Disequilibrium and Disintermediation

For more than a generation, business has been extraordinarily focused on the supply chain: building it, perfecting it, defending it. And the modern corporation depends on the supply chain to continually generate profits, because organic growth has been so hard to achieve.

The great companies of the past have always taken an historic innovation—AT&T with the telephone, Ford with cars, IBM with computers—and then consolidated control by defending their distribution arm at all costs. But the fastest growing companies of today, such as Apple, Amazon, Facebook, Twitter, and Google, don’t focus nearly as much on distribution channels. Instead, their businesses are built around consumption models, and their singleminded focus is on building relationships to their family of consumers to earn their trust, to expand their role in their consumers’ lives, and to enlist them in everything from product design to service.

These twenty-first century enterprises are as focused on constantly improving their levels of trust with their customers and consumers as they are on the degrees of efficiency of supply.

And that is only half of the story. Even as this cultural shift is taking place, the nature of distribution itself is undergoing a transformation. Today, most manufacturing business models are still built around the traditional notion of a physical community of towns and roads, warehouses and delivery trucks, advertising and point of sale marketing. Not surprisingly then, most supply chains are also built around local physical stores and factories.

But what happens in a world where one’s neighborhood is as much virtual as physical? When your friends and other key influencers are scattered around the world? What happens when a single opinion, via a blog or Web posting, can influence a billion consumers on four continents? For these questions, the traditional supply centric business model has few answers.

Every great step forward in business history, from the Industrial Revolution to the brand management system to the virtual corporation, has taken place at the system level. That is, how do you coordinate assets, information, and people? Today, the Internet is the ultimate such system, bigger than any that came before. Can we be surprised then that it reverses that most traditional of business relationships, the one between manufacturer and customer? Or that the old supply model is now beginning to seek new solutions in a world in which the consumer, for the first time ever, is enthroned in the driver’s seat of the global economy?

We were given an advance warning of this trend more than a decade ago, during the so-called dotcom bubble. Unfortunately, we drew all of the wrong conclusions from that period. Even today, that era, with its creation and destruction of thousands of new companies, is typically seen as an example of wasteful runaway business growth.

To the contrary, we should look back on the dotcom era as being one of extraordinary importance. The “big idea” in the air in the 1990s was disintermediation: the notion that business systems, empowered by the new information and communications technologies, would strip out the middleman and grow more efficient in the process. The dotcom era was essentially this idea of disintermediation, propelled by the Internet, reaching the retail world—replacing traditional bricks and mortar businesses with ecommerce companies.

As we all know, the explosion of thousands of new online retailers that targeted almost every retail business from overstock inventory to groceries to pet food was followed instead by a massive shakeout in the industry that quickly killed the vast majority of those companies. The dotcom bubble was followed by the dotcom bust.

But on closer inspection, the story is much more interesting. The fact is that almost all of those ecommerce companies were retail driven enterprises, often driven by old line supply companies. And if you had looked at their business plans, you would have noticed that few of them had any idea exactly who would buy these products or services (Pets.com being the most notorious example). In fact, very few had any fulfillment capability or competitive advantage to speak of.

By comparison, those companies that did survive the shakeout— Amazon, eBay, Yahoo, Orbitz, Google—have proven to be some of the most important and influential companies of recent years. And they in turn set the pattern for the Web 2.0 social media firms such at Twitter, MySpace, Facebook, and YouTube that have redefined modern life. What did those survivors have in common? Their business was based on what customers wanted, rather than what the suppliers already had. They were the harbingers of the demand driven economy, if only we had noticed.

One of the lessons they taught is that we have now entered an era of oversupply. Oversupply is a situation where significantly more supply exists than there is demand to absorb it. Oversupply is often characterized by a lack of differentiation, with price becoming the primary factor underlying purchase decisions. As a consequence, pricing power virtually disappears, and organic growth and profitability become increasingly difficult to achieve.

The second lesson to be learned is that in an era of oversupply it is now imperative that you construct a framework in your company that encompasses and aligns everyone toward meeting not just the current but the latent and emerging demand of your highest profit customers and consumers. And before you can do that, you need to understand who those customers and consumers are, where they are, and what “need states” they exhibit as they make their purchasing decisions. The concept of need states is important for developing an in-depth understanding of demand. Need states are the circumstances or the occasions that cause someone to want something and to take action in its pursuit. Think of how Gatorade invented the need state of the “hot and sweaty” occasion and built its business around knowing more about that need state than any of its competitors.

As we’ll show you in this book, the transformation you must make in your company and the reversal you must make in your perspective will be easier than you think. This is not reengineering; this is rethinking. This is not reorganizing, it’s reshaping manufacturers, retailers, and the media into a collaborative network that will work to the benefit of all who participate. For a long time, this new model of organizing and collaborating has been intuitively felt, and now it’s real. It’s called the “demand chain.” In this book we will demonstrate the growing arsenal of tools you have at your disposal—including new mental models, more precise ways to develop pricing strategy, “demand profit pools,” and demand-led supply chains—to find and capture the highest profit customers and consumers in your market, to find safe harbors of equilibrium in an increasingly distorted global economy, and most of all, to win in the new demand based economy.

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