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Factors Affecting Success in Business:
Management Theories/ Tools Versus Predicting Changes SPYROS MAKRIDAKIS, Research Professor, INSEAD
Management theories and tools, like the fashion industry have their moment of glory and die. Very few survive and, in some cases, their passing leaves extensive corporate damage in their wake. Spyros Makridakis reviews the large number of theories that briefly blossomed from the 1960s onwards, and also looks to see if prescriptions can be learned from examples of 'excellent' companies. He advises against extrapolating from past success stories since the environment continually changes.
On 20 September 1995, the price of AT&T's shares soared, within a few hours, by almost 10 per cent - adding nearly $11 billion in value to its market capitalization. The r e a s o n - the company announced its break-up into three separate and independent firms. In splintering AT&T, Robert Allen, its CEO, accepted that buying NCR for $7.4 billion in 1991 was a big and costly mistake. His simple explanation was "We reached a time when the advantage of integration was outweighed by the disadvantage of complexity'. 1
Companies will stand a much higher chance of success in the future if they follow a strategy of expecting change and adopting an attitude which accepts that future performance will be directly linked to accurately predicting forthcoming change and correctly assessing their implications. While human beings have not been too successful at predicting technological change, one thing is certain, it is highly likely that computers and telecommunications will have a continuing outstanding impact on data processing and the performance of tasks as their costs fall and speed increases exponentially. The consequences for business and society will be dramatic.
AT&T has not been the only company to grow by buying other firms (often paying hefty premiums). During the 1960s it became popular to diversify into unrelated industries, creating huge conglomerates like those of LTV and ITT. Senseless diversification, however, produced 'average' profits, in the best of cases, as by definition a large number of business units cannot consistently outperform the average of the market. Once this simple principle was accepted, albeit empirically, after long periods of mediocre profits and underperforming stock prices, the emphasis was shifted to acquiring, or merging firms, where synergies between them could be developed and exploited - - hence the NCR deal. But AT&T's break-up shows that even synergies are illusive and that there are advantages to concentrating on one's core business - - in particular when competition is fierce.
Spyros Makridakis explores these consequences, drawing an analogy between the industrial and information revolutions. Among other conclusions, he emphasizes the importance of educating and
motivating corporatestaff to innovate in the newlycompetitive environment generated by advances in the information industry. European ManagementJournal Vo114 No 1 February 1996
AT&T, like the great majority of large companies, follows the latest of management theories, tools and thinking in its effort to improve its operational effectiveness and efficiency as well as its long-term I
FACTORS AFFECTING SUCCESS IN BUSINESS
Table 1
Major M a n a g e m e n t Theories I Have Come Across Since 1 9 6 5
Management Theory
Brief Description
Problems or Unrealistic Assumptions
Management by Objective
Setting goals through negotiations between superiors and subordinates and then evaluating performance on how well such goals were accomplished.
People play the game of setting low objectives easy to achieve. Too much paper work. Too timeconsuming.
Theory X and Theory Y
Authoritarianism (theory X) should give way to participative management (theory Y).
Participative management can reduce efficiency of decision-making and dilute responsibility.
T-groups
Encounter groups for managers aimed at increasing their sensitivity to others and making them less authoritarian.
Sensitivity gained during T-groups did not last. Some participants remain hostile toward thai r coworkers.
Management Science
Using quantitative tools and computers to improve decision-making and actual operations.
Many decisions (notably those involving people and strategy) cannot be quantified.
Matrix Management
A form of organization where an individual can have more than one boss.
Problems of conflict and split alliances can develop.
Diversification
To maintain high growth, companies must diversify into promising industries or new markets.
Difficulty in accurately forecasting promising industries/markets.
Decentralization
Decision-making is placed in the hands of line managers.
Without effective coordi nation, decision-maki ng can become ineffective.
Conglomerates
Acquiring dissimilar businesses under a single corporation.
By definition the most conglomerates can achieve is average returns.
Optimal Investment Portfolios
The risk of investing can be minimized by selecting stocks that do not go up and down at the sametime.
Past patterns in the movement of various stocks do not also hold for the furture.
The Systems Approach
The whole is much more important than the sum of its parts. Decisions must therefore be made having the w h o l e - not the parts - in mind.
Complexity increases beyond human capability if it is assumed that everything relates to everything else.
The Managerial Grid
Classifying a manager based on his/her concern towards people and/or production.
Managers cannot be classified into nice boxes. Their behaviour and motives are complex.
Econometric Models
Statistical models capable of capturing the relationship(s) among complex phenomena in order to use it to predict future situations.
Past relationships do not necessarily hold true intothe future.
Long-Range Strategic Planning
Extrapolate long-term trends in sales, demand, etc., and plan capital investments and other expansions accordingly.
The established growth in sales, demand, etc., cannot be guaranteed in the future.
S-curves and Product Life Cycles
The life cycle of products (and technologies) follows the logic of an S-curve, which can be predicted beforehand.
No S-curve can be predicted, although selffulfilling prophecies can make it seem that such a prediction is possible.
Zero-Based Budgeting
Start from scratch in making next year's budget.
Too much uncertainty for longer-range planning.
Portfolio Matrix
Products or business units are classified as dogs, cows, question marks, and stars. The objective is to get rid of dogs and to promote stars, financing them with cash generated from cows.
It assumes future stars can be identified. It ignores synergies. It can drop profitable products. It disregards competitive action and learning.
Experience Curves
As production doubles, nondirect costs decrease by a constant percentage.
It might work for mass production. But bureaucracy can wipe out economies of scale.
PIMS
Too many methodological problems and tautologies to make the results reliable and useful.
One-minute Management
An empirical database containing companysupplied information whose purpose is to discover the relationship between profitability and other factors. Strategy must be formulated at the top, where the whole picture of corporate goals and long-term visions is available. Natural resources are limited, thus their price will increase indefinitely as the size of population keeps increasing. Managers who predominantly think in the right hemisphere are intuitive, those who think mostly in the left are analytic. Such a dichotomy can be used to facilRate training and improve decisionmaking. Through empirical research, identifythe factors common to excellent companies and use them to become excellent too. Balancing praise and criticism in sixty seconds.
Management by Walking Around (MBWA)
Visiting the line people and customers to obtain fi rst-hand information.
Centralized Corporate Strategy Limits to Growth
Intuitive/Analytic Management
Searching for Excellence
2,
Individual managers have little or no say in determining the strategy for their units/ departments. Technology has lifted the Malthusian fears to growth. Products are cheaper in real prices now than in the past. Empirical research has shown no help in training or improvements in decision-making by exploiting the left/right hemispheres.
Past excellence cannot be used to achieve excellence in the future. Gimmicks do not change managers' or employees' behavior. MBWA imposes formidable time constraints. Information can be gathered much more effectively.
European Management Journal Vo114 No 1 February 1996
FACTORS AFFECTING SUCCESS IN BUSINESS
Table I (continued) Management Theory
Brief Description
Problems or Unrealistic Assumptions
Restructuring
Getting rid of unprofitable businesses or those that do not fit the corporate identity.
The challenge is to know which businesses to get rid of.
Entrepreneurship
Encourage entrepreneurial spirit (and projects) within the corporation.
The challenge is howto achieve entreprsneurship. This is not trivial.
Competitive Strategies
Analyze the competitive situation in your industry and learn to read competitive signals.
The challenge is to predict future competition, not analyze that of the past or present.
Theory Z
Adopt e Japanese style of management (life employment, job enrichment, product quality, long-term goals).
It is difficult to adopt without a Japanese culture. In France, life employment has not increased productivity.
Quality Circles
Form groups, or committees, within the firm to discuss and promote ways of improving product or service quality. Form Alliances (if necessary even with your archrival(s)) to improve your competitive position.
Helpful if quality can be improved without wasting too much time.
Global Rationalization
The market place is the world. Thus, production, marketing, finance and R&D decision must be made with such aview in mind.
How do you know future conditions? A change in exchange rates, for instance, can make all plans useless.
Total Quality Management
Sophisticated consumers demand high quality which must be provided by focusing the organization on doing so.
Although quality is essential, firms must also be concerned with other factors in order to be successful - if not survive.
Core Competences
Special skills or technologies that provide lasting competitive advantages to firms.
Core competences can change and be a disadvantage to firms that do not recognize the change.
Self-directed Teams
A small group of employees directly responsible for practically all aspects of their work.
It may be difficult to motivate the team members and trust them to make the 'right' decisions.
Benchmarking
Measuring and comparing performance against that of competitors (often those best-in-class).
It may be difficult to measure and compare exactly the same thing.
Just-in-time (JIT)
Reduce inventories by getting raw/other material and parts just before they are needed.
Requires very accurate forecasting which may not be possible. If an order is delayed, production stops.
Cycle Reduction Time
Reducing the time required to complete a certain task by using parallel developments, and by minimizing waiting time while eliminating nonvalue added activities
Difficulties in coordination, inefficiencies and higher costs may become problems.
Delayering/Restructuring
Reduce the layers of middle management and fire workers/employees through improvements.
Losing valuable people whose experience, knowledge and skills may be needed, either now and/or in the future.
Horizontal Organizations
Flat, non-hierarchical organizations where information is shared to facilitate functional coordination.
No problem as long as appropriate computer networks, open-minded management and an educated workforce exist.
Empowerment
Em power those at lower levels to take whatever decisions are necessary to improve things while motivating them.
Those making the decisions must be capable of doing so. The limits of whet they can and cannot do must be made clear, otherwise anarchy can result.
Reengineer (or Business Process Reengineering)
The radical redesign of critical business processes to achieve dramatic improvements.
Like chemotherapy, radical redesign can destroy good processes while attempting to correct inefficient ones.
Agile Manufacturing
The speedy and efficient mass production of customized goods through the use of flexible, computerized techniques.
Degree of customization has to be limited, otherwise number of options become infinite. Also customization may increase costs.
Virtual Organizations
Through the use of computers and communications and by subcontracting and outsourcing, firms can achieve large revenues with very few people.
The suppliers, subcontractors or outsourcers can realize that they can offer the products/services themselves.
The New Future Theory
There is one certainty. There will be many new theories, although I cannot predict what they will advocate, how popular they will be, or how long theywill last.
Only through critical evaluation can you avoid the same mistakes managers made in the past by adopting fashionable theories.
Strategic Alliances
profitability. When AT&T bought NCR, the concept of synergy from the convergence of communications and computers was fashionable and was highly recommended by strategy consultants. But synergy proved to be a mirage that dragged down AT&T's performance in its core business of telecommunications. The consequence was that AT&T's stock price was lower before European Management JournaIVo114 No 1 February 1996
/I
Long-term effects can be detrimental, as they provide a false sense of security.
the breakup announcement than two years earlier (at the same time the Standard and Poor index had increased by more than 50%). Reality showed, and the stock market confirmed, that popular management thinking turned out to be disastrously wrong. Once Allen accepted his mistake, the stock market applauded his courage (most CEOs have great difficulty in facing up to their mistakes 3
FACTORS AFFECTING SUCCESS IN BUSINESS
or letting a part of their empire go) and AT&T's stock increased considerably. However, the turnaround in his thinking raises a critical and extremely important question: How are we to know that existing, popular, management theories, tools or advice provided by management gurus or consultants will not cause firms to make the same type of costly mistakes as in creating monstrous conglomerates or buying NCR?
matrix of the BCG5 and Competitive Analysis.° Porter, for instance, wrote in 1980:
Studying popular management theories, tools or popular thinking (e.g., the advice of management gurus or wellknown consultants, or recommendations published in business magazines and books) leaves little doubt that practically all of them fall out of favor in time. After an initial period of euphoria, their limitations become clear and problems associated with their use are identified and written about in the business and academic press. Some of these limitations/problems are eventually corrected but others still persist while new ones are also developed. In the final analysis few theories, tools or thinking stay popular for more than a few years. The rest die, or are only used occasionally, in special circumstances, when they may be useful.
Needless to say, 15 years after the book was published, IBM and GM have lost more than $40 billion between them while Chrysler has become the star of the automobile industry. Today Porter's statement seems outdated, if not ludicrous. Competitive analysis is useless unless the strength of future competition can be predicted. The same is true of the portfolio matrix, which was used by practically all large firms in the late 1970s and early 1980s, and the PIMS 7 approach which assumed that the bigger the competitor and the higher its market share the more important its advantages. Such thinking failed to see the bureaucratic disadvantages associated with being big, or alternatively the value of being small and therefore more entrepreneurial and flexible. 8 The recent excellent performance of smaller firms (e.g., Chrysler) and their ability to outperform their much bigger competitors (e.g., GM) point to the impossibility of drawing conclusions about the future from what has worked well in the past. Explaining the past does not guarantee the most accurate performance in the future. On the contrary, being different9 or even going against conventional wisdom like Sam Walton or Richard Branson may contribute more to future success than imitating past successes or following some alleged recipes aimed at improving a firm's fortunes.
What Can We Learn from Management Theories or Tools? The management theories or tools listed in Table 1 cover the period from the early 1960s to the present. Those at the top of Table 1 were popular in the 1960s. Those at the bottom are popular at present. The remainder became fashionable some time in the intervening years. Each theory or tool, when it appeared, gave rise to a surge in the number of papers and books written on the topic, courses offered at business schools, and consultants selling the ideas to business firms which were attempting to implement them. Within a few years, however, they inevitably became unpopular as experience with their application and empirical investigations showed few benefits, if any, or, in some cases, extensive damage. Today only a handful of the theories listed in Table 1 are taught to business students; the rest are all but forgotten. Some of these theories, however, brought huge losses to those who utilized them, like the senseless buying of businesses by conglomerates, the use of the Boston Consulting Group's (BCG) portfolio matrix, or the buying of NCR by AT&T. Corporate planning and strategy, an area of special interest to top management and critical to a firm's success, has become popular since the early 1900s as size and complexity increased and as competition in business intensified.2 Although early attempts in the field concentrated on long-range planning, later there was a shift towards accepting and dealing with uncertainty as it was recognized that trends can change and unexpected events can occur, rendering long-range plans useless.3 Prominent among these methods and tools that became popular during the late 1960s and 1970s were the Product Life Cycle Planning approach, 4 the portfolio 4
'Also, some firms persistently outperform others in terms of rate of return on invested capital. IBM's return has consistently exceeded that of other mainframe computer manufacturers, for example. General Motors has persistently outperformed Ford, Chrysler and AMC.' (pp. 126-7)
Mintzberg (1994) ~° in his book entitled The Rise and Fall of Strategic Planning concludes that 'strategic planning' did not work, that the form (the 'rationality' of planning) did not conform to the function (the needs of strategy making)' (p. 415). He also mentions the findings of a study conducted among Japanese firms11 which show that Japanese firms distrust formal strategic planning which they use instead for 'identifying major problems and for creating an atmosphere conducive to the development of creative ideas and hard work within the company' (p.217). Today we cannot assume that management theories or tools available to everybody can automatically provide competitive advantages. In a survey of such management theories or tools 12 which is made up of those listed in Table 1, the following conclusion is reached: 'no correlation exists between the number of tools used and satisfaction with financial results'. Needless to say, the literature on how to succeed is voluminous. The vast majority of the 'serious' books and articles on the subject describe successful countries (like Japan), companies (like GM or IBM), or individuals (like Trump), listing the factors that led to their success and often draw direct conclusions as to how others can achieve similar results. Alternatively they imply that by EuropeanManagementJournalVo114No 1 February 1996
FACTORS AFFECTING SUCCESS IN BUSINESS
following the same actions as those of successful countries, organizations, or individuals the reader can also succeed. Although reading success stories may be exciting, it only provides an historical account of what happened in the past. It cannot guarantee future success for those who imitate the success stories being described. For one thing, future conditions will rarely be the same as in the past, but more important, even perfect duplication of the factors that lead to success for one person or company cannot ensure the same success for another. Moreover, besides what can be described and quantified, there is another element in all success stories that eludes description and quantification. This 'something extra' which can be called talent, the appropriate organizational culture or climate, the right moment in time, charismatic leadership, or correct intuition is usually present and distinguishes successful individuals or companies from average ones. This is true in all fields, not just business.
What Can We Learn from 'Excellent' Companies? The book In Search of Excellence,I3 published in 1982, is the utmost example of 'how you can also succeed' advice. This book became an instant success, selling millions of copies soon after it was published. Based on research conducted between 1961 and 1980, its authors, Tom Peters and Robert Waterman, identified 36 excellent companies and presented the factors that
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Figure 1 shows the 1980 (the latest figures available when the study leading to the book was completed) price/eaming ratios, in comparison to the average, of as many of the 36 'excellent' companies identified by Peters and Waterman for which published data was available, while Figure 2 shows the same ratios ten years after the book was published. Figure 1 reveals that in 1980 the price/earning ratios of the 'excellent' companies were, with a couple of exceptions, well above the average. However, the opposite is true in Figure 2 which shows losses in eight of the 33 firms, three firms with practically zero earnings making the price/earning ratios meaningless (this means that one third of the once 'excellent' firms incurred losses or close to zero eaming - - an extremely high proportion). Finally, there are only three firms in Figure 2 whose price/earnings ratios are above average. In addition, two firms (Data General and Wang) found themselves in serious financial trouble that lead to Chapter 11 bankruptcy proceedings. Some people rightly argue that price/earning ratios reflect psychological factors as well as real financial performance and might not be the most appropriate way of drawing conclusions about the 'excellent' firms identified in In Search of F_zcellence:Lessons from America's Best-Run Companies. To provide a more objective basis for
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comparisons, Figure 3 shows the average annual rate of return to investors (ROI) for the decade before the book was published while Figure 4 shows the same rates for the decade after.14 Interestingly the 'excellent' firms did not perform significantly above the average during the 1971/ 81 decade, at least as far as the return to investors was concerned (Figure 3) which proves that the selection for naming a firm 'excellent' was based on the recent past. At the same time Figure 4 shows that they did considerably worse than average for the 1981/91 decade.
1990 in the annual survey conducted by Fortune.is Yet in a short time span (middle of 1995) Rubbermaid seemed plagued with problems with its income falling by one third during the last year and its stock price also declining by one third. I~ The same was true of GM, Philips and Alcatel which were once considered textbook examples of best managed companies. Yet today many think of them as dinosaurs unable to adapt to the changing business environment. Similarly Digital Equipment, Siemens, Mercedes, Olivetti, Polaroid, Xerox, Lotus and even Apple, to name but a few, have found themselves getting into serious difficulties, performing below average, a fact that can be seen in their stock prices which have declined or stayed stagnant. At the same time other firms like Microsoft, lntel, Oracle, Compaq or Virgin have become examples of successful companies and Wall Street favorites.
The obvious conclusion from the above discussion is that if the 'excellent'companies could not even manage to stay average ten years later,h o w can they teach lessons to other firms? Figures 2 and 4 even suggest that there is a regression of the 'excellent'firm to below average as it is highly unlikely that the resultsof Figures 2 and 4 are due to pure chance. W e can even argue that 'successbreeds its own failure' and that unless excellent firms make a conscious effort to overcome the 'handicaps' (arrogance, the attitude 'we do not need to change since we are so successful', higher salaries and other costs related to 'excellence')and avoid the complacency associated with excellence, there is only one way: doing worse and regressing towards, or even below, the average.
The firms of In Search of Excellence are not the exception to successful and admired companies that found themselves getting into serious trouble. Very recently the same has been true of Rubbermaid which was voted the most admired US company in 1995 and 1994, second best in 1993, 1992 and 1991 and third best in 6
The obvious challenge is not to know who has done well in the past, although such knowledge may be useful, but rather to discover future success stories, and even more importantly help management to make their firms successful. This need to concentrate on the future can be dearly seen in the now disreputed portfolio approach that has caused losses of many billions of dollars to the firms that once used it as the centerpiece of their strategy. In the portfolio matrix approach a product is defined as a 'star' when its market is growing at a fast pace while it holds a small market share at present. The idea is, therefore, to invest in such a 'star' to increase its market share, production volume, and reduce costs through economies of scale and scope. Profits could, EuropeanManagementJournalVo114No 1 February 1996
FACTORS AFFECTING SUCCESS IN BUSINESS
therefore, increase by being a high volume, low cost producer in a fast growing market. Such reasoning, however, assumes that one can predict high growth markets and that competitors will not attempt to also invest in their own 'stars' if they could also predict these high growth markets - - in which case the result will be overcapacity, high competition and low profits, or losses, even in the case when high growth markets could be correctly identified. Moreover, it assumes that economies of scale and scope outweigh the bureaucratic and other disadvantages associated with 'bigness', which recent experience has shown not to be the case. Equally wrong, the portfolio approach was suggesting that 'cows' (products with high market share but in markets not growing fast) should be 'milked' using the cash to support 'stars'. However, as the following quote from a Matsushita executive states,
'The principal fallacy of the portfolio concept is that all that frequently stands between a division (or product) being viewed as a cash cow or a star is management creativity in seeing how to r~osition their products in tune with the marketplace .i7
Predicting Changes in the Environment Versus Extrapolating the Past In 1984 John Opel, IBM's chairman, announced that the sales of his firm, $50 billion at the time, would double to $100 billion by 1990 while its profits would continue their exponential growth. Figure 5 shows IBM's sales between 1954 and 1984, the time of the announcement, while Figure 6 displays its profits. Extrapolating the historical growth of IBM's sales for 1990 results in $110 billion sales, $I0 billion more than Opel's forecast which could, therefore, be considered conservative as it underestimated the straightforward extrapolation of IBM's past sales. Based on such forecasts IBM hired more than 100,000 new personnel to be capable of providing its existing and new customers with the high quality service it was
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much acclaimed for and which constituted the foundations for its strong competitive advantage. However, things did not turn out as expected. Figures 7 and 8 show, in addition to the 1954 to 1984 era, IBM's sales and profits since 1984. In 1994, eleven years later, its sales were only $64 billion while it has incurred losses of more than $13 billion over the last four years. Moreover, its workforce was, by the end of 1994, little more than half its 1986/87 peak of 430,000. Should a firm like IBM, renowned for its high calibre, professional management, and use of expensive consultants have made such a monumental mistake in forecasting its sales and profits? After all IBM has been well-known for the high quality (and pay) of its management which, however, assumed that the business environment and IBM itself would not change during the following six years and felt, therefore, justified in extrapolating the historical pattern of sales and profits (Figures 5 and 6) and basing IBM's overall strategy and expansion plans on such forecasts. This belief, however, is false (not just in hindsight) for at least three reasons: First, if nothing changes, the future will be deterministic, as straightforward extrapolation is trivial and can be done by everyone, including all of IBM's existing as well as new competitors who would also make plans to expand and take for themselves as large a part of the growing pie as possible. But inevitably the lure of high growth and big profits creates overcapacity, intensifies competition and results in price wars that diminish profits or even bring losses. Second, yearly growth rates in the 15 to 20 per cent range may be possible for a small or medium size company but become exceedingly difficult for a $50 billion giant (the size of IBM in 1984) as a 16 per cent growth meant an $8 billion yearly increase, more than the revenues of all but a few dozen of 1984's largest firms. Finally, even if IBM had managed to grow in revenues it would have been highly unlikely to have grown equally well in profits. History has unmistakenly shown that no large, bureaucratic firm has managed to maintain the growth in its profits at the same level as when it was smaller, more flexible and entrepreneurial. Bureaucracy and the associated diseconomies of scale inevitably take their toll.
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European ManagementJournal Vo114 No 1 February1996
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FACTORS AFFECTING SUCCESS IN BUSINESS
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Many firms and whole industries (e.g., steel, automobile and airlines) have found themselves in similar situations to IBM, being unable to recognize that the environment has changed, or is about to, and realize that it does not suffice to extrapolate the past or continue doing well what has brought them success and high profits in the past. Stagnant markets, continuously changing industry boundaries, new partidpants, like the Japanese, who do not follow the established rules of the game have resulted in much stronger, and global, competition, more demanding customers, willing to only accept high value products/services, and fundamental shifts in the way firms have to be managed and operated. These changes will continue to fundamentally affect the business environment and businesses themselves as there is one certainty about the future: Firms are to expect continuous changes. They must embrace, therefore, a new attitude that accepts that future performance, and success, will be directly linked to accurately predicting forthcoming change and correctly assessing their implications as far as the opportunities and dangers that such changes are bound to bring. Strategy without adequate anticipation of forthcoming changes is not possible. At the same time it does not suffice to say that the business environment will change or that foresight is indispensable for strategy. TM Concrete and accurate predictions about forthcoming changes must be made and their implications for firms must be correctly anticipated so that a strategy can be formulated, plans made and actions taken to exploit the opportunities while steering clear of the dangers that such changes will undoubtedly bring. But accurate forecasts cannot be taken for granted necessitating a clear understanding of what can and cannot be predicted and appropriate ways of figuring out the most important/critical of forthcoming changes.
The Human Ability to Foresee the Magnitude of Technological Change We humans have not been good at predicting the use or practical value of new technologies. This is what Say, 19 the famous French economist, wrote in 1828 about the 8
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possibility of cars as substitutes for horses: 'Nevertheless... no machine will ever be able to perform what even the worst horses can - - the service of carrying people and goods through the bustle and throng of a great city.'
Even as late as the end of the last century, when cars were actually being produced, and less than a decade before Henry Ford mass-produced his model-T, neither their potential value nor their widespread ownership was obvious. In an 1899 book entitled La fin du Cheval (The Demise of the Horse),2° its author fiercely argued that the end of the horse was near, but he predicted that bicycles, rather than cars, were about to substitute for horses. In the numerous illustrations made throughout the book by the futurist A Robida, few cars are shown while bicycles abound. The same is true in a series of illustrations21 made in 1900 to commemorate the beginning of the new century by depicting examples of life in the year 2000. One of these illustrations shows a major boulevard in Paris, where not a single car is circulating. Say's objections were as valid in 1900 as they were in 1828. Cars were still dangerous, unreliable and terribly expensive (in 1900 it took four-and-a-half years of a skilled worker's wage to buy a car in France). Moreover, there were few roads where a car could be used at speeds that were hardly faster than those of horses. Yet, less than ten years later cars were being mass-produced and less than three decades afterwards more than half the families in the US owned a car. Needless to say, cars have profoundly affected all aspects of our lives by providing us with personal mobility and the freedom to choose where to live and work, do our shopping or, in general, go anywhere at any time. Will the same thing happen with computers and communications (C&C) or will their impact, if any, be minimal, having exaggerated their importance? Answering correctly such a question has critical implications for the future of businesses. There is a certainty concerning both computers and telecommunications: their costs are decreasing exponentially while their speed is increasing exponentially. Moreover, it is highly likely that these trends will European Management JournalVo114
No 1 February
1996
FACTORS AFFECTING SUCCESS IN BUSINESS
continue in the future with critical implications for how information is stored, retrieved, processed, communicated and used, as well as the type of tasks that computers will be capable of performing more productively than humans. As machines substituted, supplemented and amplified practically all routine manual tasks previously done through the use of human muscles, computers will similarly substitute, supplement and amplify almost all standardized mental tasks currently performed by humans using their brain. If present trends continue, computers will, in the not too distant future, be able to read handwritten text without major mistakes, understand and speak a limited vocabulary of natural languages and, by the beginning of the next century, acquire some elementary vision. In the longer term, 2010 to 2020, they will be capable of reading and speaking and probably 'seeing'. This means they will be able to perform, in conjunction with machines, practically all repetitive manual tasks and the great majority of standardized mental ones currently performed by people, while also helping to substantially increase the productivity of all mental tasks performed by humans, even those requiring high levels of skills and/or creativity. The consequence will be another major shift in employment, considerable changes, both societal and organizational, and new skills required to succeed either in life or in business. The implications of the changes involved are enormous.2 2
Employment Shifts: The Analogy between the Industrial and Information Revolutions Figures 9 and 10 show the percentage of the labor force employed in agriculture, manufacturing and services in the UK and the US since reliable data have been available. The employment shift from agriculture to manufacturing that started with the Industrial Revolution reached its peak in the 1950s and consequently started declining, with services increasing as the percentage employed in both agriculture and manufacturing has
been decreasing. Figures 11 and 12 show the percentage contribution of each of the three sectors to the overall GDP of the UK and the US. Interestingly, this percentage contribution of agriculture and manufacturing has remained constant, or slightly decreased, even though employment in these two sectors has been diminishing substantially. This means that the relative productivity in agriculture and manufacturing is on the rise (actual productivity is also increasing at a faster pace as the real output of both of these sectors is rising too). The relative contribution of services, on the other hand, has been declining relative to agriculture and manufacturing while the actual productivity, according to some authors z3 has been stagnant for the last two decades. The fact that white-collar productivity has not been increasing, at least not as fast as manufacturing, in spite of the huge investments made in computers and other office equipment, has raised concem as to whether or not C&C will be capable of providing the substantial productivity improvements required so that the expected benefits of the information revolution will be harnessed. Evidence from an analogy between the major inventions of industrial and information revolutions indicates that the latter is on target. Newcomen developed the first workable steam engine in 1707. It took more than 200 years before Henry Ford used such an invention for the practical purpose of building a useful car that the majority of people would be willing to buy and could actually afford. Furthermore, it took another half century before cars substantially changed our mode of life by permitting people to decide, among other things, where they would live (in relation to their place of work) and where to do their shopping. Similarly, it took more than 90 years between the time electricity was invented and its use by firms to substantially improve factory productivity. At the beginning of our century it took more than 20 years before the considerable investments in electricity paid off.24 The same can be said of many other inventions such as the telephone, the aeroplane and even the
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FACTORS AFFECTING SUCCESS IN BUSINESS
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washing machine that took several or many decades before they took off. It cannot be expected, therefore, that computers will produce immediate results. After all, they were invented about half a century ago and they are still used mainly for doing more efficiently, tasks done without computers beforehand (the same was true of engines before 1910 and electricity before the mid1920s). Thus, the fact that investments in C&C have not as yet produced substantial retttms does not mean that they will not do so in the future.
that productivity improvements due to investments in information technology may have started to pay off.z6 If the analogies continue, by 2015 the information revolution should provide firms with as many improvements in productivity as those achieved by the Industrial Revolution until today. The implications are huge.
Table 2 shows analogous events conceming major inventions in machines and computers.2s These analogies are done by relating major discoveries of the Industrial Revolution to those of the information one. Analogies in inventions like the steam engine and the mainframe computer, electricity and time sharing, the internal combustion engine and the microprocessor, cars and personal computers, and so forth, can be justified on logical grounds because of their similarities. If the analogies displayed in Table 2 are valid, we will be entering by the end of the 20th century, or the beginning of the 21st century, into a period where major productivity improvements from the computer revolution will be achieved. Recent evidence indicates Table 2
There are fewer than 20 years between now and the year 2015, by which time the information revolution should be in full swing. The information revolution is not so different today to when Henry Ford achieved substantial productivity improvements between 1914 and 1915 (close to 90%) by implementing the moving production line in his factories. Ford's innovation was to use mechanical power in a brand new way by moving work to a worker placed in a fixed position and forcing a uniform pace of output which allowed the massproduction of the Model-T car. Ford exploited the possibilities of the available technology of his time to the maximum. His bet paid off, opening up a huge market and a high growth industry. His success was based on three aspects: (a) using available technology in novel ways to substantially reduce production costs and therefore prices (the price of the Model-T was reduced by two-thirds between 1908 and 1914), (b) providing a
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FACTORS AFFECTING SUCCESS IN BUSINESS
product which was user-friendly and easy to repair, and (c) choosing a product (the car as a form of personal transportation) whose potential demand extended to all households, or even every single adult and which greatly increased people's freedom of choice to go where they wanted whenever they wished to do so. o~° Where do C&C technologies stand today with respect to their ability to be used in brand new ways, substantially reduce costs and prices, while opening up new markets extending to all households or even individuals? What is clear is that the equivalent of Ford's production line has not yet been invented, but its invention is, in my view, around the comer. It is about to come through the digitalization of sound (including voice and music) and image which will permit the marriage of computers and telecommunications. The possibilities are limitless when the fight products (hardware, software and groupware) become popular, user-friendly and cheap enough for households, not just businesses, to acquire and use them. Most important, C&C will increase people's freedom of choice as much as the car did, if not more. One only has to think about the consequences of practically free and unlimited computer power and telecommunications. Their use will skyrocket in the same way that electricity did when it became extremely cheap, providing a huge explosion in both the development and use of all sorts of electric appliances - - for both homes and offices.
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State of the Art in C&C and Forthcoming Multimedia Applications In addition to data which has been transformed in digital form, i.e., in zeros and ones, since computers were first introduced, the digitalization of sound and images allows their storage, retrieval, and/or processing in exactly the same way as data. Once this capability has been fully achieved, and once the technology becomes both userfriendly and affordable, it will allow for multimedia interaction(s) between sources and users, including the simultaneous interaction among many users/sources located anywhere in the world. Such interaction can include data, sound, and/or image permitting rich and instantaneous communications. The consequences are enormous. A single computer can, in addition to its traditional tasks, also become a terminal capable of being used interactively for the following: °~° Picturephone and teleconferencing among users who can simultaneously see each other and talk, or send written messages, including data, graphs or documents, to each other. °~° Television and videos on demand from any source located anywhere in the world to be watched, rented or bought wherever a customer wishes. '~° Music (sound and videos) on demand from any source to any customer/place. °:° Access to shopping by directly connecting to a manufacturer's computer and placing customized orders directly. Alternatively the connection can be EuropeanManagernentJournalVo114No 1 February 1996
oio
made in a warehouse/shop where the products can be seen, examined and even, in the case of clothes or shoes, worn by a computer model of oneself. Direct shopping would avoid intermediaries and allow for lower costs while getting an instantaneous and personalized/customized service. Access to banking and other financial services by connecting directly to appropriate computers carrying out the requested transaction. Airline, hotel and car reservations made directly from a personal computer rather than by telephone. Medical advice, including diagnosis, offered through specialized equipment which can monitor and/or measure relevant bodily information allowing the computer to make instant diagnosis or, in case of doubt, pass it to a doctor for finalizing it and telling the patient what needs to be done. Access to all (other) types of services that can be located anywhere in the world. Video games (individually or with others) on demand from any source to any customer/place. Other games (e.g., gambling, chess etc.) on demand from any source to any customer/place. Virtual reality simulations (e.g., flying an airbus plane, piloting a submarine or guiding a spaceship). As professional pilots are already trained using computer-driven simulators, which are as realistic as flying the real 'plane, they can be extended to anyone with a computer. News, sports and weather reports, as well as any other TV program which can be customized for individual users and even be 'seen' interactively by allowing the user to determine the speed or content of what is being watched. Access to data banks, libraries and museums located anywhere in the world from one's personal computer and easy retrieval or viewing of whatever a user is interested in.
Moreover, as wireless telecommunications will be possible, the above list of capabilities can be accessed from anywhere in the world without the need of regular telephone lines. This is considerably more than the Email capability of computers which allows sending written messages to others, or the groupware (e.g., Lotus' Notes) programs which facilitate written communication as well as the sharing of information among people having access to such a program. The Intemet provides at present a glimpse of the new, brave world of multimedia C&C even though there are still many problems to solve and dangers to be conquered,z7 A high degree of interactivity and high added value coupled with a low cost are opening up huge possibilities which will, I believe, become the centerpieces of the information revolution. This is more so as personal, wireless telephones (or telecommunication devices) are spreading at a fast pace as they are becoming progressively cheaper and more powerful. The current battle shaping the telecommunications and entertainment industries and the building up of information superhighways will further increase the 1I
FACTORS AFFECTING SUCCESS IN BUSINESS demand for multimedia computers and decrease their costs, in particular as competition in this high growth area is becoming fierce. Multimedia computers, which can also be connected to the information superhighways, are bound to become as popular and as easy to use as telephones are today. They will fundamentally change the way people interact, shop, get services, entertain and educate themselves, and work. It will be the equivalent of having combined the telephone, television and car in one device that would allow simultaneous and unlimited access to information, data, sound and images, together with the freedom of choice of being anywhere, anytime.
Computers, Communications and Superautomation: Implications for Society As computers become more powerful, smaller, and cheaper, so will robots and other machinery which use computers for their functioning. By the beginning of the next century, unattended factories run by computers and using robots will be common; by 2015, when computers will be capable of 'seeing' and exhibiting some elementary intelligence, they will be widespread. This means that manufacturing employment (see Figures 9 and 10) will continue declining, and by 2015 it will probably be, in advanced industrialized, or better 'informatized' countries, at about the same level as agricultural employment is today, i.e. a couple of percentage points. This will leave services to employ close to 95 per cent of the working population in most 'informatized' countries. Consequently it is the service sector where the highest need to improve productivity will arise. However, higher productivity in the service sector, including white-collar office work, will further decrease traditional employment and would require new sources for generating work for those becoming unemployed through the widespread use of C&C and superautomation. By 2015 there will be little need for people to do repetitive manual or mental tasks. The former will be automated using machines and robots while the latter will be performed through appropriate computer programs and expert systems. Machine and computerbased automation have and will continue to increase human productivity which allows firms to reduce the real costs of their goods or services and pass part of the savings on to consumers, in terms of decreases in real prices, part to a firm's employees, in terms of increases in real wages, and part to shareholders, in terms of higher dividends and retained earnings. Productivity improvements have and will continue to be indispensable in increasing people's buying power, under the combined impact of lower real prices and higher real income, and in raising their standards of living. Ironically the drive towards improved productivity and greater standards of living requires automation to substitute expensive workers with machines and I2
computers so that firms can continue to decrease costs and therefore prices. This is particularly necessary because of competition from developing countries where labor costs are a small fraction of those in developed ones. Advanced countries must, therefore, concentrate on products and services which add high value and allow their firms to pay the high wages and additional benefits their citizens are accustomed to. The more advanced the country, the higher its standards of living and the lesser the need for low-level, unskilled jobs which are either automated or exported to developing countries. Moreover, as developing countries compete with advanced ones and enter industries which provide standardized products or services, the pressure increases for advanced countries to move upwards in the quality/ price scale of the products or services they provide. In this continuous spiral, technological innovation, creativity and entrepreneurship become essential factors in staying competitive and creating employment to substitute for that lost through automation or exportation to low cost countries. The price for high living standards becomes, therefore, the pressure to automate and continuously improve productivity by eliminating repetitive and routine jobs. This in turn requires a well-educated workforce capable of using their heads, instead of their hands, to add extra value for the high income they receive. Consequently, to improve their productivity such a workforce will have to use C&C to a maximum, to improve their effectiveness and efficiency and continue increasing the living standards of their advanced nations. We may be moving, therefore, towards a dichotomy of high and low skills and jobs, the former grouped around tasks that can add high extra value and the latter around providing personal services to those enjoying the high skills/pay jobs but who have little free time.
The New High Growth Technologies Table 3 lists the five most important technologies of the industrial revolution. Each of them contributed significantly to changing the way people lived, and the organization, management and running of firms. Electricity brought mechanical power everywhere, whether in factories or homes, and allowed the effective use of power tools. Batteries allowed the use of mechanical power, even when electrical plugs were not available. Electrical appliances, in particular those for home use, freed women from household work, thus giving them the opportunity of entering the labor market. Cars provided people with mobility and unlimited freedom to go wherever they wanted and whenever they wanted in comfort. Cars permitted people to move from cities, where the majority of the jobs were located, to the suburbs, and go shopping far away from their homes in search of bargains. Telephones allowed people to talk to relatives or friends, obtain information or services, or do business from their homes or offices. As long distance calls have become cheaper European ManagementJournalVo114No 1 February 1996
FACTORS AFFECTING SUCCESS IN BUSINESS
T a b l e :1 F i v e I n v e n t i o n s t h a t h a v e C o n t r i b u t e d to t h e M o s t S i g n i f i c a n t C h a n g e s in our L i v e s o:o
Electricity - - Batteries o:o Electrical Appliances Programmable, Rechargeable ,¢~ Automobiles I Greater Choice, Better Quality o~o Telephones Cordless, Mobile o~° Television - - Remote Control, Cable, VCR
and cheaper, communications over telephone wires have become more and more popular, affecting both customers and firms. Cellular and wireless telephones have allowed the possibility of keeping in touch from wherever one may be located. Television, finally, brought entertainment to every home and reduced the need to physically go out. Satellite and Cable TV increased the choice of programs while VCRs permitted additional freedom of what to watch. The five technologies shown in Table 3 have achieved practically 100 per cent penetration rate in most developed countries. The obvious reason is that people want them and are willing to pay to obtain them. It is interesting to consider the five industrial revolution technologies shown in Table 3 and their correspondence in terms of C&C. As they will influence the pace and impact of the information revolution it is important to consider their consequences and implications for firms, and society in general.
Electricity Computer networks will take computer power everywhere for anyone who wishes to use it. In addition to desktops, portable notebook or smaller sized computers can be used as terminals allowing unlimited access to networks. Existing networks of networks such as the Intemet are used by many millions of users all over the world. At present they are mainly used for text and data transmissions but eventually they will also be used on a grand scale for multimedia communications between and among people as well as for allowing unlimited access to information and its processing. Groupware such as Lotus Notes will further facilitate interactions among people working in the same company or belonging to a common group in ways that will allow them to improve their decision making power and their ability to work together, more efficiently and effectively, as a team.
Electrical appliances Software and groupware will become as easy to use and provide as much value as electrical appliances have already done, in ways that are not dear yet, as the value of electrical appliances was not obvious 100 or even 50 years ago. Moreover, software and groupware will proliferate and become exceedingly cheap and userfriendly, and as widespread as refrigerators or ovens are EuropeanManagementJournalVo114No 1 February 1996
today. Moreover, they could be used anywhere or at any time as part of a network or stored in one's own computer.
Automobiles Of the five technologies of the Industrial Revolution shown in Table 3, cars are the most problematic. Their success has clogged up roads, made parking in popular places impossible and has increased air pollution. Computers and Communications can provide an alternative to cars by permitting people to work, shop or obtain services, and entertain themselves anywhere they wish, including in their own homes, thus reducing the need for automobile travel. Most interestingly, their freedom of choice in terms of where they work, shop, obtain services or get their entertainment needs not to be limited by geographical proximity (the reach can be truly global) or weather conditions.
Telephones Computers through multimedia can augment the twoway voice communication of the standard telephone. They can permit multiple connections, and allow interactivity between and among users. As sound and images, in addition to data, are becoming digital, and as common standards are established, teleconferencing over personal computers will become affordable and as popular, by the beginning of the next century, as telephones are today.
Television Information superhighways running over fiber optics, cable networks, and/or satellites will be competing with regular telephone networks and will be allowing multimedia interactions (bringing any kind of messages, information, music and/or images) to any home. The possibilities are limitless, not only for entertainment, but also for all kinds of related leisure activities, from reading, in one's own living room, a rare book in a far away library to viewing the entire works of Picasso from different museums around the world, from watching a theater play in London to being given a personalized tour of the Acropolis in Athens. In addition, entertainment can become more personalized and interactive including the possibility of competitive games or virtual reality simulations played among players who are not located physically at the same place. Large, high definition TV screens connected to computers can be used for high quality viewing, while TV cables can be utilized to obtain access to global networks that include all kinds of services that provide among others entertainment, sports and shopping. If established trends in C&C continue, there is no doubt that multimedia applications will spread as fast as the telephone, making the emergence of a tele-society possible,zs The big question is whether or not people will opt for using multimedia technologies on a grand scale and prefer to shop and obtain services, work, entertain themselves and communicate through telemeans rather than physically. This question divides experts and excites many people. On the one hand, there I3
FACTORS AFFECTING SUCCESS IN BUSINESS
are those who say that a tele-sodety is dehumanizing and it will never be accepted, z9 They argue that people are social animals. They like to go out, meet others, touch what they intend to buy and judge its quality and value by seeing it. They refer to the growth of department and specialty stores and the weak performance of catalog and mail order outfits. Moreover, they cite surveys where three out of four people tele-working from home are not satisfied and would rather be in an office with their co-workers. On the other hand, there are those who refer to the large amount of time people spend watching TV, teenagers talking on the telephone, even though their friends are often down the road, or the high percentage of services conducted over the telephone, via computer or by post. Nowadays very few people go physically to a stockbroker to buy or sell shares, to an insurance firm's office to get a policy, or to some office to pay a bill. Moreover, the proponents of tele-society3° highlight the growth in mail sales of computers, or other standardized products, and the large number of self-employed people who work from their own homes.
its present day inconveniences, thus opening up new possibilities that can fundamentally change the traditional distribution system. Whatever is true for products is even more so for services. Once a multimedia computer terminal is connected to a network that provides access to service firms around the world, there are no constraints or limits to tele-services. These services can extend beyond traditional ones to education or medical diagnosis (e.g., a doctor can do the testing while in his office and a patient at his home, or a student can have a lecture delivered at his home). Again the possibilities are limitless as the cost of such services decreases and the disadvantages of obtaining them are being reduced.
Television is already widely popular, so its extension to tele-entertainment will cause fewer problems than the other technologies. Videos on demand, music records, games, theater plays, concerts, ballets, operas, or any sports event can be televised and shown to an audience of any size according to demand. C&C networks will allow for practically unlimited choices and a high degree The answer to whether or not people will prefer teleof interactivity and personalization of what one chooses versus physical shopping, services or entertainment to watch, or play individually or with others. Moreover, depends upon the value and cost, or inconvenience of entertainment can move into additional directions (such each alternative, where the social as virtual reality) not fully "lhe information revolution understood or explored as yet. pleasure of physical interaction is one of the factors that is added has continued .for several to value. For instance, the Tele-work is another technomajority of people prefer to stay decades; it only needs future logical possibility that invokes at home and watch TV or a strong positive and negative historians to officially video rather than go to the reactions.3I Some people believe movies while a considerable that going to work allows for decide when it stm ed minority prefers the physical personal interaction among coaspects of going out, even when it rains and when they workers, making friends, participating in meetings and have to queue before going into the movie theater. making personal contacts with customers and suppliers. Similarly, some people hate shopping and avoid it at all Others refer to the long time it takes to commute to and costs while others love it and will not buy anything from work, the inefficiency of meetings, and the high unless they can see, touch and try it. Until now, cost of individual offices that are occupied but a small however, the prices and costs of the various altematives percentage of time by their occupants. With telehave been compatible. Moreover, buying through teleconferencing, computer conducted meetings can be held means (e.g., homeshopping via TV channels or catalogs) more efficiently without the need of physical presence. has been inconvenient in that buyers cannot physically Moreover, data and information can also be displayed, examine their choices and have fewer alternatives than minutes kept, action steps verified and various decisions going to a store. Most importantly there are few price and their implications viewed and debated. The differences between physical and tele-shopping. disadvantage of reduced physical interaction can be corrected, or even turned into an advantage, by using offices as clubs where people meet for breakfast or lunch If tele-shopping is done directly from the manufacturer, and maximize their interpersonal interaction rather than prices can be substantially lower as all intermediaries will locking themselves inside an office with a secretary be avoided. Moreover, if the buying can be done acting as a barrier. Equally important, when the cost of through the manufacturer of one's choice, no matter tele-work becomes considerably less than traditional where in the world it may be located, the choices work in offices, it will be hard to continue it as new firms available will be practically infinite. Furthermore, high using tele-work will be at a competitive advantage over definition, color screens can provide as good a sense traditional ones that use a lot of expensive office space about what one buys as being physically there. In to conduct their business. addition, consumer reports done by independent, nonprofit organizations can be readily available to facilitate Revolutions like the industrial or the information one do one's choice. Finally, products (such as clothing or cars) can be custom-made to one's individualized order. Lower not happen overnight. Instead their impact spreads prices, larger choice, and customization will increase the gradually. Once such an impact has produced huge attractiveness of tele-shopping and decrease or eliminate cumulative changes with far-reaching consequences for I4
European ManagementJournalVo114No 1 February 1996
FACTORS AFFECTING SUCCESSIN BUSINESS
all aspects of our societies, organizations and personal lives historians name it a 'revolution'. In this sense the information revolution has already been under way for several decades. It is only a question of future historians officially deciding when it started.
Firms and Management: From the Industrial to the Information Revolution The Industrial Revolution fundamentally affected all aspects of business firms and their management, as firms became bigger and more efficient and their professional managers, separated from their owners, developed along functional lines. Business firms became instrumental in increasing productivity, fueling economic growth, creating employment and, in general, raising the standards of living of the countries in which they operated. By exploiting the advantages of C&C, as well as superautomation, firms will continue to improve productivity, create employment and generate wealth. However, the firms of the 21st century will have few resemblances with their counterparts of the 20th century in much the same way as 19th century firms and their 20th century counterparts. The biggest change, which has already occurred and which is bound to continue, owes its origin to the very success of industrial firms in increasing productivity, cutting costs, and in general supplying products and services at a rate that has exceeded that of the increases in demand, at least in industrialized countries. This success has created overcapacity and increased competition, and has forced firms to continuously improve themselves in order to survive. With C&C the competition and pressure to reduce prices and profit margins is likely to continue, if not intensifying, bringing far reaching changes in the business environment and firms themselves and in a sense, creating the information revolution.
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The Decline of Large, Industrial Firms Figure 13 shows the real sales and Figure 14 the real profits of Fortune's 500 industrial firms since data became available in 1954. Between 1954 and 1979 sales grew, on average, by 5.4 per cent a year, well above real GNP which grew by about 3.3 per cent during the same period. Similarly, real profits grew by 4.2 per cent during the same period, higher than the 2.9 per cent growth in real total corporate profits. The above average sales and profits of the 500 largest industrial firms indicates the importance of economies of scale and scope3z that brought such results. Things reversed themselves, however, starting in the late 1970s, as sales started declining and profits plunged both in absolute (Figures 13 and 14) and relative terms (Figure 15). Similarly, in 1968 profit margins started declining after having been, on average, steady at about 6.1 per cent of sales (Figure 16). In 1991 and 1992 profit margins were less than half their 1968 level of 6.1 per cent (see Figure 16). Thus, it seems that in a short period of time, economies of scale and scope seemed to provide no advantages to large firms, reversing a trend that had established itself since the beginning of the Industrial Revolution and which had become the Holy Grail of modem management. A similar pattern can be seen in the number of people employed by Fortune's 500 firms (Figure 17) which increased on average by 3.8 per cent a year, well above the growth of the civilian labor force which was 1.9 per cent until 1969, then it slowed down to 0.8 per cent between 1969 and 1979 while it has declined on average by 2.4 per cent a year since then. Figure 18 shows the employment of Fortune's firms as a percentage of the total civilian employment and indicates a reversal in the relative growth too. After reaching 1.9 per cent of the labor force in 1969 the percentage of people employed
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FACTORS AFFECTING SUCCESS IN BUSINESS
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by Fortune's 500 firms dropped to less than I per cent (a little more than half the 1969 level) in 1993. The largest industrial US firms not only saw their sales and profits decline, but they also downsized, firing rather than hiring employees, while becoming less important in terms of the sales, profits, or employment opportunities in comparison to other firms in the US economy. Figures 13 to 18 indicate the end of the Industrial Revolution era. Its most prominent members, the largest industrial firms of the most capitalistic of all countries, declined, in both absolute and relative terms, while their collective participation in generating profits 16
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and their contribution as an employment source also diminished. Yet the productivity of these large, industrial firms continued to climb at a constant pace between 1954 and 1993 as real sales per employee increased by an average of 2 per cent a year during that period while profits per employee also increased albeit at the smaller rate of 0.5 per cent a year, fluctuating more widely, however, since 1969, than they did before. Although it is not possible to separate cause and effects, the decrease in real sales and real profits that follow cannot be unrelated to the slowdown and decline in the growth of employment that started about a decade earlier. European Management JournalVo114 No 1 February 1996
FACTORS AFFECTING SUCCESS IN BUSINESS
region. Equally important, their intentions were often known while many of their actions could be predicted. Competitive analysis to determine the strength of the various competitors and an evaluation of their signalsa4 Competition in the business environment has intensified could, therefore, be used to predict competitive moves in and will continue to do so, posing new challenges and order to make capital expansion, pricing or other bringing new threats to firms. Firms must consider the decisions that maximize a firm's profits without creating consequences of such competition as the information overcapacity and falling prices in the industry involved. revolution continues as far as both their strategy and Since the early 1970s, however, as growth slowed down, operations are concerned. firms, traditionally part of a certain industry, ventured outside their own, taking business away from other firms Overcapacity and forcing them in turn to search for opportunities, in The fact that the prices of practically all standardized other industries outside their own. For instance, there products and services have been declining in real terms 33 was to be a telecommunications, computer, commercial and that profit margins have also been decreasing (see TV and cable TV industry. Today there are no obvious Figure 16) indicates that supply is higher than demand. boundaries between them, as telecommunication firms Overcapacity fuels competition and forces prices and want to provide interactive computing services to homes profit margins downward as producers attempt to sell using fiber optic cables. Moreover, entertainment their goods in a buyer's market. Before the Industrial companies, publishing houses, and software firms are Revolution, people could afford few material possessions also competing for the same business, making it as their buying power was low. However, during the last impossible to assess competitive threats as new entrants 200 years, as real prices have been dedining and real can come from other industries, like satellite or wireless income rising, the demand for goods and services has transmission companies, that can render fixed wiring been increasing at a fast pace, in particular since telecommunication systems obsolete. Moreover, compopulation has also been growing, further stimulating petition can come from a number of countries making it the growth in demand. Until the late 1960s, although impossible to assess its strength and estimate future supply has been increasing at a capacity. Furthermore, it was fast pace it rarely exceeded impossible for typewriter firms Computers and demand by a large amount or to predict that their products communications will force would protected time span. Firms were, become obsolete because therefore, capable of setting of computer word processors, or firms to develop different prices at such a level that for banks to estimate the skills and strategies for allowed demand to grow but negative effects on their business which also permitted them to by credit cards issued by AT&T, comparative advantage increase their profits at a healthy GM or lately by newspapers like rate. By the late 1960s, however, than in the past The Times. Finally, stockbroker the markets for standardized firms have also been providing products in industrialized countries were saturating as their customers with banking services (checking accounts consumers possessed practically all durable goods they and credit cards). Such actions have forced banks to enter desired and population growth was diminishing. Firms, into insurance and other business to compensate for the however, continued expanding their capacity, as they loss in their traditional market. believed that demand would continue growing at its historical pace. Such an expansion coupled with the Brands and luxury products entrance of Western Europeans and Japanese The quality of brand and luxury products was, usually, multinational firms in the world markets further added much higher than less known or generic products. to existing capacity at a time when the demand for Consumers were, therefore, willing to pay a price standardized products was slowing down. In the face of premium for such higher quality rather than risking increased competition, and in order to maintain their buying a cheaper, non-brand, product of unknown, global competitiveness, firms had to reduce their prices, doubtful quality. During the last decade, however, little at a faster rate than in the past, and cut their profit known brands as well as generic products have margins (see Figure I6). To achieve such objectives they improved their quality to the point that there is little were obliged to downsize while, at the same time, or no difference with that of well known ones. As improving their effectiveness and efficiency. differences in quality from cars and computers to soft drinks and food products has shrunk, so has brand Industry boundaries loyalty as an increasing percentage of consumers are not Until the late 1960s industry boundaries were well willing to pay a higher price just because of a brand established and respected. Although some multinational name, or the luxury status of a product. The Marlboro firms, mostly of US origin, operated across countries, Friday (when Philip Morris was obliged to cut the price competition from abroad was constrained by custom and of its Marlboro cigarettes by 20 % because it was losing other barriers in order to protect firms at home. In such market share to generic brands), the problems of Heinz an environment competitors could be easily identified and Borden as well as those of IBM, Coca-Cola and within a single, well-defined industry and geographical PepsiCo and other well-known firms proves beyond
Increased Competition: Past and Present
European ManagementJournalVo114 No 1 February 1996
17
FACTORS AFFECTING SUCCESS IN BUSINESS
reasonable doubt that brand awareness does not suffice to increase sales or charge a price premium for a 'company' or 'brand' name. Such a change further increases competition as brands cannot be used as a way of limiting supply and therefore controlling prices.
Rules of the game In addition to well-defined and respected boundaries that existed before the I970s, and the advantages that economies of scale and scope as well as brand recognition brought to large, established companies, there were also established rules that firms accepted. There was, for instance, a price leader, usually the biggest firm of the industry, whose decisions were followed by other firms. This was the case in the automobile industry with GM in the leader role. Alternatively the strongest and usually most profitable firm of an industry set its prices at such a level that the highest cost producer could survive. By letting high cost producers continue, it permitted the strongest firm(s) to reap handsome profits while avoiding anti-trust actions against it. Such was the case in the computer industry before the late 1970s with IBM being the strongest and most profitable player. In other industries, and in particular in Europe, there were widespread gentlemen's agreements and informal cartels whose purpose was to maintain high profits and prevent new entrants from establishing themselves in an industry. Governments used to, and in some cases still continue to, help firms to impose such rules. For instance, airlines and telecommunication companies in the great majority of European countries still operate using rules that make competition impossible. The same is true in public procurements or large construction projects where competition is regulated in ways that allow insiders to reap large profits while excluding outsiders. A major objective of the European Union is opening up competition at the European level by breaking down barriers to entry, thus forcing prices down and improving quality and service. The globalization of business and the spread of C&C are bound to intensify competition and speed up the fall in whatever barriers, national or industry-wide, still exist at present. Consumers will be the main beneficiaries of increased competition that will force prices to drop further.
Future Competition The overcapacity prevailing at present in practically all industries will, in all probability, continue into the future, fueled by the effective marriage of the mechanical and computer technologies to superautomate all standardized, repetitive tasks whether manual or mental. Although C&C will significantly contribute to maintaining, if not exaggerating, prevailing overcapacity, their major impact will be in the way information is disseminated and used, and the way firms are organized and run, including the kind of products and/or services they offer to their customers. I8
In the last decade, airlines have lost many billions of dollars. A major reason is the computerization of reservations and prices. By connecting to a central computer, any travel agency or individual can figure out not only the most appropriate and convenient route to go from point A to B but also the cheapest one. Information is perfectly and instantly disseminated by being available to anyone having a computer terminal and permission to connect to the central computer. As the service offered by the various airlines is pretty similar (standardized), no carrier can afford to charge a higher price than its cheapest competitor, thus the price wars and huge losses - - even in Europe where airlines are still protected by monopolistic barriers. C&C will, by the end of this century, put the great majority of products and services into a similar situation as that of the airline industry. A consumer will be capable, from his or her own computer, to connect through regular telephone lines to centralized selling networks. Once connected, he or she will be able to compare prices and buy the product/service that provides the highest value for its price. With such a computerized system, information will be perfectly and instantly disseminated, eliminating or reducing to a minimum local or time-dependent scarcities and intensifying competition as firms will have to list the prices of their products/services together with their technical and service-related characteristics. A computerized selling system will allow consumers to buy directly from manufacturers, or providers of services, overpassing all intermediaries, and getting the lowest possible price. In addition, there will be no geographical constraints as many products and most services can be bought from far away places. Finally, the quality of their products/services will also be available, in the computer, from non-profit consumer protection agencies which will provide up-to-date information. In such a setting where price and quality will be readily available firms will not be able to charge higher prices than their competitors by counting on physical proximity, or the lack of information on the part of consumers. C&C will also allow for brand new forms of organization which will be very different to the traditional bureaucratic and hierarchical structure present in most firms. Computer networks and groupware are allowing 'network' organizations where information is exchanged irrespective of ranks or positions, giving rise to horizontal, extremely fiat organizations. Moreover, in the future, firms will not have to occupy large offices in some centralized location. If we assume that teleconferencing will spread and computer networks will continue to become more user-friendly and cheaper, then, in the near future, it will be possible to have access to company information, hold meetings and run firms with employees who are not necessarily present physically. As being a low cost producer will be a prerequisite for long-term survival, firms may not have much choice but to avoid occupying expensive offices EuropeanManagementJournalVo114No 1 February 1996
FACTORS AFFECTING SUCCESS IN BUSINESS
and instead organize themselves in new forms that use telework, subcontracting, outsourcing, and part-time or consulting work to a much greater extent in ways that would substantially decrease their fixed as well as overall costs. This would be particularly true for firms producing/offering standardized products/services. Gaining and/or maintaining competitive advantages in an era of superautomation when information is instantly and perfectly disseminated will require different skills and strategies for success than during the past. As technology will be equally available to anyone who can pay for it, producing or offering standardized products or services will provide few or no competitive advantages except to those who manage to use the technology in more efficient/effective ways. But being more efficient/effective than one's competitors will require a well-trained and highly motivated workforce capable of using their heads to improve their work beyond the normal capabilities available through the standard application of technology. Alternatively, the service offered to customers ought to be speedier or of higher quality than that of competitors, again requiring well-trained and motivated employees. Competitive advantages could be gained by firms that make and/or sell new products or offer new services. The newness of such products/services would exclude overcapacity and will assure firms of higher profit margins, at least until imitators come up with similar products/services. For firms to be successful innovators, they must have well-educated, highly motivated and creative employees capable of conceiving, inventing, developing and successfully marketing new products that consumers will buy. In addition to the creativity required to be an innovator, firms will also have to invest, often heavily, in R&D and be willing to assume the risk that their investment might not pay off. Finally, they will have to be fast in conceiving and bringing to market new products/services as their competitors will be also attempting to do the same. Greater speed to be the first in the market will require, in addition, team work and an efficient and effective organization capable of surviving in a highly competitive environment where only the fittest could stay in business in the long run.
Conclusions When the information revolution becomes widespread, firms will have to provide their customers with real value in order to survive in the long run. This can be done by providing the lowest cost, with an acceptable quality, or by offering new products and/or services ahead of their competitors. In both cases they must continuously innovate either by internal improvements to cut costs, by improving quality, or by identifying existing or new customer needs, and by coming up, faster than their competitors, with new products/services to fulfil such needs. An important factor determining success will, therefore, be the education, creative potential as well as EuropeanManagementJournaIVo114No 1 February 1996
the motivation and team spirit of those working, or better being part of the firm. Their knowledge, innovative potential, entrepreneurship, and ability/willingness to give their customers value for money will be critical for success in an environment where superautomation and the instant and perfect dissemination of information on a global basis will be widespread. In such a highly competitive environment, continuous improvements and doing something better than the competitors will be prerequisites for long-term survival and success as C&C will eliminate barriers and intensify competition. The biggest challenge for firms will not, therefore, be to follow the latest management theory or tool, imitate the strategy of today's most successful companies, or follow the advice of the best consultant or most popular management guru. History (see Table 1) has shown that management theories/tools do not last long while the performance of 'excellent' firms can fall below average -even in a short time period. This means that success cannot be based on past performance or criteria. Although it is nice to read about success stories and comforting to believe that such success can be replicated by following what worked well in the past, or by following some easy to apply 'recipe', in reality such stories or recipes do not suffice. Instead succeeding requires a fundamental understanding of the present and the correct anticipation of forthcoming changes and their implications. This article has concentrated on the major changes which are bound to affect all aspects of our society (and personal lives) while discussing their implications for firms. These implications must be clearly understood and used into both shaping top management's thinking about the future and becoming the basis for formulating and implementing appropriate strategies to exploit the advantages while avoiding the disadvantages of these forthcoming changes.
Notes
1. Amst, C., Spiro, L.N. and Burrows, P. (1995) Divide and Conquer?, Business Week, October 2, 28--29. 2. Gilmore, F.F., and Brandenburg, R.G. (1962) Anatomy of Corporate Plannin 8, Harvard Business Review (NovemberDecember), pp. 61-69; Ansoff, H.I., (1964) A QuasiAnalytical Approach of the Business Strategy Problem. Management Technology, IV, pp. 67-77. 3. Ackoff, R.L, (1970) A Concept of Corporate Planning, John Wiley and Sons, New York; Lorange, P., and Vancil, R.F., (1977) Strategic Planning Systems, Prentice-Hall, Englewood Cliffs, NJ; Steiner, G.A., (1979) Strategic Planning: What Every Manager Must Know, Free Press, New York. 4. Smith, Ward C., (1980) Product Life-Cycle Strategy: How to Stay on the Growth Curve, Manageraent Review, a publication of American Management Association, January 1980. 5. The Boston Consultin 8 Group, (1970) Perspectives o n Experience and Perspectives on Strategy, The Boston Consulting Group, 1972. 6. Porter, M.E., (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York. 7. Schoeffler, S., Buzzell, R.D., and Heany, D.F., (1974) Impact of Strategic Plannin 8 on Profit Performance, Harvard Business Review, $2, pp. 137-145. I9
FACTORS AFFECTING SUCCESS IN BUSINESS
8. Kiechel, W., (1981) The Decline of the Experience Curve, Fortune, October 1981, pp. 139-146. 9. Fierman, J., (1995) Winning Ideas from Maverick Managers, Fortune, January 6, pp. 40-48. 10. Mintzberg, H., (1994) The Rise and Fall of Strategic Planning, Prentice Hall, UK. 11. Hayashi, K., (1978) Corporate Planning Practices in Japanese Multinationals, Academy of Management Journal, XXI, 2, pp. 211-226. 12. Bain & Company and The Planning Forum (1995),
Management Tools and Techniques: An Executive's Guide, 1995, Bain & Company, Boston. 13. Peters, T.J., and Waterman, R.H., (1982) In Search of Excellence: Lessons from America's Best-Run Companies, Harper & Row, New York. 14. Taken from various issues of Fortune. 1,5. Taken from the yearly survey of Fortuneusually published in the month of March each year. 16. Smith, L., (1995) Rubbermaid Goes Thump, Fortune, October 2, 62-67. 17. Pascale, R. and Athos, A., (1982) The Art of Iapanese Management, Warner Books, New York. 18. Hamel, G., and Prahalad' C.K., (1994) Competing for the
Future: Breakthrough Strategies for Seizing Control of your Industry and Creating the Markets of Tomorrow, Harvard 19. 20. 21. 22.
23.
24. 25.
26.
27. 28.
20
Business School Press, Boston . Say, J.-P., (1828) Cours Complet de l'Economie Politique. Giffard' P., (1899) La fin du Cheval, Armand Colin, Paris. Asimov, I. and C6t4, J. M., (1986) Futuredays:A NineteenthCentury Vision of the Year 2000 Virgin Books, London. Miles, l., (1993) Services in the New Industrial Economy, Futures, 2$, 6, 653-672; Batty, M., and Barr, B., (1994) The Electronic Frontier: Exploring and Mapping Cyberspace, Futures, 26, 7, 699-712; Crampton, T., (1995) For Telecommuters, a Virtual Office Is as Close as the Nearest Phone, International Herald Tribune, Monday, April 10, 1995, 12; Senker, P., (1992) Technological Change and the Future of Work: An Approach to an Analysis, Futures 24, 4, 351-363; Blazejczak, J., (1991) Evaluation of the Long-Term Effects of Technological Trends on the Structure of Employment, Futures, 23, 6, 594-604. Roach, S.S., (1988) Technology and the Services Sector: The Hidden Competitive Challenge, TechnologicalForecasting and Social Change, 34, 4, 387-403; Roach, S.S., (1991) Services Under Siege - - The Restrucharin 8 Imperative, Harvard Business Review, September-October, 82-91. David, P., (1993) Investment in Electricity and Payoffs, Stanford Working Paper. Forester, T., (1992) Megatrends or Megamistakes? Whatever happened to the Information Society? The Information Soc/ety, 8, 1, 133-I46; Makridakis, S., (1990) Chapter 5 in Forecasting, Planning and Strategy for the 2lst Century, The Free Press, New York. Hadjian, A., (1994) The Productivity Payoff Arrives Fortune,June 27, 35-39; FarreH, C. and Mandel, M., (1994) America's Growth Economy: Conventional Wisdom Doesn't Hold Anymore, Business Week, May 16, 42--48. Stole C., (1995) Silicon Snake Oil: Second Thoughts on the Information Highway, Doubleday, New York. The Information Revolution: How Digital Technology is Changing the World, Business Week, June 13, 1994, 35--60;
Stix, G., (1993) Domesticating Cyberspace, Scientific
American, 269, 2, 84-92. 29. Weijers, T., Meijer, R., and Spoelman, E., (1992) Telework Remains 'Made to Measure' Futures, 24, 10, 1048--1055; Deschandol, P., (1993) T41~travail:Les Le¢ons des Premieres Exp4riences, Usine Nouvelle, Juin, 48--49. 30. Gassman, H.P., (1991) Information Technology Developments and Implications for National Policies, Futures,23, 10, 1019--1031. 31. Crampton, T., (1995) For Telecommuters, a Virtual Office Is as Close as the Nearest Phone, InternaHonalHerald Tribune, Monday, April 10, 1995, 12; Weijers, T., Meijer, R., and SpoeIman, E., (1992) Telework Remains 'Made to Measure', Futures, 24, 10, 1048-1055. 32. Chandler, A.D., Jr., (1990) Scaleand Scope: The Dynamics of Industrial Capitalism, The Belknap Press of Harvard University Press, Cambridge, Massachusetts. 33. Makridakis, S., (1996) Forecasting: Its Role and Value for Planning and Strategy, InternationalJournal of Forecasting. 34. Porter, M.E., (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors Free Press, New York.
SPYROS
MAKRIDAKIS,
INSEAD, Boulevard de Constance, Fontainebleau, 77305, Cedex, France Following the attainment of a place in the Greek Sailing Team in the Olympics of 1960, Spyros Makridakis set sail for New York University from where he obtained a PhD in 1969. Since then he has advised numerous international organizations and companies, and taught in several European and American universities, including IIM in Berlin and M I T and Harvard in the USA. He is currently a Research Professor at INSEAD, working on the implications of technological, competitive and other changes on work and managemenL in particular, the kind of corporate strategies that will produce winning companies in the coming century. Spyros Makridakis is the author or co-author of I8 books including Forecasting Methods for Management (Wiley) now in its 5th. edition and has sold more than I20,000 copies in I2 languages. Also author of over 100 articles in journals, his latest books are Forecasting, Planning and stategy for the 21st. Century, and Single Market Europe: Opportunities and Challenges for Business.
EuropeanManagementJournalVo114No 1 February 1996
