Printed
with permission from TCI
Management Consultants. A group of senior-level management
consultants, offering strategic planning and marketing services
to a wide range of public and private sector clients.
The
Friction-Free Economy: Marketing Strategies for a Wired
World
by T.G. Lewis
HarperBusiness, New York, 1997
ISBN 0-88730-847-3
Lewis'
main premise in this book is that for companies in telecommunications
and related industries, the old rules of classical economics
relating to supply and demand no longer apply. Companies
in this industry operate in what he calls 'internet time'
(where the time from product development to market is vastly
accelerated because companies rush to render their own products
obsolete before anyone else does). Their goal is to reach
a market position that Lewis terms 'mainstreaming', in which
a company dominates the market by having a much larger share
than anyone else. At this point, because the unit costs
of production are so low (due to the accelerated learning
curve that is also characteristic of the industry), profits
are at a maximum (and huge)! This is the fundamental logic
that should govern the development of marketing strategies
in these companies.
In order
to attain the nirvana of a mainstream position, in this
industry product is often given away (think of Netscape
making copies of its browser available for free, or Corel
bundling its software products with sales of new computers).
This builds up market share quickly and establishes a platform
for further product and service development. Thus unlike
the traditional economy, where the prevailing philosophy
is 'demand creates supply', the rules of the new economy
are that Œsupply creates demand¹.
"In
essence, classical economics has production dogging demand
- the manufacturer waits for demand to rise or fall before
adjusting production. This friction or delay introduces
cycles and uncertainty into traditional markets...In the
classical economy, prices go down when demand goes down,
forcing supply also to decline. In the friction-free economy,
prices go down as supply goes up, forcing demand to rise.
Š
the friction-free economy turns the supply-equals-demand
rule upside down. Demand effortlessly follows production,
because there is very little friction, and virtually no
gravity. This leads to a radically different economy."
(pp.10, 11)
According
to Lewis, when considering an information product such as
software, the old classical notion of diminishing marginal
returns does not apply. In the classical economy, when a
household bought a dishwasher for example, there was little
need for a second, third and fourth dishwasher - beyond
the first one, an extra dishwasher brought little or no
'additional value' to the members of the household. Thus
there was diminishing marginal returns to households for
dishwashers. With a software product, however, there is
always a new upgrade or related product that consumers will
need or want to get - so that in a sense there is increasing
marginal returns.
"In
the friction-free economy, consumers get hungrier as they
eat more. For example, Microsoft customers want more and
more software products from Microsoft. Why? Because users
of software get locked into a particular word processor
or publishing program. They do not want to learn a new system,
so they keep buying the next version. Microsoft's profits
grow as it releases new versions about every six months
feeding off upgrades as well as new usersŠ.When
this happens, the product has reached the mainstream."
(p. 11)
The
nature of the consumer market is also changing in response
to telecommunications technologies. Lewis discusses the
concepts of narrowcasting, the market-of-one, and the creation
of virtual communities through the internet. Products and
services that reach the consumer through these means is
also a key characteristic of the friction-free economy,
and is another reason for the extreme growth rates seen
in certain areas (distribution costs are very low or effectively
nil, and delivery times are instantaneous).
In short,
in this industry, the market is already huge and still growing
fast; the cost of production after initial development is
essentially nil; and there are not those pesky diminishing
returns that act to limit market growth in the same way
as conventional products. So it's not at all surprising
that the industry is booming.
In a
chapter entitled "Making Money in the Wired World"
Lewis discusses various ways in which companies can participate
in the friction-free economy. The fundamental requirement
is that companies add value to products and services at
all levels. He provides many examples of this, and discusses
how companies are becoming more reliant upon and integrated
with one another. (He uses James Moore¹s concept of
a business ecosystem extensively in this section of the
book: see the Death of Competition HarperBusiness,
1996.)
Lewis
provides various of rules of thumb that he maintains are
useful to keep in mind when developing aggressive marketing
strategies in this industry. (However, one of the problems
with the book is that he provides little in the way of sources
or documentation for these rules of thumb, and little empirical
evidence that they actually hold.) None the less, they are
interesting and get one thinking. They are:
Davidow's
Law
William
Davidow worked for Intel, where he observed the following:
the first product of a class to reach a market automatically
gets a 50% market share. According to Lewis, this law is
what impels companies to render their own products obsolete
before others do (a classic Intel strategy).
Moore's
Law
This
well-known 'law' was formulated by Gordon Moore, also of
Intel. It states that computer processor power doubles every
eighteen months an example of the accelerated learning
curve that is in place within the computer industry.
The
New Lanchester Strategy
Frederick
Lanchester was an aviation military strategist in World
War Two, considered by many to be the father of operations
research (OR). The application of his military theories
to markets has led to what Lewis calls the 'New Lanchester
Strategy'. Essentially it goes as follows:
The combined operation of these three factors drives the
telecommunications industry. Lewis presents some ground
rules underlying marketing strategies for companies that
want to change their market positioning within this cutthroat
environment:
"Strong companies get stronger by aiming at the weaker
companies first, followed by stronger and stronger companies."
(p.74)
A company's
market budget must be the square of a target company's in
order to take market share away from the target company.
(p.74) [This is one of those intriguing but annoying statements
that Lewis makes, because he presents it without any empirical
justification or foundation. It is also quite unclear as
to what he really means by this for example, is the
square of two thousand dollars: $4 thousand, or $4 million?]
"Mergers
and acquisitions are appropriate when they move a company
from unstable to player, player to leader, or leader to
monopoly." (p.75)
There
are four basic marketing strategies to fight a dominant
market leader that Lewis discusses towards the end of the
book. These are summarized below:
|
Basic
Strategy and Operating Philosophy
|
Tactics
|
Examples
|
| (1)
Brute force play: attack the market leader through
an aggressive attack on several fronts
|
- beat price-learning curve
- branding
- tailoring (to the market of one)
- volume manufacturing
- execute Davidow's law
| -
Syquest vs. Iomega
|
|
(2) Momentum Play: find a weak spot, gain a
foothold and build takeover momentum
|
- joint ventures
- mergers and acquisitions
|
- Oracle Systems vs. Microsoft
|
|
(3) Anti-Monopoly Play: get third parties to
help destroy the leadership position through monopoly
| -
target the weak
- lobby government
- litigate
|
- Netscape Navigator vs. Microsoft's Internet Explorer
|
|
(4) Pure Play: consistent execution of a strategy
over a period of time
| -
hit shooting range targets
- introduce chaos into marketplace
| -
Corel vs, Microsoft
|
