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The Friction-Free Economy

As the barriers to competion evaporate, the world is becoming the small businessperson's oyster.
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As the barriers to competition evaporate, guess who it is you're fighting now? Everybody

In his new book, The Road Ahead, Bill Gates writes of "friction-free capitalism," a type of marketplace that he argues will be ushered in by the spread of Internet-style electronics. This is like heralding the Net as a harbinger of instantaneous communication while ignoring the phone and the fax. Forget the Internet -- we already inhabit what has become a remarkably low-friction economy. That's why today's marketplace feels so competitive. And it's why some businesses are prospering beyond all expectation while others are wondering who changed the rules of the game.

Economic friction is everything that keeps markets from working according to the textbook model of perfect competition: Distance. Cost. Restrictive regulations. Imperfect information. In high-friction markets, customers don't have many suppliers to choose among. Owning a factory -- or a store with a good location -- counts for a lot. It's hard for new competitors to get into the game. The marketplace moves slowly and predictably. Low-friction markets are just the reverse. New competitors crop up all over, and customers are quick to respond. The marketplace is anything but predictable.

The single most significant change in the economy over the past 20 years has been a wholesale reduction in friction, affecting nearly every industry. Some of the factors are obvious: increased air travel, overnight delivery, cheap phone and fax communication, credit cards, 800 numbers. They put faraway companies on a competitive par with local ones; they enable Lands' End and a hundred other mail-order houses, for example, to match the convenience and price of a neighborhood store. Other factors are less visible but no less important: Deregulation opened up many industries; local truckers, for instance, may face competitors from three states away. The growth of high-risk, high-return capital markets has transformed other fields. Today a local restaurateur must worry about the likes of Outback Steakhouse showing up down the street.

Sure, the Internet will grease the market's machinery still further. But friction is declining every day anyway. Travel agents, which Jerry Useem and I wrote about in the March issue of Inc. (see "Six Characters in Search of a Strategy," [Article link]), face new competition not just from the occasional World Wide Web site but from distant competitors using local automated ticketing machines. Doctors in Kansas, according to the Wall Street Journal, must now compete with doctors from Massachusetts General Hospital, whose advice is beamed in on video.

There's little need to elaborate on the threat posed by a low-friction economy: more competition, often from unexpected parts. The opportunity is pretty plain as well. In principle, at least, the world is any small company's oyster. What sells in Dallas can be peddled in Minneapolis or Boston with only a minimum of time and expense. The thing is, the rules of a low-friction marketplace are different. And if you're not playing by the right rules, you're out of the game before it starts.

Rule Number One is merely a caution: Don't expand blindly. The fact that you can open up a new location or launch a telemarketing operation or even get onto the Web doesn't mean that you should. After all, everybody else can do the same. You may be able to peddle your products or services in Minneapolis or Boston, but nobody has to buy them.

Rule Number Two: Offer a distinctive something to your customer. This seemingly trite piece of advice is more revolutionary than it sounds. Back home, your job was to take care of the customer -- to deliver good value. All the business gurus harp on that one theme, albeit in many variations: Quality. Service. A fair price. In a low-friction marketplace, however -- particularly if you're expanding -- the old nostrums are nowhere near sufficient. You have to have something that sets you apart from all the other suppliers offering quality, service, and a fair price.

What should the something be? That's where the creativity comes in. One travel agent who didn't make it into our story set himself up as an expert in his locality's Amish culture. Rather than just selling airplane tickets, he began marketing tours of the Amish area, including dinner in an Amish family's home. It's a niche with few competitors. Plenty of other companies have come up with similar marks of distinction. A Salt Lake City auto dealer offers leases that include the cost of repairs. Worry-free driving, he calls it. A Holiday Inn franchisee in Florida has created a child-oriented hotel for families, including a kid-size check-in desk, a kids-only restaurant, and interactive on-site child-care programs. Sure, others will imitate those innovations over time. For now, that dealer and that franchisee have a lock on some small but measurable market niches.

There's a hidden secret of the low-friction marketplace, which I'll call Rule Number Three: What you sell doesn't need to be a unique product or service. It can simply be the ability to do something better than anybody else. If that puzzles you, think of Southwest Airlines. None of Southwest's strategies -- point-to-point flights, no-frills service, rock-bottom fares -- is exactly a secret. Indeed, most of the big airlines have at one point or another tried to copy Southwest, only to discover they can't. They just don't know how to do what Southwest does and still make money at it.

You can be a lot smaller than Southwest and still do things that leave most competitors baffled. Granite Rock, a supplier of building and construction materials in Watsonville, Calif., has learned how to guarantee that its delivery trucks will be on a job site within 30 minutes of schedule. You think contractors in other areas wouldn't welcome that capability? Connor Formed Metal Products, based in Menlo Park, Calif., worked with Motorola University to develop a training program that helped Connor adopt Motorola's internal quality standards as its own. Connor thus transformed itself from a sleepy family business into an aggressive, growth-oriented company capable of operating in several markets.

We get dazzled these days by Gatesian visions of information superhighways and electronic bazaars. No doubt we'll all have to deal with the commerce of cyberspace sooner or later. Meanwhile, the friction-free economy is already here. The entrepreneurs who recognize what it means are the entrepreneurs who are prospering.

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John Case (john_case@incmag.com) is a senior writer at Inc . and the author of Open-Book Management (HarperBusiness, 1995).

Last updated: Jun 1, 1996




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