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Let’s clear up a misconception. Digital doesn't
mean having a great website or linking the employees electronically, or
automating a part of the business that better should have been scrapped.
Rather, digital means using technology to create entirely
new value propositions for customers and invent new ways of capturing
profits, according to Adrian Slywotzky, co-author, along with David Morrison,
of How Digital Is Your Business?
Senior partners at Mercer Management Consulting, the authors stress in
their book the need to forge a Digital Business Design, one that uses
innovative business design thinking and digital technology to address
critical issues within the organization and opportunities in the larger
marketplace. Why? The benefits include a qualitatively superior relationship
with customers, the ability to respond to real (not forecast) demand,
and increased productivity. Say the authors, "Few companies have both
a high degree of digitization and a great business design." In their opinion,
only four companies have mastered these skills: Cemex, Charles Schwab,
Dell Computer, and Cisco Systems.
In this MWorld interview, the authors Slywotzky (AJS) and Morrison (DJM)
spoke about their work.
MWorld: Why did you write How Digital Is Your
Business?
AJS: For the last nine or ten years, we've been conducting research
to try to understand how the rules that define business success have been
changing. In the early part of the 1990s, the rules changed from a focus
on market share to a focus on business design innovation. In the last
two to three years, there has been another step-change in what makes companies
competitive and successful in the future. These companies are not only
highly innovative in their business design, but they also have figured
out how to use new digital tools and new digital options to build a better
business model.
Only in the last twelve to fifteen months, however, did it become clear
what extraordinary financial outcomes a shift from a conventional to a
digital business design could produce. The early companies that have done
this have created profit margins that are 10 percentage points higher
than their strongest competitors and growth rates that are 15 to 20 percentage
points higher than their strongest competitors. They have literally invented
a new way to compete. Researching and writing How Digital Is Your Business?
was very important both to understand this new way to compete and to make
this kind of understanding available to our clients.
MWorld: What are the characteristics of a digital business?
DJM: A digital business is able to use real-time information to
address customer segments it couldn't otherwise address, to create new
value propositions, and potentially to find new profit models. In all
of our research over the last ten years, we've looked hard at how new
events in the marketplace can drive new business models. Sometimes technology
drives a new event, sometimes changing infrastructure drives an event,
sometimes deregulation drives an event.
In response to the digital world, digital technology, and the Internet,
many managers have just created Internet business designs instead of business
designs that are profitable and customer-centric. These people should
instead be asking, "How does this new technology drive new business opportunities?"
Good digital business designs actually address the underlying priorities
of the customer, creating a new value proposition for the customer. They
don't start with the word "digital"; they start with the word "business."
MWorld: What makes a digital business design different from conventional
business models?
AJS: There are several important characteristics, and the first,
which David pointed to, is the tremendous difference between operating
in lag time versus real time. Conventional business designs usually get
their information 15 to 30 days after the fact, including sales changes,
pricing changes, and shifts in customer behavior. In a digital business
design -- Cisco, Dell, or Cemex, for example -- these companies operate
with information that is 24 to 48 hours old rather than 30 days old.
The second major difference is that a digital business' process starts
with the customer -- not the company’s own production imperatives -- and
allows customers to design and specify their own products. As a consequence,
a digital business design eliminates a lot of the guesswork involved in
decision-making and makes it possible to move from a mismatch between
what a company provides and what the customer wants, to a perfect fit
between what the customer wants and what a business system provides to
them.
The third important dimension of difference is productivity. The amount
of productivity improvement that has been achievable under conventional
systems has been on the order of 5 percent, 10 percent, or 20 percent.
With a digital business design, it is possible to achieve order-of-magnitude,
or tenfold, improvements in productivity. For example, Dell improved its
inventory turns from 10X to 60X. Dell has only six days of inventory on
its books. Oracle was able to reduce the cost of some of its customer
interactions from $350 down to $30, again a tenfold improvement.
MWorld: What difficulties do traditional companies face in transitioning
to a digital business design?
DJM: I think traditional companies have three obstacles. The first
is purely a cultural issue -- you have to do things differently. And if
you've been successful in the past running your traditional business processes,
with your traditional systems, there is often no driving force to say,
"Here’s why I must change. Can you get the change management process
started? Can you get the culture change started?"
Second, most very large enterprises are broken into sets of functional
activities. There are people who do technology development, people who
do manufacturing, and people who do sales, marketing, finance, and human
resources management. They each do their individual part of the process.
But in order to change the value proposition for a customer, to address
a new customer segment, and to transition to a new business model, you've
got to have all those functions change their business processes and change
their behaviors. Most functions rarely look at the big picture of how
value is created for a customer. To change together, they all have to
unite around the same vision. This is very, very difficult to do, even
when they want to make the change.
The third obstacle is caused by the fact that most businesses today are
computerized and have legacy systems. Companies have taken a lot of their
business processes and have built them into software packages, and whether
they're accounting packages or manufacturing packages or packages that
run call centers or P&Ls, they're all set to run yesterday’s processes
for yesterday’s business designs. When you've got everything already hard-wired
in a legacy system and you need to change that system, people will often
say they can't change their business design because it might take years
to reprogram business systems or link a new digital business design into
legacy inventory, accounts receivable, and pricing systems.
MWorld: Of the companies that you cite in the book, the one that
I'm least familiar with is Cemex. Why is it there?
AJS: Cemex is the least likely company one would consider
to be an early digital innovator. The industry is cement and the country
is Mexico. Cement manufacturing is not anybody’s vision of a high-tech,
high-growth industry. Yet in this highly asset-intensive, low-growth industry,
Cemex, a cement manufacturer based in Monterrey, Mexico, has done an extraordinary
job of shifting from a conventional to a digital business design.
Cemex accomplished this task according to the classic principles of digital
business design. But it didn't start with the technology. It started by
asking three questions. One, what is the toughest business issues facing
our organization? Two, what are the smart business design choices to resolve
those issues? And, three, how can we use digital options to build our
next-generation business design in a way that is better for the customer
and that enables us to be unique in the industry?
One of the largest business issues that Cemex faced was unforecastable
demand. In the cement industry, customers change their orders all the
time, which increases both cost- and asset-intensive for Cemex. When Cemex
identified this issue, it sent executives to visit organizations like
FedEx, Exxon, and Houston 911, which had dealt successfully with unforecastable
demand.
Cemex analyzed those companies' methods, emulated them where appropriate,
and then, and only then, put digital technologies to work. It developed
a satellite communication system, put global positioning systems (GPS)
on its trucks, and created an internal communication mechanism that made
it very easy for Cemex to react flexibly to changing market conditions.
When customers changed orders, within minutes Cemex could re-route its
fleet to where the demand was going to be.
As a consequence of this shift from a conventional to a digital approach,
Cemex reduced response time to the customer from three hours to 20 minutes
and in the year 2001 it plans to achieve a target of 10 minutes. Cemex
hit a reliability ratio of 98 percent versus 34 percent that was standard
for the industry. It was able to reduce the asset intensity of its truck
fleet by 30 percent and in many markets, because of their reliability;
it has actually been able to gain a premium price for their service. Cemex’s
profitability is 11 percentage points higher than its major competitors'
in major markets.
Cemex is a classic example of a company using digital technologies not
to digitize for its own sake, but to digitize in a way that creates (1)
a unique value proposition for the customer, (2) a new source of profitability
derived from both improved productivity of the system and price premium,
and (3) a new source of strategic control.
Having developed this system, Cemex did not apply it broadly against all
its markets. It applied the system in a sequential fashion to one market
after another. The reason this sequential focus is important is that it
enabled the company to create a leadership position in each market, which
gave it a cost position that no competitor could match and an understanding
of what the actual demand pattern in that market was.
MWorld: Why have some companies failed in trying to move to a digital
business design?
DJM: People have created an Internet business design instead of
a digital business design. We need to make that distinction one more time.
Many failures have been people who have gone for technology first and
digitized things that they found to be interesting or fun rather than
digitizing those processes that were critical to business issues and the
success of a next-generation business design. The questions executives
need to answer should be: (1) What are the critical businesses issues
facing our company? and (2) What will make us strategically successful
over the next three to five years?" That should be followed by: (3)
What will be our winning competitive business design for that three- to
five-year period to address those business issues? and (4) What
are the most critical customer-facing processes to digitize, to make sure
that we execute on that business design?
AJS: The fascination with "get me on the Internet, build me a website,
let’s see what this technology can do" has led to a situation where in
financial services, for example, institutions have invested hundreds of
millions of dollars to build an electronic presence. This build-out happened
without first asking what problem they were trying to solve, what customers'
needs were being addressed, and the even more fundamental questions of
whether customers were ready for this and whether they wanted it.
Nine months ago, there was some research done by several of our colleagues
that asked banking customers what their channel preferences were: online,
telephone, branch, etc. Fewer than 10 percent of the customers wanted
an online-only channel and, of that group, a very significant proportion
was not digital-ready. So it is no surprise, then, to see the companies
that spent a couple of hundred million dollars to digitize themselves
getting 20,000 or 30,000 customers when they had expected to get ten times
as many. It is much easier to think about the excitement of the technology
than to ask the hard questions about both business issues and customer
needs, as well as to analyze whether the customer base wants this, is
ready for it, and what offering should be created to respond to that group.
To find out more about Mercer’s study, visit www.howdigitalisyourbusiness.com.
To purchase a copy of How Digital Is Your Business?, visit Amazon.com.
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