Steven Pearlstein gets it – big time. Here is his analysis of the new business model –
Biggest Is Not Best – washingtonpost.com:
as the country slides into recession, we are going to discover that this absurd fixation on scale and growth has made many companies weaker rather than stronger. Newly acquired divisions will be shuttered, spun off and written down. And many more industry leaders are likely to follow Starbucks and Wal-Mart in slowing the pace of organic growth.
What companies in many industries are about to discover is that the competitive sweet spot may not be in being No. 1 or 2 in your category, as General Electric’s Jack Welch once famously declared, but in being slightly back in the pack, where it’s possible to deliver a more profitable trade-off between price and quality.
Think for a minute about what happens, particularly in the service sector, when companies get big. What do they do? They get more efficient. And how do they get more efficient? By coming up with sophisticated systems that allow them to produce consistent, predictable outcomes in everything they do while using as few and low-paid workers as possible.
In the restaurant business, for example, the big chains spend lots of time and money coming up with demographic and financial parameters for locating outlets. They hire executive chefs who whip up industrial-style recipes for menu items that they test on focus groups and can be replicated by line chefs with little experience and culinary flair. They come up with standard prototypes for how the restaurants will be laid out, how they’ll be decorated and equipped, what plates, uniforms, napkins and menus they’ll use. They purchase a computer system that not only takes care of processing meal orders and keeping track of the money and reordering food from the central warehouse, but also identifies any store or shift or employee producing results that are outside the desired norms. They even come up with the standard responses the hostesses and waiters use in greeting customers and handling complaints.
In the end, what you wind up with is a company that has a small corporate headquarters full of highly-paid people who design and refine these systems. At the restaurant level there are large numbers of low-skilled workers who are easily replaced and paid relatively low wages for essentially showing up and following the standard procedures. Together they create a giant company with lots of scale efficiencies producing a predictable product at a competitive price that appeals to large numbers of consumers.
The first is that these companies are coming close to having saturated the U.S. market. There’s not much more cost they can squeeze out, so they can’t stimulate additional demand through price cuts. And as a result of their relentless expansion over the past two decades, there are no new regions to enter.
At the same time, I sense there’s a growing backlash against these models from customers who are dissatisfied with formulaic products and lackluster service. This backlash has provided an opening for competitors offering something different and better, even if it is more expensive.
This is the challenge facing Starbucks and Wal-Mart. And it lies behind the recent success of former “niche” players such as Whole Foods, JetBlue, Coach and boutique hotels such as those run by the Kimpton Group. Indeed, these “middle-tier” companies are so focused on growth that, ironically, they have wound up adopting many of the same characteristics as the industry giants.
But the other reason I see an opening for mid-tier companies is that the good ones are better able to attract employees who have the creativity and initiative key to success in service industries. Those kinds of employees attach high value to autonomy and independence and don’t work particularly well in organizations where regimentation is built into the corporate DNA. And because the focus at these companies isn’t driving growth by driving down costs, they are able to offer more attractive compensation packages, particularly in the area of incentive pay.
You have already seen this phenomenon in advertising, finance and the law, where many of the brightest people are gravitating to boutique firms. And if I’m right, you are going to soon find it in mid-size retail chains that employ knowledgeable sales people rather than clueless clerks, and health insurers that assign a nurse practitioner with a name and phone number to every customer to handle everything from choosing a doctor to correcting a billing error.
So, what to do in a recession? If you follow this mid-tier strategy, refine your innovation. Rather than chasing even greater levels of efficiency and economies of scale, look at ways to improve your “customer experience.” And that doesn’t mean adding tablecloths to your coffee bar. It means looking carefully at the reasons why your customers are your customers. Just as companies are beginning to involve their customers in product development, service companies are going to have to reach out to their clients.
In the I-Cubed Economy, production will become a joint venture – not a one-directional transfer transaction. That doesn’t mean that mass produced goods and services will completely disappear. I will still want to buy a mass produced light bulb and probably ride mass transit. But customization – “just in time, just for me” – is the new production paradigm. As Pearlstein points out, this future may belong to the mid-tier companies: small enough to move rapidly and big enough to carry it off.