

Change Readiness • Change assessment • Change roadmap • Change communications (internal)

Change Planning • “Quick wins” identified • Best practices of competitors • Change communications (internal)

Change Execution • Rapid prototyping/ quick wins • Field tests/pilots • Change communications (external) • Employee training • Roll-out

The first stage of this process, Change Readiness, begins as soon as the need for anything more than incremental change has been recognized by the management team. At this point, the company will try to identify opportunities for future value capture, which will help determine the goals for its Business Design. It will conduct a candid self-assessment of its readiness for change and begin drafting a “change roadmap”—even though at this point the destination of the journey is only approximately defined. The roadmap, building on the selfassessment, will plot the possible path of change and then identify and quantify the roadblocks standing in the way. This will allow managers to begin work on removing or minimizing these roadblocks and getting employees and other key stakeholders to buy into the changes. At this stage, as throughout the process, communication within the organization will be important; it will convey the urgency for change and preview the change pathway.

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Perhaps the greatest barrier to organizational change is the need for the process to begin before it is entirely clear where the company is headed. It can be difficult to get people to embrace change when you ask them to move to a new place—but are unable to tell them, in the beginning at least, precisely where that is and what will be required of them.

The second stage, Change Planning, occurs as the new Business Design is being developed. At this point, various organization redesign options will be drafted, evaluated, and assessed against the company’s Business Design goals. The relevant change drivers—the organizational elements that need to be emphasized and the levers that need to be pulled in support of a particular Business Design—will be identified. So, too, will performance gaps in the existing organization and their root causes. “Quick wins”—selected initiatives that will produce immediate benefits and engender early support for the change program—will be identified and planned. Competitors’ and others’ best practices will be surveyed to identify useful models. The change roadmap will be refined, with the destination, if not yet pinpointed, at least directionally clear. The goals, performance gaps, and anticipated changes will be communicated to employees. During the third stage, Change Execution, changes in the organizational system will be executed at an accelerated pace. “Rapid prototyping”—a method in which small teams test and fine-tune changes to the organizational system while delivering momentum-building quick wins—will be carried out (see Exhibit 4). As benefits are realized, they will be communicated throughout and outside the organization. Employees will be trained for new jobs and regular performance measurements will be implemented, in order to hold people accountable for the required changes as well as for operating results. Pilot programs will test new products, services, or programs in the field. Finally, the new organizational system will be formally rolled out across the entire enterprise.

Exhibit 4 Rapid prototyping ensures that new capabilities are both developed and deployed in “real time”

Capability Deployment
fit Ra pi d Pr ot ot yp in g to Ac ce le r at e Le a

“Aim the Machine”
an d

Capability Development “Build the Machine”

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Reaping the fruits of Business Design

Be ne

s

Business Design dimensions Organizational systems

The overhaul of an auto components supplier
by Wolfgang Weidner

The globalization of the auto manufacturing industry has led to brutal competition within the auto components business. Strong and customer-focused suppliers have entered the traditional home markets of competitors, and numerous firms have fallen prey to takeovers. A multibillion-dollar European components business, eager to seize the opportunities inherent in this new environment, set out to change its Business Design to anticipate and respond to the priorities of its customers, the automakers. The company focused on its organizational system, one of the five dimensions of Business Design. The European company realized that the change in its Business Design required changing its entire relationship with its customers. Instead of acting as a simple producer of finished parts, it would need to become a partner with the automakers, selling them solutions rather than merely hardware. This would require assuming farreaching responsibility for much of the value chain, from design of the component part to its manufacture and delivery to final assembly of the automobile itself. The company focused on processes (the way work is organized) and structure (the way job positions are organized) as the organizational elements that would most effectively drive

change and make the business more responsive to customers. To bring its organization into alignment with its new Business Design, the company dismantled traditional functional “silos” and its command-and-control decision-making system. It replaced them with cross-functional and mostly self-governing business units organized around particular market segments. Each of the newly established units now has complete responsibility for customer acquisition, product R & D, technological planning, and manufacturing. The sales teams have been restaffed with engineers who can help design solutions that meet a particular automaker’s needs. Some of these engineers are located permanently at client sites. As a result of this overhaul of the company’s organizational structure, the company has enjoyed a clear decrease in lead time, fewer problems in the start-up of new product lines, and reduction of fixed costs.

Wolfgang Weidner is a vice president of Mercer Management Consulting based in Munich.

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The winners at organizational change, because they can’t always know where they are going before they set out, exhibit a willingness to take calculated risks. This approach results in frequent wins, occasional losses, but constant learning from both successes and failures.

Accelerating and streamlining the change process The difficult execution of the parallel tasks of Business Design development and organizational change can be guided and speeded by several insights. The first is an understanding of which organizational system elements are key drivers in the success of a particular Business Design. Knowing in advance that certain elements should receive the greatest focus will save a company precious time in a world where the half-life of Business Designs is rapidly shortening. Mercer Management Consulting research shows that such correlations exist and can be gleaned from the experience of successful Business Design executions, thereby eliminating the need for a trial-and-error approach. For example, Schwab was able to quickly and effectively implement its switchboard Business Design because it clearly understood it would need to focus on its processes, infrastructure, and people if the design were to succeed. Another insight that can help a company is an understanding of change and organizational dynamics. The enterprise needs to assess its history, culture, and values to determine its readiness for change, without which even the best-designed change programs are unlikely to get off the ground. It must analyze past change programs to identify both the drivers of change and the roadblocks that hindered it. An assessment of past efforts will allow the company to apply techniques—such as new internal communications strategies or leadership training—that will increase the likelihood of success for the current change programs. Finally, the company will benefit from an understanding of what is driving the move from its current Business Design to its new one. Most important, for the purposes of this analysis, is the company’s Value Migration® position—that is, whether shareholder value is migrating out of the company to competitors or another industry, or migrating into the company. This can be used to determine which of several patterns—Change for Survival, Change for Renewal, or Change for Preemption— should govern its change program (see Exhibit 5). For example, if the company is in a position of value outflow, the change program will require that managers communicate the urgent need for radical change. This will include interventionist survival techniques, such as cost cutting, that will create momentum for reinventing the organization quickly and will free up

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Low Change for Preemption Objective • Find next source of competitive advantage Focus of Change Effort • New, innovative Business Design moves • Perpetuation of entrepreneurial drive Challenge • Finding time/resources to focus on “next wave” growth issues

Change for Renewal Objective • Create platform for accelerated and sustainable shareholder value growth Focus of Change Effort • New innovative Business Design moves • Creation/regeneration of entrepreneurial drive Challenge • Instilling change dynamic, overcoming complacency

Urgency for Change

Change for Survival Objective • Undertake radical performance improvement and total strategic reorientation Focus of Change Effort • Stabilization and solvency • Growth-oriented Business Design Challenge • Instilling sense of urgency • Resuscitating without crippling the organization

High Value Inflow Stability Value Migration® Position Value Outflow

Exhibit 5 The type of change program deployed depends on the context

cash flow for investment in the new Business Design. In a position of value stability, the program will require less acute measures. These might include the creation of a new corporate vision, one that will provide a platform for profitable growth and renewal. In a value inflow position, the actions will be longerterm and more broadly based. One might be the continued nurturing of an entrepreneurial culture designed to keep the company ahead of the curve and to help it renew itself through the next successful Business Design. Embracing the challenge Such insights, while helpful in guiding and speeding the process of organizational change, clearly don’t provide formulaic answers. Getting from the current organizational system to the new one in a rapid and sure-footed manner also requires some calculated risk taking. In fact, Mercer Management Consulting research shows that the winners at organizational change, because they can’t always know where they are going before they set out, exhibit a willingness to take such risks. This approach results in frequent wins, occasional losses, but constant learning from both successes and failures. The winners also create a corporate culture where change is the norm rather than the exception. People are primed to reinvent the organization, not just once but again and again. A sense of urgency, driven by the need to respond to rapidly changing cus-

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tomer priorities, animates such a culture, ensuring that organizational change occurs faster rather than slower. After all, the slower the change, the more painful it usually is. Finally, the winners understand the importance of organizational change and alignment as part of the Business Design process. They know that, without an organization that supports a company’s Business Design, the best design in the world will be ineffective. It will simply become the subject of yet another strategy study sitting on a company’s shelf—the shelf of a company that won’t enjoy the fruits of shareholder value growth. The authors are vice presidents of Mercer Management Consulting. Diane MacDiarmid is based in Toronto, Hanna Moukanas is based in Paris, and Rainer Nehls is based in Munich.

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Executive summaries
Achieving Shareholder Value Growth Through Business Design

ENGLISH Achieving sustained shareholder value growth: Strategy in the age of Value Migration® by Adrian J. Slywotzky, David J. Morrison, and James A. Quella Market share is dead. Once, business leaders who increased revenue, decreased cost, fielded technically superior products, and expanded their market share could expect to reap enviable increases in shareholder value. These rules no longer hold true. Our research into leading value creators suggests a new paradigm for value growth. Under the new rules, three capabilities are essential to long-term success: 1) Strategic AnticipationSM, identifying future value creation opportunities, 2) Business Design, designing the enterprise so that it is able to seize those opportunities, 3) value growth realization, moving rapidly and successfully from the old Business Design to the new one. But the process—one of continuous reinvention in response to changing market conditions—doesn’t end there. By the time the new Business Design is in place, planning for the next one must be under way. “Changing the hand instead of the glove”: An executive roundtable on shareholder value growth A panel discussion with five top executives from a variety of industries highlights some of the issues facing managers as they strive to achieve sustained shareholder value growth. This should be a top corporate priority, the panelists agree. It’s getting harder to achieve. European companies in general have been slow to adopt the concept. Products are no longer the key to achieving value growth; customers are. But it’s not enough just to know your customers and their needs: You need to be able to predict what they will want five years from now. To do this, you can’t just continue to do what you do now, only better. You have to reinvent yourself—to “change the hand,” as one panelist says, “as opposed to changing the glove.” Identifying the opportunities of the future: Strategic AnticipationSM through marketing science by Eric Almquist and Gordon Wyner Executives need solid analysis—not anecdotal evidence or “hunches”—to help them envision future customer needs and priorities. Fortunately, advanced marketing science tools can create robust, fact-based pictures of the future and help executives identify where they should invest in a rapidly changing business environment. In 1995, technology pundits had built up a body of predictions concerning “broadband networks” and the multimedia services they would offer consumer households. A study conducted by Mercer Management Consulting based on two rigorous marketing science tools concluded that much of the conventional wisdom was wrong. The intervening three years have confirmed the study’s findings.

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A blueprint for shareholder value growth: Winning through strategic Business Design by Rick Wise The discipline of Business Design is a means to capture value from the rapidly shifting “profit zones” of today’s discontinuous business environment. It differs from other strategy frameworks in 1) its relentless focus on achieving shareholder value growth through sustained operating profit growth, the paring down of assets, and predictable performance; 2) its substitution of a product-centric view of business with one that emphasizes five broad dimensions critical to shareholder value creation: customer selection and value proposition, value capture, strategic control, scope, and organizational systems; and 3) its “outside-in” perspective, which focuses on customers and the marketplace rather than on a company’s organizational structure, operations, or core capabilities.

Reaping the fruits of Business Design: Value growth realization through rapid organizational change by Diane MacDiarmid, Hanna Moukanas, and Rainer Nehls A company may have identified a “profit zone” and then created a Business Design well suited to capturing the value that is ripe for realization in that space. But unless the organization is able to move rapidly and successfully from its old Business Design to the new one, it will miss what these days is often no more than a fleeting value-realization opportunity. That means companies must start realigning their organizations in support of their Business Design even as that design is being developed. They need to know immediately which elements of their organization—people, structures, processes, infrastructure, or leadership—are the primary change drivers for a particular Business Design. And they need to honestly assess the organization’s appetite for change.

FRANÇAIS S’assurer une croissance durable de la valeur: la stratégie à l’heure de la Migration de la Valeur par Adrian J. Slywotzky, David J. Morrison et James A. Quella Finie, la loi de la part de marché! Il n’y a pas si longtemps, les dirigeants d’entreprise qui parvenaient à augmenter le chiffre d’affaires et à diminuer les coûts tout en développant des produits techniquement supérieurs à ceux de leurs concurrents, et cela en augmentant leur part de marché, étaient sûrs d’accroître de façon significative la valeur pour l’actionnaire. Ces règles n’ont plus cours. Les travaux menés par Mercer Management Consulting auprès de champions de la création de valeur montrent qu’il existe une nouvelle logique de la croissance. Désormais, pour s’assurer d’une croissance durable, 3 aptitudes sont essentielles : (1) l’anticipation stratégique : identifier les futurs leviers de la création de valeur, (2) le “Business Design”: concevoir et organiser l’entreprise pour qu’elle profite de ces leviers, (3) réaliser la croissance de la valeur: évoluer rapidement de l’ancien Business Design vers le nouveau en s’assurant toutes les chances de succès. Mais ce processus de réinvention constante en réponse aux conditions changeantes du marché ne s’arrête pas là. Dès que le nouveau Business Design est en place, le suivant doit être en préparation ! “Changer la main, pas seulement le gant”: le point de vue des dirigeants sur la valeur pour l’actionnaire Cinq dirigeants de haut niveau, issus de secteurs différents, mettent en lumière les principaux défis à relever pour accroître la valeur de leur entreprise de façon durable. Ils sont unanimes : cela doit être désormais la première des priorités, même si cela est de plus en plus difficile à réaliser. En règle générale, les entreprises européennes ont été moins rapides à

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adopter ce concept. Le secret de la création de valeur ne réside plus dans les produits, mais dans les clients. Toutefois, il ne suffit pas de connaître sa clientèle et ses attentes pour réussir, il faut être capable aussi de prévoir ce que les clients voudront dans 5 ans. Pour y parvenir, les dirigeants ne peuvent plus se contenter de faire ce qu’ils font mais doivent le faire mieux. Ils doivent se réinventer ou, ainsi que l’a dit l’un d’entre eux : « changer la main, pas seulement le gant » ! Anticiper les opportunités de demain: l’anticipation stratégique grâce à un marketing “scientifique” par Eric Almquist et Gordon Wyner Les dirigeants ont besoin d’analyses solides, pas seulement d’évidences ou d’intuitions, pour anticiper les besoins ou les priorités futures du client. Fort heureusement, dans un environnement en rapide changement, des outils de marketing sophistiqués s’appuyant sur des faits peuvent maintenant leur permettre de visualiser concrètement le futur et d’identifier les créneaux où ils doivent investir. En 1995, des gourous des nouvelles technologies avaient émis nombre de prédictions concernant les réseaux à large bande et le potentiel de services qu’ils allaient offrir aux consommateurs. Une étude de Mercer Management Consulting fondée sur deux outils de marketing scientifique rigoureux arriva à la conclusion que beaucoup d’entre elles étaient erronées. Les trois dernières années ont confirmé les résultats de cette étude. Un modèle pour accroître la valeur pour l’actionnaire: gagner grâce à son Business Design par Rick Wise La discipline du Business Design consiste à capturer de la valeur dans des zones de profit aux contours

mouvants malgré un environnement économique instable. Ce type d’approche stratégique diffère des autres approches en plusieurs points. D’abord, il se concentre exclusivement sur la valeur créée pour l’actionnaire via l’augmentation du bénéfice d’exploitation, la diminution des actifs et la capacité à prévoir les performances. Ensuite, au lieu de centrer l’activité sur le produit, il privilégie les cinq dimensions clés de la création de valeur : la sélection des clients en fonction de leur potentiel, la capture de valeur, le contrôle stratégique, le champ d’activité, et les systèmes d’organisation. Enfin, cette approche se place du point de vue du client et du marché plutôt que de celui de l’entreprise, de sa structure ou de ses compétences. Récolter les fruits du Business Design: accroître la valeur en changeant son organisation rapidement par Diane MacDiarmid, Hanna Moukanas et Rainer Nehls Une entreprise peut avoir identifié une zone de profit et créé un design bien adapté pour profiter de la valeur à réaliser dans cet espace. Mais, à moins que son organisation ne soit capable de passer rapidement et avec succès d’une activité à une autre, elle risque de rater ce qui n’est plus aujourd’hui qu’une opportunité éphémère de création de valeur. Cela signifie que les entreprises doivent commencer à adapter leurs structures pour supporter leurs nouvelles activités avant même que ces activités ne soient opérationnelles. Elles ont besoin de savoir immédiatement lequel des éléments de leur organisation—les hommes, les structures, les process, les infrastructures, la direction—sera moteur du changement pour un “Business Design” donné. Et surtout elles ont besoin d’évaluer très honnêtement l’appétit de changement de l’entreprise.

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DEUTSCH Value Growth langfristig sichern: Strategie im Zeitalter von Value Migration® von Adrian J. Slywotzky, David J. Morrison und James A. Quella Der Marktanteil ist tot. Früher konnten Unternehmer durch Ertragssteigerung, Kostensenkung, die Entwicklung technisch überlegener Produkte und den Ausbau der Marktanteile eine überdurchschnittliche Steigerung des Unternehmenswertes erwarten. Diese Regel gilt jedoch nicht mehr. Untersuchungen, bei denen Mercer Management Consulting führende Wertgenerierer unter die Lupe genommen hat, weisen auf ein neues Paradigma für Value Growth. Unter den neuen Bedingungen sind drei Fähigkeiten entscheidend für langfristigen Erfolg: (1) Strategic AnticipationSM—die Vorwegnahme zukünftiger Möglichkeiten zur Wertgenerierung, (2) Business Design—Unternehmenskonzept, das ein Unternehmen befähigt, diese Möglichkeiten durch entsprechende Strategien auszuschöpfen, (3) Value Growth Realization—schneller, erfolgreicher Übergang vom alten zum neuen Business Design. Jedoch hört der Prozeß, der von stetigem Redesign als Antwort auf veränderte Marktbedingungen gekennzeichnet ist, an dieser Stelle nicht auf: Wenn das neue Business Design umgesetzt ist, muß die Planung des nächsten Designs bereits anlaufen. Den Inhalt und nicht die Verpackung ändern: Manager-Runde über Shareholder Value Growth Ein Gremium aus fünf Top-Managern unterschiedlicher Industriezweige hat sich intensiv mit einigen der Themen beschäftigt, mit denen sich Führungskräfte in ihrem Streben nach langfristigem Wertzuwachs auseinandersetzen müssen. Die Teilnehmer der Gesprächsrunde sind übereinstimmend der Auffassung, daß Value Growth als übergeordnetem Unternehmensziel höchste Prioriät eingeräumt werden muß. Der Weg dorthin ist allerdings zunehmend steinig. Für europäische Unternehmen gilt im allgemeinen, daß sie sich dieses Konzept nur zögerlich zu eigen machen. Produkte sind nicht mehr länger der Schlüssel zu Value Growth; es sind die Kunden. Es genügt jedoch nicht, die Kunden und ihre Bedürfnisse zu kennen, entscheidend ist die Vorwegnahme zukünftiger Bedürfnisse. Infolgedessen kann die Lösung nicht heißen: weitermachen wie bisher, nur besser. „Sie müssen Ihr Unternehmen völlig umgestalten“, so ein Teilnehmer der Runde, „und den Inhalt, nicht die Verpackung ändern.“ Zukünftige Marktchancen entdecken: Strategic AnticipationSM durch wissenschaftliches Marketing von Eric Almquist und Gordon Wyner Nur verläßliche Analysen und nicht isolierte Einzelinformationen oder undifferenzierte Einschätzungen versetzen Manager in die Lage, zukünftige Kundenbedürfnisse und-prioritäten vorherbestimmen zu können. Mit ausgefeilten wissenschaftlichen Marketinginstrumenten können verläßliche Zukunftsbilder gezeichnet werden, die dem Top-Management wertvolle Hinweise liefern, in welchen Bereichen der hochdynamischen Geschäftswelt sich Investitionen lohnen. Ein Beispiel: 1995 haben Experten eine Reihe von Vorhersagen über „Broadband Networks” und deren zukünftige Multimedia-Dienste für Privathaushalte getroffen. Eine Studie der Mercer Management Consulting, die auf zwei äußerst zuverlässigen Marketinginstrumenten basiert, kam zu der Feststellung, daß viele dieser Vorhersagen falsch waren. Die Entwicklung in den darauffolgenden drei Jahren hat die Ergebnisse dieser Studie bestätigt. Ein Modell für Wertzuwachs: Mit Strategischem Business Design gewinnen von Rick Wise Das Business Design ist ein Weg, um im heutigen dynamischen Marktumfeld Wert aus sich stets verändernden Gewinnzonen zu erzielen. Es unterscheidet sich von anderen strategischen Konzepten durch 1) seinen uneingeschränkten Fokus

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auf Wertsteigerung durch langfristige operative Ertragskraft, reduzierte Kapitalbindung und vorhersagbare Leistung; 2) die Substitution einer produktfokussierten Sichtweise durch einen Ansatz, der sich auf fünf breitangelegte Dimensionen gründet. Diese wiederum sind entscheidend für die Generierung von Unternehmenswert: Kundenselektion und Wertvorteil für Kunden, Werterzielung, Strategische Absicherung, Aktionsfeld und Organisatorische Systeme; und 3) eine „outside-in“-Perspektive, die Kunden und Märkte in den Mittelpunkt stellt, anstelle der Strukturen, Aktivitäten und Kernkompetenzen des Unternehmens.

Erfolgreiche Umsetzung des Business Designs: Value Growth realisieren durch eine schnelle Anpassung der gesamten Organisaion von Diane MacDiarmid, Hanna Moukanas und Rainer Nehls Ein Unternehmen, das eine Gewinnzone identifiziert und ein maßgeschneidertes Business Design entworfen hat, um in dieser Zone Gewinne erzielen zu können, wird trotzdem nicht in der Lage sein, die Gewinnchancen zu realisieren, wenn es nicht schnell und erfolgreich den Übergang vom alten zum neuen Business Design vollzieht. Das bedeutet, daß Unternehmen bereits in der Entwicklungsphase des neuen Business Designs zu dessen Unterstützung mit der Anpassung der gesamten Organisation beginnen müssen. Wichtig ist die rasche Erkenntnis, welche Elemente— Mitarbeiter, Strukturen, Prozesse, Infrastruktur oder Führung—die ausschlaggebenden Change-Motoren für das neue Business Design sind sowie eine nüchterne und ehrliche Einschätzung der eigenen Veränderungsbereitschaft.

E S PA Ñ O L Obtener crecimiento sostenido del valor: Estrategia en la era de “Value Migration®” por Adrian J. Slywotzky, David J. Morrison y James A. Quella La cuota de mercado está muerta. Antes, los líderes en el negocio que incrementaban los beneficios, reducían costos, ofrecían productos técnicamente superiores y aumentaban sus cuotas de mercado podían esperar aumentos envidiables en el valor para el accionista. Pero estas reglas ya no son válidas. Nuestra investigación sobre los creadores de valor nos sugiere un nuevo paradigma para el crecimiento de este valor. En este escenario en el que rigen nuevas reglas, hay tres capacidades esenciales para el éxito a largo plazo: 1) Anticipación estratégica, la identificación de futuras oportunidades de creación de valor, 2) Diseño del negocio, el diseñar la empresa de tal modo que pueda aprovechar estas oportunidades, 3) Realización del Crecimiento del Valor, el cambiar rápidamente y con éxito del antiguo diseño del negocio al nuevo. Pero el proceso, de continua reinvención en respuesta a las condiciones del mercado siempre en cambio, no termina aquí: En el momento en que el nuevo diseño ya se haya implantado, debe comenzarse a planificar el próximo. “Reinventarse”, esa es la clave: Mesa redonda sobre el crecimiento del valor para el accionista Un panel de cinco altos ejecutivos de diversas industrias discutieron sobre algunos de los temas a los que los directivos se enfrentan en su camino para alcanzar un crecimiento sostenido del valor. Todos estuvieron de acuerdo en que esta perspectiva debería ocupar un lugar prioritario para la Alta Dirección.

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Cada vez se hace más difícil lograr este crecimiento. En general, las compañías europeas han sido lentas en adoptar este concepto. La perspectiva ha cambiado: la clave ya no es el producto, sino el cliente. Pero no es suficiente conocer a tus clientes y sus necesidades hoy, necesitas ser capaz de predecir cuáles serán dentro de cinco años. Para ello, tienes que cambiar, reinventarte, no puedes seguir haciendo lo que haces hoy pero sólo de mejor manera. Cómo identificar las oportunidades del futuro: Anticipación estratégica mediante el marketing como ciencia por Eric Almquist y Gordon Wyner En 1995 los expertos en tecnología han construído una suma de predicciones sobre “redes de banda ancha” y servicios de multimedia que se ofrecerán al mercado residencial. Un estudio realizado por Mercer Management Consulting basado en herramientas científicas y rigurosas llegó a la conclusión de que gran parte de la sabiduría convencional estaba equivocada. Los tres años de desarrollo han confirmado la veracidad de los resultados del estudio. La clave para el crecimiento del valor para el accionista: Cómo vencer mediante el diseño estratégico del negocio por Rick Wise La disciplina de diseño del negocio es un medio para capturar valor de las zonas de rentabilidad que tan rápidamente varían en el hoy en día discontinuo escenario económico. Se diferencia de otros marcos de estrategia en 1) su constante enfoque puesto en alcanzar el crecimiento del valor para el accionista

mediante el crecimiento sostenido del beneficio operativo, la reducción de activos y el rendimiento predecible; 2) la sustitución de una visión centrada en el producto por una que dé importancia a las cinco dimensiones críticas para la creación de valor: la selección de los clientes y la proposición de valor, la captura de este mismo valor, el control estratégico, su alcance y los sistemas de organización y 3) su perspectiva de “dentro a fuera” enfocada en los clientes y el mercado y no en la estructura organizativa, operaciones o capacidades clave. Recogiendo los frutos del diseño del negocio: El crecimiento del valor mediante la armonización de la organización por Diane MacDiarmid, Hanna Moukanas y Rainer Nehls Una compañía puede haber identificado un área de rentabilidad y creado un diseño del negocio que se adapte perfectamente para capturar el valor ya maduro en ese espacio. Pero a no ser que la organización sea capaz de cambiar rápidamente el viejo diseño por el nuevo con éxito, perderán lo que hoy es sólo una oportunidad lejana de hacer realidad este valor. Eso significa que las empresas deben comenzar por armonizar su organización para apoyar el nuevo diseño del negocio, incluso al tiempo que éste se está desarrollando. Necesitan conocer inmediatamente qué elemento o elementos de su organización, como el personal, las estructuras, los procesos, la infraestructura o el liderazgo, son los impulsores del cambio para un diseño específico. Y lo que es realmente importante, necesitan evaluar cuál es el deseo real de cambio de la organización.

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PORTUGUÊS Alcançar Crescimento Sustentado de Valor: Estratégia na Era de “Value Migration®” por Adrian J. Slywotzky, David J. Morrison e James A. Quella A quota de mercado é um conceito ultrapassado. Em tempos, os gestores que conseguiram aumentar receitas, diminuir custos, proteger produtos tecnologicamente superiores, e aumentar quota de mercado, podiam esperar a geração de significativas mais valias para os seus accionistas. Hoje, estas regras de jogo já não são aplicáveis. Os nossos estudos sobre as entidades líderes na criação de valor sugerem o aparecimento de um novo paradigma de crescimento de valor. No novo contexto, há três requisitos essenciais para alcançar uma posição de sucesso sustentável no longo prazo: (1) “Strategic AnticipationSM”—identificar futuras oportunidades de criação de valor, (2) “Business Design”— estruturar o negócio por forma a dotá-lo da capacidade de captar novas oportunidades, (3) Realização de Crescimento de Valor—transição rápida e eficaz de um Business Design para outro. Contudo, este processo—de reinvenção contínua em resposta à mudança das condições de mercado—não termina aqui: quando, finalmente, o novo Business Design está posto em marcha, já o planeamento do próximo deve estar iniciado. “Mudar a mão e não a luva:” Uma mesa redonda sobre crescimento de valor accionista Um painel de executivos de topo, provenientes de diferentes sectores, discute alguns dos principais desafios enfrentados hoje pelos gestores na sua luta por alcançar um aumento de valor sustentado. Concordam que este objectivo deveria ser uma prioridade em todas as empresas. É, no entanto, cada vez mais difícil prossegui-lo. E, em geral, as empresas europeias têm levado algum tempo a adoptar este conceito. Os produtos deixaram de ser o veículo para um crescimento sustentado. Hoje, sãono os clientes. Contudo, não é suficiente apenas conhecer os clientes e as suas necessidades, é preciso prever o que eles vão querer daqui a cinco anos. E para tal, não é possível continuar a fazer o mesmo que se faz hoje com apenas algumas melhorias, as empresas têm que se reinventar—“é necessário”, afirma um dos presentes, “mudar a mão e não a luva”. Identificando as Oportunidades para o Futuro: “Strategic AnticipationSM“ recorrendo às Ciências de Marketing por Eric Almquist e Gordon Wyner Os gestores necessitam de análises sólidas — e não de “palpites” ou elementos não justificados—que os ajudem a prever futuras necessidades e prioridades dos clientes. Afortunadamente, existem hoje sofisticados instrumentos de marketing que permitem gerar cenários sólidos e fundamentados que ajudam os gestores a identificar oportunidades de investimento numa envolvente económica em rápida e constante mudança. Em 1995, os especialistas tecnológicos tinham gerado um conjunto de previsões sobre ‘redes de comunicação de banda larga’ e serviços multimédia por elas a oferecer. Um estudo dirigido pela Mercer Management Consulting, com base em dois poderosos instrumentos de marketing, concluiu que grande parte dos conhecimentos convencionais estavam errados. Os três anos decorridos desde essa data vieram confirmar os resultados desse estudo. Um Plano para o Crescimento do Valor Accionista: Vencer através do Desenho Estratégico de Negócio por Rick Wise “Business Design” é um modo de captação de valor em “profit zones” em rápida e constante mudança, num contexto de negócio actualmente descontínuo. O mesmo difere de outros modelos estratégicos: 1) por via de uma inexorável focalização em alcançar crescimento de valor accionista através do incremento sustentado dos resultados operacionais, da racionalização de activos, e de performance previsível; 2) pela substituição de uma visão de

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negócio centrada nos produtos (“product-centric”) por uma visão que enfatize cinco dimensões críticas para criação de valor accionista: selecção de clientes e proposta de valor, captação de valor, controlo estratégico, âmbito do negócio, e sistemas organizacionais; e 3) pela sua perspectiva “outside-in” que focaliza os clientes e o mercado em vez de estruturas organizacionais, operações ou capacidades base.

Colher os Frutos do “Business Design:” Realização de Crescimento de Valor mediante Rápida Mudança Organizacional por Diane MacDiarmid, Hanna Moukanas e Rainer Nehls Uma empresa pode ter identificado uma “profit zone” e criado um Business Design capaz de captar valor realizável nessa área. Contudo, se a organização não conseguir transitar rapidamente de um Business Design para outro, perder-se-á seguramente uma rara oportunidade de realização de valor. Isto significa que as empresas devem começar a realinhar as suas organizações em torno do Business Design logo que este comece a ser desenvolvido. É necessário saber, de imediato, qual ou quais os elementos da organização—pessoas, infra-estruturas, processos ou liderança—que serão determinantes críticos de mudança para o novo Business Design. E dever-se-á avaliar, com realismo, a apetência da organização para a mudança.

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