The New Law of Demand and Supply

by Rick Kash

Throw out those B school text books. Forget everything you ever learned about supply-side economics. Discover what the real "new economy" is and what you must know to succeed.

The New Law of Demand and Supply
The Revolutionary New Demand Strategy for Faster Growth and Higher Profits

By Rick Kash
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Chapter 1      
Why Demand Strategy? Why Now?

For several years we were dazzled, confused, and ultimately numbed by talk of the new economy -- a cybernetic wonderland, powered by microchips and liberated by the Internet, that would blow away the drab old rules and usher in a brave new era of business and finance. Of course, that vision has been seriously questioned with Wall Street's implosion and our first economic slump in a decade.

My colleagues and I at the consulting firm I lead, The Cambridge Group, have argued all along that it isn't the switch from the old economy to the new economy that has transformed business. Rather, it has been the shift from a supply-side economy to a demand-side economy that is changing forever the terms of commerce. While it was perfectly appropriate in the nineteenth and twentieth centuries to be supply-driven, the fundamental basis on which business economics function has now changed 180 degrees. Recognizing this change and the impact that it will have in determining the future success of companies cannot be overstated.

Historically, sellers have dominated nearly all markets. Today, buyers rule, and businesses that can't adapt to that sea change won't long survive.

From the Industrial Revolution to the end of the twentieth century, companies competed, for the most part, by supplying what they assumed their markets demanded. For two hundred years, this approach was successful because the world's economies on a broad scale were able to absorb virtually all of the supply that was being created. This is no longer the case, as many business leaders and economists now recognize.

 



Of course, businesses have always noted their customers' desires. As Lawrence A. Bossidy, the much-admired chairman of Honeywell International Inc., observed: "I doubt if there is a single company in [this] country that will not tell you that its first priority is satisfying customers. But do they behave that way? . . . Not many do."

Still, until recently the world's economies could absorb, on the whole, almost all of the supply that was created. As a result, it made little difference that ideas about demand were ignored and unsophisticated.

Today, as hordes of new competitors boldly and sometimes blindly enter nearly every marketplace and cause supply to outstrip demand, companies find themselves in a price squeeze. Their products have become or are in danger of becoming commodities that are entirely interchangeable. Therefore, they will have little choice but to compete on the basis of price alone. This results in a significant loss of profit. In the twenty-first century, they must realign their approaches to the market to reflect the realities of the demand economy or suffer the consequences as many companies have during the past year.

The distinction between the demand economy and the new economy is not a semantic one. My point is that it is not very useful -- and may, in fact, be misleading -- to talk about a new economy that is somehow supplanting the old one. It is both more accurate and more helpful to picture an economy that has been driven by supply but is now ruled by demand.

To alter the way a company acts, you must first address how its leaders think. I argue in this book that economic, technological, and societal forces have combined to create changes of such scope and magnitude that business leaders must rethink what they do in order to compete successfully -- that is, to win.

To be successful requires a change in how you go to market and how you compete. Competitive advantage and continuous growth in sales and profits are available by making some rather simple changes that will have an enormous impact in the marketplace.

In this chapter I will explain the evolution of these changes. Drawing upon my nearly three decades of experience as an adviser and consultant to many Fortune 500 companies, such as Merrill Lynch, AT&T., Citibank, Levi Strauss & Co., R. R. Donnelley, McDonald's Corporation, PepsiCo, Inc., Du Pont, Pharmacia Upjohn, the Quaker Oats Company, and Sears, Roebuck and Co., I show how companies can prosper in the demand economy using what I call Demand Strategy.

Unlike the many supply-side approaches -- such as reengineering, six sigma, and total quality management (TQM) -- that so many organizations engaged in during the late 1980s and 1990s, Demand Strategy begins by thoroughly understanding existing and future demand, and only then creating the supply to satisfy it. In our experience, the process of creating supply cannot be optimized until the demand it is intended to satisfy is fully understood. This is a paradigm shift of major proportions, whether you are in the credit card business, the fast food business, or any other business. The way you involve target customers so that they can guide you in the creation of supply that meets their expressed demand will define the extent to which you will succeed and potentially dominate your markets.

Frequently I'm asked how Demand Strategy is different from customer focus, customer intimacy, or any of the many customer approaches (often spelled out in books) of the past few years. My response is that Demand Strategy is vastly different.

Customers are a critically important part of Demand Strategy, but demand goes far deeper and involves a greater array of forces and factors than customers alone can supply. In fact, companies that rely only on their customers can get themselves into trouble if they don't set a context within which they hear, understand, and evaluate what customers tell them. Listening to customers provides enormous value, but there must be a system of checks and balances through which you can validate all that you are being told by customers.

Before we even talk to a customer in Demand Strategy, we gather a fact base on past, current, and emerging demand, a process we call a demand forces and industry factors analysis. The purpose of this analysis is to understand what forces and factors cause significant changes in demand in any specific category. Some are obvious; others might surprise you. For example, what would you guess is the single most important attribute teenagers around the world want in their cars today? A sleek look? Extra power? A great sound system? All are good guesses, but all are wrong -- they want a vehicle that offers them protection from physical harm and a car company that offers them emotional security. You'll read much more about this in Chapter 5.

Much of the trouble in the world's economy results from companies that listened only to their customers and built as much product as their customers thought they needed. In what will surely become a textbook account in business history, senior managers in the telecom industry were essentially told by their customer gurus to keep making more equipment and more bandwidth. As a result of listening to their customers and failing to put the information in context, the telecom companies now have an estimated twenty times more telecommunication capacity in the United States than we need. All too often, the business leaders failed to validate what customers said by putting it in the context of other information.

Unfortunately, there's a long list of highly visible companies that suffered the same fate: customers spoke convincingly about how much they wanted of a particular product, but once the manufacturer followed their advice, those same customers somehow disappeared and the products were failures. New Coke, for example, was highly preferred among some 201,000 people in market research, yet it failed miserably.

Why? Consumers gave Coke a very important answer to a critically important question: the new formulation of Coke tasted better than the existing formula. The Coca-Cola Company focused on this clear taste preference but failed to place that information into the broader context. Within this larger context the plan was to take away existing Coke and replace it with an entirely new product. The lesson is simple. Customer input must be understood in the larger context in which the business activity in question will take place.

The importance of context pertains to every issue and question in order to fully understand customer opinion, experience, and demand. For example, when asked the isolated question "Would you buy more environmentally friendly products if they were conveniently available in your favorite stores?," consumers overwhelmingly say yes all the time. However, as the requirements of making products environmentally safe can be quite expensive, many product introductions have failed because those that are environmentally safe usually cost significantly more than the products consumers are used to purchasing. Had the price differential been a part of the earlier question, many companies would have saved lots of time and money.

More recently, financial services companies across the United States have looked at research telling them that consumers would like to "bundle" many of their financial services products with one provider. For example, checking accounts, credit cards, mortgages, and investments would be provided by one company that in turn would provide monthly statements and billing all in one envelope, often with financial incentives to the consumer for having multiple product relationships with one financial institution. However, after hundreds of efforts by companies large and small, the success stories of bundling financial services products are few and very far between. Among the most important reasons these efforts have failed has to do with the context. While at one level bundled products create simplicity and time savings, these pale in comparison to the concern about putting all of your financial eggs in one basket and giving up the opportunity to select individual service providers that excel in a single financial dimension like mortgages and investments.

You will have to look far and wide to find someone who believes more in customers than I do. However, while customer insight and needs are critically important, a business leader must know all the factors that might affect demand, some of which provide the needed context for understanding what customers say and what they really mean.


Rick Kash is the founder and CEO of The Cambridge Group, one of the premier consulting firms in the United States, whose clients include many of the world's largest and most successful businesses, from Merrill Lynch to Gatorade and from Levi's to Abbott Laboratories. Kash serves on a number of community and corporate boards of directors and is a frequent speaker to corporate audiences on Demand Strategy. He lives in Chicago, Illinois.

 
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