Learn to cannibalise yourself or be beaten, Norris warns
Entrenched businesses don’t usually make it in the new environment. We talk about globalisation, but there is a strong future for smaller businesses winning niche opportunities. Intermediaries are on their way out, and partnering is a key ingredient of the new environment.
These are some of the points made by ASB Bank chief executive and Business Roundtable chairman Ralph Norris today as he looked at the forces changing the course of business, at the Pan Pacific valuers’ congress in Auckland.
Perhaps the most important of all these changes is this element: “The new entrant’s greatest competitive advantage is the unwillingness of the incumbent to fight on a deconstructed definition of the business and cannibalise itself.”
In the information revolution, “the focus of wealth creation is moving from machines to individual skill, knowledge and innovation.
“Any business that has not worked out the risks and benefits that this information revolution will bring to their business, is probably already on the way out of business and will become the equivalent of history’s blacksmiths and cowpers.
“The difficulty with these shifts is that the entrenched businesses usually do not make the transition into the new environment. They do not see the changes happening early enough, when they do see it they pass it off as a fad or a niche sector which will have limited appeal, and rely upon their current strength of incumbency to justify the status quo.”
Mr Norris said finance and insurance industry mergers would continue as scale and new technology force the creation of larger and larger businesses, to remain competitive. The midscale manufacturer’s day had passed, while focused niche players were enhancing their positions.
Small business was better positioned than large local or medium-sized businesses in the new environment. He said they should focus on niche opportunities with high levels of intensity in customer relationships, a tailored versus a custom approach.
Sector domination by monopolies, through scale and momentum, was under attack not because of the successful business model that had created the super-profits, but because the rules had been changed, mainly through the use of technology and information. This would bring the demise of the intermediary.
Mr Norris said this began 30 years ago when the banks’ large corporate customers accessed capital markets directly. “One company was so successful in its own right it has established one of the world’s largest finance businesses, GE Capital.”
Computer company founder Michael Dell beat the opposition by using catalogue, phone and fax to sell directly, eliminating most of the finished goods inventory. One research firm estimated this translated into a 6% cut in Dell’s costs, before the dealer margin was taken into account.
The book “Blown to Bits,” by Philip Evans and Thomas Wurster, describes the collapse in sales of Encyclopaedia Britannica after a 200-year climb to domination. One lesson in the book is that, “even if the executives of established businesses fully grasp the impact of new technologies, and even if they can reason their way beyond their corporate myths and assumptions, they still face a massive competitive disadvantage arising precisely because they are incumbents.
“Incumbents are saddled with legacy assets — not just clunky mainframe systems, but sales and distribution systems, bricks and mortar, brands and core competencies. Competing in the face of the new economics of information requires cannibalising those assets, perhaps even destroying them.
“Incumbents hesitate to do that, especially as long as the business has positive margins. Rather, they do complex calculations and get bogged down in internal political debates. Insurgents have no such inhibitions.”
Mr Norris said there used to be a tradeoff between richness, through one-to-one selling, and reach, through catalogue and direct mail. The internet provided the facility to offer significant richness coupled with reach. Mr Norris said the seller’s knowledge advantage over the buyer’s was fast disappearing.
The “Blown to Bits” authors termed this process deconstruction — the dismantling and reformulation of traditional business structures.
Mr Norris put it this way: “It results from two forces: the separation of economics of information from the economics of things and the blowup (within the economics of information) of the tradeoff between richness and reach.
“Traditional business structures include value chains, supply chains, organisations and consumer franchises. When the tradeoff between richness and reach s blown up, there is no longer a need for the components of these businesses to be integrated.
“The new economics of information blows all these structures to bits. The pieces will then recombine into new business structures based on the separate economics of information and things.”
He said the new entrant’s greatest competitive advantage was the incumbent’s unwillingness to fight on the new basis and cannibalise itself. To stay alive, companies would have to ensure best practice was followed in all aspects of their business.
If not, “outsource the process and continue to question your business model, where would a new entrant attack and by what means.”
Mr Norris said the intense competition for customer ownership among telcos, banks and retailers, among others, was spreading across network boundaries of the past. Banks could find telcos or retailers becoming their strongest competitors, rather than other banks.
Mr Norris related his overview directly to property through the insatiable demand for IT and e-commerce, which is creating a worldwide skills shortage. He said the US was issuing 90,000 work visas a year, specifically for people with IT skills, to address vacancies estimated at 500,000.
International competition for the best skills was strong, which meant that a country such as New Zealand had to ensure more people were educated in IT, and the economic environment made them want to stay.
“Overall these new economic forces will have a tremendous effect on the pattern of work. The use of teleworking, the reducing need for cbd space, connectivity and communications will make location largely irrelevant. The efficiency and speed within the supply chain will, as it is already doing, reduce inventory, speed delivery to the end consumer, resulting in less warehousing and manufacturing real estate.”