Predictable Biases

It appeared that IBM's acquisition of a communications switch maker and AT&T's acquisition of a computer maker illustrated the path forward.

Another bias is that, faced with a wave of change, the standard forecast will be for a "battle of the titans." This prediction, that the market leaders will duke it out for supremacy, undercutting the middle-sized and smaller firms, is sometimes correct but tends to be applied to almost all situations.

For example, the "convergence" of computing and telecommunications had been predicted for many years.  It appeared that IBM's acquisition of a communications switch maker and AT&T's acquisition of a computer maker illustrated the path forward.   Like two sumo wrestlers, AT&T and IBM advanced to the center of the ring, preparing to grapple.  Then is was as if the floor beneath them crumbled, dropping both into a pit beneath.   The very foundations they had stood upon were eaten away by waves of change--the microprocessor, software, the deconstruction of computing, and the Internet.  Having a common fate was not the kind of convergence  that had even envisioned. 

ACTION POINT: Don't always assume that Titans will battle for supremacy.  Consider all of the shifts that may affect your industry.

Defining Business Purpose and Mission: The Customer

Who is the customer?

“Who is the customer?” is the first and the crucial question in defining business purpose and business mission.  It is not an easy, let alone an obvious question.  How it is being answered determines, in large measure, how the business defines itself.  The consumer-that is, the ultimate user of a product or service-is always a customer.

Most businesses have at least two customers. Both have to buy if there is to be a sale.  The manufacturers of branded consumer goods always have two customers at the very least: the housewife and the grocer.  It does not do much good to have the housewife eager to buy if the grocer does not stock the brand.  Conversely, it does not do much good to have the grocer display merchandise advantageously and give it shelf space if the housewife does not buy.  To satisfy only one of these customers without satisfying the other means that there is no performance.

ACTION POINT: Take one product or service that you are responsible for and determine how many kinds of customers you have for it.  Then figure out if you are satisfying all of your different kinds of customers, or if you are ignoring some category (ies) of customers.

Predictable Biases

For instance, people rarely predict that a business or economic trend will peak then decline. 

In seeing what is happening during a change it is helpful to understand that you will be surrounded by predictable biases in forecasting.  For instance, people rarely predict that a business or economic trend will peak then decline.  If sales of a product are growing rapidly, the forecast will be for continued growth, with the rate of growth gradually declining to "normal" levels. 

Such a prediction may be valid for a frequently purchased product, but it can be far off for a durable good.    For durable products--such as flat-screen television, fax machines, and power mowers--there is an initial rapid expansion of sales when the product is first offered, but after a period of time everyone who is interested has acquired one, and sales can suffer a sharp drop.  After that, sales track population growth and replacement demand.

Predicting the existence of such peaks is not difficult, although the timing cannot be pinned down until the growth rate begins to slow.  The logic of the situation is counter intuitive to many people--the faster the uptake of a durable product, the sooner the market will be saturated.

ACTION POINT: Understand the trends and their limits of products in your business.

Deregulation

...they will have developed complex systems to justify their costs and prices, systems that hide their real costs even from themselves.

Many major transitions are triggered by major changes in government policy, especially deregulation.  In the past thirty years, the federal government has dramatically changed the rules it imposes on the aviation, finance, banking, cable television, trucking, and telecommunications industries.  In each case, the competitive terrain shifted dramatically.  

Some general observations can be made about this kind of transition.  First, regulated prices are almost always arranged to subsidize some buyers at the expense of others.  Regulated airline prices helped rural travelers at the expense of transcontinental travelers.  Telephone pricing similarly subsidized rural and suburban customers at the expense of urban and business customers.  Savings and loan depositors and mortgage customers were subsidized at the expense of ordinary bank depositors.   When price competition  took hold, these subsidies diminished fairly quickly, but the newly deregulated players chased what used to be the more profitable segments long after the differential vanished.  

This happened because of the inertia in corporate routines and mental maps of the terrain, and because of poor cost data.  In fact, highly regulated companies do not know their own costs--they will have developed complex systems to justify their costs and prices, systems that hide their real costs even from themselves.  It takes years for a formerly regulated company, or a former monopolist, to wring excess staff expense and other costs out of its system and to stop its accountants from making arbitrary allocations of overhead expenses to activities and products.   In the meantime, these mental and accounting biases mean that such companies can be expected to wind down some product lines that are actually profitable and continue to invest in some produce and activities that offer no real returns.

ACTION POINT: Understand your costs and avoid complex accounting systems that perpetuate inaccurate mental bias. 

Rising Fixed Costs

This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges.

The simplest form of transition is triggered by substantial increases in fixed costs,  especially product development costs.  This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges.

For example, in the photographic film industry, the movement from black-and-white to color film in the 1960s strengthened the industry leaders.  One insightful analysis of this wave of change points to is that in the previously mature black-and-white photo film industry, there was little incentive for competitors to invest heavily in R & D because film quality already exceeded the needs of most buyers.

But there were large returns to improvements in quality and the ease of processing color film.  As the costs of color film R & D escalated, many firms were forced out of the market, including Ilford in the United Kingdom and Ansco in the United States.  That wave of change left behind a consolidated industry of fewer but larger firms, dominated by Kodak and Fuji.

A similar dynamic was IBM's rise to dominance in computing in the late 1960's, driven by the surging costs of developing computers and operating systems.  Still another was the transition from piston to more sophisticated jet aircraft engines, cutting the field of player down to three: GE, Pratt & Whitney, and Rolls-Royce.

ACTION POINT: Watch for rises in fixed costs that may indicate a transition in your business.