The New Market Leaders: Who's Winning and How in the Battle for Customers - Hardcover

Wiersema, Fred

Hardcover

ISBN 10: 0743204654 ISBN 13: 9780743204651

Publisher: Free Press, 2001

Synopsis

Presents an innovative series of benchmarks for ranking businesses and measuring success in the new economy, analyzes the practical strategies that exemplify winning companies, and assesses how these corporations use their customer base to shape business strategies and operations. 100,000 first printing.

About this title

About the Author:

Fred Wiersema is a Diamond Fellow and founder of the Center for Market Leadership at DiamondCluster, the global business strategy and technology solutions firm. A renowned business strategist and sought-after lecturer, Wiersema's action-provoking insights continue to push the parameters of market leadership. Among his previous books is the influential bestseller The Discipline of Market Leaders. Earlier in his career, he held executive positions in industry and management consulting. Born in the Netherlands, Wiersema holds a doctorate in business administration from Harvard Business School. He and his family live in the Boston area.

Excerpt. © Reprinted by permission. All rights reserved.:

Chapter 1: Meet the New Market Leaders

The idea for this book originated during a World Economic Forum summit meeting in 1996. Over lunch, I joined a number of U.S. and European executives in an animated discussion about the emerging Internet economy. In the United States, some of the Europeans noted, managers appear fascinated by colorful stories about upstarts, whereas in Europe they show a bias for hard data and solid track records. "Tell me," one person asked, "when you watch all the hype about the Web and these New Economy players, how do you size up their true influence and potential?" With no satisfactory answer, it occurred to me that we needed a fresh way to look at companies' performance and market strategies, and one that would apply to both conventional and new businesses.

Consider: When Fortune magazine surveyed more than ten thousand executives, directors, and securities analysts to compile its 1999 list of most-admired companies, Caterpillar Inc. led the industrial and farm equipment suppliers, and Merrill Lynch & Co., Inc., the securities firms.

The question is, did Fortune's list really identify the role models for the New Economy? Did it pick out those companies that strongly influence how the marketplace is evolving in this era of unprecedented competition? These questions assume critical importance as managers try to cope with today's challenges.

When I designed my own list of the top 100 new market leaders that same year, Caterpillar and Merrill Lynch were not on it. And that was only the beginning of where the lists differed.

My list included then (as it still does) Yahoo! Inc., Qualcomm Inc., Amazon.com, Inc., Amgen Inc., Solectron Corporation, Infinity Broadcasting Corporation, and Carnival Corporation. These highfliers and others whose names you recognize instantly -- because their appeal to customers and performances in the stock market over the past several years have been nothing short of phenomenal -- were not even mentioned on Fortune's 1999 roll of honor. A year later, Fortune still had not recognized them.

How can that be? To start, I cast a much broader net to find the most influential companies. Unlike my friends at Fortune, I didn't restrict my list to the ten largest corporations in each industry, which rules out up-and-coming companies. And I gave much greater weight to the one success factor that I consider absolutely critical in the New Economy: an organization's ability to attract valuable customers, both now and in the future. This is vital because today's most serious business challenge doesn't involve implementing new management techniques, raising capital, or any of the familiar bugaboos of recent decades. Today's most serious business challenge, as we shall see, is a scarcity of customers.

It seems that times are changing faster and becoming more uncertain with each turbulent day, and questions are emerging from everywhere: How will the Internet affect brick-and-mortar retailing? Will today's upstarts become tomorrow's dominant players? Should we simply improve our current practices, or do we need to revolutionize the ways we operate?

Broadly speaking, there are three ways that companies deal with such questions, none of which is perfect.

First, market-leading companies such as Microsoft Corporation and Sony Corporation take the future in their own hands by creating it, thus setting a standard for others to follow. Still, in spite of their tremendous success in shaping demand, these firms have setbacks when the marketplace doesn't follow their lead, as Sony did when its Betamax VCR format succumbed to VHS.

Second, companies may anticipate the future by understanding the trends and undercurrents at the root of change -- technological, demographic, or social trends -- and then figuring out how these affect their businesses. For example, Royal Dutch/Shell is famous for its long-term-scenario planning. Finland's Nokia Corporation and Japan's NTT DoCoMo, Inc., are well known for anticipating their customers' explosive demand for cellular services. This approach suffers, however, when it comes to the kind of abrupt, revolutionary change represented by the Internet.

Third, companies may simply try to learn from others at the forefront of change. Cisco Systems, Inc., has a knack for spotting new ventures that are developing breakthrough technologies, and then acquiring those companies. To quench its thirst for knowledge, the General Electric Company sends teams of people around the world to learn from innovative companies such as Cisco.

This book endorses all three approaches, with an emphasis on the third -- learning from successful companies. Also, it offers a new logic to identify both promising up-and-comers that are transforming the way business is done and veteran companies whose experience and time-tested practices continue to exert inordinate influence in the marketplace. Eclipsing the others are the one hundred new market leaders, a collection of businesses that are stellar by almost any standard.

In this group, we find a hundred companies that, in the six years ending in May 2000, increased their sales, on average, three times faster than their peers. (In comparison, the hundred most-admired corporations on Fortune's list grew a little more than twice as fast as their peers.) In addition, we find a hundred enterprises whose investors earned an average annual return of 48 percent since 1994. This surpassed not only Fortune's hundred most-admired corporations (which returned on average 29 percent per year) but all major stock market indices, including the hot Nasdaq, which went up 32 percent per year in the same time period, and the more staid Dow Jones Industrials, which returned 20 percent. In fact, the top 100 market leaders' return was more than three times higher than the return on the average stock in the 5,009 companies that I have been tracking. Those stocks returned an average of just 14 percent per year. (Mind you, we are talking about five extraordinary years.)

What these companies share, beyond their outstanding performance, is an awareness of today's most crucial challenge: the scarcity of customers. Customer scarcity should not be construed to mean that there aren't an enormous number of customers or that they aren't buying enough. In fact, never in history have there been more customers whose collective buying power has been more formidable. The problem is that the typical company, battling increasingly voracious competitors for customers' shortening attention, does not see or feel this awesome buying power, because, paradoxically, supply and demand get out of synch when markets undergo the kind of turbulence they are undergoing today.

Surging productivity has created such an abundance of products and services that customers -- at least those in the industrialized world -- can barely keep up with them all. At the same time, customers have unmet needs. It's like when everyone brings a covered dish to a neighborhood picnic and you end up with far too much food but no one has brought dessert.

Meanwhile, rampant innovation causes supply and demand to misalign until customers catch up to the new products and suppliers get a better handle on what customers like and don't like. The net effect is that supply is plentiful and demand becomes a bottleneck -- customer scarcity. While there may, in fact, be a vast number of buyers, that is not the perception of anyone trying to close a sale. This is not necessarily bad news. For those who know how to capitalize on it, the flip side of any problem is an opportunity.

As always, a key to business success is knowing how to exploit scarcity wherever it appears -- a concept as useful to modern art dealers, IPO managers, and Ivy League colleges as it was to Scythian goldsmiths three thousand years ago. In the past when raw materials were hard to procure, they were more prized. It was no coincidence that the foremost steel companies owned iron pits and coal mines. If the need for vast manufacturing plants put a premium on capital, the leading companies were those that knew how to accumulate and deploy it. Then the information revolution made talented workers the most vital resource. The ability to attract and retain talent is one reason why businesses like General Electric (number 2 on my current list of new market leaders) and Microsoft (number 3) have maintained their prominence. More than any other factor, it is lack of customers that constrains a company's growth; it is not a scarcity of natural resources, capital, or talent.

In an era when customers are bombarded with choices, the new market leader has figured out why customers favor one choice over another, and more important, uses that insight to improve the odds of becoming their choice -- time after time. Today's leader is the company that views customer loyalty as a fragile condition that requires fastidious attention. We are going to explore the realities of competition in markets where customers are, according to my definition, scarce. While Fortune's most-admired rankings pay homage to accomplishments from a bygone era, I identify the leaders already shaping the marketplace of the future -- the exciting, unorthodox companies that will transform the way we do business in the twenty-first century. (To be fair, Fortune now has a separate list of the Internet's top 50 e-businesses.)

It does not matter whether a company's market leadership derives primarily from customer intimacy, operational excellence, or product leadership. (Those are the three disciplines that my coauthor and I identified in our 1995 book, The Discipline of Market Leaders. Customer intimacy produced best total solution, operational excellence led to lowest total cost, and product leadership yielded best product.) A market leader must now expect to meet challengers that match or surpass its own expertise.

Intense competition for customers is driving companies to excel at every level. For example, the Home Depot, Inc. (number 6 on my list), is not alone among hardware retailers in its preoccupation with customer intimacy. Wal-Mart Stores, Inc. (number 7), retains its operational excellence but must do battle with a number of other best-cost rivals. And Intel Corporation (number 4) is far from the world's only producer of leading-edge computer chips.

In other words, top performers don't necessarily stay on top. The bar is higher; yesterday's star is today's also-shone. Just as the four-minute mile was converted from an impossible dream to the standard for any world-class distance runner, so a compelling value proposition has become the starting point for today's market leaders.

To dominate their industries, companies must view each and every customer's buying decision -- whether it is a repeat purchase or a new order -- as a contest to be won against a host of competitive alternatives. To achieve and sustain competitive advantage, the winner must master additional market strategies aimed at coping with the new challenge of customer scarcity. My purpose is to identify those strategies and to show how they apply to all customers, whether businesses or individuals.

The winners of this race -- the new market leaders -- have discovered how to attract the customers who everyone else seeks.

THE FIRST MEASURE OF A NEW MARKET LEADER

How do you spot today's most influential companies? I evaluated a number of methods with which to answer that question, including the prevailing wisdom that has guided our thinking for decades: Market leaders are the largest companies in any industry. Implicitly, and often without thinking, we have equated leadership with size. But today, size is deceptive. It blinds us to the growing likelihood that giants stumble and that the meteoric rise of up-and-coming businesses will profoundly shake up industries. In the battle between David and Goliath, the giant's size was irrelevant (perhaps even the fatal weakness) when matched against the shepherd boy's agility and technology.

Most important is the fact that size in itself provides no compelling reason for customers to prefer one company over another. Customers gladly patronize smaller businesses if these are more attentive to their needs. This is the reason I decided against ranking companies on the basis of their sales revenues. While that is the method used to rank the Fortune 500 and other venerable lists, it is not designed to detect up-and-coming highfliers. (To illustrate: My top 100 list includes thirty-three companies that were too small to appear on either the domestic or global Fortune 500 radar screen.)

Another method for evaluating companies' influence is surveying people familiar with them, which is how Fortune and the Financial Times conduct their research on admired and respected organizations. But since that approach is nearly impossible to apply to more than a few hundred companies, all but an established, select group in each industry are excluded.

How about using market share as the guiding yardstick? Again, the drawbacks outweigh the appeal. Beyond the practical difficulty of obtaining this information, there is the problem of defining what constitutes a market. If you define it narrowly, your market share will be higher than if you include all conceivable competitors in the equation. And because market share and sales are so strongly related, we would once again be likely to exclude up-and-coming businesses.

Instead of resorting to these commonly used measures, I look for companies with a proven -- by which I mean repeated -- ability to win the battle for customers. I want to identify the influential companies whose business strategies make them prosper while others run into difficulty. My ideal company has a special gift for shaping market demand, for changing and raising customer expectations, thereby earning itself the status of standard setter. The single criterion that best exemplifies this is a company's ability to establish and grow customer franchises. Attracting customers is the key to market leadership in this new age, so sales growth is the number to watch. Yet traditional year-end lists of top companies can be too easily swayed by transient results: A new product soars for a year and then fades, for example. So I decided to look at sustained sales growth over the six-year period ending May 31, 2000.

Casting my net as wide as possible, including both domestic and global companies, I gave as much attention to information-based and technology-driven industries as to industrial and service businesses. Both large and small companies were included, and both established and emerging companies were recognized as long as they influenced their markets equally. To reflect today's global business environment, I included companies based outside of the United States whose stocks are traded here or on major international exchanges. However, I excluded privately held companies because they don't provide sufficient information to judge their performances accurately.

Ultimately, the research covered 5,009 companies, about a quarter of which are based outside the U...

About this edition

• Publisher: Free Press
• Publication date: 2001
• ISBN 10: 0743204654
• ISBN 13: 9780743204651
• Binding: Hardcover
• Edition number: 1
• Number of pages: 272