Firms Catering to ‘Real’ Customers
Today’s managers have watched once-stable market shares erode because new rules have altered the terms of competitive marketing. A significant and fundamental shift in competitive leverage, away from the producer toward the distributor, has forced businesses to adopt new ways of serving their markets.
As a result of this shift, many businesses now realize that their “real” customer may not be the consumer. They are also discovering that traditional competitors may be better partners than adversaries in a world of emerging global markets. For those companies that can adapt to this changing environment, the rewards will be great; for those that can’t, the risks will be high.
In the first Industrial Revolution, access to natural resources, capital and labor provided barriers to entry into the markets of traditional manufacturers, who were primarily in the United States, Great Britain and Europe. But after World War II, automation, computerization and telecommunications broke down these traditional barriers; manufacturing skills became easier to transfer from country to country. As a result, first Japan, then South Korea, Taiwan, Singapore, Hong Kong, Thailand, China and Africa emerged as producers of high-quality, low-cost products.
Confronted with a worldwide proliferation of suppliers, some companies realized that production capabilities had given way in the competitive pecking order to distribution networks and marketing skills, which enabled companies to serve their markets better and to enhance their market share.
One company that recognized the new rules and moved to take advantage of the new Industrial Revolution was Citicorp. Faced with plummeting loan volume, Citicorp identified real estate agents as one of its “real” customers and developed a marketing strategy to capture them. Since starting Mortgage Power in 1986, Citicorp has strung together 3,000 real estate brokers, lawyers, insurance agents and mortgage bankers into a 37-state captive distribution network. By extending special services to customers of “member” real estate firms, Citicorp was able to sell $10 billion in mortgages through this system in 1988.
One crucial ingredient in the service involves offering “mortgage referral fees” to real estate agents who bring clients to Citicorp. Citicorp says it doesn’t pay the fees, which it is technically prohibited from doing under federal law, but instead provides incentives through speedy approval of mortgage applications and other services. In any event, this strategy enables Citicorp to replace the loan officer with the agent. Recent protests by competing mortgage providers and realtors outside the captive network, however, have resulted in some state governments restricting Citicorp’s referral fee program.
Still, where four years ago Citicorp was not even among the 100 largest companies in the mortgage business, today it is one of the nation’s biggest mortgage lenders. The company’s success resulted from its new distribution network that locked up its “real” customer and locked out the competition.
Major changes in the relationship between auto dealers and manufacturers also illustrate the rising power of distributors. Traditional single-manufacturer dealerships have given way to multiple-line dealers who pit domestic and foreign manufacturers against each other.
In a speech earlier this year, Ford Chairman Donald E. Petersen said: “The battle for competitive advantage at dealerships is becoming more important. This is where the major opportunity for competitive breakthrough exists.” This view was echoed by Bennett A. Bidwell, a senior executive at Chrysler, who said: “The relationship is changing from one of strong influence and control by the manufacturers to one where the manufacturer is fighting for shelf space.”
Ford’s Lincoln-Mercury division felt the impact of this changing relationship last fall, when its dealers refused to use the company’s national advertising theme in local ads. To win back the dealer support, Lincoln-Mercury agreed to change its national advertising. As Ross H. Roberts, Lincoln-Mercury vice president and general manager, admitted: “We are doing this because the dealers told us to.”
The next chapter of the new Industrial Revolution is starting to write itself now. This chapter reveals an emerging pattern of cooperative networks that involve collaboration among competitors to lock out other competitors.
Two recent examples illustrate these new collaborative efforts:
* For the 1988 holiday season, Walt Disney Co. joined in a $15-million cross-promotion with Coca-Cola products to boost the sale of Disney Classics on videotape. Coke, which at the time owned Columbia Pictures--a Disney competitor--shared expenses for TV and radio advertising with Disney.
* When both Ford and Nissan wanted to enter the front-wheel-drive, mini-van market, they realized that by acting independently, neither could sell the 250,000 vehicles a year necessary to justify the design and manufacturing costs. However, by sharing a nearly completed Nissan design and an expanded Ford van plant, the two “competitors” could jointly produce and sell a new mini-van in the United States. Now, each can generate profits by selling just 60,000 to 70,000 vehicles a year.
Easier entry into markets and the resulting oversupply of goods and services have forged a new set of rules that have shaped the competitive environment in a variety of industries. As more products and services become accessible throughout the world, trade restrictions become more obvious, moving from specific products to entire markets. In effect, the transition currently under way moves economic dynamics out of the era in which a shortage of goods and services attempted to meet a seemingly insatiable worldwide demand and into a new era in which an abundance of supply will be chasing a shrinking demand.
In this new environment, mastering the competitive rules of the new Industrial Revolution will go a long way in determining who wins and who loses the battle for market share in the ‘90s.
