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Drivers
for Atomization : Atomic
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The Changing Customer
The Unchanging Corporation
Tearing Open the Corporate Envelope
Capitalizing on Relationships
A Combination of Causes
We can already see the forces of change in the world around us today. Changes in customer expectations, changes in costs of doing business, and changes in stock market valuations are commonplace. They are the subject of books, magazines, television documentaries and our own experience. And in just a quarter of a century, we have witnessed the introduction of over six billion silicon devices into our daily lives - one for every member of the human race, with every prospect of a trillion interconnected entities by the end of the decade. None of these factors is in itself capable of turning our business world upside down but in combination they are enough to tear apart even the biggest of our giant corporations.
Consumers
are not as dumb as they used to be - already they (and business customers) are
already familiar with using electronic portals on the Internet to compare prices
and diversity of goods and services from thousands of suppliers across the world.
Information is power - and they have it.
The technology we use to sustain relationships is also changing. We are walking an evolutionary path from a world of largely verbal communications, based on text and data, to a world of visual and virtual communications where the richness of interaction is increased exponentially. A picture is worth a thousand words.
The increasing richness of the communications channels mean that we can become smarter in expressing our needs and aspirations as individuals. Consumers are becoming increasingly pre-occupied with the quest for their own personal experiences rather than a company's discrete products or services. The new mantra is to 'be', to 'go', to 'know', to 'do' and to 'have fun'. And these experienced-based desires cannot be met simply by single point solutions, be they products or services. Something has to change.
While its customer is looking at the horizon, today's corporation is still focused firmly inward, just as it has been for the past two centuries. We still see vast marketing departments trying to mould consumers' demands to the product, rather than moulding the product to meet the consumer's demands. And the structure of the corporations is becoming ossified. They operate static and linear supply chains and payrolls of 100,000+, with multiple layers of management trained to deal with the complexities of co-ordinating these monolithic structures. But the proliferation and richness of interactive channels mean that individuals of all types - both consumers and employees, are able to express for the first time their individual lifestyle needs and preferences. It is only a matter of time before the stubborn old product-centric corporations are ignored by the newly empowered individuals.
And it's not just consumer demand that has been reshaped by the introduction of the silicon chip. Instead of inflexible, linear supply chains extending from raw materials to finished goods, we see a transition to more dispersed webs of business relationships designed to respond quickly and effectively to emerging individual needs.
Firms have been trying to get sleeker and slimmer. They've reengineered themselves, they've installed ERP systems, and they've paid fortunes to get a step ahead of the pack. But they missed the big prize because they looked at processes and information inside the firm's boundaries, instead of solving the problems in the supply chain. The revolution brought about by e-Commerce will bring a rapid fall in external transaction costs, and that will have more effects on corporate structure than re-enginering ever did.
Firms have also been growing in scale for as long as we can remember. But the trend towards mergers accelerated throughout the 1990s has reached its final frontier. Most mergers are a waste of shareholder time and money and we think that is going to be even truer in the years ahead. Getting bigger only succeeds in increasing internal costs and reducing agility - precisely the opposite of what companies will need to do if they are to survive in the future.
Outsourcing providers are pointing out that there is no need to run you orwn accounting function, your own HR group or your own IT shop - and they are right. These belong as Service Platforms, which is what the outsourcers are becoming.
But why does this matter? It has been known for seventy years that they size of the firm is largely governed by a balance - where the costs of doing business externally are equal to the costs of doing something in-house. Rapid falls in external transaction costs will make it possible to reduce the size of the firm to increase agility and unlock shareholder value.
But maybe the biggest worry for today's management is the investor who increasingly wants to see companies responding to the changing economy. Having emerged from one of the longest bull markets in history, investors around the globe are showing increasing impatience with both new and old economy stocks, and are demanding a bold response to the opportunities of the future. They know that competitive advantage can no longer be sustained by producing more and better "stuff", and we have seen the value of some of the world's most successful corporations - old and new - halved in a matter of months.
Waves of technological innovation will continue with ever-greater frequency and this has persuaded investors to include a 'future growth options' component in their calculations. They want companies to show just how they are prepared to cope with the inevitability of change. And so far few old economy corporations have been able to demonstrate convincingly such new growth options. There's nothing sexy about toothpaste. Valuing 'future opportunities' is part of the answer, but it's still not enough, as witnessed by the mess that some attempts to do this produced during the dot.com boom. Those who invested money in the dot.com boom will know only too well the consequences of ignoring positive cash flows.
We think the most important and sustainable source of shareholder value in a connected economy will be something more fundamental. It will be the network of relationships that a company has created and will go on to create over time. We call this relational capital - the monetary value of these current and future relationships.
The book explains exactly how to use the powerful new information infrastructures to exploit relational capital and demonstrates how you can estimate its value. We even propose a simple formula that shows how future shareholder wealth can be linked to a company's relationship building capabilities. The main factors involved are customer intimacy, alliance building, innovation capacity, corporate agility and trust.
The upshot of this is that instead of being product or service centric, tomorrow's corporations will be relationship centric. And the implications of this change cannot be overstated. You may not read the position of Chief Relationship Officer in today's corporate prospectuses but it may turn out to be one of the critical posts in the successful firms of the future. The key to the creation of value will be the ability to form and re-form alliances and to sustain high levels of trust.
It's time for firms to get themselves ready to respond to changing customer demand and irrelevant corporate structures, but most of them are still too centred on their products and their internal functions. First and foremost, they need a new focus on agility. As you can't be big and agile at the same time (the internal cost of movement is too high), fragmentation is looking more and more attractive. And breaking up has never been easier (the availability and breadth of communications channels between organization is growing exponentially, which is sharply reducing the costs of doing business). And let's not overlook the force of the push from inside - from the CEO who needs to do something, no matter how radical, to deliver results to institutional shareholders.
Taken together, these forces are a fundamental challenge to the structures of the mega-corporations that inhabit the Global 2000. It's not the first time the business world has undergone major upheaval - the only corporation in the US top hundred list of 1900 to see in the new Millennium was General Electric. But we think this revolutionary cycle, as well as being ongoing, will be far shorter and more brutal than its predecessors.
For those who embrace the coming change, the prize in terms of unlocked relational capital will be enormous. But be prepared for a breathless turnaround. It may be another ten years before the economy has mutated recognizably into its new state but it's going to feel like w in front of an avalanche.
It's time to meet the atoms.