Drivers of Business Change
During the time that I was writing this book, I was involved with a company that was very successful in its consumer products marketplacenumber one in North American market share. During the year, however, it changed its prime consumer focus to an e-commerce approach, changed its sales incentive scheme to a new network marketing model, and dropped the prices on its products by an average of 40% in anticipation of competitor response. It also opened up or consolidated operations in five new countries, each with different regulatory mandates. The company then was acquired by a large global competitor that didn't have an e-commerce solution or a network channel. Together, they became the dominant player in their industry in the world. This firm then acquired another network marketing company in the same industry with some complementary products to secure its position and merged with it. The company did all this and managed to maintain a growth trajectory that continues today.
This company isn't all that unusual. The things it did, and continues to do, are typical of the type of changes happening in the world today in many organizations. The firm is very unusual in that it managed to pull these changes off without major damage to its stakeholder relationships. Like many enterprises today, this company faces incredible pressures.
This chapter examines some of the most pressing of these business drivers. In doing so, I will start to show that managing your processes constantly is a key factor in navigating the difficult transitions that arise. Your enterprise's specific responses to these drivers will vary depending on its mission, value proposition, and its current situation in the marketplace. However, these pressures for change can't be ignored. Change isn't an optionyou will change whether you like it or not.
When enterprises make investments in change, they expect to receive a fair return on their investments. These investments should pay off in terms of the business performance results that they are chartered to deliver. Figure 1.1 depicts the challenge for managers everywhere.
Figure 1.1-Return on Investment (ROI).
As changes are made, new organizational capability is put in place. This can be in the form of new products and services that allow the organization to meet its mandate better. After spending an amount of time and money and utilizing other resources, the capability is ready for use. This time is referred to as time to market. The organization then realizes the benefits of its investments and at some point reaches the break-even point, when the accumulated investments and operating costs are exceeded by the contribution made through the availability of the product, service, or capability. I will refer to this point as the time to ROI (Return on Investment). The enterprise then continues to reap rewards until the product reaches the end of its useful life and is retired or renewed. Positive return is achieved unless the contribution never catches up to the investment and cost line when products miss the mark or projects fail. This can happen as shown in Figure 1.2. Variations on this model will be used elsewhere in this chapter to illustrate the pressures on organizations today.
Figure 1.2-Return on Investment never reached.
It's becoming harder and harder to achieve the ROI expected for several reasons. The prime business challenge faced by enterprises around the world is to manage complexity and to deliver capabilityboth the ability to perform and the capacity to scale. This task isn't trivial as the business environment becomes even more complex. A traditional response by organizations has been to conduct some form of strategic planning by doing SWOT (strengths, weaknesses, opportunities, and threats) analysis. With this approach, organizations would proceed directly from a weakness and start up a project to strengthen it or from an opportunity and build the capability to exploit it. These types of approaches, of which SWOT is just one, are devoid of real strategy formulation from an enterprise perspective. It's how many organizations ended up with 25 databases with the same data in them but with no integrity, and how enterprises produced many Web sites with conflicting or confusing messages. Today, these approaches clearly lag because they miss the concept of organizational asset alignment.
In the past, corporations have paid for this lack of integrity in the time and cost to make further changes. Today, many are still paying because they can't deliver capability to the front lines fast enough. Many organizations have responded by introducing information architecture and systems planning approaches. From the business strategy, they build architectures of the total information technology (IT) environment: data, applications, and infrastructure. From this they establish an IT transformation plan and establish budgets to implement the program. This has been a step in the right direction, but more often than not it's still not linked to any process view that connects their stakeholders to the business.
Business architectures that identify stakeholders, processes, and organizations, and link them to the products and services of the organization are now very much the focus. Many organizations are aligning all elements with one another. What's proving to be more challenging is the allocation of resources across functions such as IT and human resources (HR) as well as business units. Defining a program of change for all components is what some of the more insightful companies and government agencies are trying to address.
The most courageous enterprises are stepping up to the problem that faces many of them today: Even those who design their strategies well and produce aligned architectures for all their organizational assets often don't deliver what they said they would. The resources required don't actually get allocated to the required work. A major cause is that an organization doesn't have in place a vetting process to take rogue initiatives and assess them against the approved plans. Likewise, the required resources simply aren't available because they are doing other things. Also typically missing is a cross-functional process that reviews and approves resource allocation based on the current program of approved projects and their requirements. This process assesses the appropriateness of implementation proposals other than those already approved.
Nirvana for organizations is to close the loop through a learning cycle that feeds back to strategic planning and architecture. Monitoring progress against the planned program initiatives and also measuring ongoing business performance will allow priorities to evolve and be reset realistically.
Figure 1.3 depicts the full process of delivering enterprise asset capability. It answers the who, what, when, where, why, and how regarding the enterprise being managed. And, it does so in a logical order. It starts with why and then progresses to what, where, when, who, and how. Lastly, it re-addresses why again in a never-ending cycle.
Figure 1.3-The process to deliver enterprise asset capability.
Critical decisions are made during the process of managing these assets. They vary from organization to organization, depending on the drivers that each organization faces. The following sections address some of the more common drivers found today in many organizations' business landscape. I haven't tried to be exhaustive in this list, nor will I attempt to drill into significant detail on each. You all recognize the issues. Instead, I've focused on defining the major factors from business and technological viewpoints so that you can evaluate which are particularly relevant to you. Any of these could represent an opportunity, or potentially a risk, for the organization. Your choices of response are covered in Chapter 2. How you respond will be the key factor in your success.
New-Age Business Drivers
As the economy changes, the context for all private and public sector businesses changes with it. I feel that four major forces are causing upheaval for many enterprises:
- Growing organizational complexity and reach
- Rising external stakeholder power
- E-business technology
The term hyper-competition simply implies that competition is happening more quickly and more aggressively than ever before. The tearing down of barriers is allowing new entrants into traditional markets and playing havoc with the old rules. Competitors are also playing harder than ever before. Many new players are entering the economy and taking over a larger and larger share of markets. Many are driving out unresponsive incumbents. However, other incumbents will do anything to keep what they have and squeeze out new threats.
The airline industry's experience is a case in point. As existing large carriers merge, creating a few major players, competition often disappears on certain routes, most notably to small communities. In many cases, the newly merged carrier reduces the number of flights and increases average fares for travelers, who have little choice. Often, new competitors then enter the marketplace with lower cost structures and rates. It doesn't take long for the major carrier to respond with special low fares to keep their control over the routes. It does this at a loss and has the staying power to squeeze out its new competition in a war of attrition. When that occurs, the major carrier often then raises the prices again and recovers its position.
Air Canada was accused of this behavior before it acquired its weakened main competition, Canadian Airlines. In the United States, most major carriers have been accused of the same tactics. The behavior of Northwest, United, and American airlines will be interesting to watch as other carriers, such as TWA and USAir, are taken over. However, this arrogant behavior has also backfired at times, allowing new entrants to be successful as long as they are well funded and remain profitable through incredible efficiency. Southwest Airlines, Alaska Air, and others have been very successful in developing alternatives to the major carriers by offering lower fares and great service. They also are growing their business profitably. Competitors with high overhead structures often abandon the routes to the upstarts.
Opportunities and threats exist in all industries. Initial responses to some minor player challenges occurred in the early 1990s with massive cost-cutting exercises by the big players. Figure 1.4 shows the planned impact on competitiveness through cost reductions from business process re-engineering (BPR) programs. This was a good short-term fix, but, in many cases, it was done by reducingnot enhancingcapability, which was treated as a non value-added cost, not an investment. This capability proved to be a key factor when the business world became more competitive after 2000.
Figure 1.4-Improved ROI through cost-based business process re-engineering.
Some of the main reasons for an increasingly competitive world are
- Shrinking business cycles
- The commoditization of products and services
- The provision of knowledge as a product or service
I will deal with each of these.
Shrinking Business Cycles
It has become clear that products and services don't remain constant for very long any more. From the 1950s through the mid-1980s, it wasn't unusual to expect a new product or service to remain fairly consistent for a number of years. Since the mid-1980s, however, the in-market time, or product life, has continued to shrink. Figures 1.1 and 1.2 depicts the dilemma that executives face in trying to maximize return on their investments. These curves were manageable when there was sufficient time to earn the ROIthat is, when the product lifeline was sufficiently far to the right.
But, today, the in-market opportunity is rapidly vanishing because of two main factors. First, products and services now last for months, not for years, before they have to be dropped or renewed. This can be equated to the product lifeline racing dramatically to the left in Figures 1.1 and 1.2. When this occurs, it means that there's less opportunity to recover investment costs unless the second factor is dealt with: The time to market point must also be moved to the left to maintain a fair ROI. Figure 1.5 shows the challenge. This means that you can no longer take years to deliver a new capability that the marketplace would have loved a year ago. In one year, the market's desire has doubtlessly moved on to something else.
Figure 1.5-Improved ROI through faster time to market.
Product development cycles must shrink, and we must think about delivering changeable capability. (This will be dealt with in more detail in Chapter 2, "Organizational Responses to Business Drivers.") The pressure to do this requires us to be more adaptable in our ways of working. The old Industrial Revolution model of invest, invent, and mass produce is no longer valid because it assumes that what we deliver is stable, as is the way that we deliver it. Instead, today's challenge is to be flexible enough in generating our products and services to allow significant delivery variations. At the extreme, it means that every instance of a service or product configuration can be unique. Customers receive customized, individualized treatment. Strangely enough, in looking at this extreme, the need arises for some sort of stability because it's clear that we can't reconfigure our work methods every time a customer places an order. The trick is to design, develop, and implement capabilities that are innately adaptable and scalable. Facilities, technologies, and people must be able to deliver results, each of which might be different.
This has a strong impact on how we set up our organizations. Some of the requirements are
To adopt a customer and process focus, not a product focus, because the product will vary
To design products as basic, customizable modules that can evolve and change
To use adaptable technologies whose rules and workflows can be changed declaritively without programmers getting involved
To focus on the continuous enhancement of the knowledge of workers
To build flexible, responsive processes
A good example of these organizational characteristics can be found at Dell Computers, where new designs of computers reach the market very quickly. All Dell customers can configure their own machines on the Internet or by talking to a knowledgeable agent, and corporate customers can work through their own personalized Web pages. Dell's advantage lies more in its capability to change quickly than in great designs for its machines.
Another good example is Levi Strauss & Company's custom jeans service. Under this program, for a few dollars more than the full price of a pair of Levi jeans, you can be measured for fit in a store and have the factory thousands of miles away cut a single thickness of fabric by computer-controlled lasers. From this, a pair of jeans is expertly sewed and shipped to you in a few days. And they fit. Levi's makes much more per unit profit from these than standard jeans.
In both cases, the design was for an infinitely adaptable product using a standard process and technology that didn't require downtime to get to market after a change or a customization.
Commoditization of Products and Services
Unlike products of just a few years ago, many of today's products and services look much alike. It's hard for individuals and organizations to pick and choose among them because their features are similar. Most organizations have learned from one another and have incorporated
the best of the breed into their own offerings. To add to this, many products work well, and added features seem to be marginal in their value to customers. Businesses no longer add significantly new concepts or capabilities as they once did. Many of these products are becoming mature. An example is the last few releases of Microsoft Office. Most people were already only using a small percentage of the capabilities of the product suite when new releases were introduced and, if it weren't for the requirement to be able to read new incompatible file formats, many people may not have purchased the new versions. A few more advanced users might have welcomed some of the features, but a larger and larger proportion of users didn't find much functional advantage in new versions relative to the price charged. This scenario is repeated with other maturing products and services. When products are all hard to differentiate in functionality and performance, some other factor will determine what will be bought.
The next factor in attracting customers will usually be the quality and reliability of the product or service. The confidence that you can place in the successful operation of the offering becomes key. In the 1970s and '80s, quality differentiated products from each other in the marketplace. Products with similar functionality were assessed by their quality. Conformance to customer needs was paramount. This was apparent in the automobile industry. Japanese quality allowed companies such as Honda, Toyota, and Nissan to capture significant market share over GM, Ford, and Chrysler because of the perceived unreliability of North American automobiles. During this period, Total Quality Management was king, and quality commanded and received higher prices and profits. Today, I have confidence that Microsoft's operating systems have sufficient functionality, but I am not so confident that I can trust Windows 9x to work when I want it to. The advent of the competing Linux operating system was somewhat fueled by this lack of trust.
Reliability is no longer an option for companies. It's becoming a price of entry into the global marketplace. In many economic sectors, customers won't accept poor quality. Their expectations for performance are higher, and their tolerance of poor execution is lower. Companies with quality problems simply don't last any more. Historical customer loyalty won't overcome a lack of trust in reliability. Competitors with superior quality will eventually win out.
If products' functionality and quality are comparable, customers will look to convenience and customization next. The ability to meet specific and unique requirements is of value to many organizations and individuals. As mentioned earlier, the ability to customize still provides competitive advantage and price protection.
Given parity of all the previous factors and an equivalent level of trust, price will rule. If prices are more or less the same, the level of recognition and trust of the company providing the product or service will prevail.
Figure 1.6 shows what many organizations are now doing. They are trying to hang on to their existing customers and increase their loyalty through the relationships the organizations are
building with the customers. Terms such as share of wallet and share of book (meaning how much of the customers' total spending your company earns) are replacing share of market. This is the aim of branding programs in many organizations and the reason that many upstart companies in the e-business world have struggled or failed. There are just so many places to buy, all with the same prices and terms. It's easier to buy from a name you know when everything else seems the same. It's also the aim of customer relationship management (CRM) programs aimed at increasing loyalty.
Figure 1.6-Improved ROI through greater share.
In summary, customer relationship criteria will move
From product functionality/performance To quality and reliability To convenience and customization To price To trust, treatment, and branding
The rapid commoditization of products and (to some degree) services has become clear in a number of industries such as telecommunications service, technology supply, banking, retail, automobiles, and even financial services such as insurance and mutual funds. What differentiates one product from another is now becoming relationship-based: the confidence that customers have with the supplier, the ease of doing business, and the level of trust in the relationship.
You must ask yourself what business you really are in. If it isn't possible to quickly move up the value chain, it might be better to purchase commodities from an organization that provides high quality yet low cost and work in partnership with that organization while focusing on your distinct capabilities. No one is making a success of being mediocre any more.
Products or Services Differentiated by Knowledge
Consistent with what we have found in the last section, loyalty is tied to relationships and trust. Organizations are now realizing that doing a good job or providing a great product is required but by itself is no longer sufficient. A major component of service is knowledge. The knowledge provided to customers can be in the form of accessible, knowledgeable staff or in the form of great reference materials in a multitude of media and formats.
Many organizations also are in the business of providing knowledge as a product. Training organizations, consulting firms, encyclopedia and reference materials publishers, and others sell knowledge. For them, the currency and availability of relevant and accurate knowledge are their distinguishing characteristics. Trust in the source is critical.
The Brazilian weekly newsmagazine Veja, published by Abril, has by far the largest market share in its segment because it has established a reputation of providing trustworthy news perspectives. Veja isn't afraid to take on controversial issues and stand strong against the government. If this publication didn't show up on time on people's doorsteps early Saturday morning, there would be a national uproar. Reading it has become a Brazilian habit.
For other organizations, knowledge is associated with the prime products and services of the business and is used to differentiate the business from competitors. This ancillary knowledge is a key requirement of customer awareness and satisfaction.
Businesses that offer commodities must provide relevant knowledge about their products and services to make it easy for customers to buy and use them with confidence. This is a major area of competitive attention for many companies. If you want to make chocolate chip cookies, perhaps you will buy M&M's instead of standard chocolate chips. To do so, you might need to find a Web site or an 800 number that will give you a great recipe as well as all the nutritional information needed to evaluate how many cookies you can eat as part of a healthy diet. At the same time, you might want to confirm that you can serve them safely to family members who might have specific allergies.
This scenario plays out in many ways. One notable example is Progressive Insurance, an automobile insurer, documented in Michael Hammer and James Champy's first book1 because of its breakthrough model of service to policyholders. Since the early 1990s, Progressive's insurance adjusters have been on the road in technology-equipped vehicles so that they can go to
the accident scene, survey damage, arrange for personal transportation and towing, and give a check to close the claim at the scene. Progressive, as its name suggests, is now going even further with another previously unheard of idea. By going to its Web site (www.progressive.com) or by calling its 800 number, you can get a quote for its insurance coverage. Progressive will also give you up to three other rates from its competitors for similar coverage. This attracts a lot more potential customers and establishes a high degree of trust. Progressive couldn't do it without a significant program of constant knowledge gathering in the background. Its service isn't a commodity; it provides extra value for its customers.
The drive to incorporate knowledge also applies to new marketing and sales models that don't try to sell too much too soon. Permission marketing advocate Seth Godin points out that you usually don't ask an acquaintance to get married when you first meet. 2 A number of steps happen in between, each of which requires permission to go to the next step. The approaches to accomplish this attempt to build confidence and trust, and then move up through levels of permission to finalize a sale. Many e-business companies have adopted this evolutionary model, offering regular e-mail broadcasts of new knowledge to customers. It's an attempt to build familiarity. It doesn't advertise products and services explicitly too soon. Similarly, many organizations are offering webinars that is, online seminars on a topic of interest that gets customers closer to the organization. Web sites offer lots of guidance, hints, and sources of related information, all to build trust so that buyers will buy, and organizations can build wallet share. Competing has become more sophisticated than ever, but it requires the infusion of knowledge into business processes.
Growing Organizational Complexity and Reach
Outside pressures are pushing organizations to get bigger and enter unknown markets. Consequently, enterprises are also struggling with incredible changes in their own structure and how to go to market. These changes are becoming harder to manage, especially with hyper-competition and shrinking business cycles. Added organizational complexity makes it harder for businesses to anticipate and respond to competition. I will discuss four factors that contribute to organizational complexity:
- Corporate globalization
- Corporate consolidation
- Partnerships, virtual organizations, and extended value chains
The E-Business Factor
E-business, or business conducted over electronic networks, is having an enormous effect on all organizations today. It allows service to be provided and business to be transacted anywhere at anytime. In many ways, organizations are expected to be everywhere all the time. As a marketplace supplier, you can be in a business-to-consumer e-business relationship or a business-to-business one; e-business is opening up a wider and more extensive range of opportunities and expectations. The same is true on the supply end coming into your business. Much is now being done electronically. Cisco now sells more than 80% of its products over the Internet. Other businesses are rapidly trying to emulate its success. E-business is faster and cheaper than traditional "bricks and mortar" transactions, and customers like it better because it's more convenient. It allows them to reach globally without having to be there all the time. Growth happens faster. Scarce resources have greater leverage. E-business can be scaled upward to accommodate growth.
The implications of e-business for organizations are significant. Due to the heightened expectations of speed that come with it, supporting business processes must be cross-functional and work incredibly well. Traditionally, an order placed by mail might take weeks to deliver. This allows time for internal hand-offs across organizational boundaries to get things done and for mistakes to be worked out without impacting the customers' results and perceptions. Now, when a customer clicks a commercial Web site's "Place Order Now" button, she expects to receive the goods in hours or, at most, a few days. Disconnected processes will be apparent right away in terms of failed performance and loss of customer loyalty. Seamless value chains are mandatory regardless of the organizational structure if e-business is to be successfully supported. This factor alone is sufficient to convince an enterprise to organize and manage around processes.
In a seminar I gave a few years ago in Europe, I was discussing some best practices in business and business process benchmarks from a global viewpoint. I used a number of examples of American, Canadian, and Asian companies as well as European ones. During the discussion, some audience members maintained that many of these ideas weren't relevant because they weren't planning to operate a global company. In response, I asked them to look at the delegates in the meeting in the next hotel conference room. That meeting was being held by a Japanese multinational. My question to my group was simply, "Do you think that the group next door is here to visit the cathedral?" The local country workshop then turned the discussion to how to become as good as the global competitors in terms of their local markets.
Many management gurus have claimed that companies have a choice of becoming truly global or a just being a smaller focused niche player. They claim that there will be little in between.
As more organizations try to manage globally, they are requiring their suppliers to do the same. One of my clients is a significant supplier to Wal-Mart. In the past, the supplier's operations in different countries each had responsibility for its own national sales. However, Wal-Mart Germany discovered that it could buy more cheaply from another European country operation and demanded the same pricing and terms from its supplier in Germany. This quickly escalated into having to treat Wal-Mart as one organization with a set of global terms. It also meant that the supplier organization's processes for sales and service had to change significantly from country-based to global customer-based. The supplier soon realized that, although it already was an international company with sales, manufacturing, and distribution all over the world, that didn't qualify it as a global entity. Working globally was quite different. The transition to truly behaving globally was even more difficult as constraining and misaligned incentives and cultures had to be overcome.
Likewise, a large bank with operations in more than 70 countries discovered that its clients wanted to be treated as one entity globally. Although every one of their country operations was governed by different central bank regulations, customers wanted one deal globally. That also meant that, rather than sell to the local country customer, a relationship had to be formed under the direction of a global relationship manager. This led to the philosophy of one global balance, one global credit limit, and one set of terms operating globally in near real-time for real-time decision making. The impact on processes was and still is widespread. The changes in locations of processing from country centers to global centers is having a large impact on staff and each local country's operations. The technological upheaval is significant. Despite the cultural implications, it must be done if the bank wants to gain competitively against the other handful of banks that could possibly succeed in treating global customers with a truly global service.
Globalization is both a threat and an opportunity. The biggest danger is to ignore the trend. The biggest risk, after you have recognized it, is to not go far enough in reconfiguring your internal capabilities because of compromises and internal power struggles.
Tied in with the other aforementioned trends is the seemingly unstoppable tidal wave of consolidations, mergers, and acquisitions.
The organization mentioned in the last section that's now dealing with Wal-Mart globally also had to consolidate its sales, support, and operations across internal divisions. Previously, each division dealt with Wal-Mart and other large retailers independently because their products were different. Now it has become one relationship and one process regardless of product. This model is now being rolled out to other large multinational and national customers.
Time Warner and AOL, Exxon and Mobil, US West and GTE, Pfizer and Warner Lambertthese are just a few of the massive recent mergers or acquisitions prevalent on the financial
news pages. Add to this the steady stream of deals that Intel, Cisco, and thousands of others participate in as part of a steady appetite for growth. Organizations that do this well have significant advantage in the market. However, not all are so good at the game. A recent study by Hedgerow Mergers and Acquisitions concluded that
Sixty-six percent to seventy-five percent of all mergers and acquisitions (M&As) actually destroyed market value.
Thirty percent substantially eroded shareholder returns.
Twenty-three percent failed to recover the costs of the deal.
Fifty percent resulted in lowered productivity, profits, or both.
Thirty-three percent to fifty percent of acquisitions were divested within five years.
Hedgerow's conclusion was that only one in five mergers is considered financially successful. This is frightening in light of the number of mergers taking place currently. Clearly the risks are great, but the feeling is that these organizations must take the gamble.
Some companies have gained incredible advantages by being turnaround artists. For them, M&A is actually a core process. Bombardier has become the third largest aircraft manufacturer in the world by taking over others that were all but abandoned by their shareholders as a lost cause. They have done the same in other forms of transportation. Celestica has outperformed the high-tech market significantly by taking over manufacturing from the likes of Toshiba, Motorola, and others that decided to pull back and focus their efforts elsewhere. This implies that doing M&A right is key. It's possible to win in acquisitions, but there must be a focus on integration of processes and culture more than anything else. The successful organizations avoid the common pitfalls that lead to disaster. Again, the results from Hedgerow Mergers and Acquisitions have shown that the causes for failure are
Confusion, debate, and positioning around roles and responsibilities
Confusion and debates around positioning for resources
Sluggish execution/disagreement on priorities
Exodus of key talent (not just the dead wood)
An inward focus (away from markets and customers)
All these issues of process, project, risk, and change management are covered in this book.
Partnerships, Virtual Organizations, and Extended Value Chains
Closely related to the restructuring associated with mergers and acquisitions and to the wave of e-business formation is the significant number of new partnerships that are being established. Partly because of timing and quality of service drivers, organizations have found that they can't meet higher customer expectations if they do everything on their own. Many could-n't get off the ground with new services fast enough without help. Others have concluded that
they couldn't scale to higher levels of business volume if there was too much to do without enough human resources. For many, it's simply a matter of avoiding the risk of staffing to high levels while the economy is good. Suppose it doesn't stay that way?
In any case, each and every organization must anticipate or respond to business events affecting customers and meet their expectations when they do. There's no mystery in figuring this out. The mystery is often in designing and developing the set of workflows and enablers required to meet those expectations. From the triggering event through to the closing outcome, collaboration across internal and external corporate boundaries is required. Processes must work on behalf of the process customer regardless of internal structure but also regardless of external partners. Dell, Toshiba, and others don't make all their own computers; they have contract manufacturers such as Celestica build the computers for them. Rexall.com doesn't ship its own health supplements; it uses UPS. DCI doesn't develop and teach its own seminars; it uses experts on topics currently in demand and changes them continuously as new technology and information management approaches reach the marketplace. Many mutual-fund and insurance companies don't sell directly; they equip and train independent financial advisors and agents. Cisco's success with this model is spurring others to mimic what's seen by many as the current best practice in strategic organizational design.
To do this effectively, organizations have to ask themselves what business they are really in. What is their value proposition to their customers and to their customers' customers? What can they be good at, and what should they have others do on their behalf?
Value propositions will be covered in more detail in Chapter 2.
Some people might wonder what the difference is between real partnerships and traditional outsourcing. I believe that many well-conceived and executed outsourcing arrangements have all the hallmarks of true partnerships. The main one is that of trust among the partners. In a partnership arrangement, all parties involved must have a shared interest and incentive in the outcome of value to the ultimate customer. The business processes to make this happen are shared as one.
External Stakeholder Power
There is no doubt that organizations today, whether private or public sector, closely or widely held, are feeling a lot more external pressure from outside stakeholders. These interested parties are having a strong say in what happens. Customers, consumers, and service users can't be ignored without risking the existence of the organization. Suppliers are so intertwined with
your value chain that their failure or lack of cooperation will stop you cold. Owners and shareholders are the vehicle for financing your future. Their lack of confidence can compromise your plans. Skilled staff members are hard to attract and retain. They are your means. How you are seen by other influential outsiders is becoming more and more significant. One word from them could see the organization scrambling to recover.
Customers are getting smarter more quickly. This means that it isn't possible to fool them any-more. They have to be kept informed of products and the status of services. They know more about how your products can be used and the nature of your business than ever before. They learn more quickly, so you must do the same to stay ahead. If you miss a market trend that they see and demand that you do business that way or provide new products that you don't have yet, you will lose them. Your difficulty in staying with your customers' growing awareness is exacerbated by the shortening of business cycles that make it hard to exploit a body of knowledge.
Along with greater customer awareness has come greater customer demand for responsiveness and higher intolerance of lack of performance. Most customers want more choice and flexibility. Each customer wants to be served when he wants and in his own way, which might change from time to time. Many of these changes will require the supplier to take on responsibilities that they would not have done before. Inventory management, direct shipment, and customer support are examples of these responsibilities. Mass customization or individualization programs are expected. Many customers feel that they don't need an intermediary to initiate or provide service; they would prefer to help themselves directly.
Often, it's a matter of customers becoming caught in the time crunch where faster service is mandatory for their own customers and hence for them. Twenty-four-hours-a-day self-service is required because business never stops globally. Both physical and virtual sites must be convenient.
Automating as much of the process as possible provides timesavings to the participants in the business process and allows fewer people to do the existing work or the same people to do more work. For example, Rexall.com allows online automatic ordering of health supplements on an "easy ship" order that sends the same order each month. This saves time for both customer and supplier.
For the reasons mentioned here, segmentation of customers and consumers is critical so that you can understand each one better, serve them well, and assign staff with the right set of matched skills. It will save them and you time. Time is their scarcest resource and one that they can never get back. It's also yours, so be prepared to consider getting rid of those customers that don't warrant your effort.
I had a client in Europe that manufactured drinks and drink machines. After careful segmentation, this company concluded that the top tiers of customers were those who bought the most repeatedly. They chose to continue to provide personal service to that top tier. The bottom tier, however, was comprised of many small customers, such as hairdressing salons or small businesses, that bought very little and required a lot of support to manage orders and deliver small volumes of supplies. It was decided that the cost of supporting these customers was prohibitive relative to their business contribution. They were a losing proposition financially and from a management attention perspective. It was recommended, instead, that this segment be served by individually licensed franchisees, who would manage a defined local territory. The company would serve the franchisees with volumes consistent with those of their top segment customers.
Some customers demand that the organization take ownership of their entire set of needs all at once and consolidate all actions to deliver a consolidated result. Again, this will save time and worry. Travel services and Web sites that allow travelers to book all aspects of a trip are more valuable than those that handle only car or limousine rental, hotel, or air travel. This total response is in the best interest of many customers, who don't want to deal with many people or technologies. One-stop shopping is in demand.
It's clear that customers' and consumers' needs are becoming more complex. These stakeholders are also less loyal when their needs aren't met. Clearly, they are more demanding that their suppliers meet these commitments, and less tolerant if the supplier doesn't.
Although there is more pressure on suppliers to anticipate needs, respond to them, and perform better than in the past, there also are pressures on customers to treat their suppliers consistently well.
The best suppliers are those that meet their customers requirements well. They are also key partners in cross-company value chains. In this role, they are also the best at meeting their customers' requirements by working as part of a larger process. In many cases, the partners in the value chain might have a different value proposition from one another. They might be very focused on being an operationally excellent manufacturer of components for their customer, who, in turn, is focused on truly new and innovative products for the marketplace. They both bring their relative strengths to the partnership in such a way that neither could accomplish the same high level of customer results on their own.
The best suppliers aren't idlethey are in demand. They won't do a poor job. They solicit their customers carefully to ensure that they can do the best and work together most effectively. Top-notch suppliers might not offer the lowest price, but their customers often end up paying the least total cost when errors, defects, or mistakes are taken into account. The best suppliers are almost always the most reliable in terms of products and services. They can be trusted to deliver what is expected. They reject requests for corner cutting and instant fixes when they feel that such measures will cause bigger problems in the long run.
The bad news for some companies trying to acquire the services of the best suppliers is that they won't accept customers who aren't as committed to success as they are. They don't have to. There are plenty of other customers that value commitment to quality and service.
The Investment Market Speaks
Investors traditionally have looked at a company in light of its longer-term potential. There have always been speculative investments with high risks, but the tendency to jump in and out of stock ownership has never previously applied to the larger firms as much as it does today. Clearly, this lack of patience by investors is having a large impact on organizations of all types. For government organizations, the same is true and it manifests itself in political interference and allocated budgets. These can change dramatically depending on the day's political regime.
Investment money walks away easily, and, when it does, it has a dramatic effect on organizations that require new funds to grow and change. The pressure on the CEO and board of directors is almost unbearable. A drop of 35% in share prices means that it's hard to raise new capital. An organization seen as having upside potential and as having a strong management team can raise the money needed to capture new markets and develop new products. But one small slip can drop it to the bottom of the pile.
On the day I wrote this section of this chapter, Nortel Networks dropped one third of its market capitalization, wiping out more than $30 billion of valuation for individual investors and mutual funds. This happened not because Nortel is weak, but because its growth rate projection was scaled back for 2001. The rate of growth, however, wasn't the real issue. The investment market reacted more to the loss of faith in Nortel's management team's ability to see the future and on a perception that the news was known earlier but kept from analysts, fund managers, and investors. This is obviously a serious breach of trust in investors' and analysts' minds.
Many people look toward profits and return on equity as ways of evaluating a company's worth. A major contributing measure to this is Return-on-Assets (ROA). In traditional organizations, this was a valid metric measuring the contribution made as a proportion of balance sheet assets. However, in information or knowledge-based companies, knowing the ROA isn't sufficient to help the investor understand the true value of the knowledge created. Another perspective, fortunately, is gaining attention. Typically named Return-on-Management3 (ROM), it measures the payback of a company's scarcest resource: management time and attention. 4 Management, in this sense, is anything not directly involved with core production. It includes functions such as research and development, marketing, sales, information technology, and human resources management, among others. The investment marketplace knows that ROM is important and seems to correlate valuations reasonably well to this factor, even if it does so
qualitatively. Noted author and industry observer Paul Strassmann claims that ROM and Knowledge Capital5 can be calculated6 more precisely to aid investors to produce valuations. New economy enterprises must manage Return-on-Management to the satisfaction of investors.
Scarce Human Resources
In our knowledge-oriented economy, human issues are gaining attention again. Strassmann's ROM arguments and financial evidence strongly support the observation that humans are assets.
However, letting go of an employee with years of experience has no immediately evident negative effect on the balance sheet, even though her company has invested hundreds of thousands of dollars in her education to get her to the productive level that she is at the time of her layoff. There is no write-off of an asset as there would have been if 100 two-year-old computers were retired. As far as the official books are concerned, furniture has a value; staff doesn't.
Fortunately, many organizations learned from early misguided, cost-focused re-engineering efforts achieved primarily through staff reductions that were good only for a year or two. They learned that no one could build market share or sustain innovation by cutting smart people.
This type of careless staff reduction has translated to a genuine skills crunch, wherein the scarcest of all resources is knowledgeable and capable humans with the appropriate attitudes. They are hard to find and harder to keep. The loyalty of skilled humans with lots of career choices, who feel that they are treated poorly, is fleeting. Without a strong program of compensation, rewards, and recognition of personal preferences, hiring and retention will be a constant headache that robs the organization of its productivity and adaptability. Those companies that handle their associates well, such as SAS Institute, the software and services solution provider, also perform well in the market. SAS's remarkable performance of less than 5% annual turnover in staff is a direct reflection of sensitive human resource policies and practices that focus strongly on the customer yet recognize the importance of a balanced lifestyle and family values as well as a strong work ethic.
Because there is an obvious skills shortage in most knowledge-intensive industries, paying attention to employees as stakeholders is a critical factor for success.
Other indirect stakeholders might influence the organization's success very dramatically. The image and perception of a company in the eyes of outside groups can make a difference, either good or bad. The public, regulatory agencies, special interest groups, funding groups, professional associations, lobbyists, and other community stakeholders can be key players. These
stakeholders are becoming more powerful and sometimes militant. The company's actions in response toor in anticipation ofoutsiders' pressures can make a big difference.
In British Columbia, where I live, there is no better example of this than the forestry industry. This industry is the prime employer in the province, and in many towns and communities is the only real opportunity for work. Meeting the community expectations of job continuity is a key factor for this organization (as it is for many businesses). Also, the forestry employers face tremendous confrontational actions by environmental lobbyists. Traditionally, these groups have blocked roads, spiked old growth trees to prevent cutting, and conducted other visible radical activities to publicize their beliefs. These protests worked well to raise awareness for a while but also served to alienate the workers in the communities affected and some other members of the public. Logging firms rarely responded positively to the demands of the groups, and their cause moved forward more slowly than the environmentalists had hoped.
More recently, however, tactics have changed. Many of the environmentalists moved their focus from the logging companies to forest product customers. For example, a major market for BC forest products can be found in Europe. Lobby groups spent a lot of time with Euro-pean forest products buyers to convince them that the forestry companies' practicessuch as clear cutting and old-growth extraction in the last temperate rain forest in the worldare environmentally dangerous and not sustainable. The consequences have been the cancellation of many contracts and much publicity associated with these cancellations. The forest product companies clearly took note and were forced to answer to their owners on these issues. As a result, some of the more advanced and more process-mature companies now are certifying finished wood products by tracing specific trees throughout the process, starting with logging through to the finished product delivery. This practice, which is well defined and governed by an international standards and certification agency, has led to surprise advantages of higher-than-average prices and a high demand for products from those companies that can comply. The environmental stakeholders clearly are wielding their powers and can't be ignored.
There are numerous other examples such as the pressures and lawsuits on tobacco companies from state governments and class-action litigants, public reactions to companies that have experienced oil tanker spills, and public expectations of integrity and honesty in utilities or charities, to name just a few.
There are even Web sites in existence where individuals can check an organization's ethical behavior and performance against its social responsibilities. Users of these sites can also update the sites with their perceptions and experiences.
Clearly, what counts is not just the increasing pressures that come from the members of the business' community that affect an organization's performance, but also the organization's understanding and readiness to deal with all community stakeholders. These groups won't go away by ignoring them.