Imagine this nightmare scenario. You have long had a marvellous, specialised business. After spectacular early growth, it became the biggest in the market, with by far the best-known name. The company has not been able to keep up its early momentum, though, partly because of competition from a much larger, non-specialist opponent, who has sadly stolen your market lead. As if that wasn't bad enough, smaller rivals are nibbling away at your market share. Then, suddenly, the nightmare: a major start-up competitor confronts you with a new and massive threat.
The newcomer, another specialist, not only undercuts your prices, but has distribution just as broad as the nationwide system that you have so painstakingly and expensively put together. How do you defend yourself against the threat? Can you and should you retaliate? The firm under attack in this real-life nightmare is Toys 'R' Us, which, having lost its sales lead in toys to the gigantic generalist, Wal-Mart, is now being assailed by the Internet seller, eToys. A similar threat is either real or pending for many businesses right round the globe - and it isn't confined to e-commerce.
The problem is actually as old as business, and it was intensifying long before the first website appeared in 1993. Businesses are rarely left alone indefinitely to enjoy a market with restricted or stable competition, even monopolists. Nature abhors a monopoly, and all private monopolies eventually founder, not only because of political intervention. They face an inherent dilemma that is shared by non-monopolists. Suppose a new competitor appears, using a new approach (in technology, marketing, etc) and under-cutting you on price; the choice is between three difficult options.
Ãƒâ€šÃ‚Â¥ First Option: sticking to your current business model, suffering some loss of sales and profits, and putting longer-term prosperity, even survival, at risk.
Ãƒâ€šÃ‚Â¥ Second Option: shunning the new approach, but matching the lower prices, and taking an even larger hit on revenue and earnings without removing the long-term risk.
Ãƒâ€šÃ‚Â¥ Third Option: starting your own operation to confront the new challenge head-on, cannibalising your own business, but hoping to regain the initiative.
E-commerce adds a new dimension, simply because the attackers can start so easily and so fast, and with such enormous instant success in one vital area: capital value. To give a bizarre illustration, Toys 'R' Us will probably have some $11.9 billion of sales in the year to end-January, on which it should earn an unimpressive $12 million of net income. The projected sales, however, are 100 times those of eToys, which actually contrives to lose more money than its revenues. That hasn't prevented the shares from rising to a capital value of $5.2 billion, compared to a mere $3.9 billion for the Toys 'R' Us heavyweight.
To add insult to injury, Toys 'R' Us itself has sales via the Web that will come quite near to the eToys projection of $117 million. So, if you regard the eToys market value as a significant figure, the whole of the Toys 'R' Us business, with its 700 franchisees across America, is in the share price for less than nothing. That highlights the prime difficulty of the Third Option, meeting the challenge head-on. By definition, you are coming late into the market; you will be seen as a follower and your chances of success will be rated far below those of the pioneering challenger.
Following doesn't guarantee failure. You couldn't ask for a more conspicuous example of a threat being turned into an opportunity than the Third Option reaction of Microsoft to the rise of Netscape. The latter owned the Internet browser market until the software giant counter-attacked with its own Explorer product. The latter now has three-quarters of a market which once belonged totally to the newcomer. But Microsoft's circumstances were unique: its ability to bundle Explorer, free of charge, into the Windows package gave the champ an unbeatable advantage.
RULE OF RESISTANCE
Its winning edge was nearly thrown away. To begin with, Microsoft behaved like most threatened companies: it persuaded itself that the new competition was insignificant. Brushing the Internet aside makes King Canute's attempt to turn back the tide seem positively pragmatic. The time lost in wishing away unwelcome competition gives an invaluable present to the attacker. It's far better to follow the First Rule of Resistance. Assume that the new competitor - any new competitor - is strong, well-managed and a serious challenger. More: always assume, too, that it will succeed, unless you can find a way of resisting the attacker and drawing its teeth.
Once he had woken up to the threat, not a moment too soon, Bill Gates reacted in a way that exemplifies the Second Rule of Resistance: look for key weaknesses in the challenger's business model and for key strengths of your own. Then exploit both to alter the nature of competition to your advantage. When IBM belatedly retaliated to the rise of Apple by launching its own Personal Computer, it overmatched its upstart rival with huge assets: including the far greater strength of the brand, the no-contest dominance of its sales force in large corporations, and its ability to leapfrog Apple with the newer 16-bit technology.
Like Microsoft with its browser, IBM thus had unique powers to put behind its venture. All the same, starting up its own wonderfully successful PC business did not avert the threat to IBM's long-term prosperity. The PC revolution was bound to undermine the giant's richly profitable markets in mainframes and mini-computers. IBM was unable to sustain its old proprietary dominance in the new technology. Taking the Third Option was plainly right: but the threat materialised all the same, despite IBM's power and wealth.
The lesson applies generally. Companies genuinely threatened by new competition are between a rock and a hard place. As a Toys 'R' Us executive told the Wall Street Journal, 'You're damned if you do and damned if you don't'. You cannot afford to ignore the challenger, whether it arrives via the Internet or along some non-cyberspace route. Yet the strategy required to compete with the brash newcomers may well conflict head-on with the established business. In the case of Toys 'R' Us, that existing profitable turnover, remember, is 100 times the size of its e-business.
Setting up your own e-business is the easy part of the proper response. But just establishing a website and selling over the Net is only half the battle, if that. Toys 'R' Us, typically enough, put little energy behind the new venture, yet demand still swamped the company's ability to fulfil orders. That was doubly unfortunate, because Toys 'R' Us had approached e-commerce intelligently in one respect. The operation was launched in partnership with a venture capitalist. The latter expected the on-line business to evolve into an independent and highly valuable company, competing against eToys blow for blow along exactly the same lines.
You must seek to counter the fact that the attacker, starting from scratch with no fixed ideas or habits, has the advantages of its relative smallness: notably focus, agility, ambition, and, of course, autonomy. They can't face any conflict with the established business, because there is none. That conflict, however, crippled Toys 'R' Us when it came to the crunch.
A new man hired to galvanise the Internet business almost immediately saw that he needed to compete with eToys and the other on-liners on price. The bosses at Toys 'R' Us refused his request, on the grounds that the existing franchisees and store managers would object. So, only a few months into the job, the new man exited - and the venture capitalists promptly bowed out, too, asking themselves (understandably enough) whether Toys 'R' Us was 'serious about developing an independent on-line business'. That is the burning, fundamental issue: independence.
The dilemma is being faced by many companies. It confronted Compaq in its efforts to combat the rapid rise of Dell, with its galloping, great success on-line. Compaq's own rise had been built on close, exclusive relationships with its dealer network. The dealers were dead against Compaq's moves to sell direct. Their opposition seriously slowed the company's responses - with severe effects on its growth rate, profits and chief executive (who was fired by the board). The logic of the dealers is very clear, but their logic imposed an irrational policy on their supplier.
The Third Rule of Resistance is that, if you don't make the sales, somebody else will. In other words, pulling your punches (as both Toys 'R' Us and Compaq did) will merely divert your business to the competition. You will gain nothing, but will certainly lose market share. To quote the Journal, 'the rules of the Web play havoc with existing business relationships and economic structures. Retailers who aren't willing to rip up their old rulebooks risk missing out on the Web's huge promise'.
The dilemma doesn't only confront retailers. All businesses have to react to the rules of the Web, which will affect them in different ways, but will affect them nonetheless. To repeat, this is a general issue, not one confined to cyberspace. Changes of many kinds will alter the rules of every game as the new century develops. The issue is how to structure and manage the organisation so that it can mutate rapidly enough to make change its ally rather than its enemy.
Being 'serious about developing an independent business' raises issues even wider than coping with new competition. John A. Byrne, writing in Business Week, says that 'the Soviet Union collapsed because its command-and-control economy couldn't keep up with the West's free market. In the 21st century, the same fate will befall companies whose CEOs attempt to control everything'. The decision not to discount the on-line prices of Toys 'R' Us was a typical piece of command-and-control interference with a subsidiary operation. Such policies are surely unsustainable.
In the Age of the Internet, they make no sense. All organisations are entering an era when the very word 'subsidiary' will become meaningless, because each part of a flat structure will be equally important in its own right. Byrne argues, too, that 'in a world that is becoming ever more chaotic and dependent on brainpower, teams at the top will make more sense than a single outrageously paid CEO...'.
TEAM v INDIVIDUAL
He approvingly quotes John Chambers of Cisco Systems, the Internet overlords: 'I learned a long time ago that a team will always defeat an individual'. Apparently, Chambers has three times as many direct reports as the typical CEO and thus forces himself to encourage greater autonomy. The new technology helps to generate genuine independence, because it keeps ultimate controllers, like Chambers, fully informed of what's happening as people pool their knowledge, decisions and action plans in real time.
The trends to flatness are plainly visible. In 1987, 280 of the 1,000 largest US companies had some self-managed groups. According to Business Week, research by Edward E. Lawlor III, of USC's Centre for Effective Organisations, shows a massive expansion to 780 by 1996. However, you don't need research to see that the companies mentioned in Thinking Managers - IBM, Wal-Mart, Microsoft, Toys 'R' Us, even Cisco - all have dominant CEOs with 'outrageous' pay and strong urges to control, if not all things, at least most.
Companies won't beat the new competitive challenges until the control aspects of the old system are swept away. People who are free to shape their own destinies will outperform those still in thrall. Independence is how threats can be turned into opportunities and nightmares into dreams come true.