A new breed of company is emerging to lead the Triple Revolution. These businesses are customer-driven in a new sense: they not only respond to customers' wants, but they place the customer in the driver's seat by, paradoxically, leading the customer in directions chosen by management. That paradox springs from innovation. These companies are dynamised by brilliant ideas, conceived in quantity, realised at speed, and all aimed at both creating and serving the market.
These new leaders are inevitably steeped in state-of-the-art information and communication technology, either as its suppliers, its users and/or as both. They have emerged and are emerging in all countries, all markets, all industries. They have shattered the mould of the world economy. According to a famous 1960s projection, that was supposed to fall into the hands of 300 mega-multinationals. Instead, it is the mighty who are in danger of falling - and many have.
They have tried to avoid their apparent fate. But whether it is shattered profits (Shell), achieving turmoil by takeover (BMW), inability to grow businesses (Siemens) - the list of giant victims rumbles on and on. Some of the shambles represents passing affliction, like slumping oil prices. But chronic disease is also rampant. Many companies are living in the past when the future is rushing upon them at breathtaking pace. In that future, size is less relevant than speed, and muscle less important than litheness.
The continuing orgy of mega-mergers as the Millennium approached reflects a dangerously different view. Management after management is still betting billions of shareholder wealth on the proposition that the battle goes to the biggest. In the real world, lumbering elephants are exposed by the aggression of speeding midgets. No matter how hard they try (witness IBM) the old-line companies, even those that have pioneered the new technology, cannot win the sprint championship - and that is increasingly the only race in town.
That places unprecedented pressure on the mighty. The Internet and all its works affect them in two painful ways. First, cyberspace has brought global competitiveness within the reach of any entrepreneurial spirit, even with modest resources. Second, the same technology has become a decisive weapon for revolutionary companies, strong on people policies, low on hierarchy, fluid, flexible and fleet. Often created by the entrepreneurial spirits mentioned above, these new competitors have decisive advantages over the mighty and musclebound.
They even have money, in millions and billions. The apparently insane boom in Internet stocks in 1999 had an eminently sane side. It enabled the new entrepreneurs to lay their hands on super-abundant capital, priced with wonderful cheapness. The cash hoards of new heavyweights like Microsoft, moreover, rival or surpass those of the old-line leaders. Well-financed, well-staffed, and well-managed, the revolutionaries have nothing to fear from corporations which were once cushioned by their wealth and fixed assets.
Financial services show vividly what must happen on a widening front. Virtually every company in banking, or insurance, or home loans follows the same strategy. Nobody has genuinely new ideas. Nobody mobilises human assets to win growth: sackings (a.k.a 'down-sizing' and 'restructuring') are the favoured, wrong-headed strategy. Piece by piece, the profitable business is being chewed away by newcomers like First Direct, which pioneered telephone banking in Britain, and Charles Schwab, the investment king of cyberspace.
Schwab's venture into online broking has been a stunning success: online banking is bound to follow in these rapid footsteps. In every industry, many more upstarts are starting up every month, every week, probably every day. Whole sectors will fragment and reform, much like computery itself. As that industry churned, IBM lost its stronghold in hardware (which none of its bigtime rivals had been able to dislodge) to little PC and workstation rivals. It fell behind in third-party software, too, losing out to Microsoft and swarms of other midgets.
In services, beaten to the punch by upstart EDS and another tiny crowd, IBM is also confronted by converted accountancy practices. In microcircuits, start-up Intel has left IBM in the dust - and so on. Each of the King's challengers seemed insignificant on entry, only for the fastest to emerge as new giants, billionaire companies whose wealth is created by equity markets and predicated on the ability to mine still more paper gold.
INTERNET OVER-VALUATIONS
Microsoft's Bill Gates regards this boom with misgiving, deploring the over-valuation of Internet stocks. When Gates spoke, the price/earnings ratios of 350 on America Online, let alone the 1700 on Yahoo!, did indeed look lunatic. But Gates was threatened by what the lunatic ratings represent. He may be yesterday's man, 'the old-timer in a kid's game', to quote Fortune.
Microsoft's near-monopolies in PC operating systems and office software are threatened on several fronts. The magazine lists five threats. (1) tiny computers that do not use Microsoft software; (2) the best-selling debut of the Apple iMac (also non-Microsoft); (3) Sun Microsystems and Java (the language that bypasses Windows); (4) direct Internet access to software programmes; (5) the free operating system named Linux.
Each of these challenges is linked with a new array of upstarts. All of them represent a turning of the tide away from the Wintel proprietary dominance (for Intel is also challenged by cheaper microprocessors) and towards open competition: the same kind of flood that drowned IBM's monopoly. Nature abhors a monopoly, and so does technology. It is many-sided and no respecter of persons or the past. Both economics and applied science work against industrial establishments.
History tells that it is desperately difficult, anyway, to reverse such rolling tides. Companies of historic success, buttressed by stupendous cash flows (Shell's was $15 billion in 1998) are staffed at the top by well-heeled managers with vested interests in the past. That makes it hard to contemplate, let alone create, a future these men (no women) will only see as retirees. In contrast, the revolutionaries, led by the Silicon Valley Guevaras, are much younger people, who carry no baggage, make up their traditions as they go along, and discard them just as rapidly.
Netscape and AOL, now joined in wedlock, have metamorphosed continually. The established companies in the establishment industries have great difficulty in changing at all: metamorphosis is beyond their capability. Shell was deep into a long programme, unrolled over years rather than months, and designed to change its culture, when it was struck amidships by the blows to its profits. Ironically, the culture change was supposed to raise its profitability. Top-down change, yet again, had proved counter-productive.
Just embracing the new technology of marketing and selling will not avert nemesis. The technology is essential, and most companies have been abysmally slow in adopting e-commerce breakthroughs. But management processes also need revolution. Today you cannot afford to delay decisions for months while committees deliberate, back-burners get overloaded, and defensive people cover their backs. Nor dare you frustrate the young, bright and ambitious by resisting, second-guessing and eventually killing their ideas.
Do that, and they will react like today's promiscuous customers. They will vote with their well-shod feet. The troubled giants face a dual retention problem. They stand to lose both their best clients and their best employees, very possibly to existing upstarts, or to start-ups of the employees' own. The initials SAP should be engraved on every mega-company's heart. They are already more than likely to be engraved on its mind, for SAP's enterprise-wide software systems have been installed by blue-chip after blue-chip.
SAP has (or had, for competition is rising) a hold over this top-level market that is reminiscent of IBM's prowess with mainframes. The analogy is appropriate, since the German company was founded by four engineers who broke away from IBM when its management frustrated their project. The enormously expensive contracts which SAP now fulfills have taken its sales to $5 billion and its market value to $xxxx billion, compared to IBM's $98.3 billion. Every one of SAP's contracts represents business which might have been IBM's.
THE DOUBLE LOSS
The double loss of clients and people is today's problem as well as tomorrow's. You can readily find companies which, right now, are losing more (and more profitable) customers than they can recruit. The law of nature would suggest nothing different. If companies, however large, have outlived their usefulness, so what? But the braver and far better course for larger corporations is to embrace and manage change: to ride the revolution.
No blue-chip behemoth has attempted this. Shell's much-trumpeted culture change, for instance, merely nibbled at the edges, with the afore-mentioned awful results. But the failures provide no reason for not trying: quite the reverse. Otherwise the survivors risk the same fate as more than half the original British companies in the Footsie 500, who have simply dropped out of the list, after only 15 years. The next 15 will be even deadlier for would-be dinosaurs, richer still for their young and thrusting predators. On one prediction, 80% of the Fortune 500 are faced with dwindling or disappearance over the next few years.
Bizarrely, their managements may be congratulating themselves on having raised 'shareholder value' even as their companies head for a great fall. When the stock market creates billions of paper profits in a day, it generates huge advances in 'SHV'. True believers in the SHV cult, however, don't regard their idol in this light, as a mere euphemism for boosting share prices - which, in raging bull markets, is no hard trick. It sounds much harder just to calculate, let alone increase, the 'present value of future cash flows discounted at its weighted average cost of capital less the value of debt'.
The Price Waterhouse tome which thus defines SHV inadvertently reveals that many cultist managements have no such calculations - or anything else - in mind. 'Perhaps your company has declared a commitment to shareholder value', begin the three authors, 'and you want an explanation'. What kind of management commits itself to a prime directive that it can't even explain? Commentators, however, dispense with explanations. Thus, CEO Lou Gerstner was praised by one magazine for raising IBM's value 'more than $40 billion in four years': and that meant simply in the stock market.
Writing in the Financial Times, business professor Henry Mintzberg neatly skewered such claims with three well-chosen words: 'All by himself'. If Gerstner truly were the unique hero, he would also be the villain of every share fall. He would certainly own all the credit, or discredit, for IBM's dismal sales growth in a dynamic industry: 3% in 1997, 4% in 1998. Harshly enough, Business Week calculated that IBM would enhance SHV by selling no less than five major businesses - including PCs - to focus on services, etc.
That analysis doubtless referred to the crude SHV, hinging only on the share price, which is what managers also really pursue. It is a wildly inappropriate choice for the prime objective of corporate strategy. All that happens is that anagements twist and turn as they search for a new story that will galvanise the analysts and elevate the price-earnings ratio: like the sale of assets (as advised for IBM) to concentrate on a new 'core'.
But sell-off exercises merely repair the devaluation wrought by past neglect of the real, intrinsic worth of businesses. IBM's PCs once had an Intel-like quasi-monopoly. Successive PC managements (changed far too often) devalued the strategic strength of a marvellous brand. Sold off, the PC business, along with IBM's other suggested discards, might have remade itself into a revolutionary operation - a real challenger to the upstarts (notably Compaq and Dell) who were allowed by IBM to seize advantage after advantage.
Michael Dell is by no means indifferent to the share price which has given him a multi-billion dollar fortune. But his true success lies in the design and creation of business systems that achieve non-financial prodigies of performance. For instance, Dell has brought inventory down to eight days, a third of Compaq's. The proper target for management is optimisation of the system to achieve best-of-breed performance on all significant measures, internal and external. The SHV thus created lies in the ability to generate superior revenue and profit growth over time.
THE KNOWLEDGE POWERHOUSE
Taking the share price as objective puts the cart far ahead of the horse. And if putting the business unequivocally first also does wonders for the 'discounted present value of future cash flows', so much the better for everybody - including shareholders. Giving such priority to the business means priority for information and communications technology, for the simple reason that moving the organisation from conservative to visionary demands reconstructing all its processes around the knowledge powerhouse.
If those leading the organisation cannot grasp that truth, they are not visionaries, and the outlook for any reform plans is worse than uncertain. Tha acid test is whether those at the top, the seniors, are ready and able to move into the strategy zone (or out altogether). In that zone they look ahead, they oversee, they inspire. But they don't even try to 'manage' in an operational sense. They entrust younger men (and many more women) with the task of remaking the corporation, by removing hierarchical levels and customs, slaughtering sacred cows, and speeding up all processes.
The operators will move towards the virtual ideal, in which customer, corporation and supplier are indivisible. That sounds complex, but is actually based on simple principles and activated by approachable and readily available technology. After all, what is more natural than sharing information with your business partners and your own colleagues? And what is more sensible than acting on that information to achieve the optimal results for everybody engaged in the business system?
Riding the Revolution is most difficult psychologically: the technological, financial and economic inhibitions are as nothing compared to the fear of the unknown, the clinging to the past and the worries over risk that stop managements from taking this plain, ten-step route to the future - and to prosperity:
1. Always put the human factor first. Technology is useless unless it fulfills the requirements of human beings.
2. Always use the technology to simplify. Reduce complex issues to simple, commonsense principles.
3. Work towards clear, significant objectives. Form aims that will inform and guide, not only the technologists, but everybody else.
4. Spend money to defend money. Lagging behind on the technology will boost profits at the cost of the business.
5. Spend as long as necessary on the preliminary work of creating the set-up. Build a system in which people can operate effectively.
6. Expect the investment to make an 'economic profit'. That is, a handsome return over and above the cost of capital.
7. Use the system to delegate responsibility. Make people responsible for what they personally influence.
8. Only invest in technologies whose business economics are sound. Keep commercial purpose constantly in mind.
9. Always aim to produce the best long-term results. But also seek to optimise short-term performance.
10. Know that mistakes made in the cause of progress are no mistake - if you learn and apply their lessons. Be prepared to experiment.
These principles animate a truly Millennial management. But they are only a beginning. Faced with inescapable complexity and constant, managers have always sought for immutable guidelines (like Hewlett-Packard's 'The H-P Way') and for permanent business systems (like the innovation processes at 3M). In both companies immutabilty and permanence eventually produced unresponsiveness and conservatism: the length of 'eventually' depended on the personal strengths of the leadership. In the Age of the Triple Revolution, that is no longer enough.
Mutable, transient, responsive and revolutionary organisations are paradoxically the only corporate life-forms that promise to be lasting. They depend on an excellent infrastructure of information and communications, working in combination with killer apps that use the infrastructure to transform processes and businesses. There are no certainties in this formula. But an uncertain world provides limitless opportunities for internal and external breakthroughs, for phenomenal payoffs at fractional costs. The winning strategy is just three words long. Ride the Revolution!
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