market strategy, Microsoft, Netscape

The revolutionary company aims to own its market - not by sheer muscle, or inimitable technology of product or service, but by control of the business system within which it operates. That demands constantly changing the rules of the game, forcing competitors to react to your initiatives instead of being forced to follow theirs. That sounds difficult. But it is, of course, the way most truly successful businesses have developed in the past. As their industries coalesce, though, so these pathfinders become establishment figures themselves - and become vulnerable to the disruptors.

The Information Revolution has made the disruptive game easier to play by undermining existing patterns of distribution, widening the circle of potential contestants, and narrowing the gap between sitting tenant and attacker. The old business system relied on a series of stages, involving middlemen of many varieties, held together by pieces of paper. The paper transactions took far longer than the movement of goods through the system. Out of a total cycle time of 19 weeks, non-manufacturing activity typically took 11 - the best part of three months.

That's half the life-cycle of a new model of PC (if that), which explains why their manufacturers have been in the forefront of using technology to eliminate paperwork, cut out middlemen, and speed both transit and time spent in the factory. Competitors who change the rules in this way are very difficult to dislodge, because they are updating their systems to new pitches of efficiency when any opponents are installing the new IT for the first time.

Much of the moiling and toiling in the Internet market is explained by efforts to change the rules. This strategy had its most extraordinary manifestation in the rise of Netscape. When the infant company gave away its browser for nothing, it sounded like commercial suicide to conventional ears. But revenue was far less important than rising rapidly to a viable customer base that was so large that no competitor, even one using the same policy of free distribution, could hope to do more than take the crumbs from Netscape's table - with one exception.

That single exception, however, was mightily big: Microsoft. That company has exemplified the strategy of changing the rules to disadvantage its competitors at every stage in its ruthless exploitation of dominance in PC operating systems. First, Microsoft ensured that MS/DOS was vastly cheaper than other operating systems. Second, it built other software on to the MS/DOS base. Third, after turning Windows into a new industry standard, it bundled its software into the operating suite. Other suppliers were competing with at least one hand tied behind their backs - until Netscape.

When the latter changed the rules, it put Microsoft on the rack. The leader's counter-attack was based on the same strategy that had worked so wondrously in the past. If its own browser, Explorer 3.0, was bundled into Windows, Netscape would automatically and rapidly be shut out of the market it had created. That would remove the colossal threat to Microsoft which was presented by the upstart. If users could gain access to software over the Internet, much of it free, they had no need of Bill Gates or any of his works.

Small wonder that Microsoft pushed its retaliation beyond the limits of tolerance - so far that a highly embarrassing antitrust suit followed. In resisting any change in the rules, Microsoft was reacting like the incumbent it has become, with a massive market share, huge assets to protect and too broad a range of territory to protect itself against all raiders. It has been forced to confront a truth pronounced by Gary Hamel, co-author of Competing for the Future: 'Never has incumbency been worth less'.

Hamel points to the savage attrition of the banks, if you measure their market by share of financial assets: in the US, that share is dropping towards half. Time is running out on the banks. they cannot afford to emulate the US car industry, which 'every year for 40 years has missed every paradigm shift'. That is another phrase for changing the rules, or what Andy Grove, chairman of Intel, calls a 'strategic inflection point'. This happens when '10x forces', ten times more powerful than the normal forces in business economics, hit an industry.

THE 10X FORCES
Some of these 10x forces, like the superseding of the transatlantic liner, are the result of technology: sound movies and railroads are other examples. Intel faced three in its history: the large-scale integrated circuit (which it exploited brilliantly), the microprocessor (an Intel invention which it was slow to reognise), and the Japanese challenge in memory chips (which forced Intel to leave the business altogether). On the face of it, Intel is not making the same mistake about the Internet.

Writing in World Link magazine, Grove identified the Internet as an example of a strategic inflection point, 'a commercial and broad-based communications vehicle' that he calls the 'biggest technological change in the past decade' - an understatement if ever there was one. In his book Inside Intel, Tim Jackson in fact wonders whether Intel is reacting as rapidly and strongly as it should to the same threat as that which still confronts Microsoft:

'Intel would look very different in a networked world in which individual users had less computing horsepower and fewer bloated software packages on their desks, replying instead on smaller, simpler and faster pieces of software downloaded across the Internet as needed'.

The theat will not be wished away. As Grove himself says, such changes are unstoppable: 'whatever can be done will be done'. Like it or not, the rules will be changed, 'if not by the incumbents, it will be done by emerging players. If not in a regulated industry, it will be done in a new industry born without regulation'. The latter is what happened with satellite TV in Europe. By going extra-terrestrial, and loading his channels with highly prized sports events, the unregulated Rupert Murdoch changed the rules, with severe effect on the revenues of land-based, regulated broadcasters.

Grove describes how in the computer industry the Internet has brought 'fundamental change in its structure, distribution systems and pricing models'. What has happened in computers is also heavily impactingcommunications:

'These changes may not occur overnight on a worldwide basis, but the evidence of change is everywhere. From free Internet calls in the US to government-sanctioned Internet connections in China, a global network is emerging. More people than ever are connecting to information and e-mail through computers. Those countries, businesses and industries that embrace this new method of communication will emerge with a stronger competitive position than those that hoped it would go away'.

If changing the rules starts by accepting that technological change won't go away - and on that Grove is plainly right - the next step is to understand the change thoroughly and look for what it enables. The existing rules can be challenged successfully under nine key conditions.

NINE KEY CONDITIONS
1. The practices and products of the industry have not been changed for a long time, and all players use the same methods to create similar products and services (mainframe computing before the PC era).

2. There is a latent need for functionality that doesn't exist at present (like instant cameras or personal computing).

3. What's on the market has plain drawbacks or deficiencies (like having to use kiosks, instead of your own portable phone).

4. There is a genuine gap in the market (like laptop computers).

5. Existing products or services can be used to drive others (Microsoft's bundling of its non-operating system software).

6. Technological breakthroughs (e-mail as a faster, more convenient, cheaper alternative to fax).

7. A success in one geographical market has not been replicated elsewhere (importing cable TV from the US).

8. Satisfying market needs in cheaper ways (IP telephony instead of land-based connections.

9. Changes in economic circumstances (like the rising affluence that enables the masses to buy new gadgetry).

Because of its revolutionary impact, the Internet has seen an unprecedented outburst of disruptive, aggressive strategies exploiting these nine opportunities. Some of the companies involved have mutated at least once. Business Week gives the example of AllApartments, which began life by listing apartments for rent right across the US. After only two years, the site was still listing apartments, but was also offering furniture, moving trucks and loans. It wasn't charging for any of the services: but its three dozen 'business partners' were coughing up commissions to AllApartments, at $4 and upwards, for each customer hit.

You can earn Web money by commissions, like AllApartments, or ads, or subscriptions, or transactions, in addition, of course, to direct sales. The way you change for the latter, though, can vary. A Malaysian company called Biztone.com sells enterprise software, for 1c to 10c per electronic transaction made using said software. Intuit, famous for its financial software, gets results not only from sales, but subscriptions, usage, advertising, transaction fees - and mortgages: loan partners pay Intuit a fixed fee on mortgage business that reached $600 million last year.

'Free' is a magic word in the context of changing the rules. The only way you can compete with free is by paying the customer to take the product or service - which will no doubt, one day, be somebody's preferred strategy. The 'free' route is actually nothing new. Countless publications, both newspapers and magazines, are distributed to their readership for nothing. The revenue stream comes from advertising. You can prove that people want the publication both by the pulling power of the ads, and by getting readers to request their place on the circulation list.

Selling something for nothing is a contrarian one. Being a contrarian, going against the conventional ways and ideas, is an excellent, and simple way of seeking to alter the rules. If all the competition is selling through wholesalers to retailers, go direct to the latter. If the opposition is doing that, sell direct to the customer. Michael Dell has built a $130 billion company on the simple principle of cutting out the middleman - at a time when his competitors were dependent on wholesalers and distributors.

If the established companies sell cars in basic form with loads of costly extras, bundle all the extras into one price. If competitors operate from expensive premises, sell from the Web, with no branches at all.

Technology may play a critical role in the reversal, as in the first and third examples above. But in the second approach - adopted by the Japanese - no IT was specifically required. Nor was it when the magazine Loot was established. Traditional classified ad papers charged the advertisers. Loot didn't: it sold the paper, but printed the ads free. That rapidly made it the largest. and therefore most purchased, source of small ads.

There are obvious parallels between Loot and Netscape's giving away of its browsers. Get the market, in other words, and the revenue and profits will follow. Turning the tables aims to achieve dominant 'share of mind'. The table turner becomes the first name that comes into the customer's thoughts. Amazon.com has the dominant share of mind in bookselling. Dell has the same dominance in direct selling of PCs. Traditionally, share of mind was synonymous with share of market and followed it.

Now share of market follows winning share of mind. The Internet is an incredibly economical way of winning mind-share: instantaneous, vivid, easily accessible, rsponsiveness. Also, the gossipy nature of the Net has given rise to what Hamel and Jeff Sampler call 'word of mouse'. Web-users very rapidly spread the word about valuable sites and the companies to which they belong. The word-of-mouse will not spread, you may be sure, to sites which tell clickers about the company's products, but don't (following the rules of the old game) provide a means of purchase.

You can never change the rules if you obey them. That is blindingly, searingly obvious. So you start by becoming disobedient, by valuing contrarian ideas precisely for their contrariness. The words 'it will never work' or 'that's been tried' or 'if it was any good somebody would be doing it' are manna from heaven. Because most people will agree with this conventional unwisdom, disbelievers have a probably golden chance to be dynamically different - and to win.

CREATING THE NEW
Once you accept this imperative, the correct reaction slots neatly into place. It begins with establishing a unified idea (a 'vision', if you will) of the future, followed by a clear framework for realising the vision. Next you identify the key processes and radically reform them by applying the new tools and techniques. That's the high road to the key aim: a 'killer app' company that directs its energies to the creation of new rules, new methods, new markets, new opportunities, new products and services, all with new efficiencies.

Most managers, and most companies, get stuck 'in the box'. They swallow the conventions and obey the rules of their organisation and industry. When father (the industry leader) turns, they all turn. They thus miss a marvellous opportunity, well described by Michael Bloomberg, the financial services upstart:

'Whenever you see a business that's done the same thing for a long time, a new guy can come in and do it better. I guarantee it'.

Food retailing since the war perfectly illustrates the thesis. The new guys and their supermarkets elbowed aside old retailers, large and small; the superstores carried on the campaign; only those rare oldies, above all J Sainsbury, who jumped out of the box shared the stupendous spoils. But there's another box in which unwary giants can get stuck: staleness. They get locked in by their very success. the entire apparatus, and the careers of those within is geared to doing very well what they have always done - to obeying their own rules.

New and dynamic thought does exist in food retailing, but the star thinkers inhabit a different world from packaged goods. They are brilliant at selling prepared food and drink. Café chains like Starbucks in the US, or Pret a Manger in the far smaller British market, have caught the mood of the millenium. Although the formats are carefully standardised, the 'stores' give the perception of difference and fun. Their success demonstrates that, even in crowded markets, today's customers are wide open to a new total experience. Being perceived as different and better changes the rules - and wins the game.

Paradoxically, the giants have the most to gain from differentiating the total experience, because their size gives far greater financial leverage. Marks & Spencer created a massive business 'outside the box' with smaller, central, food-mainly stores that cut across the conventional out-of-town, superstore wisdom. But this breaking of the rules was similar to IBM's iconoclastic launching of the Personal Computer: the smash hit outcome was unexpected, and the lessons of the innovation were not absorbed into the corporate lifestyle.

Today's marketplace battles will likewise hinge on who best behaves like 'a new guy' coming in. That won't mean squeezing headcounts or price-cutting or even finding an extra twist on devices like loyalty schemes. It will mean developing the vital brand - the business itself - by finding new-guy, radical, rule-breaking ways of exploiting the established strengths. The odds are overwhelming that those who behave most like new guys will be the new guys themselves. The old guys thus face a tremendous challenge.