Winning in Smart Markets

The past two or three years will likely be remembered as the time when the long-heralded, but often postponed, “information age” finally became a reality. For business, the information age has led to the emergence of “smart” markets, or markets defined by frequent turnover in the general stock of knowledge or information embodied in products and possessed by competitors and consumers. In contrast to traditional “dumb” markets, which are static, fixed, and information-poor, smart markets are dynamic, turbulent, and information-rich. They are based on new kinds of products, competitors, and customers:

  • Smart products. These consist of products and services that have intelligence or computational ability built into them (e.g., microprocessors). More generally and more important, smart products include any offering that adapts or responds to changes in the environment as it interacts with (or is used by) consumers (for example, the process of ordering a customized computer from Dell or the crafting of a personal financial portfolio from Charles Schwab).
  • Smart competitors. These are competitors that, from a company’s standpoint, are changing or about which a company continually needs to update its information. The pervasive phenomenon of “convergence” — where firms from historically separate industries now find that they are direct competitors (in such areas as entertainment, telecommunications, and financial services) — is a direct consequence of smart competitors.
  • Smart customers. These are customers that, from a company’s standpoint, are changing or about which the firm continually needs to update its information. As customer demographics (e.g., where they live, their family and job status) and purchasing patterns (including increased switching among competing firms) display more frequent changes than in the past, firms are finding that an ever larger portion of their consumer portfolio is made up of “smart customers.”

Smart companies have tried to sustain a competitive advantage in the face of the challenges raised by smart markets largely through their information technology (IT) infrastructure. Indeed, IT is transforming business practice. The experiences of companies as diverse as American Airlines, USAA Insurance, Federal Express, Dell Computer, and pharmaceutical wholesaler McKesson — each of which has altered the dynamics of its industry and changed the requirements for competitive success — are among the most prominent recent business stories.

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References

1. M. Porter and V.E. Millar, “How Information Technology Gives You Competitive Advantage,”Harvard Business Review, volume 63, July–August 1985, pp. 149–160;

R. Glazer, “Marketing in Information-Intensive Environments: Strategic Implications of Knowledge as an Asset,” Journal of Marketing, volume 55, October 1991, pp.1–19;

R. Glazer, “Measuring the Value of Information: The Information-Intensive Organization,” IBM Systems Journal, volume 32, number 1, 1993, pp. 99–110; and

R.C. Blattbert, R. Glazer, and J.D.C. Little, The Marketing Information Revolution (Boston: Harvard Business School Press, 1994).

2. Firms are beginning to experiment with the concept of a “customer manager”; it is still too early to draw conclusions from these experiments. In industrial marketing, key account management is, of course, organized by customer; even so, the firm’s accounting systems typically favor profit and loss by product. The customer manager has bottom-line, profit-and-loss responsibility for a set of customer targets — i.e., he or she is charged with developing and delivering a set of offerings to chosen customers and will develop “customer plans” that specify the strategic objectives to be achieved with respect to the designated customer targets.

3. The extent to which some firms take the notion of “potential customers” in building the CIF is extraordinary. Implementation issues aside, several organizations conceptualize their potential customers as every household on the planet.

4. J.B. Pine II, Mass Customization (Boston: Harvard Business School Press, 1992).

5. The emergence of yield-management systems, which are effectively auctions, leads naturally to the notion of promotions as options and/or future contracts in which the seller offers the buyer the opportunity to buy a product at a later date for a specified price. See:

R.C. Blattberg and R. Glazer, “Marketing in the Information Revolution,” in Blattberg et al. (1994), pp. 9–29.

6. See:

R.C. Blattberg and J. Deighton, “Interactive Marketing: Exploiting the Age of Addressability,” Sloan Management Review, volume 33, Fall 1991, pp. 5–14; and

D. Pepper and M. Rogers, The One to One Future (New York: Doubleday, 1993).

7. S.H. Haeckel and R.L. Nolan, “Managing by Wire,” Harvard Business Review, volume 74, September–October 1993, pp. 122–132.

8. See, for example:

M.E. Porter, “What Is Strategy?” Harvard Business Review, volume 74, November–December 1996, pp. 61–81.

9. Glazer (1991).

10. The concept of an “offering,” as used here, includes all elements of the marketing mix — the product itself as well as its price, mode of distribution, associated communications activities, etc.

11. Increasingly, evidence shows that many catalogue mail-order companies are operating in the three-dimensional space, although they are doing so with a limited range of customers; so-called category stores (e.g., Circuit City, Home Depot) also compete in the three-dimensional space, although they do so with a limited set of product classes.

12. These issues echo the traditional distinction between product development and market development as alternative growth strategies.

13. Applications of behavioral decision research to marketing strategy suggest that, rather than responding to “exogenous” consumer preferences, firms may play a more active role in actually shaping these preferences. See, for example:

G.S. Carpenter and K. Nakamoto, “Consumer Preference Formation and Pioneering Advantage,” Journal of Marketing Research, volume 26, August 1989, pp. 285–298.

To the extent to which this is true, the desirability of the column or row strategy depends on the relative effectiveness of that strategy in influencing the structure of consumer preferences.

14. J.G. March and H. Simon, Organizations (New York: Wiley, 1958); and

J.G. March and Z. Shapira, “Managerial Perspectives on Risk and Risk Taking,” Management Science, volume 33, number 11, 1987, pp. 1404–1418.

15. A. Tversky, S. Sattath, and P. Slovic,

“Contingent Weighting in Judgment and Choice,” Psychological Review, volume 95, number 3, 1988, pp. 371–384;

J. Pfeffer and G.R. Salancik, The External Control of Organizations (New York: Harper & Row, 1978);

D.C. Hambrick, “Environmental Scanning and Organizational Strategy,” Strategic Management Journal, volume 3, April–June 1982, pp. 159–174; and

M.D. Cohen, J.G. March, and J.P. Olsen, “A Garbage Can Model of Organizational Choice,” Administrative Science Quarterly, volume 17, March 1972, pp. 1–25.