Cutting-Edge Enterprises Are Rewriting Yesterday's Fable; a New Business Hybrid Is Outdistancing the Pack
From issue three of synnovation Magazine, the EDS Agility Alliance Publication
Despite what you might read in the mainstream media, the world marketplace and global economies are surging ahead at a phenomenal pace. Cycle time is speeding up, and achieving the productivity and efficiency necessary to keep pace with today's business demands is a never-ending pursuit.
Successful enterprises are seeking routes and models to stay a step ahead of the ever-changing marketplace and make the most of insights and knowledge from customers and business partners. Smart leaders are exploring how to work more efficiently – smarter, faster, and better – and allow quicker responses to competitive conditions. The lines are also blurring among how employees, suppliers and customers interact. Customers are placing and tracking their own orders, suppliers are seamlessly connected to respond to those orders and requests, and many employees actually work for outsourcing partners in far-off lands.
In fact, in a zero-latency world where answers and outputs are expected immediately, you can't describe an enterprise in 20th century terms at all. The old ways of talking about business – centralization; decentralization; selling, general and administrative expenses (SG&A); cost of revenue; and command/control vs. entrepreneurial – just don't quite fit what you are trying to achieve anymore.
It is a scary change for many leaders, because this kind of enterprise is much more transparent. Inefficiencies are more evident to the customer, pricing is exposed, and switching to a competitor is significantly easier. And a poorly engineered “inside-out” design of your functional, regional, or product organization structure can create a bumpy ride for the consumers, suppliers, and employees who are expecting a seamless and responsive “outside-in” interaction. They don't care how you are organized, but they do care how your organization flows, and if they can feel the disconnects, you lose.
Too many businesses, in their haste to adapt, are approaching the challenge in the wrong way by choosing speed over all else. But a quick fix is not the answer, and neither is a slow and steady path. Unlike the old fable, neither the tortoise nor the hare has the right approach anymore. You'll remember that the tortoise takes a focused and disciplined path, and while he does win the race, he misses out on the world of potential around him. The hare, on the other hand, gets distracted by every new idea. He tries many different routes, going far out into the field and away from the center. He even stops to rest, thinking he's already ahead enough to win, because he is too far off the course to know what's going on.
Many enterprises run their race one of these ways, not out of a misguided management style, but because they are still operating in traditional 20th century modes. With roots in the Industrial Revolution, businesses have grown into either a plodding bureaucracy with a completely centralized, hierarchical leadership (the tortoise) or a field-based organization with little central control (the hare). The former usually follows the path they've always taken, often basing choices on the wrong priorities because they get no input from the point of transaction, and the latter is a company full of “hares” running in every direction and not focused on larger goals, customer needs, or anything resembling operational excellence.
These are models and structures originally based upon necessity. In the early 1900s – when businesses expanded regionally, then nationally and internationally – there was literally no way to quickly communicate with the outlying operations. There was no Internet, no email – initially, not even the telephone. Manufacturing and distribution facilities just one state away from headquarters were basically on their own. Internally, a division of labor – again, based on the industrial model – meant that workers and departments were specialized and functional. Businesses changed and grew on the basis of analytical learning, studying the good examples and bad mistakes of others, and planning their strategies accordingly.
Some organized around geography (Frito-Lay, for example), others around product (like Procter & Gamble), and some around services (like FedEx). All of these were – and are – very successful companies. They are customer-centric and operationally excellent. However, all have had to reinvent themselves because buyers or direct customers (like Wal-Mart) don't care about Frito-Lay's geographies or Procter & Gamble's product companies, and they aren't concerned with how a corporation is organized. They just want to quickly and easily acquire the full product line with their supply chain leverage, get it off the shelf, and into consumers' shopping carts.
And the customer, more importantly, can demand to do business with “one” Frito-Lay and “one” Procter & Gamble to achieve their supply chain power and their own operational excellence – in the case of Wal-Mart, the right product at the right price, in the right store, and at the right location. Oh, and right now. The real challenge is that every one of your customers can demand to do business in a way that suits them: Ahold, Carrefour, Costco, Kroger, Target, Tesco, and other major retail chains have their own structures and processes that don't match the way Wal-Mart needs and expects to do business with you.
So to be successful in the 21st century, the supplier must quickly adjust to the customer, not the other way around. This holds true up and down the supply chain, with suppliers such as Frito-Lay and Procter & Gamble adjusting and responding to customers just as they must respond to retailers. This creates the need for a very different systematic approach to business, processes, systems, structures, cultures, and incentives.
It is clearly about speed, about setting a pace that gets you there before the competition – emulating the hare – and staying agile enough to adapt as the market fluctuates. But it is equally about being the tortoise – discipline, operational excellence, standardization, simplification, and automation – focusing on serving the customer and making a profit in the process. Most consumer goods companies are rapidly responding to this new dynamic, and leading-edge corporations across industries are not far behind. However, many more companies are still structurally decentralized due to a franchised or distributorship model like PepsiCo or Coca-Cola, or because they just can't make a break from their old ways of operating.
Those models worked for most of the last century because they fit the prevailing market, available resources, and the expectations of customers and consumers. It was what we understood, what we knew how to do.
However, it doesn't work anymore. The technology innovations in networks, edge devices, and information management of the last two decades have radically changed the world and dramatically altered the business landscape. Because of a sharp curve in the sharing and transfer of information, people now expect to receive products and services in a very different way. They approach us horizontally, across departments and service areas, but we are still delivering vertically from those same silos – quite literally polarizing the market. Attempts to adapt are creating winners and losers in the process. As with other transformational periods, many Global 2000 brands are disappearing through bankruptcies, buyouts, or consolidations. A new generation of business leaders is getting it right. They are “dynamic learners,” open to multiple solutions and new means of getting the job done even if it's never been done before. They look at competitors and see potential for partnerships, a “coopetition” that blends the benefits of cooperative actions with the drive of a competitive spirit. These smart businesses are dealing with the barriers and roadblocks, and are beginning to operate seamlessly around the globe. The successful 21st century enterprise is without boundaries, dispensing with regional fiefdoms and functional stovepipes to the point that you can't even tell where the work is being done – an ideal structure, because quite frankly, you don't care where it's done, as long as you see optimal results.
These “flat world” enterprises are characterized by horizontal, collaborative ways of working and are fiercely competitive in a market where most businesses are still organized in large vertical departments, regions, or product divisions. The prevalent industrial-era structure is one in which production schedules are driven by plans, not customers. Variations in demand are handled through costly excess capacity or running out of stock; and outputs are rigid, offering consumers little choice. The organizations that are thriving are those operating at the edge – away from these rigid conditions – and organizing by the way customers want to interact with them.
So how do these companies do it? What pioneering business model supports such a maverick approach? Surprisingly, and perhaps even counter-intuitively, the ideal structure is one of standardized processes and distributed decision-making and decentralization, one that pulls much of the operation into a systematic standardization at the core. That standardization, in turn, creates an environment for flexibility and local decision-making.
It is a shift that requires a different mindset, a new way of approaching organizational excellence. Jim Collins, in his books Built to Last and Good to Great, expresses this very well, reporting that the corporate language of the 20th century was all about “either/or” – trying to choose between either centralization or decentralization, either field or headquarters overhead (G&A) or cost of revenue or selling expenses. The debate centers around the merits of each (G&A is bad, field is good; centralization is bad, decentralization is good, and so forth). It's a discussion still going on in most 20th century-like enterprises, and the pendulum swings back and forth over the years. One of the biggest problems is that these are the wrong foundational words for the dialogue, the wrong focus for doing things right.
We live in a much more complex world, where “and” thinking must dominate our leadership patterns. The answer to “do you want cost or quality?” is that you actually want both. The same is true with “standardize or customize,” “regional or global,” “centralized or decentralized,” and so on. The answer is yes; you want all those factors orchestrated in a way that is relevant to what and how people want to buy, and how they want to be served.
The true discussion should be centered on one basic foundation: “How do I gain market share and grow? And how do I make money doing it?” That's how pacesetters such as Herman Lay, Sam Walton, William Procter, and James Gamble thought about business structure and how the 21st century leader should be thinking about it, too.
When you change the dialogue to this focus, your questions detour away from what should be centralized or decentralized, and yet you get answers that actually improve business. The dialogue turns to more intriguing puzzles such as, “How do I enable customization through standardization and deliver it through end-to-end operational excellence?” and “Does customization really move me closer to what my customers want?” Many people confuse customer (the noun) with customization (the verb) and often believe they are synonymous.
What customers want must include what they ultimately are willing to pay for. That must become the focus of all dialogues, the logic of which lends itself to a set of ongoing principles that can help you define the future state:
1. Who are your customers?
Who are your direct customers, and how are they buying from you? Do they want to buy locally, regionally, and/or globally? Through what channels? Delivered how? And when?
2. Who are you?
Are you in one business or many businesses? What components can be leveraged, and what is truly a differentiator? These facets should begin to define your core operation and your customer-centric edge operations.
For example, Westinghouse was in multiple industries – nuclear power, furniture (Knoll), entertainment (CBS), etc., with very little leverage. Home Depot is in the retail hardware business – but what looks like one business has multiple channels, including orange box stores (consumer retail), builder direct (wholesale), consumer online, and contractor services (connecting customers with Home Depot partners in areas such as fencing, construction, and installation) with significant core leverage.
3. Who are your competitors?
Who are your primary competitors, and are they gaining or losing market share and margin? How are they organized and run? Who are your emerging competitors, and what non-traditional approaches are they taking? Where are they coming from locally, regionally, and globally?
4. Who are your key suppliers?
Are they local, regional, or global suppliers or some combination thereof? What is your required cycle time? Is the raw material perishable or durable? Is it readily available or scarce? Is it a quick or slow cycle to your demand side?
As you look at these organizing principles and describe your business from the “outside-in,” the foundation of your new business model begins to emerge. Operations and processes that drive leverage and operational excellence to those efforts should define your core platform. That core needs to be standardized, simplified, and automated to the point that the operations and processes can be globally consistent, including functions that are not fully owned by you. This ecosystem should be run as a virtual core, even though it may be physically or financially separate from your center.
Tethered to this core foundation of consistent processes and systems are the more flexible structures that give your company speed and visibility into the changing market. Unlike your central core, their operational models can be in constant flux, adapting to the way the markets and your customers want to interact. These might take the form of anything from account teams to regional centers to Web sites and kiosks, with the ability to influence pricing, promotions, and other localized programs. The enterprise is now positioned to take that information and react immediately from the point-of-transaction edge and also to utilize that data within the core for strategic actions elsewhere. This blueprint begins to re-create the Herman Lay intimate business model, but from a global core platform.
This Modern Approach Has Many Advantages, Allowing Your Enterprise To:
- Quickly launch innovative marketplace programs.
- Create continuous improvement from the center
- Flex up and down because you've adjusted the fixed/variable structure
- Leverage your global supply chain to take advantage of scale
- Operate in a targeted, customized way at the point of sale
This core platform strengthens the organization through consistency – marketing can present a unified brand and identity, supply chain can take advantage of economies of scale, and delivery can quickly deploy predetermined solutions to any customer problem. The entire enterprise is elevated as a result.
Further, this allows decentralized decisions to move to the field. Using a military example, the core elements and battle plans are provided by central command, assuring that the entire battalion moves in concert. Field officers are well-equipped and sure of their direction. This frees them to focus on localized strategy and changing conditions that may not be visible at the center.
This modern model is becoming more and more crucial in customer service and customer relationship management. Because customers can now access and respond to information almost instantaneously, they expect immediate interactions. They also want those experiences to be personalized and customized. No one wants to feel like a number, which is a tough challenge for companies dealing with literally millions of people every day.
Even more difficult is that some customers want a global approach, while some still like and expect a local or regional flavor. Many are motivated by a “deal” that only a leveraged supply chain can deliver, while others are looking for quality specialized products at a reasonable cost. A company that operates with a strong core platform and a market-centric edge has flexibility to meet all those demands.
Remember that you are not just selling a product or service; you are building a relationship. It takes very little to move a customer from being your biggest advocate and brand champion to being your worst nightmare. And in today's Web 2.0 environment, an individual can spread his or her thoughts almost immediately across social networks and online communities, reaching hundreds or thousands of readers within minutes of posting.
The 21st century agile business model helps you optimize this relationship. For each step in the value chain, from the first moment customers learn about your company, you have an opportunity to enhance their satisfaction and loyalty. By capturing localized information throughout key processes – sales, marketing, delivery, customer service, and other functional areas – and analyzing that information across the enterprise, your entire company can quickly respond to the market and stay ahead of the curve.
For example, in the 20th century model, retail chains typically allowed stores to operate autonomously. Corporate offices provided air coverage such as national advertising, distribution routes, and basic support functions. But most processes and operations were handled within each local store. It seemed like a good concept, as each manager could adjust inventory to meet the neighborhood's demands. Stores also had “sales” and “specials” that appealed to their customers. The relationships benefited the business, but did not leverage scale and purchasing power.
In today's model, local stores share the intelligence they collect with the central core operation. Data is captured on demographics, buying preferences, new interests, and customer requests. Similar data comes from other localities. As trends emerge across the board, the central core can quickly adjust its supply chain power and distribution, launch new products and promotions that get to market faster, and rapidly disseminate better planning criteria back to the front line.
This collaborative approach can also be used to build relationships centered upon current and potential customers. Localized data, captured from many areas, provides a more accurate snapshot of your base as it exists today. You instantly know who is buying from you and can adjust your approach to selling accordingly. For instance, instead of a generic awareness campaign and a catchy slogan, marketing could be very targeted, sorting through data to find groups that share similar characteristics, expectations, and needs. And getting a message out that is customized and immediate will make you a true frontrunner in the eyes of your customers.
Without a doubt, the 21st century marketplace is all about speed – getting there first. But this race won't go to the swiftest or the most methodical. The newest entrant to the competition – a sort of hybrid disciplined enough to stick to a path but flexible enough to adjust to the landscape – will outdistance both the hare and the tortoise. And that combination wins the race every time.