Organizations and Markets

Utility Strategy

19 March 2007 at 4:57 pm spostrel 5 comments

| Steven Postrel |

Skeleton of a Harvard Business Review article:

How do you get sustainable advantage in a service business today? One approach: Become a new-wave utility. Think about Google or Yahoo, eBay, Amazon, etc. on the Internet; think about UPS or FedEx, Grainger, Ryder, Public Storage in logistics; think about McDonald’s, Starbucks, 7-Eleven, in convenience food consumption.

Traditional “utility” aspects of a new-wave utility:

1. Taken-for-granted ubiquity
2. Taken-for-granted reliability
3. Taken-for-granted stability of offering
4. Gap of superiority in perceived ubiquity, reliability, and/or stability over fringe rivals and substitutes
5. Wide range of customer investments and expectations, including whole businesses, predicated on ubiquity, reliability, and stability of service

“New wave” aspects of a new-wave utility:

6. Need not be a natural monopoly (although it could be)
7. Need not be subject to economic regulation
8. May be able to add complementary services over time to exploit scale and scope; market boundary may be vague
9. Sunk costs and recurring fixed costs may be as much related to maintaining customer perception and service reputation as to maintenance of large physical infrastructure
10. Network economies may be as much on the demand side as the supply side

Traditional “utility” strategic issues:

11. Increasing returns means that price must be above marginal cost. Note that 9 above means that increasing returns may be in marketing, advertising, or R and D rather than in production or logistics
12. Smart price-discrimination and bundling are very important for profit maximization
13. Have to be on the lookout for cream-skimmers who try to peel off the most profitable parts of the market with focused offerings
14. May have to maintain service even in areas/categories where it is unprofitable in order to maintain taken-for-granted ubiquity and stability
15. Customer “voice” may be as important a signal of discontent as customer “exit.” Need to monitor complaints very closely to avoid public backlash
16. Changes in pricing or service characteristics will upset lots of people
17. Huge numbers of customer interactions guarantee that events way out in the tails of the probability distribution will happen frequently enough to threaten reputation
18. Inexorable market and political pressure to act as a “common carrier.” Difficulty in adding on “downstream” services with higher margins due to customers’ aversion to having their utility compete with them

“New-wave” strategic issues:

18. Hard to recognize moment when customers stop perceiving you as an innovative, cool, growth company and start perceiving you as a utility
19. Rapid technological and market change, as well as growth imperative, promotes changes in terms of service that threaten perceived stability of offerings
20. Rapid growth challenges ability to provide reliable service
21. Lack of regulation permits rapid competitive entry into uncovered niches
22. May have to fight hard to maintain common carrier status, as third parties seek to use you as a convenient leverage point against activities of your customers to which they object

A couple of charts, a few stats, bring in one well-known and one obscure anecdote for each point, and you have an HBR article. Just add water and stir. The only problem is I’m not sure which parts of this are right empirically, I don’t have a concise definition of a “new-wave utility” that doesn’t either cover everything (e.g. we count on gas stations, but they aren’t utilities) or leave out key examples, and I would like to say more about the issues than just “these are things to worry about.” So, just a blog post. Too much scholarly superego, perhaps.

Entry filed under: Business/Economic History, Entrepreneurship, Former Guest Bloggers, Institutions, Management Theory, Strategic Management.