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An elaboration

on the themes
of Mercer’s best-
selling 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 Achieving Shareholder Value Growth
1998 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 Editor
Matthew A. Clark, co-chair Paul Hemp
Carla Heaton, co-chair
João P. A. Baptista Designer
James W. Down Trina Teele
Jean-Pierre Gaben
August Joas
David J. Morrison
Patrick A. Pollino
James A. Quella
Adrian J. Slywotzky

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 ten-
uous, 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, incre-
mental 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 tomor-
row’s. Errors are costly and hard to overcome.

Today, strategy requires a new, outside-in perspective, one provid-


ed 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 cus-
tomers 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 some-
one else has seized what these days is often little more than a
fleeting value-creation opportunity.

7
This issue of the Mercer Management Journal is in essence a man-
ifesto. From the first article, which argues that today’s market-
place 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 devel-
opment, 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 share-
holder 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 achiev-
ing 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 intro-
duces a new editorial design. We think we’ve succeeded in mak-
ing the Journal easier to read and more engaging. We hope you
agree.

Sincerely yours,

James A. Quella James W. Down


Vice Chairman Vice Chairman

8
Achieving sustained shareholder value growth
Strategy in the age of Value Migration®

by Adrian J. Slywotzky,
David J. Morrison,
and James A. Quella

W 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.
Once, business leaders The assumption that size counted was central even to the large-
scale computerized war games that officers used for training and
who increased revenue, strategy.

decreased cost, fielded The Vietnam war dramatically illustrated that military strategy
could no longer rely on the old rules of the game. Despite over-
technically superior whelming firepower and mass, the United States and South
Vietnamese troops were unable to prevail over the North
products, and expanded Vietnamese army, whose clear objectives were informed by a
superior understanding of geography, local resources, and psy-
their market share could chology. Building on the lessons of Vietnam, Desert Storm was
the first really modern war. The United States and its allies,
expect to reap enviable despite being the smaller on-site force, harnessed advanced tech-
nology—from satellites to smart bombs—to provide unparal-
increases in shareholder leled information to generals. This enabled them to conduct a
complex, highly choreographed, multi-fronted war that rewrote
value. No longer. Achieving the rules for military strategy. These new rules require that old-
line generals make the transition to a new way of thinking:
sustained value growth
— from a static to a dynamic view of battle, where thinking
requires a new strategy several moves ahead is now essential rather than merely
desirable;
framework that reflects the
— from a monolithic, mass-based approach, waged on a limited
times: Business Design. 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. 9


In the last 30 years, the — from a focus on simple territorial objectives to more subtle
and sophisticated definitions of success.
focus of strategy has
As a result, military strategy has become simultaneously more
shifted, from organization critical and more difficult.

economics, which empha- We are on the cusp of an equally profound reshaping of the role
of and requirements for business strategy. Able commanders
sized the improvement such as Jack Welch of GE, Bill Gates of Microsoft, and the late
Roberto Goizueta of Coca-Cola, having mastered the new
of organization and strategic order, have achieved stunning victories for their share-
holders and employees.
command-control func-
When Strategy Didn’t Matter
tions; to relative eco- It may seem hard to believe, but for much of the post-World
War II period, customer and marketplace strategy didn’t matter.
nomics, which made use In the 1950s and early 1960s, customer demand often out-
stripped capacity, and the resulting high systemic growth rates
of tools like the “lifted all boats.” This was especially true for the U.S. economy,
which enjoyed a strong relative competitive advantage during
“experience curve” and the period. Moreover, regulation, global trade management, and
outright protectionism created relatively stable industry environ-
the “five forces” model; ments within which large-scale players had hegemony.

to efficiency economics, As the 1960s progressed, the “if you build it, they will come”
euphoria was supplanted by a need for more rigorous business
characterized by thinking. Dominant strategic approaches centered around organ-
ization economics: improving organization structure and com-
downsizing and reengi- mand-control functions.

neering. Now, the focus With the advent of the 1970s, and the balancing of supply to
demand, the focus changed again. As exemplified by the “experi-
has shifted again. ence 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 man-
agement’s core concerns.

Throughout these periods, strategic thinking was a narrow, eso-


teric 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 dis-
ciplined R&D capability. Build high relative market share
through rapid roll-out, aggressive capacity expansion, and pow-
erful marketing and sales. Harness scientific management prac-
tices—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. Value-
growth 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 fif-
teen companies ranked by absolute dollars of revenue growth,
Exhibit 1 Revenue and
profit growth don’t always operating profit growth, and shareholder value growth (see
correlate with value growth Exhibit 1). Only two of the top fifteen revenue growers were

Top 15 Revenue Growers Top 15 Operating Profit Growers Top 15 Shareholder Value Growers
1990-1996 1990-1996 1990-1996 CAGR

WAL-MART INTEL GENERAL ELECTRIC $113BB 21%


FORD MOTOR FORD MOTOR COCA-COLA $100BB 27%
TOYOTA GENERAL ELECTRIC INTEL $100BB 57%
ALLIANZ AT&T MICROSOFT $90BB 50%
GENERAL MOTORS NOVARTIS TOYOTA $68BB 18%
NIPPON TELEPHONE & TELEGRAPH PHILIP MORRIS MERCK $62BB 18%
CHRYSLER CHRYSLER ROCHE $58BB 31%
METRO GLAXO WELLCOME EXXON $57BB 11%
AXA-UAP COLUMBIA/HCA ROYAL DUTCH SHELL $52BB 14%
CREDIT SUISSE MICROSOFT PHILIP MORRIS $46BB 12%
SIEMENS HEWLETT-PACKARD HONGKONG SHANGHAI BANK $44BB 27%
HEWLETT-PACKARD HONDA PROCTER & GAMBLE $44BB 16%
VOLKSWAGEN PROCTER & GAMBLE HEWLETT-PACKARD $43BB 37%
SONY WAL-MART CISCO SYSTEMS $41BB 102%
MATSUSHITA MERCK JOHNSON & JOHNSON $41BB 18%

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

Mercer Management Journal 11


Increasingly, we see three also top value growers. Only seven of the top operating profit
growers were also top value growers. Clearly, biggest is no longer
sorts of struggling enter- necessarily best.

prises: firms with empty More and more in our research, we see three sorts of struggling
enterprises. The first, firms with empty revenue or market share, are
revenue or market share, characterized by continued profitless growth. Many consumer
electronics and PC sales and distribution companies are prime
characterized by continued examples. The second, bottle rockets, are companies that climb
rapidly to vertiginous heights of stock market success and then
profitless growth; bottle just as rapidly fall back to earth. Netscape—relying on ubiquity
and evanescent product superiority as its sources of sustainability
rockets, the companies instead of working to build in sources of continuing strategic
control—is an example. The third, asset monsters, are asset-inten-
that enjoy rapid stock sive firms that earn insufficient returns on their capital employed,
either because of flaws in their original business model or because
market success and then they are blindsided by rapid change. These companies find that
achieving market share goals—sometimes even with profitable
crash back to earth; and growth—demands more fixed assets and working capital than can
be deployed at attractive returns. Big steel and store-based com-
asset monsters, businesses puter and software retailers are historical examples. Some utili-
ties, because of deregulation, will soon join their ranks.
that earn insufficient
We’re not suggesting that the challenges faced by such companies
returns on their capital are new. But their incidence is increasing, which suggests that
traditional strategy approaches no longer apply. So what hap-
employed. pened? The old rules were overthrown by five quiet revolutions:

— The globalization of regional players, which has led to


worldwide overcapacity, price pressure, and product com-
moditization.

— The blurring of traditional industry boundaries, catalyzed by


the emergence of economically advantaged substitute tech-
nologies 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 infor-


mation 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

12 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 broad-


er group of more educated customers, greater pricing trans-
parency, and the creation of new information-based compet-
itive business models that, by their very nature, can be
highly customer-responsive.

The direct impact of these revolutions is rapidly changing cus-


tomer 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 exam-
ple, 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
Change Drivers
customer priorities and
new Business Design
alternatives drive Value Boundary Changing Industrializing Entrepreneurial
Blurring Globalization Role of Distribution Support
Migration® Information Channels Systems

Value Sector Rivalry

Changing Dynamic Emerging


Customer Customer Business
Priorities Decision Designs
Making

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.

Mercer Management Journal 13


IBM Intel/Microsoft

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

Digital Oracle/EDS
30 30
25 25
20 20
EDS
15 15
Oracle
10 10
5 5

0 0
1977 1987 1997 1977 1987 1997

Market capitalization through December 31, 1997, in billions of (1995) dollars.


Source: Mercer Management Consulting Value Growth Database

Exhibit 3 Market value Value migrated from Ford’s vertically integrated, single-car-
increasingly flows from focused Business Design to GM’s price-laddered design in the
outmoded Business
Designs to newer ones 1920s. It moved from corner grocery stores to supermarkets in
better calibrated to satisfy the 1930s, from fragmented merchandisers to national catalogue
critical customer priorities
retailers, such as Sears, in the 1890s, and to national merchan-
dise 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 cho-
sen customers’ priorities and well-differentiated from competi-
tors; 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 oper-
ating 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 expect to enjoy a long economic life. Why? Speedier Food and
Drug Administration review cycles meant that the remaining
of shareholder value from patent life at launch could be as long as 12 to 15 years. In addi-
tion, the generics industry was embryonic; it took more than a
increasingly outmoded decade for generic substitution to erode a product’s market
position.
Business Designs to others
By the 1980s, the growing complexity of drug approval reduced
better calibrated to satisfy remaining patent life at launch to 10 years, and the generics
industry had come of age. Today, it is not uncommon for a
critical customer priorities, branded pharmaceutical to lose half its share of prescriptions to
generics within nine months of patent expiration. What was
is not new. But the pace once a nearly 30-year value creation cycle has been compressed
to little more than a decade.
of Value Migration is accel-
In this increasingly dynamic business environment, the role of
erating. In industry after top management has changed. It is no longer enough to focus on
operational excellence alone. In order to sustain the firm’s value
industry, we see value growth, managers must answer the following questions: How
much life remains in our current Business Design? Where will
creation cycles—the life- we be allowed to create shareholder value? How do we seize
these opportunities as rapidly as possible?
cycle of any given Business
Despite the sea change in the rules of business success, many
Design—shortening. 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 eval-
uating the likelihood of discontinuous change. They use “core
Exhibit 4 Business Designs competency” thinking to identify the foundations for future
have a finite lifecycle growth. And when all else fails, they [continued on page 18]

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 The company maintains its value either because Value flows away from the company toward
share of value because its Business Design its Business Design remains powerful (though Business Designs that more effectively meet
is superior in satisfying customers’ priorities. mature) or because no credible alternatives exist. evolving customer priorities.

Mercer Management Journal 15


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

The communications services industry market value grew The need for more flexible com-
industry has, in recent years, from under 25 percent in 1991 munications connectivity than
been an area of steady share- to over 45 percent by the end traditional wireline provides is
holder value growth. Since of 1997, reflecting the migra- driving value growth in digital
1991, the combined market tion of value to them from tra- wireless services, including
value for firms competing in ditional providers (see exhibit). those that are satellite-based.
communications services has This change is behind the value
increased by about 120 per- These non-traditional service growth of providers such as
cent, slightly higher than the providers are generating value Nextel and PanAmSat. The
increase for the S&P 500 Index. growth primarily in three areas. explosion of communications
But the majority of new value The unprecedented rise of the volume—resulting from the
growth has come not from the Internet is driving value growth reduction of cost-per-communi-
traditional service providers— in data communications ser- cation to nearly zero in areas
AT&T, MCI, Sprint, GTE, the vices. Beneficiaries have been such as E-mail and voice mail—
“Baby Bells”—but from non- non-traditional service providers is driving value growth in con-
traditional providers. Indeed, such as WorldCom, America text services, which organize
those companies’ share of Online, Qwest, and @Home. and provide meaning to a cus-

$361BB $402BB $465BB $456BB $615BB $664BB $803BB

Providers’ shares of 100%


Non-
communications
90% traditional
services industry Providers
market value 80% • Data
- Internet
- Broadband
70%
• Wireless/
Satellite
60%
• Context

50%

40%
Baby Bells
and GTE
30%

20%

AT&T,
10%
MCI, and
Sprint
0%
1991 1992 1993 1994 1995 1996 1997

Market values include long-term debt.


SOURCE: Mercer Management Consulting Value Growth Database

16 Achieving sustained shareholder value growth


tomer’s communications. to business customers. Yahoo!’s the superior Business Design
Winners in this category are focus on providing navigation gets an overwhelmingly dispro-
Yahoo! and Premiere and context assistance for portionate share of the value
Technologies. Internet users has given it growth. For example, America
shareholder value multiples Online’s Business Design
These three areas of value higher than firms with greater focused on creating an online
growth reflect new areas of revenue that merely provide “community” that was easy for
technology innovation. For access to the ‘Net. even technology novices to join,
example, new packet-switching on building subscriber volume
and compression technologies The danger for established ser- through free trial software, and
have allowed some non-tradi- vice providers is to ignore the on generating revenue through
tional providers to greatly power of newly created advertising and transaction
expand the amount of informa- Business Designs such as these. fees. CompuServe, AOL’s early
tion transmitted on an existing As regulatory barriers come rival, had a Business Design that
line. But even though new down, many Baby Bells and focused on providing informa-
technology has given upstart long distance providers are tion to more sophisticated users
providers a source of competi- focusing on strategies built and generating revenue
tive advantage, traditional around improving their current through subscription fees. AOL’s
providers are quickly able to Business Designs, through cost superior design helped it
replicate this technology. cutting and expansion of scale. reverse CompuServe’s early lead
Technology alone is insufficient Like the steelmakers, airlines, and leave later-comers like
to generate significant creation and automakers before them, Prodigy, Microsoft Network,
of shareholder value. these companies risk missing and AT&T, along with
the true competition and the CompuServe, in the dust. This
Instead, according to a recent true opportunity. Instead, the battle was won very early by
study of the communications established players should look choices AOL made in its
services industry by Mercer toward redesigning their busi- Business Design. The winners
Management Consulting, it is nesses for the customer priori- in the next battles for commu-
the non-traditional players with ties, technologies, and econom- nications services are creating
innovative Business Designs that ics of the future. their winning Business Designs
have captured the majority of right now.
value growth over the past six The stakes for developing a
years. Nextel has prospered by Business Design that will cap- Richard S. Christner is a vice
refocusing on a well-defined set ture future value creation president of Mercer Management
of customers: business work- opportunities are high. The Consulting based in
groups. WorldCom’s end-to-end communications and related Washington, D.C.
fiber network, assembled technology industries show an
through several acquisitions, increasing propensity toward
gives it the advantage in provid- “winner-take-all” competitive
ing low-cost, seamless service battles, where the player with

Mercer Management Journal 17


reengineer to make up for the shrinking operating profit growth
delivered by a declining Business Design. These are fundamen-
tally 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
Exhibit 5 Companies that earn attractive returns. Identifying and occupying these
master the discipline of
Business Design are well zones requires a robust understanding of customers’ changing
rewarded priorities, economics, and behavior; an “outside-in” approach

Indexed to 1980 Values


4,000 CAGR
1980-1997

3,500 Business 23.3%


Design
1
Grandmasters

3,000

2,500

2,000

1,500

1,000

S&P 500 12.3%


500
Market Share 7.7%
Leaders2
0
1980 1982 1984 1986 1988 1990 1992 1994 1996

1
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.
2
Market share leaders include American Airlines, Bethlehem Steel, Digital Equipment, Ford, GM, IBM, Kmart, Sears, United Airlines, and U.S. Steel.
SOURCE: Mercer Management Consulting Value Growth Database

18 Achieving sustained shareholder value growth


to strategy development; and a disciplined effort to under-
stand 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

$239.6BB
Exhibit 6 GE’s value
growth through business
redesign

GE Shareholder
Value

$13.1BB
1981 1997
Shareholder
Value/Revenue: 0.5x 2.7x

SOURCE: Mercer Management Consulting Value Growth Database

Mercer Management Journal 19


Legendary value creators was a diversified manufacturer of both industrial and consumer
products, from light bulbs to jet engines to locomotives to plastic
excel in three broad areas: resin. GE’s shareholder-value-to-revenue ratio—its market capi-
talization divided by its annual sales—was 0.5. By 1997, GE had
Strategic AnticipationSM, grown to become the most valuable company in the world, with
a market value of $239.6 billion and a shareholder-value-to-rev-
the identification of future enue ratio of 2.7 (see Exhibit 6).

“profit zones”; Business How did Welch achieve this feat? He worked smarter as well as
harder. Over 16 years, he reinvented GE, transforming it from a
Design, the development classic product-oriented manufacturer into a services company
where products are viewed as just a component of the total solu-
of the enterprise blueprint tion provided to customers. Welch’s capacity for Strategic
Anticipation is exceptional; based on his customer-driven under-
that will best capture the standing of where the profit zone will be tomorrow, he has guid-
ed the company through an evolution of Business Design phases
identified profit zone(s); (see Exhibit 7).

and value growth His talents for Business Design and value growth realization are
no less impressive. In the early 1980s, Welch saw that occupying
realization, the galvanizing the profit zone for most of GE’s businesses meant capturing
dominant share in chosen product markets. In response, he gave
of the organization to the organization a challenge: Be Number 1 or Number 2 in a
sector or exit the business. As the mid-1980s arrived—and based
create the new Business on his frequent interactions with the CEOs of GE’s customers—
Welch saw the profit zone shifting. Increasingly powerful cus-
Design. tomers facing more intense competition were beginning to seek
price concessions. In such an environment, GE’s sustained prof-
itability 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
Services and Solutions for Profit Growth
Business Design focus
• Capturing “beyond the product” profit by improving
customers’ systems economics through solutions selling
• Product plus:
Early 1980s
- Financing
#1 or #2 - Maintenance
- Service
• Achieving market
share leadership to
increase profit per
product sold
• Exit any product
area where GE is
neither #1 nor #2

20 Achieving sustained shareholder value growth


Shareholder Value ($BB) Shareholder-Value-to-Revenue Ratio
$300 3

$250 2.7
GE

$200 2

$150

$100 1

0.5
$50 0.7

United Technologies 0.2

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

SOURCE: Mercer Management Consulting Value Growth Database

Exhibit 8 Working To occupy the customer solutions profit zone, GE thought


smarter: GE vs. United beyond the product to the entire economic equation of the cus-
Technologies
tomer’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 cus-
tomers 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:

Mercer Management Journal 21


— From inside-out to outside-in. Understanding customers is the
cornerstone of effective strategy. With Business Design life-
cycles shortening, winning strategies are rarely based on yes-
terday’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 cus-
tomers.

— 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 lead-
ers must inform their current investment decisions with an “out-
side-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.

22 Achieving sustained shareholder value growth


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

N o one is more familiar with the challenge of achieving sus-


tained 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
A discussion by five top changing global marketplace.

executives from a variety of With that in mind, Mercer Management Journal conducted a “vir-
tual” roundtable discussion designed to glean value-growth
industries highlights some insights from top executives in a number of industries. The dis-
cussion took the form of individual interviews in which the exec-
of the issues facing business utives responded to a set list of questions. The participants
included:
leaders as they strive to
Dr. A. B. Fred Bok, chairman and chief
achieve sustained value executive officer, Philips Business
Electronics, one of nine product divi-
growth. One conclusion: sions of Philips Electronics N.V. The
division sells information products, sys-
Companies can’t just tems, and services. Philips, with 1997
revenue of 76.5 billion Dutch guilders
continue to do what they do ($37.3 billion) and 265,000 employees,
is based in Eindhoven, the
now, only better. They have Netherlands.

to reinvent themselves— Donald L. Boudreau, vice chairman for


consumer banking at Chase Manhattan
to “change the hand,” as one Corp., one of the largest banks in the
United States. Chase, the product of the
panelist says, “as opposed 1996 merger of Chemical Bank and
Chase, had 1997 revenue of $30.4 bil-
to changing the glove.” lion. The company, which has 68,000
employees, is based in New York.

Mercer Management Journal 23


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 employ-
ees, 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 com-
pany, 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 cap-
ital is highly fungible, and that a company like ours can’t be sat-
isfied 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-

24 “Changing the hand instead of the glove”


“Our customers are no er screens as being competitors that you’re going to be measured
against on an ongoing basis. So, coming back to your question,
longer satisfied with merely shareholder value becomes preeminent in terms of driving a
company.
competitive products. They
MMJ: Is it getting harder to achieve this kind of growth?
also want services and
LeBoeuf: If you take the macro, long-term look at it, you’d say,
solutions adapted to their “Well, it gets increasingly difficult as you mature in the
businesses in which you operate.” But I think there are some
problems. . . . Products alone reasons to believe that it can get easier, in the sense that your
people are more directed toward these issues today than they’ve
no longer drive our ever been before. So for driving shareholder value, in terms of
marshaling your resources—principally your people—I think
business.” 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
—Didier Pineau-Valencienne 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 sharehold-
er 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 fac-
tor 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?

Mercer Management Journal 25


“A lot of older companies, Boudreau (Chase): The rate of change has been dramatic. If you
go back twenty years, someone wanting a loan to buy a car went
in particular, think they’re 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
solving the problem by changes began to take place, some of which seemingly facilitated
banks doing the business better. But, as often happens—and will
trying harder and running continue to happen as technology continues to redesign business
systems—those changes cleared the tracks for non-entrenched
along the same curve faster. players. What that’s doing is repositioning in the minds of cus-
tomers who the providers are for financial services. You used to
And all they’re doing is 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
flattening the curve faster.” lot of bunting on branches, but customers aren’t coming back to
us there. To stay there is a destruction of shareholder value.

—Raymond W. LeBoeuf 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 cus-
tomer, 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 cus-
tomers. We’ve got patients—every person in America is, ulti-
mately, 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 per-
formed,” 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 com-
panies, 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 com-
petitive products. They also want services and solutions adapted
to their problems. So that means we need to understand the cus-
tomer 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 branch-


centric notion. The new paradigm, the one that we’re so busy
implementing, is what we call “an information-based business

26 “Changing the hand instead of the glove”


“The other way to system.” It essentially has every element of our business support-
ed by an information capability that is constantly reflecting the
approach [change] is insights we gain about our customers and is continuously iterat-
ing that through every aspect of our doing business. This gives us
to anticipate where the end the ability to recognize a complete customer relationship at any
point a customer shows up. One of the things that this informa-
game is going to be played, tion-based business does for us—without question, in every
application—is to empower our people to do more to satisfy cus-
what it’s going to look like, tomers. 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
and then to . . . make the way, and we make customers happier. That gives us a retention
benefit, which, again, is a way to maintain shareholder value.
journey with your franchise
MMJ: We have talked about the changing business environment.
and your customers.” What degree of change must a business itself be prepared to make?

LeBoeuf: One of the things that has allowed a 115-year-old com-


—Donald L. Boudreau pany 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 begin-
ning 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 ortho-
doxies 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 cus-
tomer 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 dissi-
pating shareholder value, because what you end up doing is erod-
ing 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

Mercer Management Journal 27


“I think that you always things better: standardizing your processes, deploying best prac-
tices, all that sort of stuff. But in a situation like this, that’s not
need to strive to do what nearly enough. The other piece you have to do is redefine the
game. And redefining the game can come in a number of differ-
you're doing better, just ent ways. You can start thinking about how you segment the
market. You can think about geographic market participation.
to keep up with a kind of You can think about acquisitions. But all of those are relatively
conventional answers, and to some degree I think can redefine
natural inertia in a competi- the game for only a short period of time. The bigger challenge,
I think, is to actually change the offering—to change the hand,
tive situation. . . . But that's as opposed to changing the glove.

not nearly enough. The MMJ: How does a management team go about identifying future
opportunities for shareholder value growth?
other piece you have to do
Pineau-Valencienne: As a company thinks about change, it’s
is redefine the game . . . important to remember that the concept of shareholder value
cannot be disassociated from what we call “competitive growth,”
change the hand, as or profitable growth. Increasing shareholder value through a
purely financial approach—for example, through cost-cutting
opposed to changing 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
the glove.” in shareholder value. I prefer the concept of “francs of value cre-
ated for each franc of competitive growth.” This concept is moti-
vating for employees and fits into a long-term vision.
—Kenneth W. Freeman
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 some-
body’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 mar-
ketplace, but the marketplace transcends the customer. We try to
be out there understanding the marketplace in which our cus-
tomers 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 cus-
tomers’ customers, and right down through the chain.

28 “Changing the hand instead of the glove”


“In technology industries, it Boudreau: We don’t believe just listening to the customer is going
to be good enough going forward. That’s important, but some-
is difficult to create an times the customer isn’t able to articulate exactly what new prod-
uct or service improvement they want or need. What we should
organizational bridge be doing continuously is understanding what consumers are try-
ing to do in terms of achieving a financial goal or mitigating a
from the way technologies concern. Our job, it seems to me, is to frame up a response that
meets that requirement in a cost-effective and convenient way.
are nurtured to the way If we do this well and continuously, it will give our customers a
Chase brand experience that will provide us with a competitive
strong customer relation- advantage.

ships are built.” MMJ: How do you get value-growth thinking placed front and center
among your company’s priorities, get it integrated into the organiza-
tional consciousness, and create a dynamic environment for change?
—Dr. A. B. Fred Bok
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 orga-
nizational bridge from the way technologies are nurtured to the
way strong customer relationships are built. Managing both cul-
tures—technology-centric for product performance and cus-
tomer-centric for relevance in the marketplace—is a key success
factor.

Boudreau: The guy running our mortgage business isn’t a mort-


gage 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 rea-
son 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

Mercer Management Journal 29


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 rea-
sons 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.

30 “Changing the hand instead of the glove”


Identifying the opportunities of the future
Strategic AnticipationSM through marketing science

by Eric Almquist
and Gordon Wyner

H 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
A winning Business Design to be tend to be rewarded with substantial growth in shareholder
value.
is founded on an insightful
Our experience suggests that the customer can represent the
understanding of rapidly most reliable compass to help a business leader plot his or her
company’s course. But gaining an understanding of the future
shifting customer priorities. through customers is not easy. Businesses have a long history of
missing upcoming trends because they—and the consumers they
In 1995, Mercer Manage- query—fail to envision the future environment in which a new
product or technology will be introduced. A 19th century farmer
ment Consulting used two would have said he needed a stronger and faster horse, not a
tractor. Mercedes-Benz concluded in 1900 that the worldwide
rigorous marketing science market for automobiles would never exceed 1 million, primarily
because of the limited number of available chauffeurs. Similar
tools to conclude— faulty predictions were made in the early history of computers,
photocopy machines, telephones—and, more recently, in the
correctly, it turns out—that “broadband” marketplace.

much of the conventional The broadband opportunity


Back in 1995, it was clear that the communications, informa-
wisdom about the future tion, and entertainment industries were entering a period of
blistering change and convergence. Technological advances had
of multimedia “broad- made it possible to send enormous quantities of digitized infor-
mation over fiber-optic cables, and the planned broadband net-
band” networks was works promised both to bring new multimedia services to con-
sumer households and to usher in head-to-head competition
wrong. between telephone and cable services.

Mercer Management Journal 31


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 Manage-
ment 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 opportu-


nity. 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, com-
petitive economic analysis, and game theory to address the
problem.

32 Identifying the opportunities of the future


Information Acceleration™ Marketing science for Strategic AnticipationSM
This was clearly a challenging task. Estimating the future
drops consumers into an demand and profit power of new and emerging products and
technologies with which consumers had no familiarity wouldn’t
all-encompassing future be easy. We were fortunate to have at our disposal a number of
proprietary marketing science tools that enabled us to develop a
marketplace. Once they are fact-based, robust picture of future customer segment priorities,
behaviors, and values. These tools enabled us to condition cus-
conditioned to the future, tomers to a future world and then—in the context of this new
world—to evaluate their decision-making process.
Strategic Choice Analysis®
The consumer demand research started with a national sample
gauges their preferences. of 850 randomly chosen consumers, all with household incomes
greater than $10,000. Mercer introduced these consumers to a
In the 1995 broadband world of broadband capability, showed them examples of new
broadband-related services, and asked them to choose between
study, consumers were available offerings at various prices. This research project relied
heavily on two research techniques: Information Acceleration™
asked to consider how they and Strategic Choice Analysis®, both developed at academic
institutions and adopted by Mercer over the last 15 years.
would use the new
Information Acceleration “accelerates” consumers into an all-
technology—not in the encompassing future market environment. Sitting at an interac-
tive multimedia workstation that uses video, graphics, sound,
context of 1995, but in a motion, and text, consumers are able to experience an array of
new products and services. They see and hear simulated testimo-
richer, more “futuristic” nials, advertisements, in-store displays, sales presentations, prod-
uct literature, and other elements of the marketing mix. Glenn
environment of 2000 Urban, of MIT’s Sloan School of Management, developed
Information Acceleration based on methodologies he created
to 2005. 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 power-
ful consumer decision model. This model allows us to estimate
market sizes, provider shares, product penetration, demand elas-
ticities, 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 devel-
op Strategic Choice Analysis, which we have used in over
300 mainstream marketing applications across the transporta-
tion, financial services, and communications industries.

Mercer Management Journal 33


In Mercer Management Consulting’s broadband study, con-
sumers 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 time-
shifted 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 Future Services Consumer Choices Future Market

• “Accelerate” consumer • Voice and videophone From among future offerings:


• Size
into the future • Traditional cable, video-on- • Six brands
demand, near video-on- • Provider shares
• Illustrate the new • Different prices
competitive landscape demand, time-shifted TV, • Product penetration
interactive TV • Performance options (e.g.,
picture quality) • Demand elasticities
• Information, shopping,
banking, chat, and other • Bundling options
online services

Information Acceleration™ Strategic Choice Analysis®

Exhibit 1 Creating the Because brands have a significant influence over buying deci-
virtual future ”broadband”
sions, we also asked the consumers to choose among six
marketplace
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, per-
formance 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 com-
pleted 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.

34 Identifying the opportunities of the future


The Mercer broadband At the conclusion of the study, we predicted that much of the
conventional wisdom was false, and that investments based on
study predicted that much those assumptions would not pay off. Three years later, a review
of our broadband work shows the validity of some of our most
of the conventional controversial conclusions, which debunked four important
myths.
wisdom was false, and that
Myth 1: Video-on-demand services would boom. In 1995, industry
investments based on experts believed that there was substantial pent-up consumer
demand for services such as video-on-demand (movies shown
those assumptions would whenever the viewer wants, with selection available from thou-
sands of titles), “near video-on-demand” (movies shown at regu-
not pay off. In particular, lar intervals, with selection available from a few hundred avail-
able titles), and time-shifted television (personalized
the study debunked four rescheduling of existing TV programming). In this view, cable
companies and telephone companies would compete to bring a
important myths. 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 net-
work 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 net-
works. Neither group would be able to recover their cost of capi-
tal 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 con-
sumers most of the capabilities they wanted while still allowing
long-term value creation for both cable companies and tele-
phone companies.

Mercer Management Journal 35


Cable Company Local Phone Company
$0
Bloody Stalemate
Exhibit 2 The risk of

Net present value of cash flows per household


broadband investment: a
-200
“bloody stalemate”
Capital Industry
-400
Growth Capital

-600 Industry
Growth

-800 Price
Decline Gained
Share
Lost Price
-1000 Share Decline
Cost
Savings
-1200 Lost
Gained Share
Share
-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 per-
cent 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 house-
hold 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 com-
municate 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-quali-
ty, black-and-white picture. But our research indicated substan-
tial opportunities for ISDN-quality or cable-modem-quality
videophone service, even though these offer pictures that, unlike

36 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 they would deliver the hoped-for
that operates the high-speed trains between increase in ridership and margins.
London, Paris, and Brussels—was to capture
high-margin customers and maintain their Eurostar chose to use a sophisticated model-
loyalty in an increasingly competitive environ- ing technique, Strategic Choice Analysis®, to
ment. Just 18 months after the inauguration test service enhancements in a realistic com-
of service through the Channel Tunnel, petitive context. With Strategic Choice
Eurostar had achieved 60 percent market Analysis, a proprietary tool of Mercer
share—higher than air transport—on the Management Consulting, customers are pre-
Paris-London route. Now, it wanted to secure sented with realistic choices and then state
that customer base, increase penetration in their preferences among a number of fully
attractive market segments, and penetrate packaged service offers. The model not only
new high-margin segments. measures the number of travelers who are
attracted by the enhancement, it also quanti-
To do this, the company could no longer fies how much they are willing to pay for it.
count on its original service mix. It had to The end result is a “decision support system”
identify new ways to appeal to high-value that allows marketing managers to test the
customers by identifying and meeting their impact of an array of price and product
priorities. This required changes in one of the changes, as well as to simulate the impact of
five dimensions of the company’s Business competitor reaction.
Design—customer selection and value propo-
sition. Based on its use of Strategic Choice Analysis,
Eurostar decided to change from two to four
The company began by identifying the priori- classes of service, each with a distinctive
ties of new and existing customers and positioning aimed at a specific customer seg-
determining what amenities would satisfy ment. In the first full year since the changes
those priorities. A frequent traveler program? were instituted, Eurostar has registered a
Taxi service on arrival? “Fast-track” check-in? 20 percent increase in ridership and, more
On-board entertainment? And once the importantly, a 40 percent increase in revenue,
desired amenities were identified, how dramatically enhancing margins.
should they be bundled? Before rolling out
costly changes on a large scale, Eurostar Olivier Fainsilber is a principal of Mercer
wanted to quantify their impact and verify Management Consulting based in Paris.

Mercer Management Journal 37


the “TV quality” images of full-service broadband networks,
have movement that is somewhat jerky or fuzzy. These projec-
tions 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, PC-
based 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

38 Identifying the opportunities of the future


Increasingly, companies are Business Designs, and innovative channels are providing cus-
tomers with substantially more purchase options. It’s also taking
demanding solid analysis— place at a time when organizations in many industries are
becoming aware that a few extremely valuable customers
not anecdotal evidence or typically bring in the lion’s share of their profits.

hunches—to help them In this environment, the organizations that can best anticipate
the needs of their most valuable customers are at a distinct com-
envision the future. petitive advantage. Those that can develop scenarios that envi-
sion the future with enhanced certainty will gain not only the
Advanced marketing information and confidence needed to make informed business
decisions but also a strong advantage over the competition.
science techniques,
Well-known examples include Charles Schwab & Co., which
designed to reveal recognized in the 1980s that investors had become more knowl-
edgeable about their investment options than before and that
customers’ needs and pref- many, who were not really utilizing their brokers as information
resources anyway, would prefer discount brokerage services to
erences in a futuristic paying for a middleman. In the future, this ability to discern—
and design businesses around—evolving customer needs will be
business environment, an even more critical skill.

provide forecasts that can Charles Schwab, however, relied on intuition and personal
experience in developing his innovative Business Design.
help executives identify Increasingly, our clients are demanding solid analysis—not anec-
dotal evidence or hunches—to help them envision the future.
how value in their business That’s why marketing science is so important. The payoff can be
the difference between moving into a “profit zone” or taking aim
sectors will migrate— at the wrong target while others with greater capacity for
Strategic Anticipation seize the best opportunities.
and where they should
The work that Mercer did in anticipating broadband informa-
invest to capitalize on tion and entertainment market applications overturned conven-
tional wisdom with intelligent analysis. Such analysis is possible
those shifts. 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.

Mercer Management Journal 39


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 some-
where out there a Business Design exists that will turn broad-
band into a new $40 billion profit zone. The company that iden-
tifies that design will reap tremendous riches.

Eric Almquist and Gordon Wyner are vice presidents of Mercer


Management Consulting based in Boston.

40 Identifying the opportunities of the future


A blueprint for shareholder value growth
Winning through strategic Business Design

By Rick Wise

A puzzling phenomenon exists in today’s business world:


companies that by traditional standards should be big win-
ners 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
The discipline of Business developers such as Apple and CompuServe; market share leaders
in industries ranging from retailing to autos to insurance to steel
Design, with its customer- to airlines. They are firms that, despite their seeming advantages,
have been battling in the middle of the pack in terms of profit
centric rather than and shareholder value growth—if they haven’t been left com-
pletely behind.
product-centric view
Then there is another phenomenon: remarkable companies that
of business and its explicit have emerged as first-rate creators of shareholder value from
what would seem to be unpromising origins. They include
focus on shareholder value Coca-Cola, for years a lumbering giant in the slow-growth bev-
erage market; Dell Computer, a firm whose products feature off-
growth, recognizes and the-shelf components instead of ground-breaking technology;
General Electric, historically a sprawling collection of business-
embraces the demanding es, many in second-tier market positions.

requirements of today’s Most conventional strategy frameworks provide little insight


into these unlikely successes and failures. Clearly, dominant
volatile marketplace. 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.

Mercer Management Journal 41


Business Design represents A strategy framework for turbulent times
So why have the time-honored approaches to strategy become
much more than a less relevant? The answer should come as no surprise.
Fundamental shifts in the business environment have changed
variation on old strategic forever the rules of business success. The traditional strategy
frameworks were oriented toward a simpler economic time, one
themes. Three key ele- of stable, scale-oriented industry environments, high systemic
growth rates, and meaningful opportunities for product differen-
ments differentiate it from tiation. Traditional strategy tools—with their emphasis on mar-
ket growth and relative market share, on core competencies, on
traditional approaches: an “time to market” and “experience curve” economies—provided
valuable guidance in this world.
explicit and relentless focus
Today, a company follows the old rules at its peril. Markets are
on shareholder value fragmenting and blurring, which has led to increasingly lumpy
profit distribution across customers and a complex array of new
growth as the objective of market opportunities. Once-powerful barriers to competition are
eroding, the result of technology becoming more widely avail-
corporate strategy; a deci- able, entrepreneurial talent and capital becoming more plentiful,
and service and knowledge becoming increasingly important
sion-making framework sources of added value. These days, the traditional strategy prin-
ciples can, instead of providing guidance, become hindrances
that extends beyond the that lock a company into a low-profit market zone and yester-
day’s critical skills.
traditional product-centric
Instead, business success must be driven by a strategy framework
view of business; and an that recognizes and embraces the requirements of today’s mar-
ketplace. These include a customer-centric rather than a
“outside-in,” market- product-centric focus; an expansive rather than a narrow view of
the business landscape; a dynamic rather than a static perspec-
driven approach to tive on the future market environment; and, most importantly,
an emphasis on the multiple and interrelated strategic dimen-
strategy setting. sions 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-and-


accessories-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

42 A blueprint for shareholder value growth


While achieving share- have enjoyed phenomenal growth in shareholder value through
their Business Design-oriented approach to strategy
holder value growth may development.

seem an obvious corporate Business Design—developed for today’s challenging business


environment and refined through dozens of real-world trials in
goal, many strategy practi- client strategy situations—represents much more than a varia-
tion on old strategy themes. Three key elements sharply differ-
tioners lose sight of it. entiate it from traditional approaches:

By contrast, the discipline 1. an explicit and relentless focus on shareholder value growth
as the objective of corporate strategy;
of Business Design
2. a decision-making framework that extends beyond the tradi-
addresses several factors tional product-centric view of business; and

repeatedly cited by market 3. an “outside-in,” market-driven approach to strategy setting.

analysts as key to their A singular focus on shareholder value growth


While achieving shareholder value growth may seem an obvious
valuations of stocks: corporate goal, many strategy practitioners lose sight of it. If
they explicitly articulate any strategic objective at all, they
operating profit momen- emphasize those simplistic objectives such as market dominance
or economies of scale or ‘‘first to market” advantage that have
tum, asset efficiency, and only an indirect causal relationship with shareholder value
growth.
predictable performance.
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 capi-
tal investments relative to the profits they generate. ‘‘Roller
coasters” give shareholders an unwelcome, stomach-churning
ride. Even worse, businesses that ignore shareholder value cre-
ation and its drivers may find themselves in the unenviable posi-
tion 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

Mercer Management Journal 43


While traditional strategy leading relationship with any of them. Often, it is simply the
outcome of having successfully built a better value-creation
approaches focus narrowly engine.

on one or two product- A company’s multiple dimensions


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

Customer Selection Value Capture/


and Value Proposition Profit Model
Where is the greatest What profit model will I
opportunity in terms of harness to capture value
long-term profit growth, from this customer?
and how can I meet the
critical priorities of this
customer segment?

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

How will I maintain What are the most


dominant control of my critical activities and
profit stream to prevent product/service offerings
it from migrating to I need to control to
competitors, customers, create value for the
or out of my industry customer and capture
Exhibit 1 The five altogether? value for myself?
interrelated dimensions
Strategic Control Scope
of Business Design

44 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 manu-
facturers 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 exam-
ples of strategic control is the “de facto standard” model, uti-
lized 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 con-
trol? 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 sys-
tems “solutions” business—aimed at addressing customers’
needs rather than simply selling them products—it adopted
a “global account management” system. This provided man-
agers with information on customer profitability, rather than
simply product and geography profitability, which was criti-
cal to achieving Hewlett-Packard’s objective.

Decisions made in each of these five dimensions are not mutual-


ly 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

Mercer Management Journal 45


Business Design dimensions Scope of activities

A fusion of technology and customer relationships


by Ted Moser

One of the big challenges facing a company In 1996, both companies recognized the
today is the growing need to redesign its rules of the smart card game were about to
business every five to seven years in order to change. The rest of the world was waking
achieve sustainable profit and shareholder up to the benefits of the cards, and the
value growth. The fast-growing market for market was poised to shift from a French
“smart cards”—plastic cards that store payphone-dominated business to a global
extensive information on an embedded one where banking relationships would be
microprocessor—provides a striking illustra- paramount. Banking customers were look-
tion of how two companies, Philips ing for a “transition partner,” a supplier
Electronics, based in the Netherlands, and that could continue to supply them with
De La Rue, based in the U.K., did just that. magnetic stripe cards—which weren’t going
By exploiting value-chain “fusion” in their to disappear overnight—while layering on
market and successfully broadening the smart cards.
scope of their activities—one of the five
dimensions of Business Design—they were Both Philips, with its high-end chip, and De
able to participate in a new wave of value La Rue, with its banking customer relation-
growth. ships and magnetic stripe cards, had the
chance to play the next game. But they real-
Neither Philips nor De La Rue had been big ized their existing Business Designs were not
winners in the first wave of value creation in broad enough to fully exploit the new
smart cards. The market had been limited opportunity. Recognizing their complemen-
primarily to the French telephone and bank- tary positions, the two companies started
ing industries, and the first rule of the game talks that culminated in May 1997 in the
had been to build scale with high-volume creation of what has become one of the
telephone cards. Philips, with only a high- world’s leading integrated smart card manu-
end chips targeted at the banking, mobile facturers, De La Rue Card Systems.
phone, and pay TV segments, had missed
out on much of the early market. And De La Ted Moser is a vice president of Mercer
Rue, whose core business was in currency Management Consulting based in Paris.
printing and magnetic stripe card produc-
tion for banks, lacked in-house chip
technology.

46 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 pri-
mary 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 pri-
orities 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 market-


place economics is, at best, a volatile one these days, the outside-
Exhibit 2 Different
approaches to strategy-
in approach requires a dynamic and flexible decision-making
setting process. [continued on page 51]

Inside-out

Assets/Core Inputs, Raw Product/Service Channels The Customer


Competencies Material Offering

Outside-in

Customer Priorities Channels Product/Service Inputs, Raw Assets/Core


Offering Material Competencies

Mercer Management Journal 47


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 pro- belief that consolidation is the at the expense of traditional
vide perhaps the most com- best response to a financial ones. For example, MBNA, a
pelling demonstration of the services environment being rad- leading credit card company,
velocity with which Value ically redefined by the changing has a market value of more
Migration® is sweeping through economics of customers and than 81/2 times its book value,
the financial services landscape. the growing number of choices while an index of the top
The mergers and acquisitions they enjoy. But the mergers, 20 retail banks has a market-
wave that has joined several of seemingly similar in nature, in value-to-book-value ratio of
the largest U.S. banks and fact conceal a variety of differ- 31/2. (It is worth noting that
other financial services ent perspectives on where the several of these category killers,
providers—CitiCorp and future “profit zones” of the such as First USA and The
Travelers, Nationsbank and financial services industry lie Money Store, have been
Bank of America, BancOne and and which of numerous com- acquired by more traditional
First Chicago, among others— peting Business Designs will be players at substantial
reflects managers’ desire to find able to identify and occupy premiums.)
sustainable sources of value cre- those zones.
ation. The comments of Messrs. These new designs are marked
Weill and Aldinger are two per- The recent consolidation repre- by several common characteris-
spectives on how to tap those sents the second phase of a tics: focused attention on how
sources. change that began in the customer priorities are shifting,
1980s, when the changing eco- a profit model that targets
At the heart of these consolida- nomics of information and reg- high-value customers, and an
tions, however, lies a troubling ulatory trends combined to “information-based business
question: Do the mega-institu- “de-integrate” the unified, ver- system” that enables a compa-
tions represent the emergence tically integrated Business ny to go to market in a much
of one or more new Business Design of commercial banking. more dynamic and adaptive
Designs that capitalize on the The rise of “category killers” manner.
opportunities inherent in offering specialized financial
enlarged scale and scope—or services products presaged the The most impressive value cre-
will some, if not all, of these emergence of the multiple ators emerging are those that
institutions turn out to be little Business Designs that can now have followed what we charac-
more than warehouses of out- be observed in embryonic form. terize as the “recombinant”
dated Business Designs? approach—that is, taking some
The equity markets have grant- of the capabilities developed
In general, the flurry of big ed substantial value to the new and exploited more narrowly by
transactions is fueled by the category-killer Business Designs the category killers and

48 A blueprint for shareholder value growth


Type of Offering

“Aggregator” “Distributor” “Manufacturer”


Exhibit 1 More Sophisticated Wealth
Managers
Future “profit (Higher Value)
zones” in “Re-intermediator”
retail financial
services will “Anywhere,
Anyhow, “Scale
match scope Any Brand” Manufacturer”
of offering Customer Segments
“Mass
(illustrative)
with customizer”
customer
segments
“McBank”

Less Sophisticated Wealth


Managers
(Lower Value) Advice and Access/ Product Functionality
Information/ Convenience/ and Performance
Experience Experience

Customer Priorities Addressed

regrouping them in new ways tion that can be used to tai- — Scale Manufacturers will be
to meet broad customer needs. lor financial solutions to indi- the low-cost providers of
Schwab is a powerful example: vidual customers, and dis- products in traditional and
Its intense focus on how its cus- tributing a variety of non-traditional categories—
tomers’ needs are evolving has “best-in-class” third-party some grown from today’s
enabled it to move with them, products that meet their category killers, some
providing a relationship-based high-end customers’ evolving emerging from new tech-
approach that features an needs. nologies, and some trans-
information-enriched set of formed from the operations
offerings delivered through an — Mass Customizers will focus of today’s vertically integrat-
integrated, multi-channel net- on the aggregator role, act- ed institutions.
work of phones, the Web, and ing as intelligent agents to
retail offices. seek out a mix of third-party — McBanks will provide stan-
products that meet the dardized, low-cost access to
Ultimately, Schwab will be just needs of their customers. financial services to fill the
one example of a new set of More reactive to customer market “white space” that
Business Designs that will com- requests and less interactive will grow as large institutions
pete for dominance in financial in helping those customers focus their capital and
services, each one representing identify their needs than Re- capacity on the highest-value
new combinations of ways to intermediators, Mass 10 to 15 percent of U.S.
meet evolving customer priori- Customizers will appeal to a households.
ties and capture emerging prof- broader audience.
it zones. A simplified frame- Each of these models is defined
work for thinking about the — Anywhere/Anyhow/Any by the five dimensions of
new financial services landscape Brand firms will be multi- Business Design. Take, for
includes five Business Designs product, multi-brand distrib- example, the Scale
(see Exhibit 1): utors of third-party products, Manufacturer Business Design.
operating integrated multi- Its customer selection and value
— Re-intermediators will, in channel networks that pro- proposition will focus on the
many ways, return to a clas- vide a broad array of pack- price-conscious customer who
sic banking role: gathering— aged solutions. seeks basic financial products
or “aggregating”—informa- and services. Its means of value

Mercer Management Journal 49


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 Reinventors
9
MBNA
8 Schwab

Capital One
6
State Street
Market Value
5
Book Value
Progressive
4 First Data
Top 20 Bank Composite Morgan Bank One/First Chicago1 1 Travelers/Citicorp
1
Stanley/Dean UBS/Swiss Bank
3 Witter
Top 20 Brokerage Composite NationsBank/BoA1

2 Top 20 Life Top 20 P&C Bank of Tokyo/Mitsubishi


Insurance Insurance
Composite Composite
1
Traditional Business Designs Consolidators
0
0 10 20 30 40 50 60 70 80 90 100 140 +
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 It appears clear that the seem- all” model to vibrant new
fees and product margins. It ingly revolutionary mergers of Business Designs, ones that
will gain strategic control April 1998 are only the begin- enable them to better serve the
through scale, pricing based on ning of widespread consolida- customer and migrate into the
the credit risk of individual cus- tion in the financial services radically different profit zones
tomers, and superb customer industry. The necessary compo- that will define the future of
information. Its scope of activi- nents for new value-creating financial services. To date, very
ties will be limited to a menu of Business Designs—customers, few financial institutions have
standardized products and serv- channels, products, brands, demonstrated innovation on a
ices delivered through multiple information-based capabilities— large scale—that is, transforma-
channels. Its organizational sys- are being assembled under tion of the traditional value
tems will emphasize low-cost increasingly larger roofs. But chain (see Exhibit 2). It is this
operations across the value whether the players are build- potential that should galvanize
chain, information-based capa- ing something new, or simply senior management to drive the
bilities to manage individual something big, remains to creation of the next wave of
customer value, and highly be seen. Business Design.
focused channel, product, and
customer management. Other Management teams need to Corey Yulinsky is a vice president
Business Designs will exhibit transform these mega-institu- of Mercer Management
very different qualities in these tions from the traditional verti- Consulting based in New York.
five areas. cally integrated “one-size-fits

50 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-mak-
ing 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 mid-
1970s, 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 effi-
ciently, 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 togeth-
er to address the priorities of the supermarket chains. Yet, the
large chains could squeeze the margins of the fragmented Coke

Mercer Management Journal 51


To surmount its problems bottlers, and ultimately Coke itself. Pepsi-Cola, with more con-
trol over its own bottling network and able to offer the super-
and turbocharge its market chains lower prices, began chipping away at Coke’s mar-
ket share in the grocery segment.
profitability and growth,
To surmount these problems and turbocharge its profitability
Coke reinvented its and growth, Coke, under the leadership of the late
Roberto Goizueta, reinvented its business, making changes in
business, making changes each of the five Business Design dimensions. It amounted to a
crushing counterattack against Pepsi—one that was carried out
in each of the five Business on numerous fronts and was accomplished through brains rather
than brute force.
Design dimensions. It
In the area of customer selection, Coke continued to fight Pepsi
amounted to a crushing for parity in the supermarket, a critical foundation of its busi-
ness. But it sought market share dominance in other markets
counterattack against that really mattered in terms of profitability: restaurants and
vending machines. In part because of the brutal fight for shelf
Pepsi—one that was space between Coke and Pepsi, consumers today pay on average
about 2 cents per ounce for Coke in grocery stores. By contrast,
carried out on numerous 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 target-
fronts and was ing vending machine and restaurant consumers, Coke not only
focused on more valuable customers but, because these segments
accomplished through were underserved, gained an opportunity for volume growth in a
flat market.
brains rather than
In order to go after these higher-value customers, rationalize its
brute force. 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 inde-
pendent 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 prof-
its that could be both recaptured by the company in higher
syrup prices and duplicated overseas through global deployment
of the new system.

52 A blueprint for shareholder value growth


Exhibit 3 Coca-Cola’s 1980
“managing-the-value-
Syrup Bottling Logistics Distribution Consumer
chain” Business Design
Grocery
Fountain
Vending

1996

Syrup Bottling Logistics Distribution Consumer

Grocery
Fountain
Vending
Coke’s participation/control 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 market-
ing, 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 creat-
ing 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 com-


pany’s shareholder value. In an industry that since the early
1980s has seen soft-drink consumption grow at rates of 3 per-
cent 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.

Mercer Management Journal 53


Exhibit 4 Coke’s and $180
1997
Pepsi’s performance
$160
trajectories, 1980-1997
$140

Shareholder Value ($BB)


$120

$100

ola
-C
ca
$80

Co
$60
1997
$40
o
Pepsic
$20
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 busi-
ness 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 develop-
ment 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-

54 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 the scope of the company’s activities, one of
electric utilities in Western Europe could see the five dimensions of Business Design.
that shareholder value was about to migrate
from their mature Business Design to more The company first invested in a few small
vibrant ones. While the anticipated deregu- telecommunications businesses, such as
lation of electricity industries across the con- paging, to understand how transferable its
tinent would provide some new opportuni- Business Design would be to other endeav-
ties for creating value, it would also put ors. When it met with success, it continued
pressure on prices in a sector where con- to venture into new areas of the telecom-
sumption was growing at only about 3 to munications industry. Today, the onetime
4 percent. electric utility’s telecommunications portfolio
includes major stakes in wireless, long dis-
In this environment, a large Spanish utility tance, and cable television businesses.
began looking for ways to capture increased
profit and shareholder value. Knowing that The company has been rewarded for broad-
consumers value credibility and financial sta- ening the scope of its activities. Its market
bility in providers of utilities and other cru- value today is 3.5 times what it was three
cial services, the company bet that its well- years ago, the increase far outstripping its
known name would enhance the reputation investments in telecommunications. The
of a business that it backed. The company company’s market-value-to-revenue ratio,
also realized that its Business Design, which which was just 0.5 three years ago, is 1.7
had proven successful in the electricity busi- today—a reflection, at least in part, of the
ness, could be leveraged to adjacent mar- company’s successful transfer of its Business
kets that had greater growth potential. The Design to an adjacent, high-growth busi-
current design was optimized to serve mil- ness.
lions of clients in a network-based industry
in which there were just a handful of com- Ambrosio Arizu is a vice president and
petitors. This focus seemed to be well suited Javier Gómez de Olea is a principal of Mercer
to the soon-to-be deregulated Spanish Management Consulting; both are based in
telecommunications market. Taking advan- Madrid.
tage of that opportunity required changing

Mercer Management Journal 55


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.

56 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 oday’s winning companies—ones that are achieving sustain-


able 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
A company may have that opportunity. Neither is easy.

created a Business Design But enterprises that successfully carry out these, and just these,
undertakings have only begun to tackle the real work. Unless a
perfectly suited to company can quickly catalyze changes in its organization that
correspond to the changes in its Business Design, it will miss
capturing future value- what these days is often little more than a fleeting opportunity.
A beautiful blueprint, whether it be for a home or a business,
creation opportunities. isn’t worth much until it is transformed into something tangible.
The sooner a Business Design is realized, the sooner it will be
But unless the company able to capture the value created by changing conditions. The
longer the Business Design sits on the shelf, the more likely it
can get its organization will be made obsolete.

to rapidly move from its Indeed, a key challenge for managers in today’s environment is
getting their organizations to begin to change in support of a
current Business Design new Business Design even as that design is being conceived. Given
the shortening cycles of value creation, change must be anticipa-
to the new one, it will miss tory and continuous: As a company’s latest organizational system
is being implemented, the next version—one that will support
what these days is often tomorrow’s Business Design—must be under development.

little more than a fleeting The ability to achieve this rapid and continuous change repre-
sents an enormous competitive advantage. The failure to develop
opportunity. this capability means ceding millions of dollars of shareholder
value to competitors.

Mercer Management Journal 57


Managers must start the Focusing on the organizational system
Despite the paramount importance of aligning an organizational
process of organizational system with a company’s Business Design, the process is often
ignored. Executives often view it as a less-than-strategic
change even as the new endeavor, one that merits little high-level management atten-
tion. Or they assume that the compelling economic logic of the
Business Design is being new Business Design will translate spontaneously into a new
organizational system. For these executives, the external business
conceived. And as a environment, with its demanding customers and ruthless com-
petitors, is the place where the daunting challenges lie.
company’s latest organiza-
But ask top managers about their biggest headaches, and most
tional system is being will tell you they originate closer to home. Indeed, most execu-
tives—more than 80 percent, according to surveys of corporate
implemented, the next leaders conducted by Mercer Management Consulting—believe
that the failure to achieve shareholder value growth is caused by
version—one that will internal, not external, factors. Identifying future profit opportu-
nities and creating a Business Design that seizes those opportu-
support tomorrow’s nities are certainly keys to achieving shareholder value growth—
but they represent only half of the equation.
Business Design—must be
When asked in the surveys why their organizations have failed
under development. 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 organiza-


tion—people, structures, processes, infrastructure, and leader-
ship—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-

58 Reaping the fruits of Business Design


Exhibit 1 The elements of
Leadership People
an organization must work
The direction-setting force The human capital of the company
together to support a
• Vision/strategy articulation • Performance and rewards
company’s Business Design
• Decision making • Training and development
• Governance • Career development
• Institutional performance • HR processes and capabilities
measures and goals
• Motivation for change

Processes
Infrastructure
The way work is organized
The “connectors” across to create value
people, processes, and
structure • Work flows
• Communications • Inputs/outputs/key decisions
• Information systems • Economics
• Production and logistics
networks
Structure
The way positions are organized to
ensure clarity and drive collaboration
• Roles and responsibilities
• Job design
• Reporting relationships

tions are most critical to the new design—that is, which organi-
zational system levers to pull first and hardest.

Consider, for example, a financial services company that is mov-


ing to an information-based Business Design, one in which
value capture will derive from giving employees, using a com-
mon 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 exam-
ple, the rapid, customer-focused decision making that is the
hallmark of an information-based Business Design won’t materi-
alize 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 tradition-
al 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.

Mercer Management Journal 59


The arguments against Matching the organization to the Business Design
Companies that are able to quickly align the elements of their
change—or at least organization with their Business Design can reap huge divi-
dends. Charles Schwab, British Airways, and Nucor—three
for postponing it—are companies in very different businesses that implemented effec-
tive organizations in support of their Business Designs—have
universal: “Our customers together created nearly $23 billion in shareholder value in the
past decade.
are satisfied.” “We need
Charles Schwab, the discount brokerage, pursued a strategy in
to get everyone on board the 1990s built around a “switchboard” profit model. By posi-
tioning itself as the intermediary between thousands of invest-
first.” “We don’t have the ment products and millions of customers, it is largely immune to
shifts in the popularity of any particular fund type while control-
information technology ling a vast database of customer names, behaviors, and holdings.
The validity of its Business Design has been borne out by the
and data we need.” “We sharp increase in its market capitalization. Despite a sharp drop
in its share price since the beginning of the year, the result of
have to reorganize our growing competition, Schwab’s current market capitalization is
about $9 billion (three times its annual revenue), up from
structure before we do $150 million (one-third its annual revenue) in 1987.

anything else.” 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 rela-
tionships. To meet this critical strategic requirement of its
Business Design, Schwab emphasized nearly error-proof
processes, a superb information system infrastructure, and well-
trained 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 opera-
tions 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 effi-


cient and cost-effective processes, including scheduling, reserva-
tions, 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 combi-
nation of knowledge and judgment. British Airways also adopt-

60 Reaping the fruits of Business Design


Often, one of the least ed a decentralized and streamlined structure aimed at moving
decision making closer to the customer and speeding organiza-
promising environments tional response time.

for organizational change Nucor set out to be a low-cost producer of a relatively narrow
range of steel products. Its Business Design called for using low-
exists in companies that, cost “mini-mill” technology and relying heavily on scrap steel for
its raw material. Today, its market capitalization is more than
by most appearances, are $4 billion, significantly higher than larger, traditional competi-
tors such as U.S. Steel and Bethlehem Steel.
doing well: In such a
To support its Business Design, Nucor created an organizational
setting, it can be difficult system that included a flexible and low-cost work force, stream-
lined manufacturing processes, a low-cost infrastructure, a lead-
to create the sense ership team that continually articulates strategy and goals, and a
bare-bones organizational structure. Fewer than 30 people at
of urgency necessary corporate headquarters run a business with revenue of more than
$3 billion.
to overcome inertia.
Confronting the barriers to organizational change
Satisfaction with the status The success stories of Charles Schwab, British Airways, and
Nucor make realigning an organization in support of a new
quo, however, will soon Business Design seem, if not easy, at least logical and straight-
forward. Anyone who has tried to do it knows otherwise. After
become such a company’s all, organizations are run and staffed by human beings, whose
response to change is often more emotional than rational. The
greatest enemy. arguments against change—or at least for postponing it—are
universal: “Our customers are satisfied.” “We need to get every-
one 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 appear-
ances, 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 diffi-
cult; it is also the nature of the change usually required to align
an organization with a new Business Design. Just as the new

Mercer Management Journal 61


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 Old Business Design

new one poses numerous


challenges High-Risk Period

New Business Design

Time

Because the change will take place while business-as-usual con-


tinues, 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, espe-
cially, 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

62 Reaping the fruits of Business Design


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,
Exhibit 3 Redesigning the approved, and packaged will doom the effort: The value-capture
business and changing the
organization must be done
opportunity will have passed. The alignment process must paral-
in tandem lel the development of the design (see Exhibit 3).

Business Design Strategic Business Design Value Growth


Anticipation Realization

Change Readiness Change Planning Change Execution


Organizational Change
• Change assessment • “Quick wins” • Rapid prototyping/
identified quick wins
• Change roadmap
• Best practices of • Field tests/pilots
• Change
competitors
communications • Change
(internal) • Change communications
communications (external)
(internal)
• 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 cap-
ture, 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 self-
assessment, will plot the possible path of change and then iden-
tify 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.

Mercer Management Journal 63


Perhaps the greatest barrier The second stage, Change Planning, occurs as the new Business
Design is being developed. At this point, various organization
to organizational change is redesign options will be drafted, evaluated, and assessed against
the company’s Business Design goals. The relevant change driv-
the need for the process ers—the organizational elements that need to be emphasized
and the levers that need to be pulled in support of a particular
to begin before it is entirely Business Design—will be identified. So, too, will performance
gaps in the existing organization and their root causes. “Quick
clear where the company is wins”—selected initiatives that will produce immediate benefits
and engender early support for the change program—will be
headed. It can be difficult identified and planned. Competitors’ and others’ best practices
will be surveyed to identify useful models. The change roadmap
to get people to embrace will be refined, with the destination, if not yet pinpointed, at
least directionally clear. The goals, performance gaps, and antici-
change when you ask pated changes will be communicated to employees.

them to move to a new During the third stage, Change Execution, changes in the organi-
zational system will be executed at an accelerated pace. “Rapid
place—but are unable prototyping”—a method in which small teams test and fine-tune
changes to the organizational system while delivering
to tell them, in the begin- momentum-building quick wins—will be carried out (see
Exhibit 4). As benefits are realized, they will be communicated
ning at least, precisely throughout and outside the organization. Employees will be
trained for new jobs and regular performance measurements will
where that is and what will be implemented, in order to hold people accountable for the
required changes as well as for operating results. Pilot programs
be required of them. 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 Capability


Deployment
prototyping ensures that “Aim the
new capabilities are both Machine”
s
fit
ne

developed and deployed in


Be
d

“real time”
an
g
in
rn
a
Le
e
at
r
le
ce
Ac
to
g
in
yp
ot
ot
Pr
d
pi
Ra

Capability Development
“Build the Machine”

64 Reaping the fruits of Business Design


Business Design dimensions Organizational systems

The overhaul of an auto components supplier


by Wolfgang Weidner

The globalization of the auto manufacturing change and make the business more
industry has led to brutal competition within responsive to customers.
the auto components business. Strong and
customer-focused suppliers have entered the To bring its organization into alignment with
traditional home markets of competitors, its new Business Design, the company dis-
and numerous firms have fallen prey to mantled traditional functional “silos” and its
takeovers. A multibillion-dollar European command-and-control decision-making sys-
components business, eager to seize the tem. It replaced them with cross-functional
opportunities inherent in this new environ- and mostly self-governing business units
ment, set out to change its Business Design organized around particular market seg-
to anticipate and respond to the priorities of ments. Each of the newly established units
its customers, the automakers. The compa- now has complete responsibility for cus-
ny focused on its organizational system, one tomer acquisition, product R & D, techno-
of the five dimensions of Business Design. logical planning, and manufacturing. The
sales teams have been restaffed with engi-
The European company realized that the neers who can help design solutions that
change in its Business Design required meet a particular automaker’s needs. Some
changing its entire relationship with its cus- of these engineers are located permanently
tomers. Instead of acting as a simple pro- at client sites.
ducer of finished parts, it would need to
become a partner with the automakers, sell- As a result of this overhaul of the company’s
ing them solutions rather than merely hard- organizational structure, the company has
ware. This would require assuming far- enjoyed a clear decrease in lead time, fewer
reaching responsibility for much of the value problems in the start-up of new product
chain, from design of the component part lines, and reduction of fixed costs.
to its manufacture and delivery to final
assembly of the automobile itself. The com- Wolfgang Weidner is a vice president of
pany focused on processes (the way work is Mercer Management Consulting based in
organized) and structure (the way job posi- Munich.
tions are organized) as the organizational
elements that would most effectively drive

Mercer Management Journal 65


The winners at organiza- Accelerating and streamlining the change process
The difficult execution of the parallel tasks of Business Design
tional change, because development and organizational change can be guided and
speeded by several insights.
they can’t always know
The first is an understanding of which organizational system
where they are going elements are key drivers in the success of a particular Business
Design. Knowing in advance that certain elements should
before they set out, exhibit receive the greatest focus will save a company precious time in a
world where the half-life of Business Designs is rapidly shorten-
a willingness to take ing. Mercer Management Consulting research shows that such
correlations exist and can be gleaned from the experience of suc-
calculated risks. This cessful Business Design executions, thereby eliminating the need
for a trial-and-error approach. For example, Schwab was able to
approach results in quickly and effectively implement its switchboard Business
Design because it clearly understood it would need to focus on
frequent wins, occasional its processes, infrastructure, and people if the design were to
succeed.
losses, but constant
Another insight that can help a company is an understanding of
learning from both change and organizational dynamics. The enterprise needs to
assess its history, culture, and values to determine its readiness
successes and failures. for change, without which even the best-designed change pro-
grams 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 share-
holder 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 momen-
tum for reinventing the organization quickly and will free up

66 Reaping the fruits of Business Design


Low
Change for Preemption
Objective
• Find next source of competitive
advantage
Focus of Change Effort
• New, innovative Business Design
moves
Change for Renewal
• Perpetuation of entrepreneurial
drive Objective
• Create platform for accelerated
Urgency for Change

Challenge
and sustainable shareholder value
• Finding time/resources to focus
growth
on “next wave” growth issues
Focus of Change Effort
• New innovative Business Design
moves Change for Survival
• Creation/regeneration of Objective
entrepreneurial drive • Undertake radical performance
Challenge improvement and total strategic
reorientation
• Instilling change dynamic,
overcoming complacency 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 Outflow

Value Migration® Position

Exhibit 5 The type of cash flow for investment in the new Business Design. In a posi-
change program deployed
depends on the context
tion of value stability, the program will require less acute meas-
ures. 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 longer-
term and more broadly based. One might be the continued nur-
turing of an entrepreneurial culture designed to keep the compa-
ny 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-

Mercer Management Journal 67


tomer priorities, animates such a culture, ensuring that organiza-
tional 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 com-
pany’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.

68 Reaping the fruits of Business Design


Executive summaries
Achieving Shareholder Value Growth Through Business Design

ENGLISH

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

Mercer Management Journal 69


A blueprint for shareholder value growth: Reaping the fruits of Business Design: Value
Winning through strategic Business Design growth realization through rapid
by Rick Wise organizational change
The discipline of Business Design is a means to by Diane MacDiarmid, Hanna Moukanas, and
capture value from the rapidly shifting “profit zones” Rainer Nehls
of today’s discontinuous business environment. It A company may have identified a “profit zone” and
differs from other strategy frameworks in 1) its then created a Business Design well suited to
relentless focus on achieving shareholder value capturing the value that is ripe for realization in that
growth through sustained operating profit growth, space. But unless the organization is able to move
the paring down of assets, and predictable rapidly and successfully from its old Business Design
performance; 2) its substitution of a product-centric to the new one, it will miss what these days is often
view of business with one that emphasizes five broad no more than a fleeting value-realization
dimensions critical to shareholder value creation: opportunity. That means companies must start
customer selection and value proposition, value realigning their organizations in support of their
capture, strategic control, scope, and organizational Business Design even as that design is being
systems; and 3) its “outside-in” perspective, which developed. They need to know immediately which
focuses on customers and the marketplace rather elements of their organization—people, structures,
than on a company’s organizational structure, processes, infrastructure, or leadership—are the
operations, or core capabilities. 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 Design”: concevoir et organiser l’entreprise pour


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

70 Executive Summaries
adopter ce concept. Le secret de la création de valeur mouvants malgré un environnement économique
ne réside plus dans les produits, mais dans les clients. instable. Ce type d’approche stratégique diffère des
Toutefois, il ne suffit pas de connaître sa clientèle et autres approches en plusieurs points. D’abord, il se
ses attentes pour réussir, il faut être capable aussi de concentre exclusivement sur la valeur créée pour
prévoir ce que les clients voudront dans 5 ans. Pour y l’actionnaire via l’augmentation du bénéfice
parvenir, les dirigeants ne peuvent plus se contenter d’exploitation, la diminution des actifs et la capacité
de faire ce qu’ils font mais doivent le faire mieux. Ils à prévoir les performances. Ensuite, au lieu de
doivent se réinventer ou, ainsi que l’a dit l’un d’entre centrer l’activité sur le produit, il privilégie les cinq
eux : « changer la main, pas seulement le gant » ! dimensions clés de la création de valeur : la sélection
des clients en fonction de leur potentiel, la capture
Anticiper les opportunités de demain: de valeur, le contrôle stratégique, le champ d’activité,
l’anticipation stratégique grâce à un et les systèmes d’organisation. Enfin, cette approche
marketing “scientifique” se place du point de vue du client et du marché
par Eric Almquist et Gordon Wyner plutôt que de celui de l’entreprise, de sa structure ou
Les dirigeants ont besoin d’analyses solides, pas de ses compétences.
seulement d’évidences ou d’intuitions, pour anticiper
les besoins ou les priorités futures du client. Fort Récolter les fruits du Business Design:
heureusement, dans un environnement en rapide accroître la valeur en changeant son
changement, des outils de marketing sophistiqués organisation rapidement
s’appuyant sur des faits peuvent maintenant leur par Diane MacDiarmid, Hanna Moukanas et
permettre de visualiser concrètement le futur et Rainer Nehls
d’identifier les créneaux où ils doivent investir. En Une entreprise peut avoir identifié une zone de profit
1995, des gourous des nouvelles technologies avaient et créé un design bien adapté pour profiter de la
émis nombre de prédictions concernant les réseaux à valeur à réaliser dans cet espace. Mais, à moins que
large bande et le potentiel de services qu’ils allaient son organisation ne soit capable de passer
offrir aux consommateurs. Une étude de Mercer rapidement et avec succès d’une activité à une autre,
Management Consulting fondée sur deux outils de elle risque de rater ce qui n’est plus aujourd’hui
marketing scientifique rigoureux arriva à la qu’une opportunité éphémère de création de valeur.
conclusion que beaucoup d’entre elles étaient Cela signifie que les entreprises doivent commencer
erronées. Les trois dernières années ont confirmé les à adapter leurs structures pour supporter leurs
résultats de cette étude. nouvelles activités avant même que ces activités ne
soient opérationnelles. Elles ont besoin de savoir
Un modèle pour accroître la valeur pour immédiatement lequel des éléments de leur
l’actionnaire: gagner grâce à son organisation—les hommes, les structures, les process,
Business Design les infrastructures, la direction—sera moteur du
par Rick Wise changement pour un “Business Design” donné. Et
La discipline du Business Design consiste à capturer surtout elles ont besoin d’évaluer très honnêtement
de la valeur dans des zones de profit aux contours l’appétit de changement de l’entreprise.

Mercer Management Journal 71


DEUTSCH

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

72 Executive Summaries
auf Wertsteigerung durch langfristige operative Erfolgreiche Umsetzung des Business
Ertragskraft, reduzierte Kapitalbindung und Designs: Value Growth realisieren durch eine
vorhersagbare Leistung; 2) die Substitution einer schnelle Anpassung der gesamten
produktfokussierten Sichtweise durch einen Ansatz, Organisaion
der sich auf fünf breitangelegte Dimensionen von Diane MacDiarmid, Hanna Moukanas und
gründet. Diese wiederum sind entscheidend für die Rainer Nehls
Generierung von Unternehmenswert: Ein Unternehmen, das eine Gewinnzone
Kundenselektion und Wertvorteil für Kunden, identifiziert und ein maßgeschneidertes Business
Werterzielung, Strategische Absicherung, Design entworfen hat, um in dieser Zone Gewinne
Aktionsfeld und Organisatorische Systeme; und 3) erzielen zu können, wird trotzdem nicht in der Lage
eine „outside-in“-Perspektive, die Kunden und sein, die Gewinnchancen zu realisieren, wenn es
Märkte in den Mittelpunkt stellt, anstelle der nicht schnell und erfolgreich den Übergang vom
Strukturen, Aktivitäten und Kernkompetenzen des alten zum neuen Business Design vollzieht. Das
Unternehmens. 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: oportunidades, 3) Realización del Crecimiento del
Estrategia en la era de “Value Migration®” Valor, el cambiar rápidamente y con éxito del
por Adrian J. Slywotzky, David J. Morrison y antiguo diseño del negocio al nuevo. Pero el proceso,
James A. Quella de continua reinvención en respuesta a las
La cuota de mercado está muerta. Antes, los líderes condiciones del mercado siempre en cambio, no
en el negocio que incrementaban los beneficios, termina aquí: En el momento en que el nuevo diseño
reducían costos, ofrecían productos técnicamente ya se haya implantado, debe comenzarse a planificar
superiores y aumentaban sus cuotas de mercado el próximo.
podían esperar aumentos envidiables en el valor para
el accionista. Pero estas reglas ya no son válidas. “Reinventarse”, esa es la clave: Mesa
Nuestra investigación sobre los creadores de valor redonda sobre el crecimiento del valor para
nos sugiere un nuevo paradigma para el crecimiento el accionista
de este valor. En este escenario en el que rigen Un panel de cinco altos ejecutivos de diversas
nuevas reglas, hay tres capacidades esenciales para el industrias discutieron sobre algunos de los temas a
éxito a largo plazo: 1) Anticipación estratégica, la los que los directivos se enfrentan en su camino para
identificación de futuras oportunidades de creación alcanzar un crecimiento sostenido del valor. Todos
de valor, 2) Diseño del negocio, el diseñar la empresa estuvieron de acuerdo en que esta perspectiva debería
de tal modo que pueda aprovechar estas ocupar un lugar prioritario para la Alta Dirección.

Mercer Management Journal 73


Cada vez se hace más difícil lograr este crecimiento. mediante el crecimiento sostenido del beneficio
En general, las compañías europeas han sido lentas operativo, la reducción de activos y el rendimiento
en adoptar este concepto. La perspectiva ha predecible; 2) la sustitución de una visión centrada
cambiado: la clave ya no es el producto, sino el en el producto por una que dé importancia a las
cliente. Pero no es suficiente conocer a tus clientes y cinco dimensiones críticas para la creación de valor:
sus necesidades hoy, necesitas ser capaz de predecir la selección de los clientes y la proposición de valor,
cuáles serán dentro de cinco años. Para ello, tienes la captura de este mismo valor, el control estratégico,
que cambiar, reinventarte, no puedes seguir haciendo su alcance y los sistemas de organización y 3) su
lo que haces hoy pero sólo de mejor manera. perspectiva de “dentro a fuera” enfocada en los
clientes y el mercado y no en la estructura
Cómo identificar las oportunidades del organizativa, operaciones o capacidades clave.
futuro: Anticipación estratégica mediante el
marketing como ciencia Recogiendo los frutos del diseño del
por Eric Almquist y Gordon Wyner negocio: El crecimiento del valor mediante la
En 1995 los expertos en tecnología han construído armonización de la organización
una suma de predicciones sobre “redes de banda por Diane MacDiarmid, Hanna Moukanas y
ancha” y servicios de multimedia que se ofrecerán al Rainer Nehls
mercado residencial. Un estudio realizado por Una compañía puede haber identificado un área de
Mercer Management Consulting basado en rentabilidad y creado un diseño del negocio que se
herramientas científicas y rigurosas llegó a la adapte perfectamente para capturar el valor ya
conclusión de que gran parte de la sabiduría maduro en ese espacio. Pero a no ser que la
convencional estaba equivocada. Los tres años de organización sea capaz de cambiar rápidamente el
desarrollo han confirmado la veracidad de los viejo diseño por el nuevo con éxito, perderán lo que
resultados del estudio. hoy es sólo una oportunidad lejana de hacer realidad
este valor. Eso significa que las empresas deben
La clave para el crecimiento del valor para el comenzar por armonizar su organización para apoyar
accionista: Cómo vencer mediante el diseño el nuevo diseño del negocio, incluso al tiempo que
estratégico del negocio éste se está desarrollando. Necesitan conocer
por Rick Wise inmediatamente qué elemento o elementos de su
La disciplina de diseño del negocio es un medio para organización, como el personal, las estructuras, los
capturar valor de las zonas de rentabilidad que tan procesos, la infraestructura o el liderazgo, son los
rápidamente varían en el hoy en día discontinuo impulsores del cambio para un diseño específico. Y
escenario económico. Se diferencia de otros marcos lo que es realmente importante, necesitan evaluar
de estrategia en 1) su constante enfoque puesto en cuál es el deseo real de cambio de la organización.
alcanzar el crecimiento del valor para el accionista

74 Executive Summaries
PORTUGUÊS

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

Mercer Management Journal 75


negócio centrada nos produtos (“product-centric”) Colher os Frutos do “Business Design:”
por uma visão que enfatize cinco dimensões críticas Realização de Crescimento de Valor
para criação de valor accionista: selecção de clientes e mediante Rápida Mudança Organizacional
proposta de valor, captação de valor, controlo por Diane MacDiarmid, Hanna Moukanas e
estratégico, âmbito do negócio, e sistemas Rainer Nehls
organizacionais; e 3) pela sua perspectiva “outside-in” Uma empresa pode ter identificado uma “profit
que focaliza os clientes e o mercado em vez de zone” e criado um Business Design capaz de captar
estruturas organizacionais, operações ou capacidades valor realizável nessa área. Contudo, se a organização
base. 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.

76 Executive Summaries
Mercer Management Consulting, Inc.

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