Business Design

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

Management Consulting

Achieving Shareholder Value GrowthThrough Business Design

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 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:


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


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.


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®


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


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.


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


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


ShareholderValue/Revenue: 0.5x 2.7x

$13.1BB

$239.6BBExhibit 6 GE’s valuegrowth through businessredesign


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


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:


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


— 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.


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-


“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?


“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


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


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


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


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.


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.


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.


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


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.


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”


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


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


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.


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.


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.


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.


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


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


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


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


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


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


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.


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


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

)


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


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.


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.


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-


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


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-


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.


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


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


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.


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.


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.


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


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.


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


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.


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


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.

ESPAÑOL


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


POR TUGUÊS


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.

Boston

Buenos Aires

Chicago

Cleveland

Hong Kong

Lisbon

London

Madrid

Montréal

Munich

New York

Paris

Pittsburgh

San Francisco

Toronto

Washington, DC

Zurich

Mercer Management Consulting, Inc.

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