building profitable

Building Profitable Business Growth:The IT Leadership Agenda

Peter G.W. Keen

Professor TU Delft, Netherlands

Chairman, Keen Innovations

Monterrey

November, 2004

Managing (versus leading)

Degree of change

Time

“Natural” change: incremental, inevitable, paced by environmentPriority is skilled management and execution

Examples: the PC,standard outsourcing

Managing Change

Degree of change

Time

Accelerate change, innovate, mobilize – and execute

Examples: process innovation,Logistics, cycle time transformation

Leadership: announcing a discontinuity

Degree of change

Time

Examples: The new business landscapeThe new IT conversation

A new “reality”New “imperatives”A mission, not astrategy

The objectives of this workshop

Announce the discontinuityBring the business landscape into sharp focus

Help define a new IT leadership agenda for directly enabling growth and profits

Provide practical guidelines for action that balance risk and payoff

Herald the shift from IT to CT – coordination technology

The Challenges to Business and IT Leadership

Profitable growth is an oxymoron – like jumbo shrimp, English cuisine

Commoditization is everywhere and increasing

Asia is defining much of the global competitive agenda

The new fashion is that IT doesn’t matter

“Outsourcing” has become core, not peripheral, to more and more areas of business – and IT

The IT agenda for helping respond to the challenges

Escape the commodity trapShift from traditional value chain to value websMove outsourcing to co-sourcing: the global

search for talentHelp make the innovation shiftContribute to the transformation of financial

structures: Welcome to the Variable Cost Economy

Gain the coordination edge

Business growth as oxymoron 

Of the 172 companies that had at some point been on the Fortune 50 list between 1955 and 1995, only 5% grew their revenues above the overall inflation rate.

Just 13% of a sample of 1,854 companies grew consistently over a ten-year period.

Only 16% of 1,008 companies tracked from 1962 to 1998 survived. Of the original Forbes 100 announced in 1917, just one of the 68

companies still on the list in 1987 – GE – had surpassed the average return on the S&P 500 over the seventy year period.

From 1997 to 2002, the 30 firms that constitute the Dow Jones index grew at a rate of under 5% in revenues and gross profits and just 0.5% in after-tax profits.

Commoditization

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?

Commoditization Examples (1)

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?PCs, standard IT hardware:

from “high tech” to consumer electronics

Commoditization Examples (2)

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?Manufacturing:The global outsourcing

scramble

Commoditization Examples (3)

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?

Consumer goods:Weakening of established

brandsRetailer pricing power

Commoditization Examples (4)

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?

Pharmaceuticals:Generics

Challenges to Big Pharmafrom Canada, Mexico

Commoditization Examples (5)

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?Airlines:

The shattering of the majors’ business models

Even low cost playersgoing broke

Commoditization Examples (6)

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?Telecommunications:

Phone call prices trending to zero cents

AT&T taken off the Dow Jones

Examples of price erosion (1)

Consumer electronics: prices of component parts drops 1 percent per week, on average; it used to take ten years for the price of a product to drop from $1,000 to $100; now it takes eighteen months.

Security trades: 1996-2002, margins dropped by 50 percent.Telecommunications: the deregulation of long distance phone services

in any country typically cuts prices by 40 percent within five years.  Jewelry: close to five hundred stores closed in 2003 as Amazon and

Blue Nile cut markups on fine jewelry from the industry’s 60-100% range to 15%

Engineering services: the price of power plants fell by 50% in the 1990s. China graduated 1 million engineers in 2002. The United States graduates around 70,000 engineers.

Automotive: price of cars has grown slower than inflation since 1994

Examples of price erosion (2)

Clothing: the price of men’s jeans has dropped by over 40 percent in five years. For retailers, double figure margins are now in single digits in a good year

Financial services: in 1999, the average fee to send $300 from the U.S. to Mexico was $60, in 2004, under $10.

Processing fees for credit cards on track to drop by 40 percent in this decade, saving retailers as much as $100 billion. The average return for credit card issuers dropped from 3.5 to 1.5 percent between 1992 and 1998.

Groceries: prices in an area drop by 13-16 percent when Wal-Mart enters the neighborhood

Manufacturing: The prices of goods made in Hong Kong, Singapore, Taiwan and South Korea fell by 22 percent between 1996 and 2002. Half the world’s manufacturing is now carried out in Asia versus around 20 percent two decades ago.

BUT………… Energy costs do not commoditize – and often cannot be passed on (e.g. airlines); this is the real China Syndrome 

Commoditization Impact

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?

For customers: commodity heavenChoice, price competition everywhere

Commoditization Impact

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?For companies: commodity hell

Choice, price competition everywhere

For customers: commodity heavenChoice, price competition everywhere

The commodity trap

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?What does a company do?

Cut costs?Outsource?

Price opportunistically?

The commodity trap

Deregulation

Globalization

Technology

Overcapacity

Customer power

Aggressive newentrants

Price erosion

StandardizedInterfaces

Outsourcing

?What should a company do?

Use IT and process innovationto build value web

capabilities and roles

So who does make money?

Three exemplars: Dell, Southwest, Wal-MartReturns to shareholders around 16,000% over

several decadesDominate their ecosystem to extent that competitors’

strategies based less of their own ambitions than to find a counterpunch

Yet, there is no way they could ever make moneyNo proprietary product or serviceIn commodity industriesSelf-commoditizing: drive their own prices down all

the time and push the industry to follow

The coordination edge

All three companies have an explicit enterprise coordination design owned at the top:Dell: complete synchronization of the demand chain,

patented processesWal-Mart: supply chain/store replenishment

integration end-to-endSouthwest: standardization of operations, incentive

systems All three are superb users not of IT – “information”

technology but CT – coordination technology

The IT leadership contribution

Open up a new executive conversation

Governance: extended architecture and policy

Standardized interfaces: technology and process capabilities

Value web enablement

Making IT a force for innovation in the commodity world

From IT platform to enterprise coordination design

Enterprise Coordination Designs (1)

FedEx: Coordinate customer logistics needs via cross-linking ground/air services through an integrated technology platform

Toyota: Coordinate global manufacturing via standardized process components; coordinate global product development

Li and Fung: Act as a global “orchestrator” for thousands of specialists in apparel manufacturing, contracting to create a mutual balance in value gains

Enterprise Coordination Designs (2)

Magna Steyr: Make coordination of customer processes the differentiator of commodity auto parts

Amazon: build from the customer contact point back via a modular platform that coordinates the complete customer relationship, partners, service providers, outside systems developers

TAL: Extend design, manufacturing and store inventory management into the customer’s processes and take responsibility for demand-supply coordination

Enterprise Coordination Designs (3)

EBay: create and grow a set of communities, acting as relationship coordinator

GE: optimize process capabilities through selective standardization, global centralization; “turbocharge” innovation by internal crosslinkages and reuse

Procter and Gamble: switch from in-house business and product development to a collaborative network of help and innovation

Commonalities among leading designs

Ownership at the top (FedEx, Dell, etc.)Inheritance (Wal-Mart)Innovative commoditization (Flextronics, AAM)The Way: diffusion of the design, metrics, incentives

across the organization (Cemex, Toyota)Use of Coordination Technology everywhere to

selectively centralize, co-source, standardize and reuse capabilities (GE, eBay)

Exploitation of standardized interfaces (BMW/Magna Steyr)

Value web principles not value chain

Examples of standardized interfaces

GSM/SMS: created – and commoditized – the European mobile phone industry; note the U.S. lag

USB: enabled and commoditized digital camera marketU.S. mortgage market transformed by XMLRFID: information moves with the goodsCredit cards: airport self-service check inANSI/EDIFACT EDI “ontologies”Car manufacturing: the Toyota dominance1-800 numbers: global call center outsourcingConsumer electronics: “HP” printers with HP never involved

Value webs versus chains

Inbound Logistics

Operations Outbound Logistics

Marketing & Sales

Service

Procurement

Technology & Development

Human Resource Management

Firm Infrastructure

Inbound Logistics

Operations Outbound Logistics

Marketing & Sales

Service

Procurement

Technology & Development

Human Resource Management

Firm Infrastructure

Value chain:Tidy, linear, Control-centeredSupply-driven

Value webs:Demand-driven, power lawsNonlinear“Scale-free” networksYahoo, UPS as Hubble Space

Growth platforms:Value web roles

Focus Where growth comes from

Control Traditional value chain: in-house

capabilities and M&As

Coordinate Your own and partner capabilities

Service Your coordination on behalf of selective partners

Collaborate Close relationships with partners

that they make “core’ to their own growth

Enable You open up your platform,

inviting others to innovate on their own behalf

Product innovation and development

General agreement that radical innovation opportunities are disappearing

Value chain petrification: Big Pharma pipeline drying up, high tech is consumer electronics, no major innovation in auto manufacturing for four decades (until the hybrid car)

Collaborate or die: R&D and development as value webs

Asia as innovation centers

Emerging trends

Contract manufacturers extending their value web roles: consumer electronics, cell phones (60% now made by third parties)

P&G, IBM letting go of their protected patent base: license even to competitors

Eli Lilly InnovCenter portal for research problem-solving for a reward fee

Global centers of excellence: Motorola, GM, GE, synchronized labs in China, Europe, U.S.

Toyota blueprint for global design-production

The search for global talent

Relative labor cost burden Low High

Premium Specialist Creative Skill capabilities economy base Commodity Assembly Outsourcing economy crisis creator

The financial imperatives

Welcome to the variable cost economy

The CT platform changes the nature of scaling

Supply chain management indicates the extent of the financial value of such a platform: halving of working capital per unit of sales, halving of overhead

The linkage between the CT architecture and process “clusters” cuts cycle times by around 40%; time really is money

Business scaling: Up

1995 2000 NOW 2004

Investment

Add people, systems,facilities

Disruptive, expensive

Business Scaling: Down

1995 2000 NOW 2004

Investment

Cut people, systems,facilities

Disruptive, expensive

What’s next?

1995 2000 NOW 2004

Investment

??

??

An example from a superb company

Charles Schwab: Business Charles Schwab: Business ScalingScaling

1995 2000 NOW 2004

Investment

15,100

20,100

26,300

16,100

$150M$199M

$370M

$705M

$301M

$160M

191,000

350,000

115,000

141.000

Transaction per day

Millions of $ of Investments

Employees

SUPERSTRUCTURESPriority targets: customer relationships,

supply chain, financial, organizational, operational;

BrandingInnovation paths

Bundling of distinctive capabilitiesvia infrastructure clusters

Process edge – differentiation 

INFRASTRUCTURES:Clusters of services,

Networks of providers and partners; business-, industry- or partnership-focused arrangements

SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems

Automatically interconnected via common interfacesThe Web as electricity;

Largely usage-based variable cost

The IT resource

Super

Infra

Sub

SUPERSTRUCTURESPriority targets: customer relationships,

supply chain, financial, organizational, operational;

BrandingInnovation paths

Bundling of distinctive capabilitiesvia infrastructure clusters

Process edge – differentiation 

INFRASTRUCTURES:Clusters of services,

Networks of providers and partners; business-, industry- or partnership-focused arrangements

SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems

Automatically interconnected via common interfacesThe Web as electricity;

Largely usage-based variable cost

The IT resource

Super

Infra

SubCan’t innovate here: may rely

on others’ innovations

SUPERSTRUCTURESPriority targets: customer relationships,

supply chain, financial, organizational, operational;

BrandingInnovation paths

Bundling of distinctive capabilitiesvia infrastructure clusters

Process edge – differentiation 

INFRASTRUCTURES:Clusters of services,

Networks of providers and partners; business-, industry- or partnership-focused arrangements

SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems

Automatically interconnected via common interfacesThe Web as electricity;

Largely usage-based variable cost

The IT resource

Super

Infra

Sub

SUPERSTRUCTURESPriority targets: customer relationships,

supply chain, financial, organizational, operational;

BrandingInnovation paths

Bundling of distinctive capabilitiesvia infrastructure clusters

Process edge – differentiation 

INFRASTRUCTURES:Clusters of services,

Networks of providers and partners; business-, industry- or partnership-focused arrangements

SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems

Automatically interconnected via common interfacesThe Web as electricity;

Largely usage-based variable cost

The IT resource

Super

Infra

Sub

Imperatives

Implicitly begin: “Regardless of how we do it, it is absolutely vital that we………”

The link between vision – the goal – and strategy – the “how”

Key to avoiding change management overload – when everything is urgent and important, nothing is

Reflects the changing nature of change: when is radical jump-shift change easier to handle than never-ending incremental and accelerated change initiatives?

Beachheads

Larger than pilots, small enough to deliver in 90-180 days

Focused goal of building momentum for innovation Self-explanatory, self-justifying benefitsHigh centrality: visibility, political credibility, link to key

constituenciesPhase 1 of an “architected” campaignA force for organizational mobilization that balances

speed and flexibility of a small team with scale and rollout capacity that a large project can leverage

Localized enough so that the leader/sponsor can provide oversight and commitment

Beachhead planning

For each Beachhead:What is the 90 or 180 deliverable? Warning: if it takes two

years, forget it NOW please (FINP)What is the “elevator” pitch about its self-explanatory, self-

justifying benefits? If you need to calculate the hypothetical ROI, FINP

How does this contribute to the Imperatives? How will it scale and be rolled out across the business?Which leader will sponsor this and put credibility on the

line?What new roles and skills will this help build?What are the incentives for others to pick up on the

beachhead and commit to moving it forward?What is the 8-15 person team it needs?

IT Matters

Global coordination of development and in-sourcing of talent is fundamental to innovation

Time is the currency of competition: time-to-market, time from design to production, time to distribute, etc.

This alone makes coordination technology the vital force in innovation

How to get that across and to whom? The very term Chief Information Officer gets in the way of doing so