The Future of Success (5 page)

Your profits shrink. Now you have three options: (1) You can figure out how to cut your costs and offer X for less than $Y. (2) You can figure out how to produce a much better X for the same cost. (3) You can use whatever expertise you’ve gained along the way to be the first out with an entirely new product (Z), which is something that buyers will like even more than they liked X and will pay a premium for. Any or all of these strategies will restore your lead—for a time. You should try all three, because you have no way of knowing in advance which one will work best. But beware: They’re all costly, and risky.

The first strategy, to cut costs, is the least risky, but it will cost you in the short term because you’ll have to pay to figure out how to make your operation more efficient. Say you hire a management consultant who recommends that you install new software that can accomplish more with fewer steps and fewer people on the payroll, outsource anything else that can be done more cheaply by a subcontractor, and cut the wages of your remaining employees—maybe give them a share in the profits instead or the option to buy shares of stock. You accept his advice and pay his bill. It occurs to you that you should have become a management consultant.

The second strategy, to improve the product, requires money for research and development, and then for marketing. It’s a riskier strategy, because you can’t be sure that what you consider a newly improved X will be perceived that way by customers. When it comes to product improvements, even Coca-Cola can blow it. But at least you know that your customers like X, so you can have some confidence they will respond well to a faster, more powerful, lighter-weight, tastier, or prettier X-plus.

The third strategy, coming up with a whole new product Z, is the costliest and riskiest of all. It requires more basic research, which, in the end, may yield nothing of value. Z is sufficiently different from X that you can’t even be sure there’s a market for it. On the other hand, if your gamble turns out to be on the money, the payoff from Z will be the highest of all. You’re likely to have the Z market to yourself for a long time before your competitors can figure out how to produce their own versions.

Hopefully, at least one of these strategies will restore your profits long enough for you to recoup the costs of pursuing the others and still come out ahead. But here’s the bad news, and I have saved it until now because I didn’t want to discourage you: You will never reach a point where you can relax. Even if you succeed, your success will be temporary, because your competitors are sure to follow quickly. Years ago, in the industrial era, competition was more restrained because producers were tied to large-scale production. But now that rivals are nimble, there’s no coasting. You may make a nice profit for a while, but in order to survive, you’ll need to sink most of it back into the three strategies.

If you do well at this game—keep cutting costs, adding value, and inventing—you’ll be able to attract partners or investors. You may even be able to issue a public offering of shares that makes you very rich, but you’d be wise not to count on it. More likely, your new partners or investors will provide just enough cash to allow you to place more bets on a wider assortment of innovations. The greater the number of bets you can make, the more likely one will pay off big enough to cover the other bets and allow you to keep a step ahead when rivals catch on.

Still, even with the additional capital, the race will never end. That’s what Schumpeter liked about it. Every producer and seller is running scared—placing bets, working his tail off, watching his back. Andrew Grove, the voluble chairman of Intel, famously quipped that only the paranoid survive in the new economy. He could have added the obsessive and the compulsive. You may exhaust yourself, but thanks to your nonstop efforts the economy is brimming with innovation. Consumers are far better off.

THE NEW ROLE OF BRANDS

Even if you provide the best X at the lowest $Y, you may still starve. That’s because there’s so much “noise” in the marketplace—so many competitors jockeying for position, so many products and services contending for space, so many messages and solicitations vying for attention—that customers may never find you. You occupy but one booth in a giant worldwide bazaar in which tens of millions of other sellers are trying to lure customers their way. With millions of Web pages, 1,500 television channels available by satellite dish, plus the distractions of instant messaging, e-mail, fax, cell phones, videos, personalized mailings, an almost infinite capacity for custom design, and, soon, exponentially more of everything through broadband—how do you get yourself noticed amid the clamor? Or, to put it in Internet-speak, how do you attract traffic and eyeballs?

Your potential customers have the same problem, only in reverse. They’re overwhelmed with information—sales pitches, commercials, bids, choices, visual clutter, noise. The emerging economy gives them great power to get what they want, if they can find it. As their choices escalate, so does their confusion. They need trusted guidance about where to find what they’re looking for.

Word of mouth is surely helpful, to you and to them. A satisfied customer may tell her best friend or first cousin about the great deal she got from you, and this conversation may well lead to other sales. Sometimes Internet gossip can generate a powerful “buzz,” creating almost instant demand for a particular movie or CD. But gossip is not especially reliable. Besides, by the time word spreads like this, your rivals will be on the move. Anything consumers learn, your rivals can learn just as quickly.

Mass marketing is inefficient because there’s not likely to be a mass market for what you produce. You might try direct marketing—advertising in places where people who are apt to buy Xs and Zs are likely to lurk, or telemarketing to computerized lists of people who have bought similar products or services in the past. But this, too, is an expensive way of finding customers. You’re still reaching a lot of people who have no conceivable interest, and you’re missing many who would be interested.

Your best bet for finding your customers—and for them finding you—is to link up with a big brand that has a reputation for reliability. Trustworthy brands are becoming consumer guides through the jungle of the new economy. Their profits come from pocketing a portion of what consumers pay for what they find.

A well-known brand (including Internet portals and Web sites) may
appear
to have a large organization behind it, because its reputation is large. But in the new economy it need not have many—or any—tangible assets or employees. In the old industrial economy, large enterprises controlled large-scale systems of production and depended on economies of scale. In the new economy, businesses depend on economies of trustworthiness. Their economic value comes not from assets they own or employees they supervise but from the domain of trust they’ve established with buyers. The only thing the new “large” enterprise needs to control and continuously enhance is its most valuable asset: its reputation for getting customers the best buy. The more buyers who come to rely on it and are delighted by what they receive, the greater its reputation for leading buyers to the best deals—which, in turn, attracts more buyers.

The “largest” enterprises will thus be the brands that enjoy the largest economies of trust, which translate into large profits and high market value. At this writing, the company value per employee at General Motors—a company still largely based on economies of scale—is less than $100,000. But the value per employee at Microsoft, which is rapidly becoming a brand-portal relying on economies of trustworthiness, is more than $12 million; at Yahoo, a pure brand-portal, it’s more than $22 million.
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Although many “dot-coms” are now worth less than they were when investors’ enthusiasm knew no bounds, it’s likely that market valuations per employee will continue to rise for the leading-edge businesses of the economy.

Disney is a trusted guide to family entertainment. Its brand-portal leads customers to family vacations, films, videos, books, music, sporting events, and family activities online. The people whom Disney employs directly and the assets over which it has direct control contribute only a fraction of these offerings, and that fraction will decline in the future. Most “Disney” products and services will be produced independently. Disney will preselect them to be consistent with—and thus enhance its reputation for—high-quality family entertainment, and will take a small commission (or licensing fee, or markup) on the sale of each. If managed well, the Disney brand-portal will continue to develop greater economies of trust while depending less on its own economies of scale.

Dell has become a brand-portal for computers, and could easily extend its franchise to include other office equipment, telecommunications devices, and anything else that helps buyers work more efficiently. Dell makes none of its computers directly. It links its growing customer base with its widening base of suppliers over the Internet. Dell’s subcontractors then assemble to order. Dell only attracts the customers—the eyeballs—and controls for quality. Then it collects a commission on each sale.

Most movies today are produced by small entrepreneurial groups that contract with “big” Hollywood studios to market and distribute their creations. At this writing, CBS/Viacom owns Nickelodeon, which produces the popular, cheerfully repellent
Rugrats
cartoons. But the actual work of creating them is done by a small independent group of animators that contracts with Nickelodeon. That is very much the case for the Rugrats movie, book, Web site, and other seemingly inexhaustible manifestations as well. Independent groups of workers create almost every other entertainment product, too. More than 90 percent of the roughly seven thousand entertainment firms in the Los Angeles area employ fewer than ten employees.
⁷

Soon, record companies will no longer be in the business of manufacturing and distributing anything. What’s the point, when music flows through the Internet like water through plumbing? If they’re to survive, big brands like Warner Music, EMI, and Sony will have to specialize in finding great recording artists, and in marketing themselves to customers as great guides to the music customers will enjoy.

Every big brand is on the way to becoming a Web site or portal that electronically links the right buyers to the right sellers. Yahoo is a major gateway to Internet content; Charles Schwab, to financial services; Amazon.com, to books and music (and, most likely in the future, to any other intellectually stimulating or entertaining product that can be readily packaged and delivered). Other “large” businesses that once made things are transforming into matchmaking brands. IBM is making less of what it sells; more of its business is providing advice and technical assistance, and much of it over the Internet. Cisco’s outside contractors take orders directly from its customers, and ship data-networking equipment without a Cisco employee’s ever seeing it.

Harvard University is becoming the world’s preeminent brand-portal for learning. It’s the second most widely recognized brand in the world, just behind Coca-Cola, although McDonald’s is closing in. Harvard confers its prestigious franchise on a wide range of research centers, institutes, executive programs, shirts, hats, pillowcases, stuffed animals, a health plan, a hospital group, magazines, journals, and a publishing house. It employs directly only a small fraction of the people who produce these goods and services; it collects royalties or commissions on the work of the rest.

Several years ago, I wrote a book that was published by Harvard University Press, and I still occasionally receive modest royalty checks from its sales. From time to time I write articles for the
Harvard Business Review
and am paid a small sum for them as well. So in this sense I’m still selling some of my services under the Harvard brand. Harvard retains most of the income paid by the recipients of my efforts, and remits the rest to me. The pay is not much, to be sure, and more erratic than it was when I once served on Harvard’s faculty, but I profit from the institution nonetheless.

As major nonprofits become brand-portals to a wide range of profit-making enterprises, the distinction between nonprofit and for-profit is breaking down, although the Internal Revenue Service has yet to catch on. Nonprofit museums house for-profit retail stores and restaurants; they promote online for-profit gift shops, featuring knickknacks made by for-profit knickknack makers; they rent their rooms and galleries for corporate functions and license their trustworthy names to a range of products sold for profit. Harvard is well positioned to be Harvard.com—a leading brand-portal for a wide range of educational services through the Internet, gathered from suppliers all over the world (some of them for-profit) and sold to people all over the world who have come to the Harvard brand as a trustworthy guide.
⁸
Some nonprofit brands are shedding their nonprofit cloaks to reveal what they’re really selling. The New York Stock Exchange, nonprofit since its inception, is being reborn as a for-profit corporation. It has no other practical option. Electronic markets have been drawing customers away from it. The only way the Big Board can compete is by turning its brand into a profit-making portal, and becoming an e-market itself.

A CAUTIONARY NOTE ON THE FRAGILITY OF TRUST

In the older economy, brands stood for particular products or services. Everyone understood that Ivory was a soap, and Disney a particular kind of filmmaker. The purpose of the brand was to induce consumers to buy particular, identifiable things. A company with a well-known brand name might extend its product line, but buyers still used the brand as a means of identifying specific goods or services. But in the emerging economy—with all its choice, noise, and clutter—buyers often don’t know what they want, and use the brand-portal as a means of discovering it. Major brand-portals represent
solutions
rather than specific products. Disney is no longer a kind of cartoon. It’s a guide to good family entertainment, available from a vast array of providers.