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Leadership: In-Front of a Moving Train

October 2003 Corporate, Marketing

To take on the role of leadership can be like putting oneself in-front of the moving train. In this rather uncomfortable analogy, the obvious threat to assuming this position is the potential of being overrun if the train speeds up or you fail to keep pace. Less obvious however is the threat of running lead, in-front of the moving train, while the train switches tracks and pursues a different course. Maintaining the leadership position not only requires great stamina and courage, but also knowing the train’s direction.

Business leaders charging the industry future are faced with these challenges every day. Not only is it imperative for them to know the future of their individual businesses, but it is also required that they understand the future of the industry. Fortunately, an examination of historical industry development patterns can be of use in anticipating the course.

When you’re in the forest, you can only see the trees.
The stages of industry development are not cleanly separated. While the industry may be discussed as being in one stage or another, individual competitors within the industry improve their companies in many separate dimensions simultaneously. For many players in the field, the simultaneous changes in direction made by competing companies will leave the players uncertain as to which stage of development the industry is experiencing. Stepping back however can provide some clarity.

As a group, companies within an industry will compete in distinct environments. The historical pattern for industry development segregates these distinct environments as:

1. Industry Exploration
2. Distribution Efficiency
3. Differentiation or Commoditization
4. Whole Customer Experience
5. Industry Decline

Industry Exploration

The early phase, Industry Exploration, is characterized by a rapid expansion of the industry and an expansion of its diversity. Many analysts have described this industry exploration phase as analogous to biological evolutionary cladogenesis. In this analogy, cladogenesis refers to an evolutionary period of time in which the number of species rapidly expands and bio-diversification explodes. For the technology industry, this “cladogenetic” phase during 1995-2000 was marked by a rapid growth in both the number and the diversity of new products and services. Accompanying this growth, many new firms initiated business to explore the new market frontier.

During an industry exploration phase, businesses are challenged in their ability to produce. Customers, acknowledging the potential value created by the new industry, will have a high latent demand for products and services coming from that industry. Businesses that are able to meet customer demands reliably and efficiently are quickly accepted by the market.

In the industry exploration stage, the key challenge for businesses is their ability to deliver.

Distribution Efficiency

The second phase, Distribution Efficiency, is marked by changes in the industry structure from high-cost sales and marketing channels towards low-cost sales and marketing channels. An example of this stage can be found in the rapidly developing economies in the post-communist countries such as Central and Eastern Europe or in China. Today in these countries, industrial manufactures are searching for new markets for their goods and consumers are queuing-up to purchase even the most common items. Getting in front of a large number of new buyers often results in the creation of new distribution channels or sales force responsibilities.

To maintain customer attention and lower the cost of sales, companies in business markets may lower their cost of sales by equipping the field sales force with a variety of products or services or create new sales and marketing models. They do this either through acquiring several other companies with tangential products in demand by their customer base, contracting Industry Representatives to sell on behalf of several companies, or creating a telesales force.

Creating distribution efficiency requires selecting a sales channel in which the customer relationships in that channel are continuously relevant to both the business and the customers. For businesses within the distribution chain, their key concern is constantly providing products and services that their customers demand. For businesses upstream of the distribution chain, their challenge is in selecting distribution channels with the highest number of customers that would have a demand for their output. If the output of the business is purchased infrequently by their customers, creating or participating in a distribution channel that sells other items that are also purchased by these same customers creates value through lowering the cost of sales.

In the distribution efficiency stage, the key challenge is the business’s ability to reach relevant customers.

Differentiation or Commoditization

The third phase, Differentiation or Commoditization, focuses on combating buyer power or succumbing to it. For example, tool and die firms in the states have accepted the commoditization of their product and have raced to be the lowest cost provider. Elsewhere, Rolls Royce North America has differentiated their jet engines and is the premier supplier of high-end jets.

Providing value to customers in excess of their competitors challenges businesses during the differentiation or commoditization. At this stage of industry development, customers will have a high level of familiarity with the products and services of the industry and they will also have developed trusted supplier relationships. A company that is able to demonstrate that their offering delivers greater value than their competitors for a specific customer segment will capture that segment. If the value cannot be meaningfully differentiated, customers will select the lowest-cost provider.

In the distribution or commoditization stage, the key challenge is the business’s ability to differentiate and maintain supplier power or succumb to buyer power and become the lowest cost producer.

Whole Customer Experience

The fourth phase, Whole Customer Experience, focuses on creating customer evangelists and capturing mindshare. Krispy Kreme and Starbucks have championed the whole-customer experience. As customers enter their outlets, touch, sight, sound, and smell are simultaneously activated to encourage consumption and pleasure. Business markets also develop towards satisfying the whole customer experience, albeit without the tactile senses. From GE, electricity generators are able to purchase turbines as well as their financing and maintenance. In this manner, GE is able to manage the entire experience of the customer over the lifecycle of purchasing, installing, and maintaining the turbine.

During the Whole Customer Experience phase, the key challenge for businesses is their ability to ensure that the customer derives value from their interaction at all times during purchasing, use, and disposal.

Industry Decline

Industry decline is perhaps inevitable, but its examples are mundane. Many industries have declined in their importance, but only because new industries have developed to make the declining industry’s offering no longer relevant. For example, water mill gear manufacturing declined as industries adapted the use of electricity, buggy whips fell as we adapted cars, and cobblers have been displaced by low-cost tennis shoes.

Application to Information Technology

Most of IT is clearly in the second phase: Distribution Efficiency. Acquisitions at both the large and the small company levels are rapidly being made. Outside of the thwarted Oracle/PeopleSoft debacle; Microsoft has acquired PlaceWare (main.placeware.com), a web meeting solution provider; Veritas has acquired Geodesic (www.veritas.com), a high-runtime solution; and Itron has acquired SEM (www.itron.com), a solid state meter solution. In other markets, IT suppliers are selecting to utilize alternative channels to reach end customers. For instance, WordWare (www.wordware.com), a software provider to the educational market, has selected to reach their potential customers through industry representatives who also sell blackboards. Likewise, many web site design firms are developing relationships with advertising firms to access their customers.

From these examples, the implications are clear. Small companies should seek to be acquired or develop new channel partners. Larger firms should expand their offerings at a manageable pace.

Run Where the Train Will Be

Returning to our earlier analogy, it is better to run in front of where the train will be than run to where the train currently is. Not all businesses are positioned to take advantage of the current industry trends. That doesn’t spell their demise as much as it indicates that the development of their potential will depend upon their ability to position themselves for the next industry stage. For IT companies, if mergers and acquisition or, alternatively, industry representatives are not reasonably achievable opportunities, they still have the potential to target a highly specific segment and create a superior value offering or race to becoming the lowest cost provider of a generic customer demand. In this way, they can race to where the industry evolution will be.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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