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12 March 2007  Achieves Payor of Last Resort Status
Chicago, 13 March 2007—Today, the Global Human Capital Journal awarded StaySmall, the global payment intermediary, the odious Web 0.2 Citation for inducing a poignant bout of customer yechsperience™.
As readers know, the GHCJ exercises stringent criteria before conferring the Web 0.2 Citation: to earn it, companies must induce prolonged feelings of frustration, confusion and anguish in customers more effectively than their competitors.
Tonight, StaySmall delivered in spades, as reported by the judges. Here is a summarized account of the findings…
19 February 2007
Meeting Customer Empowerment with Transformation
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 Michael L. Eskew, Chairman and CEO of UPS, outlined the package delivery giant’s vision for transforming itself into a “one-to-one” business at the Executives’ Club of Chicago’s Enterprise CEO Lunch, 15 February 2007. Before a packed house at the Chicago Hilton, he demonstrated UPS’s creative “whiteboard” marketing campaign and explained its role in communicating to customers the value of the company’s transformation.
The importance of UPS’s vision extends beyond UPS stakeholders because it reflects a shift in emphasis away from industrial efficiency to knowledge-based innovation. Make no mistake, efficiency is mission-critical to every business, but fewer companies can differentiate based on efficiency. To its considerable credit, UPS sees the shift and is striving to empower customers with information as well as delivery services.
A History of Transformation
Mr. Eskew set the context by emphasizing that UPS has a history of transforming itself to meet technology and market challenges:
- Founder Jim Casey began the company as bicycle messenger service in 1907, but emerging technology, in the form of the telephone, began to drive down demand.
- The company shifted emphasis to serve downtown retailers by delivering shoppers’ parcels to their homes via uniformed messengers. This business was subsequently challenged by the automobile after World War II, which gave rise to shopping centers and the fall of the “downtown shopper.”
- In response, UPS changed its focus to business customers, away from retail. It grew its numerous business-focused delivery services on a global scale.
- Today the value proposition is enabling customers’ growth through transparent supply chain services. The company has acquired complementary logistics and supply chain services and made aggressive technology investments in order to deliver as much as its services as customers wants—when and how customers want them. Reflecting the change, the “parcel” dropped from company branding, and the name changed from “United Parcel Service” to “UPS.” The tagline changed from “We run the tightest ship in the shipping business” to “What Can Brown Do For You?” For fun, here is a tagline history.
In August 2005, Mr. Eskew addressed the Asia Technology Summit, and his comments about UPS’s vision beautifully articulated the shift in focus from the Industrial Economy’s efficiency to the Knowledge Economy’s innovation:
When I started with UPS back in 1972, we were a one-dimensional business… we charged one rate… (whether) you were the largest department store in America or a small family-owned business… Residential and commercial rates were all the same. We picked up and delivered packages on our terms, that is, whenever we said we would. We were designed for efficiency and whatever was best for the masses… We came to work every day thinking about how we could better optimize the system.
We didn’t think about how we could help make each customer better; rather, how we could optimize the system better. (1:1 Technology’s Role in Creating Customer Intimacy)
New Customer Focus
Today, UPSers are constantly asking themselves, “How can we make senders and receivers more successful?” Executives are looking at two key forces that drive commerce today: 1) the globalization of labor and 2) the empowerment of the individual. These trends are reflected by the growth of the “small package” business:
- In 1976, the U.S. had $10 billion in foreign exchange per day, and 2% of U.S. GDP involved movement of “small package” freight (consumer pull)
- In 2006, the U.S. had $10 billion in foreign exchange per second, and 12% of U.S. GDP involved movement of “small package” freight
- These figures show that the supply chain is speeding up and becoming more granular and responsive
UPS is responding to these market forces by transforming how it goes to market: rather than “pushing” vertical asset “solutions” to customers, the company seeks to empower customers to “pull” individualized services to themselves. In other words, it is personalizing services, treating each customer, each package and each transaction as if it were the only one, and it has a strong SMB (small/medium business) focus. In connection with this, Mr Eskew cited “the Internet” as a metaphor: on the Web, small companies can look as big as the biggest ones. (The company has about 500 custom-built applications that enhance granular visibility into all aspects of the supply chain, and it makes select functionality available to customers through Web services. For more on this, see UPS Seeks End-to-end.. Visibility.)
Marketing Campaign: “Whiteboard”
However, it isn’t enough for UPS to transform itself; the company must also communicate to customers how it is changing, and what the transformation means to them. Enter “whiteboard,” an icon for brainstorming and creating sophisticated solutions for customer needs. “Andy” is the character that interacts with online customers while at the (online) whiteboard. Mr. Eskew demonstrated some of its concepts and features, live:
- UPS wants to get customers thinking and rolling their own solutions using UPS services.
- Choose time of delivery, mode and cost, and track every package all the way.
- Seamless supply chain solutions can bring global customers (and suppliers) closer.
- Clear customs faster by bundling discrete parcels to clear and splitting them for individual delivery afterward.
- Think of UPS as a “rolling warehouse,” whether over land, sea or air.
Mr. Eskew also stressed that UPS strives to make the complex simple (another way to look at this is that UPS encapsulates complexity. Customers get transparency of service options and shipping information, but they don’t have to understand all the intricacies of how UPS gets the package there).
Wrap-up and Q&A
- Mr. Eskew’s concluding message was, “Don’t let your current success prevent you from transforming your company.” UPS is still here because it’s been willing to transform itself to meet the market.
- One-to-one is how to meet customers today. Mass marketing is less relevant.
- Nimble is more important than size in many cases.
- Running a massively complex company like UPS is possible when you “get out of the way and depend on your people.”
- Chicago is very important to UPS to to its importance as a locus of distribution. UPS will continue to have a strong presence here.
- Regarding competitors, it’s more important to focus on customers.
- Of course, the growth of international trade is very important to UPS. China and India are on everyone’s list, but don’t overlook Europe and the U.S. UPS’s European operations have seen double digit growth over the past decade.
- The global labor shift is fueling UPS’s growth. In the 20th century, companies brought labor to the company (production line), beginning with Henry Ford’s revolutionary assembly line. Today, work flows to people.
Analysis and Conclusions
- UPS’s transformation reflects the shift to the Knowledge Economy in which companies: 1) create most of their value through knowledge rather than products and 2) use customer experience as a touchstone for innovation. For more on this, see The Knowledge Economy: the Ultimate Context for Understanding the Future.
- Supply chains can be defined as processes in which partners collaborate by sharing information and coordinating action. They have material channels and information channels. The latter enable coordination and largely determine the efficiency of the supply chain, which has a powerful bearing on competitiveness.
- UPS does move bits at the end of the day, but its differentiation increasingly comes from the information channel. When customers configure highly granular services (often for their customers), they create options and services for their customers. Many times, information about the movement of packages is worth as much or more than the package itself.
- Metaphorically, UPS and its rivals are the Internet of bits. On the Internet, a piece of data—whether text, picture, voice or video—gets split into packets that travel separately over the network and get reassembled at the receiver’s end. Similarly, UPS can chunk your bits-based packages to make them cross borders more quickly and/or cheaply and disassemble them for individual delivery. Their capabilities are growing in this area, and the increasing granularity of control over information can provide customers with extensive room to innovate.
- UPS delivers an increasingly sophisticated suite of supply chain and logistics resources to customers, many of whom cannot afford advanced supply chain and logistics experts as can large enterprises. Using information effectively, companies of all sizes can minimize the need for warehouse space and safety stock by employing just in time processes.
11 February 2007 Production-focused Enterprises Languish as Customers Continue to Forsake Them
As readers of these pages know well, I estimate that one of the most poignant changes that faces Industrial Economy enterprises is shifting their primary focus from production and operations to the customer. The Industrial Economy mechanized work and production, and by any measure it created unprecedented wealth by drastically lowering per-unit costs of any kind of product you can name, bringing more products within the means of more people. This worked extremely well while demand exceeded supply: customers were excited to have their first car/house/television, and they were happy with what producers brought to market.
However, Industrial Economy CSFs (critical success factors) look extremely stale in the Knowledge Economy (also see Transformation: From Self-contained Company to Networked Global Organization). The e-business revolution has vastly enhanced communications, decreased cycle times and moved the mass customization model closer to reality.
Big Dealer to Detroit: Fix How You Make Cars (The Wall Street Journal, 9 February 2007) spells out the problem extremely well:
“One of the toughest problems facing the ailing U.S. car industry stems from Detroit’s century-old business model, which dates to Henry Ford’s mass production of millions of largely identical Model T’s. Rather than build cars to suit customer tastes, U.S. auto makers churn out what makes sense for their plants, and then use incentives and rebates to lure buyers.”
Large organizations have huge infrastructure costs which can produce fantastic efficiency through economies of scale—as long as production and demand remain high. Short product life cycles are the bête noire of the large scale enterprise and, unfortunately, the rule of the emerging Knowledge Economy, in which customers collectively discover and expose differentiating information about any product or service in existence. Hyper-available information about products and services shortens product life cycles and drives commoditization. Another quote from the article:
“The Big Three are trying to be more market-driven, but it isn’t easy. Because they have big and rising costs for union health care and pensions, they need to maintain revenue, which means they often keep plants open and build more cars than the market demands.”
There is no simple solution to the transformation of the large-scale enterprise, but enlisting customers to help with product ideas would be a step in the right direction. Web 2.0-enabled customers are increasingly accessible and eager to collaborate when companies know how to engage them (for more, see the review of Outside Innovation). As it is, focus groups are so artificial that they often fail to produce real insight: too often the context is that the company is asking the customer to respond to certain scenarios; they rarely ask openly what the customer wants, and customer-to-customer interaction is virtually always very limited.
Customer-to-customer interaction in social network sites and blogs does not impose the limitations of the enterprise, and enterprises can gain true insight into the customer experience by participating in them. Until then, Detroit will have this result:
“Detroit often misses when it tries guessing the market. Chrysler thought buyers of its redesigned Jeep Wrangler would want two doors and a canvas roof. Dealers say the four-door model with a hard top is a big seller.”
4 February 2007  What does the Knowledge Economy Portend for the Industrial Economy organization?
Today, most of the world’s global commercial and governmental organizations increasingly find themselves confronted by the Knowledge Economy’s new success factors, which are often contrary to the Industrial Economy’s. Compounding the challenge, past competitors have had similar structures and limitations to incumbents’, which gave everyone more time to adapt to change; however, new Knowledge Economy competitors often do not have the same structures and limitations. Technology and globalization are changing the rules of engagement.
These developments leave industrial companies in an awkward situation. Now, they need to excel at collaborative innovation—historically a weak point—to capture and hold customers’ attention. In the Knowledge Economy, innovation will replace efficiency as the primary driver of value creation. Competitors that can engage rapidly shifting customer desires will dominate.
To succeed, incumbents must quickly become more adaptive and collaborative with external partners and customers. Moreover, they must transform themselves while they continue to operate at increasing levels of performance.
| Industrial Economy Success Factors |
Knowledge Economy Success Factors |
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Deliver vast quantity and low prices to relatively few broad demographics
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Deliver unprecedented choice to many narrow customer segments; low prices table stakes
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| Tightly integrated command/control organization |
Loosely coupled collaborative networked organization |
| Failed new offering launches are the rule because it’s a low velocity, internally-focused research/ produce/ sell process |
New offering launch processes are high velocity and feature customer input and collaboration with external specialists |
| Off-line consumers isolated and passive; buying decisions usually made using company-influenced information; consumers can’t easily find consumer-produced information |
On-line customers validate each other’s interests and influence purchases, creating micro-markets with unique demands; this will be the rule in emerging markets, where on-line is the default for new middle classes |
| Focus on product/service features |
Focus on customer experience |
New Structural Capability Enables New Level of Customer Focus
The increased practice of (out)sourcing is enabling the enterprise to evolve in order to meet the challenges of Knowledge Economy customers. (Out)sourcing failures and successes are educating enterprises and their providers about new IT-enabled options for executing (and redesigning) business processes. Forward-thinking executives are realizing that their options for business process execution and competency definition will continue to increase in step with their sophistication in sourcing.
In the Knowledge Economy, the enterprise’s networked structure enables it to put customer needs before the needs of the organization. Even today, most corporate “organizations” are defined by their positions within their enterprises’ organizational structures, and their actions are defined by their performance within the departmental context. Thanks to “reengineering” pioneers, executives began to appreciate the relevance of the business process orientation in the 1980s, but very few organizations have truly been transformed. The organization has been the required mechanism to deliver value to the customer, but it adds little value to the customer today (its services do).
What if the company could deliver the services without the organization?
The industrial organization is large, complex and expensive, and maintaining its optimal function too often requires the enterprise to focus on itself at the expense of the customer. If the company were to separate the organizational structure from the services it delivers, the company could transform how it delivers value to customers.
E-Business, the application of open standards-based Internet technologies and processes throughout enterprises of all sizes, has provided a capability to change all this. Because executives increasingly have granular, real-time information about business processes, they can change the model: in effect, the degree of information available renders the “organization” far less relevant today, and the stage is set to move the customer-serving business process in the forefront.
What does this mean? First, execute the process in the way that is most advantageous to the customer, based on the nature of the customer’s request and the enterprise’s ability to fulfill it at that moment in time. Real-time, granular information can begin to enable executives to understand that the context around requests (for products or services) and their fulfillment is in constant flux. Previously, executives did not have the information or visibility.
But “organizations,” which were required prior to the e-business era to manage inflexible actions that coordinated complex inputs to produce and deliver products/services, are no longer required.
Because each part of a business process increasingly can self-report its status, it can be reconfigured on the fly as needed. In other words, processes will increasingly self-organize.
Self-organization
Self-organization is a future state that already exists in pockets today, and it will be more true every month that passes. But executives have a serious legacy problem: organizations have provided the structure and coordination to marshall tremendous resources to produce vast amounts of product very efficiently. If they want to dismantle them in favor of the business process, how can this be accomplished? How does one change a tire while the car is still rolling? It is well established that organizations struggle with “adaptiveness.” Why? Their method of making order out of chaos has been scale and its inflexibility. They have “tightly coupled” (inflexible) processes, which were required due to the massive process dependencies within the enterprise.
The future state calls for enterprise organizational structures to devolve into “business components” that fulfill service requests from each other using standardized communications (business services). Such business components will organize themselves around service requests. Of course this idea is by no means new; however, I.T. maturation, business process digitization and the rapidly developing, robust outsourcing provider market make process-focused transformation actionable today. What is missing is an approach to deliver the vision incrementally yet decisively. Transourcing™ is that approach.
For a more detailed treatment of organizational transformation, see transourcing.com.
29 November 2006 (**Updated) Marketing Outlays Sabotaged by Sub-par Process Execution
Chicago, 29 November 2006—Today, the Global Human Capital Journal awarded Grace Bank, the top three credit card issuer, its notorious Web 0.2 Citation for inducing an acute spasm of customer yechsperience™.
This citation demonstrates how exceptionally poor service destroys brand despite kind words and happy pictures from Marketing. Although Grace employed a somewhat formulaic approach, it demonstrated laudable skill at producing customer irritation and angst.
Continue reading Our first Web 0.2 Citation—Grace Bank Lost in Commodityland
23 April 2006 Jim Champy, author of many management bestsellers, including Reengineering the Corporation, led a fascinating discussion 18 April 2006 at Chicago’s Standard Club, sponsored by Perot Systems. Beginning with the presentation, “Doing Business in a Flat World: An Exploration of the Next Era in Globalization,” Jim gave attendees an invaluable perspective on how executives needed to reengineer reengineering for the knowledge economy. He highlighted past transformational efforts in the industrial economy (the original reengineering) and focused on how to achieve change in the knowledge economy. As usual, I will summarize key points of the discussion first and follow up with my insights.
Reengineering: 20th Century
In the 80s and 90s, reengineering helped businesses improve their business processes. For example, an insurance company regularly required 24 days to issue a policy because 13 departments were involved, each of which had optimized processes for itself, not the enterprise (or the customer). In fact, to issue the policy took ten minutes of actual work; the rest was administrative time. Today, business models of the industrial era are becoming obsolete, but most companies haven’t yet changed how they manage their businesses. A default method of drastic organization change, often employed by IBM and many others, is to implement large-scale layoffs and let the remaining people figure out how to streamline processes.
Reengineering: 21st Century
Today, innovation is vital to managing a business because continuous change (process refinement) isn’t enough. Innovation usually entails breaking the mold in some way. Consumers are far more demanding today because they have increasing information at their disposal. For example, Jim shared his personal experience with buying an unnamed “German sports car” by looking up the list price online, sharing it with the dealer and executing the sale in a few minutes. He illustrated the problem of the out of synch company by referring to GM and Ford, which are notorious for many levels of management. Japanese carmakers have flattened their structures and consequently innovate far more quickly. Competition is relentless. Consumers are getting accustomed to the “More-with-Less Economy” in which they get higher quality products and services for less money. Former Federal Reserve Chairman Alan Greenspan has stated repeatedly that economists don’t yet understand the impact of the productivity increases we are experiencing.
The More-with-Less Economy
The More-with-Less Economy poses challenges for 20th Century producers. For example, having low costs is table stakes, and restored pricing power will be the exception to the rule. Innovation (he cited Doblin extensively—for more, see Innovation and Interaction) will be required to thrive because it is a way to achieve widespread change. Returning to the insurance policy above, many corporations labor under business processes that are bloated with administrative cost (health care, anyone?): ten minutes of work that requires 24 days (say, that’s 34,550 minutes for administration and 10 minutes for the actual work!). Therefore, new entrants have a lot of room to deliver for much less. It’s an understatement that executives need to manage differently now: we are at an inflection point. They must focus on cross-boundary reengineering, across departments and outside the enterprise.
Another group of drivers for imminent discontinuous change will spring from the 3 billion people that comprise the emerging consumer markets in Asia. Already, Asia has burgeoning pockets of consumerism, and these will accelerate over time. Work crosses boundaries with less friction all the time, and new capabilities are emerging every day. These capabilities will give astute companies the opportunity to reorganize themselves.
Innovation at the Business Model Level
Will executives have the appetite for radical operating change? Jim gave us an example of SwissAir, which couldn’t see its unique assets and opportunity to innovate at the business model level by focusing on passenger and crew experiences. They went bankrupt and ended up re-launching as Swiss, which is now largely owned by Lufthansa. Business model innovation must focus on strong value propositions for customers who leverage information transparency in the “More-with-Less Economy.” Although ideas are important in a value proposition, Jim strongly feels that execution is what gives a business sustainability. He presented a “differentiation value curve” (from least to most differentiation): price > speed > quality > service > customization > variety > innovation.
Here are some examples of innovative business models:
- Lean—The Minute Clinic‘s operating principle is leanness. Employing mostly R.N.s at locations within (mostly) pharmacies, they diagnose common illnesses right away, and prescriptions are filled immediately. Their tag line gets to the point: “You’re sick. We’re quick.”
- Value beyond the product—Bass Pro Shops pampers their customers to an amazing degree.. and customers reward them by paying top dollar.
- Leverage processes and technology—Zip Car‘s value proposition is offering automobiles as a service. They enable, in effect, shared car ownership in a seamless fashion. Members reserve cars via the Internet, and everything is in the package at a reasonable price. It’s another example of “appealing to a higher value” (below) as Zipcar talks about “liberating” city dwellers from the costly car ownership model. Check out their comparison calculator.
- Appealing to higher value—some propositions appeal to a sense of mission beyond profits. For example, Tata Motors is making a “car for everyone” (which reminds me of the $100 laptop) that will cost a $2,200 and is projected to go into production around 2008 (see Sidebar).
Some guiding principles for innovation are:
- Beware of long adoption curves. Although many of these ideas seem obvious, experience tells all people who listen that the adoption of new ideas is always longer than one expects. To whit, many of the Internet companies that were born in the Internet Boom had solid value propositions, but they discounted the length of time required for adoption.
- Don’t confuse individual behavior with corporate behavior. In general, it is far easier for individuals to change their behavior than for corporations.
- Be sure the idea is scalable. When you’re dealing with a global market that is far more diverse than previous markets, you need scalability and adaptiveness.
- Drive some level of standardization. You can manage complexity and achieve adaptiveness by standardizing where possible. Dell’s mass customization is an excellent example of this.
- Digitize as much of your process as you can. Paper is static and invisible from a global standpoint; however, digital documents are searchable (and able to be found) anywhere in the world (even out of the world).
X-Engineering
X-Engineering is defined as “..the art and science of using technology-enabled processes to connect businesses with other businesses and companies with their customers to achieve dramatic improvements in efficiency and create new value for everyone involved.” Some of its key principles are transparency, standardization and harmonization. Trust underlies everything (because it’s crucial in collaboration). Choosing partners with whom to collaborate is difficult, but recognize that most partnerships don’t work. To succeed, you need compatible beliefs, complementary products/services, the ability to create new propositions and the power to eliminate redundancy. Jim shared with us some business model concepts, “flat world opportunities”:
- The delivery of discreet, repeatable business processes on an on-demand, transactional basis most likely enabled by or delivered over the Internet.
- An IT and business process outsourcing company, with a real global delivery model: the ability to deliver with scale on-site, on-shore, offshore, and nearshore services.
- A business software provider that supports simple, elegant operations processes, at low costs.
- A real offshore, IT infrastructure utility (scale).
- Almost anything that has to do with healthcare administrative and clinical services and that changes how services are managed and delivered (e.g., build a global healthcare information utility using search engine capabilities).
- A manufacturing company that begins with quality products but that also runs with a superb set of processes, deeply linked to the processes of its customers and suppliers, running on the principles of transparency and collaboration.
- Any of the above business models, but selling back into the countries where the playing field has been “leveled” and that represents new markets and new wealth of 3 billion people.
Analysis and Conclusions
- The knowledge economy (“flattened world”) challenges all the assumptions of the industrial economy, which does not mean that everything changes. Rather, smart leaders will reexamine long-held assumptions and principles to see whether they still apply in the same way they did before. Some things just no longer apply, while others are relevant in a different way. Of course, this includes management tools and approaches, and Jim’s talk reflected this. Reengineering itself must be adapted to the knowledge economy. For example, the old reengineering focused mostly on process improvement, while the new focuses on innovation.
- In the 80s and 90s, reengineering helped to change the corporation within the context of itself, which made sense because the industrial enterprise was the locus of attention. The industrial enterprise developed and thrived in an era of scarcity (products, food, health), and therefore producers had the most influence in the market. Today, people in the world increasingly live in an era of plenty, and therefore the influence in the market has shifted to the consumer. Imagine how many business decisions embed the assumption that the producer has the upper hand. I’ll wager most of them.
- My favorite of Jim’s Principles was: “go for businesses that take work out of companies rather than businesses that try to change how companies do their work.” Reading between the lines here, discontinuous change is required because the amount of change is too great for continuous change. Therefore, don’t try to do the reengineering of the 80s and 90s, even though that may be more comfortable, because it won’t be enough. In addition, expand your vision outside the enterprise because innovation thrives on the dynamism that results from diverse points of view and practices coming together. Of course, that means extensive collaboration with partners (some would even say “pervasive outsourcing” ;-).
- Tata Motors’ “peoples car” represents a price point that is orders of magnitude less than other carmakers’ current offerings. In addition, it will be “the first car” for many people in emerging markets, giving Tata the opportunity to imprint customer experiences with millions of emerging market customers. This is a textbook example of why multinationals cannot stay out of emerging markets: they represent a precious R&D opportunity to learn how to engage tomorrow’s customers.
- The productivity increases behind the “More-with-Less Economy” are driven by the shift to the knowledge economy. In the industrial economy, companies differentiated by changing product features, which often meant changing the alloy, design or manufacturing process. These things are difficult changes because they involve “bits,” real physical materials that impose constraints on what can be done and how. In the knowledge economy, companies create differentiation with information, which knowledge workers organize and apply as knowledge. In most cases, it is far easier to change information about a product (“bytes”) than it is to deal with the “bits.” Information is far more scalable and change is more rapid. From a macroeconomic perspective, knowledge workers create more change more quickly, hence more differentiation and value.
- X-Engineering is sorely needed due to its focus on cross-enterprise boundaries. In my opinion, decreasing e-collaboration costs will increasingly pressure enterprises to forgo their tightly coupled business processes in favor of loosely coupled processes. Outsourcing is a paradigm in which to transition to loosely coupled processes. This is a very difficult proposition that will require much innovation and—you guessed it—unparalleled collaboration, to the point that the very definition of the “enterprise” will morph from a centralized command/control structure to a decentralized networked, collaborative one.
| Sidebar: McKinsey Interview with Tata Group’s Ratan Tata |
| McKinsey: On the development of a people’s car that would sell for 100,000 rupees. What’s the thinking behind it?
Ratan Tata: It is propelled by the opportunity, but there is also a social or dreamy side to it. Today in India, you often see four people on a scooter: a man driving, his little kid in front, and his wife on the back holding a baby between them. It’s a dangerous form of transformation… If we can make something available on four wheels—all weather and safe—then I think we will have done something for that mass of young Indians. |
| Excerpted from “What’s next for Tata Group: An interview with its chairman,” The McKinsey Quarterly |
9 April 2006 The emerging knowledge economy will reconfigure the role of discovery in innovation in some surprising ways. First, a couple corollaries:
- For most of the history of mankind, information has been scarce, and an important way that people innovated was through discovery. In agrarian and industrial economies, it was extremely important to discover new ways to transform raw materials in order to create new products. Since people lived in relative isolation compared to today, there was significant duplication of discovery efforts in pockets around the world.
- The pervasive TCP/IP network (i.e. Internet), combined with accelerating adoption of modern architectural approaches (i.e. service-oriented architecture) and messaging (Web services and XML) is unlocking the world’s data/information as a dizzying pace. It’s a cliché that we have too much information, and this trend shows no sign of abating. Moreover, software tools for automating the management of information are improving all the time. Of course, this development gives people an unprecedented ability to collaborate—on everything.
In the knowledge economy, discovery gets leveraged, pervasively and instantaneously. Discovery will remain extremely important to creating value, but I’m going to argue that it will play a cameo role in the hyper-innovation knowledge economy: crucial but supporting.
Anyone attending innovation conferences and seminars will tell you about a persistent refrain emanating from enterprises with world renowned laboratories: they roll out patents at a torrid pace, but commercialization of the discoveries remains a consistent frustration. Very few of their patents create business value. This is true irrespective of industry or country.
The commercialization process will be the innovation mother lode, from electronic gadgets, to pharmaceuticals to space lichens. Commercialization means making a new discovery relevant to customers and creating a process to fabricate (if product), service and introduce it to customers, in an efficient way. These are all areas in which groups of inter-connected knowledge workers, collaborating at an unprecedented level, can achieve a quantum leap in value creation.
But there’s a catch. Companies must reorganize themselves, in structure, attitude and habit. Large industrial enterprises have traditionally managed risk by controlling variables. Because they have large tightly coupled structures, they must constrain change within the limits that their structures can accept. Structural realities and limitations have imprinted employees with formal processes and methodologies.
Does this sound like fast-moving, dynamic spontaneous energy that can be focused on fulfilling customers’ whims? Exactly.
Transforming how the employees of a global enterprise interact to create value is a daunting task, but it’s eminently doable. Some of the secrets are encapsulation, delegation, collaboration and abstraction. In brief, encapsulation enables activity to be differentiated and organized within “pods,” which operate without external micro-management. Pods have specialized competencies and are responsible for producing something, but the approach they take is up to them, which gives them the freedom (and responsibility) to create and innovate. Of course, pods collaborate with other pods to get something done. This structure is very flexible. Pods can exist anywhere in the world, inside or outside the company.
Delegation is a concept that everyone’s familiar with, but it bears mention that, when one pod asks for a service to be performed, it specifies what it needs and when it needs it, and relevant pods respond and organize themselves to get it done. Delegation does not focus on specifying how the job is to be performed because the how is encapsulated within the pod that said that it could provide the service.
Management needs to become a brain.
Now, abstraction. In command/control environments, management typically gives literal (that is, not abstract) direction for what gets done—and often how things get done. This approach can theoretically be workable in relatively static environments in which change is slow. In the hyper-dynamic knowledge economy (and I postulate that we’re still in the initial stages of acceleration), management can’t know the optimal process to get something done because capabilities and conditions are changing too fast. In the self-organizing world, requests are made in standardized formats, and pods respond in standardized formats, so that communication is pervasive and consistent. Pods know what their specialties are and what services they perform. They only respond to appropriate requests.
It bears mention that this is roughly how the human body is organized: the brain doesn’t instruct lymph nodes on how to fight a disease or muscle cells how to deal with lactic acid. It just receives and sends messages, and only cells that are relevant to that particular message respond. This is a way that enables the body to excel in a tremendous range of activities and circumstances. The brain would be overwhelmed if it had to micro-manage all the body’s systems and how they did their work.
Having been closely involved with enterprise transformations for years, I realize that this proposition will be difficult for enterprises, but the rewards will be many (they include survival ,^). Moreover, the journey can be iterative—it need not be a big bang—the new can coexist with the old as it replaces it.
17 March 2006 Adam Hartung of Spark Partners led a compelling and thought-provoking discussion at this month’s MITEF meeting on 14 March in Chicago. Adam is a veteran of a bevy of management consultancies and large corporations who has spent the last four years researching a hypothesis about innovation, writing a book (The Phoenix Principle) and consulting. His observations are straightforward, profound and potentially healing for industrial economy companies.
Summary of the Meeting and Discussion
- “Lock-in” is a corporate phenomenon that is fatal for organizations because it prevents new thinking.
New thinking is increasingly important because the market is more volatile than ever. Lock-in happens in a cycle: in its formative stage, the corporation experiences success, and success “hardens” into a success formula; it leaves an imprint on executives, workers and customers, who all identify with the success. Of course, the problem arises when the market moves and nullifies some key assumptions that are embedded in the success formula. There are three types of lock-in:
- Behavioral lock-in: group-think, not invented here; slow decision making; rigid ideas about customers and products; sacred cows. Profits from financial manipulation.
- Structural lock-in: many, but one stood out–”biased toward easily quantified, traditional actions and against more speculative ventures.” Tightly integrated processes; relentless focus on process excellence; creative financial accounting.
- Cost lock-in: costs always increase in real terms and are difficult to escape beyond a certain point without cutting innovation.
- Lock-in is very hard to change, and it is the cause of death of many (most?) corporations. Adam cited many well-known statistics about corporations’ short tenures as members of the Fortune 500. Today, bankruptcies are at an all-time high in number and size. The most arresting statistic related to a symptom of lock-in—stalled growth—which he defined as zero/negative growth, either in two subsequent adjacent quarters or in subsequent quarters year over year. Only 7% of stalled companies ever produce 2% or greater growth again, and 70% lose 50% or more of their market value.
- The concept of lock-in is deceptively simple, but it’s a widely applicable. Individuals are locked into their success formulas, as are universities, government and any type of organization. For example, a sacred cow of management education is the “S curve,” which holds that an innovative product experiences nearly vertical success before the slope of the curve diminishes. The rationale of product extensions is to create successive S curves, all feeding off of each other, and this is a myth.
- There are 3 kinds of leaders: stabilizers, explorers and adapters. Each is valuable for various stages of the company’s life cycle.
- Another key concept is “Defend and Extend,” which is invoked when growth starts to falter. The success formula is harshly inflicted on the organization in fierce determination to maintain success. The company tries to defend its market leading position by replicating and extending the formula, not by innovation. Investment in game-changing innovation is pared back because they can’t meet the investment criteria that were established in the company’s heyday.
- Product life cycles are not nearly as durable as they are held to be (this one is close to my heart): Lock-in justifies itself by exaggerating product lifecycles and extensions. Some stats: 86% of new products are extensions, and they produce 40% of profits. 60% of profits come from the 14% of the products that are truly new.
- “The Phoenix Principle” is an approach for rectifying this situation:
- Don’t defend and extend: distinguish between “the challenge” and “the problem.” The former is more externally focused, as it embodies the market’s new demands and a new context in which the company’s product/service is consumed. The latter represents the company success formula’s lack of alignment with the new demands. By focusing on the external, the company aligns itself with customers; the latter is a ticket to demise.
- Attack competitors’ lock-in. Everyone with corporate experience knows that the proverbial “three leaders” in a market often move in lock-step; they often have collective lock-in. But any competitor with the insight, discipline and skill can innovate. He proposes using that to advantage, citing Domino’s, Encarta and Casio as examples.
- Explicitly use disruption as a way to eviscerate lock-in. Groups imbued with lock-in are comprised of individuals that reinforce each other, and it’s critical to interrupt this by exposing the lock-in.
- Finally, use “white space,” which is permission and resources to innovate. To succeed consistently, innovation requires commitment, but it has to be managed by using actionable milestones. Notably, measurement has to be of a different standard, but it has to be real. White space projects must involve new people from the outside. Obviously, you want a strong element of explorers involved.
Additional Insights
“The Phoenix Principle” is valuable because it explains the problem of what I call “industrial economy” thinking in a powerful way and in some detail. Abstracting up a level, it becomes a way to manage the inherent tension between efficiency and innovation. As decision makers, we all face the challenge of when to accept that a “success formula” has outlived its usefulness. Of course, formulas are useful tools, and they’re hard to give up. At a simplistic level, life cycle management of a company, a product or a country revolves around optimizing efficiency and innovation. Too much innovation would not make a company competitive, either, and striving for efficiency using yesterday’s context rapidly becomes a disadvantage. This tension is also directly applicable to natural selection and survival in a literal sense; all competitors in a system are faced with the pressure to adapt.
A related issue is that industrial economy companies have traditionally meant large, complex organizations. In practice, their size has mandated long life cycles because it takes a long time to get all parts of the organization to understand and support the company’s competitive advantage in a coordinated way. In being tightly coupled, their processes do not inherently support discontinuous change very easily.
If information exchange has as much of an impact on life cycles as I hypothesize, the continued increase in information flow may prove that the large organization itself is an outmoded success formula. This is something that will be discovered in the years ahead, as we seek to apply rapidly changing technology capabilities to business process to drive competitiveness. Technology has the potential to change the rules of efficiency.
This is why outsourcing can be such a powerful strategic tool for transformation. It is an idea and approach for collaborating with a partner that excels at a task or process while saving money or creating productivity gains. However, organizations typically don’t approach it as a way to collaborate; their goal is usually efficiency or operational excellence. But those organizations that develop widespread competency in collaboration will have the means to optimize efficiency and innovation as market conditions change. They will be able to tap into competencies outside themselves in a seamless way.
To return to the talk, this discussion gives us a construct with which to ask ourselves, “What is my company’s success formula, and how are we locked in?” I don’t believe that being locked in is a binary proposition: there are always shades of gray. Following the natural selection example, adaptation always involves figuring out what about our experience we can harvest and continue to apply in the present, what we must reject, what we must adapt, and what we must invent. In the context of organizational change, however, Adam’s point is well taken: it’s very difficult to support transformative innovation within the context of lock-in due to the disagreement about when and how we should abandon the success formula. Defend/Extend will always rob resources from innovation because more people (within the company) agree on traditional values. Lock-in has to be identified and faced.
This is a simple concept but it will undoubtedly surprise you if you focus it on organizations you might not think of at first, like sports teams, countries and other institutions—or even yourself!
24 January 2006 Sidebar: Industrial Economy DNA
Chicago, in being one of the foremost industrial regions, has industrial economy DNA. This DNA isn’t well suited to the first phase of the knowledge economy, which turns many industrial economy assumptions on their heads. For example, even more remarkable than tech companies’ ability to create wealth quickly is their lack of constraints from raw material inputs: these companies can be located anywhere, irrespective of natural resources. Their main physical requirements are power and fiber, which can be built or brought almost anywhere. In contrast, putting together an industrial enterprise involves accommodating materials with physical constraints at every turn: the sources of raw material inputs are often limited and scarce. Moving the material or parts from one area of the enterprise to another often requires special machines and specialized equipment. Dangerous chemicals are often involved in transforming raw materials. Disposing of waste is not trivial. Often, machinery to transform the raw materials must be custom built, and the machinery imposes its own constraints. Consequently, Chicagoans are accustomed to changes being incremental; we are accustomed to things taking time. This economy is bits, not bytes.
Chicago is renowned as a distribution hub, which began with its proximity to water. Since it was already a distribution hub when rail and air transport were born, this infrastructure was hard-wired into Chicago; a similar dynamic made it a fiber infrastructure hub. Transporting pigs is quite a different proposition from lumber, iron ore or hydrochloric acid. The process of meat packing is subject to spoilage, the type of animal, the markets and locations of customers. Dealing with these things is in Chicagoans’ DNA. Mastering their foibles is what made Chicagoans excel, and it’s hard to give up.
As discussed in The 3.x Economies, the agrarian economy preceded the industrial economy, and it was even more imbued with physical constraints. The point here is that we humans have hardwired into our brains the imprint of these economies’ lessons and impulses. Many of these do not apply in a knowledge economy, and that stymies us. The impulses are often so profound, we are not aware of them. People don’t change unless they have to. The fact that we are alive is testament to the fact that we made the right decisions in the past. This is a profound truth and difficult to deal with. It often makes us stick with something longer than we should.
Transformation is so difficult because it challenges us to selectively unlearn part of what we knew before. We have to figure out what parts of what made us successful in the past will help us in the future, and we have to modify the rest or throw them away.
To illustrate what I mean, here are some of the lessons that have made us successful in the past and which are altered drastically in the knowledge economy. Be warned, they contain myriad generalizations, and exceptions abound. Since we’re talking about deep beliefs of Chicagoans as a group of people (i.e. critical mass), I think they are relevant:
| Industrial Economy Lessons |
Knowledge Economy Lessons |
| Barriers to entry are immense because they are based on topography and history; Chicago is the heart of the U.S. when it comes to distributing agricultural and industrial products to the U.S. and beyond. No city will replace Chicago as a distribution hub for physical products. This fact can lead to a certain smugness and imperviousness to change. |
Barriers to entry are often fleeting; a new alliance of hardware or network vendors could roust our software from its dominant position; this leads to legendary (and healthy) paranoia. |
| Zero sum: if I get that parcel of land by the river for my new plant, you can’t have it. If I make that tree into a chair, you can’t use it. If I win, you lose. Even more important: if you win, I lose. |
Not zero sum: if the input is digital, we can both use the same input. Digital assets are infinitely scalable, almost instantly, too. |
| Alliance relationships, because they have often been about raw materials in the past or distribution agreements, have often had a zero sum flavor. |
Alliance relationships are often fleeting as they are based on exploiting temporary conditions in the market. |
| Collaboration usually denotes sharing thoughts with a distinct, independent party on a project that will be jointly accredited; it is done sporadically and guardedly. Industry features a command/control structure, not a collaborative structure. You have production lines because process is often linear. |
Collaboration is the lifeblood of innovation because combining various points of view is crucial in creating transformative products. |
| Innovation is incremental, not transformative. It’s not efficient to rip up an entire factory to drastically change the flow of production based on a radical new idea. Machines are heavy. The long iron pipe inputs couldn’t be brought in that door if the milling machines were put there. Moving the milling machines would mean displacing the grinders and… you get the idea. |
Innovation is often transformative to a fault. Making changes to software can be labor intensive due to complexity, but they need not be. They are much less risky than tearing up a shop floor. |
| Transformation in thought and action is fanciful; efficiency is wisdom, not thinking up discontinuous change ideas. |
Transformation is a key part of the value proposition. It is often a technology start-up’s middle name. |
| Product life cycles are long; we amortize our investments in R&D, packaging, deals with our distribution partners, who have a certain kind of trucks (say, refrigeration at a certain temperature) that couldn’t safely transport a frozen version of the product. Therefore, we operate within physical constraints and invent new flavors instead. |
Product life cycles are short by definition because making significant changes is relatively easy for everyone. |
| Outlook: I am a powerful financier/industrialist/professor/x: the world comes to me to get done what I do. |
I am a technology entrepreneur. The world isn’t here. We have to create a prototype, (get funding) and get customers. We have to go to the world. |
| Information: is scarce, and conditions change slowly which gives information a longer shelf life. Therefore, it is a better strategy to hoard information and share it guardedly. This makes collaboration more difficult. |
Conditions change rapidly, and information rapidly becomes outdated. Therefore, it’s a better strategy to share information. |
In the knowledge economy, inputs are mainly information and knowledge. Hence, the importance of universities and the leverage of repeat technology entrepreneurs and tech-savvy financiers, attorneys and marketers. Moving product means FTP or email. Waste? Empty the trash with no environmentalist consequences. Workers can be anywhere. Plug these differences into Ronald Coase’s economic theory around transaction costs, and you will see a gigantic difference between industrial transactions and knowledge transactions. That is why knowledge economy companies and products develop so fast; they warp our industrial economy perspective.
Transformation means profound change by definition, and people don’t like change. They need powerful, galvanizing and persistent motivation. In being more successful than Massachusetts, Silicon Valley, Austin or North Carolina during the industrial economy, Chicago is challenged to forget many of the lessons that it learned during the industrial economy. We are still too successful today to be universally motivated. Jerry Mitchell pointed out to me that the Route 128 phenomenon was born of the fact that area textiles and other manufacturing were devastated, and there was simply no alternative to taking the risks necessary to build something new. In Chicago, we have not and will never reach that point, which is a curse in the short term and a blessing in the long term. We have a diverse economy, and the industrial economy will continue to be important, although its value will continue to slip relative to the knowledge economy.
18 January 2006 The End of Corporate Imperialism, by C.K. Prahalad and Kenneth Lieberthal, encapsulates the obvious elegantly and factually, and its thesis is far more true today than in 1998, when it was written: “Too often, companies try to impose Western models of commerce on developing countries. They’d do better—and learn more—if they tailored their operations to the unique conditions of emerging markets.” Western MNCs (multinational corporations) perceive the primitive state of consumption in emerging markets, and they too often develop a strategy in which they: 1) focus on the extreme minority of wealthy consumers and/or 2) address the order of magnitude larger middle tier of the market by offering their past-mature products with minor cosmetic changes.
This is another symptom of MNCs’ being stuck between industrial and knowledge economies. As I stated in my Transourcing Point of View, “Enterprises are ambivalent about innovation and product creation because they represent an inherent conflict: the drive to amortize past investments (including process-oriented constraints of marketing, distribution, service, etc.) conflicts with companies’ need to satisfy customers’ wishes for novelty. In practice, this too often leads to vapid product extensions.” The industrial-era enterprise derived its competitiveness largely through production and distribution efficiency, and it marketed to customers in a (relative to today) era of scarcity in which they were grateful for what they could get. Mastering efficiency in transforming heavy, constraint-laden raw materials into products imprinted on executives the impulse to develop products to satisfy their needs to extend past investments while satisfying customer wants as well. This impulse is dangerously out of synch in the knowledge economy, where leaders are differentiated through innovation and marketing excellence. MNCs must focus on innovation that puts customer wants first while retaining their competences in efficiency.
Value-added goods of all types are loaded with assumptions that simply do not hold true in emerging markets. Two common examples are mobile phones and laptops. Cellular infrastructure and usage patterns are different in China and India, so companies cannot address these markets my making current models more cheaply; they must design for the environment. In India, for example, most customers are accustomed to inconsistent infrastructure, and people take it in stride if they have to place three calls to complete a mobile phone conversation. This would be intolerable for a U.S. customer, and this has been built into phones and infrastructure, adding to the cost of the phone and putting it out of reach of many potential customers in India.
If you had asked any computer manufacturer five years ago whether it was possible to make a $100 laptop, s/he would have smiled kindly at your ignorance. Even today’s most advanced designs and supply chains can produce a price four to five times that amount. Yet 2006/2007 will probably see it done (see The $100 Laptop Moves Closer to Reality, The Wall Street Journal, 14 November 2005). To make it happen, however, designers had to go back to the drawing board and discard past assumptions. They had to design for the customer first.
This is the big lesson for emerging markets, which have “usage scenarios” vastly different from those of western countries. Admittedly, there is risk involved in investing in R&D for a market that differs significantly from traditional markets. There are two responses: 1) companies have lived in an era of long product life cycles, and innovation was a core competence for few. Therefore, few are good at it; they are inefficient and success rates are low. Approaching emerging markets through innovation will enable leaders to get better at innovation in general, which will benefit them many times over.
Secondly, the rapidly developing human capital market is waiting to be tapped. By partnering with design and engineering talent within the markets, MNCs will develop a competence that will serve them well: to design products specifically for these markets at a lower cost than they would pay at home. They can take the design lessons they learn and apply them to developed markets as well.
Innovation and tapping the global human capital market are ends in themselves. They are the core competencies of the knowledge economy. Put another way, those that don’t develop these competencies will become less relevant and fade into obscurity.
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