Post on 13-May-2015
Building Profitable Business Growth:The IT Leadership Agenda
Peter G.W. Keen
Professor TU Delft, Netherlands
Chairman, Keen Innovations
Monterrey
November, 2004
Managing (versus leading)
Degree of change
Time
“Natural” change: incremental, inevitable, paced by environmentPriority is skilled management and execution
Examples: the PC,standard outsourcing
Managing Change
Degree of change
Time
Accelerate change, innovate, mobilize – and execute
Examples: process innovation,Logistics, cycle time transformation
Leadership: announcing a discontinuity
Degree of change
Time
Examples: The new business landscapeThe new IT conversation
A new “reality”New “imperatives”A mission, not astrategy
The objectives of this workshop
Announce the discontinuityBring the business landscape into sharp focus
Help define a new IT leadership agenda for directly enabling growth and profits
Provide practical guidelines for action that balance risk and payoff
Herald the shift from IT to CT – coordination technology
The Challenges to Business and IT Leadership
Profitable growth is an oxymoron – like jumbo shrimp, English cuisine
Commoditization is everywhere and increasing
Asia is defining much of the global competitive agenda
The new fashion is that IT doesn’t matter
“Outsourcing” has become core, not peripheral, to more and more areas of business – and IT
The IT agenda for helping respond to the challenges
Escape the commodity trapShift from traditional value chain to value websMove outsourcing to co-sourcing: the global
search for talentHelp make the innovation shiftContribute to the transformation of financial
structures: Welcome to the Variable Cost Economy
Gain the coordination edge
Business growth as oxymoron
Of the 172 companies that had at some point been on the Fortune 50 list between 1955 and 1995, only 5% grew their revenues above the overall inflation rate.
Just 13% of a sample of 1,854 companies grew consistently over a ten-year period.
Only 16% of 1,008 companies tracked from 1962 to 1998 survived. Of the original Forbes 100 announced in 1917, just one of the 68
companies still on the list in 1987 – GE – had surpassed the average return on the S&P 500 over the seventy year period.
From 1997 to 2002, the 30 firms that constitute the Dow Jones index grew at a rate of under 5% in revenues and gross profits and just 0.5% in after-tax profits.
Commoditization
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?
Commoditization Examples (1)
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?PCs, standard IT hardware:
from “high tech” to consumer electronics
Commoditization Examples (2)
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?Manufacturing:The global outsourcing
scramble
Commoditization Examples (3)
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?
Consumer goods:Weakening of established
brandsRetailer pricing power
Commoditization Examples (4)
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?
Pharmaceuticals:Generics
Challenges to Big Pharmafrom Canada, Mexico
Commoditization Examples (5)
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?Airlines:
The shattering of the majors’ business models
Even low cost playersgoing broke
Commoditization Examples (6)
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?Telecommunications:
Phone call prices trending to zero cents
AT&T taken off the Dow Jones
Examples of price erosion (1)
Consumer electronics: prices of component parts drops 1 percent per week, on average; it used to take ten years for the price of a product to drop from $1,000 to $100; now it takes eighteen months.
Security trades: 1996-2002, margins dropped by 50 percent.Telecommunications: the deregulation of long distance phone services
in any country typically cuts prices by 40 percent within five years. Jewelry: close to five hundred stores closed in 2003 as Amazon and
Blue Nile cut markups on fine jewelry from the industry’s 60-100% range to 15%
Engineering services: the price of power plants fell by 50% in the 1990s. China graduated 1 million engineers in 2002. The United States graduates around 70,000 engineers.
Automotive: price of cars has grown slower than inflation since 1994
Examples of price erosion (2)
Clothing: the price of men’s jeans has dropped by over 40 percent in five years. For retailers, double figure margins are now in single digits in a good year
Financial services: in 1999, the average fee to send $300 from the U.S. to Mexico was $60, in 2004, under $10.
Processing fees for credit cards on track to drop by 40 percent in this decade, saving retailers as much as $100 billion. The average return for credit card issuers dropped from 3.5 to 1.5 percent between 1992 and 1998.
Groceries: prices in an area drop by 13-16 percent when Wal-Mart enters the neighborhood
Manufacturing: The prices of goods made in Hong Kong, Singapore, Taiwan and South Korea fell by 22 percent between 1996 and 2002. Half the world’s manufacturing is now carried out in Asia versus around 20 percent two decades ago.
BUT………… Energy costs do not commoditize – and often cannot be passed on (e.g. airlines); this is the real China Syndrome
Commoditization Impact
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?
For customers: commodity heavenChoice, price competition everywhere
Commoditization Impact
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?For companies: commodity hell
Choice, price competition everywhere
For customers: commodity heavenChoice, price competition everywhere
The commodity trap
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?What does a company do?
Cut costs?Outsource?
Price opportunistically?
The commodity trap
Deregulation
Globalization
Technology
Overcapacity
Customer power
Aggressive newentrants
Price erosion
StandardizedInterfaces
Outsourcing
?What should a company do?
Use IT and process innovationto build value web
capabilities and roles
So who does make money?
Three exemplars: Dell, Southwest, Wal-MartReturns to shareholders around 16,000% over
several decadesDominate their ecosystem to extent that competitors’
strategies based less of their own ambitions than to find a counterpunch
Yet, there is no way they could ever make moneyNo proprietary product or serviceIn commodity industriesSelf-commoditizing: drive their own prices down all
the time and push the industry to follow
The coordination edge
All three companies have an explicit enterprise coordination design owned at the top:Dell: complete synchronization of the demand chain,
patented processesWal-Mart: supply chain/store replenishment
integration end-to-endSouthwest: standardization of operations, incentive
systems All three are superb users not of IT – “information”
technology but CT – coordination technology
The IT leadership contribution
Open up a new executive conversation
Governance: extended architecture and policy
Standardized interfaces: technology and process capabilities
Value web enablement
Making IT a force for innovation in the commodity world
From IT platform to enterprise coordination design
Enterprise Coordination Designs (1)
FedEx: Coordinate customer logistics needs via cross-linking ground/air services through an integrated technology platform
Toyota: Coordinate global manufacturing via standardized process components; coordinate global product development
Li and Fung: Act as a global “orchestrator” for thousands of specialists in apparel manufacturing, contracting to create a mutual balance in value gains
Enterprise Coordination Designs (2)
Magna Steyr: Make coordination of customer processes the differentiator of commodity auto parts
Amazon: build from the customer contact point back via a modular platform that coordinates the complete customer relationship, partners, service providers, outside systems developers
TAL: Extend design, manufacturing and store inventory management into the customer’s processes and take responsibility for demand-supply coordination
Enterprise Coordination Designs (3)
EBay: create and grow a set of communities, acting as relationship coordinator
GE: optimize process capabilities through selective standardization, global centralization; “turbocharge” innovation by internal crosslinkages and reuse
Procter and Gamble: switch from in-house business and product development to a collaborative network of help and innovation
Commonalities among leading designs
Ownership at the top (FedEx, Dell, etc.)Inheritance (Wal-Mart)Innovative commoditization (Flextronics, AAM)The Way: diffusion of the design, metrics, incentives
across the organization (Cemex, Toyota)Use of Coordination Technology everywhere to
selectively centralize, co-source, standardize and reuse capabilities (GE, eBay)
Exploitation of standardized interfaces (BMW/Magna Steyr)
Value web principles not value chain
Examples of standardized interfaces
GSM/SMS: created – and commoditized – the European mobile phone industry; note the U.S. lag
USB: enabled and commoditized digital camera marketU.S. mortgage market transformed by XMLRFID: information moves with the goodsCredit cards: airport self-service check inANSI/EDIFACT EDI “ontologies”Car manufacturing: the Toyota dominance1-800 numbers: global call center outsourcingConsumer electronics: “HP” printers with HP never involved
Value webs versus chains
Inbound Logistics
Operations Outbound Logistics
Marketing & Sales
Service
Procurement
Technology & Development
Human Resource Management
Firm Infrastructure
Inbound Logistics
Operations Outbound Logistics
Marketing & Sales
Service
Procurement
Technology & Development
Human Resource Management
Firm Infrastructure
Value chain:Tidy, linear, Control-centeredSupply-driven
Value webs:Demand-driven, power lawsNonlinear“Scale-free” networksYahoo, UPS as Hubble Space
Growth platforms:Value web roles
Focus Where growth comes from
Control Traditional value chain: in-house
capabilities and M&As
Coordinate Your own and partner capabilities
Service Your coordination on behalf of selective partners
Collaborate Close relationships with partners
that they make “core’ to their own growth
Enable You open up your platform,
inviting others to innovate on their own behalf
Product innovation and development
General agreement that radical innovation opportunities are disappearing
Value chain petrification: Big Pharma pipeline drying up, high tech is consumer electronics, no major innovation in auto manufacturing for four decades (until the hybrid car)
Collaborate or die: R&D and development as value webs
Asia as innovation centers
Emerging trends
Contract manufacturers extending their value web roles: consumer electronics, cell phones (60% now made by third parties)
P&G, IBM letting go of their protected patent base: license even to competitors
Eli Lilly InnovCenter portal for research problem-solving for a reward fee
Global centers of excellence: Motorola, GM, GE, synchronized labs in China, Europe, U.S.
Toyota blueprint for global design-production
The search for global talent
Relative labor cost burden Low High
Premium Specialist Creative Skill capabilities economy base Commodity Assembly Outsourcing economy crisis creator
The financial imperatives
Welcome to the variable cost economy
The CT platform changes the nature of scaling
Supply chain management indicates the extent of the financial value of such a platform: halving of working capital per unit of sales, halving of overhead
The linkage between the CT architecture and process “clusters” cuts cycle times by around 40%; time really is money
Business scaling: Up
1995 2000 NOW 2004
Investment
Add people, systems,facilities
Disruptive, expensive
Business Scaling: Down
1995 2000 NOW 2004
Investment
Cut people, systems,facilities
Disruptive, expensive
What’s next?
1995 2000 NOW 2004
Investment
??
??
An example from a superb company
Charles Schwab: Business Charles Schwab: Business ScalingScaling
1995 2000 NOW 2004
Investment
15,100
20,100
26,300
16,100
$150M$199M
$370M
$705M
$301M
$160M
191,000
350,000
115,000
141.000
Transaction per day
Millions of $ of Investments
Employees
SUPERSTRUCTURESPriority targets: customer relationships,
supply chain, financial, organizational, operational;
BrandingInnovation paths
Bundling of distinctive capabilitiesvia infrastructure clusters
Process edge – differentiation
INFRASTRUCTURES:Clusters of services,
Networks of providers and partners; business-, industry- or partnership-focused arrangements
SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems
Automatically interconnected via common interfacesThe Web as electricity;
Largely usage-based variable cost
The IT resource
Super
Infra
Sub
SUPERSTRUCTURESPriority targets: customer relationships,
supply chain, financial, organizational, operational;
BrandingInnovation paths
Bundling of distinctive capabilitiesvia infrastructure clusters
Process edge – differentiation
INFRASTRUCTURES:Clusters of services,
Networks of providers and partners; business-, industry- or partnership-focused arrangements
SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems
Automatically interconnected via common interfacesThe Web as electricity;
Largely usage-based variable cost
The IT resource
Super
Infra
SubCan’t innovate here: may rely
on others’ innovations
SUPERSTRUCTURESPriority targets: customer relationships,
supply chain, financial, organizational, operational;
BrandingInnovation paths
Bundling of distinctive capabilitiesvia infrastructure clusters
Process edge – differentiation
INFRASTRUCTURES:Clusters of services,
Networks of providers and partners; business-, industry- or partnership-focused arrangements
SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems
Automatically interconnected via common interfacesThe Web as electricity;
Largely usage-based variable cost
The IT resource
Super
Infra
Sub
SUPERSTRUCTURESPriority targets: customer relationships,
supply chain, financial, organizational, operational;
BrandingInnovation paths
Bundling of distinctive capabilitiesvia infrastructure clusters
Process edge – differentiation
INFRASTRUCTURES:Clusters of services,
Networks of providers and partners; business-, industry- or partnership-focused arrangements
SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems
Automatically interconnected via common interfacesThe Web as electricity;
Largely usage-based variable cost
The IT resource
Super
Infra
Sub
Imperatives
Implicitly begin: “Regardless of how we do it, it is absolutely vital that we………”
The link between vision – the goal – and strategy – the “how”
Key to avoiding change management overload – when everything is urgent and important, nothing is
Reflects the changing nature of change: when is radical jump-shift change easier to handle than never-ending incremental and accelerated change initiatives?
Beachheads
Larger than pilots, small enough to deliver in 90-180 days
Focused goal of building momentum for innovation Self-explanatory, self-justifying benefitsHigh centrality: visibility, political credibility, link to key
constituenciesPhase 1 of an “architected” campaignA force for organizational mobilization that balances
speed and flexibility of a small team with scale and rollout capacity that a large project can leverage
Localized enough so that the leader/sponsor can provide oversight and commitment
Beachhead planning
For each Beachhead:What is the 90 or 180 deliverable? Warning: if it takes two
years, forget it NOW please (FINP)What is the “elevator” pitch about its self-explanatory, self-
justifying benefits? If you need to calculate the hypothetical ROI, FINP
How does this contribute to the Imperatives? How will it scale and be rolled out across the business?Which leader will sponsor this and put credibility on the
line?What new roles and skills will this help build?What are the incentives for others to pick up on the
beachhead and commit to moving it forward?What is the 8-15 person team it needs?
IT Matters
Global coordination of development and in-sourcing of talent is fundamental to innovation
Time is the currency of competition: time-to-market, time from design to production, time to distribute, etc.
This alone makes coordination technology the vital force in innovation
How to get that across and to whom? The very term Chief Information Officer gets in the way of doing so