Sunday, January 28, 2018

Using Porter's Model to Transform an Industrial Age Business to the Digital Age

While many businesses are talking about the need to transform for the Digital Age, the roadmap for transformation is unclear.  This is not a surprise.  Few organizations have done it successfully.  While there are several "native-born" digital age success stories, the transition from industrial age business to digital age business requires fundamental changes in business systems, structures, and culture.  Where to start your transformation depends upon the current status of your business technology, the industry you are in, and the level of commitment and support from the executive management team.  One of the most difficult challenges in starting the transformation is to create a vision of what "digital" means for the business.

Porter’s Model for Business Value Chain

Let me help you create your vision by applying digital age technologies and management practices to a well-known and accepted industrial age business model.  In 1985, Michael Porter, the Harvard Business School professor, published the seminal book, "CompetitiveAdvantage."  Porter’s theories on competitive advantage became the foundation for business strategy around the world.  In that book, he articulated a model for the business value chain.  The effectiveness of a company’s strategy is based upon the strengths and weaknesses of each of the elements of the business value chain as compared to those of its competitors. 

The value chain model had five primary activities which were associated with acquiring customers and fulfilling sales.  These activities are directly associated with the transaction that provides the product or service to the customer, which means these activities lead to revenue, and the effectiveness of these lead to gross profit.  These activities often operate in a chain or series of steps.  Removing waste from the series of steps and increasing customer satisfaction increases competitive advantage.  The Primary Activities in Porter’s business value chain are:
  • Inbound logistics – the receipt and inventory management of inputs to the business processes.
  • Operations – the transformation of raw materials and components into products, services, and systems for sale to the customers.
  • Outbound logistics – the shipment and delivery of products and services to the customers.
  • Marketing and Sales – the interactions with the customer to convince them to purchase the products or services.  In retail businesses this primary activity normally occurs after the inbound logistics, operations, and outbound logistics steps.  In Build-to-Order businesses, this step is normally the first of the primary activities.
  • Service – the delivery of services to the customer, either supporting a product or as the market offering.  Some industries are exclusively service industries (airline) and other industries have almost no service component (retail paper goods).

However, the effectiveness of the Primary Activities depends upon four Supporting Activities.  These activities are enablers for competitive advantage from the primary activities.  They provide the foundational process capability and culture that guide the execution of the primary activities.  The Supporting Activities in Porter’s business value chain are:
  • Firm infrastructure – not only the facilities, but the overhead and management functions of the business
  • Human Resources management – the hiring, training, and employee management policies of the business
  • Technology deployment – product and process technology used throughout the organization, its products and services
  • Procurement – the network of suppliers, contractors, and service providers who perform key functions for the organization or provide materials and services

These four activities supported the Primary Activities, which are the ones leading to transactions with customers. The effectiveness of these Support Activities improves the effectiveness of the Primary Activities.

Digital Age Enablers

Now let us consider the four technologies whose intersection has been the genesis for the digital age.  Some of these technologies have been available for many years. However, the integration of these has transformed more than products or services. These have changed the way companies interact with customers, the role of employees, and how businesses manage their processes.

Internet of Things (IoT)

The widespread integration and use of digital WIFI technology allows almost anyone and anything in the world to establish a connection with other people or things.  Whether it is in a home, in a factory, at retail store, or entertainment venue, there are numerous devices connected via WIFI.  And the devices on the network are growing every day.  This opens up totally new channels of communication between the customer and the seller.  It also opens up new channels of communication within an organization or operation for providing status and control of what is happening.

Big Data

All of these devices are collecting and transmitting data which leads to the creation of enormous data sets that are changing in real time.  The tools and techniques used with big data can analyze these data sets for trends, patterns and associations that provide insight about the ecosystems represented by the data set.  Without the tools and techniques of Big Data, the information created by the IoT would be practically worthless. Big Data brings insight and clarity from the confusion of data overload.

Cloud Computing

Processing the Big Data created by the IoT requires a great deal of computer processing power.  However, building and operating data centers is expensive overhead for many companies.  Especially when the data center must be sized for the worst case computational load.  That means that much of the functionality is sitting idle most of the time.  Cloud Computing overcomes this challenge by spreading the computation and memory requirements over many computers and data centers that are connected via the internet cloud.  This allows virtually any company to now have instant access to huge amounts of processing capability at low cost.

Artificial Intelligence/Machine Learning

Artificial intelligence (AI) is the use of computer systems to perform tasks or activities that normally require the insight and understanding of a person.  Machine learning is a current application of artificial intelligence that provides enormous amounts of data to AI machines, letting them extract patterns and discover cause and effect relationships.  A characteristic of AI is that the systems assess a situation and takes an action based upon that situation without any intervention from a human operator.  Thanks to the integration of IoT, Big Data, and Cloud Computing, AI has become feasible for numerous applications.

Digitizing Porter’s Business Value Chain

Now it is time to apply the four enabling digital technologies to the Business Value Chain activities.  This will create a vision for the impact of digital transformation on that aspect of a business.  When you understand that vision in a generic sense, you can translate it into your specific business realities.  I’ll start with the support activities.
  • Firm infrastructure – all four enabling technologies will have a significant impact on these activities.  Business analytics are growing exponentially in many organizations and these are built using the enabling technologies.  In addition, the IoT is changing the nature of physical infrastructure requiring networks or WIFI throughout the operation. 
  • Human Resources management – IoT and AI will have the biggest impact in this area.  Through IoT, employees and operators will be able to connect with equipment, systems and team members anywhere at any time.  The application of AI will change the content of many positions.  AI is likely to take over many lower-end manual or repetitive tasks.  This will eliminate some positions and change the content of others into the role of problem solver.
  • Technology deployment – from a transformation perspective, this activity is likely to be the least affected.  Many organizations already have processes and practices in place to upgrade and enhance both product and process technology.  That activity will continue.  One likely change will be a greater reliance on sourced technology deployment such as the use of the Cloud Computing.
  • Procurement – the change in this area will be one of timing and flexibility which means it leverages IoT, Big Data, and Cloud Computing.  The pace of change in the digital age is much faster than the pace in the industrial age.  Windows of opportunity in the market open and close within months not years.  Therefore, the network of key suppliers, contractors and service providers will likely need to change quickly also. There will be more emphasis on procurement partners who have already transformed to digital age business processes and less emphasis on "low cost" providers who are still operating in the industrial age.   

The impact of the digital age technologies on Porter’s business value chain supporting activities is integrative and reinforcing.  As technology deployment makes the IoT, Big Data, Cloud Computing, and AI available, the other three supporting activities utilize that capability.  They soon rely on it and will demand that technology deployment accelerate the implementation of improvements in each of those areas.  For instance, the IoT leads to better connect people and systems.  This leads to better management using real-time data in the infrastructure layer.  This also allows the procurement layer to partner in real-time with suppliers and service providers anywhere in the world opening up new opportunities.  However, this demands that the HR layer provide people with the technical skills to use the technology and the leadership skills to form, lead, and facilitate constantly evolving diverse global teams.  All of these will lead to a demand for the technology deployment layer to provide better IoT performance in terms of bandwidth and security.

Let’s turn our attention now to applying the four enabling digital technologies to the five primary activities from Porter’s business value chain model.  These activities are the ones directly supporting a customer transaction.
  • Inbound logistics – the IoT will improve the speed and accuracy of this activity.  If the supply chain is large and complex, Big Data and Cloud Computing can help to manage the logistics to ensure optimal performance for either cost or cycle time.
  •  Operations – the transformation in this area is likely to use all four technologies.  In manufacturing operations, many companies already rely on IoT and limited AI in their factory automation.  In addition, many field service based operations rely on IoT to stay connected with their operators and equipment in the field.  The expansion of IoT in operations systems has exponentially increased the data collected leading to the use of Big Data and Cloud Computing to monitor system status and predict system performance and the need for maintenance.
  • Outbound logistics – IoT, Big Data, and Cloud Computing are already changing this activity.  Amazon is an example of a business that is built upon using the digital technologies to transform this business activity.  The digital technologies allow Amazon to find and ship almost anything to almost anywhere overnight.
  • Marketing and Sales – Big Data, Cloud Computing and AI are transforming the Marketing and Sales processes.  Big data and Cloud Computing can segment customers and provide personalized product and service offerings based upon this segmentation.  The AI "bots" are now taking orders and answering questions from customers.   This area is growing fast, and capabilities are expanding almost daily.
  • Service – again all four technologies, IoT, Big Data, Cloud Computing, and AI are having an impact in this area.  The connectivity of products and services allows expanded data collection and the use of Big Data analytics.  The Cloud Computing can analyze and predict performance and service needs.  AI is problem solving and in some cases automatically fixing issues.  Consider your automobile.  It knows when something is wrong, it informs you of the diagnostics, it can schedule a service call or identify the closest service center to your current location, and connect you with someone in an emergency.  And coming soon, it will actually do the driving also.

The digital age technologies are transforming industrial age industry. If you wait until the transformation is complete before you start to change, you will go the way of shipwrights for sailing ships and buggy manufacturers. But you don’t want to haphazardly throw resources at the technologies and hope that something works. Many of us tried that during the bubble and watched as millions of dollars and years of time were wasted. You need a strategy for your transformation.

I suggest you start with the Porter business value chain model. Consider your industry, your organization’s strengths and weaknesses and then begin to apply the digital age technologies. Your strategy for competitive advantage will dictate what changes are needed and when.

Tuesday, January 2, 2018

I Thought We Were Playing Football! How Digital Age Business Management Differs from Industrial Age Business Management

I grew up playing football.  I was a tight end.  I learned to block and tackle and knew how to run my routes.  I wasn’t very good, so when I went to college I moved off the field and into the stands.  There I cheered for my team.  I don’t think I missed a single home game and I made it to some of the away games.  I don’t go to games as often any more, but I am still a fan.  I have binge watched football games on holidays and weekends.  While I may not be classified as an expert, I know the rules, I know how the game is scored, and I can spot a well-executed play.  I understand what it takes to win at football.  

There is just one thing – I know what it takes to win at American Football, but as I look around I find that there are lots of people playing Association Football and it is very different from the football that I know.  It is what we in the USA would call “soccer,” but in the rest of the world it is known as “football.”

There is a strong resemblance between business success in the industrial age and American Football.  And there is also a strong resemblance between business success in the digital age and Association Football.  There are some similarities; for instance, both have two teams of 11 players competing against each other on a large field with the goal to be to outscore the opponent.  But don’t let the similarities fool you.  The games are different.  How they are played, the skills needed by the players, and the strategies used need to be those appropriate for which version of “football” you are playing.  

So let’s set aside the technology for digital age businesses for a minute.  Things like the Internet of Things (IoT), cloud computing, big data, artificial intelligence and robotics.  Instead lets’ talk about how we organize and manage a business for the digital age as compared to the industrial age using a metaphor of playing two different games, both called football.

American Football (Think Industrial Age Business)

American Football relies on power, strength, agility, training, and competitive strategic game plan.  Let's consider the implication of some of these attributes and their parallel to industrial age business.

Functional Specialist

In American Football, each player has a position or role.  There are strict rules associated with that position.  For instance, an interior lineman cannot catch a forward pass, that action is reserved for backs, ends, and wide receivers.  Also, the skills needed for success vary based upon your position on the team.  That same interior linemen must be excellent at blocking, with great leg strength and arm strength.  A wide receiver should be very fast and have “good hands” for catching the ball.  A free safety needs to be very quick and agile to play pass defense, while a nose tackle should be very strong to push past the opposing teams offensive line and tackle the running backs or quarterback.  Sure, it would be great if everyone was good at everything, but on most teams, a player works to develop the skills that are essential for success in their position.

Industrial age businesses have a similar characteristic.  The business has functional specialists who know one position well.  There are accountants in Finance, engineers in R&D, and quality inspectors in Operations.  The skills required for each position are very different and the authority of each individual is different based upon the rules for that position.  A Finance person does not have the authority to determine if a product was made correctly, and the quality inspector does not prepare the quarterly tax filings.  Everyone knows their role, and the road to advancement and success in the organization is to become very good at your job.   Of course, broad business knowledge is good to have, but you are expected to be an expert in your function or role.  If everyone has that attitude and aptitude, the industrial age business should perform well.  It is just like in American Football terms, you want to be in the starting lineup of team that is bound for the playoffs or a bowl game.

Set Plays with Clear Assignments

Also, in American Football, the teams run set plays.  Everyone waits until the ball is snapped, then every player has a specific action they are to do.  The right guard may be pulling to block for the tailback who is going off the left tackle, or he may be pass blocking for the quarterback.  The tight end is running a buttonhook route, or blocking for a jet sweep.  The outside linebacker is tracking the running back who is in motion to pass defend them out of the backfield, and the defensive backs are either in man-to-man or zone coverage.  Everyone knows what they are supposed to do on every play.  And each team is trying to win on each play.  They want to overpower the other team with their athleticism and confuse them so they won’t know what to expect. 

Again, there is similarity to this in industrial age business.  The company creates a competitive strategy.  It may involve intellectual property, new products or new markets.  It may rely upon excellent execution that leads to faster delivery or personalized service.  Some of the strategies may be defensive in nature such as negotiating long term contracts to prevent competitors from gaining market share or using pricing to discourage other entrants to the market.  Many businesses conduct an annual or semi-annual strategy planning session to determine these strategies.  The business functions then create processes to support those strategies.  This is just like creating plays in American Football.  Everyone has specific actions they are supposed to do.  If successful, they either advance the company’s offering in the market – just like the offense advancing the football.  Or the processes will blunt the competitor’s offering – just like when the defense stops the opponent for no gain. 

A Field of Play and Rules for How to Win

At the risk of stretching the metaphor too much more, let’s also acknowledge that there are rules about how the game is to be played and scored.  There are end zones and goalposts that are used to determine the scoring.  There are sidelines that define when something is out-of-bounds.  Each team gets four tries, or downs, to move the ball at least 10 yards forward.  If they can’t do that, they turn the ball over to the other team and then that team tries to move the ball 10 yards.  There is a clock that is running, but it frequently stops for a variety of reasons.  Also, there are rules on how the game is played at the individual level.  This includes rules of behavior and rules associated with different positions.  Finally, there are umpires and referees who watch for any infraction of the rules.  Depending upon the nature of the infraction, they impose penalties of varying degrees all the way from a minor repositioning of the football up to barring an individual from ever participating in the sport.

Industrial age business is the same.  There are rules governing the industry and individual behavior.  These include financial accounting rules and tax laws that tell us how to score success.  Depending upon your industry, their may be other regulatory requirements that define what business actions or offerings are “out-of-bounds.”  In addition, there are industry watchdog groups and regulators who are watching for infractions.  Depending upon the nature of the infraction, you may have to do additional testing or add a warning label on your product.  You may be barred from selling certain types of products or services within certain markets.  And for really serious infractions, you may be incarcerated.  

Association Football (Think Digital Age)

So, let’s look at how things change when we discuss digital age business.  Association Football, what is known as “soccer” in the USA, is our metaphor.  

The Rule Book is Different

I will start by pointing out that the rule books are very different.   Association Football has 17 rules of play and they can be fully described in a seven-page memo.  The rule book for college level American Football, as published by the NCAA, is 220 pages long. Even if we overlook the 14 pages compromising the title, table of contents, acknowledgements, and index, there are still 206 pages of rules.   That doesn’t mean that Association Football is easier, rather it means that there is a much broader scope for innovation and improvisation.  That is definitely something we see in the digital age business.  The scope for innovation, collaboration, co-creation and changing the business model is enormous.

The Field of Play Varies

One of the similarities is a field with sidelines and end-lines that clearly delineate “in-bounds” from “out-of-bounds” with both types of football.  However, the Association Football field is larger and what is even more enlightening is that the dimensions can vary from field to field within a minimum and maximum length and width.  And speaking of the field, the markings on the field are also different.  American Football has yard markers and hash marks so you can determine your precise location on the field.  An Association Football field has a center line with a center circle and then lines defining space around the goals and in the corners.  But no other markings on the field – just lots of open space,  Digital age business is also operating in a field that is varying all the time and is less clearly defined than industrial age business. 

Goals and Scoring are Different

Another point of both similarity and contrast is that there is a goal at either end of the field  with both types of football.  However, there are some differences in the goals.  The Association Football goal is resting on the ground and is closed on all four sides – left, right, top, and bottom.  If a kicked ball crosses the plane of the box defined by the goal, there is a score.  

The American Football goal is suspended in the air.  It is only defined on three sides – left, right, and bottom.  If a kicked ball crosses the plane of the goal, there is a score.  But the magnitude of the score varies depending upon whether the kick it is a field goal or a point after attempt.  In addition, American Football has three other ways to score: a touchdown, a safety, or a two-point conversion.  There is a lot of complexity in the scoring system for American Football.   

Association Football scoring is much simpler – kick a goal, score a point. However, it is interesting to observe that the scores in a match in Association Football are much lower than American Football.  Just because the scoring is easy to understand, that does not mean it is easy to accomplish.  Applying this to digital age business, we see that there is no advantage in complexity.  Businesses are much closer to their customers and suppliers.  Success is measured in real-time when the transaction occurs.  That doesn’t make it easier.  If your team is much quicker and more agile than the competition it will likely score many more goals.   Complexity does not add value to digital age businesses.

There are Still Referees but Penalties are Different

A similarity between the two styles of football is that there are referees, and umpires or linesmen who watch for infractions and can penalize a team or player.  Of course, the nature of the infractions is different because the rules are different.  And the nature of the penalties is also different.  As a general rule, American Football infractions will put you in a less advantageous position with respect to scoring or preventing a score (penalty yards).  Whereas, Association Football infractions will give the ball to the opposing team with an opportunity for a free kick.  

Continuing with our discussion of business.  Most infractions in industrial age business practices were a setback, but the business could continue operating with its current strategy, customers and suppliers.  In digital business, information is immediately and widely shared.  Information, or misinformation, about an infraction can go viral in a matter of hours.  This will directly impact your ability to do business with customers and suppliers.  When an infraction occurs, you find yourself immediately playing defense.

Free Style Rather Than Set Plays

In fact, that brings us to the actual playing of the game.  In American Football, each player had a specific position with rules for that position and specific assignment on each play.  This principle is not followed as closely in Association Football.  The goalie does have some very specific rules, but many of those only apply when the goalie is in front of the goal.  There are just three other positions on the Association Football team, that of defenders, midfielders, and forwards.  The team can determine how many team members from each category are on the field at one time, as long as the total is eleven.  And while these positions have general responsibilities, they are fluid.  Often interchanging between each other within a position category and helping each other across categories on both offense and defense.  

There is a decided parallel in digital age business.  Roles are fluid.  Virtual teams are created for an opportunity and when something changes in the ecosystem, the team membership or team leadership changes in a heart beat to react to the new opportunity.

The Clock Continues to Run

So it is no surprise to see the play on the field of an Association Football match is much less structured or choreographed as compared to an American Football play.  The ball is always moving; it does not stop between plays.  And a team finds itself switching between offense to defense in a moment as a pass is intercepted or a kick goes awry.  When things change, clock keeps running and there is no stop to run a set play.  Instead, each team is constantly on the move as they strive for ball control and to gain an advantage.  

Digital age business moves at pace that is much faster than industrial age.  The technology is rapidly changing, customer needs and expectations are changing with each new transaction, and the amount of data is growing exponentially.  Also, the clock doesn’t stop in digital age business.  It is conducted on a global level and is expected to be “on” 24/7/365.  An industrial age business trying to stop and setup a play in the digital age will find the competition has swept pass them.

A New Normal

It is instructive to note that what is normal play in an Association Football match would be called a “busted play” in American Football.  Granted there are special plays in Association Football that may start action on the field such as a corner kick or free kick, but even then, the action is very fluid.  A good rule of thumb is that the team with the better agility and stamina will have a distinct advantage in Association Football.  Since the ball is always moving, team members must always be moving to either defend their goal or attack their opponent’s goal.  

The implication for digital age business is that you need empowered agile teams that can innovate and co-create in real-time to be successful.  The command and control structure of industrial age business is too slow.  You can’t operate with the coach calling all the plays like we do in American Football.  Instead, the team members are assessing the environment, taking instant advantage of a mistake by the other team and moving the ball toward the goal.  When the opportunity arises they act, they don’t stop to ask permission.

Final Thoughts

Well this metaphor is becoming a bit tortured so let’s wrap this up.  Managing in the industrial age and managing in the digital age are different.  The skills that were needed for one, can become pitfalls for the other.  If you were successful as an industrial age business, you will need to make some changes to thrive in the digital age.  Be thoughtful how you make the change.  

Chances are, there will be a time of transition where part of your business will need to continue to operate in the industrial age to serve your industrial age customers.  But as that customer base shrinks, you will need to be serving digital age customers with a digital age management approach.  If you don’t, you can bet that someone else will.  The management approaches are different.  Roles and responsibilities are different.  The pace of business is different.  If you don’t change, or if only part of your organization changes, you won’t be successful at the new style of football.

American Football (Industrial Age) Success Criteria

American Football success often depended upon how well a team performed on three different attributes of team preparation and performance.  Ideally, you were good at all three, but you could make up for a weakness in on attribute with superior strengths in the other two:
  • Athletes that are big, strong and fast.
  • Athletes who have been taught the skills to perform their positions well
  • Coaches who call good plays based upon the strengths and weaknesses of their team and the opponent’s team

Industrial age success has been based upon a strategy that led to having a sustainable competitive advantage.  Just like American Football this was usually based upon a combination of three things.
  • Proprietary, innovative or customized products or service
  • Excellent business processes – internal and customer-facing
  • Management and control systems that ensured everything was operating as it should. 

A competitive advantage was often rooted in one of those and strongly supported by the other two.  You strengthened your business by becoming better at any or all of these.  Industrial age business competition rewarded the company in an industry that was the best at doing these. 

Association Football (Digital Age) Success Criteria

But Association Football is different.  There are still three factors that are indicators of successful team, but the factors are different.  Some of the differences are subtle and some are profound.
  • Athletes that are fast, agile, and with great stamina
  • Athletes who are skilled in handling the ball, seeing the field and working together to create opportunities
  • Coaches who ensure the team is physically prepared and then manages the chemistry and talents of those on the field to find the best combination for the circumstances

So comparing the success factors for football; in Association Football the athlete’s agility and stamina is prized over raw strength, skills are important but the critical skills are different, and the coaches have less direct control but must instead rely on the instincts of an  empowered team. 

And there is a parallel in digital age business performance.  We find that there is a new management strategy for success that is emerging.   Digital business requires very fast decision-making by those on the front line of business – the annual strategic planning process just won’t cut it.  The amount of data and information is over-whelming unless there is a system that makes sense of it.  Competitive advantage is based upon how quickly you can react to changes with excellence and at scale.  As it is developing, we are finding that there are three keys to success:
  • Digital technology enablers are deployed: IoT, Cloud, big data, appropriate AI or robotics
  • Empowered cross-functional. cross-organizational virtual teams co-create value that is aligned with the corporate strategic imperatives
  • Management and ecosystems leverage successes and provide clear organizational and operational vision

So we find in digital age businesses, digital technology implementation is more important than the proprietary technology.  The business must rely more on empower teams to recognize and take advantage of opportunities rather than fixed processes that determine what can and cannot be done.  Finally dynamic learning by the organization to take advantage of emerging opportunities rather than management control and precisely predicted performance.

The good news is that whether in the industrial age or the digital age, you are still playing football.  What you need to recognize is that you are no longer playing American Football, it is now Association Football – and that means many things about the game have changed.