Four Tracks to Market Leadership
Trends
spotted by Strategy&Business 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 defense, 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 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=20161103&utm_campaign=respA
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