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Xavier Van de Lanotte

[May 7, 2003]

Opportunity At The Bottom Of The Cycle

BY XAVIER VAN DE LANOTTE


The telecommunications sector has been severely hit across the board. While a significant pickup of investment in that part of the economy is unlikely for the short term, opportunities for success exist for those companies that know how to manage their markets.

Joseph Schumpeter, in his Theory of Economic Development, states that in a stationary economy, there is no place for profit. He demonstrates that it is the innovation which disrupts the status quo that creates profits. At the industry level, the entrepreneurs' unique inventions draw imitators -- business managers and financiers that seek higher margin opportunities -- to invest en masse, causing a boom at the onset of a new business cycle. However, at the enterprise level the focus must be on creating and maintaining competitive differentiation.

The telecommunications industry has known such a boom with the advent of Internet, fiber and wireless technologies. As the telecommunications sector spirals down, is the manager doomed to wait out a period of phase-out and corporate consolidations to return to profitability until the next big revolution in the industry? The answer is negative as opportunities lie at the bottom of the cycle. The solution: Managing the value chain.

A FOCUS ON VALUE CREATION
While Schumpeter believed that only inventors could claim responsibility for disruptive occurrences -- the manager in contrast holding responsibility for administrating the business only -- he could not foresee that, at the turn of the 21st century, information technology, globalization, and the complexity of relationship and business models would give the manager an opportunity to be an innovator in his or her own right. For while the focus then was on manufacturing, nowadays it is on value creation.

The great economists were on a quest to determine the origin of "value" and "profit." They established that "value" comes from labor and is captured in the price of goods and services set by the market through the balancing of supply and demand. "Profit" was thought of either as a surplus value due the capitalist (Smith), or as the taxation of labor (Marx), and was computed as the difference between price and cost.

Sadly enough, many a business manager still runs their businesses based on these somewhat antiquated concepts. Fortunately, today we have management science at our disposal to reveal the inner-workings of the enterprise and bring the broader definition of "value" to light, as well as implications of Schumpeter's theory on the "origin of profits" and the diversely dynamic concept of "competition" laid out by Adam Smith.

Is this merely a matter of nomenclature, or is there something more substantial in defining concepts and understanding the economic principles and the business practices? Good skills in business administration, negotiation and finance certainly help in running a business neatly. Integration of technology and process management creates business efficiency. But a strategy that will drive business effectiveness requires the understanding of the bigger picture. Therein lies the key differentiator.

For anyone thinking of waiting out the economic slump or hoping to be acquired, consider that the telecommunications sector has been devastated by bankruptcies, price erosion and a capacity glut in proportions never heard of before. When finally the next-generation technology arrives and boosts the sector to new heights, will there remain sufficient resources in your business to retool and take advantage of the high margin business opportunities this wave brings with it?

On the other hand, for anyone determined that telecommunications is the place to be, that there is a market niche where they can play a significant role and, that it can -- and will -- be done profitably, consider that:

  • While demand may not grow, need for more value to the dollar spent is virtually limitless.
  • While output (product or service) is easily duplicated, a successful process or strategic business relationship is not.
  • While clients acquire products and services, they buy the intrinsic value the products or services add to their operation.
  • While the industry average cost of goods and services sold is below 50 percent of revenues when operating near capacity, clients expect -- and get -- value added for the price differential (premium).
  • While the industry average gross margin is near 50 percent, the requirement to create differential value increases as the gross margin trends down.
  • While prices are determined by the market, profit potential is irrelevant of price but intricately linked to the value-creating abilities of the business model.

These principles, when effectively integrated in the business strategy, most certainly can -- and will -- lay the foundation for a sound business model. When at last the next-generation technology arrives, such a strategy will propel your business to the next level.

Managing the value chain provides the key to cost-effectively unleashing differential value. It enables the business to perform at a higher level by opening up new markets. It expands the reach and effectiveness of the distribution channels. It provides the impetus for strong partnerships and alliances. More importantly, with the differential value it creates, it further develops the business' core competencies, strengthens its reputation for superior standards and fosters customer loyalty.

For more information on managing the value chain, please visit us at www.vxtconsulting.com, or contact us at info@vxtconsulting.com. Xavier Van de Lanotte is the president and founder of VXTConsulting. He advises telecommunications services and equipment firms on Competitive Strategy, Customer Value, Alliance Management and Distribution, and has worked in this industry in various parts of the world for 15 years.







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