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.

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