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The New
Market Leaders
By Michael Alan Hamlin
July 2, 2001
How do we recognize a market leader? Is it market share?
Revenues? Growth? Profitability? Asset value? Or is it all of these
measures? If it is one or more of these things, as most corporate
lists of best-performing companies tend to suggest, how is it that
a company like AOL, a struggling, scrambling Internet play just
half a decade ago, absorbed Time Warner to evolve into a sprawling
entertainment behemoth? NTT DoCoMo today is probably the world's
most respected mobile phone company but was just a fraction of its
current size a few years ago, and its management, unwanted in parent
NTT had been exiled to the then unimpressive communications company.
JDS Uniphase, a company that builds technology networks, was likewise
puny five or six years ago, at least compared to it's worth today,
even after the technology bust of the past year and a half.
Dramatic changes in circumstances like these are not
just the product of investor enthusiasm during the decade-long tech
boom that brought unprecedented prosperity to an already prosperous
U.S. and helped pull most of Asia out of a deep recession. According
to best-selling author Fred Wiersema, these companies grew because
they were expert at anticipating the future and developed the agility
to rapidly evolve products and services and organizational structures
as the world changed just as rapidly around them. It's also because
globalization, liberalization, and new technology has leveled the
global marketplace as never before. As a result, no company is safe.
Mr. Wirsema in his new book, The New Market Leaders:
Who's Winning and How in the Battle for Customers, argues that successful
companies address fast changing market conditions in at least one
of three ways. First, companies like Microsoft and Sony shape the
future by creating new markets and providing products and services
for them. Second, is exercising strategic insight, or the ability
to anticipate trends and undercurrents be they technological, demographic,
or social. Mr. Wiersema says Nokia and DoCoMo are examples of companies
that anticipate trends, and adapt early.
Third, companies learn from other companies. Cisco
does this by identifying new ventures developing fast-breaking technologies
and buying them. General Electric "sends teams of people around
the world to learn from innovative companies such as Cisco,"
says Mr. Wiersema, who believes all three strategies are bona fide
approaches to sustainable development. And that measuring the success
of these companies, therefore, requires new standards of measurement
because they don't show up on traditional lists of industry leaders
until after they've arrived.
He's come up with two, which he applied to over 5,000
companies. The top 100 he calls the New Market Leaders. They earned
an average return for their investors of 48 percent over the six-year
study period, compared to Fortune magazine's top 100 corporations'
average of 29 percent. They also beat the Nasdaq for the period,
which averaged a 32 percent annual gain.
The first measure has to do with how these companies
compete for scarce customers, which Mr. Wiersema says is today's
most crucial challenge for all enterprises. But "customer scarcity
should not be construed to mean that there aren't an enormous number
of customers or that they aren't buying enough," he explains.
Mr. Wiersema believes that turbulent market conditions cause supply
and demand to misalign. The outcome is that customers, rather than
companies, are behind the demand curve. In other words, market leaders
are those that attract market makers, the truly scarce early adapters
who initiate trends, better than the competition. When they do,
the latecomers are theirs.
So Mr. Wiersema says that market leaders should first
be measured by sales growth, because "customers are the ultimate
arbiter of success. The only way to increase your sales is to get
customers to change their buying decisions." That's what companies
do when they capture the hearts of early adapters, and leverage
that relationship to grow. Mr. Wiersema says that his top 100 New
Market Leaders grew "at an astonishing rate of three times
that of their peers."
While that's the measure of the top 100 New Market
Leaders, Mr. Wiersema believes that there are sectors in which market
leaders grow at slower, if still impressive rates. However, "unless
you are growing at twice the pace of your peers, you're at risk
of falling behind in the race for market leadership." That's
a pretty sobering thought for a region just now learning to face
up to the competitive realities of globalization and liberalization.
It's a high bar, indeed.
Of course, as we've seen from the ugly dot-bust, growth
without profitability does not a sustainable market leader make.
And so Mr. Wiersema's second standard of success is value of customers
to investors. While measuring customer value sounds innovative,
Mr. Wiersema points out that the practice has been around for at
least awhile, and is popularly known as "monetizing eyeballs."
It was on the basis of projected customer value that AOL bought
Netscape, and later sued Microsoft. Microsoft itself used the same
logic to purchase Hotmail, at US$40 per customer. Values exploded
thereafter: Mannesmann acquired Orange, for example, for around
US$9,600 per customer, and other sky-high valuations followed in
subsequent mergers.
Mr. Wiersema evolved this trend into a market-set index,
which he arrives at by dividing how much investors are willing to
pay for a dollar of sales into the average amount they are willing
to pay for a dollar of sales of the company's peer group, which
is a group of roughly comparable competitors serving as a control
group. On average, Mr. Wiersema's New Market Leaders have a market-value
index of 2.1
"That means investors believed each dollar of
their sales was worth more than twice that of their peer group."
Does that address the issue of profitability? Not always. But for
Wiersema, traditional measures of leadership ignore the rise of
future market leaders like AOL, Cisco, and DoCoMo, all profitable,
successful companies that dominate their markets. And because it
ignores them, it ignores what makes them successful.
Companies that want to learn from the best, therefore,
will find Mr. Wiersema's standards of great value, because it allows
them to learn from the best on their way up, before the news is
old, and they become institutionalized benchmarks. And as Mr. Wiersema
says, learning from others is an important way to prepare for the
future.
The New Market Leaders provides a number of case studies
of companies from both old and new economy sectors, such as UPS
and Yahoo! And Mr. Wiersema spends much of the book's 262 pages
in a careful examination of the qualities that make his Market Leaders
adept at capturing profitable customers and investors' dollars.
Like his earlier book, The Discipline of Market Leaders, this volume
is distinguished by its insight, simplicity, and what will surely
be sustained impact on the way companies view themselves and their
futures.
(Mr. Hamlin is managing director of the consultancy
TeamAsia and the author of two books on Asian economies and managing
in Asia. His latest book is The New Asian Corporation: Managing
for the Future in Post-Crisis Asia. His e-mail address is mahamlin@teamasia.com.ph.)
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