Kogan Page - Business Solutions on Demand - Transform the Business to Deliver Real Customer Value docx

Business Solutions on Demand: Transform the Business to Deliver Real Customer Value
by Mike Cerasale and Merlin Stone
ISBN:0749441720
Kogan Page © 2004
This motivational and fast-paced book emphasizes that for businesses to compete and survive, they have to
exceed customer expectations. The book shows how companies can increase sales and improve margins by
introducing a range of solutions.
Table of Contents
Business Solutions On Demand—Creating Customer Value at the Speed of Light
Foreword
Chapter 1
-
Business Strategy and Transformation
Chapter 2
-
Transformation in Food Retailing
Chapter 3
-
The Low-Cost Business Model
Chapter 4
-
The Solutions Business Model
Chapter 5
-
Transformation in the Information Technology Industry
Chapter 6
-
Industries transforming
Chapter 7
-
Business Innovation

Chapter 8
-
The Business Innovator
Chapter 9
-
Solution Creation and Delivery
Chapter 10
-
The Customer Relationship Manager
Chapter 11
-
Solution Marketing
Chapter 12
-
The Industry Marketing Manager
Chapter 13
-
Knowledge Management
Chapter 14
-
The Knowledge Manager
Chapter 15
-
Business Design
Chapter 16
-
Change Management
Index
List of Figures
List of Tables

Business Solutions on Demand: Transform the Business to Deliver Real Customer Value
by Mike Cerasale and Merlin Stone
ISBN:0749441720
Kogan Page © 2004
This motivational and fast-paced book emphasizes that for businesses to compete and survive, they have to
exceed customer expectations. The book shows how companies can increase sales and improve margins by
introducing a range of solutions.
Table of Contents
Business Solutions On Demand—Creating Customer Value at the Speed of Light
Foreword
Chapter 1
-
Business Strategy and Transformation
Chapter 2
-
Transformation in Food Retailing
Chapter 3
-
The Low-Cost Business Model
Chapter 4
-
The Solutions Business Model
Chapter 5
-
Transformation in the Information Technology Industry
Chapter 6
-
Industries transforming
Chapter 7
-

Business Innovation
Chapter 8
-
The Business Innovator
Chapter 9
-
Solution Creation and Delivery
Chapter 10
-
The Customer Relationship Manager
Chapter 11
-
Solution Marketing
Chapter 12
-
The Industry Marketing Manager
Chapter 13
-
Knowledge Management
Chapter 14
-
The Knowledge Manager
Chapter 15
-
Business Design
Chapter 16
-
Change Management
Index
List of Figures

List of Tables

Back Cover
Based partly on IBM’s own transformation, and partly on the transformations that IBM has helped its clients to achieve,
this ground-breaking book shows how companies can increase sales and improve margins by introducing a range of
solutions.
It draws upon IBM’s highly readable and fast-paced, Business Solutions on Demand emphasizes that for today’s business
to compete and survive, it has to exceed the expectations of its customers.
With contributions from a host of
why corporations need to provide business solutions to stay competitive;
why business customers want to buy solutions;
what it takes to move from supplying products and services to creating and delivering solutions;
how you can learn from the experiences of leading suppliers of business solutions.
Business Solutions on Dem and will be a stimulating read for all business leaders, sales and marketing professionals and all
those committed to improving business performance. If that sounds like your business agenda, make sure this important
book is top on your reading list.
About the Authors
Mark Cerasale is a Senior Consultant in IBM’s Business Consulting Services division. He specializes in customer
management, e-business and solution transformation, helping clients to improve business performance through
innovation, operational efficiency and customer loyalty.
Mark’s consulting experience covers many sectors, including automotive, chemical and telecommunications, electronics
and IT. For several years he was responsible for managing IBM client relationships and providing some of the world’s most
successful companies with information technology-enabled solutions. Mark, together with Merlin Stone, has co-authored
several articles and management briefings, and has contributed to many white papers and books.
Merlin Stone is Business Research Leader with IBM’s Business Consulting Services division, where his role combines
consulting and marketing with the development of business research partnerships with IBM’s clients and partners and
various universities. He runs he IBM Marketing Transformation Group and is a director of The Database Group Ltd, as well
as Qci Ltd, an OgilvyOne company that specializes in customer management consulting. His consulting experience covers
many sectors, including financial services, utilities, telecommunications, travel and transport, retailing, automotive, energy
and IT.

Merlin is also the IBM Professor of Relationship Marketing at Bristol Business School and the author of many articles and
over twenty books. He is a Founder Fellow of the Institute of Direct Marketing, a Fellow of the editorial advisory boards of
several key journals. The CIM recently selected Merlin as one of the world’s 50 leading marketing thinkers. He has a first-
class honours degree and doctorate in economics.


Business Solutions On Demand—Creating Customer
Value at the Speed of Light
Mark Cerasale and Merlin Stone
London and Sterling, VA
Publisher’s note
Every possible effort has been made to ensure that the information contained in this book is accurate at the time of
going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however
caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result
of the material in this publication can be accepted by the editor, the publisher or any of the authors.
First published in Great Britain and the United States in 2004 by Kogan Page Limited
Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under
the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in
any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic
reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction
outside these terms should be sent to the publishers at the undermentioned addresses:
120 Pentonville Road
London N1 9JN Sterling
UK
22883 Quicksilver Drive
VA 20166-2012 USA
www.kogan-page.co.uk
© IBM Corporation, 2004
The right of the IBM Corporation to be identified as the author of this work has been asserted by them in
accordance with the Copyright, Designs and Patents Act 1988.

ISBN 0 7494 4172 0
British Library Cataloguing-in-Publication Data
A CIP record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Cerasale, Mark Vincent, 1969-Business solutions on demand : creating customer value at the speed of light / Mark
Cerasale and Merlin Stone 1st ed.
p. cm. ISBN 0-7494-4172-0
1. Business planning. 2. Strategic planning. I. Stone, Merlin, 1948-II. Title. HD30.28.C415 2004 658.4’012 dc22
2003024779
Typeset by Saxon Graphics Ltd, Derby Printed and bound in Great Britain by Clays Ltd, St Ives plc
To Stefania (my wife), Vincent and Jillian (my parents) and Lisa (my sister) Mark Cerasale
To my wife Ofra and daughters Maya and Talya Merlin Stone
Author profiles
Mark Cerasale is a Senior Consultant in IBM’s Business Consulting Services division. He specializes in customer
relationship management and business transformation. For several years Mark worked as a Client Manager,
providing IT-enabled solutions to some of the world’s most successful companies. As a consultant he has helped
many clients to improve their business performance through solution transformation. Please visit markcerasale.com
for more information.
Merlin Stone is Business Research Leader with IBM and a director of QCi Ltd and The Database Group Ltd. He is
a Founder Fellow of the Institute of Direct Marketing, a Fellow of the Chartered Institute of Marketing and is on the
editorial advisory boards of many journals. He is IBM Professor of Relationship Marketing at Bristol Business
School and a prolific author with 25 titles to his name.
List of contributors
Julie Adams is a Managing Consultant in IBM’s Business Consulting Services division. She specializes in
organizational change management and organizational development. Over the last 10 years, she has developed
particular expertise in working with companies to get the best results from large scale business change
programmes, whilst minimizing impact on day-to-day business.
Alan Clark is a Management Consultant in IBM’s Business Consulting Services division. He focuses on delivering
business-tobusiness sales force improvement solutions. In recent years he has worked with many international
companies where a key factor in sales productivity improvement has been the shift away from traditional product

selling.
Howard Cox is Professor in International Business History at the London South Bank University. Professor Cox
recently led a two year Leverhulme Trust funded project with Simon Mowatt and Martha Prevezer investigating
technology and industrial change. He has published widely, including articles in Business History, The Business
Economist and the OUP book on the history of BAT, The Global Cigarette.
Lucia Cuttle is Automotive Marketing Manager with IBM’s Industrial Sector division. She is responsible for
marketing IBM’s products, services and solutions to the automotive industry across Europe, the Middle East and
Africa.
Bryan Foss is Customer Insight Solutions Executive within IBM Financial Services. Bryan works with retail banks,
insurers, financial markets and other financial services companies globally. Bryan is a joint author of four other
publications with Professor Merlin Stone, Fellow of the Chartered Institute of Marketing, IT editor of the Journal of
Financial Services Marketing and is a frequent presenter at business conferences around the world.
John Griffiths is a Client Executive in IBM’s Sales and Distribution division. He has over twenty years experience
in selling and implementing complex IT solutions and services in the industrial sector. As a management consultant
he has advised many major international companies on their Customer Relationship Management (CRM) strategy,
knowledge management and IT strategy to support their transition from product to solution businesses.
Simon Mowatt is Senior Research Lecturer at Auckland University of Technology and Visiting Fellow at the Centre
for International Business History at the University of Reading. His interest is in technological change, business
networks and industrial transformation. Simon has published in journals such as Industrial and Corporate Change
and Industry and Innovation.
Martha Prevezer has worked at NEDO, London Business School, the Bank of England, South Bank University and
is currently at Birkbeck College. She has published widely on biotechnology and has coauthored several books
examining the role of clusters in economic development.
Glenn Taylor is a Client Executive in IBM’s Sales and Distribution division. He has 30 years experience in the IT
industry, of which he spent 14 in a sales role, and has applied his skills in large enterprises as well as start-ups.
Abigail Tierney is the EMEA Marketing Manager for the Strategy and Change Practice within IBM Business
Consulting Services. She works with consultants, customers, academics and influencers to drive business value
and deliver thought–leadership marketing.
Kevin Wheatly is the Learning and Knowledge Industrial Sector Lead within IBM’s Business Consulting Services
division in Europe, the Middle East and Africa. He is responsible for improving Knowledge Management and

Learning across the Industrial Sector practice. He has worked for IBM for over five years in various Knowledge
Management roles both internally and assisting IBM clients.


Foreword
Overview
I wonder why you have chosen to look at this book. Maybe you, like me, have begun to sense important changes in
the way that some buyer–seller relationships have developed. The growing dominance of the customer is
provoking new and radical changes in business relationships: the growth of virtual businesses, networks of
alliances and new, complex, long-term partnerships between suppliers and customers. If you see this in your own
business or industry and want to understand more about what it takes to exploit this change effectively, I believe
this book will help you.
It shines a light on this new and changing world – where the boundary between one organization and another
becomes ever more complex and where what is deemed valuable migrates away from products and even services
towards solutions and experiences. The era of a mass-customized service – blending industrial economics and
scale with bespoke outcomes – has begun. It is a world where we in IBM have already staked out a leading
position and one we believe passionately will continue to develop in market after market.
This book breaks new ground. It is an exposition of how companies moving down this road work to transform both
what they and what their customers do. Maybe you see this phenomenon as nothing new – a mere shift in the
division of labour between supplier and customer.
Maybe you see this as fundamentally no different from the ancient mercenary soldier or, in recent times, the
changing services of accounting, recruitment, marketing, communications, customer service businesses and many
others. I see the scale and economics of this trend as something different – not merely activity substitution but the
transformation of the commercial model.
Making this kind of jump in a business is tough. Many know this from their own bitter experience. For as suppliers,
the continually changing requirements for staff skills, technology, commercial approach, financial management and
programme structure combine with the challenge of managing totally new economics during transition. Business-
as-usual management approaches do not succeed, and new approaches are needed to make the change quickly
and successfully.
If you are considering making this change, then this book is for you. It is not a recipe, nor even a menu. It is more

of a guide – to the journey towards more effective and efficient, intensely partnered relationships.
I hope that it stimulates your thinking and, encourages you to be bold, and, if you are already on the journey, that it
gives you ideas that enhance your speed and direction. Finally, I hope that it makes you think deeply about what
you need to do to give your people and partners a more exciting and acceptable journey.
I wish you success.
Rod Street,
Partner, IBM Business Consulting Service


Acknowledgements
We would like to thank the following people for their support and contributions during the creation of this book: Paul
Clutterbuck, Iain Devine, Bryan Foss, Rod Street, Phil Walker, Jane Ashton, Maikel Vlugt, Alan Flack, Rob Smith,
Anthony Marsella, Kevin Bishop and Julie Abbott.
We also want to thank the many IBM clients whose experience of transformation we drew upon in writing this book.
We are all learning together.


Chapter 1: Business Strategy and Transformation
Mark Cerasale
INTRODUCTION
Managing a successful company is tough. The pressures are greater than ever. Satisfying the often conflicting
needs of customers, shareholders and employees has never been more challenging. Increased competition and
unpredictable change mean it is no longer enough for business leaders to maintain a steady hand on the tiller. To
succeed, they must plot a course, sail rough seas, explore uncharted waters and be prepared for the unexpected
along the way.
Business strategy is about deciding what to do. It requires more than best-practice benchmarking, cost-reduction
initiatives and one-off process re-engineering. These are often focused on operations. Business strategy is
grounded in a vision of the future and is oriented towards innovation and growth. Only when you know where you
are trying to reach can you work out how to get there. A business design provides a blueprint for the acquisition
and development of capabilities, enablers and the customer interface needed to create and deliver customer value.

New business designs are emerging.
Today’s business environment
Powerful forces such as globalization, deregulation and greater access to capital transformed business during the
1980s and 1990s. New management approaches, information technology, the Internet and increasing customer
power have altered the competitive landscape for ever. Customers are more demanding: some want lower costs,
others want solutions. Markets have become saturated and competition in many industries is intense. Today,
industries are converging and change is unpredictable. Many products and services are similar, perhaps
commoditized. To succeed, companies must innovate, grow and reduce costs simultaneously.
The economic growth of the late 1990s ended with a downturn in most economies. The new economy of continual
growth was short-lived. After 2000, expansion plans were put on hold. Cost-cutting started. The events of 11
September 2001 and the subsequent explosion of global terrorism changed the geopolitical landscape. As if things
were not complicated enough, a string of corporate scandals undermined the public’s trust in private enterprise and
increased demands for greater inspection and regulation.


BUSINESS LEADERS FACE INCREASING PRESSURE
Nowhere is the pressure for better performance greater than at the very top. According to a survey carried out by
consulting firm Booz Allen Hamilton, ‘Companies are setting higher standards of performance for chief executive
officers than ever before, and CEOs are falling short in record numbers.’ Charles Lucier at Booz Allen Hamilton
commented, ‘Business leaders are enduring scrutiny and pressure unseen since the Great Depression… There is
no longer any safe haven for chief executives who can’t deliver superior results.’
[1 ]
Corporate responsibility
Charitable and governmental organizations have long been aware of their responsibilities and commitments to the
communities in which they operate. Companies and their employees willingly give their time and money to
charitable causes. However, for much of the 20th century it was rare to find environmental and societal issues as
top priorities in most private companies. Things have changed recently. There is more awareness of equality of
opportunity, ‘green’ issues and social responsibility. The many corporate scandals and financial irregularities have
brought the latter to the fore. Executives are distracted by the need to satisfy new rules. The need for reporting has
increased. There is some risk too that governance worries may encourage business leaders to become overly

conservative at a time when more innovation and growth are needed. The need for strong leadership, moral
commitment and a renewed focus on creating value has never been greater.
Today the symbiotic relationship between companies and their communities is better understood. Many business
leaders would concur with the view expressed by Lou Gerstner, former chairman and CEO of IBM: ‘[C]orporations
succeed only if they operate in a healthy and vibrant society. They need the communities where their customers
and employees live to be strong, as much as they need successful research, planning and advertising. Contributing
to their communities is, therefore, good business, too.’
[2 ]
The Internet enables charities, environmental groups and communities of consumer interest to come together
across the world and has increased their power. Today, environmental issues influence political, economic and
corporate policy-making. Some of the world’s largest oil companies are reinventing themselves to stay in tune with
public opinion. They are changing their brands, adapting their business designs, executing new strategies and
investing in new markets such as renewable energy. In the future, pressure from future generations may cause
more change in industries deemed to be environmentally or socially ‘unfriendly’.
Tough new legislation relating to the disposal and recycling of consumer goods, such as refrigerators and cars, has
forced manufacturers to redefine their product life cycles. Sophisticated buyers are beginning to question the need
to own products at all. There is more demand for services. According to environmentalists Paul Hawken and Amory
and Hunter Lovins, ‘mere product-sellers will become suspect. Why – a prospective buyer may ask – if your
product delivers its service with all of the operational advantages you claim, don’t you want to capture those
advantages for yourself by owning the product and just providing me with its service?’
[3 ]
Partner value
For much of the 20th century, manufacturing was the main driver of growth. Economies grew along with large
corporations. This growth rested on massive investment, managerial control, mass production,
standardization, and the creation of large markets through lowering costs and prices. Aggregation worked. The
vertically integrated enterprise became the dominant organizational model. Many of the world’s largest companies,
such as Ford, owned and managed their entire value chains. They controlled brands, technology, access to
markets, customers, capital and business talent.
Today, competition has increased and change is unpredictable. Success depends more on agility and focus.
Customers are more demanding and companies must ‘sense and respond’ to their needs. New technologies such

as the Internet allow companies to come together in value networks, where scale is less important. In the past,
assets and managerial structure were added to support growth. In the future, networks of companies will come
together to innovate and create growth. A network economy is emerging in which success will be achieved by
focusing on the very few powerful forces operating in any arena and harnessing them to create exceptional
customer value.
Partnering reduces costs, improves focus on core competencies, can help a company enter new markets and
provides opportunities to create exceptional customer value. According to a recent report, ‘Of the 403 executives
surveyed on this subject by the Economist Intelligence Unit, 65% reported that their company’s dependence on
external relationships to achieve business objectives had grown substantially over the past three years. A similar
proportion expected that dependence to increase significantly again over the coming three years.’
[4 ]
Partnering comes with its own challenges. Most companies have little experience in finding and attracting strategic
partners and building relationships with them. Successful partnerships are built on enduring relationships between
individuals and groups. They require investment over time, exceptional mutual understanding, extraordinary trust
and a clear sense of purpose.
Employee value
For much of the 20th century, manual workers were common in most organizations. Managers were concerned
with how to organize their work and how to improve their productivity. Today, knowledge working has replaced
physical labour in many industries. The knowledge worker, ‘the man who puts to work what he has between his
ears rather than the brawn of his muscles or the skill of his hands’,
[5 ]
is now predominant. Knowledge-intensive
industries, such as software and biotechnology, have emerged. Even industries such as manufacturing and
retailing rely on more information.
In many services organizations, assets such as client relationships, goodwill, ideas and talent are intangible and
people-oriented. Over a decade ago, Fred Moody wrote in the New York Times Magazine, ‘Microsoft’s only factory
asset is the human imagination.’
[6 ]
Today, physical assets, such as industrial machinery, are rarely sources of
sustainable competitive advantage. When motivated, employees create value through their ideas and their ability to

innovate. The workforce, and how it is organized and managed, is an increasingly important source of competitive
advantage.
However, the job for life is a thing of the past. Few workers have career horizons of more than five years and many
have several careers. Valuable information exists in employees’ heads in the form of knowledge – of how a
process works, a machine operates or a technology integrates. Knowledgeable employees are in short supply and
prone to move on if they are not treated well. As they move between companies, they disseminate valuable
knowledge. Companies are under pressure to attract and retain their human assets; a ‘war for talent’ is raging.
The best and most successful employees want to work for the best and most successful companies. Most
employees want a career, a decent rate of pay, respect from co-workers and a boss who supports them. Some
employees are even more powerful and demanding. A recent study concluded that factors such as corporate social
responsibility (CSR) are beginning to figure heavily in an employee’s choice of employer: ‘there is an accumulation
of evidence which shows that an organization’s reputation in the field of business ethics and CSR can tangibly
affect its attractiveness as an employer. In a tight labour market, a positive employer “brand” can make a real
difference.’
[7 ]
The most educated, highly motivated and capable employees are in short supply. A new generation of software
tools is emerging to help employers manage their costs – for example, by improving utilization rates in services
industries. Similarly, tools are emerging for workforce development. These tools aim to improve productivity by
enabling managers to match skills to positions and will help identify the best employees and support succession
planning. Technology will enable internal forecasts and external trend analyses to be combined to provide better
forecasting of workforce needs.
Shareholder value
Many people lost their investments in the crash that followed the hi-tech and Internet stock boom of the late 1990s.
Today, investors have little hunger for a return to the roller coaster of fortunes experienced then. Investors are
more conservative and want to avoid great risks. Today they want a reasonable rate of return balanced over the
short and the long term. Investors want steady growth and more consistency. If a company does not create
shareholder value through earnings, investors will withdraw their money, stock value will drop and access to future
capital will be blocked.
Investors are more knowledgeable and sophisticated. They have learned that value from assets is more important
than value of assets. They know, too, that bigger is no longer necessarily better. Shareholders value profits over

revenue and market value over market share. Today’s sophisticated investors have moved their gaze from
technology, infrastructure and fanciful business concepts to real-world business strategy and design. Investors are
looking for companies to innovate, grow and reduce costs at the same time. The need for innovation has never
been greater.
Shareholders are more demanding and will make their voices heard on all manner of issues, from the environment
to executive pay. In an article in the London Sunday Times entitled ‘The rewards should be justified by the results’,
Peter Jauhal noted, ‘Executive pay is under the spotlight again, with public concern mounting over the justification
being offered for some remuneration packages… we may be seeing a new activism on the part of shareholders.’
[8 ]
Despite all this, most business leaders are optimistic about the future. They continue to focus on achieving cost
reductions and improving productivity. Fluctuating markets cause inefficiencies such as over-capacity in services
and over-supply in industries, increasing costs. Some suppliers have introduced adaptive or ‘on demand’ services
to bring their customers’ operating costs in line with market fluctuations.
According to a study conducted by the Economist Intelligence Unit,
Despite executives’ expectations of better economic times, corporate strategies remain focused on efficiency
discipline, cost control and lean operations. Companies are hunkering down around their core businesses,
and striving to strip away any activities that don’t constitute core competencies, whether through outsourcing
or divestment. Mergers and acquisitions are generally viewed as too risky or too costly, though the slack
global market offers some firms opportunities to acquire weak rivals or to ‘cherry pick’ top talent. Instead
companies are increasingly turning to looser partnerships and alliances.
[9 ]
Best practice is operational, not strategic
Best-practice benchmarking is often used to cut costs. It is one of the most widely used management tools. In
many ways, it makes much sense to use best-in-class strategy, organizational structure, processes and products
as models for re-engineering. It can help achieve quick improvements and is appealing to investors, who often feel
reassured when it is used. According to Philipp Nattermann, ‘Best practice benchmarking – the measurement and
implementation of the most successful operational standard or strategy available in an industry – can be one of the
most effective tools for increasing a corporation’s efficiency, productivity, and, ultimately, earnings.’
[10 ]
However, taking a best-practice approach can turn out to be the antithesis of innovation and growth. A major

drawback of best-practice benchmarking is that it can ultimately kill margins. When an innovation enables a
company to create a new market and capture high margins, new entrants are attracted and margins eventually go
down. Margins are cut for all players in the market: the first movers, ‘me toos’ and late arrivals. In some companies,
imitating successful competitors too often determines what they do. They do not understand that best-practice
benchmarking is an operational tool, not one for making strategy.
For years, companies have focused on occupying a position in the market already staked out by their quickest and
most successful competitor. Soon companies begin herding, like lemmings, around the best-practice companies’
business design. Products and services become commoditized and margins are eroded as competition increases
for smaller slices of customer and industry resources. Conforming to the opinions and behaviour of others is natural
human behaviour. The same behaviour applies to companies and strategy. Warren Buffett once famously wrote,
‘Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming
has ever received bad press.’
[11 ]
According to Philipp Nattermann,
Best practice doesn’t always equal best strategy. Best practice benchmarking, rightly viewed as one of the
most important tools for improving operational efficiency, can be a doubleedged sword. Managers must
guard against transforming what is a purely process-related technique into the overriding goal of strategic
decision making. When industry competitors begin to herd around a single strategy, declining margins are
bound to follow.
[12 ]
Business process re-engineering is also an operational tool. Approaches such as Six Sigma were widely adopted
in the 1990s. Business process re-engineering aims to reduce costs and complexity in the way activities are
performed and at the same time improve customer satisfaction. Some companies achieved significant benefits
from process reengineering; others were less successful. While the primary goal of process re-engineering is
usually improved customer satisfaction, the unstated aim is often cost reduction.
[1 ]
Booz Allen Hamilton, CEO succession 2002: deliver or depart [Online] www.bah.com [accessed 12 May 2003]
[2 ]
Louis Gerstner, Who Says Elephants Can’t Dance?, HarperCollins, London, 2002 (p 273)
[3 ]

Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 90)
[4 ]
The Economist Intelligence Unit, Extending the Enterprise, The Economist Intelligence Unit, London, 1999 (p 4)
[5 ]
Peter Drucker, The Effective Executive, Butterworth-Heinemann, Oxford, 2001 (p 3)
[6 ]
Fred Moody, Mr. Software, New York Times Magazine, 25 August 1991 (p 56)
[7 ]
The Work Foundation and The Future Foundation, The Ethical Employee, 2002 (p 1)
[8 ]
Peter Jauhal, The rewards should be justified by the results, Sunday Times (London), 7 July 2002 (Business
Section)
[9 ]
The Economist Intelligence Unit, CEO Agenda: Corporate priorities for 2003, The Economist Intelligence Unit,
London, 2003 (p 2)
[10 ]
Philipp M Nattermann, Best practice does not equal best strategy, McKinsey Quarterly, no 2, 2000 (pp 22–31)
[11 ]
Warren Buffett, Letter from the chairman, Berkshire Hathaway Annual Report, 1984 (quoted from Charles
Roxburgh, Hidden flaws in strategy, McKinsey Quarterly, no 2, 2003, p 35)
[12 ]
Philipp M Nattermann, Best practice does not equal best strategy


BUSINESS STRATEGY
Business strategy is about deciding what to do. It aims to create value for all stakeholders: customers,
shareholders, employees, business partners and the wider society in which they all reside. While productivity
improvements and cost reduction are necessary, they may not constitute good strategy. Downsizing and re-
engineering provide opportunities to become as efficient as the next company. They are necessary but they are not
strategic. Though short-term tactics and long-term strategy are not mutually exclusive, strategy should be oriented

towards innovation and long-term growth.
In today’s competitive markets, change is unpredictable. Innovators, not imitators, will achieve exceptional growth
over the long term. The rewards for imitation are less attractive. Competition has moved from individual products
and services to the level of corporations and their entire extended enterprises. Companies now compete to create
and lead industries and markets. To become an industry leader and to retain that position, a company must take
charge of the process of industry transformation. Business leaders must invent new industries and reinvent old
ones. Strategy must be oriented towards innovation and growth.
Innovation and growth
Business leaders should look for ‘white-space’ areas of opportunity on the strategic landscape. The number of
such white-space opportunities is almost unlimited. There is obviously some risk in a strategy that looks to identify,
develop and exploit white-space opportunities, but risks can be managed, and first-mover advantages make it
worthwhile. It is no longer enough to be number two or three in an industry; only industry leaders will create and
capture exceptional value.
Competitors playing catch-up will inevitably cancel any advantage, so companies must innovate constantly to stay
ahead of the game. They must keep inventing and reinventing their industries (and their strategies).
Some problems with strategy today
Today, business strategy may occur at the corporate level in the form of a major investment, such as an
acquisition, or a divestment, like selling off a manufacturing plant or business unit. Sometimes such actions form
the basis of a shift in corporate direction. All too often such strategy is thinly disguised imitation. According to Lou
Gerstner, ‘If a management team doesn’t believe that it has identified and is seriously funding new growth
opportunities, then it is likely to wander off and drink the heady brew of acquisitions and diversification – and
ultimately fail.’
[13 ]
Business strategy often appears in the form of strategic planning, which itself is often little more than incremental
tactical planning. It is often just about making the numbers add up. When strategic planning aims exclusively to
satisfy short-term shareholder expectations, it fails to be oriented towards innovation and inhibits opportunities for
significant long-term growth. Strategic planning often causes strategy to be set at a strategic business unit (SBU)
level. It is often then broken down further to business unit functions such as sales, marketing and manufacturing.
This reduces opportunities to invent or reinvent whole industries. Strategic planning can work well in stable
industries but is less suited to industries experiencing big changes.

The strategic planning tools common in many companies often fail to help business leaders in identifying and
exploiting white-space opportunities for innovation and growth. Competitor analysis and scenario planning, for
example, are largely concerned with today’s competitors and optimizing positioning in today’s industries. They do
not help business leaders position their company against competitors that do not yet exist, in industries yet to be
created. Companies that focus too much on the present will be constantly catching up with innovative competitors.
Innovative competitors stay ahead by taking control of the process of industry transformation.
A vision of industries invented or reinvented in the future requires more than contingency planning around a
number of likely scenarios. Scenario planning and technology forecasting can provide input to the creation of a
unique and compelling vision of the future but are not enough in themselves. In a world of discontinuous change
and increased uncertainty, the number of potential permutations and future outcomes is limitless. Scenario
planning usually starts with the status quo and projects forward to what might be. What is required is an approach
that creates a future vision of what could be and then works back to what must happen for that future vision to
become a reality.
[13 ]
Louis Gerstner, Who Says Elephants Can’t Dance? (p 228)


STRATEGIC VISION
It is hard enough to imagine, with any certainty, what things will be like five months ahead. Predicting the future five
years ahead is even tougher. However, a vision of the future is needed before a successful business strategy can
be created. The kind of vision of the future we advocate is not one that may appear if you do nothing (as is typically
created during scenario planning). The vision we propose is one of an industry that must be created, shaped and
transformed over time. For this, business leaders should seek input from the extended enterprise: customers,
employees and business partners. This input should be combined with analysis and forecasts of changes in the
external environment, many of which will be evident in the present.
This means asking and answering questions like: What new regulations or political legislation will be in place? How
will environment issues affect the way businesses operate? Which suppliers and business partners will be
important? What type of employees will be required and how many of them? Where will funding come from? How
might the needs of shareholders be different? Who will be customers? What will their needs be? Are their needs
explicit or do they need developing? Is there opportunity to create a new need and be the first to satisfy it? Which

new channels will be available? Would a direct relationship create value? Will margin exist in products or services?
Who are tomorrow’s competitors?
Strategy starts with the customer
For much of the 20th century, under-supply made suppliers powerful. Change (in the form of growth) was more
continuous, predictable and consistent, and companies increased in size. A central objective in large companies
was growth in market share. Management was focused on today’s bottom line. They attempted to make
productivity improvements in the form of lower manufacturing costs, better product quality and reduced time to
market. Companies defined themselves by what they produced rather than by the value they created for
customers.
Today, greater competition, globalization and faster imitation have caused many products and services to become
commoditized. In many markets, over-supply has caused saturation and has eroded profit margins. The customer
is now the scarce resource, not the product. Companies have started to compete for share of customer spend, not
market share. Managers have shifted their focus from the activities involved in production to those involved in
distribution and consumption.
Customers are familiar with many of today’s products and services. They have access to more information through
new channels such as the Internet. They are more knowledgeable and discerning than ever before and many
demand exceptional value. Customer relationships have come to the fore. Suppliers must compete both on the
quality and ingenuity of their products and through the quality of their customer relationships. The need for
productivity improvements has not gone away: knowledgeable and powerful customers are sensitive to pricing
anomalies.
The customer has taken centre stage. An understanding of customer needs and wants is the foundation of a
successful business strategy. Peter Drucker once wrote:
There is only one valid definition of a business purpose: to create a customer… What the business thinks it
produces is not of first importance – especially not to the future of the business and to its success. What the
customer thinks he is buying, what he considers ‘value’, is decisive – it determines what a business is, what it
produces and whether it will prosper.
[14 ]
According to The Economist,
Companies are redoubling their efforts to build better customer relationships. Judging from the results of the
Economist Intelligence Unit online survey and in-depth interviews, this orientation will permeate everything

companies do in 2003. Senior management time will be devoted disproportionately to understanding
customer needs. Technology investments will aim to leverage information about customers, to tailor products
to customer needs and to test satisfaction continuously.
[15 ]
Understanding customer needs
Some customer needs are explicit and can be quickly identified. Others are less obvious and must be developed.
In business-to-business settings, the most common way to understand customers’ needs is via face-to-face
meetings. More structured methods, tools and approaches have been developed by strategists and business
consultants. Customer needs are captured using focus groups, market research and one-to-one interviews.
However, trends can occur over many years. New information technologies such as data analysis software enable
suppliers to ‘sense and respond’ to trends that are difficult to identify.
Purchasing managers have become more sophisticated and knowledgeable. Today, new approaches such as total
cost of ownership, supplier segmentation and reduction are widely used. Some customers invest to improve mutual
understanding with their suppliers, but only if those suppliers show ability to create exceptional value. Trust may
need to be established before a meaningful relationship can begin. Establishing enduring customer relationships
often takes time and investment from both sides.
Some suppliers are unable to get access to new customers, which may be a prerequisite to understanding their
needs. This can be a problem when a company enters a new market or introduces a new product that new
customers may be unfamiliar with. Sometimes intermediaries, such as distributors, sit between suppliers and end
customers and are reluctant to share information on customer needs. They may resist introducing partners to the
customer through fear of losing influence or to avoid opportunities for disintermediation.
As markets evolve, buying responsibilities can shift and new customers may appear. Customers needing solutions,
for example, often have different roles and responsibilities from traditional product customers. For solution
customers, the specifications of the product or service are less important than their economics. For them, value
resides in the process, not the product. Value is created by how the product is used, not by what it does (its
features and functions). As a result, responsibility for purchasing decisions moves from technical specialists to
senior administrators and business executives. When this happens, a new customer interface must be put in place.
[14 ]
Peter Drucker, The Practice of Management, Butterworth-Heinemann, Oxford, 2001 (p 35)
[15 ]

The Economist Intelligence Unit, CEO Agenda: Corporate priorities for 2003, The Economist Intelligence Unit,
London, 2003 (p 5)


BUSINESS DESIGN
A business design is an architecture that may be developed over a number of years. It is an outcome of a business
vision and should provide a high-level blueprint for the creation and delivery of customer value. It outlines the need
for future capabilities (such as skills) and enablers (such as technology). It also describes the customer interface –
how products and services will be marketed, sold and distributed.
According to Adrian Slywotzky, ‘a business design is the totality of how a company selects its customers, defines
and differentiates its offerings, defines the tasks it will perform itself and those it will outsource, configures its
resources, goes to market, creates utility for customers, and captures profit.’
[16 ]
Through business design
innovation a company configures the optimal business design for serving its chosen customers. It is not enough to
wait for competitors to take the lead. Only companies that are first to see future opportunities and then first to act to
exploit them will achieve competitive advantage and rewards.
Customer value
A business design is a high-level blueprint for the creation and delivery of customer value. Some customers
demand greater value through lower costs. Customers that want lower costs are familiar with the products and
services they require and are able to choose and buy without a great deal of expert advice and guidance from
intermediaries such as salespeople. Customers that value lower costs will research their options, compare prices
and shop around for the best deal. The products they buy are usually commoditized, and cost is the key factor in
determining which suppliers they choose. Personal computer (PC) manufacturers, for example, satisfy the needs of
customers for cheaper PCs through low-cost business designs.
Some customers demand exceptional value through solutions. Solution customers need to solve complex
problems or exploit new opportunities for value creation. They may not have the specialist knowledge or the
resources required and often look to partners and suppliers for support. Suppliers help them to understand their
issues and opportunities. They can provide assistance in assessing the options and will often create and deliver
unique solutions by customizing services and products. Solutions are services-led. IBM, for example, satisfies the

needs of its customers for information technology-enabled solutions.
Customers value the benefits provided by products but are less likely to take ownership of them. In a world of rapid
change, buying products makes less sense. Some products need to be replaced or upgraded before they are even
paid for. Technology enables some products to be replaced by services. Falling information and communication
technology costs mean that information technology, such as microchips, can be embedded into many new
products. When technology-rich products are connected to the Internet they become devices for providing services
and enable the creation of customer value at the speed of light. Many manufacturers are introducing services in
response to customer needs, and, as product margins erode, are introducing services-led business models.
In creating a successful strategy to exploit white-space opportunities, it can be helpful to think of products and
services in terms of the value they create, rather than their features and functions. Thinking in terms of features
and functions limits opportunities to today’s products and services. Technology enables customer value to be
created and delivered in new and exciting ways – the same value in a new delivery vehicle. The value a telephone
answering machine creates, for example, is more effective use of time. In the past, answering machines were
hardware devices, domestic appliances. Today, enabled by computer software and communications technology,
the same value is often provided remotely as a service.
Creating and delivering customer value requires more than being ‘customer-led’. Many customer needs are
articulated; some are not. The risk with being completely customer-led is that unarticulated needs may never be
served, and those needs often offer the greatest ‘white-space’ opportunities (since they are not being served by
competitors either). Akio Morita at Sony said, ‘Our plan is to lead the public with new products rather than ask them
what kind of products they want. The public does not know what is possible, but we do. So instead of doing a lot of
market research, we refine our thinking on a product and its use and try to create a market for it by educating and
communicating with the public.’
[17 ]
Capabilities
In 1990, C K Prahalad and Gary Hamel published an article entitled ‘The core competence of the corporation’. In it
they advocated a focus on learning rather than physical assets and suggested that companies should exit activities
that do not use core competencies.
[18 ]
Core competencies are bundles of skills and technologies that enable a
company to provide a particular benefit to its customers. Core competencies are, therefore, unlike strategic

business units, which are usually defined by specific product markets. Focusing on core competencies encourages
companies to identify and exploit what they do best and enables resources to be focused on areas of innovation
and growth. Core competencies create and deliver a class of customer benefits such as ‘low-cost’ or ‘solution’.
A business design outlines the need for future capabilities (such as skills) and enablers (such as technology).
Capabilities of a company selling low-cost PCs might include selling online, call centre management, build to order
and inventory management skills. Capabilities in a solutions company like IBM include solution selling, business
consulting, programme management, service delivery and industry marketing. Some capabilities, such as
continuous innovation, knowledge management and the effective use of information technology, are common to
both business designs.
The widespread adoption of the Internet and new technologies has made working with external partners cheaper
and easier. More companies are abandoning many non-core activities. Core competency thinking has led some
companies to define themselves in terms of what they do rather than what they make. By redefining the nature of
‘served market’, core competency thinking offers opportunities for innovation, growth and the creation of new
customer value. Focusing on core competencies may take a company away from the markets it has traditionally
served and into competition with new rivals.
New competitors
The Prussian military expert Carl von Clausewitz wrote that one must judge an enemy by his capabilities, not by his
intentions.
[19 ]
Most competitive analysis focuses on existing product or service markets. As companies focus on
core competencies and industries converge, new and unfamiliar competitors emerge, often from unrelated
industries. They may try to create a new industry for your customers based on their own vision of the future. In the
United Kingdom, for example, the financial services industry is being transformed by supermarkets offering banking
and insurance services. They have access to capital and opportunities for partnering, allowing them to take on the
largest competitors.
Enablers
Enablers are tangible and intangible assets that enable things to get done. They include offices, factories, brands,
products and employees. Today, many companies are attempting to improve their balance sheets by selling off
physical assets that depreciate, often preferring to lease them instead. Partnering and outsourcing provide
opportunities to enjoy the benefits of enablers without taking ownership. Companies look to own assets only if there

is some advantage in doing so. Customer data, for example, are an enabler that companies seek to own, because
they enable better customer relationship management, although they may outsource the management of the data.
Small start-up companies, particularly in knowledge industries, may rely on a just a few enablers for conducting
business, relying on partnerships and externally provided services instead. Companies often have heritage
enablers – assets that they may have acquired and developed over many years – that can form the basis of future
business designs. IBM, for example, has a widely recognized brand that enables it to enter new product and
service markets and data centres that it uses to deliver new services.
The customer interface
The customer interface – the way a company interacts with its customers – is an increasingly important element of
any business design. For most of the 20th century, consumer demand was insatiable and products were in short
supply. During this era, management resources were focused on production. Business designs were created to
sustain product sales growth and achieve maximum operational efficiency. Marketing focused on differentiation
through product features and functions. The role of the sales force was to communicate product value. Distribution
was about getting as much product on to the market as quickly as possible.
Greater competition, globalization and rapid imitation have caused many products and services to become
commoditized. Over-supply, greater choice and access to information have made customers more discerning and
powerful. Today, companies are fighting for a share of customer spend and attempt to build enduring relationships
with customers by understanding and satisfying their needs. In many companies, marketing, sales and distribution
activities, which constitute the customer interface, have remained unchanged for decades, and nowhere is the
need for transformation more evident.
Customers demanding lower costs are familiar with the products and services they require and are able to choose
and buy without a great deal of expert advice and guidance from intermediaries such as salespeople. They require
a new customer interface. The costly field sales force can be made more efficient by adopting new technologies or
can be eliminated altogether. The Internet and telephone-based call centres provide new opportunities to interact
with customers demanding lower costs. Customers can access relevant information online, conduct research,
compare buying options and make a purchase with the minimum of cost and inconvenience. Outbound marketing
is enabled by technologies such as databases and telemarketing.
Customers demanding solutions also require a new customer interface. Customer relationship management, for
example, enables better customer management over time and improves marketing to business buyers. The role of
the sales force is shifting from communicating the value of products and services to creating value for customers.

Today, in many industries, services form the basis of enduring relationships and are substituting traditional product-
led distribution based on individual transactions. IBM, for example, has introduced industry-oriented marketing,
adopted solution selling methods, and developed business consulting and outsourcing service delivery capabilities
to support solution creation and delivery.
Sony’s strategic vision
Sony has a vision of a future in which electronics, telecommunications and information technologies are
converging. It anticipates that customers will demand new products and services through broadband networks –
which will be cheaper to use and more widely adopted. Sony is working towards a ‘personal broadband network
solutions’ business design:
Sony Corporation today [29 March 2001] announced its intention to transform itself into a Personal
Broadband Network Solutions Company for the coming broadband network society which is forecast to arrive
around the year 2005. Sony is making organizational changes aimed at deepening its interactive relationship
with millions of customers worldwide, offering a variety of products and services optimized for the broadband
society. As the broadband network era approaches, Sony will capitalize on its unique combination of
hardware and content assets.
[20 ]
Nobuyuki Idei, Sony chairman and CEO, commented:
Sony will continue to focus on and consolidate its unique resources in brand recognition, electronics
hardware expertise, entertainment business know-how and venture business development both within and
outside the company. In enhancing group corporate value, we will pursue ‘soft alliances’ with outside
companies that will complement our existing internal resources, and accelerate the pace of change.
[21 ]
Strategies develop over the long term
It may take years before all the elements of a business design are in place. Technologies and customer needs
need to be developed over many years before a new industry can be created. During that time, companies begin a
transformation journey. They build the factories, warehouses and technology infrastructure, and hire the employees
they will need. They develop new capabilities such as solution selling, business consulting or new service delivery
concepts. They may need to transform the sales force or replace it entirely with new technology. Companies may
need to get agreement on standards, test product and service concepts with customers and build alliances with
selected business partners, to prepare for and shape the emerging industry.

When to create strategy and begin transformation
The right time to create a new strategy and to transform an industry is when a company is successful, or at least
not in crisis. During periods of crisis, business leaders are distracted by firefighting activities and the required
resources are often in short supply. It becomes difficult to attract key business partners and suppliers, the most
capable employees abandon the sinking ship and access to investment capital is restricted. When shareholders
press for short-term performance improvements, the natural tendency is to cut costs rather than invest for the
longer term. The required capabilities and enablers do not get put in place and opportunities for innovation and
growth are not exploited.
White-space opportunities are often spotted first by industry outsiders who then create new business designs and
go about the business of industry transformation. Incumbents often tend to rely far too long on their traditional
business models, particularly if they have been successful. They take the view that what worked well in the past
must also work in the future. It can take a fresh set of eyes to see the wood as distinct from the trees. The
challenge for industry incumbents – leaders and laggards alike – is to continually reinvent their own industries and
create new ones. To do this they must develop a vision of the future, then configure a business design and
implement a strategy that aims at building it. The need for business design innovation and transformation is real
and immediate.
[16 ]
Adrian J Slywotzky, Value Migration, Harvard Business School Press, Boston, 1996 (p 4)
[17 ]
Gary Hamel and C K Prahalad, Competing for the Future, Harvard Business School Press, Boston, 1996 (p
108)
[18 ]
Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May–June
1990 (pp 79–90)
[19 ]
Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House
Business Books, London, 2002 (p 253)
[20 ]
Nobuyuki Idei, Sony press release, Transforming Sony into a ‘Personal Broadband Network Solutions
Company’ [Online] www.sony.net [accessed 29 March 2001]

[21 ]
Nobuyuki Idei, Sony press release, Transforming Sony into a ‘Personal Broadband Network Solutions
Company’


SUMMARY
In this chapter I examined the causes of change in today’s business environment. I concluded that these changes
have made leading a company to success much more difficult. I outlined the shifting needs of customers,
shareholders and employees, and suggested that the needs of business partners and society will figure more in
strategic thinking in the future. I argued that while productivity improvements and the adoption of ‘best practices’
are important, they are often confused with strategy. In reality, ‘best practice’ is more operational than strategic.
I proposed that companies invest at least as much into looking for opportunities for innovation and growth as they
do in reducing costs, although both are important. I argued that every company needs a vision (a view of how
things will be different) and a strategy (decisions on what must be done), and must be capable of executing it (it
must be able to make things happen). I suggested that that strategy should aim to create customer value, should
be oriented towards innovation and growth and should be based on an understanding of customer needs (both
today and in the future). I argued that strategy starts with the customer. I suggested that the needs of some
customers are changing: some customers want lower costs, others want solutions.
I proposed that business leaders should attempt to transform both their companies and their industries. The
company and the industry must be created, shaped and transformed over time. I suggested that a business design
be created (based on the business vision) to guide the transformation. The design should outline the need for
future capabilities (things the company should be able to do) and enablers (things a company should have to get
things done), and describe the customer interface (how value will be created and delivered to the customer). The
transformation journey can be long and difficult. It should start sooner rather than later.
In Chapter 2 we outline a transformation that took place in British food retailing, over several decades, during the
latter half of the 20th century. This example aims to demonstrate how whole industries can be transformed through
new business designs that create and deliver exceptional customer value. In Chapter 3 we describe how products
are changing and how low-cost business models are emerging. In Chapter 4 we describe how services are
changing and how solutions business models are emerging. In the remaining chapters we explore aspects of the
solutions business model, many of which are still evolving.

NOTES
1. Booz Allen Hamilton, CEO succession 2002: deliver or depart [Online] www.bah.com [accessed 12 May 2003]
2. Louis Gerstner, Who Says Elephants Can’t Dance?, HarperCollins, London, 2002 (p 273)
3. Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 90)
4. The Economist Intelligence Unit, Extending the Enterprise, The Economist Intelligence Unit, London, 1999 (p 4)
5. Peter Drucker, The Effective Executive, Butterworth-Heinemann, Oxford, 2001 (p 3)
6. Fred Moody, Mr. Software, New York Times Magazine, 25 August 1991 (p 56)
7. The Work Foundation and The Future Foundation, The Ethical Employee, 2002 (p 1)
8. Peter Jauhal, The rewards should be justified by the results, Sunday Times (London), 7 July 2002 (Business
Section)
9. The Economist Intelligence Unit, CEO Agenda: Corporate priorities for 2003, The Economist Intelligence Unit,
London, 2003 (p 2)
10. Philipp M Nattermann, Best practice does not equal best strategy, McKinsey Quarterly, no 2, 2000 (pp 22–31)
11. Warren Buffett, Letter from the chairman, Berkshire Hathaway Annual Report, 1984 (quoted from Charles
Roxburgh, Hidden flaws in strategy, McKinsey Quarterly, no 2, 2003, p 35)
12. Philipp M Nattermann, Best practice does not equal best strategy
13. Louis Gerstner, Who Says Elephants Can’t Dance? (p 228)
14. Peter Drucker, The Practice of Management, Butterworth-Heinemann, Oxford, 2001 (p 35)
15. The Economist Intelligence Unit, CEO Agenda: Corporate priorities for 2003, The Economist Intelligence Unit,
London, 2003 (p 5)
16. Adrian J Slywotzky, Value Migration, Harvard Business School Press, Boston, 1996 (p 4)
17. Gary Hamel and C K Prahalad, Competing for the Future, Harvard Business School Press, Boston, 1996 (p
108)
18. Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May–June
1990 (pp 79–90)
19. Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House
Business Books, London, 2002 (p 253)
20. Nobuyuki Idei, Sony press release, Transforming Sony into a ‘Personal Broadband Network Solutions

Company’ [Online] www.sony.net [accessed 29 March 2001]
21. Nobuyuki Idei, Sony press release, Transforming Sony into a ‘Personal Broadband Network Solutions
Company’


Chapter 2: Transformation in Food Retailing
Howard Cox, Simon Mowatt, Martha Prevezer, Mark Cerasale and Merlin Stone
INTRODUCTION
Transformation can occur when companies combine industry-shaping strategies with effective execution. Such
transformations occurred in the United Kingdom in the frozen foods and chilled ready meals industries during the
second half of the 20th century. More women entered the workforce after the Second World War. Pressure to
balance a full working day with household chores created opportunities for labour-saving innovations (which their
new income meant they could afford). Frozen foods offered convenience to an increasingly busy and wealthy
population. During the 1980s and 1990s, consumers became more affluent, sophisticated and discerning. They
demanded food that was easier to prepare and tastier, for which they were prepared to pay a premium. The ready-
chilled foods sector emerged.
The frozen foods sector emerged as a result of proprietary technology innovations that allowed continuous-process
manufacturing of standardized products. Vertically integrated firms dominated the frozen foods industry. In the
early days, a major challenge for frozen food manufacturers was to raise awareness of their new products. They
achieved this through mass-media advertising. Another inhibitor was the need for special cold storage cabinets in
the retail environment.
Manufacturers resolved this problem by providing them to retailers on favourable terms. In this way, frozen food
manufacturers created frozen foods markets that grew in size and diversity during the second half of the 20th
century.
By contrast, proprietary manufacturing techniques were not critical to the chilled ready meals industry. Non-
proprietary information management systems were the key to success with chilled ready meals. Chilled ready
meals used established technologies of food preservation and established distribution channels. However, the
products’ short shelf life created new and complex logistical issues, which meant that manufacturing had to be
based on batch rather than continuous process production methods. A major challenge was to match supply and
demand over relatively short time periods. This was achieved through expert supply chain management and new

inventory control systems. Vertically integrated firms are less effective in such an environment. Market-making
retailers, not manufacturers, emerged as industry leaders. Retailers were able to bring their products to customers
by leading and coordinating networks of suppliers and distributors.


THE FROZEN FOOD INDUSTRY IN THE UNITED KINGDOM
Frozen food developed in two phases. The first, beginning in the 1930s, involved introducing quick-freezing as a
way to preserve food. Quick-freezing could be applied particularly to white fish and some green vegetables. In this
phase of the development, quick-freezing had many parallels to high-speed canning, which had been applied to
other foodstuffs since the 1880s. In each case, the use of packaging facilitated the introduction of proprietary
branded goods that were supported by extensive advertising. The second phase moved beyond the simple
preservation of foodstuffs into more innovative forms of product development. In the United Kingdom from the mid-
1950s, manufacturers of frozen foods, led by the Unilever subsidiary Birds Eye, began to introduce a range of new
products such as fish fingers, beef-burgers and frozen ready meals.
The earliest applications of freezing technology to food preservation were designed to serve the catering trade.
Towards the end of the Second World War, Unilever began to develop a market in frozen foodstuffs for final
consumers. This innovation built directly on Unilever’s experience in the mass production of branded packaged
consumer goods. At that time, the company was one of the few non-US firms to have developed an extensive
management structure, with its UK-based operation featuring four product divisions (soap, margarine, oil mills and
food) overarched by a range of advisory and service departments that served the entire range of the company’s
international subsidiaries. These service departments managed the entire value chain, including activities such as
buying, marketing, transport and advertising.
The integrated value chain
For frozen food to be developed successfully into a mass consumer good, it was necessary to create new markets
upstream and downstream of production, and develop a supporting infrastructure. Upstream markets were required
in which a sufficient volume of raw materials could be delivered in a way that enabled the process of quick-freezing.
Downstream markets were required to store, handle and transport the frozen produce. Retailers were needed to
store and distribute the products to final consumers. Frozen food products were new and innovative; consumers
would have to be educated and informed about their use. Only when all these things were in place was it possible
to reap the potential benefits of the new technology.

Unilever had a long history of backward integration (of producing the food it required). A similar approach was
taken with frozen foods. Several factories were opened in the 1940s. More factories were acquired during the
1950s as sales grew. Birds Eye entered the broiler chicken industry in 1958, quickly building up its capacity to
around 20 farms, and in 1965 it acquired a controlling interest in North Eastern Fish Industries Ltd to provide a
direct source of Newfoundland cod. However, direct control over the provision of chicken and fish was eventually
abandoned as overproduction and falling prices during the late 1960s and early 1970s made such investments
uneconomic.
The policy of backward integration was not adopted for vegetables. Nevertheless, Birds Eye did develop quasi-
backward integration through the use of annually negotiated forward contracts with local farmers, to whom they
gave assurances of short-term renewal and, in many cases, provided seed. Seed was supplied to allow
standardization and quality control. This arrangement also ensured exclusivity for Birds Eye. This meant that this
activity was quasi-integrated into the Unilever structure. The response of growers was to form committees such as
the Processed Vegetable Growers Association to negotiate with Unilever on their behalf.
Creating the necessary markets downstream from the production process was more complicated. Unilever would
have to apply the skills and resources it had developed to support its other food businesses. Distribution and
handling of the products was placed into the hands of the refrigerated division of the company’s transportation
subsidiary, SPD. SPD utilized its national network of depots and vehicles in a closely coordinated operation with
Birds Eye’s own sales division. Independent wholesalers were integrated into the company’s frozen food
distribution system in parts of the country too remote to operate economically. These wholesalers were prevented
(by contract) from distributing the rival brands of direct competitors.
Creating a profitable market downstream was challenging. Unilever operated a small chain of retail stores but these
would not provide the required sales volumes. In the early 1950s few retailers had the equipment needed to display
and sell frozen food. In 1953, Birds Eye persuaded two manufacturers of refrigerated equipment to design and
market ‘open-top’ display cabinets for use by retailers. In return, the company agreed to limit its sales to those
retailers that installed them. Later, Birds Eye developed a policy of leasing refrigerated cabinets to some of its more
important retail customers on condition that the equipment was used for stocking Birds Eye products or other
products that were not in direct competition. Large retailers, such as J Sainsbury, developed their own refrigerated
cabinets in order to display a larger selection of stock and eventually began to offer their own-brand products.
Meanwhile, advertising, sales promotions and temporary price reductions were used to encourage consumers to
change their buying behaviour (by adopting the new products).

In pioneering the mass market for frozen foodstuffs, Birds Eye had to take responsibility for putting the
infrastructure in place that would enable products to be sold in sufficient volume to turn a profit. Birds Eye’s
approach was also adopted by its two main rivals, Ross Group Ltd and Findus Ltd (a subsidiary of Nestlé), which
became competitors in branded consumer markets during the 1960s. Management of the supply chain in each
case was extensive, and both companies developed integrated distribution operations, although in the case of
Findus this was a joint venture with J Lyons & Co Ltd. Their links with independent wholesalers were made under
conditions of exclusivity. However, the dominant model (integrated supply chain supported by strong brand
advertising) became increasingly vulnerable during the 1960s as new forms of organization and market segments
emerged.
The causes of change
Three developments changed the structure of the UK frozen food industry in the 1960s and 1970s. One of these
concerned the rapid growth in demand for frozen food by the catering trade, which led to a pronounced bifurcation
of the frozen food industry. The other two were brought about by increased competition in the market for frozen
food to households. These involved the development of product differentiation and market segmentation on the
one hand and the advancing power of multiple retailers on the other.
Sales of frozen food increased to caterers. New competitors, with relatively modest turnover, were able to enter the
market as a result of lower advertising and packaging costs. These changes also facilitated a broadening of the
distribution arrangements within the frozen food industry. In the past, retailers had been supplied through
manufacturers’ wholly owned distribution companies or through exclusive deals with independent wholesalers. The
growth of small-scale manufacturers serving the catering trade encouraged companies to be set up specializing in
the provision of processing, storage and distribution services.
Cold-store companies and specialist distributors entered the market, causing it to fragment. The larger cold storage
companies tended to be integrated concerns that also provided processing and distribution services. Indeed, as the
role of independent suppliers expanded, the freezing capacity of these large storage and distribution companies
began to rival those of the proprietary branded manufacturers. The increasing number of independent distributors
enabled smaller, more specialized frozen food manufacturers to enter the market. These included agricultural
cooperatives that were formed for the purpose of processing fruit and vegetables, and a number of small
manufacturing concerns that specialized in manufacturing products within a defined segment of the market
(vegetables, fish, meat products, fruit, confectionery). In some cases they specialized in a single product such as
frozen potato chips (fries) or pizzas.

Frozen food retailing helped to speed up vertical industry disintegration. The need for relatively small orders, in the
small-scale segment of grocery retailing, led to the emergence of cash-and-carry wholesalers. They acted as
intermediaries between the distributing wholesalers and the retailers. By the mid-1970s, for example, 60 per cent of
greengrocers carried a small range of frozen food, increasing the availability of the main proprietary brands of