IBM announced yesterday that it had put its PC division on the block. One way of seeing this is simply a matter of the cycle of innovation where the PC is on the back end and has become a commodity. This is true but there is another factor working here as well. This is another event in the end of the traditional business model and the advent of a new one.
No major PC firm can compete with the Dell model of business. One response has been to get bigger - Compaq and HP are trying this. Another response is to exit, IBM. No one has responded by matching the Dell model of working back from the direct wishes of the customer. Why? I think that the answer is that if you have a culture embedded in you, change is all but impossible. The new model is powerful in two ways. The first is that it works. The second is that those who are best at working the old way cannot change to catch you.
You don't believe me? Look at Wal*Mart. Wal*Mart uses the new model. Everything works back from the store not out from Bentonville. The response from its major competitors - bankruptcy or merger. Do you believe that the Sears Kmart deal will threaten Wal*Mart? What will threaten Wal* Mart will be its size and success. As it becomes even more dominant it will create ever more opposition.
But its model of buying for you and giving you the best deal remains the key to its success.
The top down model not only does not buy for you - it works against you. The traditional model creates value by extracting it from us. The new model creates value by giving too us. This is a revolution of Copernican scale.
Imagine a bank that instead of pushing products at you all the time, instead constantly worked to find cheaper and more flexible products for you. Imagine a university that instead of raising fees every year and increasing class size and reducing student space did the opposite? Imagine a chain restaurant that instead of treating you like a piece of their production system, focused entirely on giving you and your date the most wonderful eating and social experience?
The traditional top down model is maxed out as a system. It cannot compete with the value creating model once a value creator has set up shop in the sector. I am convinced that, over the next 10 years, competitors will emerge in every sector of the economy and even in education and health care and sweep away the top down model.
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When Henry Ford introduced mass production at the beginning of the 20th century, he not only changed how things were made, he changed the culture of the workplace. In this production culture, head office was the organization’s brain and it decided everything. Products were conceived, designed, produced and then marketed and sold. The enterprise pushed out from the centre. This model has taken over all aspects of organized life today. At its heart is a need to control the core process. Everything and everyone had to be “managed”. It was successful during a long period of relative stability.
We are so imbued with this model that we mainly fail to see it for what it is – only a model which has had a life of about 100 years. Today, we have reached the design limits of this model. More efficiency cannot be squeezed out of it and the business, social and technology environments are now changing so fast that such a model cannot react fast enough.
A new model is emerging. It is the reverse of the production model. In this new model, which we can see in the actions of new adopters such as Wal*Mart, Amazon or Dell, the flow is reversed. The customer sets the product agenda. It is the customer who decides what they want and who drives the production process back into, not simply one organization, but into a network of suppliers organized by the host company. The new model works deliberately to eliminate, or significantly reduce, inventory, such as eBay, Dell or Southwest, or to carry inventory in a distributed form in the supporting federated system such as Wal*Mart and its suppliers. With very low or no inventory, they have a compelling cost advantage.
All have remarkably sensitive customer interfaces where, at best, individual customer profiles, preferences and accrued activity and trust are maintained in real time such as by Amazon, eBay and Dell. Or, profiles are held in aggregate, where community profiles are maintained such as at Wal*Mart.
This is not simply a re-engineering of the process but a shift in culture. It involves the giving up of the idea that the market can be controlled by head office. Head office in these organizations does not pretend to be able to predict customer behaviour, instead it works to have the best sensory system possible. It uses this acutely sensitive information system to track trends and to react immediately.
As a result, the customer experience has been transformed from an outward push to an inward acceptance. It is fun to fly Southwest as well as being inexpensive. Amazon provides a community of book reviewers that pulls the customer into the primary sales position in the firm. Wal*Mart greats each customer and so on. The customer gets what they want rather than only what the firm will give them.
