Carl Stern's is the quintessential All-American résumé: Harvard and Stanford, a stint in the US Navy--and a life-time with the WASP-ish Boston Consulting Group (BCG). For the most part, under the leadership of the legendary Bruce Henderson, the founder of the firm, and one of the shapers of strategy thinking. That Stern is a good learner became evident when he shared his thoughts with BT's Roshni Jayakar in a 60-minute session during a recent visit to India, his first after taking over as the CEO of BCG. Read carefully, for, couched in the soft-speaking Stern's not-so-stern syntax are some telling punches about the future of business. Excerpts from an exclusive interview:

Q. Mr Stern, BCG has quite a reputation. The unconventional enfant terrible of consulting that changed the complexion of the business by introducing, in the 1970s, power tools like the BCG Growth Matrix. Are we witnessing another change now? Is there a shift towards a more generalised approach to consulting?

A. May be. But I think consulting has always been a segmented business. There have always been parts of the business that are based on specific expertise. And then you have the segment that is more general because it deals with CEOs. What people are really looking for (from a consulting firm) is business judgement. Some advise on the future shape of the company. It has always been that way. Since the 1960s. The nature of the business has become a little more rigorous now, and combines generalist capabilities with various kinds of expertise in a sophisticated fashion. But it has really evolved itself; not revolutionised itself.

Let us talk about the Growth Matrix. What does it look like in its present form?

I don't think we have used the Growth Matrix as a primary consulting tool for a very long time. At least 20 years now. We have evolved lots since then. We use the ideas behind the graphic, but we do not use the display. The nature of competitive advantage has changed, and you now need finer tools to manage your portfolio with.

Such as...

We see active and disciplined portfolio management as a key activity in creating shareholder value in a diversified company. We have developed sophisticated value management concepts to help senior managers understand the sources of value-creation and value-erosion in their portfolio. Portfolio management should, ideally, be viewed in the context of building horizontal capabilities across businesses. The portfolio matrix captures growth and competitive position in a scale-driven industry, and their impact on cash-generation. As such, the concept is still valid, but the skill is in defining business boundaries correctly, and in understanding which additional factors other than scale have a bearing on competitive advantage.

The Growth Matrix was really the culmination of an age when diversification was the norm. With today's focus on core competence, is it even relevant?

Certainly. Core competence is just one kind of logic to build a corporation on. Remember, diversification per se is not bad. In fact, empirical evidence shows that there is neither a systematic conglomerate discount, nor do demergers and break-ups systematically create value. What matters is how you manage diversity, and whether you are able to extract an advantage out of being in a range of businesses. With the changing economics of information, 2 separate businesses may actually be more alike than the different steps of the value chain in one business. In such a case, developing horizontal strategies across businesses may prove to be significantly more impactful than vertical integration.

Does that mean that the vertically-integrated value chain is no longer a route to competitiveness? What are the forces subverting the value chain?

There are a number of them, and some have their roots in macro-economics. The erosion of trade barriers, for example, has allowed for much more globalisation. This has enabled companies to access capabilities all over the world as opposed to just their part of the world. Another force is the change in manufacturing and logistics: just-in-time manufacturing, and new ways of moving goods cheap and fast. But the biggest force, which speeds up everything, is the revolution in infotech. With both information and communications being, virtually, free, companies now have options they did not have before, and this offers them an alternative to traditional proprietary relationships.

So, as a company, I do not need to control my whole value chain; I can outsource parts of it. One of the reasons I can outsource is because the movement of information is easy. I can specify to someone halfway around the world precisely what I want, and even programme his machine tools directly. The economics of infotech and cheap communications change everything. And when this happens, the value chain breaks up into separate businesses, with different competitors controlling different segments of it.

Does this deconstruction of the value chain engender new business models? What are the patterns that you have noticed?

Sometimes, you see a competitor making a direct attack on a company using technology. A start-up mounts a direct attack on the established business model by separating the information flows from the physical flows. The best example I can think of is amazon.com's challenge to conventional book-selling. The Net allows a company to create a business model by separating the information flows of the business from the physical flows of the business.

A more common-place pattern is what is happening in the computer business. You get a competitor who decides to outsource key parts of the value chain--usually, the non-strategic or asset-intensive parts--even as it continues to dominate the whole. In these cases, integration gives way to orchestration. Successful orchestrators possess powerful brands, and use them to retain control of the lion's share of an industry's value-added while minimising their own assets. What Nike is doing with shoes, Hewlett-Packard is doing with computers: they are not manufacturing any more.

IBM did it too for PCs. But, sometimes, you can't keep control of the value chain. IBM outsourced and, in the process, lost control of the business. If that happens, the business breaks up into its constituent elements. Today, disk drives is a separate business, memory chips are a separate business, microprocessors is a separate business, and software is a separate business. Where there used to be one business before, you now have many. And each layer becomes a distinct business, with its own economics. That is total deconstruction. When that happens, the companies that are being orchestrated--which focus on a specific value-added step or layer--have every incentive to drive the scale and scope themselves. If they succeed, they wrest control of the value chain from the orchestrator. As Intel and Microsoft did from IBM.

Does this apply to companies operating in all sectors? To what extent, for instance, is the concept applicable to, say, the services business?

One of the best examples of deconstruction is what has happened to most aspects of the financial services business. Let us take the benefits of retail banking. You no longer have to get a mortgage and keep your checking-account in the same place; you can bank anywhere. The bank no longer controls the customer; the customer controls herself and, therefore, banking is no longer one single business. It is lots of businesses, and most of them are fragments. And it is very hard to control the entire business and establish dominance over it.

What you see in financial services is a situation where the constituent pieces of the value chain have broken up, and different institutions specialise in different parts of the chain. In fact, most of the individual businesses are fragmented; there are very few examples of one company dominating any of them. You see the mutual funds business as one that is clearly distinct from the banking business. And the mortgages business has separated out; in fact, different kinds of mortgage businesses have separated out. So, you get specialists. On the credit side, you have specialists in loans and credit cards. The whole market has shattered into pieces. And this confusion creates opportunities for a different sort of player. New companies

Like...

The whole issue of intermediation and disintermediation, bundling and unbundling, will change. Bundles composed of pieces with different economics, like the computer-manufacturing business, will unbundle. The customer is certain to get confused, and look to brands or navigators which can serve as intermediators and make some sense for him. Some brands will be undermined; new ones with navigators will rise.

New businesses will emerge to help people cope with the confusion and complexities of doing business in a deconstructed world. So, if you have an infinity of choices, in, say, the mortgages business, you have to identify the businesses or the companies that can actually help you find a list of companies that do mortgages. There are companies that help you rate different mortgages, and there are companies with software which help you find the lowest rate. Now, this is a different value chain.

This deconstruction will, obviously, have an impact on the kind of strategies and structures companies adopt. What should the ideal reaction be?

If an industry is no longer an industry, but several smaller industries, the definition of a Strategic Business Unit changes altogether, and the way you have to manage your positions and businesses is much more complicated. You have to think not just about your position in a business, but your probable position if the value chain happens to deconstruct itself. So, it has become quite an art, but it has opened up many more options as well.

If you buy into the premise of deconstruction, uncertainty will multiply, and increase exponentially. A number of things we knew to be true will no longer be true. Industry definitions will change, competitors will change, the shape of demand will change, and the way customers relate to us will change (Hopefully, when everything changes, the demand for strategic consultancy will increase.) But, as product and business life-cycles become shorter, and the duration of demand (the demand cycle) gets shorter, there is an immediate need to come up with something new. And this need is getting more and more insistent. And that means that companies have to rethink their strategy more often.

BCG was really the wunderkid of the consulting business in the 1970s. Why do we hear so little about it now?

I don't think that is true. Consulting is a strange business; there are lots and lots of new entrants, but few survive. BCG has maintained a growth rate of 20 per cent over the last three decades; we are now a $750-million company. We want our clients to get the limelight. So, we are quite content to be in the background. But we are certainly quite well-known, and continue to try to evolve the state of the art in strategy. We have a dominant share of the breakthrough ideas that have changed the way people think throughout the 70s, the 80s, and the 90s.

Thank you, Mr Stern.

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