REMEMBER BACK to those golden years when customers loved your company. Your products were widely regarded as the cream of the crop. Executives were proud to be on the management team. Competition was fun. Profitability was high. Today, everything looks somehow different. Even though your products are at least as good as ever (indeed, they are vastly improved), separating them from the competitive pack now seems next to impossible. More and more, you find yourself saying, "Our product has become a commodity." What has happened? You have assumed what we call "the trappings of incumbency." You have reached the stage where leadership's mantle no longer seems to confer power in the marketplace. In fact, almost the opposite feels true.

THE COMMODITY MINDSET
We submit that the most important change is often not in the marketplace. It has been in your own mind, and in the minds of your executive colleagues. Chances are your product is not a commodity. Simply, you have slipped into thinking it is, and acting accordingly. You have lost the belief that competition on any basis other than price is possible. This attitude is suffocating, and unnecessary. The good news is there are ways to step off the commodity treadmill.

Fortunately, you are probably no worse off than your traditional competitors. They are apt to be imprisoned in a commodity mindset that is just as hard to escape as yours.

However, for every incumbent - IBM, Kmart, Navistar - whose hubris, lethargy (or both) convinced them that the risks of change were too high, there is also a new player plotting a radical, once-unthinkable course for the industry. What do these new guerrilla companies have that incumbents don't? A revolutionary spirit. It's all about new ideas, new ambitions, new boundaries. Consider back to when Microsoft, Charles Schwab, Wal-Mart, Federal Express were the upstarts.

Their secret (usually openly avowed) is to differentiate in an unexpected - and powerfully new - way.

The pattern in commoditizing industries is that the unexpected generally goes unexplored. Trade shows and industry conferences become forums for confirming and furthering the industry's conventional wisdom. As they strive to attain par with rival products - as many oomphs per hour, money back guaranteed - incumbents come to convince themselves that their buyers tune in to the same measures they do. Inevitably, they settle into a grim and grinding drive for parity. Their reward is ever lower margins and miniscule gains in market share.

In recent years, it seems that incumbents in industry after industry are "training" their end-users to shop on price - to the neglect of any other needs end-users might have. Contrary to the media's interpretation - that consumers in the 1990s have chosen price as their sole decision driver - it is the manufacturers and their industry cohorts who have taught end-users that price is the only differentiator.

Consumer products markets like computers, furniture, or recreational products are prime examples. Try to find a leading national or regional retail outlet that is not obsessed with shouting its everyday low prices, 36-hour sales, Saturday-only specials, and so on to weary and frustrated consumers.

Industrial markets exhibit a similar pattern across a wide range of traditional and high-technology businesses. Both manufacturers and their value partners lament ever-falling margins and the inevitable deterioration in their customer relationships. When pressed to describe areas of differentiation, their typical response is: "any extra services we provide customers just get us in the door. . . our business is only about price today."

We believe that executives in all of these businesses have it backwards. Commoditization is the outcome of undifferentiated and interchangeable strategies along the entire value delivery chain from manufacturer to end customer. Each player is benchmarking itself on the same dimensions, competing in the same ways as the rest of the pack. Lethargy has set in as incumbents find more reasons not to change than reasons to invent a new future.

SEEING THE VALUE CHAIN IN REVERSE
Suppose that you agree with this diagnosis. Your company has talked itself into a commodity mindset. What perspective will 21st century business leaders replace it with? We believe that the biggest, most productive departures from the status quo will be gained by starting with powerful and fresh insights into end users' needs. Find fundamentally new ways to delight end-users, then look back up the value-delivery chain and start a revolution.

This is exactly the opposite of what most companies habitually do. The natural tendency of any company is to focus on its own operations and how improvements might benefit immediate customers. The immediate customer is the company's nearest downstream partner, typically a wholesaler or a retailer. The company's ultimate end customer, like someone in the background of a photograph, is fuzzy, peripheral, and all too easily ignored.

An end-user orientation in effect moves the camera into the background and shoots the value chain in reverse: from end-users' needs and behaviors to retailer operations, to distributor, on up to component assemblers, manufacturers, and beyond to manufacturers' suppliers. The thought process runs from downstream to upstream, focusing on how value has just been delivered at each stage.

Three aspects of this approach are worth stressing. First, the camera should photograph not what the end user sees; it should capture the end result of what an improvement in the day of that end-user would be. End-users focus on their experiences - what they get. They would prefer not to be concerned with the likes of product design, pricing strategies, manufacturing coordination, distribution logistics, warehousing, and all the other complexities of integrating a product's production, promotion, delivery, training and use. What the newly delighted end user will get in an improved world has to be the starting point for analysis.

Second, upstream manufacturers - who are often farthest from the end user - are, ironically, better positioned than downstream distributors or retailers to see things from the vantage point of the end user. That is because these other players do not have to deal with crucial upstream activities, like supply chains and manufacturing, whereas manufacturers always have to squint down the entire length of the value-delivery pipe. Upstream manufacturers know more or less everything that is going on, even if they don't yet fully grasp where the problems lie.

Third, optimizing the entire system of value delivery makes more sense for individual companies than does serving their own narrow interests. Yet once again common practice turns out to be quite different. Businesses with commodity self-images are caught up in intrafamily jockeying for power. Manufacturers become absorbed in winning pricing games with value partners (and vise versa), in shifting inventory to the other guy, in outsourcing to move costs off their books. Jostling one's partners becomes a preoccupation. These feints and parries detract from forward motion toward the end user and dissipate net value.

VALUE INTEGRATION
A more productive goal would be to work together collectively to find exciting new forms of value. Differentiate the entire system, outcompete rival systems, and achieve profitable growth. For now, comparatively few companies think this way. But more and more are starting to do so. CHICAGO STRATEGY ASSOCIATES has observed a quickening drift toward systemwide optimization in a wide variety of businesses, from mature manufacturing through fast-evolving services. To be sure, this trend is more advanced in some industries than others. Still, anywhere that competition intensifies, the rationale for tighter, smarter integration across the value-delivery system is bound to become more compelling.

Value delivery that is optimized at a high level across the system looks distinctly different from a series of rigid partner-to-partner hookups. Try to imagine an iron chain without loose, overlapping links. Redundancy and looseness are, in a sense, what held the chain together, what gave it both strength and flexibility. Today's competition increasingly demands something like a linkless chain of value. What might that look like?

Peapod is one example. Peapod in its ultimate form is a storeless supermarket. Customers send in their orders remotely by phone or PC, and Peapod ships them their goods direct from a specially designed warehouse. Another example is Levi's, with its experiments in direct-to-consumer, custom-fit jeans. Once a customer has filed the requisite measurements with Levi's, he or she can simply call in a request for a particular style of jeans, and the garment will be custom cut and sewn to size, and then shipped overnight. The customer gets a more wearable garment at a lower price; Levi's streamlines fulfillment, while transforming its production and inventorying processes. Better yet, Levi's benefits from immediate access to an invaluable database of end-user product preferences and ordering patterns.

In both these examples, much of the gain in value is generated by disintermediation. In essence, distributors are removed from the value equation. However, partner-elimination will not likely be the dominant route to greater end-user value. In an era when businesses are retrenching to their core competencies, few organizations will have either the means or the motive to go it alone. Too broad a range of superior capabilities would be needed. Instead, most players will opt for closer teamwork - horizontal and vertical - with other organizations in their existing system.

For that reason, Chicago Strategy Associates foresees that Value IntegrationT will become a key growth lever in many industries. The main components of this skill will be: (1) accurate but not slavish attunement to end users' needs, (2) the imagination to look up the value delivery system and see radical new ways to differentiate from competitors, (3) the broad system orientation needed to see revolutionary new ways to structure the entire value delivery chain, and (4) savoir faire in negotiation, communication, and collaboration with a range of related and allied organizations.

To this list of value-integrating skills should be added a fifth that, while not strictly necessary, is apt to prove decisive in many situations: the ability to manage information cross-organizationally with such speed and precision that entire processes are compressed to the point where they become instantaneous and invisible.

Product delivery has already become as important as product development for many industries. Most others will enter this era soon. Yet to my frequent amazement, corporate managements continue to look the other way. When trouble looms, they rightly intensify focus on their product - but usually fail to look at the critical companion issue of distribution.

Perhaps this is understandable. Most top executives are uncomfortable with distribution. Few have done a tour of duty in channel management, which demands as much time and attention to learn as anything else does. Naturally they are not always sure what could be done better. Yet finding out will prove invaluable.

Today's hot problems (and for that matter, hot growth opportunities) are often rooted in distribution. Product, advertising, promotion, pricing, and services solutions are not enough. Distribution channel issues demand distribution channel strategies. Any such strategy needs to blend what is right for the business, for its distribution partners, and for its ultimate customers. It will have to be more right for the future than for the past.