From Trend to Quantum Leap
 

W. Chan Kim and Renée Mauborgne

Companies often face changing markets, but few know how to exploit them, say  W. Chan Kim and Renée Mauborgne . 

Until the mid-1980s, the US gas industry was regulated and comfortable. The regulatory framework had created a monopoly franchise where gas and pipeline companies were almost guaranteed a healthy return on their investments. 

So when the government set out to remove price controls, most of the interstate pipeline companies fought the loss of local monopolies. 

But Enron, the Houston energy company, saw an opportunity. Instead of fighting deregulation, it explored what would happen if the market moved to a flexible system. 

True, interstate pipelines would lose local monopolies, reducing the value of their local pipelines. But deregulation would also mean gas could be purchased from anywhere in the country and sold anywhere else. At the time, the cost of gas varied dramatically: it was much more expensive in New York and California than in Oregon and Idaho. 

Enron set out to create the first national market for gas, allowing it to buy gas where it was cheap and sell it where it was expensive. It worked with government agencies to push for deregulation. It then purchased regional gas pipelines across the US, to create a national network. 

That allowed Enron to buy the lowest cost gas from numerous sources across North America and to operate with the best spreads in the industry. Enron became the largest transporter of natural gas in North America, and its customers benefited from more reliable delivery and a price reduction of up to 40 per cent. 

All industries, from traditional to modern, are subject to external trends that emerge over time. Think of the rise of the internet, the migration from mainframes to servers, the global movement toward protecting the environment, or pressures for deregulation in transport, telecommunications and utilities. 

These changes shape the industrial landscape and are powerful sources of new market space. Yet many companies respond incrementally and passively as events unfold. Some even fight to stop the arrival of a new reality, as Enron's competitors did. 

To profit from change - rather than be its victim - companies must use these trends to unlock value. The key is not to focus on pro-jecting the trend itself, as many managers tend to do, but to assess how the trend will change the value a company is able to deliver to customers. Cisco Systems recognised that the world was hampered by slow data exchanges and incompatible computer networks. Demand for network computing was exploding, especially as the internet took off and the number of web users doubled roughly every 100 days. So Cisco could clearly see that the problem of slow data exchanges and incompatible computer systems would inevitably worsen. 

To get ahead of this trend, Cisco designed routers, switches and other networking devices that offered customers fast data exchanges in aseamless computing environment. Today, more than 80 per cent of internet traffic flows through Cisco products, and its margins in this new market are in the 60 per cent range. 

While many trends can be observed at any one time - the emergence of a new lifestyle or a discontinuity in technology - usually only one or two will be critical. 

To identify those key trends, three criteria must be met. The trend must have a decisive impact on your business, be irreversible, and have a clear trajectory. Think back to Enron. Deregulation of the gas industry was clearly decisive to Enron's pipeline business. Given that the US government had just deregulated telecommunications and transport, a reversal of its intent to deregulate the gas industry was unlikely. Its logical conclusion was also predictable: the end of price controls and the breaking up of local monopolies. 

Having identified a trend that meets the three criteria, managers can then ask themselves what the market would look like if the trend were taken to its logical conclusion. By assessing the gap between the market as it stands and the market to be, companies can then identify what must be changed today to unlock value. 

Is your company being marginalised by the changes in its environment? Are other companies leapfrogging you by riding the waves of change? To turn this situation around, begin by singling out an external trend that is decisive to your business, irreversible, and evolving along a clear trajectory. Then ask: if this trend were taken to its logical conclusion, what would the market look like? What then would we need to change to unlock value for buyers in light of this conclusion? 

This is not an attempt to predict the future. It is about capitalising on existing trends by examining what the extreme of their effects could be across time.