The Mark Hotel
September 27th and 28th

Linux, a free operating system, will soon become the number 1 version of Unix (an approach at the opposite end of Microsoft, which keeps the system trends). Increasingly, firms may give away Web-based services to fuel product sales on their sites or gain revenue from advertisements. While drug companies widely advertise their prescription drugs, employers and health plans are pushing cheaper generics. Private label makers have long been gaining shelf space against such powerful brand names as Kellogg and Nabisco, and supermarkets earn 25% more on store brands even though they are priced 10% to 24% below name brands. Day traders now account for 12% of Nasdaq volume, putting pressure on the big market makers to trim their spread, saving investors billions of dollars. Digital distribution of content, like music, makes pirating - free and unauthorized downloading of information - commonplace. Deregulation of the energy utilities is sending companies scrambling to keep old customers and find new ones as lowest cost begins to erode monopolistic pricing. Even low-income areas, where the few retailers who remained charged higher prices and were able to corner the $85 billion spent there, are now becoming attractive to lower-price chains.

Fast travel and the Internet make global comparison shopping a reality, forcing an entire country, like Britain, to lower prices in all categories from cars to supermarkets. The Net allows consumers everywhere to find the lowest price anywhere through comparisons and auctions, and within 25 years, businesses and individuals will use mobile intelligent agents routinely to perform tasks like shopping and negotiating on line. In one simulation of the upcoming digital marketplace, the cyber economy degenerated into vicious price wars and market crashes. For now, more and more consumers are getting a free ride from retailers because customers go into stores to see, feel, experience and learn about products, then go home and order them at the best prices over the Internet.

Lowest cost has made companies, but it can break them, because of an even lower cost and more convenient entrant. Witness the quick rise and then serious problems of CompUSA, as the category killers get killed by on-line and other lower cost operators. Competing on the basis of least cost has become a dangerously short-lived game, but for a while, it looks like, if the volume is right, the profits are guaranteed, and so companies seek to cut costs everywhere through the value and production chain in order to get to the consumer as cheaply as possible.

Nick Graham, CEO of Joe Boxer says, ËThe brand is the amusement park, the product is the souvenir.Ó But even in that scenario, International Data Corporation (IDC) predicts access to the Web in many retail stores as well as at home, and access to live salespeople via voice-enabled retail websites. Thus, even clever marketing and attraction may yield to least cost competition. Customization, individually tailoring products and easy do-it-yourself items from home d¾cor to health remedies to food to artwork, may work as a differentiator for a while, but eventually mass customization will drive prices down here, too.

Merely generating accounting profits can be a misleading indicator of a company"s true financial health. EVA (economic value added) and MVA (market value added) are increasingly attracting CEO"s, money managers and analysts. Of interest: None of the companies with the biggest market caps as well as highest MVA compete as lowest cost sellers (GE, Coca-Cola, P&G, Philip Morris, Bristol-Myers Squibb, Microsoft, Intel, Exxon, Pfizer).

One observer points out that the current economy is new because of its potential to create never-ending cost reductions driven by technological innovation. Money is being made by selling goods for less than they cost and relying on the learning curve to lower your costs next year. After this phase of a leading sector"s effects on the economy, the focus must shift to figuring out exactly what customers want and making sure they get it. ËIt is possible that in an information age economy, the businesses that enjoy the most success will not be those that focus on making better products but those that strive to find ways to induce consumers to pay for what they use.

Implications:
Least cost is transforming energy utilities into other entities. Some are repairing appliances for a monthly fee, some offer home security, credit cards, Internet connections and even lawn services. As cost-lowering computerization makes skilled workers redundant, manual labor re-emerges in the form of the professional servant class. In London, new cooks are earning $50,000 a year, and provisions of such services may be the way companies can drive margins.

Rommelsmuehle Center, a shopping center outside Stuttgart, Germany, caters to the environmentally conscious: selling building products from pure raw material, jewelry for people with allergies, and a beauty salon with natural products and Ëaroma drinks.Ó Manufacturers and distributors may have to work even harder to create ËartificialÓ market segmentation of this sort to differentiate and drive margins.

Time becomes an important strategy, on a continuum parallel to price but apart from it. But even though compressing time allows for higher prices, at some point that field, too, will crowd, because speeding up time pushes the low cost curve faster.

Eventually, much of the retail establishment may find itself profoundly changed. It may be that in 5 year we will see a number of stores, electronic stores being a perfect example, where the consumer is charged a fee to enter the premises. Once inside, there is only one of each item, displayed on the shelf, and the consumer has the ability to try items out, compare them, and even use an accompanying library to research them on line or in print. Then the consumer uses the store computer or her home computer to order the item wherever it is available at least cost, with the fastest delivery (e.g., 1-800-Mattress), or both. The service model of this is the equivalent of the customer paying the 1-800-Honest Broker for both a look-see at all the possibilities, plus professional help in finding the best vendor.

TREND PAPERS:
1. The New Value Chain
2. Hand-holding in the 21st Century: The Rising Demand for Stewards, Navigators and Other Learned Intermediaries.
3. The Dangerous Crowding in Least Cost

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