Four Tracks to Market Leadership
Trends
spotted by Strategy& suggest that companies in any industry can gain
prominence by choosing the right approach.
Within a single decade, the music industry underwent a revolution
in which digital upstarts triumphed over the market leaders. In 2006, record
labels generated US$9.4 billion in CD sales in the U.S.; a mere 10 years later,
their sales had dropped 84 percent, to $1.5 billion. The cause of this decline,
of course, was digital online music.
Significantly, the revolution happened in two waves. In the first
wave, during the late 2000s, the record companies became spectators in their
own industry. They still produced the songs people purchased, but by 2010,
Apple, with its iTunes site and iPod mp3 player, had siphoned off most of the
profits.
Then came the second wave. Apple had barely had time to enjoy its
ascendancy when it, in turn, was overtaken. In 2015, streaming music replaced
downloads as the industry’s biggest source of revenue, accounting for 34.3
percent of sales. Spotify, a company launched in 2008 but barely on most
people’s radar until 2012, is now the leader in the music industry.
These shifts took place so quickly and were so thorough that the
music industry is often viewed as a perfect example of disruption. It is said
that stalwarts such as Sony, Warner Bros., and Universal made themselves
vulnerable by failing to anticipate the impact of digital technologies. But
there is another, more relevant way of looking at this episode: as a case study
in the dynamics of market leadership.
Market leadership is perhaps the most critical challenge in
today’s business environment. It is the ability of a company to dominate and
shape its business ecosystem: the chain of activity leading from suppliers to
end customers. It has long been a recognized and sought-after source of
business power and profitability.
But the idea of market leadership is more complex than it would
seem at first blush. Different industries have different patterns of market
leadership; only if you understand the particular pattern in your industry can
you position your company effectively. Apple and Spotify took over their
industry not by disrupting it and changing it entirely, but by recognizing and
working with the dynamics that were already there. And certain companies in
every industry are poised to do the same.
That’s
the conclusion suggested by a collection of Industry
Perspectives developed earlier this year. Between January
and May 2016, Strategy&, PwC’s strategy consulting group, published a
series of articles examining the current state of play in major industries.
Companies in all the industries we looked at —
aerospace
and defence, auto, chemicals, commercial
aviation, commercial
transportation, engineering
and construction, entertainment
and media, financial
services, industrial
manufacturing, oil
and gas, retail
and consumer products, technology, utilities, and wealth
management — are struggling to differentiate
themselves and shape their future. Today’s executives understand their
companies can no longer be all things to all people, and many are focusing
their company’s efforts on a more coherent identity: one based on a distinctive
value proposition and a few powerful capabilities. Their efforts are
complicated, however, by the mutable and somewhat blurred paths to market
leadership in their industries.
According to the Industry Perspectives, four broad types of market
leadership dynamics — recurring patterns of industry behavior that affect the
way companies jockey for position — are taking place. They are the
Commoditization Spiral (in which companies struggle to avoid having to compete
on cost alone), the Table Stakes Game (in which many contenders fight over the
same broad customer base with similar capabilities and offerings), the
Supercompetitors’ Pie (carved up by the companies with the most distinctive
edge), and the Dominating Platform (in which one company controls most of the
playing field).
Some industries combine several of these dynamics. Retailers, for
example, may be enmeshed in all four at once. Moreover, these dynamics don’t
appear to be static. Industries move from one to another. Thus, the music
industry has shifted from the Table Stakes Game (where it was before iTunes) to
the Dominating Platform (under Apple) to either the Supercompetitors’ Pie or
the Commoditization Spiral (depending on how the shift to streaming turns out).
If you want to lead your industry, it matters which types of
dynamics affect your enterprise. The Industry Perspectives, and the trends they
uncovered, provide worthwhile clues.
The Commoditization Spiral
In most industries, companies compete by having a distinctive and
hard-to-replicate way to serve customers. But in a Commoditization Spiral
dynamic, there isn’t any easy way to differentiate. The only value proposition
that seems effective is to offer the lowest price to customers.
In this dynamic, competition is so fierce and products are so
similar that customers can play manufacturers off against one another to
negotiate better deals. Almost as soon as a new product or service is
introduced, others in the industry — including new entrants from emerging
economies — offer something similar, and frequently at a lower price. When
caught in this dynamic, companies tend to panic and eliminate costs as quickly
as possible, often hurting themselves by cutting corners on processes, on
employee development, and on procurement to maintain the slimmest of margins on
their products and services.
Many people think the music industry will end up here — but it
hasn’t happened yet. Purveyors of recorded music can still differentiate
themselves by the method of distribution (who has the best streaming network),
the quality of the content, and the breadth of material (e.g., including work
by a wide range of independent musicians).
Commoditization does seem to be happening, however, in the
chemicals industry. A couple of decades ago, chemicals companies relied on
formulations with unique properties, known as specialty chemicals, to set up
exclusive relationships with customers. The popularity of these products
allowed companies to offer bundled packages that included a range of items and
yielded relatively high profits. That strategy went by the wayside, however, as
low-cost suppliers took aim at the specialty market by packaging all their
products separately, dropping prices on the less desired products, offering
discounts, and winning over customers.
Surviving the Commoditization Spiral is difficult; in fact, it may
be possible only for companies that double down on differentiation. This often
means investing in innovations that help companies provide solutions to
customer problems. For instance, in the engineering and construction sector,
which had been slow to adopt new technologies, a few companies have begun to
provide advanced software that allows information to be shared across project
sites and the home office. Alterations in design and materials can be added
directly into these systems, reducing wasteful discrepancies and rework and
boosting safety. In addition, project simulation programs are increasingly
popular, offering the opportunity to experiment with different materials and
construction techniques before the project begins. Similarly, in the chemicals
arena, one supplier has installed sensors in dispensing equipment that allow
its technical services people to optimize product usage at a customer’s site.
In these examples, the product is commoditized but enhanced with special
features and characteristics for which customers are willing to pay more.
The Table Stakes Game
This dynamic takes its name from “table stakes” capabilities:
competitive skills that every company in an industry needs just to stay in
business. In the recorded music industry, for instance, every company has to
know the basics of maintaining technical audio quality in distributed sound. In
industries caught in the Table Stakes Game, many companies are competing at
once — not necessarily on price, but on quality and features. Although they
don’t fall into commoditization, it’s very hard for any of them to stand out
and reach market leadership.
The recorded music industry
was in this position during the 1980s and 1990s. Many record companies were
thriving, each with its own line of artists usually covering a wide range of
genres. Some of these companies, such as Warner/Elektra/Asylum, Columbia, EMI,
PolyGram, and MCA, enjoyed competitive advantages because of their size and
economies of scale. But they could never dictate terms to, say, record store
chains or major recording artists. They were too dependent on hits — which were
virtually impossible to predict — and they topped the industry only when they
were fortunate enough to top the Billboard charts.
This dynamic can be found today in automobiles, oil and gas, some
consumer packaged goods sectors (e.g., beer), appliances, and any industry
where a large number of major companies rely on similar capabilities. Because
the customer base is deep enough and the potential revenue pool sufficiently
wide, companies can maintain profitability by touting ancillary features on
their many product and service choices while fine-tuning scale across extensive
manufacturing, distribution, and supplier channels. There tend to be many
players and no clear winners.
More recently, technological advances have made it easier to gain
table stakes capabilities. The Internet introduced new sales, marketing, and
communications channels that anyone could adopt with relative ease while the
digitization of the back office, front office, factory floor, and
organizational functions swelled the amount and usefulness of data that any
company could tap into. Large and small businesses took advantage of these new
tools to leapfrog each other. More industries are thus falling into this
dynamic, and challenging their leading companies to escape it.
The auto sector represents an especially visible example of the
Table Stakes Game. There is no shortage of enthusiastic customers for vehicles
at the moment, and most car buyers seek the same features for a reasonable
price: reliability, performance, advanced electronic amenities (such as
easy-to-use smartphone connectivity), safety (including features developed for
autonomous vehicles), easy financing, and environmentally friendly features.
For their part, automakers have so successfully learned from one another that
they all have similar capabilities. They can all, for example, manufacture
vehicles using the kind of continuous improvement and lean production that was
once limited to Toyota and Honda. They also have similar capabilities in auto
styling, dealer relationships, financing, and automotive electronics.
Meanwhile, the car is undergoing a design and engineering
revitalization whose level of activity rivals that of the golden age of
automobile invention a century ago. In the coming years, new cars will run on a
variety of powertrains. The highways will be shared by internal combustion
(gasoline) vehicles, cars and truck with diesel engines, vehicles with fuel
cells (hydrogen engines), electric vehicles (powered by batteries), and
hybrids. Some automakers will stake their future on connected cars and
autonomous (self-driving) cars, while others continue to base their brand on
styling, performance, or value. But in a table stakes environment, no matter
which niche they choose, there will be plenty of competition. The industry
would have to consolidate a great deal to move out of this dynamic, and it’s
not yet clear how that would happen.
How do you get to market leadership in a Table Stakes Game
industry? It’s not easy. There appear to be two tracks. In the first, you step
away from some of your existing business, stop trying to be all things to all
customers, and focus on achieving some capability that no other company in the
industry can match. Chances are, this will mean building on your existing
strengths. It wasn’t enough to save Volvo from being acquired, but it could
save your company if you are far enough ahead. The second track is simply to do
what every other company does — but do it better, faster, and more effectively.
The Supercompetitors’ Pie
This
dynamic is named after a hypothesis put forth by Northwestern University’s
Kellogg School of Management faculty members N. Thomas Hubbard, Paul Leinwand, and
Cesare Mainardi (“The New Supercompetitors,” s+b,
Autumn 2014). They predicted that most industries would soon be carved up by
the companies with the most distinctive value propositions and the capabilities
to match. Businesses that could set themselves apart in pivotal ways — for
instance, by their product design, supply chain scale, or manufacturing
efficiency — would become supercompetitors, able to shape their “slice” of the
customer market to their advantage. Leinwand and Mainardi put this concept at
the center of their PwC- and Strategy&-sponsored book, Strategy
That Works (Harvard Business Review Press, 2016).
Industries caught up in this dynamic tend to get sliced into a few
specialized domains, often consolidating through M&A until there are only a
few major companies in each. Competing on capabilities is effective for these
companies because it allows them to focus on one or two specialized domains
where they have the prowess they need to shape the category. For example, many
consumer packaged goods companies have jettisoned products and services that
don’t fit with their capabilities. The businesses they end up with — Procter
& Gamble’s personal care and cleaning products, Kraft’s meats and cheeses —
are often much more narrowly focused than what they had before, but also more
able to dominate the market.
One of the most radical such transitions is occurring in the
aerospace and defense (A&D) industry. These companies were once in a system
where they all played the same game: tailoring their products to meet the requirements
of large weapons programs that were the priorities of the biggest, wealthiest
defense customers, such as the U.S. armed forces. Now those priorities are
shifting. The Pentagon, for example, is focusing its attention on more
flexible, lower-cost high tech. This change has, in turn, galvanized a spate of
new technologically adept and agile competitors able to quickly provide small,
customized solutions that are out of the reach of traditional A&D
contractors.
Going into direct competition with high-tech companies would be a
mistake for A&D contractors, which generally lack the necessary breadth and
depth of talent to support the continuous technological advances needed to
develop products that are wedded to the information value chain. U.S. A&D
companies employ fewer than one in every 150 engineers with expertise in
autonomous systems, secure communications, artificial intelligence, and machine
learning. And defense companies spend far less on R&D (2.2 percent of
revenues on average) than do most U.S. technology companies (7.6 percent of
revenues on average). For these reasons, defense companies are not going to
out-hire Amazon in cloud services or Google, Microsoft, or Facebook in data
science and analytics.
But A&D outfits have a huge advantage over technology firms in
their special relationship with defense departments around the world. After
years of doing business with the military, defense contractors have learned the
secrets of navigating the halls of the Pentagon, for example, and have become
fluent in the language and expectations of the top brass. And unlike most
relatively young technology companies, A&D organizations are used to the
extended lead times, delays, intellectual property rules, and elbow rubbing
that are typical of a long-term defense contract.
Thus, A&D companies are increasingly seeking to carve up the
sector by targeting selective weapons niches. Some companies are specializing
in sensor-equipped tracking devices, others in vehicles for difficult terrain,
still others in weapons with artificial intelligence, and others in the
cyberwarfare slice. Fewer companies than before are specializing in maintaining
the major weapons of conventional defense contracting.
Airlines are also carving up their industry. The decisive battle
for the future of the airline industry over the next five to 10 years will be
fought over which airlines cater to which type of customer, with the right
capabilities. If you are a family of four on the way to a resort with skis, a
car seat, eight bags, and toys, and are in need of a lot of entertainment
during the trip, one or two airlines will provide a package that addresses all
of these needs, including help getting through security and on and off the
plane. If you are a businessperson, you might travel on a different airline
altogether — one that specializes in all-business-class amenities. And if you
simply want cheap, practical, point-to-point transportation, you’ll fly a
no-frills airline oriented to that purpose.
The Dominating Platform
The final dynamic is the Dominating Platform. In this dynamic, the
industry is already disrupted, and now the competitors must figure out how to
assert a role for themselves using a new common technological platform. In this
category, there is often just one supercompetitor, keeping itself dominant by
continually improving its capabilities, without any real competition — at least
not yet. Microsoft’s Windows operating system, Google’s search engine, and
Amazon’s “everything online” retail experience are all renowned cases of the
Dominating Platform. These companies will remain in control until someone comes
along with a more disruptive technology.
Indeed, a battle for platform domination is still going on in the
music business. As we noted above, iTunes controlled the industry for about a
decade; it was a powerful Dominating Platform. Then Spotify overtook Apple in
both revenue and subscribers. But Spotify has not created a fully Dominating
Platform, in part because streaming audio is a relatively open architecture
with fewer barriers to entry than downloaded music had. Consequently, Spotify
is battling with Amazon, Apple, Pandora, and many other music sources — along
with some popular musicians including Taylor Swift and Adele — for platform control.
This sector may ultimately fall into the Table Stakes Game dynamic instead.
You don’t have to be a producer of high-tech products to be in an
industry where a Dominating Platform dynamic is in play. Consider commercial
transportation, the business of container ships, freight trains, and trucking
fleets. This industry has been dramatically disrupted since the early 2010s.
Yesterday’s established logistics companies have been beset by new high-tech
entrants slicing off bits and pieces of their business, offering speed and
flexibility — and more value — to customers at an attractive cost. There is, in
effect, a new “open source” logistics platform, and gaining leadership in this
sector by gaining control of the platform is essential.
Financial services is another industry struggling with platform
domination. Dozens of specialized products have been launched by startup
financial technology (fintech) companies providing loans, credit, mobile
payments, investment services, and even risk analysis. They are all seeking to
develop a ubiquitous infrastructure that other banks and financial-services
companies will join. Technology giants like Apple, Google, and Samsung are
trying to enter this platform business as well.
In a Dominating Platform dynamic, the best way to thrive is to
create a powerful enough platform, or to align with the company that does.
Creating a Dominating Platform requires extensive and highly distinctive
capabilities. The place to start, therefore, is with a sober assessment of what
your company does best and whether it could be the basis of a Dominating
Platform. If the answer is yes, channel all your investment into this value
proposition, defunding activities that don’t fit, and make alliances with or
acquire third-party technology providers that can provide the hardware,
software, and apps to support the platform you are building.
Getting Ready for 2017
This coming winter, when we again examine the trends and prospects
in critical industries, the need for specialization will no doubt come into
sharper focus. We expect that companies will increasingly use technological
innovation — big data, connectivity, advanced sensors, apps, and cloud-based
hardware and software — to reach individual consumers with customized products.
And some companies will rely on M&A and internal cultural change to support
these efforts. Although all industries have begun to feel the impact of
specialization, and some are suffused with it, companies have no shortage of
strategic and tactical options for prospering from it
by Jeffrey
Rothfeder and Art
Kleiner
http://www.strategy-business.com/article/Four-Tracks-to-Market-Leadership?gko=fbdf5&utm_source=itw&utm_medium=20161117&utm_campaign=respB
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