CHAPTER 1: THE ADVENT OF ECONOMIC TIME
The central idea of this book is economic time.
When we think of the effects of time on a business, we imagine that markets are speeding up and that advantage is short-lived. But business time is becoming more complex than that. Time is not what you think.
The significance of time in business goes beyond the reality that markets and companies are moving faster. There is a more interesting force at work. Business time is not only speeding up -- business time is splitting markets apart, as well as the companies that compete in them.
Do we really think dynamically? Most of us don't. We are conditioned from birth to regard change with caution, even as we grow and explore the world around us. When we ask managers whether they think dynamically, we hear answers that range from a confident "of course we do!" to a perplexed "what do you mean?" Ask yourself these basic questions:
- What makes you special, different from all of your competitors?
- What is your organization ultimately capable of when stretched? What will you never be able to do, no matter how hard you try?
- What role is left for your corporate headquarters? Or should you leave your diverse businesses alone to run themselves?
As simple as these questions are, they get at the heart of modern business problems. The business opportunities in the new economy are complex and dynamic. Some are different. Other time-honored rules remain little changed. Facing this complexity, failure to equip yourself to think in terms of multispeed competition -- what we call economic time
-- can reduce your effectiveness to that of a horse and buggy driver facing the onset of the automobile.
But how can time move at different speeds for companies? Of course, real time cannot. Each second marks the passage of linear time along precise, equally paced intervals that have changed little over the centuries. But in the new economy, the speed and means by which advantage grows and declines are becoming increasingly diverse. This is why business leaders in the new economy need to be able to manage across different business models with the agility of a decathlon athlete.
A company that operates in fast economic time is Compaq Computer. In the personal computer hardware industry, product advantage is slippery. Compaq's ProLinea line must be replenished with new products every three to six months to sustain advantage. A delay of thirty days in a pricing decision can have ruinous effects. One decision by Compaq to reduce prices was matched by a competitor and implemented through distributors nationwide in forty-eight hours. Dell, Packard Bell, and IBM can react to Compaq's strategic moves almost daily.
But is Compaq's fast-time orientation right for you? Consider Merck, the U.S. pharmaceuticals giant whose origins date to a seventeenth century German apothecary. One Merck product, the anticholesterol drug Mevacor, took three decades to bring to market, a development schedule that would be preposterous for Compaq. But Mevacor, with a product life of a decade or more, is effectively shielded from the ravages of economic time. First-mover advantage is inherently sustainable. Business advantage is sticky. The Merck organization, even as its managers work to renew advantage, travels over its business terrain in slow economic time.
Compaq -- fast time. Merck -- slow time. Traditional, single-speed business thinking is not equipped to capitalize on these differences. Why not? Companies like Compaq and Merck are well managed. Additionally, traditional thinking about industry rivalry, while important, does not provide the answer. The reason is that traditional business thinking treats change as unusual
rather than as normal.
The pathway to renewing advantage for Compaq is like a high-speed raceway, filled with vehicles that enter fast but burn out quickly. No single product, no matter how successful, sustains its advantage for long. Sony's portable electronics business is similar to Compaq's. Sony managers have been required to introduce hundreds of Walkman variations to renew the Sony Walkman brand. Managers at fashion companies like Liz Claiborne and Benetton, and Wall Street securities innovators like Salomon Brothers, face the same high speed of product growth, quick competitive entry, and fast product decline.
For managers at Merck, in contrast, the competitive cycles by which one product displaces another are drawn out, over a decade or more. One product in five thousand makes it through the barriers of clinical development, testing, and approval. Pharmaceutical companies find it difficult and time consuming to displace one another. For Merck, the pathway to competitive renewal is like a rugged trail through a thick forest, narrow and tough to traverse.
Consider the evolution of Merck's Mevacor. Marketing efforts for Mevacor began eight years before commercialization with the process of educating physicians. For four years during Merck's long, winding regulatory process, development was slowed because of a rumor, proven false, that competitors were having side-effect problems with a similar drug. As Mevacor neared FDA approval, 120 regulatory specialists at Merck met six thousand individual target dates by dividing each task into small responsibilities. Merck's research laboratory took a delegation of fifty employees to Washington for a last run-through, supported by a van loaded with 104 volumes of documentation, each 400 pages long. When FDA approval for Mevacor was granted, the company's reaction was "like when your team wins the World Series," according to one Merck manager. Six years later Mevacor's revenue passed $1 billion and continued to grow with little competition.
In today's fast-paced markets is Merck's product sustainability an exception? The world's most studied company at the onset of the new economy is Microsoft, a company that wrote the book on how to build long-lived advantage in the software industry. Or consider Disney Corporation: Disney managers recently issued one-hundred-year bonds, a reflection of the expected duration of Disney assets such as The Lion King,
the first cartoon to gross $1 billion in revenues and related sales worldwide. Thirty years from now, when our grandchildren are bored on a rainy day and sit to watch high-definition television on flat-screen displays the size of a wall, they will watch the same Lion King
movie that we have seen, and they will pay Disney for the privilege. With products like Mevacor, Windows95, and The Lion King,
managers at Merck, Microsoft, and Disney are creating long-lived advantages.
Consider: Does the three-billion-dollar Space Shuttle use higher technology than a three-dollar electronic wristwatch? In terms of newness, a throwaway wristwatch made from parts designed recently, scores higher. IBM designed the shuttle's on-board computers in the 1970s. Twenty-five years later, NASA managers upgraded to Intel 386-based computers, machines that had been commercially obsolete for a decade. The shuttle's ceramic tiles are fitted by hand, one after another. Processes used to make the Space Shuttle recall styles of management used to craft fine furniture for European royalty centuries ago.
Compaq, Sony, and Intel operating in one part of economic time; Merck, Disney, and NASA operating in another part of economic time. The styles of leadership in these companies are being pulled apart as they shape the new economy. Yet, at a time when multispeed business opportunities are unprecedented, management ideas remain grounded in the modern-day equivalent of the Iron Age: freeze-frame thinking that treats change as temporary rather than the rule.
As the director of a major electronics company put it to us, "It's not that things are moving faster. We know that they are. But for us some things remain stable. We have a whole constellation of stuff swirling around us with rules that we do not understand. Our challenge is to know constancy from change and to manage across both."WHAT IS ECONOMIC TIME?
Although markets operate at different rates of competitive speed, you can't see this by looking at whether people in these companies run faster or slower to the coffee machine or whether they work longer or shorter hours. While these differences are real, traditional ideas about speed don't tell us enough about the economy's expanding competitive styles.
The growth engine of every company has distinguishing competitive mechanics, its own dynamic signature that gives clues as to how value for it is created, destroyed, and potentially renewed. The reality is that customers don't
come first -- neither do companies. Each gains its meaning from its relationship with the other. Through economic time we see the dynamic forces rooted in these processes of value creation: how managers perceive environmental threats, learn and meet customer needs, and react to one another.
In physical systems there is a law: For every action there is an equal but opposite reaction. In a like manner, laws of action and reaction shape company growth and rebirth. In fighter pilot competition there is the OODA loop. This stands for observe, orient, decide, and act. Rivals observe an action of strategic significance, orient themselves to it, decide what action should be taken, and finally act.
At first glance, action-reaction cycles seem similar to product life cycles, which measure the rise and fall of a product's revenues. But action-reaction cycles go deeper, down to a company's growth engine, the underlying processes that create, sustain, and renew value. Action-reaction cycles, from initial information gathering to the final actions taken, dictate the management styles and organizational processes needed to serve customers. They also provide clues about the various options available for dealing with suppliers and competitors. Action-reaction cycles align a company dynamically with the key success factors in its markets.
Action-reaction cycles can differ greatly among companies, even when companies make similar products. Microsoft and Netscape provide an example. Microsoft brings out new versions of its popular Web browser software, Explorer, at a fast pace. So does Netscape, which pioneered the Internet browser software called Navigator. Yet, how economic time operates within Microsoft and Netscape is different. Advantage for Explorer is sticky. Like Merck, Microsoft operates in slow competitive time. For Netscape, however, economic time moves fast, like that of Compaq Computer. We don't see this by looking at product life cycles.
No single approach captures all of the forces at work in a market. An economic time zone is a segment of a market where the styles of management needed to renew advantage are similar. Within an economic time zone, managers learn customer needs, see threats, build control systems, and leverage capabilities with similar competitive logic. Economic time zones are the dynamic analogy to the traditional idea of strategic groups, regions of a market where competitors behave similarly toward each other. In similar economic time the growth engines of companies have similar dynamic mechanics at work to sustain growth.
Consider how things work in real time. If you were in Eastern Standard Time and tried to operate on European Standard Time, you would be out of sync with the activities taking place in your region. The clocks in your multispeed company would be mismatched with one another. Your activities would proceed at the wrong pace or be out of sync with one another for creating value. So it is for managers operating in different zones of economic time.
Another way to think about economic time is that it keeps everything from having the same time dependency; it creates priorities. It predicts how your actions are likely to produce moves and countermoves by competitors, where you are strongest in terms of your growth opportunities, and where you are most vulnerable. Economic time identifies customers that are important to you in the long run and which competitors pose the greatest threat to you over time.
It can be risky to ignore the multiple forces of economic time. Most value-creating relationships that companies have with their suppliers, customers, and competitors are grounded, in some way, somewhere, in economic time. As one CEO put it, "We had to find out how economic time operated for us or we would have found out later the hard way."HOW DO I KNOW WHERE I AM IN ECONOMIC TIME?
We conducted a ten-year study of birth, decline, and renewal in forty-five industries. The companies spanned a range of industries, including service, manufacturing, high technology, and knowledge-based markets. A range of dynamic forces were catalogued and compared, from markets where economic time moves slowly to markets where economic time moves quickly. The study was guided by insights from economic and organizational theory. The findings were supplemented by discussions with managers and industry analysts.
Dynamic groupings became apparent. Some companies, such as Microsoft, Disney, and Merck, block competition through barriers, or as Richard Rumelt puts it, strong isolating mechanisms.
These are based on one-of-a-kind advantages such as geography, copyrights, patents, or ownership of an information resource. At the opposite end of the spectrum of economic time, companies such as Compaq, Sony, and Benetton rely on new ideas, novelty, and innovation, products that are quickly copied. In the middle, between the extremes of fast-and slow-cycle markets, we find traditional, economies-of-scale-driven companies. With no preexisting method to account for dynamic diversity, we classified these competitive patterns into three broad groupings of economic time; slow-cycle, standard-cycle, and fast-cycle.Slow-Cycle Economic Time.
Companies operating in this first renewal class, like Microsoft with its Windows operating system, pursue renewal opportunities that are shielded from traditional competitive pressures. The key to renewal lies in gaining an advantage that is proprietary, slowly changing, and essential to the functioning of a market.
As a unique point of supply and demand, slow-cycle renewal efforts more or less automatically resist competitors' attempts to duplicate them. Product advantage is secured within the company and confined to it. Competitors cannot effectively gain a foothold with the company's customers, even where they find the company's advantage attractive.
As we will see, slow-cycle markets can be subject to a competitive effect we call tipping,
whereby a market flips all the way toward dominance by one competitor. These winner-take-all markets are the focus of some of the economy's most profitable companies. In contrast to the idea that markets are becoming unstable, slow-cycle companies like Merck, Microsoft, and Disney, through the use of staircase strategies, gain enduring advantage.Standard-Cycle Economic Time.
Companies in this second renewal class are found midway on the spectrum of economic time. They are typically mass-market companies, market share oriented, and process focused. What distinguishes their success is their ability to replicate the same usage experience for customers with no surprises. Standard-cycle management styles are a descendant of traditional business thinking.
Toyota, McDonald's, and IKEA routinely make large investments, yet their isolating mechanisms are less effective than those of companies in slower-cycle economic time. To see why renewal pressures can be greater for companies that are viewed traditionally as dominant, we looked at these companies' internal processes, their investment patterns, and their management styles.
Standard-cycle companies are oriented toward serving large numbers of customers in competitive markets. Demand patterns are repetitive and relatively stable. Still, economic time moves faster for these companies because their capabilities are less specialized. Competitors have greater ability and incentive to duplicate them, improve upon them, or render them obsolete. In this way their isolating mechanisms are less powerful than those in slower-cycle time. Still, extended dominance is possible if a range of technical and organizational elements are harmonized with economies of scale. After careful study, we came to describe the management style needed to renew standard-cycle companies as one of scale orchestration.Fast-Cycle Economic Time.
The questions we asked over and over again in the study were these: Why are some products and services copied so quickly?
Why does first-mover status for some products and services, such as cellular phones and DRAM computer chips, yield such short-lived advantage? Companies producing these products, like Compaq, Motorola, Sony, and Toshiba, are well managed. Also, industry structure is not notably different from that of companies operating in slower economic time.
One clue to the dynamics of fast-cycle companies is that, once commercialized, fast-cycle products do not require complex organizations to support them. The Compaq ProLinea, for example, originated at a Comdex trade show in Las Vegas, only nine months before the ProLinea's launch. Two managers, sent from Compaq to check up on the competition, visited booths and talked with component vendors. They found that they could buy components on the open market faster and at lower prices than Compaq was getting through its purchasing department. By shopping around and asking questions, these two engineers were able to build a prototype ProLinea computer in their hotel room in three days.
Products like ProLinea have, at most, a few hundred parts, most of which can be easily purchased on the open market. Like most fast-cycle products, ProLinea is largely a nonproprietary collection of ideas, which can be readily pieced together by Compaq as well as by Compaq's rivals.
Ask yourself, "How is a 64-megabyte DRAM chip like a Cabbage Patch doll?" Remember the Cabbage Patch doll? It originally sold for $850. A few years later you could buy one at Kmart for $39.95. While worlds apart in technology and capital investment, their similarity is that DRAM chips and Cabbage Patch dolls both gain their value from their information content, which can be readily copied. Freestanding ideas are the engines of growth. With the forces of value creation and destruction operating at high speed, the pursuit of advantage takes place in its fastest, most unrestrained form. This is why managers find their journey in fast-cycle markets to be marked by a continuous gale of creative destruction, as the economist Joseph Schumpeter emphasized.
How can you know where you are operating in economic time? Or whether economic time is changing for you? Or whether you are facing a two- or three-front market that demands a mix of management styles?
Begin by looking inward, to the mechanics of your company's past growth. If your products are like front-line troops, your internal core competencies or your capabilities provide your supporting logistics. But you should also understand the field of combat, or your market's critical success factors, as well as the tactics and strategies available in each economic time zone. The spectrum of economic time is shown in Table 1.1.
The diversity of forces in this chart helps to understand contemporary business phenomena. Consider the Internet-based competition between Netscape's Navigator and Microsoft's Explorer. Both companies introduce improved Internet products at a fast pace to win customers. This is fastpaced competition, to be sure, but look deeper, in economic time. The reality is that fast-cycle competition is a fact of life only for Netscape. For Microsoft the competitive clock operates more slowly.
Netscape managers, capable and hardworking, have had little time to build what David Teece calls complementary assets. Netscape's Navigator is based on extensions of the HTML programming language, a freely available standard in the industry. Netscape has no proprietary technology or other supporting strengths that can shield its products from fast imitation. Netscape has a lot at stake with each new product introduction. The pace of innovation must be fast and unceasing.
For Microsoft, Explorer is only one of many interconnected applications built upon extensions of Microsoft's original MS-DOS Windows operating system. The Windows95 growth engine, because it has created dynamic lock-in with customers, runs in slow-cycle economic time. Thus, Microsoft has competitive options not available to Netscape. At the same time, facing different renewal pathways, Netscape can do things that are difficult for Microsoft. Similar products -- different competitive options.
In our work we developed what we call the 80% rule.
In this book you will be exposed to a range of economic time descriptors, factors that can help you to decide where you operate in economic time. Conservatively, each of these factors is accurate, that is, correctly distinguishes economic time, in about 85 percent of the cases. Thus, to know where you operate in economic time you will want to ask a number of questions about your business. Each can be thought of as offering a proposition, a hypothesis, about how your business renews itself. If three or four economic time descriptors point in the same direction, you can be relatively sure that you have correctly assessed how economic time operates for you.
In this regard, a useful way to begin a journey in economic time is to look at products in terms of their long-run pricing patterns. Pricing patterns across the economic time cycles are shown in Table 1.2.
The data in Table 1.2, drawn from a range of industries, show the range of dynamic pricing patterns possible in economic time. The stronger and more vigorous your company's isolating mechanisms are, the more prices stabilize or even rise. As the isolating power of your capabilities weakens, the amount of time that you have to recoup profits from innovation declines. Prices fall more rapidly. Product advantage becomes more temporary. Economic time speeds up.
In terms of theory, slow-cycle markets are a grouping of different types of mostly "natural" monopolistic advantages. Standard-cycle markets map most closely onto extended oligopolistic rivalry, or "life with the four-hundred-pound gorillas." Fast-cycle markets can be thought of as most like Schumpeterian competition, "the chase after the innovator." So in this sense economic time is a simple organizing device with which to compare a range of possible renewal opportunities and to know whether they are changing.
Renewal opportunities do not always fall neatly into one economic time zone or another. Within any company fine-grained patterns may be found and mixed economic time opportunities may arise. Success also results from the effects of industry structure, chance and uncertainty, and leadership. Any complete understanding of long-term renewal opportunities needs to account for these important forces as well. But before we lay out a framework for renewal through economic time, a little history.THE LAWS OF RENEWAL
Evolution is central to our experience. We know this is true in physical systems, biology, chemistry, and human affairs. Although our lives center on the here and now, our experiences from the beginning have been defined by changing relationships. Death and rebirth are necessary to clear the way for newer forms. The temporary nature of things is also apparent in the birth, growth, and decline of organizations.
Still, over the past twenty-five years managers have operated by a different way of thinking: the idea that advantage, once achieved, is inherently sustainable. As success is gained, advantage is long-lived unless
managers make mistakes. We refer to this collection of ideas as the traditional view of business. Many of us were taught that the drivers of success have more or less the same mechanics; achieve and maintain market share through economies of scale. Extended rivalry, as it is termed, has indeed played an essential role in business. Examples include the rivalry between General Motors and Ford in the 1970s, or Coke and Pepsi in the 1980s, to name but two.
Through the stake-and-hold perspective of traditional thinking the dynamic nature of your company and your markets can be difficult to see. You know that change is central to success and failure. Companies and their customers are temporary. Even where companies retain the same corporate name for decades, how managers operate within them changes so much that if company founders came back they would not recognize their organizations.
Traditional thinking reflects insufficient attention to what Joseph Schumpeter emphasized and what today's business leaders know. Change is central to economic progress. The progression of species, their life, death, and renewal, gives meaning to their existence. The old must be cleared away to create opportunities for the next generation. The evolutionary ecology of business, the competitive, dynamic interdependence of your organization and your customers, can be difficult to account for in traditional thinking.
Sometimes we criticize ourselves too much. As a manager put it, "It's not that our assumptions were wrong to begin with, which is what our people used to think of when they rejected past strategies. We thought, 'Well, we were wrong but now we've got it right.' As it turns out, we were right, but things changed. Our old ideas outlived their usefulness."
But we need to preserve traditional thinking. Traditional ideas provide insights into success in relatively stable mass markets like automobiles, fast food, distribution, and retailing. Comprehensive approaches to setting strategy in the new economy must preserve the best of traditional thinking.
A step in preserving the best of the past while moving toward the future is to think in terms of the laws of competitive evolution. In our studies of economic time we came to see three laws at work. We termed them convergence, alignment,
Each plays a role in the dynamic process of creating and renewing advantage.
The first law of competitive evolution is convergence. When you successfully innovate, profits follow. You operate high up the convergence curve. Then, just as surely, competitors offer newer products or improved products at lower costs. As your products move down the convergence curve, profits fall. Profits become low, zero, or even negative.
You can slow down convergence through isolating mechanisms but you cannot stop it. Convergence formalizes the idea of economic time that nothing lasts forever.
At the top of the convergence curve are profitable, noncompetitive markets. When your products are located here, your profits are the highest possible. At the opposite end, the bottom of the convergence curve are highly competitive markets. Here your products are indistinguishable from those of your competitors; you are forced to drop your prices down to the prices of the most efficient producer in the industry. If you and your competitors continue to attack each other at this point, you will move down the convergence curve to the point where all of you lose money on every product sold.
Profitability depends on how long you can hold off convergence, reverse it, and how well you can introduce products high up on the convergence curve. This, in turn, depends on how your core competencies operate in economic time, that is, how well they generate value and isolate your products from competitive imitation, substitutes, or obsolescence -- what can be thought of as competitive displacement.
Each product has a position on the convergence line and a distinctive rate of movement. Products move inexorably, slowly or quickly, down the convergence curve toward competitive extinction. As a leader, you are responsible for recognizing this in economic time and helping to put plans into action that give your company opportunities for renewal.
The second law of renewal is the principle of alignment. This is the idea that the capabilities of your company and the needs of your customers are dependent on one another. Companies and customers each gain their meaning from the requests placed on them by the other. Your company and your customers need one another, are defined by one another, and exist for one another.
Alignment is formed and reformed through the actions of managers. When alignment is strong, the capabilities of your company and the needs of your customers are well matched. For any product's location on the convergence curve -- anywhere from profitable to nonprofitable markets -- the full amount of profits possible
flow to your company.
Alignment is gained through business strategy, your pattern of day-to-day activities, the operating procedures by which your company maintains its relationships with its environment. Corporate pronouncements of strategy don't matter much in understanding alignment. What matters is how people in your company actually behave,
toward suppliers, customers, and competitors, day after day.
The third law of competitive evolution is renewal. The purpose and responsibility of renewal is the recapitalization of aging assets. Renewal is required by the certain knowledge that what you are doing today, no matter how successful, will become obsolete. Renewal has as its goal the renaissance of your company, away from the slide toward competitive markets brought on by convergence. Renewal repositions aging products and introduces new products higher up on the convergence curve. Leadership is the process of giving your organization every opportunity for recapitalization to happen.
Renewal reflects how well a company's growth engine capitalizes the resources available to it and transforms its capabilities into value. As we will see, about 70 percent of the value of a typical company comes from renewal. Economic time orients managers to success drivers beyond the current period -- how competitive progress will reshape advantage into the future.MULTISPEED COMPETITION
Economic time can make sense of problems that in our day-to-day experiences we tend to see as unrelated. Sometimes these insights can be unexpected. Ask yourself if you know:
- When bigger is not better
- When faster is not better
- When it is better to say "no" to customers
- Why great ideas for good products fail
- When market share goals can destroy a company
Answers to questions like these help to uncover the leverage points in a business problem, where concentrated efforts lead to high payoffs. Economic time sets a balance in thinking about long term and short term. The main operating sequences, your company's central, value-added processes, are accented and compared to the short-term activities that consume your day-to-day energy. Thinking in terms of economic time puts the focus on the deeper patterns of behavior, the underlying forces central to organizational regeneration.
To understand what their companies can do, we encourage managers first to understand their company's growth history in terms of economic time. Look at how your company's growth engine has operated in the past. Confirm how you are similar or different from your competitors in terms of how you replicate your advantage. Distinguish a history of continuous change from framebreaking change.
Emulating the practices of another company, or adopting a new strategy without a grounding in economic time, can be like starting a game without being certain that you know what the rules are, whether the game is changing, or whether your company is likely to be good at it. In one Fortune 10 company that we worked with, this danger became apparent. On the surface of it, the problem was that company managers needed to understand the challenges brought on by the faster-moving markets into which their product was headed. But as discussions unfolded, a deeper problem surfaced. Company officers did not know how economic time had operated for them in the past.
As we discovered, hidden growth barriers were present deep within the company that would have remained undetected well into the process of commitment to the new strategy. A barrier to growth in economic time within the company's information systems could have driven the enterprise into bankruptcy. Eventually, it became clear that managers needed to reset their cultural clocks to a new management style. Before decisions could be made on what direction to take, managers needed to think through what kind of company they wanted to be.
Ask yourself: Do you think of your advantage as merely sustainable -- or as dynamically renewable?
There are few free rides in economic time, few tricks or one-shot tactical maneuvers to create advantage. What you get is a dynamic road map among the outcomes that may be possible and indicators of which styles of management may be best for you. As the research illustrates, managing through economic time opens up new ways to get from here to there. Still, the question you will be left with is, "What kind of a company do I want
The ancient Greeks had a way of putting it: "I can only discover what I am when I know what is unlike me. When I look to what is fundamentally different from me, then I know who I am." We have found that a useful place to start your journey is economic time is to look at companies that were brought into being in traditional markets. These familiar markets and the companies that define them provide an important starting point. Through them we see how traditional markets are changing, what new opportunities their managers face, and how you can begin to ask yourself where you want to operate in economic time.
Copyright © 1998 by Jeffrey R. Williams