business design
TRANSCRIPT
Number 10 1998
Market Share Is Dead:Long Live Business DesignOnce, business leaders who increased revenue,decreased cost, fielded technically superior products,and expanded their market share could expect to reapenviable increases in shareholder value. No longer.Achieving sustained value growth requires a strategyframework that reflects today’s marketplace of rapidlyshifting customer priorities. It requires the disciplineof Business Design, which helps companies find andcapture tomorrow’s “profit zones.”
Table of contents, page 4; executive summaries, page 69.
Management Consulting
An elaboration on the themesof Mercer’s best-selling book, The Profit Zone
Mercer Management Journal
4
Mercer Management JournalAchieving Shareholder Value GrowthThrough Business Design
7 Letter to readersby James A.Quella and James W. Down
9 Achieving sustained shareholder value growthStrategy 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 futureStrategic 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
Number 10
1998
5
41 A blueprint for shareholder value growthWinning 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 DesignValue 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 summariesAbstracts of the main articles of this issue in English, French, German,
Spanish, and Portuguese.
To join a discussion on howcompanies can achievesustained shareholder valuegrowth, visit ourMercer ManagementJournal Forumat www.mercermc.com.
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
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
Editorial Board
Matthew A. Clark, co-chair
Carla Heaton, co-chair
João P. A. Baptista
James W. Down
Jean-Pierre Gaben
August Joas
David J. Morrison
Patrick A. Pollino
James A. Quella
Adrian J. Slywotzky
Editor
Paul Hemp
Designer
Trina Teele
7
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.
8
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
Mercer Management Journal Copyright © 1998 by Mercer Management Consulting, Inc. 9
Wars were traditionally won by those who marshaled the
largest fighting force. It was a zero-sum game. The goal
of the advancing army was to keep driving the opponent back,
capturing the ceded territory. Size mattered, perhaps more than
fighting prowess: You won if you were the last person standing.
The assumption that size counted was central even to the large-
scale computerized war games that officers used for training and
strategy.
The Vietnam war dramatically illustrated that military strategy
could no longer rely on the old rules of the game. Despite over-
whelming firepower and mass, the United States and South
Vietnamese troops were unable to prevail over the North
Vietnamese army, whose clear objectives were informed by a
superior understanding of geography, local resources, and psy-
chology. Building on the lessons of Vietnam, Desert Storm was
the first really modern war. The United States and its allies,
despite being the smaller on-site force, harnessed advanced tech-
nology—from satellites to smart bombs—to provide unparal-
leled information to generals. This enabled them to conduct a
complex, highly choreographed, multi-fronted war that rewrote
the rules for military strategy. These new rules require that old-
line generals make the transition to a new way of thinking:
— from a static to a dynamic view of battle, where thinking
several moves ahead is now essential rather than merely
desirable;
— from a monolithic, mass-based approach, waged on a limited
number of fronts, to one that focuses on fighting several
simultaneous battles, each using a different mix of troops,
artillery, and air power;
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.
Achieving sustained shareholder value growth
Strategy in the age of Value Migration®
by Adrian J. Slywotzky,
David J. Morrison,
and James A. Quella
Achieving sustained shareholder value growth10
— from a focus on simple territorial objectives to more subtle
and sophisticated definitions of success.
As a result, military strategy has become simultaneously more
critical and more difficult.
We are on the cusp of an equally profound reshaping of the role
of and requirements for business strategy. Able commanders
such as Jack Welch of GE, Bill Gates of Microsoft, and the late
Roberto Goizueta of Coca-Cola, having mastered the new
strategic order, have achieved stunning victories for their share-
holders and employees.
When Strategy Didn’t Matter
It may seem hard to believe, but for much of the post-World
War II period, customer and marketplace strategy didn’t matter.
In the 1950s and early 1960s, customer demand often out-
stripped capacity, and the resulting high systemic growth rates
“lifted all boats.” This was especially true for the U.S. economy,
which enjoyed a strong relative competitive advantage during
the period. Moreover, regulation, global trade management, and
outright protectionism created relatively stable industry environ-
ments within which large-scale players had hegemony.
As the 1960s progressed, the “if you build it, they will come”
euphoria was supplanted by a need for more rigorous business
thinking. Dominant strategic approaches centered around organ-
ization economics: improving organization structure and com-
mand-control functions.
With the advent of the 1970s, and the balancing of supply to
demand, the focus changed again. As exemplified by the “experi-
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
In the last 30 years, the
focus of strategy has
shifted, from organization
economics, which empha-
sized the improvement
of organization and
command-control func-
tions; to relative eco-
nomics, which made use
of tools like the
“experience curve” and
the “five forces” model;
to efficiency economics,
characterized by
downsizing and reengi-
neering. Now, the focus
has shifted again.
Mercer Management Journal 11
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,
operating profit growth, and shareholder value growth (see
Exhibit 1). Only two of the top fifteen revenue growers were
Only includes those companies that had values for both 1990 and 1996.SOURCE: Mercer Management Consulting Value Growth Database
Top 15 Shareholder Value Growers1990-1996
21%
27%
57%
50%
18%
18%
31%
11%
14%
12%
27%
16%
37%
102%
18%
$113BB
$100BB
$100BB
$90BB
$68BB
$62BB
$58BB
$57BB
$52BB
$46BB
$44BB
$44BB
$43BB
$41BB
$41BB
GENERAL ELECTRIC
COCA-COLA
INTEL
MICROSOFT
TOYOTA
MERCK
ROCHE
EXXON
ROYAL DUTCH SHELL
PHILIP MORRISPHILIP MORRIS
HONGKONG SHANGHAI BANK
PROCTER & GAMBLE
HEWLETT-PACKARD
CISCO SYSTEMS
JOHNSON & JOHNSON
Top 15 Operating Profit Growers1990-1996
INTEL
FORD MOTOR
GENERAL ELECTRIC
AT&T
NOVARTIS
PHILIP MORRISPHILIP MORRIS
CHRYSLER
GLAXO WELLCOME
COLUMBIA/HCA
MICROSOFT
HEWLETT-PACKARD
HONDA
PROCTER & GAMBLE
WAL-MART
MERCK
Top 15 Revenue Growers1990-1996
WAL-MART
FORD MOTOR
TOYOTA
ALLIANZ
GENERAL MOTORS
NIPPON TELEPHONE & TELEGRAPH
CHRYSLER
METRO
AXA-UAP
CREDIT SUISSE
SIEMENS
HEWLETT-PACKARD
VOLKSWAGEN
SONY
MATSUSHITA
CAGR
Exhibit 1 Revenue andprofit growth don’t alwayscorrelate with value growth
Achieving sustained shareholder value growth12
also top value growers. Only seven of the top operating profit
growers were also top value growers. Clearly, biggest is no longer
necessarily best.
More and more in our research, we see three sorts of struggling
enterprises. The first, firms with empty revenue or market share, are
characterized by continued profitless growth. Many consumer
electronics and PC sales and distribution companies are prime
examples. The second, bottle rockets, are companies that climb
rapidly to vertiginous heights of stock market success and then
just as rapidly fall back to earth. Netscape—relying on ubiquity
and evanescent product superiority as its sources of sustainability
instead of working to build in sources of continuing strategic
control—is an example. The third, asset monsters, are asset-inten-
sive firms that earn insufficient returns on their capital employed,
either because of flaws in their original business model or because
they are blindsided by rapid change. These companies find that
achieving market share goals—sometimes even with profitable
growth—demands more fixed assets and working capital than can
be deployed at attractive returns. Big steel and store-based com-
puter and software retailers are historical examples. Some utili-
ties, because of deregulation, will soon join their ranks.
We’re not suggesting that the challenges faced by such companies
are new. But their incidence is increasing, which suggests that
traditional strategy approaches no longer apply. So what hap-
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
Increasingly, we see three
sorts of struggling enter-
prises: firms with empty
revenue or market share,
characterized by continued
profitless growth; bottle
rockets, the companies
that enjoy rapid stock
market success and then
crash back to earth; and
asset monsters, businesses
that earn insufficient
returns on their capital
employed.
Mercer Management Journal 13
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.
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.
Value Migration®
Value Sector Rivalry
BoundaryBlurring
EntrepreneurialSupportSystems
GlobalizationChanging
Role ofInformation
IndustrializingDistribution
Channels
Change Drivers
DynamicCustomerDecisionMaking
ChangingCustomerPriorities
EmergingBusinessDesigns
Exhibit 2 Shiftingcustomer priorities andnew Business Designalternatives drive ValueMigration®
Achieving sustained shareholder value growth14
Value migrated from Ford’s vertically integrated, single-car-
focused Business Design to GM’s price-laddered design in the
1920s. It moved from corner grocery stores to supermarkets in
the 1930s, from fragmented merchandisers to national catalogue
retailers, such as Sears, in the 1890s, and to national 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
0
20
40
60
80
100
120
140
160
Market capitalization through December 31, 1997, in billions of (1995) dollars.Source: Mercer Management Consulting Value Growth Database
0
5
10
15
20
25
30
Digital
IBM
0
20
40
60
80
100
120
140
160
0
5
10
15
20
25
30
Oracle/EDS
Oracle
EDS
Intel
Intel/Microsoft
Microsoft
1977 1987 1997 1977 1987 1997
1977 1987 19971977 1987 1997
Exhibit 3 Market valueincreasingly flows fromoutmoded BusinessDesigns to newer onesbetter calibrated to satisfycritical customer priorities
Mercer Management Journal 15
expect to enjoy a long economic life. Why? Speedier Food and
Drug Administration review cycles meant that the remaining
patent life at launch could be as long as 12 to 15 years. In addi-
tion, the generics industry was embryonic; it took more than a
decade for generic substitution to erode a product’s market
position.
By the 1980s, the growing complexity of drug approval reduced
remaining patent life at launch to 10 years, and the generics
industry had come of age. Today, it is not uncommon for a
branded pharmaceutical to lose half its share of prescriptions to
generics within nine months of patent expiration. What was
once a nearly 30-year value creation cycle has been compressed
to little more than a decade.
In this increasingly dynamic business environment, the role of
top management has changed. It is no longer enough to focus on
operational excellence alone. In order to sustain the firm’s value
growth, managers must answer the following questions: How
much life remains in our current Business Design? Where will
we be allowed to create shareholder value? How do we seize
these opportunities as rapidly as possible?
Despite the sea change in the rules of business success, many
companies still struggle to apply traditional strategy processes
and frameworks to these new problems. They build projections
based on extrapolations of the current situation rather than eval-
uating the likelihood of discontinuous change. They use “core
competency” thinking to identify the foundations for future
growth. And when all else fails, they
Value Migration®, the flow
of shareholder value from
increasingly outmoded
Business Designs to others
better calibrated to satisfy
critical customer priorities,
is not new. But the pace
of Value Migration is accel-
erating. In industry after
industry, we see value
creation cycles—the life-
cycle of any given Business
Design—shortening.
Market Value to Revenue Ratio
<1
2 - 10
1 - 2
ValueInflow
ValueOutflow
The company captures a disproportionateshare of value because its Business Designis superior in satisfying customers’ priorities.
The company maintains its value either becauseits Business Design remains powerful (thoughmature) or because no credible alternatives exist.
Value flows away from the company towardBusiness Designs that more effectively meetevolving customer priorities.
DANGER POINT
Stability
Reinvention
Exhibit 4 Business Designshave a finite lifecycle [continued on page 18]
16 Achieving sustained shareholder value growth
Value Migration® in the communications industry Business Designs, not technology, are driving the shift
by Richard S. Christner
The communications services
industry has, in recent years,
been an area of steady share-
holder value growth. Since
1991, the combined market
value for firms competing in
communications services has
increased by about 120 per-
cent, slightly higher than the
increase for the S&P 500 Index.
But the majority of new value
growth has come not from the
traditional service providers—
AT&T, MCI, Sprint, GTE, the
“Baby Bells”—but from non-
traditional providers. Indeed,
those companies’ share of
industry market value grew
from under 25 percent in 1991
to over 45 percent by the end
of 1997, reflecting the migra-
tion of value to them from tra-
ditional providers (see exhibit).
These non-traditional service
providers are generating value
growth primarily in three areas.
The unprecedented rise of the
Internet is driving value growth
in data communications ser-
vices. Beneficiaries have been
non-traditional service providers
such as WorldCom, America
Online, Qwest, and @Home.
The need for more flexible com-
munications connectivity than
traditional wireline provides is
driving value growth in digital
wireless services, including
those that are satellite-based.
This change is behind the value
growth of providers such as
Nextel and PanAmSat. The
explosion of communications
volume—resulting from the
reduction of cost-per-communi-
cation to nearly zero in areas
such as E-mail and voice mail—
is driving value growth in con-
text services, which organize
and provide meaning to a cus-
1991 1992 1993 1994 1995 1996 1997
Non-traditionalProviders•Data
- Internet -Broadband
•Wireless/ Satellite
•Context
AT&T,MCI, andSprint
Baby Bellsand GTE
Market values include long-term debt.SOURCE: Mercer Management Consulting Value Growth Database
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$361BB $402BB $465BB $456BB $615BB $664BB $803BB
Providers’ shares of
communications
services industry
market value
17Mercer Management Journal
tomer’s communications.
Winners in this category are
Yahoo! and Premiere
Technologies.
These three areas of value
growth reflect new areas of
technology innovation. For
example, new packet-switching
and compression technologies
have allowed some non-tradi-
tional providers to greatly
expand the amount of informa-
tion transmitted on an existing
line. But even though new
technology has given upstart
providers a source of competi-
tive advantage, traditional
providers are quickly able to
replicate this technology.
Technology alone is insufficient
to generate significant creation
of shareholder value.
Instead, according to a recent
study of the communications
services industry by Mercer
Management Consulting, it is
the non-traditional players with
innovative Business Designs that
have captured the majority of
value growth over the past six
years. Nextel has prospered by
refocusing on a well-defined set
of customers: business work-
groups. WorldCom’s end-to-end
fiber network, assembled
through several acquisitions,
gives it the advantage in provid-
ing low-cost, seamless service
to business customers. Yahoo!’s
focus on providing navigation
and context assistance for
Internet users has given it
shareholder value multiples
higher than firms with greater
revenue that merely provide
access to the ‘Net.
The danger for established ser-
vice providers is to ignore the
power of newly created
Business Designs such as these.
As regulatory barriers come
down, many Baby Bells and
long distance providers are
focusing on strategies built
around improving their current
Business Designs, through cost
cutting and expansion of scale.
Like the steelmakers, airlines,
and automakers before them,
these companies risk missing
the true competition and the
true opportunity. Instead, the
established players should look
toward redesigning their busi-
nesses for the customer priori-
ties, technologies, and econom-
ics of the future.
The stakes for developing a
Business Design that will cap-
ture future value creation
opportunities are high. The
communications and related
technology industries show an
increasing propensity toward
“winner-take-all” competitive
battles, where the player with
the superior Business Design
gets an overwhelmingly dispro-
portionate share of the value
growth. For example, America
Online’s Business Design
focused on creating an online
“community” that was easy for
even technology novices to join,
on building subscriber volume
through free trial software, and
on generating revenue through
advertising and transaction
fees. CompuServe, AOL’s early
rival, had a Business Design that
focused on providing informa-
tion to more sophisticated users
and generating revenue
through subscription fees. AOL’s
superior design helped it
reverse CompuServe’s early lead
and leave later-comers like
Prodigy, Microsoft Network,
and AT&T, along with
CompuServe, in the dust. This
battle was won very early by
choices AOL made in its
Business Design. The winners
in the next battles for commu-
nications services are creating
their winning Business Designs
right now.
Richard S. Christner is a vice
president of Mercer Management
Consulting based in
Washington, D.C.
Achieving sustained shareholder value growth18
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
earn attractive returns. Identifying and occupying these
zones requires a robust understanding of customers’ changing
priorities, economics, and behavior; an “outside-in” approach
CAGR1980-1997
23.3%
12.3%
7.7%
BusinessDesignGrandmasters1
S&P 500
Market ShareLeaders2
1 ABB, Coca-Cola, Disney, GE, Intel, Microsoft, Schwab, SMG, and Thermo Electron. Without Microsoft and Intel, the Grandmasters had a 19.9 percent compoundannual 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
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1980 1982 1984 1986 1988 1990 1992 1994 1996
Indexed to 1980 Values
Exhibit 5 Companies thatmaster the discipline ofBusiness Design are wellrewarded
Mercer Management Journal 19
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
1981 1997
GE ShareholderValue
SOURCE: Mercer Management Consulting Value Growth Database
ShareholderValue/Revenue: 0.5x 2.7x
$13.1BB
$239.6BBExhibit 6 GE’s valuegrowth through businessredesign
Achieving sustained shareholder value growth20
was a diversified manufacturer of both industrial and consumer
products, from light bulbs to jet engines to locomotives to plastic
resin. GE’s shareholder-value-to-revenue ratio—its market capi-
talization divided by its annual sales—was 0.5. By 1997, GE had
grown to become the most valuable company in the world, with
a market value of $239.6 billion and a shareholder-value-to-rev-
enue ratio of 2.7 (see Exhibit 6).
How did Welch achieve this feat? He worked smarter as well as
harder. Over 16 years, he reinvented GE, transforming it from a
classic product-oriented manufacturer into a services company
where products are viewed as just a component of the total solu-
tion provided to customers. Welch’s capacity for Strategic
Anticipation is exceptional; based on his customer-driven under-
standing of where the profit zone will be tomorrow, he has guid-
ed the company through an evolution of Business Design phases
(see Exhibit 7).
His talents for Business Design and value growth realization are
no less impressive. In the early 1980s, Welch saw that occupying
the profit zone for most of GE’s businesses meant capturing
dominant share in chosen product markets. In response, he gave
the organization a challenge: Be Number 1 or Number 2 in a
sector or exit the business. As the mid-1980s arrived—and based
on his frequent interactions with the CEOs of GE’s customers—
Welch saw the profit zone shifting. Increasingly powerful cus-
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.
Legendary value creators
excel in three broad areas:
Strategic AnticipationSM,
the identification of future
“profit zones”; Business
Design, the development
of the enterprise blueprint
that will best capture the
identified profit zone(s);
and value growth
realization, the galvanizing
of the organization to
create the new Business
Design.
• Achieving marketshare leadership toincrease profit perproduct sold
• Exit any productarea where GE isneither #1 nor #2
#1 or #2
Services and Solutions for Profit Growth
• Capturing “beyond the product” profit by improvingcustomers’ systems economics through solutions selling
• Product plus:- Financing- Maintenance- Service
Early 1980s
Early 1990sExhibit 7 GE’s evolvingBusiness Design focus
Mercer Management Journal 21
To occupy the customer solutions profit zone, GE thought
beyond the product to the entire economic equation of the cus-
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:
SOURCE: Mercer Management Consulting Value Growth Database
GE
United Technologies 0.2
0.50.7
2.7
UnitedTechnologies
GE1981 1997
$0
$50
$100
$150
$200
$250
$300
Shareholder Value ($BB) Shareholder-Value-to-Revenue Ratio
1981 19970
1
2
3
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Exhibit 8 Workingsmarter: GE vs. UnitedTechnologies
Achieving sustained shareholder value growth22
— 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.
Mercer Management Journal 23
No 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
changing global marketplace.
With that in mind, Mercer Management Journal conducted a “vir-
tual” roundtable discussion designed to glean value-growth
insights from top executives in a number of industries. The dis-
cussion took the form of individual interviews in which the exec-
utives responded to a set list of questions. The participants
included:
Dr. A. B. Fred Bok, chairman and chief
executive officer, Philips Business
Electronics, one of nine product divi-
sions of Philips Electronics N.V. The
division sells information products, sys-
tems, and services. Philips, with 1997
revenue of 76.5 billion Dutch guilders
($37.3 billion) and 265,000 employees,
is based in Eindhoven, the
Netherlands.
Donald L. Boudreau, vice chairman for
consumer banking at Chase Manhattan
Corp., one of the largest banks in the
United States. Chase, the product of the
1996 merger of Chemical Bank and
Chase, had 1997 revenue of $30.4 bil-
lion. The company, which has 68,000
employees, is based in New York.
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.”
“Changing the hand instead of the glove”An executive roundtable on shareholder value growth
“Changing the hand instead of the glove”24
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-
Mercer Management Journal 25
“Our customers are no
longer satisfied with merely
competitive products. They
also want services and
solutions adapted to their
problems. . . . Products alone
no longer drive our
business.”
—Didier Pineau-Valencienne
er screens as being competitors that you’re going to be measured
against on an ongoing basis. So, coming back to your question,
shareholder value becomes preeminent in terms of driving a
company.
MMJ: Is it getting harder to achieve this kind of growth?
LeBoeuf: If you take the macro, long-term look at it, you’d say,
“Well, it gets increasingly difficult as you mature in the
businesses in which you operate.” But I think there are some
reasons to believe that it can get easier, in the sense that your
people are more directed toward these issues today than they’ve
ever been before. So for driving shareholder value, in terms of
marshaling your resources—principally your people—I think
we’re in better shape today than we were 20 years ago. But,
again, if you look at it in terms of certain external forces, of
course it’s more difficult, because everybody’s getting better at
doing it. More people today are focusing on the shareholder as
being a principal, if not the principal, scorekeeper in evaluating
your performance as a corporation.
MMJ: How widely accepted is a value growth philosophy in Europe?
Pineau-Valencienne (Schneider): Only in the last two or three
years has the concept of shareholder value begun to spread in
France, where many enterprises have long operated under state
control—although, like other large French corporations,
Schneider adopted this approach earlier because of its 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?
“Changing the hand instead of the glove”26
“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.”
—Raymond W. LeBoeuf
Boudreau (Chase): The rate of change has been dramatic. If you
go back twenty years, someone wanting a loan to buy a car went
to a bank; if you wanted a mortgage you went to a bank. Bank
cards were defined by banks. Begin to fast forward that. Little
changes began to take place, some of which seemingly facilitated
banks doing the business better. But, as often happens—and will
continue to happen as technology continues to redesign business
systems—those changes cleared the tracks for non-entrenched
players. What that’s doing is repositioning in the minds of cus-
tomers who the providers are for financial services. You used to
have to go to a branch to do a lot of stuff that today no longer
requires going to a branch, or even to a bank. So we can hang a
lot of bunting on branches, but customers aren’t coming back to
us there. To stay there is a destruction of shareholder value.
MMJ: How does a business cope with this kind of change?
Freeman (Quest Diagnostics): We think an awful lot about what
the world will look like in five to ten years, and how we need to
anticipate that and get in front of it. But, at the same time, we
often get tangled up in the web of: “Okay, well, who is the 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
Mercer Management Journal 27
system.” It essentially has every element of our business support-
ed by an information capability that is constantly reflecting the
insights we gain about our customers and is continuously iterat-
ing that through every aspect of our doing business. This gives us
the ability to recognize a complete customer relationship at any
point a customer shows up. One of the things that this informa-
tion-based business does for us—without question, in every
application—is to empower our people to do more to satisfy cus-
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
way, and we make customers happier. That gives us a retention
benefit, which, again, is a way to maintain shareholder value.
MMJ: We have talked about the changing business environment.
What degree of change must a business itself be prepared to make?
LeBoeuf: One of the things that has allowed a 115-year-old com-
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
“The other way to
approach [change] is
to anticipate where the end
game is going to be played,
what it’s going to look like,
and then to . . . make the
journey with your franchise
and your customers.”
—Donald L. Boudreau
“Changing the hand instead of the glove”28
things better: standardizing your processes, deploying best prac-
tices, all that sort of stuff. But in a situation like this, that’s not
nearly enough. The other piece you have to do is redefine the
game. And redefining the game can come in a number of differ-
ent ways. You can start thinking about how you segment the
market. You can think about geographic market participation.
You can think about acquisitions. But all of those are relatively
conventional answers, and to some degree I think can redefine
the game for only a short period of time. The bigger challenge,
I think, is to actually change the offering—to change the hand,
as opposed to changing the glove.
MMJ: How does a management team go about identifying future
opportunities for shareholder value growth?
Pineau-Valencienne: As a company thinks about change, it’s
important to remember that the concept of shareholder value
cannot be disassociated from what we call “competitive growth,”
or profitable growth. Increasing shareholder value through a
purely financial approach—for example, through cost-cutting
alone—is a sign of short-term vision. You may increase your
share price in the short term, but you won’t get sustained growth
in shareholder value. I prefer the concept of “francs of value cre-
ated for each franc of competitive growth.” This concept is moti-
vating for employees and fits into a long-term vision.
LeBoeuf: One of the things that we’ve tried to do is move from
being a more reactive, inside-out company to a more proactive,
outside-in company, with more of a marketplace focus than in
the past. If you go back twenty to twenty-five years, we were an
“invent it, manufacture it, and then it will sell” company. Very
much inside-out. We looked at: What was the next invention?
Could we make it? And if we could make it, “I’m sure 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.
“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 competi-
tive situation. . . . But that's
not nearly enough. The
other piece you have to do
is redefine the game . . .
change the hand, as
opposed to changing
the glove.”
—Kenneth W. Freeman
Mercer Management Journal 29
Boudreau: We don’t believe just listening to the customer is going
to be good enough going forward. That’s important, but some-
times the customer isn’t able to articulate exactly what new prod-
uct or service improvement they want or need. What we should
be doing continuously is understanding what consumers are try-
ing to do in terms of achieving a financial goal or mitigating a
concern. Our job, it seems to me, is to frame up a response that
meets that requirement in a cost-effective and convenient way.
If we do this well and continuously, it will give our customers a
Chase brand experience that will provide us with a competitive
advantage.
MMJ: How do you get value-growth thinking placed front and center
among your company’s priorities, get it integrated into the organiza-
tional consciousness, and create a dynamic environment for change?
Bok: In one way it’s simple, really. The key to success is clarity.
A CEO needs to pass along a clear vision of what he wants his
management team to do, then hold them accountable for it and
incentivize them on it. Because in Philips Business Electronics
we structure our business units as entrepreneurial companies,
there is transparency about how each unit performs. However,
one big challenge that can arise from value-oriented strategies is
business unit leadership. If a company is value-growth oriented,
it may follow value opportunities to new business designs that
challenge its management team’s perceptions of their businesses.
How do you convince them to follow aggressively? Another
challenge is how a company organizes itself for new business
designs. In technology industries, it is difficult to create an 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
“In technology industries, it
is difficult to create an
organizational bridge
from the way technologies
are nurtured to the way
strong customer relation-
ships are built.”
—Dr. A. B. Fred Bok
“Changing the hand instead of the glove”30
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.
Mercer Management Journal 31
Hockey great Wayne Gretzky has explained his phenomenal
success on the ice by saying that, while other players skate
to where the puck is, he skates to where the puck is going to be.
Similarly, we have seen that those companies that are most
skilled at identifying where new business opportunities are going
to be tend to be rewarded with substantial growth in shareholder
value.
Our experience suggests that the customer can represent the
most reliable compass to help a business leader plot his or her
company’s course. But gaining an understanding of the future
through customers is not easy. Businesses have a long history of
missing upcoming trends because they—and the consumers they
query—fail to envision the future environment in which a new
product or technology will be introduced. A 19th century farmer
would have said he needed a stronger and faster horse, not a
tractor. Mercedes-Benz concluded in 1900 that the worldwide
market for automobiles would never exceed 1 million, primarily
because of the limited number of available chauffeurs. Similar
faulty predictions were made in the early history of computers,
photocopy machines, telephones—and, more recently, in the
“broadband” marketplace.
The broadband opportunity
Back in 1995, it was clear that the communications, informa-
tion, and entertainment industries were entering a period of
blistering change and convergence. Technological advances had
made it possible to send enormous quantities of digitized infor-
mation over fiber-optic cables, and the planned broadband net-
works promised both to bring new multimedia services to con-
sumer households and to usher in head-to-head competition
between telephone and cable services.
A winning Business Design
is founded on an insightful
understanding of rapidly
shifting customer priorities.
In 1995, Mercer Manage-
ment Consulting used two
rigorous marketing science
tools to conclude—
correctly, it turns out—that
much of the conventional
wisdom about the future
of multimedia “broad-
band” networks was
wrong.
Identifying the opportunities of the futureStrategic AnticipationSM through marketing science
by Eric Almquist
and Gordon Wyner
Identifying the opportunities of the future32
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.
Mercer Management Journal 33
Marketing science for Strategic AnticipationSM
This was clearly a challenging task. Estimating the future
demand and profit power of new and emerging products and
technologies with which consumers had no familiarity wouldn’t
be easy. We were fortunate to have at our disposal a number of
proprietary marketing science tools that enabled us to develop a
fact-based, robust picture of future customer segment priorities,
behaviors, and values. These tools enabled us to condition cus-
tomers to a future world and then—in the context of this new
world—to evaluate their decision-making process.
The consumer demand research started with a national sample
of 850 randomly chosen consumers, all with household incomes
greater than $10,000. Mercer introduced these consumers to a
world of broadband capability, showed them examples of new
broadband-related services, and asked them to choose between
available offerings at various prices. This research project relied
heavily on two research techniques: Information Acceleration™
and Strategic Choice Analysis®, both developed at academic
institutions and adopted by Mercer over the last 15 years.
Information Acceleration “accelerates” consumers into an all-
encompassing future market environment. Sitting at an interac-
tive multimedia workstation that uses video, graphics, sound,
motion, and text, consumers are able to experience an array of
new products and services. They see and hear simulated testimo-
nials, advertisements, in-store displays, sales presentations, prod-
uct literature, and other elements of the marketing mix. Glenn
Urban, of MIT’s Sloan School of Management, developed
Information Acceleration based on methodologies he created
for forecasting demand for consumer packaged goods. This
approach is now licensed exclusively to Mercer.
Once consumers are conditioned to the future, the use of
Strategic Choice Analysis provides the tools to develop a 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.
Information Acceleration™
drops consumers into an
all-encompassing future
marketplace. Once they are
conditioned to the future,
Strategic Choice Analysis®
gauges their preferences.
In the 1995 broadband
study, consumers were
asked to consider how they
would use the new
technology—not in the
context of 1995, but in a
richer, more “futuristic”
environment of 2000
to 2005.
Identifying the opportunities of the future34
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).
Because brands have a significant influence over buying deci-
sions, we also asked the consumers to choose among six
providers whose names were familiar to them, ranging from
their local telephone companies to national cable providers.
They were asked to make their decisions based on price, 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.
Information Acceleration™
• “Accelerate” consumerinto the future
• Illustrate the newcompetitive landscape
• Voice and videophone
• Traditional cable, video-on-demand, near video-on-demand, time-shifted TV,interactive TV
• Information, shopping,banking, chat, and otheronline services
From among future offerings:
• Six brands
• Different prices
• Performance options (e.g.,picture quality)
• Bundling options
Future Market
Strategic Choice Analysis®
Future Conditioning Future Services Consumer Choices
• Size
• Provider shares
• Product penetration
• Demand elasticities
Exhibit 1 Creating thevirtual future ”broadband”marketplace
Mercer Management Journal 35
At the conclusion of the study, we predicted that much of the
conventional wisdom was false, and that investments based on
those assumptions would not pay off. Three years later, a review
of our broadband work shows the validity of some of our most
controversial conclusions, which debunked four important
myths.
Myth 1: Video-on-demand services would boom. In 1995, industry
experts believed that there was substantial pent-up consumer
demand for services such as video-on-demand (movies shown
whenever the viewer wants, with selection available from thou-
sands of titles), “near video-on-demand” (movies shown at regu-
lar intervals, with selection available from a few hundred avail-
able titles), and time-shifted television (personalized
rescheduling of existing TV programming). In this view, cable
companies and telephone companies would compete to bring a
panoply of broadband products and services to customers over
the companies’ own proprietary broadband networks.
We saw a different picture. While demand existed for these
services, its level was insufficient to allow attractive returns on
the investment required to build more than one broadband 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.
The Mercer broadband
study predicted that much
of the conventional
wisdom was false, and that
investments based on
those assumptions would
not pay off. In particular,
the study debunked four
important myths.
Identifying the opportunities of the future36
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
IndustryGrowth
PriceDecline
LostShareGained
Share
CostSavings
IndustryGrowth
Capital
GainedShare
Cable Company Local Phone CompanyBloody Stalemate
PriceDecline
LostShare
Capital
$0
-200
-400
-600
-800
-1000
-1200
-1400
SOURCE: 1995 Mercer Management Consulting Broadband Study, “Colliding Worlds”
Net
pre
sen
t va
lue
of
cash
flo
ws
per
ho
use
ho
ldExhibit 2 The risk ofbroadband investment: a“bloody stalemate”
37Mercer Management Journal
The challenge for Eurostar—the company
that operates the high-speed trains between
London, Paris, and Brussels—was to capture
high-margin customers and maintain their
loyalty in an increasingly competitive environ-
ment. Just 18 months after the inauguration
of service through the Channel Tunnel,
Eurostar had achieved 60 percent market
share—higher than air transport—on the
Paris-London route. Now, it wanted to secure
that customer base, increase penetration in
attractive market segments, and penetrate
new high-margin segments.
To do this, the company could no longer
count on its original service mix. It had to
identify new ways to appeal to high-value
customers by identifying and meeting their
priorities. This required changes in one of the
five dimensions of the company’s Business
Design—customer selection and value propo-
sition.
The company began by identifying the priori-
ties of new and existing customers and
determining what amenities would satisfy
those priorities. A frequent traveler program?
Taxi service on arrival? “Fast-track” check-in?
On-board entertainment? And once the
desired amenities were identified, how
should they be bundled? Before rolling out
costly changes on a large scale, Eurostar
wanted to quantify their impact and verify
that they would deliver the hoped-for
increase in ridership and margins.
Eurostar chose to use a sophisticated model-
ing technique, Strategic Choice Analysis®, to
test service enhancements in a realistic com-
petitive context. With Strategic Choice
Analysis, a proprietary tool of Mercer
Management Consulting, customers are pre-
sented with realistic choices and then state
their preferences among a number of fully
packaged service offers. The model not only
measures the number of travelers who are
attracted by the enhancement, it also quanti-
fies how much they are willing to pay for it.
The end result is a “decision support system”
that allows marketing managers to test the
impact of an array of price and product
changes, as well as to simulate the impact of
competitor reaction.
Based on its use of Strategic Choice Analysis,
Eurostar decided to change from two to four
classes of service, each with a distinctive
positioning aimed at a specific customer seg-
ment. In the first full year since the changes
were instituted, Eurostar has registered a
20 percent increase in ridership and, more
importantly, a 40 percent increase in revenue,
dramatically enhancing margins.
Olivier Fainsilber is a principal of Mercer
Management Consulting based in Paris.
Business Design dimensions Customer selection and value proposition
Targeting the profitable rail passenger
by Olivier Fainsilber
Identifying the opportunities of the future38
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
Mercer Management Journal 39
Business Designs, and innovative channels are providing cus-
tomers with substantially more purchase options. It’s also taking
place at a time when organizations in many industries are
becoming aware that a few extremely valuable customers
typically bring in the lion’s share of their profits.
In this environment, the organizations that can best anticipate
the needs of their most valuable customers are at a distinct com-
petitive advantage. Those that can develop scenarios that envi-
sion the future with enhanced certainty will gain not only the
information and confidence needed to make informed business
decisions but also a strong advantage over the competition.
Well-known examples include Charles Schwab & Co., which
recognized in the 1980s that investors had become more knowl-
edgeable about their investment options than before and that
many, who were not really utilizing their brokers as information
resources anyway, would prefer discount brokerage services to
paying for a middleman. In the future, this ability to discern—
and design businesses around—evolving customer needs will be
an even more critical skill.
Charles Schwab, however, relied on intuition and personal
experience in developing his innovative Business Design.
Increasingly, our clients are demanding solid analysis—not anec-
dotal evidence or hunches—to help them envision the future.
That’s why marketing science is so important. The payoff can be
the difference between moving into a “profit zone” or taking aim
at the wrong target while others with greater capacity for
Strategic Anticipation seize the best opportunities.
The work that Mercer did in anticipating broadband informa-
tion and entertainment market applications overturned conven-
tional wisdom with intelligent analysis. Such analysis is possible
in many other markets as well. Advanced marketing science
techniques, designed to reveal customers’ needs and preferences
in a futuristic business environment, provide forecasts that can
help executives identify how value in their business sectors will
migrate—and where they should invest to capitalize on those
shifts.
And invest they will. The reality of entrepreneurial capitalism is
that if an organization doesn’t develop the new Business Design
that will take advantage of an emerging profit zone, someone
else will seize the opportunity. This reality will increasingly turn
managers into entrepreneurs.
Increasingly, companies are
demanding solid analysis—
not anecdotal evidence or
hunches—to help them
envision the future.
Advanced marketing
science techniques,
designed to reveal
customers’ needs and pref-
erences 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.
Identifying the opportunities of the future40
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.
Mercer Management Journal 41
Apuzzling 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
developers such as Apple and CompuServe; market share leaders
in industries ranging from retailing to autos to insurance to steel
to airlines. They are firms that, despite their seeming advantages,
have been battling in the middle of the pack in terms of profit
and shareholder value growth—if they haven’t been left com-
pletely behind.
Then there is another phenomenon: remarkable companies that
have emerged as first-rate creators of shareholder value from
what would seem to be unpromising origins. They include
Coca-Cola, for years a lumbering giant in the slow-growth bev-
erage market; Dell Computer, a firm whose products feature off-
the-shelf components instead of ground-breaking technology;
General Electric, historically a sprawling collection of business-
es, many in second-tier market positions.
Most conventional strategy frameworks provide little insight
into these unlikely successes and failures. Clearly, dominant
market share isn’t the determining factor. Consider GE, which
boosted its market position as a necessary, but only intermediate,
step on the way to superior shareholder value creation. Being in
a rapidly growing market doesn’t govern the outcome, as Coke’s
experience demonstrates. Neither does ‘‘first mover” advantage;
Dell was a latecomer to the personal computer market. Focusing
on “core competencies” isn’t the answer either. Both Coke and
GE—which ventured beyond their original businesses and got
into, respectively, bottling and financial services—ignored that
maxim.
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.
A blueprint for shareholder value growthWinning through strategic Business Design
By Rick Wise
A blueprint for shareholder value growth42
A strategy framework for turbulent times
So why have the time-honored approaches to strategy become
less relevant? The answer should come as no surprise.
Fundamental shifts in the business environment have changed
forever the rules of business success. The traditional strategy
frameworks were oriented toward a simpler economic time, one
of stable, scale-oriented industry environments, high systemic
growth rates, and meaningful opportunities for product differen-
tiation. Traditional strategy tools—with their emphasis on mar-
ket growth and relative market share, on core competencies, on
“time to market” and “experience curve” economies—provided
valuable guidance in this world.
Today, a company follows the old rules at its peril. Markets are
fragmenting and blurring, which has led to increasingly lumpy
profit distribution across customers and a complex array of new
market opportunities. Once-powerful barriers to competition are
eroding, the result of technology becoming more widely avail-
able, entrepreneurial talent and capital becoming more plentiful,
and service and knowledge becoming increasingly important
sources of added value. These days, the traditional strategy prin-
ciples can, instead of providing guidance, become hindrances
that lock a company into a low-profit market zone and yester-
day’s critical skills.
Instead, business success must be driven by a strategy framework
that recognizes and embraces the requirements of today’s mar-
ketplace. These include a customer-centric rather than a
product-centric focus; an expansive rather than a narrow view of
the business landscape; a dynamic rather than a static perspec-
tive on the future market environment; and, most importantly,
an emphasis on the multiple and interrelated strategic dimen-
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
Business Design represents
much more than a
variation on old strategic
themes. Three key ele-
ments differentiate it from
traditional approaches: an
explicit and relentless focus
on shareholder value
growth as the objective of
corporate strategy; a deci-
sion-making framework
that extends beyond the
traditional product-centric
view of business; and an
“outside-in,” market-
driven approach to
strategy setting.
Mercer Management Journal 43
have enjoyed phenomenal growth in shareholder value through
their Business Design-oriented approach to strategy
development.
Business Design—developed for today’s challenging business
environment and refined through dozens of real-world trials in
client strategy situations—represents much more than a varia-
tion on old strategy themes. Three key elements sharply differ-
entiate it from traditional approaches:
1. an explicit and relentless focus on shareholder value growth
as the objective of corporate strategy;
2. a decision-making framework that extends beyond the tradi-
tional product-centric view of business; and
3. an “outside-in,” market-driven approach to strategy setting.
A singular focus on shareholder value growth
While achieving shareholder value growth may seem an obvious
corporate goal, many strategy practitioners lose sight of it. If
they explicitly articulate any strategic objective at all, they
emphasize those simplistic objectives such as market dominance
or economies of scale or ‘‘first to market” advantage that have
only an indirect causal relationship with shareholder value
growth.
By contrast, Business Design addresses several factors repeatedly
cited by market analysts as key to their valuations of stocks:
operating profit momentum; efficient deployment of the assets
needed to sustain that momentum; and predictable, sustained
performance.
Companies that fail in one or more of these areas are legion.
“Bottle rockets” enjoy rapid initial growth but, after a dizzying
take off, quickly crash. ‘‘Asset monsters” make tremendous 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
While achieving share-
holder value growth may
seem an obvious corporate
goal, many strategy practi-
tioners lose sight of it.
By contrast, the discipline
of Business Design
addresses several factors
repeatedly cited by market
analysts as key to their
valuations of stocks:
operating profit momen-
tum, asset efficiency, and
predictable performance.
A blueprint for shareholder value growth44
While traditional strategy
approaches focus narrowly
on one or two product-
centric strategy elements,
Business Design stresses
the importance of making
decisions across five broad
and interrelated dimen-
sions, each of which plays
a critical role in robust
strategy formulation—and,
by extension, shareholder
value creation.
leading relationship with any of them. Often, it is simply the
outcome of having successfully built a better value-creation
engine.
A company’s multiple dimensions
Another way in which Business Design differs from traditional
strategy frameworks is its recognition of the complex set of
choices facing the modern executive when making blank-sheet
business decisions. While traditional strategy approaches focus
narrowly on one or two product-centric strategy elements,
Business Design stresses the importance of making decisions
across five broad and interrelated dimensions, each of which
plays a critical role in robust strategy formulation—and, by
extension, shareholder value creation (see Exhibit 1):
— Customer selection and value proposition. Where is the greatest
market opportunity in terms of long-term profit growth, and
how can I meet the critical priorities of this customer seg-
ment? In the cellular phone service market, for example,
dramatic variations exist in the needs and profitability of
different segments: Contrast business executives, for whom a
cell phone is an invaluable tool, with the larger but less prof-
itable segment of “soccer moms,” for whom it is a seldom-
used security device.
— 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
Organizational Systems
Strategic Control
Value Capture/Profit Model
Scope
Customer Selectionand Value Proposition
Where is the greatestopportunity in terms oflong-term profit growth,and how can I meet thecritical priorities of thiscustomer segment?
What profit model will Iharness to capture value
from this customer?
How will I maintaindominant control of myprofit stream to preventit from migrating tocompetitors, customers,or out of my industryaltogether?
What are the mostcritical activities and
product/service offeringsI need to control tocreate value for the
customer and capturevalue for myself?
What organizational capabilities are criticalto my translating the other dimensions
into marketplace success?
Exhibit 1 The fiveinterrelated dimensionsof Business Design
Mercer Management Journal 45
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
46 A blueprint for shareholder value growth
One of the big challenges facing a company
today is the growing need to redesign its
business every five to seven years in order to
achieve sustainable profit and shareholder
value growth. The fast-growing market for
“smart cards”—plastic cards that store
extensive information on an embedded
microprocessor—provides a striking illustra-
tion of how two companies, Philips
Electronics, based in the Netherlands, and
De La Rue, based in the U.K., did just that.
By exploiting value-chain “fusion” in their
market and successfully broadening the
scope of their activities—one of the five
dimensions of Business Design—they were
able to participate in a new wave of value
growth.
Neither Philips nor De La Rue had been big
winners in the first wave of value creation in
smart cards. The market had been limited
primarily to the French telephone and bank-
ing industries, and the first rule of the game
had been to build scale with high-volume
telephone cards. Philips, with only a high-
end chips targeted at the banking, mobile
phone, and pay TV segments, had missed
out on much of the early market. And De La
Rue, whose core business was in currency
printing and magnetic stripe card produc-
tion for banks, lacked in-house chip
technology.
In 1996, both companies recognized the
rules of the smart card game were about to
change. The rest of the world was waking
up to the benefits of the cards, and the
market was poised to shift from a French
payphone-dominated business to a global
one where banking relationships would be
paramount. Banking customers were look-
ing for a “transition partner,” a supplier
that could continue to supply them with
magnetic stripe cards—which weren’t going
to disappear overnight—while layering on
smart cards.
Both Philips, with its high-end chip, and De
La Rue, with its banking customer relation-
ships and magnetic stripe cards, had the
chance to play the next game. But they real-
ized their existing Business Designs were not
broad enough to fully exploit the new
opportunity. Recognizing their complemen-
tary positions, the two companies started
talks that culminated in May 1997 in the
creation of what has become one of the
world’s leading integrated smart card manu-
facturers, De La Rue Card Systems.
Ted Moser is a vice president of Mercer
Management Consulting based in Paris.
Business Design dimensions Scope of activities
A fusion of technology and customer relationshipsby Ted Moser
Mercer Management Journal 47
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-
in approach requires a dynamic and flexible decision-making
process.
Inputs, RawMaterial
Product/ServiceOffering
Channels The CustomerAssets/CoreCompetencies
Channels Product/ServiceOffering
Inputs, RawMaterial
Assets/CoreCompetencies
Customer Priorities
Inside-out
Outside-in
Exhibit 2 Differentapproaches to strategy-setting [continued on page 51]
48 A blueprint for shareholder value growth
Tomorrow’s Business Designs in financial servicesDo 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-
vide perhaps the most com-
pelling demonstration of the
velocity with which Value
Migration® is sweeping through
the financial services landscape.
The mergers and acquisitions
wave that has joined several of
the largest U.S. banks and
other financial services
providers—CitiCorp and
Travelers, Nationsbank and
Bank of America, BancOne and
First Chicago, among others—
reflects managers’ desire to find
sustainable sources of value cre-
ation. The comments of Messrs.
Weill and Aldinger are two per-
spectives on how to tap those
sources.
At the heart of these consolida-
tions, however, lies a troubling
question: Do the mega-institu-
tions represent the emergence
of one or more new Business
Designs that capitalize on the
opportunities inherent in
enlarged scale and scope—or
will some, if not all, of these
institutions turn out to be little
more than warehouses of out-
dated Business Designs?
In general, the flurry of big
transactions is fueled by the
belief that consolidation is the
best response to a financial
services environment being rad-
ically redefined by the changing
economics of customers and
the growing number of choices
they enjoy. But the mergers,
seemingly similar in nature, in
fact conceal a variety of differ-
ent perspectives on where the
future “profit zones” of the
financial services industry lie
and which of numerous com-
peting Business Designs will be
able to identify and occupy
those zones.
The recent consolidation repre-
sents the second phase of a
change that began in the
1980s, when the changing eco-
nomics of information and reg-
ulatory trends combined to
“de-integrate” the unified, ver-
tically integrated Business
Design of commercial banking.
The rise of “category killers”
offering specialized financial
services products presaged the
emergence of the multiple
Business Designs that can now
be observed in embryonic form.
The equity markets have grant-
ed substantial value to the new
category-killer Business Designs
at the expense of traditional
ones. For example, MBNA, a
leading credit card company,
has a market value of more
than 81/2 times its book value,
while an index of the top
20 retail banks has a market-
value-to-book-value ratio of
31/2. (It is worth noting that
several of these category killers,
such as First USA and The
Money Store, have been
acquired by more traditional
players at substantial
premiums.)
These new designs are marked
by several common characteris-
tics: focused attention on how
customer priorities are shifting,
a profit model that targets
high-value customers, and an
“information-based business
system” that enables a compa-
ny to go to market in a much
more dynamic and adaptive
manner.
The most impressive value cre-
ators emerging are those that
have followed what we charac-
terize as the “recombinant”
approach—that is, taking some
of the capabilities developed
and exploited more narrowly by
the category killers and
Mercer Management Journal 49
regrouping them in new ways
to meet broad customer needs.
Schwab is a powerful example:
Its intense focus on how its cus-
tomers’ needs are evolving has
enabled it to move with them,
providing a relationship-based
approach that features an
information-enriched set of
offerings delivered through an
integrated, multi-channel net-
work of phones, the Web, and
retail offices.
Ultimately, Schwab will be just
one example of a new set of
Business Designs that will com-
pete for dominance in financial
services, each one representing
new combinations of ways to
meet evolving customer priori-
ties and capture emerging prof-
it zones. A simplified frame-
work for thinking about the
new financial services landscape
includes five Business Designs
(see Exhibit 1):
— Re-intermediators will, in
many ways, return to a clas-
sic banking role: gathering—
or “aggregating”—informa-
tion that can be used to tai-
lor financial solutions to indi-
vidual customers, and dis-
tributing a variety of
“best-in-class” third-party
products that meet their
high-end customers’ evolving
needs.
— Mass Customizers will focus
on the aggregator role, act-
ing as intelligent agents to
seek out a mix of third-party
products that meet the
needs of their customers.
More reactive to customer
requests and less interactive
in helping those customers
identify their needs than Re-
intermediators, Mass
Customizers will appeal to a
broader audience.
— Anywhere/Anyhow/Any
Brand firms will be multi-
product, multi-brand distrib-
utors of third-party products,
operating integrated multi-
channel networks that pro-
vide a broad array of pack-
aged solutions.
— Scale Manufacturers will be
the low-cost providers of
products in traditional and
non-traditional categories—
some grown from today’s
category killers, some
emerging from new tech-
nologies, and some trans-
formed from the operations
of today’s vertically integrat-
ed institutions.
— McBanks will provide stan-
dardized, low-cost access to
financial services to fill the
market “white space” that
will grow as large institutions
focus their capital and
capacity on the highest-value
10 to 15 percent of U.S.
households.
Each of these models is defined
by the five dimensions of
Business Design. Take, for
example, the Scale
Manufacturer Business Design.
Its customer selection and value
proposition will focus on the
price-conscious customer who
seeks basic financial products
and services. Its means of value
“Aggregator”
“Re-intermediator”
More Sophisticated WealthManagers
(Higher Value)
“Distributor” “Manufacturer”
Less Sophisticated WealthManagers
(Lower Value) Product Functionalityand Performance
Advice andInformation/Experience
“Masscustomizer”
“Anywhere,Anyhow,
Any Brand” “Scale
Manufacturer”Customer Segments
(illustrative)
Access/Convenience/
Experience
“McBank”
Customer Priorities Addressed
Type of Offering
Exhibit 1Future “profitzones” inretail financialservices willmatch scopeof offeringwithcustomersegments
A blueprint for shareholder value growth50
capture will involve transaction
fees and product margins. It
will gain strategic control
through scale, pricing based on
the credit risk of individual cus-
tomers, and superb customer
information. Its scope of activi-
ties will be limited to a menu of
standardized products and serv-
ices delivered through multiple
channels. Its organizational sys-
tems will emphasize low-cost
operations across the value
chain, information-based capa-
bilities to manage individual
customer value, and highly
focused channel, product, and
customer management. Other
Business Designs will exhibit
very different qualities in these
five areas.
It appears clear that the seem-
ingly revolutionary mergers of
April 1998 are only the begin-
ning of widespread consolida-
tion in the financial services
industry. The necessary compo-
nents for new value-creating
Business Designs—customers,
channels, products, brands,
information-based capabilities—
are being assembled under
increasingly larger roofs. But
whether the players are build-
ing something new, or simply
something big, remains to
be seen.
Management teams need to
transform these mega-institu-
tions from the traditional verti-
cally integrated “one-size-fits
all” model to vibrant new
Business Designs, ones that
enable them to better serve the
customer and migrate into the
radically different profit zones
that will define the future of
financial services. To date, very
few financial institutions have
demonstrated innovation on a
large scale—that is, transforma-
tion of the traditional value
chain (see Exhibit 2). It is this
potential that should galvanize
senior management to drive the
creation of the next wave of
Business Design.
Corey Yulinsky is a vice president
of Mercer Management
Consulting based in New York.
1Proposed mergerBook value: FY-end 1997. Market value: April 1998.SOURCE: Mercer Management Consulting Value Growth Database
Market Value (Billions)
Market Value
Book Value
Innovators
Traditional Business Designs Consolidators
Reinventors
0
1
2
3
4
5
6
7
8
9
10
140 +0 10 20 30 40 50 60 70 80 90
NationsBank/BoA1
Capital One
First Data
Progressive
Schwab
State Street
Travelers/Citicorp1MorganStanley/DeanWitter
MBNA
Top 20 P&CInsuranceComposite
Top 20 LifeInsuranceComposite
Top 20 Brokerage Composite
Top 20 Bank Composite
Bank of Tokyo/Mitsubishi
UBS/Swiss Bank1Bank One/First Chicago1
100
Exhibit 2 Value in the financial services industry has been migrating from traditional product-centric BusinessDesigns to customer-centric innovators, though few institutions have yet shown innovation on a large scale
Mercer Management Journal 51
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
A blueprint for shareholder value growth52
To surmount its problems
and turbocharge its
profitability and growth,
Coke reinvented its
business, making changes
in each of the five Business
Design dimensions. It
amounted to a crushing
counterattack against
Pepsi—one that was
carried out on numerous
fronts and was
accomplished through
brains rather than
brute force.
bottlers, and ultimately Coke itself. Pepsi-Cola, with more con-
trol over its own bottling network and able to offer the super-
market chains lower prices, began chipping away at Coke’s mar-
ket share in the grocery segment.
To surmount these problems and turbocharge its profitability
and growth, Coke, under the leadership of the late
Roberto Goizueta, reinvented its business, making changes in
each of the five Business Design dimensions. It amounted to a
crushing counterattack against Pepsi—one that was carried out
on numerous fronts and was accomplished through brains rather
than brute force.
In the area of customer selection, Coke continued to fight Pepsi
for parity in the supermarket, a critical foundation of its busi-
ness. But it sought market share dominance in other markets
that really mattered in terms of profitability: restaurants and
vending machines. In part because of the brutal fight for shelf
space between Coke and Pepsi, consumers today pay on average
about 2 cents per ounce for Coke in grocery stores. By contrast,
Coke costs from 5 to 7 cents per ounce in vending machines and
can cost as much as 10 cents per ounce in restaurants. By target-
ing vending machine and restaurant consumers, Coke not only
focused on more valuable customers but, because these segments
were underserved, gained an opportunity for volume growth in a
flat market.
In order to go after these higher-value customers, rationalize its
antiquated distribution system, and better coordinate its sales
and pricing strategies with the chain stores, Coke also adjusted
the scope of its business. It “forward integrated” into soft drink
bottling, taking controlling positions in the majority of its 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.
Mercer Management Journal 53
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.
Syrup Bottling Logistics
Grocery
Fountain
Vending
Consumer
1980
Coke’s participation/control
Distribution
Syrup Bottling Logistics Consumer
1996
Grocery
Fountain
VendingThe Profit Zone
Distribution
Exhibit 3 Coca-Cola’s“managing-the-value-chain” Business Design
A blueprint for shareholder value growth54
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-
$0 $5 $10 $15 $20 $25 $30 $35
Shar
eho
lder
Val
ue
($BB
)
SOURCE: Mercer Management Consulting Value Growth Database
Coca
-Col
a
Pepsico
1997
1997
1980
Revenue ($BB)
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180Exhibit 4 Coke’s andPepsi’s performancetrajectories, 1980-1997
55Mercer Management Journal
Business Design dimensions Scope of activities
Replicating a successful Business Design
by Ambrosio Arizu and Javier Gómez de Olea
At the end of the 1980s, forward-looking
electric utilities in Western Europe could see
that shareholder value was about to migrate
from their mature Business Design to more
vibrant ones. While the anticipated deregu-
lation of electricity industries across the con-
tinent would provide some new opportuni-
ties for creating value, it would also put
pressure on prices in a sector where con-
sumption was growing at only about 3 to
4 percent.
In this environment, a large Spanish utility
began looking for ways to capture increased
profit and shareholder value. Knowing that
consumers value credibility and financial sta-
bility in providers of utilities and other cru-
cial services, the company bet that its well-
known name would enhance the reputation
of a business that it backed. The company
also realized that its Business Design, which
had proven successful in the electricity busi-
ness, could be leveraged to adjacent mar-
kets that had greater growth potential. The
current design was optimized to serve mil-
lions of clients in a network-based industry
in which there were just a handful of com-
petitors. This focus seemed to be well suited
to the soon-to-be deregulated Spanish
telecommunications market. Taking advan-
tage of that opportunity required changing
the scope of the company’s activities, one of
the five dimensions of Business Design.
The company first invested in a few small
telecommunications businesses, such as
paging, to understand how transferable its
Business Design would be to other endeav-
ors. When it met with success, it continued
to venture into new areas of the telecom-
munications industry. Today, the onetime
electric utility’s telecommunications portfolio
includes major stakes in wireless, long dis-
tance, and cable television businesses.
The company has been rewarded for broad-
ening the scope of its activities. Its market
value today is 3.5 times what it was three
years ago, the increase far outstripping its
investments in telecommunications. The
company’s market-value-to-revenue ratio,
which was just 0.5 three years ago, is 1.7
today—a reflection, at least in part, of the
company’s successful transfer of its Business
Design to an adjacent, high-growth busi-
ness.
Ambrosio Arizu is a vice president and
Javier Gómez de Olea is a principal of Mercer
Management Consulting; both are based in
Madrid.
A blueprint for shareholder value growth56
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.
Mercer Management Journal 57
Today’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
that opportunity. Neither is easy.
But enterprises that successfully carry out these, and just these,
undertakings have only begun to tackle the real work. Unless a
company can quickly catalyze changes in its organization that
correspond to the changes in its Business Design, it will miss
what these days is often little more than a fleeting opportunity.
A beautiful blueprint, whether it be for a home or a business,
isn’t worth much until it is transformed into something tangible.
The sooner a Business Design is realized, the sooner it will be
able to capture the value created by changing conditions. The
longer the Business Design sits on the shelf, the more likely it
will be made obsolete.
Indeed, a key challenge for managers in today’s environment is
getting their organizations to begin to change in support of a
new Business Design even as that design is being conceived. Given
the shortening cycles of value creation, change must be anticipa-
tory and continuous: As a company’s latest organizational system
is being implemented, the next version—one that will support
tomorrow’s Business Design—must be under development.
The ability to achieve this rapid and continuous change repre-
sents an enormous competitive advantage. The failure to develop
this capability means ceding millions of dollars of shareholder
value to competitors.
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.
Reaping the fruits of Business DesignValue growth realization through rapid organizational change
by Diane MacDiarmid,
Hanna Moukanas,
and Rainer Nehls
Reaping the fruits of Business Design58
Managers must start the
process of organizational
change even as the new
Business Design is being
conceived. And as a
company’s latest organiza-
tional system is being
implemented, the next
version—one that will
support tomorrow’s
Business Design—must be
under development.
Focusing on the organizational system
Despite the paramount importance of aligning an organizational
system with a company’s Business Design, the process is often
ignored. Executives often view it as a less-than-strategic
endeavor, one that merits little high-level management atten-
tion. Or they assume that the compelling economic logic of the
new Business Design will translate spontaneously into a new
organizational system. For these executives, the external business
environment, with its demanding customers and ruthless com-
petitors, is the place where the daunting challenges lie.
But ask top managers about their biggest headaches, and most
will tell you they originate closer to home. Indeed, most execu-
tives—more than 80 percent, according to surveys of corporate
leaders conducted by Mercer Management Consulting—believe
that the failure to achieve shareholder value growth is caused by
internal, not external, factors. Identifying future profit opportu-
nities and creating a Business Design that seizes those opportu-
nities are certainly keys to achieving shareholder value growth—
but they represent only half of the equation.
When asked in the surveys why their organizations have failed
to increase shareholder value, the executives repeatedly point to
the same five problems:
— people who are ill-equipped to assume the new roles and
mindset necessary for success;
— organization structures that impede decision making and
slow response time;
— processes that appear disjointed to the customer and produce
outputs below a competitive standard;
— organization infrastructure that is outdated, inefficient, and
not supportive of the Business Design; and
— leadership that does not vigorously champion needed
organizational changes.
Each of these five elements of the modern business 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-
Mercer Management Journal 59
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.
People
Processes
The way work is organizedto create value
• Work flows
• Inputs/outputs/key decisions
• Economics
The way positions are organized toensure clarity and drive collaboration
• Roles and responsibilities
• Job design
• Reporting relationships
Infrastructure
The “connectors” acrosspeople, processes, andstructure
• Communications
• Information systems
• Production and logisticsnetworks
Leadership
The direction-setting force
• Vision/strategy articulation
• Decision making
• Governance
• Institutional performancemeasures and goals
The human capital of the company
• Performance and rewards
• Training and development
• Career development
• HR processes and capabilities
• Motivation for change
Structure
Exhibit 1 The elements ofan organization must worktogether to support acompany’s Business Design
Reaping the fruits of Business Design60
The arguments against
change—or at least
for postponing it—are
universal: “Our customers
are satisfied.” “We need
to get everyone on board
first.” “We don’t have the
information technology
and data we need.” “We
have to reorganize our
structure before we do
anything else.”
Matching the organization to the Business Design
Companies that are able to quickly align the elements of their
organization with their Business Design can reap huge divi-
dends. Charles Schwab, British Airways, and Nucor—three
companies in very different businesses that implemented effec-
tive organizations in support of their Business Designs—have
together created nearly $23 billion in shareholder value in the
past decade.
Charles Schwab, the discount brokerage, pursued a strategy in
the 1990s built around a “switchboard” profit model. By posi-
tioning itself as the intermediary between thousands of invest-
ment products and millions of customers, it is largely immune to
shifts in the popularity of any particular fund type while control-
ling a vast database of customer names, behaviors, and holdings.
The validity of its Business Design has been borne out by the
sharp increase in its market capitalization. Despite a sharp drop
in its share price since the beginning of the year, the result of
growing competition, Schwab’s current market capitalization is
about $9 billion (three times its annual revenue), up from
$150 million (one-third its annual revenue) in 1987.
For its Business Design to succeed, Schwab knew that it would
have to flawlessly execute millions of transactions daily; because
the company was handling customers’ investments, lapses in
quality or timely processing would be fatal to its customer 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-
Mercer Management Journal 61
ed a decentralized and streamlined structure aimed at moving
decision making closer to the customer and speeding organiza-
tional response time.
Nucor set out to be a low-cost producer of a relatively narrow
range of steel products. Its Business Design called for using low-
cost “mini-mill” technology and relying heavily on scrap steel for
its raw material. Today, its market capitalization is more than
$4 billion, significantly higher than larger, traditional competi-
tors such as U.S. Steel and Bethlehem Steel.
To support its Business Design, Nucor created an organizational
system that included a flexible and low-cost work force, stream-
lined manufacturing processes, a low-cost infrastructure, a lead-
ership team that continually articulates strategy and goals, and a
bare-bones organizational structure. Fewer than 30 people at
corporate headquarters run a business with revenue of more than
$3 billion.
Confronting the barriers to organizational change
The success stories of Charles Schwab, British Airways, and
Nucor make realigning an organization in support of a new
Business Design seem, if not easy, at least logical and straight-
forward. Anyone who has tried to do it knows otherwise. After
all, organizations are run and staffed by human beings, whose
response to change is often more emotional than rational. The
arguments against change—or at least for postponing it—are
universal: “Our customers are satisfied.” “We need to get 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
Often, one of the least
promising environments
for organizational change
exists in companies that,
by most appearances, are
doing well: In such a
setting, it can be difficult
to create the sense
of urgency necessary
to overcome inertia.
Satisfaction with the status
quo, however, will soon
become such a company’s
greatest enemy.
Reaping the fruits of Business Design62
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).
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
Time
High-Risk Period
Old Business Design
New Business Design
Exhibit 2 Moving from anold Business Design to anew one poses numerouschallenges
Mercer Management Journal 63
must be continuous and parallel tasks. Just as product developers
work with marketing and manufacturing people during the
design stage to ensure that a new product will meet government
regulations and be cost-effective to make, so must strategists
crafting a Business Design work with executives to ensure that
the organization will be ready and able to carry out the design as
soon as it is completed.
A rule of thumb in the pharmaceutical industry holds that each
day of delay in the Food and Drug Administration approval
process for a new drug costs the drug manufacturer $1 million.
Consequently, work must begin on facilitating that approval
even as the drug is being developed. Likewise, aligning an
organization in support of a company’s Business Design only
after that design has been developed, reviewed, revised,
approved, and packaged will doom the effort: The value-capture
opportunity will have passed. The alignment process must paral-
lel the development of the design (see Exhibit 3).
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.
Change Readiness
• Change assessment
• Change roadmap
• Changecommunications(internal)
Change Planning
• “Quick wins”identified
• Best practices ofcompetitors
• Changecommunications(internal)
Change Execution
• Rapid prototyping/quick wins
• Field tests/pilots
• Changecommunications(external)
• Employee training
• Roll-out
Organizational Change
Business Design StrategicAnticipation
Business Design Value GrowthRealization
Exhibit 3 Redesigning thebusiness and changing theorganization must be donein tandem
Reaping the fruits of Business Design64
The second stage, Change Planning, occurs as the new Business
Design is being developed. At this point, various organization
redesign options will be drafted, evaluated, and assessed against
the company’s Business Design goals. The relevant change driv-
ers—the organizational elements that need to be emphasized
and the levers that need to be pulled in support of a particular
Business Design—will be identified. So, too, will performance
gaps in the existing organization and their root causes. “Quick
wins”—selected initiatives that will produce immediate benefits
and engender early support for the change program—will be
identified and planned. Competitors’ and others’ best practices
will be surveyed to identify useful models. The change roadmap
will be refined, with the destination, if not yet pinpointed, at
least directionally clear. The goals, performance gaps, and antici-
pated changes will be communicated to employees.
During the third stage, Change Execution, changes in the organi-
zational system will be executed at an accelerated pace. “Rapid
prototyping”—a method in which small teams test and fine-tune
changes to the organizational system while delivering
momentum-building quick wins—will be carried out (see
Exhibit 4). As benefits are realized, they will be communicated
throughout and outside the organization. Employees will be
trained for new jobs and regular performance measurements will
be implemented, in order to hold people accountable for the
required changes as well as for operating results. Pilot programs
will test new products, services, or programs in the field. Finally,
the new organizational system will be formally rolled out across
the entire enterprise.
CapabilityDeployment
“Aim theMachine”
Capability Development“Build the Machine”
Rapid
Prot
otyp
ing to
Acc
elera
te Le
arnin
g an
d Be
nefit
s
Exhibit 4 Rapidprototyping ensures thatnew capabilities are bothdeveloped and deployed in“real time”
Perhaps the greatest barrier
to organizational change is
the need for the process
to begin before it is entirely
clear where the company is
headed. It can be difficult
to get people to embrace
change when you ask
them to move to a new
place—but are unable
to tell them, in the begin-
ning at least, precisely
where that is and what will
be required of them.
65Mercer Management Journal
Business Design dimensions Organizational systems
The overhaul of an auto components supplier
by Wolfgang Weidner
The globalization of the auto manufacturing
industry has led to brutal competition within
the auto components business. Strong and
customer-focused suppliers have entered the
traditional home markets of competitors,
and numerous firms have fallen prey to
takeovers. A multibillion-dollar European
components business, eager to seize the
opportunities inherent in this new environ-
ment, set out to change its Business Design
to anticipate and respond to the priorities of
its customers, the automakers. The compa-
ny focused on its organizational system, one
of the five dimensions of Business Design.
The European company realized that the
change in its Business Design required
changing its entire relationship with its cus-
tomers. Instead of acting as a simple pro-
ducer of finished parts, it would need to
become a partner with the automakers, sell-
ing them solutions rather than merely hard-
ware. This would require assuming far-
reaching responsibility for much of the value
chain, from design of the component part
to its manufacture and delivery to final
assembly of the automobile itself. The com-
pany focused on processes (the way work is
organized) and structure (the way job posi-
tions are organized) as the organizational
elements that would most effectively drive
change and make the business more
responsive to customers.
To bring its organization into alignment with
its new Business Design, the company dis-
mantled traditional functional “silos” and its
command-and-control decision-making sys-
tem. It replaced them with cross-functional
and mostly self-governing business units
organized around particular market seg-
ments. Each of the newly established units
now has complete responsibility for cus-
tomer acquisition, product R & D, techno-
logical planning, and manufacturing. The
sales teams have been restaffed with engi-
neers who can help design solutions that
meet a particular automaker’s needs. Some
of these engineers are located permanently
at client sites.
As a result of this overhaul of the company’s
organizational structure, the company has
enjoyed a clear decrease in lead time, fewer
problems in the start-up of new product
lines, and reduction of fixed costs.
Wolfgang Weidner is a vice president of
Mercer Management Consulting based in
Munich.
Reaping the fruits of Business Design66
Accelerating and streamlining the change process
The difficult execution of the parallel tasks of Business Design
development and organizational change can be guided and
speeded by several insights.
The first is an understanding of which organizational system
elements are key drivers in the success of a particular Business
Design. Knowing in advance that certain elements should
receive the greatest focus will save a company precious time in a
world where the half-life of Business Designs is rapidly shorten-
ing. Mercer Management Consulting research shows that such
correlations exist and can be gleaned from the experience of suc-
cessful Business Design executions, thereby eliminating the need
for a trial-and-error approach. For example, Schwab was able to
quickly and effectively implement its switchboard Business
Design because it clearly understood it would need to focus on
its processes, infrastructure, and people if the design were to
succeed.
Another insight that can help a company is an understanding of
change and organizational dynamics. The enterprise needs to
assess its history, culture, and values to determine its readiness
for change, without which even the best-designed change 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
The winners at organiza-
tional change, because
they can’t always know
where they are going
before they set out, exhibit
a willingness to take
calculated risks. This
approach results in
frequent wins, occasional
losses, but constant
learning from both
successes and failures.
Mercer Management Journal 67
cash flow for investment in the new Business Design. In a posi-
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-
High
Low
Value Inflow Stability Value Outflow
Value Migration® Position
Urg
ency
fo
r C
han
ge
Change for PreemptionObjective• Find next source of competitive
advantageFocus of Change Effort• New, innovative Business Design
moves• Perpetuation of entrepreneurial
driveChallenge• Finding time/resources to focus
on “next wave” growth issues
Change for RenewalObjective• Create platform for accelerated
and sustainable shareholder valuegrowth
Focus of Change Effort• New innovative Business Design
moves• Creation/regeneration of
entrepreneurial driveChallenge• Instilling change dynamic,
overcoming complacency
Change for SurvivalObjective• Undertake radical performance
improvement and total strategicreorientation
Focus of Change Effort• Stabilization and solvency• Growth-oriented Business DesignChallenge• Instilling sense of urgency• Resuscitating without crippling
the organization
Exhibit 5 The type ofchange program deployeddepends on the context
Reaping the fruits of Business Design68
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.
Mercer Management Journal 69
Achieving sustained shareholder value
growth: Strategy in the age of Value
Migration®
by Adrian J. Slywotzky, David J. Morrison, and
James A. Quella
Market share is dead. Once, business leaders who
increased revenue, decreased cost, fielded technically
superior products, and expanded their market share
could expect to reap enviable increases in shareholder
value. These rules no longer hold true. Our research
into leading value creators suggests a new paradigm
for value growth. Under the new rules, three
capabilities are essential to long-term success:
1) Strategic AnticipationSM, identifying future value
creation opportunities, 2) Business Design, designing
the enterprise so that it is able to seize those
opportunities, 3) value growth realization, moving
rapidly and successfully from the old Business
Design to the new one. But the process—one of
continuous reinvention in response to changing
market conditions—doesn’t end there. By the time
the new Business Design is in place, planning for the
next one must be under way.
“Changing the hand instead of the glove”:
An executive roundtable on shareholder
value growth
A panel discussion with five top executives from a
variety of industries highlights some of the issues
facing managers as they strive to achieve sustained
shareholder value growth. This should be a top
corporate priority, the panelists agree. It’s getting
harder to achieve. European companies in general
have been slow to adopt the concept. Products are
no longer the key to achieving value growth;
customers are. But it’s not enough just to know your
customers and their needs: You need to be able to
predict what they will want five years from now. To
do this, you can’t just continue to do what you do
now, only better. You have to reinvent yourself—to
“change the hand,” as one panelist says, “as opposed
to changing the glove.”
Identifying the opportunities of the future:
Strategic AnticipationSM through marketing
science
by Eric Almquist and Gordon Wyner
Executives need solid analysis—not anecdotal
evidence or “hunches”—to help them envision future
customer needs and priorities. Fortunately, advanced
marketing science tools can create robust, fact-based
pictures of the future and help executives identify
where they should invest in a rapidly changing
business environment. In 1995, technology pundits
had built up a body of predictions concerning
“broadband networks” and the multimedia services
they would offer consumer households. A study
conducted by Mercer Management Consulting
based on two rigorous marketing science tools
concluded that much of the conventional wisdom
was wrong. The intervening three years have
confirmed the study’s findings.
Executive summariesAchieving Shareholder Value Growth Through Business Design
ENGL I SH
Executive Summaries70
S’assurer une croissance durable de la
valeur: la stratégie à l’heure de la Migration
de la Valeur
par Adrian J. Slywotzky, David J. Morrison et
James A. Quella
Finie, la loi de la part de marché! Il n’y a pas si
longtemps, les dirigeants d’entreprise qui
parvenaient à augmenter le chiffre d’affaires et à
diminuer les coûts tout en développant des produits
techniquement supérieurs à ceux de leurs
concurrents, et cela en augmentant leur part de
marché, étaient sûrs d’accroître de façon significative
la valeur pour l’actionnaire. Ces règles n’ont plus
cours. Les travaux menés par Mercer Management
Consulting auprès de champions de la création de
valeur montrent qu’il existe une nouvelle logique de
la croissance. Désormais, pour s’assurer d’une
croissance durable, 3 aptitudes sont essentielles :
(1) l’anticipation stratégique : identifier les futurs
leviers de la création de valeur, (2) le “Business
Design”: concevoir et organiser l’entreprise pour
qu’elle profite de ces leviers, (3) réaliser la croissance
de la valeur: évoluer rapidement de l’ancien Business
Design vers le nouveau en s’assurant toutes les
chances de succès. Mais ce processus de réinvention
constante en réponse aux conditions changeantes du
marché ne s’arrête pas là. Dès que le nouveau
Business Design est en place, le suivant doit être en
préparation !
“Changer la main, pas seulement le gant”: le
point de vue des dirigeants sur la valeur
pour l’actionnaire
Cinq dirigeants de haut niveau, issus de secteurs
différents, mettent en lumière les principaux défis à
relever pour accroître la valeur de leur entreprise de
façon durable. Ils sont unanimes : cela doit être
désormais la première des priorités, même si cela est
de plus en plus difficile à réaliser. En règle générale,
les entreprises européennes ont été moins rapides à
A blueprint for shareholder value growth:
Winning through strategic Business Design
by Rick Wise
The discipline of Business Design is a means to
capture value from the rapidly shifting “profit zones”
of today’s discontinuous business environment. It
differs from other strategy frameworks in 1) its
relentless focus on achieving shareholder value
growth through sustained operating profit growth,
the paring down of assets, and predictable
performance; 2) its substitution of a product-centric
view of business with one that emphasizes five broad
dimensions critical to shareholder value creation:
customer selection and value proposition, value
capture, strategic control, scope, and organizational
systems; and 3) its “outside-in” perspective, which
focuses on customers and the marketplace rather
than on a company’s organizational structure,
operations, or core capabilities.
Reaping the fruits of Business Design: Value
growth realization through rapid
organizational change
by Diane MacDiarmid, Hanna Moukanas, and
Rainer Nehls
A company may have identified a “profit zone” and
then created a Business Design well suited to
capturing the value that is ripe for realization in that
space. But unless the organization is able to move
rapidly and successfully from its old Business Design
to the new one, it will miss what these days is often
no more than a fleeting value-realization
opportunity. That means companies must start
realigning their organizations in support of their
Business Design even as that design is being
developed. They need to know immediately which
elements of their organization—people, structures,
processes, infrastructure, or leadership—are the
primary change drivers for a particular Business
Design. And they need to honestly assess the
organization’s appetite for change.
FRANÇA IS
Mercer Management Journal 71
adopter ce concept. Le secret de la création de valeur
ne réside plus dans les produits, mais dans les clients.
Toutefois, il ne suffit pas de connaître sa clientèle et
ses attentes pour réussir, il faut être capable aussi de
prévoir ce que les clients voudront dans 5 ans. Pour y
parvenir, les dirigeants ne peuvent plus se contenter
de faire ce qu’ils font mais doivent le faire mieux. Ils
doivent se réinventer ou, ainsi que l’a dit l’un d’entre
eux : « changer la main, pas seulement le gant » !
Anticiper les opportunités de demain:
l’anticipation stratégique grâce à un
marketing “scientifique”
par Eric Almquist et Gordon Wyner
Les dirigeants ont besoin d’analyses solides, pas
seulement d’évidences ou d’intuitions, pour anticiper
les besoins ou les priorités futures du client. Fort
heureusement, dans un environnement en rapide
changement, des outils de marketing sophistiqués
s’appuyant sur des faits peuvent maintenant leur
permettre de visualiser concrètement le futur et
d’identifier les créneaux où ils doivent investir. En
1995, des gourous des nouvelles technologies avaient
émis nombre de prédictions concernant les réseaux à
large bande et le potentiel de services qu’ils allaient
offrir aux consommateurs. Une étude de Mercer
Management Consulting fondée sur deux outils de
marketing scientifique rigoureux arriva à la
conclusion que beaucoup d’entre elles étaient
erronées. Les trois dernières années ont confirmé les
résultats de cette étude.
Un modèle pour accroître la valeur pour
l’actionnaire: gagner grâce à son
Business Design
par Rick Wise
La discipline du Business Design consiste à capturer
de la valeur dans des zones de profit aux contours
mouvants malgré un environnement économique
instable. Ce type d’approche stratégique diffère des
autres approches en plusieurs points. D’abord, il se
concentre exclusivement sur la valeur créée pour
l’actionnaire via l’augmentation du bénéfice
d’exploitation, la diminution des actifs et la capacité
à prévoir les performances. Ensuite, au lieu de
centrer l’activité sur le produit, il privilégie les cinq
dimensions clés de la création de valeur : la sélection
des clients en fonction de leur potentiel, la capture
de valeur, le contrôle stratégique, le champ d’activité,
et les systèmes d’organisation. Enfin, cette approche
se place du point de vue du client et du marché
plutôt que de celui de l’entreprise, de sa structure ou
de ses compétences.
Récolter les fruits du Business Design:
accroître la valeur en changeant son
organisation rapidement
par Diane MacDiarmid, Hanna Moukanas et
Rainer Nehls
Une entreprise peut avoir identifié une zone de profit
et créé un design bien adapté pour profiter de la
valeur à réaliser dans cet espace. Mais, à moins que
son organisation ne soit capable de passer
rapidement et avec succès d’une activité à une autre,
elle risque de rater ce qui n’est plus aujourd’hui
qu’une opportunité éphémère de création de valeur.
Cela signifie que les entreprises doivent commencer
à adapter leurs structures pour supporter leurs
nouvelles activités avant même que ces activités ne
soient opérationnelles. Elles ont besoin de savoir
immédiatement lequel des éléments de leur
organisation—les hommes, les structures, les process,
les infrastructures, la direction—sera moteur du
changement pour un “Business Design” donné. Et
surtout elles ont besoin d’évaluer très honnêtement
l’appétit de changement de l’entreprise.
Executive Summaries72
DEUTSCH
Value Growth langfristig sichern: Strategie
im Zeitalter von Value Migration®
von Adrian J. Slywotzky, David J. Morrison und
James A. Quella
Der Marktanteil ist tot. Früher konnten
Unternehmer durch Ertragssteigerung,
Kostensenkung, die Entwicklung technisch
überlegener Produkte und den Ausbau der
Marktanteile eine überdurchschnittliche Steigerung
des Unternehmenswertes erwarten. Diese Regel gilt
jedoch nicht mehr. Untersuchungen, bei denen
Mercer Management Consulting führende
Wertgenerierer unter die Lupe genommen hat,
weisen auf ein neues Paradigma für Value Growth.
Unter den neuen Bedingungen sind drei Fähigkeiten
entscheidend für langfristigen Erfolg: (1) Strategic
AnticipationSM—die Vorwegnahme zukünftiger
Möglichkeiten zur Wertgenerierung, (2) Business
Design—Unternehmenskonzept, das ein
Unternehmen befähigt, diese Möglichkeiten durch
entsprechende Strategien auszuschöpfen, (3) Value
Growth Realization—schneller, erfolgreicher
Übergang vom alten zum neuen Business Design.
Jedoch hört der Prozeß, der von stetigem Redesign
als Antwort auf veränderte Marktbedingungen
gekennzeichnet ist, an dieser Stelle nicht auf: Wenn
das neue Business Design umgesetzt ist, muß die
Planung des nächsten Designs bereits anlaufen.
Den Inhalt und nicht die Verpackung ändern:
Manager-Runde über Shareholder Value
Growth
Ein Gremium aus fünf Top-Managern
unterschiedlicher Industriezweige hat sich intensiv
mit einigen der Themen beschäftigt, mit denen sich
Führungskräfte in ihrem Streben nach langfristigem
Wertzuwachs auseinandersetzen müssen. Die
Teilnehmer der Gesprächsrunde sind
übereinstimmend der Auffassung, daß Value Growth
als übergeordnetem Unternehmensziel höchste
Prioriät eingeräumt werden muß. Der Weg dorthin
ist allerdings zunehmend steinig. Für europäische
Unternehmen gilt im allgemeinen, daß sie sich
dieses Konzept nur zögerlich zu eigen machen.
Produkte sind nicht mehr länger der Schlüssel zu
Value Growth; es sind die Kunden. Es genügt jedoch
nicht, die Kunden und ihre Bedürfnisse zu kennen,
entscheidend ist die Vorwegnahme zukünftiger
Bedürfnisse. Infolgedessen kann die Lösung nicht
heißen: weitermachen wie bisher, nur besser. „Sie
müssen Ihr Unternehmen völlig umgestalten“, so ein
Teilnehmer der Runde, „und den Inhalt, nicht die
Verpackung ändern.“
Zukünftige Marktchancen entdecken:
Strategic AnticipationSM durch
wissenschaftliches Marketing
von Eric Almquist und Gordon Wyner
Nur verläßliche Analysen und nicht isolierte
Einzelinformationen oder undifferenzierte
Einschätzungen versetzen Manager in die Lage,
zukünftige Kundenbedürfnisse und-prioritäten
vorherbestimmen zu können. Mit ausgefeilten
wissenschaftlichen Marketinginstrumenten können
verläßliche Zukunftsbilder gezeichnet werden, die
dem Top-Management wertvolle Hinweise liefern,
in welchen Bereichen der hochdynamischen
Geschäftswelt sich Investitionen lohnen. Ein
Beispiel: 1995 haben Experten eine Reihe von
Vorhersagen über „Broadband Networks” und deren
zukünftige Multimedia-Dienste für Privathaushalte
getroffen. Eine Studie der Mercer Management
Consulting, die auf zwei äußerst zuverlässigen
Marketinginstrumenten basiert, kam zu der
Feststellung, daß viele dieser Vorhersagen falsch
waren. Die Entwicklung in den darauffolgenden drei
Jahren hat die Ergebnisse dieser Studie bestätigt.
Ein Modell für Wertzuwachs: Mit
Strategischem Business Design gewinnen
von Rick Wise
Das Business Design ist ein Weg, um im heutigen
dynamischen Marktumfeld Wert aus sich stets
verändernden Gewinnzonen zu erzielen. Es
unterscheidet sich von anderen strategischen
Konzepten durch 1) seinen uneingeschränkten Fokus
Mercer Management Journal 73
Obtener crecimiento sostenido del valor:
Estrategia en la era de “Value Migration®”
por Adrian J. Slywotzky, David J. Morrison y
James A. Quella
La cuota de mercado está muerta. Antes, los líderes
en el negocio que incrementaban los beneficios,
reducían costos, ofrecían productos técnicamente
superiores y aumentaban sus cuotas de mercado
podían esperar aumentos envidiables en el valor para
el accionista. Pero estas reglas ya no son válidas.
Nuestra investigación sobre los creadores de valor
nos sugiere un nuevo paradigma para el crecimiento
de este valor. En este escenario en el que rigen
nuevas reglas, hay tres capacidades esenciales para el
éxito a largo plazo: 1) Anticipación estratégica, la
identificación de futuras oportunidades de creación
de valor, 2) Diseño del negocio, el diseñar la empresa
de tal modo que pueda aprovechar estas
oportunidades, 3) Realización del Crecimiento del
Valor, el cambiar rápidamente y con éxito del
antiguo diseño del negocio al nuevo. Pero el proceso,
de continua reinvención en respuesta a las
condiciones del mercado siempre en cambio, no
termina aquí: En el momento en que el nuevo diseño
ya se haya implantado, debe comenzarse a planificar
el próximo.
“Reinventarse”, esa es la clave: Mesa
redonda sobre el crecimiento del valor para
el accionista
Un panel de cinco altos ejecutivos de diversas
industrias discutieron sobre algunos de los temas a
los que los directivos se enfrentan en su camino para
alcanzar un crecimiento sostenido del valor. Todos
estuvieron de acuerdo en que esta perspectiva debería
ocupar un lugar prioritario para la Alta Dirección.
auf Wertsteigerung durch langfristige operative
Ertragskraft, reduzierte Kapitalbindung und
vorhersagbare Leistung; 2) die Substitution einer
produktfokussierten Sichtweise durch einen Ansatz,
der sich auf fünf breitangelegte Dimensionen
gründet. Diese wiederum sind entscheidend für die
Generierung von Unternehmenswert:
Kundenselektion und Wertvorteil für Kunden,
Werterzielung, Strategische Absicherung,
Aktionsfeld und Organisatorische Systeme; und 3)
eine „outside-in“-Perspektive, die Kunden und
Märkte in den Mittelpunkt stellt, anstelle der
Strukturen, Aktivitäten und Kernkompetenzen des
Unternehmens.
Erfolgreiche Umsetzung des Business
Designs: Value Growth realisieren durch eine
schnelle Anpassung der gesamten
Organisaion
von Diane MacDiarmid, Hanna Moukanas und
Rainer Nehls
Ein Unternehmen, das eine Gewinnzone
identifiziert und ein maßgeschneidertes Business
Design entworfen hat, um in dieser Zone Gewinne
erzielen zu können, wird trotzdem nicht in der Lage
sein, die Gewinnchancen zu realisieren, wenn es
nicht schnell und erfolgreich den Übergang vom
alten zum neuen Business Design vollzieht. Das
bedeutet, daß Unternehmen bereits in der
Entwicklungsphase des neuen Business Designs zu
dessen Unterstützung mit der Anpassung der
gesamten Organisation beginnen müssen. Wichtig
ist die rasche Erkenntnis, welche Elemente—
Mitarbeiter, Strukturen, Prozesse, Infrastruktur oder
Führung—die ausschlaggebenden Change-Motoren
für das neue Business Design sind sowie eine
nüchterne und ehrliche Einschätzung der eigenen
Veränderungsbereitschaft.
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Executive Summaries74
Cada vez se hace más difícil lograr este crecimiento.
En general, las compañías europeas han sido lentas
en adoptar este concepto. La perspectiva ha
cambiado: la clave ya no es el producto, sino el
cliente. Pero no es suficiente conocer a tus clientes y
sus necesidades hoy, necesitas ser capaz de predecir
cuáles serán dentro de cinco años. Para ello, tienes
que cambiar, reinventarte, no puedes seguir haciendo
lo que haces hoy pero sólo de mejor manera.
Cómo identificar las oportunidades del
futuro: Anticipación estratégica mediante el
marketing como ciencia
por Eric Almquist y Gordon Wyner
En 1995 los expertos en tecnología han construído
una suma de predicciones sobre “redes de banda
ancha” y servicios de multimedia que se ofrecerán al
mercado residencial. Un estudio realizado por
Mercer Management Consulting basado en
herramientas científicas y rigurosas llegó a la
conclusión de que gran parte de la sabiduría
convencional estaba equivocada. Los tres años de
desarrollo han confirmado la veracidad de los
resultados del estudio.
La clave para el crecimiento del valor para el
accionista: Cómo vencer mediante el diseño
estratégico del negocio
por Rick Wise
La disciplina de diseño del negocio es un medio para
capturar valor de las zonas de rentabilidad que tan
rápidamente varían en el hoy en día discontinuo
escenario económico. Se diferencia de otros marcos
de estrategia en 1) su constante enfoque puesto en
alcanzar el crecimiento del valor para el accionista
mediante el crecimiento sostenido del beneficio
operativo, la reducción de activos y el rendimiento
predecible; 2) la sustitución de una visión centrada
en el producto por una que dé importancia a las
cinco dimensiones críticas para la creación de valor:
la selección de los clientes y la proposición de valor,
la captura de este mismo valor, el control estratégico,
su alcance y los sistemas de organización y 3) su
perspectiva de “dentro a fuera” enfocada en los
clientes y el mercado y no en la estructura
organizativa, operaciones o capacidades clave.
Recogiendo los frutos del diseño del
negocio: El crecimiento del valor mediante la
armonización de la organización
por Diane MacDiarmid, Hanna Moukanas y
Rainer Nehls
Una compañía puede haber identificado un área de
rentabilidad y creado un diseño del negocio que se
adapte perfectamente para capturar el valor ya
maduro en ese espacio. Pero a no ser que la
organización sea capaz de cambiar rápidamente el
viejo diseño por el nuevo con éxito, perderán lo que
hoy es sólo una oportunidad lejana de hacer realidad
este valor. Eso significa que las empresas deben
comenzar por armonizar su organización para apoyar
el nuevo diseño del negocio, incluso al tiempo que
éste se está desarrollando. Necesitan conocer
inmediatamente qué elemento o elementos de su
organización, como el personal, las estructuras, los
procesos, la infraestructura o el liderazgo, son los
impulsores del cambio para un diseño específico. Y
lo que es realmente importante, necesitan evaluar
cuál es el deseo real de cambio de la organización.
Alcançar Crescimento Sustentado de Valor:
Estratégia na Era de “Value Migration®”
por Adrian J. Slywotzky, David J. Morrison e
James A. Quella
A quota de mercado é um conceito ultrapassado. Em
tempos, os gestores que conseguiram aumentar
receitas, diminuir custos, proteger produtos
tecnologicamente superiores, e aumentar quota de
mercado, podiam esperar a geração de significativas
mais valias para os seus accionistas. Hoje, estas regras
de jogo já não são aplicáveis. Os nossos estudos
sobre as entidades líderes na criação de valor
sugerem o aparecimento de um novo paradigma de
crescimento de valor. No novo contexto, há três
requisitos essenciais para alcançar uma posição de
sucesso sustentável no longo prazo: (1) “Strategic
AnticipationSM”—identificar futuras oportunidades
de criação de valor, (2) “Business Design”—
estruturar o negócio por forma a dotá-lo da
capacidade de captar novas oportunidades,
(3) Realização de Crescimento de Valor—transição
rápida e eficaz de um Business Design para outro.
Contudo, este processo—de reinvenção contínua em
resposta à mudança das condições de mercado—não
termina aqui: quando, finalmente, o novo Business
Design está posto em marcha, já o planeamento do
próximo deve estar iniciado.
“Mudar a mão e não a luva:” Uma mesa
redonda sobre crescimento de valor
accionista
Um painel de executivos de topo, provenientes de
diferentes sectores, discute alguns dos principais
desafios enfrentados hoje pelos gestores na sua luta
por alcançar um aumento de valor sustentado.
Concordam que este objectivo deveria ser uma
prioridade em todas as empresas. É, no entanto, cada
vez mais difícil prossegui-lo. E, em geral, as
empresas europeias têm levado algum tempo a
adoptar este conceito. Os produtos deixaram de ser o
veículo para um crescimento sustentado. Hoje, são-
no os clientes. Contudo, não é suficiente apenas
conhecer os clientes e as suas necessidades, é preciso
prever o que eles vão querer daqui a cinco anos. E
para tal, não é possível continuar a fazer o mesmo
que se faz hoje com apenas algumas melhorias, as
empresas têm que se reinventar—“é necessário”,
afirma um dos presentes, “mudar a mão e não
a luva”.
Identificando as Oportunidades para o
Futuro: “Strategic AnticipationSM“ recorrendo
às Ciências de Marketing
por Eric Almquist e Gordon Wyner
Os gestores necessitam de análises sólidas — e não
de “palpites” ou elementos não justificados—que os
ajudem a prever futuras necessidades e prioridades
dos clientes. Afortunadamente, existem hoje
sofisticados instrumentos de marketing que
permitem gerar cenários sólidos e fundamentados
que ajudam os gestores a identificar oportunidades
de investimento numa envolvente económica em
rápida e constante mudança. Em 1995, os
especialistas tecnológicos tinham gerado um
conjunto de previsões sobre ‘redes de comunicação
de banda larga’ e serviços multimédia por elas a
oferecer. Um estudo dirigido pela Mercer
Management Consulting, com base em dois
poderosos instrumentos de marketing, concluiu que
grande parte dos conhecimentos convencionais
estavam errados. Os três anos decorridos desde essa
data vieram confirmar os resultados desse estudo.
Um Plano para o Crescimento do Valor
Accionista: Vencer através do Desenho
Estratégico de Negócio
por Rick Wise
“Business Design” é um modo de captação de valor
em “profit zones” em rápida e constante mudança,
num contexto de negócio actualmente descontínuo.
O mesmo difere de outros modelos estratégicos: 1)
por via de uma inexorável focalização em alcançar
crescimento de valor accionista através do
incremento sustentado dos resultados operacionais,
da racionalização de activos, e de performance
previsível; 2) pela substituição de uma visão de
Mercer Management Journal 75
POR TUGUÊS
Executive Summaries76
negócio centrada nos produtos (“product-centric”)
por uma visão que enfatize cinco dimensões críticas
para criação de valor accionista: selecção de clientes e
proposta de valor, captação de valor, controlo
estratégico, âmbito do negócio, e sistemas
organizacionais; e 3) pela sua perspectiva “outside-in”
que focaliza os clientes e o mercado em vez de
estruturas organizacionais, operações ou capacidades
base.
Colher os Frutos do “Business Design:”
Realização de Crescimento de Valor
mediante Rápida Mudança Organizacional
por Diane MacDiarmid, Hanna Moukanas e
Rainer Nehls
Uma empresa pode ter identificado uma “profit
zone” e criado um Business Design capaz de captar
valor realizável nessa área. Contudo, se a organização
não conseguir transitar rapidamente de um Business
Design para outro, perder-se-á seguramente uma
rara oportunidade de realização de valor. Isto
significa que as empresas devem começar a realinhar
as suas organizações em torno do Business Design
logo que este comece a ser desenvolvido. É
necessário saber, de imediato, qual ou quais os
elementos da organização—pessoas, infra-estruturas,
processos ou liderança—que serão determinantes
críticos de mudança para o novo Business Design. E
dever-se-á avaliar, com realismo, a apetência da
organização para a mudança.