Jack Welch once said that the 1980s would be a "white-knuckle" decade of intensifying industrial competition — and that the 1990s would be tougher still. Despite history's greatest bull market, rising incomes, and unprecedented prosperity throughout much of the world, the former GE chairman was proved right. The "topple rate," at which companies lose their leadership positions, doubled in the 20 years to the mid-1990s. (See Exhibit 1, "Vulnerability at the Top.") New technologies eclipsed long-established industry champions, and nimbler competitors with sharper value propositions and lower costs emerged, seemingly from nowhere, to take their place.
In many ways, however, the 1990s were just the start of a massive reshaping of the global economy that will continue for the next 10 to 20 years. Three supply-side forces will combine to unleash innovation and to expand productivity and GDP on a scale never seen before: globalization, particularly the integration of large, low-cost economies into the world's supply-and-demand base; technology, coupled with the exploitation of the networking and communications infrastructure created in the 1990s; and economic liberalization. The pie is still growing, and growing fast, but the increasingly uncomfortable reality is that the distribution of growth — and profits — is anything but uniform or predictable.
Welcome to the world of extreme competition, where supply-side trends that have been on the march for years are accelerating the pace of economic change and expanding its scope. Some industries are more exposed than others, but mature companies with seemingly dominant industry positions are particularly vulnerable: they face a double whammy of more intense competition and declining average industry performance. A comparatively gentle decline — like that of U.S. automakers during the past 30 years as they lost market share to Japanese rivals with lower costs and better quality — isn't likely.
Few incumbents are in a position to respond well to the challenge. Decision-making processes are often slow, backward looking, and incremental. Too many companies need nothing less than a new competitive approach built on speed, flexibility, and resilience — an approach that isn't found in most strategy textbooks or, for that matter, in the experience of business leaders who won their spurs at a time of more incremental change.
Everything in Oversupply
Let's take a closer look at the dynamics of supply-side growth — a term familiar to politicians and economists but used less often in managerial contexts. Every corporation requires, to varying degrees, labor, raw materials, a communications infrastructure, production facilities, and capital. Over time, these factors of production and the way they combine in business systems have changed dramatically. (See Exhibit 2, "Too Much of Everything.")
Take labor, for example. More than one-third of the world's six billion inhabitants live in China or India, but 25 years ago their population pools were out of reach for the developed world's companies. Technology, in the form of vastly more efficient communications and computing power, has now made large numbers of people in these countries available for an astonishing array of physical and knowledge work. The buildup of North American industrial capacity in the second half of the 1990s was equally unprecedented. Finally, capital is both cheap and mobile. The federal funds rate, 15 percent in real terms in 1980, is close to zero today.
Three Industry Effects. Plentiful, cheap, and global labor, capital, capacity, infrastructure, and information have affected industries profoundly. In microeconomic terms, this growth in supply has had three broad consequences: the aggregation of formerly distinct markets, enhanced market clearing and efficiency, and greater specialization, particularly in supply chains.
Aggregation takes place when competitors in one geography can compete in another because of falling shipping costs, lower search costs for consumers (as a result of the ability to find sellers on the Internet, for example), or both. Technology or deregulation can also bring about convergence, a different kind of aggregation: like the geographic variety, it can quickly create substitutes and new competitors. Technology-driven convergence is common in consumer electronics — cell phones, for instance, are now cameras and Web browsers too — and will become even more so as communications, computing, and storage technologies continue their forward march. Deregulation, as well, drives convergence: with the stroke of a pen, and some subsequent litigation on both sides, U.S. long-distance and local telecom providers could invade each other's markets.
Enhanced market clearing means that buyers can make more efficient purchasing decisions. While sophisticated purchasing practices and the scale of the buyers have long driven corporate purchasing power, widespread information and the presence of new supply alternatives with radically different economics now take the traditional "supplier squeeze" to a new level. These forces promise to reshape the economics of many industries as the products and services of competitors with dramatically different cost structures become acceptable substitutes for dominant offerings.
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