CHAPTER TWENTY-FIVE
Manage by Walking Around—Outside!
EVERYONE KNOWS HOW FAST technology is changing. Everyone knows about markets becoming global and about shifts in the work force and in demographics. But few people pay attention to changing distributive channels. Yet, how goods and services get to customers and where customers buy are changing fully as fast as technology, markets, and demography. And they are changing fast all over the world.
The bulk of consumer electronics—radios, TVs, VCRs, calculators—were sold in Britain 15 years ago by thousands of independent, locally owned “mom-and-pop” shops. Today the bulk of these goods is sold by four national chains. The mom-and-pop shop had to carry major manufacturers’ brands and relied on the manufacturers’ advertising. The four big chains carry their own private brands and do their own advertising.
In the U.S. office furniture—chairs, desks, filing cabinets—was bought 15 years ago in specialized office-furniture stores. Increasingly these goods are now being bought in discount stores and “buying clubs.”
The recent Japanese promise to repeal the law that protects their mom-and-pop shops and keeps out big stores and chains, has been hailed as a great American victory. But in Japan’s metropolitan areas (where 60 percent of the population live and shop), a majority of the mom-and-pop shops have already been converted into franchises of huge chains such as 7-Eleven or Mister Donut.
Six or seven years ago, mutual funds were distributed in the U.S. through two channels: indirectly, through brokerage houses, and directly, through TV advertising. These two channels still carry something like three-fifths of all mutual funds sold. But one of the big mutual-fund groups (which six years ago sold exclusively through brokers) now sells 15 percent of its products through regional banks, 15 percent through insurance agencies and another 15 percent through professional and trade associations.
Independent Outsiders
The hospital became a major market only 25 years ago. But then the hospital itself bought the goods it used. Now a steadily growing share is bought by independent outsiders to whom the hospital contracts maintenance, patient feeding, billing, physical therapy, the pharmacy, X-ray, the medical lab, and so on.
Increasingly even large users do not themselves buy their computers. They are bought instead by computer management firms that design, buy, install, and run their clients’ information systems. A major computer maker, Digital Equipment Corp., now has its own computer-management subsidiary.
Where customers buy is changing fast too.
Many major department store chains are in serious trouble. Some once great stores—Bonwit Teller, for instance, or B. Altman, only recently New York’s fashion leaders—are out of business. Others, such as Bloomingdale’s, are in bankruptcy. But one chain, Seattle-based Nordstrom, has been doing well. The department stores that are in trouble are all organized and run as downtown stores with suburban branches. Nordstrom has only suburban stores. We may be seeing the first result of the slow but steady move of office work out of downtown and into the suburbs where the office workers live.
The big “wire houses,” the New York-based stockbrokers such as Merrill Lynch and Shearson Lehman, did exceptionally well only a few years ago. Now they are losing sales and profits. But some large “regional” houses (i.e., brokers not headquartered in New York), such as A. G. Edwards in St. Louis, are doing fine. And so are some “institutional brokers” such as New York-based Sanford Bernstein.
The wire houses serve both the “retail customer”—the individual investor—and the “wholesale customer”—the pension funds. A. G. Edwards serves primarily the retail market, Sanford Bernstein exclusively the institutional market. Traditionally, large stockbrokers were successful in serving both markets. But in no other line of business do retail customers and wholesale customers shop in the same place. Are the securities markets now segmenting themselves the way every other market has?
Changes in distributive channels may not matter much to GNP and macroeconomics. But they should be a major concern of every business and every industry. Yet they are very difficult to predict. What’s worse: they do not show up in reports and statistics until they have gone very far. They are what statisticians call “changes at the margin.” And by the time such changes become statistically significant, it is usually too late to adapt to them, let alone to exploit them as opportunities.
The one way to be abreast of them is to go out and look for these changes. Here again are a few examples:
Alfred P. Sloan built General Motors into the world’s premier manufacturing company, in the ’20s and ’30s, by actually working with customers. Once every three months he would disappear from Detroit without telling anyone where he was going. The next morning he would show up at a dealer’s lot in Memphis or Albany, would introduce himself, and would ask the dealer’s permission to work as a salesman for a couple of days or as an assistant service manager. During that week he would work like this in two more dealerships in two other cities. The following Monday he’d be back in Detroit, firing off memoranda on changing customer behavior and changing customer preferences on dealer service and on company service to the dealer, on market trends and style trends.
GM in those years had the most up-to-date and comprehensive customer research in American industry. And yet—at least so I was told by the then head of customer research at GM—Sloan, by actually working in the field, spotted more and more important trends than did customer research, and spotted them earlier.
The late Karl Bays made American Hospital Corp. the leader in its industry during the 1970s. He himself credited his success largely to his going out into the field. Twice a year he would take for two weeks each the place of a salesman on vacation. When the salesman came back, Bays said (with a twinkle in his eye) “the customer always complained about the incompetence of his replacement and about the dumb questions I asked.” But selling, Bays said, was not the point of the exercise; learning was.
Another variant: two men who together took over a small and lackluster chain of fashion shops in the mid-’50s built it into one of America’s retail giants. For 30 years, until their retirement, each spent every Saturday in a different shopping mall. They did not visit their own stores. They spent the day in other companies’ stores—some fashion stores, some bookshops, some stores for household goods and so on, watching shoppers, watching sales people, chatting with store managers. And they insisted that every one of their senior executives do likewise, including the lawyer, the controller, and the vice president for personnel.
As a result, the company foresaw in the early ’60s the coming of the “youth culture” and built or remodeled stores to attract teenagers. A few years later, when everyone talked of the “greening of America,” the company realized that the youth culture was passé and changed merchandise and stores to attract the young adult. And another 10 years later, well before 1980, the company saw and understood the emergence of the two-earner family.
Dumb Questions
To be able to anticipate changes in distributive channels and in where customers buy (and how, which is equally important) one has to be in the marketplace, has to watch customers, and noncustomers, has to ask “dumb questions.” It is almost 40 years since I first advised executives to “walk around”—that is, to get out of their offices, visit and talk to their associates in the company. This was the right advice then; now it is the wrong thing to do, and a waste of the executive’s scarcest resource, his time. For now we know how to build upward information into the organization. To depend on walking around actually may lull executives into a false sense of security; it may make them believe that they have information when all they have is what their subordinates wanted them to hear.
The right advice to executives now is to walk outside.
[1990]