Business Solutions on Demand: Transform the Business to Deliver Real Customer Value

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Author: Mark Vincent Cerasale | Merlin Stone

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Business Solutions on Demand: Transform the Business to Deliv er Real Customer Value ISBN:0749441720 by ike C erasale nd erlin Stone? Kogan Page ?2004 This motivational and fast-paced book emphasizes that for businesses to compete and survive, they have to exceed customer expectations. The book shows how companies can increase sales and improve margins by introducing a range of solutions.

Table of Contents Business Solutions On Demand—C reating C ustomer Value at the Speed of Light Foreword C hapt er 1

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Business Strategy and Transformation

C hapt er 2

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Transformation in Food Retailing

C hapt er 3

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The Low-C ost Business Model

C hapt er 4

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The Solutions Business Model

C hapt er 5

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Transformation in the Information Technology Industry

C hapt er 6

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Industries transforming

C hapt er 7

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Business Innovation

C hapt er 8

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The Business Innovator

C hapt er 9

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Solution C reation and Delivery

C hapt er 10

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The C ustomer Relationship Manager

C hapt er 11

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Solution Marketing

C hapt er 12

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The Industry Marketing Manager

C hapt er 13

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Knowledge Management

C hapt er 14

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The Knowledge Manager

C hapt er 15

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Business Design

C hapt er 16

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C hange Management

Index List of Figures List of Tables

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Back Cover Based partly on IBM’ s own transformation, and partly on the transformations that IBM has helped its clients to achieve, this ground-breaking book shows how companies can increase sales and improve margins by introducing a range of solutions. It draws upon IBM’ s highly readable and fast-paced, Business Solutions on Demand emphasizes that for today’ s business to compete and survive, it has to exceed the expectations of its customers. With contributions from a host of

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why corporations need to provide business solutions to stay competitive;

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why business customers want to buy solutions;

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what it takes to move from supplying products and services to creating and delivering solutions;

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how you can learn from the experiences of leading suppliers of business solutions.

Business Solutions on Demand will be a stimulating read for all business leaders, sales and marketing professionals and all those committed to improving business performance. If that sounds like your business agenda, make sure this important book is top on your reading list. About the Authors Mark C erasale is a Senior C onsultant in IBM’ s Business C onsulting Services division. He specializes in customer management, e-business and solution transformation, helping clients to improve business performance through innovation, operational efficiency and customer loyalty. Mark’ s consulting experience covers many sectors, including automotive, chemical and telecommunications, electronics and IT. For several years he was responsible for managing IBM client relationships and providing some of the world’ s most successful companies with information technology-enabled solutions. Mark, together with Merlin Stone, has co-authored several articles and management briefings, and has contributed to many white papers and books. Merlin Stone is Business Research Leader with IBM’ s Business C onsulting Services division, where his role combines consulting and marketing with the development of business research partnerships with IBM’ s clients and partners and various universities. He runs he IBM Marketing Transformation Group and is a director of The Database Group Ltd, as well as Qci Ltd, an OgilvyOne company that specializes in customer management consulting. His consulting experience covers many sectors, including financial services, utilities, telecommunications, travel and transport, retailing, automotive, energy and IT. Merlin is also the IBM Professor of Relationship Marketing at Bristol Business School and the author of many articles and over twenty books. He is a Founder Fellow of the Institute of Direct Marketing, a Fellow of the editorial advisory boards of several key journals. The C IM recently selected Merlin as one of the world’ s 50 leading marketing thinkers. He has a first-class honours degree and doctorate in economics.

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Business Solutions On Demand— Creating Customer Value at the Speed of Light Mark Cerasale and Merlin Stone London and Sterling, VA Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or any of the authors. First published in Great Britain and the United States in 2004 by Kogan Page Limited Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road London N1 9JN Sterling UK 22883 Quicksilver Drive VA 20166-2012 USA www.kogan-page.co.uk ?IBM Corporation, 2004 The right of the IBM Corporation to be identified as the author of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN 0 7494 4172 0 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Cerasale, Mark Vincent, 1969-Business solutions on demand : creating customer value at the speed of light / Mark Cerasale and Merlin Stone.-- 1st ed. p. cm. ISBN 0-7494-4172-0 1. Business planning. 2. Strategic planning. I. Stone, Merlin, 1948-II. Title. HD30.28.C415 2004 658.4’ 012--dc22 2003024779 Typeset by Saxon Graphics Ltd, Derby Printed and bound in Great Britain by Clays Ltd, St Ives plc To Stefania (my wife), Vincent and Jillian (my parents) and Lisa (my sister) Mark Cerasale To my wife Ofra and daughters Maya and Talya Merlin Stone Author profiles Mark Cerasale is a Senior Consultant in IBM’ s Business Consulting Services division. He specializes in customer relationship management and business transformation. For several years Mark worked as a Client Manager, providing IT-enabled solutions to some of the world’ s most successful companies. As a consultant he has helped many clients to improve their business performance through solution transformation. Please visit markcerasale.com for more information. Merlin Stone is Business Research Leader with IBM and a director of QCi Ltd and The Database Group Ltd. He is a Founder Fellow of the Institute of Direct Marketing, a Fellow of the Chartered Institute of

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html Marketing and is on the editorial advisory boards of many journals. He is IBM Professor of Relationship Marketing at Bristol Business School and a prolific author with 25 titles to his name. List of contributors Julie Adams is a Managing Consultant in IBM’ s Business Consulting Services division. She specializes in organizational change management and organizational development. Over the last 10 years, she has developed particular expertise in working with companies to get the best results from large scale business change programmes, whilst minimizing impact on day-to-day business. Alan Clark is a Management Consultant in IBM’ s Business Consulting Services division. He focuses on delivering business-tobusiness sales force improvement solutions. In recent years he has worked with many international companies where a key factor in sales productivity improvement has been the shift away from traditional product selling. Howard Cox is Professor in International Business History at the London South Bank University. Professor Cox recently led a two year Leverhulme Trust funded project with Simon Mowatt and Martha Prevezer investigating technology and industrial change. He has published widely, including articles in Business History, The Business Economist and the OUP book on the history of BAT, The Global Cigarette. Lucia Cuttle is Automotive Marketing Manager with IBM’ s Industrial Sector division. She is responsible for marketing IBM’ s products, services and solutions to the automotive industry across Europe, the Middle East and Africa. Bryan Foss is Customer Insight Solutions Executive within IBM Financial Services. Bryan works with retail banks, insurers, financial markets and other financial services companies globally. Bryan is a joint author of four other publications with Professor Merlin Stone, Fellow of the Chartered Institute of Marketing, IT editor of the Journal of Financial Services Mark eting and is a frequent presenter at business conferences around the world. John Griffiths is a Client Executive in IBM’ s Sales and Distribution division. He has over twenty years experience in selling and implementing complex IT solutions and services in the industrial sector. As a management consultant he has advised many major international companies on their Customer Relationship Management (CRM) strategy, knowledge management and IT strategy to support their transition from product to solution businesses. Simon Mowatt is Senior Research Lecturer at Auckland University of Technology and Visiting Fellow at the Centre for International Business History at the University of Reading. His interest is in technological change, business networks and industrial transformation. Simon has published in journals such as Industrial and Corporate Change and Industry and Innovation. Martha Prevezer has worked at NEDO, London Business School, the Bank of England, South Bank University and is currently at Birkbeck College. She has published widely on biotechnology and has coauthored several books examining the role of clusters in economic development. Glenn Taylor is a Client Executive in IBM’ s Sales and Distribution division. He has 30 years experience in the IT industry, of which he spent 14 in a sales role, and has applied his skills in large enterprises as well as start-ups. Abigail Tierney is the EMEA Marketing Manager for the Strategy and Change Practice within IBM Business Consulting Services. She works with consultants, customers, academics and influencers to drive business value and deliver thought–leadership marketing. Kevin Wheatly is the Learning and Knowledge Industrial Sector Lead within IBM’ s Business Consulting Services division in Europe, the Middle East and Africa. He is responsible for improving Knowledge Management and Learning across the Industrial Sector practice. He has worked for IBM for over five years in various Knowledge Management roles both internally and assisting IBM clients.

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Foreword Overview I wonder why you have chosen to look at this book. Maybe you, like me, have begun to sense important changes in the way that some buyer–seller relationships have developed. The growing dominance of the customer is provoking new and radical changes in business relationships: the growth of virtual businesses, networks of alliances and new, complex, long-term partnerships between suppliers and customers. If you see this in your own business or industry and want to understand more about what it takes to exploit this change effectively, I believe this book will help you. It shines a light on this new and changing world – where the boundary between one organization and another becomes ever more complex and where what is deemed valuable migrates away from products and even services towards solutions and experiences. The era of a mass-customized service – blending industrial economics and scale with bespoke outcomes – has begun. It is a world where we in IBM have already staked out a leading position and one we believe passionately will continue to develop in market after market. This book breaks new ground. It is an exposition of how companies moving down this road work to transform both what they and what their customers do. Maybe you see this phenomenon as nothing new – a mere shift in the division of labour between supplier and customer. Maybe you see this as fundamentally no different from the ancient mercenary soldier or, in recent times, the changing services of accounting, recruitment, marketing, communications, customer service businesses and many others. I see the scale and economics of this trend as something different – not merely activity substitution but the transformation of the commercial model. Making this kind of jump in a business is tough. Many know this from their own bitter experience. For as suppliers, the continually changing requirements for staff skills, technology, commercial approach, financial management and programme structure combine with the challenge of managing totally new economics during transition. Business-as-usual management approaches do not succeed, and new approaches are needed to make the change quickly and successfully. If you are considering making this change, then this book is for you. It is not a recipe, nor even a menu. It is more of a guide – to the journey towards more effective and efficient, intensely partnered relationships. I hope that it stimulates your thinking and, encourages you to be bold, and, if you are already on the journey, that it gives you ideas that enhance your speed and direction. Finally, I hope that it makes you think deeply about what you need to do to give your people and partners a more exciting and acceptable journey. I wish you success. Rod Street, Partner, IBM Business Consulting Service

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Acknowledgements We would like to thank the following people for their support and contributions during the creation of this book: Paul Clutterbuck, Iain Devine, Bryan Foss, Rod Street, Phil Walker, Jane Ashton, Maikel Vlugt, Alan Flack, Rob Smith, Anthony Marsella, Kevin Bishop and Julie Abbott. We also want to thank the many IBM clients whose experience of transformation we drew upon in writing this book. We are all learning together.

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Chapter 1: Business Strategy and Transformation Mark Cerasale

INTRODUCTION Managing a successful company is tough. The pressures are greater than ever. Satisfying the often conflicting needs of customers, shareholders and employees has never been more challenging. Increased competition and unpredictable change mean it is no longer enough for business leaders to maintain a steady hand on the tiller. To succeed, they must plot a course, sail rough seas, explore uncharted waters and be prepared for the unexpected along the way. Business strategy is about deciding what to do. It requires more than best-practice benchmarking, cost-reduction initiatives and one-off process re-engineering. These are often focused on operations. Business strategy is grounded in a vision of the future and is oriented towards innovation and growth. Only when you know where you are trying to reach can you work out how to get there. A business design provides a blueprint for the acquisition and development of capabilities, enablers and the customer interface needed to create and deliver customer value. New business designs are emerging. Today’s business environment Powerful forces such as globalization, deregulation and greater access to capital transformed business during the 1980s and 1990s. New management approaches, information technology, the Internet and increasing customer power have altered the competitive landscape for ever. Customers are more demanding: some want lower costs, others want solutions. Markets have become saturated and competition in many industries is intense. Today, industries are converging and change is unpredictable. Many products and services are similar, perhaps commoditized. To succeed, companies must innovate, grow and reduce costs simultaneously. The economic growth of the late 1990s ended with a downturn in most economies. The new economy of continual growth was short-lived. After 2000, expansion plans were put on hold. Cost-cutting started. The events of 11 September 2001 and the subsequent explosion of global terrorism changed the geopolitical landscape. As if things were not complicated enough, a string of corporate scandals undermined the public’ s trust in private enterprise and increased demands for greater inspection and regulation.

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BUSINESS LEADERS FACE INCREASING PRESSURE Nowhere is the pressure for better performance greater than at the very top. According to a survey carried out by consulting firm Booz Allen Hamilton, ‘ Companies are setting higher standards of performance for chief executive officers than ever before, and CEOs are falling short in record numbers.’ Charles Lucier at Booz Allen Hamilton commented, ‘ Business leaders are enduring scrutiny and pressure unseen since the Great Depression?There is no longer any safe haven for chief executives who can’ t deliver superior results.’[1 ] Corporate responsibility Charitable and governmental organizations have long been aware of their responsibilities and commitments to the communities in which they operate. Companies and their employees willingly give their time and money to charitable causes. However, for much of the 20th century it was rare to find environmental and societal issues as top priorities in most private companies. Things have changed recently. There is more awareness of equality of opportunity, ‘ green’issues and social responsibility. The many corporate scandals and financial irregularities have brought the latter to the fore. Executives are distracted by the need to satisfy new rules. The need for reporting has increased. There is some risk too that governance worries may encourage business leaders to become overly conservative at a time when more innovation and growth are needed. The need for strong leadership, moral commitment and a renewed focus on creating value has never been greater. Today the symbiotic relationship between companies and their communities is better understood. Many business leaders would concur with the view expressed by Lou Gerstner, former chairman and CEO of IBM: ‘ [C]orporations succeed only if they operate in a healthy and vibrant society. They need the communities where their customers and employees live to be strong, as much as they need successful research, planning and advertising. Contributing to their communities is, therefore, good business, too.’[2 ]

The Internet enables charities, environmental groups and communities of consumer interest to come together across the world and has increased their power. Today, environmental issues influence political, economic and corporate policy-making. Some of the world’ s largest oil companies are reinventing themselves to stay in tune with public opinion. They are changing their brands, adapting their business designs, executing new strategies and investing in new markets such as renewable energy. In the future, pressure from future generations may cause more change in industries deemed to be environmentally or socially ‘ unfriendly’ . Tough new legislation relating to the disposal and recycling of consumer goods, such as refrigerators and cars, has forced manufacturers to redefine their product life cycles. Sophisticated buyers are beginning to question the need to own products at all. There is more demand for services. According to environmentalists Paul Hawken and Amory and Hunter Lovins, ‘ mere product-sellers will become suspect. Why – a prospective buyer may ask – if your product delivers its service with all of the operational advantages you claim, don’ t you want to capture those advantages for yourself by owning the product and just providing me with its service?’[3 ] Partner value For much of the 20th century, manufacturing was the main driver of growth. Economies grew along with large corporations. This growth rested on massive investment, managerial control, mass production, standardization, and the creation of large markets through lowering costs and prices. Aggregation worked. The vertically integrated enterprise became the dominant organizational model. Many of the world’ s largest companies, such as Ford, owned and managed their entire value chains. They controlled brands, technology, access to markets, customers, capital and business talent. Today, competition has increased and change is unpredictable. Success depends more on agility and focus. Customers are more demanding and companies must ‘ sense and respond’to their needs. New technologies such as the Internet allow companies to come together in value networks, where scale is less important. In the past, assets and managerial structure were added to support growth. In the future, networks of companies will come together to innovate and create growth. A network economy is

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emerging in which success will be achieved by focusing on the very few powerful forces operating in any arena and harnessing them to create exceptional customer value. Partnering reduces costs, improves focus on core competencies, can help a company enter new markets and provides opportunities to create exceptional customer value. According to a recent report, ‘ Of the 403 executives surveyed on this subject by the Economist Intelligence Unit, 65% reported that their company’ s dependence on external relationships to achieve business objectives had grown substantially over the past three years. A similar proportion expected that dependence to increase significantly again over the coming three years.’[4 ] Partnering comes with its own challenges. Most companies have little experience in finding and attracting strategic partners and building relationships with them. Successful partnerships are built on enduring relationships between individuals and groups. They require investment over time, exceptional mutual understanding, extraordinary trust and a clear sense of purpose. Employee value For much of the 20th century, manual workers were common in most organizations. Managers were concerned with how to organize their work and how to improve their productivity. Today, knowledge working has replaced physical labour in many industries. The knowledge worker, ‘ the man who puts to work what he has between his ears rather than the brawn of his muscles or the skill of his hands’ , [5 ]is now predominant. Knowledge-intensive industries, such as software and biotechnology, have emerged. Even industries such as manufacturing and retailing rely on more information. In many services organizations, assets such as client relationships, goodwill, ideas and talent are intangible and people-oriented. Over a decade ago, Fred Moody wrote in the New York Times Magazine,‘ Microsoft’ s only factory asset is the human imagination.’[6 ]Today, physical assets, such as industrial machinery, are rarely sources of sustainable competitive advantage. When motivated, employees create value through their ideas and their ability to innovate. The workforce, and how it is organized and managed, is an increasingly important source of competitive advantage. However, the job for life is a thing of the past. Few workers have career horizons of more than five years and many have several careers. Valuable information exists in employees’heads in the form of knowledge – of how a process works, a machine operates or a technology integrates. Knowledgeable employees are in short supply and prone to move on if they are not treated well. As they move between companies, they disseminate valuable knowledge. Companies are under pressure to attract and retain their human assets; a ‘ war for talent’is raging. The best and most successful employees want to work for the best and most successful companies. Most employees want a career, a decent rate of pay, respect from co-workers and a boss who supports them. Some employees are even more powerful and demanding. A recent study concluded that factors such as corporate social responsibility (CSR) are beginning to figure heavily in an employee’ s choice of employer: ‘ there is an accumulation of evidence which shows that an organization’ s reputation in the field of business ethics and CSR can tangibly affect its attractiveness as an employer. In a tight labour market, a positive employer rand?can make a real difference.’[7 ] The most educated, highly motivated and capable employees are in short supply. A new generation of software tools is emerging to help employers manage their costs – for example, by improving utilization rates in services industries. Similarly, tools are emerging for workforce development. These tools aim to improve productivity by enabling managers to match skills to positions and will help identify the best employees and support succession planning. Technology will enable internal forecasts and external trend analyses to be combined to provide better forecasting of workforce needs. Shareholder value Many people lost their investments in the crash that followed the hi-tech and Internet stock boom of the late 1990s. Today, investors have little hunger for a return to the roller coaster of fortunes experienced then. Investors are more conservative and want to avoid great risks. Today they want a reasonable rate of return balanced over the short and the long term. Investors want steady growth and more consistency. If a company does not create shareholder value through earnings, investors will withdraw their money, stock value will drop and access to future capital will be blocked.

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Investors are more knowledgeable and sophisticated. They have learned that value from assets is more important than value of assets. They know, too, that bigger is no longer necessarily better. Shareholders value profits over revenue and market value over market share. Today’ s sophisticated investors have moved their gaze from technology, infrastructure and fanciful business concepts to real-world business strategy and design. Investors are looking for companies to innovate, grow and reduce costs at the same time. The need for innovation has never been greater. Shareholders are more demanding and will make their voices heard on all manner of issues, from the environment to executive pay. In an article in the London Sunday Times entitled ‘ The rewards should be justified by the results’ , Peter Jauhal noted, ‘ Executive pay is under the spotlight again, with public concern mounting over the justification being offered for some remuneration packages?we may be seeing a new activism on the part of shareholders.’[8 ] Despite all this, most business leaders are optimistic about the future. They continue to focus on achieving cost reductions and improving productivity. Fluctuating markets cause inefficiencies such as over-capacity in services and over-supply in industries, increasing costs. Some suppliers have introduced adaptive or ‘ on demand’services to bring their customers’operating costs in line with market fluctuations. According to a study conducted by the Economist Intelligence Unit, Despite executives’expectations of better economic times, corporate strategies remain focused on efficiency discipline, cost control and lean operations. Companies are hunkering down around their core businesses, and striving to strip away any activities that don’ t constitute core competencies, whether through outsourcing or divestment. Mergers and acquisitions are generally viewed as too risky or too costly, though the slack global market offers some firms opportunities to acquire weak rivals or to ‘ cherry pick’top talent. Instead companies are increasingly turning to looser partnerships and alliances. [9 ] Best practice is operational, not strategic Best-practice benchmarking is often used to cut costs. It is one of the most widely used management tools. In many ways, it makes much sense to use best-in-class strategy, organizational structure, processes and products as models for re-engineering. It can help achieve quick improvements and is appealing to investors, who often feel reassured when it is used. According to Philipp Nattermann, ‘ Best practice benchmarking – the measurement and implementation of the most successful operational standard or strategy available in an industry – can be one of the most effective tools for increasing a corporation’ s efficiency, productivity, and, ultimately, earnings.’[10 ] However, taking a best-practice approach can turn out to be the antithesis of innovation and growth. A major drawback of best-practice benchmarking is that it can ultimately kill margins. When an innovation enables a company to create a new market and capture high margins, new entrants are attracted and margins eventually go down. Margins are cut for all players in the market: the first movers, ‘ me toos’and late arrivals. In some companies, imitating successful competitors too often determines what they do. They do not understand that best-practice benchmarking is an operational tool, not one for making strategy. For years, companies have focused on occupying a position in the market already staked out by their quickest and most successful competitor. Soon companies begin herding, like lemmings, around the best-practice companies’business design. Products and services become commoditized and margins are eroded as competition increases for smaller slices of customer and industry resources. Conforming to the opinions and behaviour of others is natural human behaviour. The same behaviour applies to companies and strategy. Warren Buffett once famously wrote, ‘ Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.’[ 11 ]

According to Philipp Nattermann, Best practice doesn’ t always equal best strategy. Best practice benchmarking, rightly viewed as one of the most important tools for improving operational efficiency, can be a doubleedged sword. Managers must guard against transforming what is a purely process-related technique into the overriding goal of strategic decision making. When industry competitors begin to herd around a single strategy, declining margins are bound to follow. [12 ]

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Business process re-engineering is also an operational tool. Approaches such as Six Sigma were widely adopted in the 1990s. Business process re-engineering aims to reduce costs and complexity in the way activities are performed and at the same time improve customer satisfaction. Some companies achieved significant benefits from process reengineering; others were less successful. While the primary goal of process re-engineering is usually improved customer satisfaction, the unstated aim is often cost reduction. Booz Allen Hamilton, CEO succession 2002: deliver or depart [Online] www.bah.com [accessed 12 May 2003] [1 ]

[2 ]

Louis Gerstner, Who Says Elephants Can’ t Dance?, HarperCollins, London, 2002 (p 273)

[3 ]

Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 90)

The Economist Intelligence Unit, Extending the Enterprise, The Economist Intelligence Unit, London, 1999 (p 4) [4 ]

[5 ]

Peter Drucker, The Effective Executive, Butterworth-Heinemann, Oxford, 2001 (p 3)

[6 ]

Fred Moody, Mr. Software, New York Times Magazine, 25 August 1991 (p 56)

[7 ]

The Work Foundation and The Future Foundation, The Ethical Employee, 2002 (p 1)

Peter Jauhal, The rewards should be justified by the results, Sunday Times (London), 7 July 2002 (Business Section) [8 ]

The Economist Intelligence Unit, CEO Agenda: Corporate priorities for 2003, The Economist Intelligence Unit, London, 2003 (p 2) [9 ]

Philipp M Nattermann, Best practice does not equal best strategy, McKinsey Quarterly, no 2, 2000 (pp 22– 31) [10 ]

Warren Buffett, Letter from the chairman, Berkshire Hathaway Annual Report, 1984 (quoted from Charles Roxburgh, Hidden flaws in strategy, McKinsey Quarterly, no 2, 2003, p 35) [11 ]

[12 ]

Philipp M Nattermann, Best practice does not equal best strategy

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BUSINESS STRATEGY Business strategy is about deciding what to do. It aims to create value for all stakeholders: customers, shareholders, employees, business partners and the wider society in which they all reside. While productivity improvements and cost reduction are necessary, they may not constitute good strategy. Downsizing and re-engineering provide opportunities to become as efficient as the next company. They are necessary but they are not strategic. Though short-term tactics and long-term strategy are not mutually exclusive, strategy should be oriented towards innovation and long-term growth. In today’ s competitive markets, change is unpredictable. Innovators, not imitators, will achieve exceptional growth over the long term. The rewards for imitation are less attractive. Competition has moved from individual products and services to the level of corporations and their entire extended enterprises. Companies now compete to create and lead industries and markets. To become an industry leader and to retain that position, a company must take charge of the process of industry transformation. Business leaders must invent new industries and reinvent old ones. Strategy must be oriented towards innovation and growth. Innovation and growth Business leaders should look for ‘ white-space’areas of opportunity on the strategic landscape. The number of such white-space opportunities is almost unlimited. There is obviously some risk in a strategy that looks to identify, develop and exploit white-space opportunities, but risks can be managed, and first-mover advantages make it worthwhile. It is no longer enough to be number two or three in an industry; only industry leaders will create and capture exceptional value. Competitors playing catch-up will inevitably cancel any advantage, so companies must innovate constantly to stay ahead of the game. They must keep inventing and reinventing their industries (and their strategies). Some problems with strategy today Today, business strategy may occur at the corporate level in the form of a major investment, such as an acquisition, or a divestment, like selling off a manufacturing plant or business unit. Sometimes such actions form the basis of a shift in corporate direction. All too often such strategy is thinly disguised imitation. According to Lou Gerstner, ‘ If a management team doesn’ t believe that it has identified and is seriously funding new growth opportunities, then it is likely to wander off and drink the heady brew of acquisitions and diversification – and ultimately fail.’[13 ] Business strategy often appears in the form of strategic planning, which itself is often little more than incremental tactical planning. It is often just about making the numbers add up. When strategic planning aims exclusively to satisfy short-term shareholder expectations, it fails to be oriented towards innovation and inhibits opportunities for significant long-term growth. Strategic planning often causes strategy to be set at a strategic business unit (SBU) level. It is often then broken down further to business unit functions such as sales, marketing and manufacturing. This reduces opportunities to invent or reinvent whole industries. Strategic planning can work well in stable industries but is less suited to industries experiencing big changes. The strategic planning tools common in many companies often fail to help business leaders in identifying and exploiting white-space opportunities for innovation and growth. Competitor analysis and scenario planning, for example, are largely concerned with today’ s competitors and optimizing positioning in today’ s industries. They do not help business leaders position their company against competitors that do not yet exist, in industries yet to be created. Companies that focus too much on the present will be constantly catching up with innovative competitors. Innovative competitors stay ahead by taking control of the process of industry transformation. A vision of industries invented or reinvented in the future requires more than contingency planning around a number of likely scenarios. Scenario planning and technology forecasting can provide input to the creation of a unique and compelling vision of the future but are not enough in themselves. In a world of discontinuous change and increased uncertainty, the number of potential permutations and future outcomes is limitless. Scenario planning usually starts with the status quo and projects forward to what

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might be. What is required is an approach that creates a future vision of what could be and then works back to what must happen for that future vision to become a reality. [13 ]

Louis Gerstner, Who Says Elephants Can’ t Dance? (p 228)

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STRATEGIC VISION It is hard enough to imagine, with any certainty, what things will be like five months ahead. Predicting the future five years ahead is even tougher. However, a vision of the future is needed before a successful business strategy can be created. The kind of vision of the future we advocate is not one that may appear if you do nothing (as is typically created during scenario planning). The vision we propose is one of an industry that must be created, shaped and transformed over time. For this, business leaders should seek input from the extended enterprise: customers, employees and business partners. This input should be combined with analysis and forecasts of changes in the external environment, many of which will be evident in the present. This means asking and answering questions like: What new regulations or political legislation will be in place? How will environment issues affect the way businesses operate? Which suppliers and business partners will be important? What type of employees will be required and how many of them? Where will funding come from? How might the needs of shareholders be different? Who will be customers? What will their needs be? Are their needs explicit or do they need developing? Is there opportunity to create a new need and be the first to satisfy it? Which new channels will be available? Would a direct relationship create value? Will margin exist in products or services? Who are tomorrow’ s competitors? Strategy starts with the customer For much of the 20th century, under-supply made suppliers powerful. Change (in the form of growth) was more continuous, predictable and consistent, and companies increased in size. A central objective in large companies was growth in market share. Management was focused on today’ s bottom line. They attempted to make productivity improvements in the form of lower manufacturing costs, better product quality and reduced time to market. Companies defined themselves by what they produced rather than by the value they created for customers. Today, greater competition, globalization and faster imitation have caused many products and services to become commoditized. In many markets, over-supply has caused saturation and has eroded profit margins. The customer is now the scarce resource, not the product. Companies have started to compete for share of customer spend, not market share. Managers have shifted their focus from the activities involved in production to those involved in distribution and consumption. Customers are familiar with many of today’ s products and services. They have access to more information through new channels such as the Internet. They are more knowledgeable and discerning than ever before and many demand exceptional value. Customer relationships have come to the fore. Suppliers must compete both on the quality and ingenuity of their products and through the quality of their customer relationships. The need for productivity improvements has not gone away: knowledgeable and powerful customers are sensitive to pricing anomalies. The customer has taken centre stage. An understanding of customer needs and wants is the foundation of a successful business strategy. Peter Drucker once wrote: There is only one valid definition of a business purpose: to create a customer?What the business thinks it produces is not of first importance – especially not to the future of the business and to its success. What the customer thinks he is buying, what he considers ‘ value’ , is decisive – it determines what a business is, what it produces and whether it will prosper. [14 ] According to The Economist, Companies are redoubling their efforts to build better customer relationships. Judging from the results of the Economist Intelligence Unit online survey and in-depth interviews, this orientation will permeate everything companies do in 2003. Senior management time will be devoted disproportionately to understanding customer needs. Technology investments will aim to leverage information about customers, to tailor products to customer needs and to test satisfaction continuously. [15 ] Understanding customer needs Some customer needs are explicit and can be quickly identified. Others are less obvious and must be developed. In business-to-business settings, the most common way to understand customers’needs is

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via face-to-face meetings. More structured methods, tools and approaches have been developed by strategists and business consultants. Customer needs are captured using focus groups, market research and one-to-one interviews. However, trends can occur over many years. New information technologies such as data analysis software enable suppliers to ‘ sense and respond’to trends that are difficult to identify. Purchasing managers have become more sophisticated and knowledgeable. Today, new approaches such as total cost of ownership, supplier segmentation and reduction are widely used. Some customers invest to improve mutual understanding with their suppliers, but only if those suppliers show ability to create exceptional value. Trust may need to be established before a meaningful relationship can begin. Establishing enduring customer relationships often takes time and investment from both sides. Some suppliers are unable to get access to new customers, which may be a prerequisite to understanding their needs. This can be a problem when a company enters a new market or introduces a new product that new customers may be unfamiliar with. Sometimes intermediaries, such as distributors, sit between suppliers and end customers and are reluctant to share information on customer needs. They may resist introducing partners to the customer through fear of losing influence or to avoid opportunities for disintermediation. As markets evolve, buying responsibilities can shift and new customers may appear. Customers needing solutions, for example, often have different roles and responsibilities from traditional product customers. For solution customers, the specifications of the product or service are less important than their economics. For them, value resides in the process, not the product. Value is created by how the product is used, not by what it does (its features and functions). As a result, responsibility for purchasing decisions moves from technical specialists to senior administrators and business executives. When this happens, a new customer interface must be put in place. [14 ]

Peter Drucker, The Practice of Management, Butterworth-Heinemann, Oxford, 2001 (p 35)

The Economist Intelligence Unit, CEO Agenda: Corporate priorities for 2003, The Economist Intelligence Unit, London, 2003 (p 5) [15 ]

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BUSINESS DESIGN A business design is an architecture that may be developed over a number of years. It is an outcome of a business vision and should provide a high-level blueprint for the creation and delivery of customer value. It outlines the need for future capabilities (such as skills) and enablers (such as technology). It also describes the customer interface – how products and services will be marketed, sold and distributed. According to Adrian Slywotzky, ‘ a business design is the totality of how a company selects its customers, defines and differentiates its offerings, defines the tasks it will perform itself and those it will outsource, configures its resources, goes to market, creates utility for customers, and captures profit.’[16 ]Through business design innovation a company configures the optimal business design for serving its chosen customers. It is not enough to wait for competitors to take the lead. Only companies that are first to see future opportunities and then first to act to exploit them will achieve competitive advantage and rewards. Customer value A business design is a high-level blueprint for the creation and delivery of customer value. Some customers demand greater value through lower costs. Customers that want lower costs are familiar with the products and services they require and are able to choose and buy without a great deal of expert advice and guidance from intermediaries such as salespeople. Customers that value lower costs will research their options, compare prices and shop around for the best deal. The products they buy are usually commoditized, and cost is the key factor in determining which suppliers they choose. Personal computer (PC) manufacturers, for example, satisfy the needs of customers for cheaper PCs through low-cost business designs. Some customers demand exceptional value through solutions. Solution customers need to solve complex problems or exploit new opportunities for value creation. They may not have the specialist knowledge or the resources required and often look to partners and suppliers for support. Suppliers help them to understand their issues and opportunities. They can provide assistance in assessing the options and will often create and deliver unique solutions by customizing services and products. Solutions are services-led. IBM, for example, satisfies the needs of its customers for information technology-enabled solutions. Customers value the benefits provided by products but are less likely to take ownership of them. In a world of rapid change, buying products makes less sense. Some products need to be replaced or upgraded before they are even paid for. Technology enables some products to be replaced by services. Falling information and communication technology costs mean that information technology, such as microchips, can be embedded into many new products. When technology-rich products are connected to the Internet they become devices for providing services and enable the creation of customer value at the speed of light. Many manufacturers are introducing services in response to customer needs, and, as product margins erode, are introducing services-led business models. In creating a successful strategy to exploit white-space opportunities, it can be helpful to think of products and services in terms of the value they create, rather than their features and functions. Thinking in terms of features and functions limits opportunities to today’ s products and services. Technology enables customer value to be created and delivered in new and exciting ways – the same value in a new delivery vehicle. The value a telephone answering machine creates, for example, is more effective use of time. In the past, answering machines were hardware devices, domestic appliances. Today, enabled by computer software and communications technology, the same value is often provided remotely as a service. Creating and delivering customer value requires more than being ‘ customer-led’ . Many customer needs are articulated; some are not. The risk with being completely customer-led is that unarticulated needs may never be served, and those needs often offer the greatest ‘ white-space’opportunities (since they are not being served by competitors either). Akio Morita at Sony said, ‘ Our plan is to lead the public with new products rather than ask them what kind of products they want. The public does not know what is possible, but we do. So instead of doing a lot of market research, we refine our thinking on a product and its use and try to create a market for it by educating and communicating with the public.’[17 ]

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html Capabilities In 1990, C K Prahalad and Gary Hamel published an article entitled ‘ The core competence of the corporation’ . In it they advocated a focus on learning rather than physical assets and suggested that companies should exit activities that do not use core competencies. [18 ]Core competencies are bundles of skills and technologies that enable a company to provide a particular benefit to its customers. Core competencies are, therefore, unlike strategic business units, which are usually defined by specific product markets. Focusing on core competencies encourages companies to identify and exploit what they do best and enables resources to be focused on areas of innovation and growth. Core competencies create and deliver a class of customer benefits such as ‘ low-cost’or ‘ solution’ . A business design outlines the need for future capabilities (such as skills) and enablers (such as technology). Capabilities of a company selling low-cost PCs might include selling online, call centre management, build to order and inventory management skills. Capabilities in a solutions company like IBM include solution selling, business consulting, programme management, service delivery and industry marketing. Some capabilities, such as continuous innovation, knowledge management and the effective use of information technology, are common to both business designs. The widespread adoption of the Internet and new technologies has made working with external partners cheaper and easier. More companies are abandoning many non-core activities. Core competency thinking has led some companies to define themselves in terms of what they do rather than what they make. By redefining the nature of ‘ served market’ , core competency thinking offers opportunities for innovation, growth and the creation of new customer value. Focusing on core competencies may take a company away from the markets it has traditionally served and into competition with new rivals.

New competitors The Prussian military expert Carl von Clausewitz wrote that one must judge an enemy by his capabilities, not by his intentions. [19 ]Most competitive analysis focuses on existing product or service markets. As companies focus on core competencies and industries converge, new and unfamiliar competitors emerge, often from unrelated industries. They may try to create a new industry for your customers based on their own vision of the future. In the United Kingdom, for example, the financial services industry is being transformed by supermarkets offering banking and insurance services. They have access to capital and opportunities for partnering, allowing them to take on the largest competitors.

Enablers Enablers are tangible and intangible assets that enable things to get done. They include offices, factories, brands, products and employees. Today, many companies are attempting to improve their balance sheets by selling off physical assets that depreciate, often preferring to lease them instead. Partnering and outsourcing provide opportunities to enjoy the benefits of enablers without taking ownership. Companies look to own assets only if there is some advantage in doing so. Customer data, for example, are an enabler that companies seek to own, because they enable better customer relationship management, although they may outsource the management of the data. Small start-up companies, particularly in knowledge industries, may rely on a just a few enablers for conducting business, relying on partnerships and externally provided services instead. Companies often have heritage enablers – assets that they may have acquired and developed over many years – that can form the basis of future business designs. IBM, for example, has a widely recognized brand that enables it to enter new product and service markets and data centres that it uses to deliver new services. The customer interface The customer interface – the way a company interacts with its customers – is an increasingly important element of any business design. For most of the 20th century, consumer demand was insatiable and products were in short supply. During this era, management resources were focused on production. Business designs were created to sustain product sales growth and achieve maximum operational efficiency. Marketing focused on differentiation through product features and functions. The role of the sales force was to communicate product value. Distribution was about getting as much product on to the market as quickly as possible.

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Greater competition, globalization and rapid imitation have caused many products and services to become commoditized. Over-supply, greater choice and access to information have made customers more discerning and powerful. Today, companies are fighting for a share of customer spend and attempt to build enduring relationships with customers by understanding and satisfying their needs. In many companies, marketing, sales and distribution activities, which constitute the customer interface, have remained unchanged for decades, and nowhere is the need for transformation more evident. Customers demanding lower costs are familiar with the products and services they require and are able to choose and buy without a great deal of expert advice and guidance from intermediaries such as salespeople. They require a new customer interface. The costly field sales force can be made more efficient by adopting new technologies or can be eliminated altogether. The Internet and telephone-based call centres provide new opportunities to interact with customers demanding lower costs. Customers can access relevant information online, conduct research, compare buying options and make a purchase with the minimum of cost and inconvenience. Outbound marketing is enabled by technologies such as databases and telemarketing. Customers demanding solutions also require a new customer interface. Customer relationship management, for example, enables better customer management over time and improves marketing to business buyers. The role of the sales force is shifting from communicating the value of products and services to creating value for customers. Today, in many industries, services form the basis of enduring relationships and are substituting traditional product-led distribution based on individual transactions. IBM, for example, has introduced industry-oriented marketing, adopted solution selling methods, and developed business consulting and outsourcing service delivery capabilities to support solution creation and delivery. Sony’s strategic vision Sony has a vision of a future in which electronics, telecommunications and information technologies are converging. It anticipates that customers will demand new products and services through broadband networks – which will be cheaper to use and more widely adopted. Sony is working towards a ‘ personal broadband network solutions’business design: Sony Corporation today [29 March 2001] announced its intention to transform itself into a Personal Broadband Network Solutions Company for the coming broadband network society which is forecast to arrive around the year 2005. Sony is making organizational changes aimed at deepening its interactive relationship with millions of customers worldwide, offering a variety of products and services optimized for the broadband society. As the broadband network era approaches, Sony will capitalize on its unique combination of hardware and content assets. [20 ] Nobuyuki Idei, Sony chairman and CEO, commented: Sony will continue to focus on and consolidate its unique resources in brand recognition, electronics hardware expertise, entertainment business know-how and venture business development both within and outside the company. In enhancing group corporate value, we will pursue ‘ soft alliances’with outside companies that will complement our existing internal resources, and accelerate the pace of change. [21 ] Strategies develop over the long term It may take years before all the elements of a business design are in place. Technologies and customer needs need to be developed over many years before a new industry can be created. During that time, companies begin a transformation journey. They build the factories, warehouses and technology infrastructure, and hire the employees they will need. They develop new capabilities such as solution selling, business consulting or new service delivery concepts. They may need to transform the sales force or replace it entirely with new technology. Companies may need to get agreement on standards, test product and service concepts with customers and build alliances with selected business partners, to prepare for and shape the emerging industry. When to create strategy and begin transformation The right time to create a new strategy and to transform an industry is when a company is successful, or at least not in crisis. During periods of crisis, business leaders are distracted by firefighting activities and the required resources are often in short supply. It becomes difficult to attract key business partners

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and suppliers, the most capable employees abandon the sinking ship and access to investment capital is restricted. When shareholders press for short-term performance improvements, the natural tendency is to cut costs rather than invest for the longer term. The required capabilities and enablers do not get put in place and opportunities for innovation and growth are not exploited. White-space opportunities are often spotted first by industry outsiders who then create new business designs and go about the business of industry transformation. Incumbents often tend to rely far too long on their traditional business models, particularly if they have been successful. They take the view that what worked well in the past must also work in the future. It can take a fresh set of eyes to see the wood as distinct from the trees. The challenge for industry incumbents – leaders and laggards alike – is to continually reinvent their own industries and create new ones. To do this they must develop a vision of the future, then configure a business design and implement a strategy that aims at building it. The need for business design innovation and transformation is real and immediate. [16 ]

Adrian J Slywotzky, Value Migration, Harvard Business School Press, Boston, 1996 (p 4)

Gary Hamel and C K Prahalad, Competing for the Future, Harvard Business School Press, Boston, 1996 (p 108) [17 ]

Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May– June 1990 (pp 79–90) [18 ]

Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House Business Books, London, 2002 (p 253) [19 ]

Nobuyuki Idei, Sony press release, Transforming Sony into a ‘ Personal Broadband Network Solutions Company’[Online] www.sony.net [accessed 29 March 2001] [20 ]

Nobuyuki Idei, Sony press release, Transforming Sony into a ‘ Personal Broadband Network Solutions Company’ [21 ]

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SUMMARY In this chapter I examined the causes of change in today’ s business environment. I concluded that these changes have made leading a company to success much more difficult. I outlined the shifting needs of customers, shareholders and employees, and suggested that the needs of business partners and society will figure more in strategic thinking in the future. I argued that while productivity improvements and the adoption of ‘ best practices’are important, they are often confused with strategy. In reality, ‘ best practice’is more operational than strategic. I proposed that companies invest at least as much into looking for opportunities for innovation and growth as they do in reducing costs, although both are important. I argued that every company needs a vision (a view of how things will be different) and a strategy (decisions on what must be done), and must be capable of executing it (it must be able to make things happen). I suggested that that strategy should aim to create customer value, should be oriented towards innovation and growth and should be based on an understanding of customer needs (both today and in the future). I argued that strategy starts with the customer. I suggested that the needs of some customers are changing: some customers want lower costs, others want solutions. I proposed that business leaders should attempt to transform both their companies and their industries. The company and the industry must be created, shaped and transformed over time. I suggested that a business design be created (based on the business vision) to guide the transformation. The design should outline the need for future capabilities (things the company should be able to do) and enablers (things a company should have to get things done), and describe the customer interface (how value will be created and delivered to the customer). The transformation journey can be long and difficult. It should start sooner rather than later. In Chapter 2 we outline a transformation that took place in British food retailing, over several decades, during the latter half of the 20th century. This example aims to demonstrate how whole industries can be transformed through new business designs that create and deliver exceptional customer value. In Chapter 3 we describe how products are changing and how low-cost business models are emerging. In Chapter 4 we describe how services are changing and how solutions business models are emerging. In the remaining chapters we explore aspects of the solutions business model, many of which are still evolving.

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NOTES 1. Booz Allen Hamilton, CEO succession 2002: deliver or depart [Online] www.bah.com [accessed 12 May 2003] 2. Louis Gerstner, Who Says Elephants Can’ t Dance?, HarperCollins, London, 2002 (p 273) 3. Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 90) 4. The Economist Intelligence Unit, Extending the Enterprise, The Economist Intelligence Unit, London, 1999 (p 4) 5. Peter Drucker, The Effective Executive, Butterworth-Heinemann, Oxford, 2001 (p 3) 6. Fred Moody, Mr. Software, New York Times Magazine, 25 August 1991 (p 56) 7. The Work Foundation and The Future Foundation, The Ethical Employee, 2002 (p 1) 8. Peter Jauhal, The rewards should be justified by the results, Sunday Times (London), 7 July 2002 (Business Section) 9. The Economist Intelligence Unit, CEO Agenda: Corporate priorities for 2003, The Economist Intelligence Unit, London, 2003 (p 2) 10. Philipp M Nattermann, Best practice does not equal best strategy, McKinsey Quarterly, no 2, 2000 (pp 22–31) 11. Warren Buffett, Letter from the chairman, Berkshire Hathaway Annual Report, 1984 (quoted from Charles Roxburgh, Hidden flaws in strategy, McKinsey Quarterly, no 2, 2003, p 35) 12. Philipp M Nattermann, Best practice does not equal best strategy 13. Louis Gerstner, Who Says Elephants Can’ t Dance? (p 228) 14. Peter Drucker, The Practice of Management, Butterworth-Heinemann, Oxford, 2001 (p 35) 15. The Economist Intelligence Unit, CEO Agenda: Corporate priorities for 2003, The Economist Intelligence Unit, London, 2003 (p 5) 16. Adrian J Slywotzky, Value Migration, Harvard Business School Press, Boston, 1996 (p 4) 17. Gary Hamel and C K Prahalad, Competing for the Future, Harvard Business School Press, Boston, 1996 (p 108) 18. Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May–June 1990 (pp 79–90) 19. Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House Business Books, London, 2002 (p 253) 20. Nobuyuki Idei, Sony press release, Transforming Sony into a ‘ Personal Broadband Network Solutions Company’[Online] www.sony.net [accessed 29 March 2001] 21. Nobuyuki Idei, Sony press release, Transforming Sony into a ‘ Personal Broadband Network Solutions Company’

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Chapter 2: Transformation in Food Retailing Howard Cox, Simon Mowatt, Martha Prevezer, Mark Cerasale and Merlin Stone

INTRODUCTION Transformation can occur when companies combine industry-shaping strategies with effective execution. Such transformations occurred in the United Kingdom in the frozen foods and chilled ready meals industries during the second half of the 20th century. More women entered the workforce after the Second World War. Pressure to balance a full working day with household chores created opportunities for labour-saving innovations (which their new income meant they could afford). Frozen foods offered convenience to an increasingly busy and wealthy population. During the 1980s and 1990s, consumers became more affluent, sophisticated and discerning. They demanded food that was easier to prepare and tastier, for which they were prepared to pay a premium. The ready-chilled foods sector emerged. The frozen foods sector emerged as a result of proprietary technology innovations that allowed continuous-process manufacturing of standardized products. Vertically integrated firms dominated the frozen foods industry. In the early days, a major challenge for frozen food manufacturers was to raise awareness of their new products. They achieved this through mass-media advertising. Another inhibitor was the need for special cold storage cabinets in the retail environment. Manufacturers resolved this problem by providing them to retailers on favourable terms. In this way, frozen food manufacturers created frozen foods markets that grew in size and diversity during the second half of the 20th century. By contrast, proprietary manufacturing techniques were not critical to the chilled ready meals industry. Non-proprietary information management systems were the key to success with chilled ready meals. Chilled ready meals used established technologies of food preservation and established distribution channels. However, the products’short shelf life created new and complex logistical issues, which meant that manufacturing had to be based on batch rather than continuous process production methods. A major challenge was to match supply and demand over relatively short time periods. This was achieved through expert supply chain management and new inventory control systems. Vertically integrated firms are less effective in such an environment. Market-making retailers, not manufacturers, emerged as industry leaders. Retailers were able to bring their products to customers by leading and coordinating networks of suppliers and distributors.

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THE FROZEN FOOD INDUSTRY IN THE UNITED KINGDOM Frozen food developed in two phases. The first, beginning in the 1930s, involved introducing quick-freezing as a way to preserve food. Quick-freezing could be applied particularly to white fish and some green vegetables. In this phase of the development, quick-freezing had many parallels to high-speed canning, which had been applied to other foodstuffs since the 1880s. In each case, the use of packaging facilitated the introduction of proprietary branded goods that were supported by extensive advertising. The second phase moved beyond the simple preservation of foodstuffs into more innovative forms of product development. In the United Kingdom from the mid-1950s, manufacturers of frozen foods, led by the Unilever subsidiary Birds Eye, began to introduce a range of new products such as fish fingers, beef-burgers and frozen ready meals. The earliest applications of freezing technology to food preservation were designed to serve the catering trade. Towards the end of the Second World War, Unilever began to develop a market in frozen foodstuffs for final consumers. This innovation built directly on Unilever’ s experience in the mass production of branded packaged consumer goods. At that time, the company was one of the few non-US firms to have developed an extensive management structure, with its UK-based operation featuring four product divisions (soap, margarine, oil mills and food) overarched by a range of advisory and service departments that served the entire range of the company’ s international subsidiaries. These service departments managed the entire value chain, including activities such as buying, marketing, transport and advertising. The integrated value chain For frozen food to be developed successfully into a mass consumer good, it was necessary to create new markets upstream and downstream of production, and develop a supporting infrastructure. Upstream markets were required in which a sufficient volume of raw materials could be delivered in a way that enabled the process of quick-freezing. Downstream markets were required to store, handle and transport the frozen produce. Retailers were needed to store and distribute the products to final consumers. Frozen food products were new and innovative; consumers would have to be educated and informed about their use. Only when all these things were in place was it possible to reap the potential benefits of the new technology. Unilever had a long history of backward integration (of producing the food it required). A similar approach was taken with frozen foods. Several factories were opened in the 1940s. More factories were acquired during the 1950s as sales grew. Birds Eye entered the broiler chicken industry in 1958, quickly building up its capacity to around 20 farms, and in 1965 it acquired a controlling interest in North Eastern Fish Industries Ltd to provide a direct source of Newfoundland cod. However, direct control over the provision of chicken and fish was eventually abandoned as overproduction and falling prices during the late 1960s and early 1970s made such investments uneconomic. The policy of backward integration was not adopted for vegetables. Nevertheless, Birds Eye did develop quasi-backward integration through the use of annually negotiated forward contracts with local farmers, to whom they gave assurances of short-term renewal and, in many cases, provided seed. Seed was supplied to allow standardization and quality control. This arrangement also ensured exclusivity for Birds Eye. This meant that this activity was quasi-integrated into the Unilever structure. The response of growers was to form committees such as the Processed Vegetable Growers Association to negotiate with Unilever on their behalf. Creating the necessary markets downstream from the production process was more complicated. Unilever would have to apply the skills and resources it had developed to support its other food businesses. Distribution and handling of the products was placed into the hands of the refrigerated division of the company’ s transportation subsidiary, SPD. SPD utilized its national network of depots and vehicles in a closely coordinated operation with Birds Eye’ s own sales division. Independent wholesalers were integrated into the company’ s frozen food distribution system in parts of the country too remote to operate economically. These wholesalers were prevented (by contract) from distributing the rival brands of direct competitors. Creating a profitable market downstream was challenging. Unilever operated a small chain of retail stores

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but these would not provide the required sales volumes. In the early 1950s few retailers had the equipment needed to display and sell frozen food. In 1953, Birds Eye persuaded two manufacturers of refrigerated equipment to design and market ‘ open-top’display cabinets for use by retailers. In return, the company agreed to limit its sales to those retailers that installed them. Later, Birds Eye developed a policy of leasing refrigerated cabinets to some of its more important retail customers on condition that the equipment was used for stocking Birds Eye products or other products that were not in direct competition. Large retailers, such as J Sainsbury, developed their own refrigerated cabinets in order to display a larger selection of stock and eventually began to offer their own-brand products. Meanwhile, advertising, sales promotions and temporary price reductions were used to encourage consumers to change their buying behaviour (by adopting the new products). In pioneering the mass market for frozen foodstuffs, Birds Eye had to take responsibility for putting the infrastructure in place that would enable products to be sold in sufficient volume to turn a profit. Birds Eye’ s approach was also adopted by its two main rivals, Ross Group Ltd and Findus Ltd (a subsidiary of Nestl?, which became competitors in branded consumer markets during the 1960s. Management of the supply chain in each case was extensive, and both companies developed integrated distribution operations, although in the case of Findus this was a joint venture with J Lyons & Co Ltd. Their links with independent wholesalers were made under conditions of exclusivity. However, the dominant model (integrated supply chain supported by strong brand advertising) became increasingly vulnerable during the 1960s as new forms of organization and market segments emerged. The causes of change Three developments changed the structure of the UK frozen food industry in the 1960s and 1970s. One of these concerned the rapid growth in demand for frozen food by the catering trade, which led to a pronounced bifurcation of the frozen food industry. The other two were brought about by increased competition in the market for frozen food to households. These involved the development of product differentiation and market segmentation on the one hand and the advancing power of multiple retailers on the other. Sales of frozen food increased to caterers. New competitors, with relatively modest turnover, were able to enter the market as a result of lower advertising and packaging costs. These changes also facilitated a broadening of the distribution arrangements within the frozen food industry. In the past, retailers had been supplied through manufacturers’wholly owned distribution companies or through exclusive deals with independent wholesalers. The growth of small-scale manufacturers serving the catering trade encouraged companies to be set up specializing in the provision of processing, storage and distribution services. Cold-store companies and specialist distributors entered the market, causing it to fragment. The larger cold storage companies tended to be integrated concerns that also provided processing and distribution services. Indeed, as the role of independent suppliers expanded, the freezing capacity of these large storage and distribution companies began to rival those of the proprietary branded manufacturers. The increasing number of independent distributors enabled smaller, more specialized frozen food manufacturers to enter the market. These included agricultural cooperatives that were formed for the purpose of processing fruit and vegetables, and a number of small manufacturing concerns that specialized in manufacturing products within a defined segment of the market (vegetables, fish, meat products, fruit, confectionery). In some cases they specialized in a single product such as frozen potato chips (fries) or pizzas. Frozen food retailing helped to speed up vertical industry disintegration. The need for relatively small orders, in the small-scale segment of grocery retailing, led to the emergence of cash-and-carry wholesalers. They acted as intermediaries between the distributing wholesalers and the retailers. By the mid-1970s, for example, 60 per cent of greengrocers carried a small range of frozen food, increasing the availability of the main proprietary brands of frozen food. At the same time, the very rapid growth in sales of home freezers during the late 1960s and early 1970s created a force in the opposite direction. As more consumers were able to store frozen foods, sales volumes rose considerably. New home freezer centres were opened, led by the Bejam Group in 1968, which combined the sale of home freezers with the retailing of bulk packs of frozen food. Home freezer centres allowed smaller manufacturers of frozen food to increase sales and reduce distribution costs. During the 1960s, supermarket shelf space was limited in the United Kingdom. The growth of home

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freezer centres enabled the industry to overcome this growing constraint on retail sales. During the same decade, the leading multiple retailers grew in size and power, taking an increasing share of the sales of Birds Eye’ s products. Birds Eye began offering the large multiples discounts relating to turnover and allocation of shelf space. These discounts acted as entry barriers to rival suppliers that were attempting to gain sales through supermarkets. The Monopolies Commission report of 1976 ordered Birds Eye to end the discounts on condition that other manufacturing firms also ceased such a strategy. In reality, the main threat to the proprietary brands in supermarkets arose less from rival manufacturers than from the multiple retailers themselves. As in other product lines, supermarkets increasingly sought to introduce their own-label brands of goods into their freezer cabinets during the 1960s. Indeed, led by J Sainsbury and Marks & Spencer, the multiples’own brands had made significant inroads into the frozen food market by the early 1970s. Although Birds Eye resisted the pressure to relabel its own products for retailers (although it did relabel products for the generic or unbranded market), other manufacturers proved more willing to adopt an own-label strategy. The first own-label frozen food produced for retailers’ own brands was frozen fish, supplied by Ross (then a marginal manufacturer in frozen foods) in 1957. Findus, which supplied products for Sainsbury, Marks & Spencer and other leading multiples, saw the proportion of its gross sales (in value terms) accounted for by own-label products rise from under 7 per cent in 1971 to 16.5 per cent just three years later. The beginnings of the own-label industry started a revolution that was to be the turning point in the relationship between manufacturers and retailers. From the mid-1950s to the mid-1970s, the frozen food industry in the United Kingdom grew in both size and complexity. At the outset, only a firm such as Unilever, with vertical control over the value chain, could assemble the various components required to create and profit from the market. By the 1970s a whole raft of firms, small and large, were attracted to the market. While manufacturing remained largely a classic oligopoly, the balance of power within the value chain shifted towards the retailers. However, two decades of continuous advertising had helped establish the proprietary brands and provided them with longevity. The frozen food market is still dominated by the ‘ big four’companies, all subsidiaries of multinational firms: Birds Eye Walls Ltd, Nestl?Holdings (UK), Ross Youngs and H J Heinz Company Ltd UK. With the advent of chilled ready meals, however, an important segment of the processed food industry was about to be turned on its head.

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THE CHILLED READY MEALS INDUSTRY IN THE UNITED KINGDOM Large manufacturers of frozen foods introduced ready meals to raise the value added component of their products. They were also responding to the opportunities presented by various demographic changes, notably increased female employment. British consumers took packaged foreign vacations and began acquiring a taste for non-British recipes. An increasingly sophisticated range of products were found in the freezers of UK supermarkets and other retailers during the 1970s, starting with TV dinners by Birds Eye in 1969. In 1975, Birds Eye’ s retail product range included British staples such as cod and chips through to quasi-exotic Asian offerings such as sweet and sour chicken. The process of freezing and reconstituting meals in many cases caused the texture and flavour of the food to deteriorate. If the dishes could be preserved by chilling rather than freezing, then a better product would end up on the consumer’ s dinner table. The logistical difficulties involved were formidable, since the maximum period of time that could elapse between production and final consumption of such products was a matter of days rather than weeks. While it might be possible to charge a premium price, the cost in wastage would be prohibitive unless supply and demand could be coordinated with unprecedented accuracy. The retailers, not the manufacturers, were best placed to manage the coordination of customer demand and product supply. In the United Kingdom the chilled ready meals market was pioneered by the multiple retailer Marks & Spencer, which specialized in high-quality fresh and convenience food products. Its decision to provide premium-priced chilled ready meals was to have important consequences for supply chain management and for the relationship between retailers and suppliers in the industry. Marks & Spencer’ s long-term strategy was to differentiate on quality. To achieve this, it had to forge close relationships with suppliers. Marks & Spencer used its many years of experience in collaborative product development to exploit a latent demand for pre-prepared ‘ fresh’ready meals during the 1980s. Unilever had supported the introduction of freezer technology in an attempt to enable consumers to participate in the frozen food market. By contrast, Marks & Spencer sought to exploit unsatisfied customer demand. Other retailers in the UK grocery market, such as J Sainsbury, sought to emulate this strategy. The network value chain In the 1970s, large grocery retailers began to take control of product distribution. Sainsbury, for example, pioneered the development of dedicated regional distribution centres (RDCs) as an intermediate stage in the distribution process. These RDCs were owned by one of a growing number of specialist distributors but were operated on Sainsbury’ s behalf through a process of subcontracting. Sainsbury contracted out the operation of its RDCs for two main reasons. First, there was organized labour unrest at the time, and, with inflationary pressures on wages increasing industrial action, contracting out removed Sainsbury from labour management problems in the area of distribution. Second, the period was one during which Sainsbury and the other large retailers were using their resources to expand the number and the geographical spread of their stores. Transportation of products from the RDCs to the stores was largely undertaken directly by Sainsbury’ s own fleet of vehicles. By the 1990s the RDC pattern had become established with UK retailers, although they increasingly contracted out operations. Retailers also began to operate primary consolidation centres (PCCs) to which manufacturers were able to deliver increasingly small batch-driven loads, prior to their transfer to the RDCs. With PCCs, very small crate (rather than pallet) based deliveries can be made. Crates can accommodate partial boxes and are ideal for the delivery of low-demand, high value added products with a very short shelf life such as chilled ready meals. In such cases the efficiency does not come from standardized delivery and economies of scale, but through the precise matching of supply and demand. Larger manufacturers can coordinate the collection of stock from smaller suppliers for delivery to the PCC. Retailers use technologies such as Electronic Data Interchange (EDI) systems, and later the Internet, to coordinate, control and manage the supply chain from beginning to end. Information technology as an enabler of transformation The chilled ready meals industry evolved as a result of developments in information technology, not production technology. Information technology systems enabled the coordination of independent firms to

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create and deliver the product (the chilled ready meal) to the customer. Computer-controlled inventory management systems are also critical in the chilled ready meals industry. Many such systems have been introduced since the 1980s. Electronic point of sale (EPOS) systems also enabled the transformation of the industry. EPOS systems improve stock management by enabling retailers to record and replenish chilled stock in the limited space available on shelves. New scanning technology, which was introduced in the mid-1980s, has also improved supply chain management. Grocery retailers, constrained by the perishable nature of their produce, were the first to move from inventory-based systems to customer-driven systems. EDI and collaborative Internet technologies enabled the various players in the value chain to be coordinated in real time. This new ability to manage the supply chain allowed retailers to switch to customer demand-driven replenishment systems. These systems allowed the retailers to have better control of the supply chain and increased the supplier’ s dependency on retailers. Information on customer buying behaviour was gathered from stores and loyalty cards. During the late 1990s, retailers invested in data warehousing systems. Some retailers invested in data mining technologies allowing them further insight into customer buying behaviour. Control of the customer interface and ownership of customer data gave manufacturers a dominant position in the value chain. Sainsbury introduced computer-controlled stock management systems and was able to gather wholesaling information more effectively. The company extended its management control back down the value chain. This move also enabled the company to obtain even more control by contracting directly for distribution services. The manufacturers had no choice but to relinquish some of their responsibilities. Sainsbury was then able to unbundle many of the services supplied by wholesaling subcontractors and gain more precise information over a variety of costs that had previously been invisible to them. Inventory management software has given Sainsbury more information and control over the value chain. The retailer retains direct ownership of the warehouse and the computer-controlled stock management system, outsourcing other activities considered to be non-core. Thus the integrated information system underpins and provides control over a network of independent firms revolving around the hub played by the retailer’ s head office. In Sainsbury’ s terms, this arrangement represents the inverse of the concept of ‘ hollowing out’ , since it allows the company to maintain control over the critical system-wide information while enabling the company to relinquish direct responsibility for its management. Retailers tend to own and maintain some logistics support services directly. This enables them to benchmark the performance of outsourced services and better understand other operating costs. By keeping some services in-house, the retailer has better information and is able to maintain its position of power and control over suppliers and subcontractors. This requires the management of many more transactions than are involved in conventional subcontracting, but information technologies such as the Internet have greatly reduced the cost of managing these transactions. In the Information Age, an integrated information network has replaced a corporate hierarchy as the most efficient method of managing many discrete transactions. Collaborative product development Marks & Spencer’ s chilled ready meals featured attractive packaging and were marketed as high-quality premium-priced products. Their pricing and positioning offered them as a substitute for take-away meals and even restaurant food. Marks & Spencer’ s customers were, in many ways, good prospects for chilled ready meals. The company had already developed a range of chilled products such as meat pies and quiches under its own St Michael brand name. Expanding this range into full meals, or meal centres, was a logical step that required marketing only at the point of sale. Marks & Spencer was less concerned about advertising and awareness than with understanding customer preferences. This marked a shift from one-way to two-way product information flows. A proprietary charge card scheme enabled the company to obtain detailed information about customer buying habits. Card-holding customers were invited to special in-store events that also allowed the company to get to know them better. Marks & Spencer’ s chilled ready meals were introduced as highvalue meal-replacement products. As such, their success depended on continuous new product development (NPD). Successful NPD required the pooling of knowledge from many sources. When Sainsbury introduced chilled ready meals during the late 1980s, it assembled new product development teams that included employees from food manufacturing and packaging companies as well as its own staff. These teams monitored purchasing patterns and studied eating trends in restaurants before using the information gained to innovate with

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new products. They learned about customer needs and developed products to satisfy them. Despite having no manufacturing capability of their own, UK retailers have been able to compete head-to-head with branded manufacturers such as Unilever. The retailers’NPD groups also have expertise in areas such as food technology and hygiene. They do not have direct access to manufacturing facilities, so they tend to work closely with suppliers, who are obliged to absorb many of the costs incurred. The chilled food manufacturers with whom the retailers collaborate are a very different group from the early pioneers of frozen food. They are mainly smaller firms that can engage in systems of batch production; some are no more than micro-kitchens employing fewer than five people. Small manufacturers are capable of rapid and flexible development of new products, which is a critical success factor for the retailers. The retailer supplies the manufacturer with ideas, technical help and access to its network of specialists. This activity has produced specialist food companies that provide products to several supermarkets. For example, Noon Food Products is a supplier of chilled Indian-style ready meals to Sainsbury (and other retailers) but does not undertake the branding, marketing or distribution of its products. Such suppliers are expected to come up with new recipes. The rise in ownership of microwave ovens fuelled the growth in demand for chilled ready meals. Microwave cooking created new challenges, not least with regard to packaging. There have been many innovations in packaging that were directly driven by the needs of consumers of chilled ready meals. Microwaveable meals need containers with different degrees of ‘ transparency’in terms of their ability to transmit, reflect and absorb microwaves. ‘ Active’packaging has been developed that can control or influence the effects of microwave heating. Hygiene is also a key issue with regard to chilled ready meals. Some products, for example, contain ingredients with very different heating characteristics depending on whether they are heated in a conventional oven or by microwave. Unless instructions are clear, food can be cooked incorrectly. Therefore, packaging must be jointly developed between the manufacturer and the retailer. The retailer will often use the packaging as part of its generic own brand marketing strategy. New product development in the chilled ready meals industry involves the formation of collaborative teams drawing on a wide range of information. The retailers retain a dominant nodal position because they have control over the customer interface and can access customer data that provide them with information on customer needs and wants. Retailers also control product development and the allocation of shelf space in stores. This means that it is easier to switch suppliers than the other way around. This system gives them greater flexibility than would be allowed in a wholly owned value chain and enables them to sense and respond to changing customer needs. Retailers are able to exert considerable influence and control over suppliers and partners in the value chain, even those performing high-value activities. Retailers such as Marks & Spencer, Sainsbury and Tesco have exploited the market for chilled ready meals on the strength of their own-label brands. This is a clear sign of their dominance over manufacturers in this market. To compete with retailers, manufacturers must resort to more costly direct methods such as advertising to increase sales. The retailers can promote their products in-store at much lower cost. Some retailers have benefited further. Tesco, for example, was able to improve its image dramatically during the 1990s partly through the association with quality and added value that came with the introduction of innovative chilled foods. Marks & Spencer, Sainsbury and Tesco account for well over three-quarters of total sales of chilled ready meals in the United Kingdom. Marks & Spencer alone accounts for nearly half of all sales. Efficient information management systems have raised the ability of retailers to exert control over the value chain in the food industry. However, unlike the earlier forms of control exercised by large manufacturers, based on vertically integrated organizational structures, the multiple retailers operate through management systems that take the form of inter-firm networks. This is perhaps most evident in the process of new product development. Inter-firm collaboration takes the form of long-term strategic alliances with companies whose core competencies are complementary to those of the retailers. Each firm must assess the benefits of collaboration. Collaboration is often performed in multidisciplinary teams whose common objective and continuous interaction help to facilitate mutual trust. The market-making role performed by the retailer is critical in making the collaboration a success. In the market for ready chilled meals, the retailers control the customer interface, they understand their customers’needs and they manage the flow of information that gives them control of the collaborative network as a whole.

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CONCLUSION In the case of frozen food, the impact of technical innovation occurred at the production stage and required corresponding changes in the provision of raw materials, in the systems of distribution, wholesaling and retailing, and in the patterns of household consumption. The creation of these various new markets was therefore a prerequisite for the successful exploitation of the technology of quick-freezing. Unilever and its subsidiary companies were well placed to coordinate the flows of information needed to effect new processes of market intermediation. This was done partly through the company’ s own corporate management system – as in the case of the inputs of chicken and fish, and the mode of distribution, wholesaling and, in some cases, retailing – and partly via a process of negotiation and persuasion – as in the case of long-term supply contracts with vegetable farmers, quantity discounts to large retailers and mass advertising campaigns to win over consumers. Once the new production technology had been successfully established, however, opportunities arose for this process of intermediation to be undertaken by other actors operating at different stages of the supply chain. In particular, in the 1960s and 1970s the multiple retailers were able to alter the mix of information that reached final consumers by adding their own-label products to proprietary brands from the large food processors and so gain increasing influence over the information flows operating within the industry as a whole. The retailers’position was further strengthened by the technical innovations that ushered in the Information Age. Enhanced systems of information management gave retailers that invested in the appropriate technology far greater control over the process of inventory management and allowed them to introduce products featuring much shorter shelf lives such as chilled ready meals. With improved systems of stock management and easier access to current consumer buying patterns and eating trends, retailers were also able to initiate a process of continuous product innovation by pooling knowledge with food manufacturers and packaging companies through the use of strategic alliances featuring multidisciplinary teams. Competitive advantage in the chilled ready meals industry has been gained less through technical advances in the process of production, and more by retailers’ability to manage the coordination of their supply chain, even when competitors have access to the same suppliers and contractors. The successful innovation of chilled ready meals depended on the information management facilities that arose as a result of the digital revolution, but it did not require large investments in the creation of new markets. Rather, it had the effect of changing the nature of the existing processes of intermediation that retailers previously engaged in. Increasing use of information technology enabled the outsourcing of the management services in warehousing and logistics but without sacrificing control over the information flows that stemmed from them. It also further encouraged collaboration between complementary firms in the value adding chain, allowing pooling of complementary sources of knowledge. This, though it operated to the mutual benefit of all the parties involved, did not oblige retailers to surrender the critical information regarding patterns of consumer demand. Crucially, information technology supported a shift from one-way to two-way processes of information exchange with customers, allowing future purchasing trends to be anticipated and accommodated.

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A GLOBAL MOVEMENT Parallels can be drawn with trends occurring in the US market in the same period. Wal-Mart, for example, has developed one of the most mature retail ecosystems in the world. Wal-Mart’ s proposition is simple: good (often branded) products at low prices. K-Mart and Wal-Mart entered the discount market in the 1960s. While K-Mart opened stores near shopping malls and towns of more than 50,000 inhabitants, Wal-Mart targeted towns of around 5,000 inhabitants, particularly in areas where they might serve more than one town. Wal-Mart chose to compete against small stores, using its size to offer heavily discounted products. This strategy proved successful. While the area was often big enough to support one store, it was not usually big enough to support more than one such discounter. This enabled Wal-Mart to beat its local competitors on price and protect itself from competition from its peers such as K-Mart. Wal-Mart needed loyal and committed employees if it was to grow, which it needed to do to achieve economies of scale. Employees were provided with training and competitive pay and bonuses. Many stores were located in remote parts of the country. Wal-Mart’ s strategy was to manage its network closely. Control was maintained through daily communication with the headquarters based in Arkansas. Wal-Mart also needed an effective joint purchasing and distribution system, so it set up a hub-and-spoke system of warehouses that provided goods to stores located no more than a day’ s drive from the centre. During the 1970s, Wal-Mart expanded through a process by which it targeted an area, set up a hub distribution centre and then established as many stores in the area as could be sustained by the local population. This approach proved successful and deterred potential competitors. During the 1960s and 1970s, Wal-Mart focused on growth, and was quick to adopt new technologies to support its rapid growth. In the early 1980s, Wal-Mart launched its own satellite to stay in touch with its growing distribution and store network. From the mid-1980s, Wal-Mart’ s strategy was to consolidate. By that time it had established itself in a nodal position, leading and controlling a network of suppliers, many of which were major global product manufacturers with considerable brand power. The challenge for Wal-Mart business executives was to retain and increase bargaining power against such influential suppliers. Wal-Mart resisted pressure from suppliers to increase prices. By contrast, it put pressure on suppliers to continually lower their prices. The low price strategy worked and Wal-Mart engendered strong brand loyalty among its customers. Its policy of low prices without special sales or promotions proved popular and became a de facto norm in discount retailing. Growth and greater scale gave Wal-Mart better bargaining power, which it used to innovate with its value chain. It was able to force suppliers to improve manufacturing efficiency by setting up crosscompany distribution systems. It created innovative relationships with key suppliers, often making use of new technologies to improve collaboration. James Moore reports, ‘ [I]n 1987, Wal-Mart and Procter & Gamble reached an unprecedented accord to work together through extensive electronic ordering and information sharing between the companies. In return, Wal-Mart gives better payment terms than the rest of the retailing industry: on average, Wal-Mart pays its suppliers within 29 days compared with 45 days at K-Mart.’[1 ]Wal-Mart demonstrated its credentials as an innovator in other areas too. It successfully entered the membership discount market and was quick to use Internet technologies to improve communication and collaboration throughout the value chain. James F Moore, Predators and prey: a new ecology of competition, Harvard Business Review, May–June 1993 (quoted from Don Tapscott, Creating Value in the Network Economy, Harvard Business School Publishing, Boston, 1999 (p 139) [1 ]

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SUMMARY The transformation of production processes that occurred across a range of manufacturing industries during the Industrial Age generated new and more complex requirements for the processes of intermediation as well as for the production systems themselves. The development of hierarchical organizations provided firms with the ability to oversee directly many of these new tasks and to create the markets that supported them. The advent of the Information Age has tended not so much to require the creation of new markets as to alter the nature of existing relationships of intermediation in ways that have facilitated a much wider collection of organizational forms. In this chapter we have outlined the transformation that took place in British food retailing and demonstrated how entire industries can be transformed through new business designs that create and deliver exceptional customer value. Chapter 3 describes how products are changing. Many are becoming devices for delivering services. It will also describe how low-cost business models are emerging. Chapter 4 analyses how business services evolve. Many manufacturers are introducing services because they are generally more profitable than products, and services enable the creation and delivery of solutions. Solutions are services-led. Chapter 4 describes the emergence of the solutions business model.

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NOTES 1. James F Moore, Predators and prey: a new ecology of competition, Harvard Business Review, May– June 1993 (quoted from Don Tapscott, Creating Value in the Network Economy, Harvard Business School Publishing, Boston, 1999 (p 139)

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Chapter 3: The Low-Cost Business Model Mark Cerasale

INTRODUCTION Every year it is becoming more difficult to satisfy customers and shareholders. Homogeneity has become a problem: companies offer increasingly similar products and services. Further, many companies use similar working practices, and so produce similar results. Powerful forces such as globalization, deregulation, easier access to capital, new management approaches, cheaper and better information technology (IT), the Internet and increasing customer power have altered the competitive landscape for ever. It is no longer enough to make and sell a product or provide a service just like any other. It’ s time to do things differently. The very nature of products is changing. Mass customization allows products to be tailored to the needs of individual customers. New products are brought to market more often and more quickly, causing over-supply. However, despite advances in technology, the rate of true product innovation is slowing. At the same time, the speed at which product and service innovation are imitated is increasing, leading to quicker product obsolescence. As a result, there is less opportunity to create and sustain healthy margins on new products. The falling cost of information technology has allowed manufacturers to embed technology, such as microchips, in many new products. When technology-rich products are connected to the Internet they become devices for providing services. Value is migrating from products to services. Over-supply of products and services has made customers more powerful. Customers have become more knowledgeable and sophisticated, and many demand exceptional value. Some customers demand exceptional value through solutions; others demand exceptional value through lower costs. Some suppliers have sensed and responded to these changes in customer demand and have developed and implemented models for solution creation and delivery or low-cost supply.

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THE CAUSES OF CHANGE What forces shaped business in the 20th century? What will shape business in the 21st century? The 1980s and 1990s were decades of increasing globalization and deregulation in many industries. Unprecedented access to capital meant that many new companies were formed and existing companies could grow. New management techniques and best practices travelled the globe and became commonplace in many organizations. The widespread use of information technology and adoption of the Internet enabled further efficiencies. Productivity improved, competition increased and new markets emerged in the developed countries. Many markets became saturated with products and services. Globalization Globalization has increased competition. Many products and services have become commoditized. Over-supply has caused some markets to become saturated. Manufacturing continues to migrate to developing economies, where labour costs are low. China has successfully positioned itself to attract low-cost manufacturing and assembly. India has become a global centre of competence for software development. Other developing countries are looking to emulate these examples. Offshore companies have emerged for data entry, software development, customer support, financial services, equipment maintenance and many other services. In the 1980s and 1990s, political stability, liberalization and the introduction of free-market economics enabled Eastern Europe, Latin America and China to increase their participation in world trade. Developing countries can succeed by combining advanced communications, transportation and technologies with a low-cost workforce. Globalization has raised the competitive bar and increased competition. Many companies are moving their operations to centres of excellence where they can access key resources and competencies such as process expertise and technological know-how. Many competencies are relocated to access the most advanced and sophisticated capabilities. Thus, design might be based in Italy, technology development in the United States, engineering in Germany. Geography no longer limits access to value added knowledge and capabilities. Deregulation In the 1990s, deregulation accelerated in the United States and Europe. Telecommunications, gas, electricity and water industries transformed themselves to take up the opportunity. Industrial giants expanded their portfolios to take on deregulated and non-regulated products and services. Mergers and acquisitions were widespread. Companies grew in size, but in each market they met large competitors that had themselves crossed over their own product frontiers. Size allowed them to invest to overcome entry barriers, and economies of scale allowed them to cut costs. Ferocious competition led to price wars and lower margins. New global giants emerged in newly privatized and deregulated industries. Vodafone, a local UK player in the early 1990s, became the world’ s largest mobile telecommunications provider. Access to capital The state can no longer provide generous pensions. Life expectancy and medical costs are rising fast. The baby boom generation have invested heavily in the stock exchange, conscious of the need to prepare for a long and fruitful retirement. They were accompanied by a new generation of investors eager to make a fortune, many later discouraged by dot.com disasters. Between 1995 and 2000 the NASDAQ Composite Index rocketed from 755 to 4,696 and the Dow Jones Industrial Average climbed from less than 4,000 to nearly 11,500. This fuelled a huge boom in capital spending. Much of this fell apart in the early 21st century, leaving individuals and corporations with assets depleted. Corporations accelerated their search for low-cost solutions to their problems. Economic growth fuelled by stock market investment and wide-scale share ownership energized the final decades of the 20th century. Start-ups and ventures flourished. Established companies invested in new plant and technology throughout the years of economic growth. Despite the post-millennium economic downturn, when many investors lost much of their life savings or their pensions, a culture of investment has been established. Today, access to investment capital is neither the exclusive privilege of established companies, nor is it the inhibitor to business it once was.

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html New management approaches Knowledge of best practice has spread throughout executive ranks through management training programmes such as those leading to MBAs. Professional services industries have evolved, and specialist advisory and consulting firms have emerged to propagate new management ideas. The effect has generally been positive. During the 1980s and 1990s new levels of efficiency and effectiveness were achieved through the widespread adoption of new management approaches, techniques and tools. Occasionally when new approaches were adopted, unexpected consequences followed. For example, during the 1970s, global scale and experience effects were cited as key competitive advantages. Companies made pre-emptive investments in large-scale plants in an attempt to secure the required minimum share of world capacity. While this strategy had the desired effect for many companies, in some industries it resulted in over-supply and subsequently a need for price-cutting. Lean manufacturing, just-in-time (JIT) inventory management, total quality management (TQM), business process re-engineering (BPR) and focusing on core competencies are just a few of the concepts that transformed many companies in the final decades of the 20th century. Without appropriate regulation against customer demand, productivity improvements have led to over-production and over-supply. A further effect of homogeneity in production techniques and business practices has been a reduction in product and service innovation and differentiation. Information technology During the 1980s and 1990s, information technology moved from the data centre into the hands of business users. Information technologies such as software applications offered opportunities to automate and integrate manual processes that were costly and prone to error. At first, business software applications were often bespoke, but later on, packages became available for applications such as computer-aided design (CAD), enterprise resource planning (ERP), supply chain management (SCM) and customer relationship management (CRM). Business applications and e-business (using Internet technologies to transform key business processes) combined to enable further productivity improvements. According to Steve Hamm, Steve Rosenbush and Cliff Edwards, ‘ Economists credit tech spending with at least one-third of the productivity gains in the second half of the 1990s.’[1 ] In May 2003, Nicholas Carr published an article in the Harvard Business Review entitled ‘ IT doesn’ t matter’ . [2 ]In it, he argues that IT is affordable and accessible to most companies, and therefore no longer offers strategic value to anyone. Certainly there are signs of commoditization in some parts of the IT industry; many IT products are becoming commoditized. As a result, the IT industry is entering a period of radical transformation. In the future, products will increasingly be provided as services. The widespread use of the Internet and availability of more advanced information technologies has led to a new phase of development for information technology infrastructure and software application companies. In the future, many IT services will be provided on a more variable basis, much like a utility such as electricity. Further analysis of the transformation taking place in the IT industry will be provided in Chapter 5. The Internet Information technology allows manual business processes to be automated. The Internet has enabled many to be transformed; some processes can be eliminated all together. E-business, the use of Internet technologies to transform key business processes, has had a profound effect on how many companies operate. At first, internal business processes such as human resource management (HRM) were transformed. Later, as the Internet and e-business became more popular and pervasive, companies began connecting and integrating with their customers, business partners and suppliers. The Internet has cut transaction costs, allowing companies to consolidate all manner of services such as IT support that before were provided locally at greater cost. Lower transaction costs allow companies to source services such as HRM support from third-party providers. The Internet also facilitates closer collaboration between companies, allowing them to form strategic partnerships and virtual enterprises. The lowering of transaction costs has also enabled companies to sell and distribute their products at lower cost. Mass customization of products For most of the last century, manufacturing was the driving force of developed economies. The product was king. From the beginning of that century, the pace of manufacturing innovation was breathtaking,

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and customer demand seemed insatiable. Mass production transformed business and social life as new consumer markets were created. Mass production was the optimal model for the product economy, enabling uniform products to be manufactured in large volumes. The 20th century was an age of product-led consumerism. Uniformity of the product was the key to mass production, yet mass production is based not on uniform products, but on uniform parts. Those uniform parts can then be mass-assembled, or mass-customized, to create many different products, tailored to the needs of each customer. In mass production, products are produced and then markets are created to distribute them. In mass customization, products are assembled according to customers’individual needs and specifications. Mass customization makes it necessary for business operations to begin with the customer and work backwards. This approach works better in the present era, now that the customer is more demanding. Introduction of new products The speed of introduction of new products has increased. Customers have become more sophisticated and discerning, and are demanding more of their suppliers than ever before. This has increased pressure on suppliers to bring new products to market more quickly and more frequently. New information technology systems, design, manufacturing and product management techniques have greatly reduced the time it takes to introduce new products. For example, in the automotive industry, the number of new vehicle models has increased significantly in recent years. According to Ralph Szygenda, group vice president and chief information officer at General Motors, ‘ We’ re cutting our product design cycle dramatically. A few years ago, we had a 48-month design cycle. Today, we’ re approaching 18 months,’he said. ‘ We now have web-based design iteration flexibility lacking a few years ago. Our common digital-based systems permit teams to design vehicles globally linked to production, procurement, and other GM functions.’He also noted that GM has ‘ integration centers’around the world that connect designers, engineers, suppliers and manufacturing. [3 ] Product innovation Greater customer sophistication and competition mean there is more need for continuous product innovation. However, the speed of product innovation appears to be decreasing. The frequency of ground-breaking product and service innovations has slowed in most industries. What was the last big product innovation in your industry? Is there any sign yet of the next one? A study published in late 2002, as many economies were sliding into recession, concluded that many consumers are not buying because they are disappointed by the level of innovation in virtually all product and service sectors. [4 ] As products become embedded with technology such as microchips and are connected to the Internet, they provide opportunities to access new services. Perhaps product innovation in the future will appear less in the form of traditional features and functions and more in the form of services delivered by the product? As everyday devices at home and work become ‘ intelligent’with information technology and ‘ connected’to the Internet, there will be more opportunities for innovation in service delivery. Product imitation While the speed of product innovation may be slowing, the speed of innovation imitation is increasing. Increasingly transient employees, many of whom are so-called knowledge workers, take valuable knowledge with them when they leave. Transient workers, flexible manufacturing and the proliferation of information have greatly reduced imitation cycle times. When features and functions are embedded in software and services (and can be provided as upgrades over the Internet), imitation can occur almost instantaneously. In the automotive industry, features such as anti-lock braking and air-conditioning are standard on many vehicles. It will not be long before more vehicles have telematics systems ‘ as standard’ , providing in-car entertainment and information services directly to the vehicle. Innovation imitation is not confined to products. It also extends to processes, organizations, policies and procedures, and, indeed, whole business models. Product obsolescence The increasing frequency of new product introductions and the faster pace of innovation imitation have

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shortened product life cycles. Products and services are becoming obsolete more rapidly than ever before. In the IT industry, Moore’ s Law can be applied to many products. Gordon Moore, founder of Intel, predicted that the processing power of computer chips would continue to double every 18 months, while the cost of producing them would hold constant or decrease. While Moore’ s Law applies primarily to information and communication technologies, similar trends appear in many industries. Rapid product obsolescence and over-production have resulted in over-supply. Surplus stock and costly inventories have led to price discounting and margin erosion. Products as devices for providing services The very nature of products is changing. Taichi Sakaiya, director general of the Economic Planning Agency of Japan, once predicted that ‘ The significance of material goods [will be] as containers or vehicles of knowledge-value.’[5 ]Many products are embedded with information technology such as microchips, enabling them to be connected to the Internet and remotely accessed, managed and continually upgraded. As information technology content and connectivity increase, the value a product creates migrates to the services it provides access to. Products are becoming devices through which services can be accessed. In the future, products may be introduced as ‘ Trojan horses’– a means of establishing a physical presence in an office, a factory or the home through which new services will be provided. Many companies are designing products with services in mind. Microsoft may have introduced the X-Box to tap into the multi-billion-dollar games market but it also clearly recognized an opportunity to connect a new generation of consumers to the Internet. In the future, the X-Box may be positioned as an alternative to the PC for accessing all kinds of consumer services such as e-mail, television and movies. In the manufacturing industries of the future, the services and upgrades may count more than the product. Investment in technology has already transformed the nature of many industrial businesses. As Jack Welch, ex-chairman and CEO of General Electric (GE) put it, ‘ Investing heavily in technology for services has changed the fundamentals of our service business. Long-term service agreements wouldn’ t be possible without these large investments in technology and?have greatly increased our intimacy with customers.’[6 ] The manufacturing industries of the future will be increasingly services-led. Products may even be seen as a cost of doing business. According to Jeremy Rifkin, ‘ With the containers or platform becoming so cheap to produce, and quality controls indistinguishable, the only area where opportunities exist to make money is in delivering expertise to customers in the form of services. While gross margins today are generally less than 30 percent, gross margins in service-related activities often exceed 50 percent.’[7 ] Some companies are turning their backs on traditional ‘ cost-plus’charging models. They make little or no profit from selling the product. Instead, they charge customers for upgrades and support services. In the mobile phone industry, network service providers often heavily subsidize products. Some computer software firms give their products away for free and charge only for upgrades and maintenance services. The challenge in using this approach is to keep customers long enough to recoup product costs. This depends on whether suppliers can develop enduring relationships with customers by providing them with the value added services they require. Neil Gross, Peter Coy and Otis Port, in an article entitled ‘ The technology paradox’ , claim that The new rules require more than ingenuity, agility and speed. They call for redefining value in an economy where the cost of raw technology is plummeting toward zero. Sooner or later, this plunge will obliterate the worth of almost any specific piece of hardware or software. Then, value will be in establishing a longterm relationship with a customer – even if it means giving the first generation of a product away. [8 ] The customer has replaced the product on centre stage. Steve Hamm, Steve Rosenbush and Cliff Edwards, Tech comes out swinging [Online], http://www.businessweek.com [accessed 23 June 2003] [1 ]

[2 ]

Nicholas G Carr, ‘ IT doesn’ t matter’ , Harvard Business Review, May 2003 (pp 3–10)

Ralph Szygenda, Group Vice President and Chief Information Officer at General Motors, Auto Engineering International, 2002 [3 ]

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html According to a recent study published by Accenture (Stimulating Customer Demand through Meaningful Innovation, November 2002), if consumers believe that a product will both be innovative and improve their quality of life, 70 per cent of them are willing to pay more. The report concluded that ‘ Many consumers aren’ t buying – or aren’ t buying more – because they’ re convinced that few companies have given them a compelling reason to do so. In short, they said, they’ re disappointed by the level of innovation they value in virtually all product and service sectors.’According to the survey, there is an untapped resource among consumers: a desire for both high-quality and innovative items. See http://www.accenture.com/xdoc/en/ services/sba/sba_ideas_innovation.pdf. [4 ]

Taichi Sakaiya, The Knowledge-Value Revolution, or, A History of the Future, trans George Fields and William Marsh, Kodansha International, Tokyo, 1991 (p 60) [5 ]

Jack Welch, ‘ Jack , What I’ ve Learned Leading a Great Company and Great People’ , Warner Books, New York, 2001 (p 322) [6 ]

[7 ]


Neil Gross, Peter Coy and Otis Port, The technology paradox: how companies can thrive as prices dive, Business Week, 6 March 1995 (pp 76–77) [8 ]

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FROM PRODUCT VALUE TO CUSTOMER VALUE Customers are more knowledgeable and sophisticated. As the speed of product obsolescence increases, more customers choose services in preference to products. Customers are more selective. In businesses, purchasing departments are energized with new management techniques, tools and approaches such as supplier segmentation, supplier reduction, total cost of ownership and e-business. In developed markets, over-supply and intense competition have made customers powerful. As customers become more knowledgeable and sophisticated, some demand exceptional value. As I have already pointed out, some customers demand exceptional value through solutions; others demand exceptional value through lower costs. Some suppliers have sensed and responded to their customers’ needs: solution and low-cost business models are emerging. Customers are more knowledgeable After decades of product-led consumerism in developed markets, customers have become familiar with many products and services at home and work. They have become more knowledgeable and sophisticated. The Internet provides a wealth of information and enables customers to make supplier comparisons quickly, conveniently and cheaply, and has thereby transformed the buying process. Customers no longer rely on salespeople to supply the information they need to make informed buying decisions. Instead, many of them prefer to inform themselves. Customers have more choice, are willing to consider different options and are less loyal to their traditional suppliers. Brand loyalty, while still important, appears to be falling. In fact, the percentage of US customers claiming to remain with familiar brands when buying products and services has dropped dramatically over the past 25 years. Even in the 60-plus age group, one of the most traditional and brandloyal groups, loyalty has fallen by 20 per cent since 1975.[9] Business buyers have also become more sophisticated. Enormous changes have taken place in purchasing departments. These once quiet backwaters of many companies are attracting talented employees, encouraging innovative thinking and adopting new business practices such as ‘ total cost of ownership’ . Purchasing managers are more knowledgeable and willing to explore new ways for suppliers to provide exceptional value. Don’t own the asset; get the service! Many products become obsolete quickly. Many customers are asking themselves why they should buy a product that is likely to be quickly outdated (often before they have even paid for it). Some customers are questioning whether they should be purchasing products at all and are turning instead to services. According to Jeremy Rifkin, we are entering an ‘ age of access’in which long-term product ownership is being replaced by short-term access to services. He says, ‘ It is likely that for a growing number of enterprises and consumers, the very idea of ownership will seem limited, even old-fashioned, twenty-five years from now?To have, to hold, and to accumulate in an economy in which change itself is the only constant makes less and less sense.’[10 ] Companies can improve shareholder value by moving costly capital assets from the balance sheet. By leasing capital equipment, companies can improve their cash flow, particularly if their method of buying and maintaining assets was inefficient. Externally provided services give the company flexibility and allow it to focus on core competencies – those things that it does best. For many companies, the managing of information technology or catering services, for example, is a distraction from their core business. In an attempt to reduce overheads and to focus on core competencies, many companies have reduced their own support staff. Now they rely more on third parties for these support services. Some products have become more complex. They often require integration and maintenance, and users must have specialist training. Increasing product complexity has led to greater demand for integration services in many industries such as IT. These services can be costly (making up a high proportion of the total cost) and are budgeted for in ‘ total cost of ownership’calculations. Customers are more selective

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Not all suppliers are equal. Many customers believe suppliers should be treated according to the value they provide. As a result, the purchasing function is being transformed by supplier segmentation and reduction techniques. Supplier segmentation enables purchasing departments to invest their limited time and resources in the most valuable suppliers: those that can create exceptional value. In an attempt to get closer to selected customers, many procurement managers are rejecting competitive bidding. They view managing the tendering process as too time-consuming and expensive, particularly when this involves a large number of suppliers. Competitive bidding only keeps suppliers at a distance. It also reduces opportunities to learn about each other’ s business, and there are fewer opportunities for continuous improvement. A smaller number of suppliers can also reduce administration costs on both sides, and enables volume discounting through economies of scale. Purchasing departments have also been quick to use Internet technologies to improve collaboration with key suppliers. Older electronic data interchange (EDI) systems are being replaced with newer and more sophisticated forecasting and collaboration technologies. E-business is used to automate the procurement of low-value commodities such as office stationery and other non-essential supplies. Specialist third-party procurement agencies have emerged whose job is to encourage more competition, commoditize the sale and get prices down even further. Customers demand more value In developed markets, over-supply and intense competition between suppliers have made the customer more powerful. More knowledge, sophistication and buying power have made customers more demanding. Some customers demand exceptional value. New customer types are emerging. As we have seen, one group demands exceptional value through solutions, the other through lower costs.

Customer value through solutions The customers who demand exceptional value through solutions need external suppliers to help them understand their problems and opportunities for innovation and growth. They have neither the specialist knowledge nor the resources to do this themselves. Increasingly, solution creation and delivery are provided through services. Solutions are services-led. Solution creation and delivery will be described further throughout the remaining chapters of this book.

Customer value through lower costs By contrast, customers demanding value through lower costs understand their own needs and are able to choose and buy without a great deal of expert advice and guidance. They are knowledgeable enough to do the research themselves, compare their options and shop around for the best deal. For many customers who value lower costs, salespeople and consultants are an unnecessary overhead. Cost is the key factor in determining which suppliers they choose, so they have little brand loyalty. The products and services they buy are widely available, undifferentiated and often perceived as commodities. As such, performance matters less, because most products are considered ‘ good enough’ . Customers who value lower costs can be found in business and consumer markets where they cut across many age and socioeconomic groups. Those baby boomers who saw their investments dwindle in the recent stock market decline, for example, are now looking to preserve what they have left. The services they buy in their old age will have to be provided efficiently and at low cost. Business customers demanding value through low costs want the lowest total cost of ownership. Their focus is on cutting the cost of acquisition through low prices but they also look to make cost savings from the procurement process and reduce the cost of maintaining the product or receiving the service over time. They look for opportunities to eliminate inefficiencies and wastage from distribution processes and for innovations in low-cost product support and service delivery. The low-cost customer has led to transformation in the personal computer (PC) industry. During the 1980s, when PCs were new and unfamiliar, consumers valued the information and advice provided by the salesperson. As the PC became commoditized during the 1990s, low-cost customers emerged. Today, consumers and small business customers might research the latest products on the Internet, read PC magazines or ask friends for advice on which computer to buy. They are able to make comparisons based on many factors, including financing, available software, Internet time and technical support.

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Payment can be made online and the PC delivered directly (or taken home from the store). A similar trend has emerged in business-to-business sales. The customer does the research, compares the options, and acquires and owns the product at the lowest cost (and with greatest convenience). Purchasing professionals in larger companies might consult the Internet to research their buying options and often have access to reports from independent analysts. They meet with a representative from the supplier to discuss prices and negotiate volume discounts. They explore options for ordering and delivery. After factoring in all costs, they select a vendor. Over time, employees order the products and they are delivered, installed and supported by the supplier (or a third party). The relationship with the supplier often then continues through electronic means such as Web sites.

Emergence of the low-cost business model How can suppliers succeed with customers demanding lower costs? Some suppliers try to differentiate their products by adding features and functions. Others try to confuse customers by making it hard for them to make like-for-like comparisons – for example, by customized pricing (offering special discounts on standard offerings). Product differentiation often fails when targeted at customers who value lower costs and consider most products ‘ good enough’ . Customers demanding lower costs tend to focus on the core product, not the extras, which too often just add cost and complexity to both parties. Michael Porter perceives that ‘ a firm’ s differentiation stems from how its value chain relates to its buyer’ s chain?this derives fundamentally from creating value for the buyer through a firm’ s impact on the buyer’ s value chain. Value is created when a firm creates competitive advantage for its buyer – lowers its buyer’ s cost or raises its buyer’ s performance.’[11 ]To succeed with customers who value lower costs, you must give them what they want: lower costs and less inconvenience. Suppliers must provide a lower-cost (and easier) buying experience. The Internet and e-business offer new opportunities to re-engineer costly and complex business processes. The Internet allows customers to research, explore buying options, search for the best deals and make simple and convenient purchases. Companies using the Internet to automate outdated sales and distribution processes have often been disappointed. They have not been able to take out enough cost and complexity. New technologies such as the Internet provide opportunities to do things differently. In highly competitive and commoditized markets, it is not good enough to be low cost; you must be lowest cost. A fundamental transformation of sales and distribution is required to achieve this: it’ s more revolution than evolution. New technologies such as the Internet are key enablers to such business transformation. But it doesn’ t stop there. If competitive advantage is to be sustained, supporting business functions such as supply chain management must then be transformed to lower costs and increase customer value. Working from the customer backwards, the extended enterprise (including suppliers and business partners) must be transformed and aligned to create and deliver lowcost customer value. Over-supply and standardization on parts led to the commoditization of PCs. Customers became more familiar with the technology and required less expert support when making a purchase – many became low-cost customers. Until the early 1990s, most manufacturers sold PCs to consumers through retail stores and to businesses through distributors and field sales forces. During the 1990s, new models were introduced based on direct sales by telephone. Later, the Internet emerged as an important low-cost channel. Most PC manufacturers have moved to low-cost business models. They have streamlined their supply chains, outsourced non-core activities (such as parts manufacturing) to low-cost manufacturers and introduced build-to-order assembly processes. By applying the same low-cost thinking to business operations further upstream as had already been applied to sales and distribution, they have further reduced costs and improved customer service. Build-to-order, for example, means that customers can personalize PCs to their individual needs (mass customization). Build-to-order has reduced inventory costs: cost savings can be passed on to customers in the form of lower prices. The changes that took place in the PC market during the 1990s were transformational. The field sales force was replaced with a direct sales model enabled by technology (except for the largest customers). Networks of suppliers and business partners are coordinated to provide the product and supporting services. Extensive use is made of partnerships and outsourcing arrangements for all activities

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html considered non-core. A more detailed analysis of business partner networks and the emerging network economy will be provided in Chapter 15. The traditional field sales force was not set up to serve customers who value lower costs. It was conceived when products could be differentiated in terms of features and functions and demand was high, during the era of product-led consumerism. In many industries the traditional sales force is no longer effective. Low-cost customers do not want product information; they want salespeople to make the buying process simpler, cheaper and more efficient. Selling becomes less about explaining features and functions and more about facilitating the buying process. In the future, salespeople (in business-to-business sales) will become more consultative, focussing on the benefits of the buying process rather than the product. However, many senior managers faced with increasingly commoditized products and services are unwilling to make the changes needed. Reducing the size of the sales force and outsourcing non-core activities to low-cost service providers would be viewed as failure. Many choose to focus instead on making marginal improvements in existing operations and productivity. They exhort the sales force to sell harder and reduce salaries and benefits to keep costs down. Morale soon starts to suffer. Any recovery tends to be short-lived if underlying change is taking place in the industry. [9]

David Lipke, Pledge of allegiance, American Demographics, November 2000 (pp 40–41)

[10 ]


[11 ]

Michael Porter, Competitive Advantage, Macmillan, Basingstoke, 1985 (p 52)

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SUMMARY If change is taking place in your industry – products are becoming commoditized and customers demanding lower costs – you may be facing an opportunity to create exceptional customer value. This requires more than best-practice benchmarking, cost-reduction initiatives and one-off productivity improvements. It may be time to redefine your industry: to create a new low-cost business design and go about the business of industry transformation. In this chapter I outlined some of the forces that are shaping business in the 21st century. I explained why competition has increased and how many products and services have become commoditized in many industries. I described how products are changing, in that many are becoming devices for providing services. I explained that many customers have become more knowledgeable, sophisticated and powerful. Many choose services over products. I argued that some customers demand exceptional value – some through solutions, others through lower costs, and explained that new low-cost business models are emerging. Chapter 4 explains why many customers are choosing services over products. I explore why more manufacturers are introducing (or planning to introduce) services. I describe how services tend to grow out of products, and look at the problems many companies face when introducing services. I explain why some customers demand solutions that are more than standard services – although solutions are servicesled. I show how new solutions business models are emerging.

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NOTES 1. Steve Hamm, Steve Rosenbush and Cliff Edwards, Tech comes out swinging [Online], http://www.businessweek.com [accessed 23 June 2003] 2. Nicholas G Carr, ‘ IT doesn’ t matter’ , Harvard Business Review, May 2003 (pp 3–10) 3. Ralph Szygenda, Group Vice President and Chief Information Officer at General Motors, Auto Engineering International, 2002 4. According to a recent study published by Accenture (Stimulating Customer Demand through Meaningful Innovation, November 2002), if consumers believe that a product will both be innovative and improve their quality of life, 70 per cent of them are willing to pay more. The report concluded that ‘ Many consumers aren’ t buying – or aren’ t buying more – because they’ re convinced that few companies have given them a compelling reason to do so. In short, they said, they’ re disappointed by the level of innovation they value in virtually all product and service sectors.’According to the survey, there is an untapped resource among consumers: a desire for both high-quality and innovative items. See http://www.accenture.com/xdoc/en/ services/sba/sba_ideas_innovation.pdf. 5. Taichi Sakaiya, The Knowledge-Value Revolution, or, A History of the Future, trans George Fields and William Marsh, Kodansha International, Tokyo, 1991 (p 60) 6. Jack Welch, ‘ Jack , What I’ ve Learned Leading a Great Company and Great People’ , Warner Books, New York, 2001 (p 322) 7. Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 92) 8. Neil Gross, Peter Coy and Otis Port, The technology paradox: how companies can thrive as prices dive, Business Week, 6 March 1995 (pp 76–77) 9. David Lipke, Pledge of allegiance, American Demographics, November 2000 (pp 40–41) 10. Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 6) 11. Michael Porter, Competitive Advantage, Macmillan, Basingstoke, 1985 (p 52)

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Chapter 4: The Solutions Business Model Mark Cerasale

INTRODUCTION Powerful forces such as globalization, deregulation and easier access to capital shaped business in the 1980s and 1990s. At the same time, new management approaches, cheaper and better information technology (IT) and the Internet improved productivity, increased competition and caused over-supply. Today, customers and shareholders are more demanding, competition is tough and product margins are eroding in many industries. Many products are commoditized, and business models are easily imitated. Despite this, there are many remaining opportunities for innovation and growth. Business leaders transform their companies and their industries with new value-creating business models. Some manufacturers are introducing services, which are often more profitable than products. Why buy the asset when you can get the service? Customers are more powerful, knowledgeable and discerning. Some customers demand exceptional value through lower costs, others through solutions. New business models will create exceptional customer value by meeting one or other of these two demands. Increasing customer demand for services Many customers are beginning to question whether they need to own some products at all. Customers buy things for the value they receive from them: what they do, not what they are. That value is often best provided as a service. Robert B. Shapiro, chairman and CEO of Monsanto, gave an example of Monsanto’ s line of nylon fibre that is used to make carpets: ‘ Nobody really wants to own carpet?they just want to walk on it?What would happen if Monsanto or the carpet manufacturer owned that carpet and promised to come in and remove it when it required replacing?’He went on to say that his company is ‘ starting to look at all our products and ask, what is it people really need to buy? Do they need the stuff or just its function? What would be the economic impact of our selling a carpet service instead of a carpet?’[1 ] In 1990, C K Prahalad and Gary Hamel published a landmark article in the Harvard Business Review entitled ‘ The core competence of the corporation’ . [2 ]They advocated a focus on learning rather than physical assets, and suggested that companies should exit activities that do not use core competencies. Core competencies are the things companies do best. They are bundles of skills and technologies that enable a company to provide a particular benefit to its customers, rather than strategic business units, which are often defined by specific product-markets. Core competency thinking has led many companies to outsource activities and whole business processes. Focusing on core competencies encourages companies to identify and exploit what they do best and enables resources to be focused on areas of value and growth. Organizations outsource many services today from support functions such as catering, cleaning and data processing to processes such as supply chain management and procurement. Non-core competence activities are typically retained only if external third parties, for political, economic or technological reasons, cannot provide them. Joan Magretta, Growth through global sustainability: an interview with Monsanto’ s CEO, Robert B. Shapiro, Harvard Business Review, January–February 1997 (p 83) [1 ]

Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May– June 1990 (pp 79–90) [2 ]

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FROM PRODUCTS TO SERVICES For much of the 20th century, manufacturing was the engine of growth in most economies. Under-supply made the product largely a scarce resource. Many goods were bought as quickly as they could be made and product margins were sufficiently high to sustain business growth. The sales force was the prime channel for large business-to-business sales. Elsewhere, risk, cost and the responsibility for sales and distribution were transferred to intermediaries such as retailers and distributors. Manufacturers focused primarily on the product and the processes involved in production. Operational efficiencies and productivity improvements were achieved in design, engineering, manufacturing and supply chain management. During the era of product-led consumerism, manufacturers were product-led. Today’ s business environment is very different. Many customers are choosing to use services rather than to own products. Faced with intense competition, increasing product commoditization and profit margin erosion, many manufacturers are basing their strategies on services. Two of the world’ s largest manufacturers, General Electric (GE) and IBM, adopted service strategies during the 1990s. Shortly before retiring in 2002, Lou Gerstner, then chairman and CEO of IBM, wrote, ‘ Our bet was this: over the next decade, customers would increasingly value companies that could provide solutions – solutions that integrated technology from various suppliers and, more important, integrated technology into the processes of an enterprise?services-led, not technology-led.’[3 ] How services grow out of products Advances in information and communications technology are changing products into devices for delivering services. The cost of the technology continues to fall. Products such as industrial machinery and office equipment can include IT, integrated and connected across communication networks such as the Internet. Telephone answering machines, for example, were once hardware connected to a telephone. Today, networks often provide telephone answering services. The telephone has become a device for providing a service. Manufacturers often introduce services for two reasons: to differentiate their products through service ‘ bundling’and to exploit new opportunities for growth. Services tend to grow out of products and capabilities that the manufacturer already has. The transformation to a services-led business is usually evolutionary: it takes place over a long period (even when managed as a series of ‘ Big Bang’ transformation programmes). In the short term, manufacturers rarely abandon their existing customers, markets, industries and core competencies. Most do not want to venture too far from familiar territory in the short term. Many find that introducing services is a journey. In running terms, it’ s a marathon, not a sprint.

Financial services Manufacturers often provide financial services (such as loans) to their distributors. This practice is invaluable to distributors holding large volumes of high-value stock such as automobiles. Manufacturers have also provided financial services to end-consumers for many years. Indeed, the concept was pioneered by agricultural equipment manufacturers in the United States early in the 20th century and led to a transformation of farming industries. Large manufacturers like carmakers can borrow money on the open market at low rates. Many have entered the financial services market with products such as credit cards, loans and mortgages. General Motors and Ford are today among the largest financial services providers in the world.

Training services Some manufactured goods such as industrial equipment and high-technology products can be complex and require user training. In the past, training was often given free, with costs absorbed into healthy product margins. Product margins have decreased and made this practice less sustainable. Today, training is usually priced separately. Technology such as multimedia and the Internet enables training to be delivered at lower cost and greater convenience. The student can choose when, where and at what pace to receive instruction. Some manufacturers have extended the scope of training services to include other manufacturers’products.

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Education services Since the first factories of the Industrial Revolution, most companies have used a hierarchical management structure for decision-making and implementation. Activities were broken down into their constituent tasks, which were then organized for maximum operational efficiency. Blue-collar workers were trained to perform repetitive tasks. Today’ s knowledge workers perform fewer routine tasks and activities. Knowledge workers require less prescription, supervision and instruction about their roles. However, they need to be educated to make decisions for themselves. Knowledge workers require less training but more education. The ‘ learning enterprise’ , as advocated by Prahalad and Hamel in their work on core competencies, is made up of ‘ learning employees’ . Many manufacturers are moving into education services by extending their existing training capabilities and infrastructure. IBM’ s Learning Services division, for example, offers more than product user training. It has introduced a curriculum of management and process skills education.

User support services Some products such as large industrial machinery or computer software are complex enough to require constant upgrades and user support. While future generations of products may be self-managing and self-healing, today many need support provided by people. Manufacturers use new technologies such as the Internet to provide Q&A Web sites and 24/7 help desks to extend their range of support services, often including other manufacturers’products.

Maintenance services Many companies invested heavily in design, engineering and manufacturing quality management during the 1980s and 1990s. Many products today are extremely reliable and ‘ good enough’for most purposes. They require little maintenance. Indeed, cheaper commoditized products are often thrown away when a problem occurs. By contrast, expensive products such as brain scanners are complex enough to require regular maintenance. When profit margins were high, manufacturers often gave maintenance free of charge for a period, to differentiate their core product. Today, as margins on many products have eroded, maintenance is often charged separately. Many customers regard support services as ‘ non-core’and will outsource them when possible. Technologies such as the Internet allow many products to be monitored, managed and maintained remotely. Maintenance services enable manufacturers to generate revenues from their installed products and can be the basis of enduring customer relationships. Jack Welch once noted, ‘ I can expand a lot faster by upgrading or maintaining the equipment I have installed than by trying to sell more units.’GE’ s improved financial results during that time confirmed that view. He reported that product-related services were growing at ‘ two or three times the rate of products themselves’ . [4 ]

Business continuity services Threat of terrorist attack, natural disaster and the loss of critical operations through systems or production-line failure have all increased demand for business continuity services. The consequential costs caused by the loss of an engine production line for just a few hours, for example, can run to millions of dollars. Manufacturers often introduce business continuity services that go beyond product repairs and maintenance to include expert advice and access to spare capacity. New technologies enable remote monitoring, so faults can be predicted before they occur. Back-up services can be provided remotely through networks such as the Internet. When tangible parts must be replaced, efficient distribution and logistics systems allow spare parts to be kept off-site and provided just in time.

Outsourcing services The market for facilities management and outsourcing services has grown as more customers focus on core competencies and exit noncore activities. Companies buy many services, ranging from the basic such as catering and cleaning, to the more complex such as supply chain management. With facilities management services, the customer often keeps ownership of the asset, eg industrial machinery. With outsourcing, the customer’ s ownership of the asset often passes to the supplier. Many manufacturers use the skills and knowledge they develop in providing maintenance and business continuity services to enter into outsourcing contracts.

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Information technologies such as the Internet have lowered interaction costs and enabled services to be centralized and provided at lower cost. It is easier and cheaper to outsource services; technology is rarely a barrier. Perhaps the biggest inhibitors to outsourcing are the need for business change and issues relating to the transfer of employees to external suppliers. Given such challenges, some companies choose to in-source (ie give an internal department the responsibility for service provision) rather than outsource, achieving some of the same benefits through centralized shared service centres. This approach also allows skills to be retained in-house – although that may not be desirable if those skills are considered ‘ non-core’ . From the customer’ s perspective, one benefit of outsourcing is lower costs through supplier economies of scale. The supplier consolidates capital investment, reduces operating costs and provides the service more efficiently using expert knowledge. These benefits can be passed on to customers in the form of lower prices and better service. Outsourcing also allows the customer access to skills, knowledge and expertise that might not be widely available. Outsourcing creates opportunities for customers to reduce costs and extract more value from suppliers. Outsourcing can allow customers to remove assets from the balance sheet, avoiding depreciation charges on costly assets. From the outsourcing supplier’ s perspective, outsourcing can require major investment and access to substantial capital in the early days. Often the customer’ s assets have to be acquired at the outset of the contract. This makes larger deals initially loss-making, and profitable only after several years. Outsourcing contracts require careful management, and continuous improvements in service delivery may be required to sustain profitability. From the supplier’ s perspective, outsourcing agreements reduce the revenue peaks and troughs often evident in a product business. In highly competitive markets, where brand loyalty is low and competitors are gaining market share, outsourcing can establish strong customer relationships that exclude competitors. The closeness of the outsourced relationship allows the supplier to identify further opportunities to create value – by selling additional products and services. Outsourcing gives suppliers control of product selection and so can reduce the competitive threat. Customer value has shifted from the product to the service. If value is created through the service (and service levels are achieved or exceeded), the customer has little interest in which products are being used. Products are just devices to enable the service and are usually not selected by the customer. Change today is discontinuous, making planning difficult. Many companies want to turn their fixed costs into variable costs. Fluctuating demand creates inefficiencies for suppliers and customers. When demand is low, companies have excess capacity. When demand is high, they often do not have enough. Many outsourcing contracts today are agreed over a fixed period of time to a fixed service level at a fixed price. More customers want greater flexibility. Many want to pay for the consumption of services in the same way that they pay for utilities such as gas or electricity. Innovations in technology and operating models allow suppliers to provide services that are more flexible, variable and adaptive. New adaptive and ‘ on demand’business models are emerging in the IT industry. Massive sums are invested to make flexible IT services more widely available. However, e-business and IT ‘ on demand’involve more than sophisticated pricing agreements: technology must support fluctuating usage, and business processes must be transformed and integrated. Flexible outsourcing services are not exclusive to the information technology industry. Rolls-Royce was one of the first companies to pioneer a ‘ power by the hour’service in the aerospace industry. Traditionally, airlines purchased engines and took responsibility for maintenance and stocking spare parts. With ‘ power by the hour’ , Rolls-Royce keeps both ownership and the maintenance responsibilities for its engines after they are installed on the aeroplanes. This arrangement is similar to a rental arrangement. The airline pays Rolls-Royce for every hour the engine runs.

Integration services While some products have become commoditized, others have become more complex. High-technology products often need to be integrated with each other through systems and networks. Competition has increased the number and variety of products available. Often they are not designed to work together; they are incompatible. The absence of standards raises the cost and complexity of integrating products

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from many suppliers. However, customers demand greater compatibility and standardization. In competitive markets, achieving consensus between manufacturers on standards is challenging. Manufacturers resist pressure to standardize, unless their technology is to become the standard! Standardization may lead to commoditization, which cuts margins and allows customers to substitute cheaper products. In the IT industry, numerous attempts have been made at standardizing, with only limited success. Customers do not have the skills, knowledge or expertise to integrate many complex products. For example, fewer companies outside the IT industry consider information technology integration a core competency, so they retain few skills in this area. Moreover, integration skills are often specialist and therefore in short supply. This makes them expensive. However, as the need for products to be ‘ connected’increases, the demand for integration services is growing significantly in many industries. Manufacturers with experience in installing, implementing and integrating their own equipment can extend their capabilities to include other manufacturers’products. Many, particularly in the IT industry, have introduced integration services.

Business consulting services Most challenges of line-of-business or functional senior managers relate to the processes they are responsible for. A process is any linked group of tasks carried out by several groups or functions that together create customer value. Michael Hammer and James Champy were among the first to articulate the benefits of taking a process approach to improving business performance. In their book Reengineering the Corporation, [5 ]they outline the inefficiencies often inherent within and between business processes. For the customer, the problem of integration also extends to processes. Customers require integration of products with products, products into business processes and processes with other processes. Indeed, the challenge may be to re-engineer a process or abandon it altogether – which is often made possible by using new technologies such as the Internet. So it is increasingly important for suppliers to have process knowledge; product knowledge is less valuable. As a first step into consulting, manufacturers often redeploy existing staff into consulting roles. They often know a lot about how their own company operates – their own processes and organization – and have experience in fixing their own problems. Manufacturers help customers achieve organizational and process integration, reengineering and address transformation challenges in the course of providing them with products. Many manufacturers have skills such as project management that are not explicitly recognized. Such skills, knowledge and capabilities may form the basis of consulting services. Some companies look outside their own organizations to fill capability gaps – hiring skilled individuals and acquiring consulting firms. Suppliers introduce consulting services because they are profitable. Specialist technical knowledge, organizational skills or process reengineering skills are not widely available and can be charged at a premium. Business consulting services can form the basis of enduring customer relationships. If the manufacturer is able to create value, the customer will invest time and other resources to improve the relationship. Like outsourcing, consulting allows suppliers to identify further opportunities to create value. Consulting can give the manufacturer early sight of further opportunities. This allows the manufacturer to prepare an offer in advance of competitors. However, the supplier has a duty of care to act in the customer’ s best interests. Consulting requires trust. Expert advice should not be influenced by proprietary products and services (if they are not right for the customer). When IBM introduced business consulting services, it recognized the need to remain product-agnostic. Lou Gerstner, ex-IBM chairman and CEO, pointed out that ‘ the services unit would need to be able to recommend the products of Microsoft, HP, Sun and all other major IBM competitors if that, in fact, was the best solution for the customer. Of course, we’ d have to maintain and service these products as well.’[6 ] Problems with services Introducing services may not be a panacea for all manufacturing companies. Incumbent service providers may have in-depth knowledge of a customer or an industry, unique capabilities developed over many years and access to specialist skills that are in short supply. Incumbents can have considerable goodwill and extensive customer relationships that are difficult to supplant.

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html Introducing services is a marathon, not a sprint. Ask any executive in a services company and they will tell you that competition is fierce in service industries too. Globalization and deregulation have increased competition and have caused over-capacity and service commoditization in many areas. Running a services business is not easy. Services should be higher margin than products, though if they are poorly managed, losses often arise. Labour-based businesses require new financial and management systems. Combining a service business with an asset-based business can be particularly challenging. A more detailed analysis of business design considerations is provided in Chapter 15. [3 ]


Claudia H Deutsch, Services becoming the goods in industry: not enough profit in making things, New York Times, 7 January 1997 (p 4) [4 ]

For more information on process re-engineering, see Michael Hammer and James Champy, Reengineering the Corporation, Nicholas Brealey Publishing, London, 2001 [5 ]

[6 ]

Louis Gerstner, Who Says Elephants Can’ t Dance? (p 130)

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FROM SERVICES TO SOLUTIONS Customers will invest resources to build relationships only with those suppliers that are capable of creating and delivering exceptional value. Customers are more knowledgeable Enormous changes have taken place in purchasing departments. Many have become centres of excellence, with talented employees and new working practices. Purchasing managers are more knowledgeable and innovative. They constantly seek new ways to work with suppliers to create value. They use new management techniques and approaches such as ‘ total cost of ownership’ , supplier segmentation and supplier reduction. Customers are more selective Not all suppliers are equal. Many customers treat suppliers according to the value they provide. Purchasing managers apply supplier segmentation and reduction techniques to target and identify suppliers capable of creating exceptional value. ‘ Total cost of ownership’techniques (often including the cost of complementary products and services) enable purchasing managers to better understand value propositions. Many customers are willing to invest time and other resources with the most valuable suppliers to improve mutual understanding. Suppliers unable to create exceptional value are excluded. When price is not the main consideration, many purchasing professionals reject competitive bidding. They view the tendering process as too time-consuming and expensive. Competitive bidding can keep value added suppliers at a distance. It can also reduce opportunities for mutual understanding and continuous improvement. From the customer’ s perspective, supplier segmentation and reduction improve the targeting of scarce resources, create economies of scale and reduce administration costs (on both sides). From production to distribution Signs of the emergence of customer-led consumerism have been around for many years. In a landmark article in the Harvard Business Review in 1960, entitled ‘ Marketing myopia’ , [7 ]Theodore Levitt argued that companies were too concerned with the products they produced and not concerned enough with the customers they served. He argued that businesses should plan from the customer backwards rather than from production forwards. In many markets, the customer, not the product or service, is the scarce resource. Suppliers are forced to create greater value for a smaller number of customers. From the supplier’ s perspective, becoming customer-led requires radical business transformation. During the era of product-led consumerism, business designs were created to maximize operating efficiencies. Management resources were focused on production. Today, those resources are focused on distribution. To become customer-led, suppliers must transform their businesses. Nowhere is the need for transformation more evident than in the sales and distribution functions (although ultimately change must occur throughout the business). From the supplier’ s perspective, sales and distribution are the functions closest to the customer and, in many companies, have remained unchanged for decades. Mass customization of services Product mass customization was widely introduced in the final decades of the 20th century. This allowed products to be tailored to customers’individual needs and represented a paradigm shift for many manufacturers. Companies that once saw themselves as manufacturing companies with distribution capabilities began to see themselves as distribution companies with manufacturing capabilities. Focus shifted from production to distribution, with the production process becoming a function of sales and marketing. Mass customization of products set a precedent. Customers now require the same level of tailoring and customization from service providers. [7 ]

Theodore Levitt, Marketing myopia, Harvard Business Review, 38, July–August 1960 (pp 45–56)

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CUSTOMER VALUE THROUGH SOLUTIONS Services do not create exceptional customer value; they deliver it. Products can deliver customer value too. Services create exceptional value when they are customized to satisfy a customer’ s needs. Exceptional value is created for a customer when a supplier combines services and products in ways that address customers’problems or help customers exploit opportunities for innovation and growth. Solutions create and deliver customer value. Solutions are services-led. According to Michael Hammer, In the customer economy?you must go beyond merely giving them [customers] your products and services; you need to help them solve the problems that motivated them to ask for your products and services in the first place?It goes beyond simplifying your customers’interactions with you to delivering solutions to your customers’problems, of which your products and services in their native forms are but small pieces. [8 ] He goes on to assert: When products are well-differentiated, customers may be willing to pick and choose from among the best ones and endure the trouble of integrating them. But in a world of commoditized products and powerful customers, the key to success lies in turning your focus away from yourself and your products and toward your customers and the solutions they seek. [9 ] Solution customers For solution customers, the specifications of the product or service are less important than their economics. Value resides in the process, not the product. Value is defined in terms of how the product is used, not its features and functions (what it does). As a result, responsibility for purchasing decisions moves from technical specialists to senior administrators and business executives. Senior executives are responsible for the ‘ bigger picture’of systems, processes and activities in which the product or service is used. Neil Rackham describes them as extrinsic value customers: These customers focus largely or exclusively on the benefits or extrinsic elements of the value equation. For them, value is not intrinsic to the product itself but lies in how the product is used. Extrinsic value customers are interested in solutions and applications?They put a premium on advice and help. They expect sales people to give them new understanding of needs and options. They will willingly invest time, effort and cost in working with sales people to create customized solutions. [10 ] This is confirmed by Dennis Courtney, chief information officer at Dunlop Tire Corporation: The products that a supplier offers are only a small part of the equation. Generally we could get what we need from several places, so it’ s not unique. These suppliers who try to sell the product – who try to show us their stuff is better – are missing the point. What we’ re looking for goes beyond the product. We ’ re looking for business understanding, we’ re looking for whether they can adapt to our special needs or whether they can advise and help us. We want their sales people to add something worthwhile on their own account. [11 ] Here is an example of the kind of solution we are considering. The Manufacturing Vice President of a small US company, Company X, that produces specialist high-tech components calls in a trusted supplier to discuss a problem that she just can’ t figure out. Despite many attempts to close the gap, one of Company X’ s manufacturing sites is unable to achieve the same productivity levels as its main competitor, based in Japan. The Manufacturing Vice President has worked successfully for many years with one supplier in particular. She values his advice and his company’ s ability to solve Company X’ s problems. Company X runs a tight ship, so there aren’ t many internal resources available to throw at the problem. The customer has faith in the supplier’ s ability to understand her issues, explore the options and create the right solution.

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The supplier suggests starting with some analysis to get to the bottom of the problem. Manufacturing process consultants from the supplier’ s business consulting team perform the study. They discover that the productivity problem is caused in the final stages of the manufacturing process: when the goods are packed by hand. After consideration of the options with the customer and consultation with numerous Company X vice presidents, the consultants recommend either outsourcing the packing of the components to a third party (specialists in that area) or installing new packing equipment. Both would involve making changes to the day-to-day running of the business – in particular, its processes. The Manufacturing Vice President is not keen on outsourcing the packing activities entirely. At the same time, she had not budgeted for the major capital investment that would be involved in installing new equipment so early in the financial year. The supplier proposes an innovative solution. The supplier’ s consultants will re-engineer the packing process, and the supplier’ s integration specialists will deliver and install the new equipment. Company X’ s employees will operate the machinery but it will be supported and maintained by the supplier. Company X will not buy the machinery. Instead, a charge will be made every time a component is packed. No other supplier offers such a service. The solution is created and delivered. Solution creation and delivery Solution creation and delivery aims to create exceptional customer value and is best provided on a foundation of mutual trust and understanding between customer and supplier. Solution creation and delivery is different from product marketing, selling and distribution. Traditional approaches tend to push products into the market. That may have worked well when demand was high but is often less affective now that the customer is a scarce resource. Solutions business models are emerging. Capabilities and enablers often found in companies providing business solutions are presented in Figure 4.1.

Figure 4.1: Companies providing business solutions: capabilities and enablers People performing many roles are involved in creating and delivering solutions. Solution marketers must focus less on product value and more on industry value and more complex offerings. Solution salespeople must help customers understand their problems and opportunities for growth and innovation. To do this, solution salespeople must get to know their customers at least as well as their customers know themselves. Often, opportunities to create value must be discovered and made explicit; they are not always obvious. Solution salespeople help the customer to understand and evaluate the options available even if that means choosing to work in partnerships or to use competing products. Solution salespeople and consultants must also become adept at helping customers with the execution and management of change. This may require implementing a new system, re-engineering processes, retraining employees or installing new plant in a factory. The nature of service delivery is changing. While there are some very real differences between products and services, services are often defined, packaged, sold and delivered as products – in many ways, much like durable goods. New processes, management techniques, tools and pricing models allow many services to be delivered in the form of long-term relationships, such as on demand in the IT industry. When a long-term service arrangement, such as outsourcing, has been established, solution delivery and operations specialists must remain focused on innovation and creating further customer value if the relationship is to endure. Solutions are not for everyone

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The opportunity to introduce solutions may be great in many industries, but solutions are not for everyone. Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg strike a note of caution, suggesting that too many companies may enter the solutions market and fail, for one of three reasons:  Some believe they are selling solutions when they are just bundling products that create little value when offered together. They then find it hard to recover the extra costs of providing the products as solutions.  Some underestimate the difficulty of selling solutions. They cost more to develop, have longer sales cycles and require deep knowledge of the customers’ businesses.  Many sell solutions just like products. They do not understand the need to rethink their sales approach. [12 ] The key to success with solutions is an understanding of customer needs – today and tomorrow. Strategy and execution are required in equal amounts. Introducing solutions (or transforming entirely into a solutions enterprise) is a long and challenging journey, but for many it is a journey well worth making. According to Johansson and colleagues, When a company offers true solutions, its investment can pay off in several ways. Besides generating higher margins for itself and additional value for customers, it might find that it can build longer-lasting and more profitable relationships with them. Sometimes solutions open doors to new markets and even reduce or eliminate competition, in effect decommoditizing sales. [13 ] Emergence of low-cost business models As we have seen, while some customers value solutions, others value lower costs. Customers demanding value through lower costs understand their own needs and are able to choose and buy without a great deal of expert advice and guidance. They are knowledgeable enough to do the research themselves, compare their options and shop around for the best deal. Salespeople and consultants are viewed as an unnecessary overhead; cost is the key factor in determining which suppliers they choose. The products and services they buy are widely available, undifferentiated and often perceived as commodities. As such, performance matters less. Business customers who want value through low costs want the lowest total cost of ownership. Their focus is on cutting the cost of acquisition through low prices, but they also want cost savings from the procurement process and to cut the cost of maintaining the product or receiving the service over time. They look for opportunities to eliminate inefficiencies and wastage from distribution processes and for innovations in low-cost product support and service delivery. Some suppliers, such as PC manufacturers, are transforming their companies and their industries to satisfy the needs of customers who value lower costs. Low-cost business models are emerging in many industries. A more comprehensive analysis of the commoditization of products, the transformation of many products into services and the emergence of low-cost business models was provided in Chapter 3 . Michael Hammer, The Agenda: What Every Business Must Do to Dominate the Decade, Random House Business Books, 2002 (p 38) [8 ]

[9 ]

Michael Hammer, The Agenda (p 39)

[10 ]

Neil Rackham, Rethink ing the Sales Force, McGraw-Hill, New York, 1998 (p 17)

[11 ]

Neil Rackham, Rethink ing the Sales Force (p 11)

Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no 6696, 2003 (pp 117–18) [12 ]

[13 ]

Juliet Johansson et al., Solving the solutions problem (pp 117–18)

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SUMMARY In this chapter I explained why many customers are choosing services over products. I observed that more companies, particularly manufacturers, are introducing (or planning to introduce) services, and described how services tend to grow out of products. I explained that there are problems with introducing services: many have become commoditized. I argued that customers are more powerful, knowledgeable and selective. They choose to work with suppliers who can create exceptional customer value. Some customers want exceptional value in the form of lower costs; others want solutions. New solutions business models are emerging. Many companies, in both manufacturing and service industries, are attempting to transform their companies and their industries with a solutions strategy. Some companies are cautious or unable to change quickly; they plan to introduce solutions over time with an evolutionary approach. Other companies plan to reinvent themselves through more ambitious transformation, more akin to revolution. Examples of how industries and companies are transforming themselves with solutions will be provided in Chapter 6. A number of companies, such as IBM, are transforming themselves to satisfy the needs of both emerging customer types – by lowering costs and introducing solutions. Transformation in the IT industry and IBM’ s introduction of services and solutions will be described in Chapter 5. Several of the remaining chapters in this book provide insight into key solution capabilities and business designs.

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NOTES 1. Joan Magretta, Growth through global sustainability: an interview with Monsanto’ s CEO, Robert B. Shapiro, Harvard Business Review, January–February 1997 (p 83) 2. Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May–June 1990 (pp 79–90) 3. Louis Gerstner, Who Says Elephants Can’ t Dance?, HarperCollins, London, 2002 (p 123) 4. Claudia H Deutsch, Services becoming the goods in industry: not enough profit in making things, New York Times, 7 January 1997 (p 4) 5. For more information on process re-engineering, see Michael Hammer and James Champy, Reengineering the Corporation, Nicholas Brealey Publishing, London, 2001 6. Louis Gerstner, Who Says Elephants Can’ t Dance? (p 130) 7. Theodore Levitt, Marketing myopia, Harvard Business Review, 38, July–August 1960 (pp 45–56) 8. Michael Hammer, The Agenda: What Every Business Must Do to Dominate the Decade, Random House Business Books, 2002 (p 38) 9. Michael Hammer, The Agenda (p 39) 10. Neil Rackham, Rethink ing the Sales Force, McGraw-Hill, New York, 1998 (p 17) 11. Neil Rackham, Rethink ing the Sales Force (p 11) 12. Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no 6696, 2003 (pp 117–18) 13. Juliet Johansson et al., Solving the solutions problem (pp 117–18)

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Chapter 5: Transformation in the Information Technology Industry Mark Cerasale and Merlin Stone The rapid growth that the information technology (IT) industry experienced in the 1990s has slowed. According to Steve Hamm, Steve Rosenbush and Cliff Edwards, the early years of the 21st century were the worst ever experienced, much more serious than the earlier IT recessions of 1985 and 1990.[1] In an article entitled ‘ IT doesn’ t matter’ , [2 ]published in May 2003, Nicholas Carr argues that profound change has taken place: IT infrastructure has become commoditized. IT customers, suppliers and industry commentators have responded with passion. However, innovation is still alive and well in the IT industry: new products, services and business models are emerging.

DOES IT MATTER? Carr argues that the commoditization of IT followed the pattern of many other widely adopted technologies, such as railways and electrical power. He claims that since IT is affordable and accessible to all, it no longer offers strategic value to anyone. He argues that although chief executives consider IT to be of strategic value, particularly in gaining a competitive edge and in creating new business models, this does not mean that IT’ s value to companies has increased. He argues that what makes a resource truly strategic and a basis for sustained competitive advantage is not ubiquity but scarcity. [3 ] He argues that there should be a distinction between proprietary and infrastructural technologies. The former can be owned by a single company and give long-term strategic advantage. The latter offer more value when shared between companies. Their characteristics ‘ make it inevitable that they will be broadly shared – that they will become part of the general business infrastructure’ . [4 ]The opportunity for gaining advantage from an infrastructural technology is brief. As soon as the benefits are widely understood, companies begin investing in the infrastructure, and a process of ‘ build-out’begins. By the end of this phase, the rush to invest leads to more competition, greater capacity, and falling prices, making the technology broadly accessible and affordable. At the same time, the buildout forces users to adopt universal technical standards, rendering proprietary systems obsolete. Even the way the technology is used begins to become standardized, as best practices come to be widely understood and emulated. Often, in fact, the best practices end up being built into the infrastructure itself?Both the technology and its modes of use become, in effect, commoditized. [5 ] He argues that IT is a classic infrastructural technology, with characteristics that guarantee very rapid commoditization. IT is a transport mechanism and as such is more valuable when shared than in isolation. IT’ s history is characterized by increased interconnectivity, interoperability, homogenization of functionality, standardization and scalability, which ‘ dooms most proprietary applications to economic obsolescence’ . [6 ]He argues that the Internet is accelerating IT’ s commoditization by providing an ideal delivery channel for generic applications, allowing companies to buy ‘ web services’ . [7 ] Carr urges IT managers to focus less on strategy and innovation and more on operations and cost reduction. He suggests they focus more on making IT systems work. ‘ When a resource becomes essential to competition but inconsequential to strategy, the risks it creates become more important than the advantages it provides?Today, no company builds its business strategy around its electricity usage, but even a brief lapse in supply can be devastating.’[8 ]He argues that, similarly, an IT disruption can have devastating effects. Bob Evans reports on the response of Ralph Szygenda (CIO of General Motors) to the article: ‘ Nicholas Carr may ultimately be correct when he says IT doesn’ t matter?Business-process improvement, competitive advantage, optimization, and business success do matter and they aren’ t commodities. To facilitate these business changes, IT can be considered a differentiator or a necessary evil. But today, it’ s a must in a real-time corporation.’[9 ]Rick Whiting reports on the response of another General Motors manager, Tony Scott: ‘ Brakes are a commodity, but I don’ t think anybody would say they don’ t matter.’[ 10 ]

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Richard Wallace reports on the response of Craig Barrett (chairman and chief executive of Intel), which was that Carr’ s article absolutely misses the point and that common infrastructures may allow movement of material but do not allow the introduction of intellectual content or value. IT is the vehicle by which you take information and data and turn it into intellect content?Intel can’ t design a next generation chip without IT infrastructure, Boeing can’ t design an airplane and GM can’ t design a new automobile without an advanced IT and communications infrastructure. And you can’ t index the human genome or tailor drugs on individual DNA makeup without IT infrastructure. [11 ] Steve Hamm, Steve Rosenbush and Cliff Edwards, Tech comes out swinging [Online], Business Week Online [accessed 23 June 2003] [1]

[2 ]

Nicholas G Carr, Harvard Business Review, May 2003 (pp 3–10)

[3 ]

Carr, IT doesn’ t matter, p 4

[4 ]


[5 ]


[6 ]

Carr, IT doesn’ t matter, pp 5–6

[7 ]


[8 ]


Bob Evans, Business technology: IT is a must, no matter [Online], http://informationweek.com [accessed 19 May 2003] [9 ]

[10 ]

Rick Whiting, CIOs sure think IT matters [Online], http://informationweek.com [accessed 23 May 2003]

Richard Wallace, Intel’ s Barrett fires back in IT relevance debate [Online], http://eetimes.com [accessed 15 May 2003] [11 ]

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THE NATURE OF INNOVATION Peter Drucker highlights the tendency of IT companies to focus more on their technology than the business value it creates: In large measure the high casualty rate of knowledge-based industry is the fault of the knowledge-based, and especially the high-tech, entrepreneurs themselves. They tend to be contemptuous of anything that is not ‘ advanced knowledge’ , and particularly of anyone who is not a specialist in their own area. They tend to be infatuated with their own technology, often believing that ‘ quality’means what is technically sophisticated rather than what gives value to the user. In this respect they are still, by and large, nineteenth-century inventors rather than twentiethcentury (or twenty-first-century) entrepreneurs. [12 ] Further analysis of business innovation is provided in Chapter 7. In a forward-looking article first published in the Harvard Business Review in 1991, John Seely Brown suggested that change was imminent in the IT industry: As computing power becomes ubiquitous?it will become more and more invisible, a taken-for-granted part of any work environment, much as books, reports, or other documents are today?Indeed, at some point in the not-too-distant future – certainly within the next decade – information technology will become a kind of generic entity, almost like clay. And the ‘ product’will not exist until it enters a specific situation, where vendor and customer will mold it to the work practices of the customer organization. When that happens, information technology as a distinct category of products will become invisible. It will dissolve into the work itself. And companies like ours [Xerox] might sell not products but rather the expertise to help users define their needs and create the products best suited to them. Our product will be our customers’learning. [13 ] [12 ]

Peter Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, Oxford, 2001 (p 109)

John Seely Brown, Research that reinvents the corporation, Harvard Business Review, August 2002 (p 108) [13 ]

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INNOVATION IN THE IT INDUSTRY Innovation is still alive in the IT industry. This is not the place to review the enormous progress still being made in terms of speed, reliability and lower costs. However, innovation in the IT industry is not confined to products. Services are changing too. During the 1990s there was more need to integrate information technologies through systems and networks. New technology suppliers entered the market and greater competition led to more choice for IT customers. In the absence of widely adopted standards, the cost and complexity of integrating products from many suppliers was often considerable. Many companies do not have integration skills, knowledge or expertise; these are seldom considered a core competency (except in the case of IT suppliers). IT integration skills can be highly specialized and are often in short supply. Systems integrators emerged. Initially, customers used system integrators to transform and integrate core business processes, such as enterprise resource planning (ERP), using business software packages from SAP and others. Later, the Internet provided new opportunities to transform and integrate core business processes. At first, internal processes such as human resource management (HRM) were integrated. Eventually, many customer, supplier and business partner processes were integrated too. Further analysis of the evolution of the network economy will be provided in Chapter 15. According to Michael Hammer, ‘ The Last Big Thing was demolishing the walls within enterprises. The Next Big Thing that will dominate business discourse for the coming decade is the destruction of walls between enterprises.’[14 ]He continues, ‘ [U]ntil now, processes and the information systems that support them have stopped at the corporate edge. No longer. Now we recognize that corporate boundaries are no less artefacts than functional ones, and that processes may span them as well.’He cites the example of the order fulfilment process that turns orders into deliveries, demonstrating the absurdity of repeated rekeying and reprinting of information. He argues that the Internet is the critical technology for inter-enterprise process integration. [15 ] Indeed, it is not unusual for technology- or knowledge-based innovations (such as the Internet) to develop over many years before finding value-creating applications. According to Peter Drucker, ‘ Knowledge-based innovation has the longest lead time of all innovations. There is, first, a long time span between the emergence of new knowledge and its becoming applicable to technology. And then there is another long period before the new technology turns into products, processes, or services in the marketplace.’[16 ] The Internet and broadband networks enable many IT products, such as software applications, to be provided as services. Customer relationship management (CRM) applications, for example, are often provided as services. According to research from Aberdeen Group, ‘ Companies are increasingly looking to rent rather than buy software, changing the nature of the CRM marketplace in the process.’[17 ] The Internet has lowered interaction costs and enabled services to be centralized and provided at lower cost. Some companies choose to do this ‘ in-house’through shared service centres (SCCs); others choose to outsource. Core competency thinking has fuelled the growth in IT outsourcing. By focusing on the things they do well (their core competencies), companies are encouraged to identify and exploit what they do best. This allows resources to be focused on areas of value and growth. Many companies also turn to IT outsourcing to reduce costs. They aim to avoid depreciation charges on costly assets by removing them from the balance sheet. External service providers can often consolidate capital investment and reduce operating costs through economies of scale. They can often improve service delivery through the application of expert knowledge and provide access to skills and expertise that are not widely available. The needs of some customers are changing with regard to technology, IT services and suppliers. Steve Lohr writes, ‘ Most corporate executives say there is a lot they can do now with technology to give themselves an edge?Customers are also pressing for greater flexibility in how they buy computing resources, including paying only for as much product as they use, as if they were buying electricity.’[18 ] Steve Hamm, Steve Rosenbush and Cliff Edwards report: [Sam] Palmisano [CEO and chairman of IBM] is overhauling IBM to win back the dispirited. He thinks the answer is to make computing simpler, to shift the burden of managing tech systems from corporate customers to experts, such as IBM. Called on-demand computing by IBM, and utility computing by others in the industry, the idea is simple: Much of this complexity can be removed by using software to

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better stitch together applications and computers – and to deliver computing power to customers via the Internet. Rather than selling computers by the box, the plan is to sell computing as a service. [19 ] Christopher Koch writes: In 2000, IBM created a series of internal divisions, now called Emerging Businesses Opportunities (EBOs), that focus, among other things, on developing new technologies for the different pieces of on-demand, including utility (essentially pay-bythedrink IT), autonomic (software that automatically diagnoses and fixes computer problems), grid (pooling computers to form a single virtual entity), business process integration and Linux. [20 ] Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House Business Books, London, 2002 (p 167) [14 ]

[15 ]

Hammer, The Agenda, p 171

[16 ]

Peter Drucker, Innovation and Entrepreneurship, p 99

[17 ]

Rental CRM is on the rise, says Aberdeen Group [Online] http://crmforum.com [accessed 27 June 2003]

Steve Lohr, NYT, Ringing the death knell on tech’ s high-growth era [Online] http://iht.com [accessed 5 May 2003] [18 ]

[19 ]

Hamm, Rosenbush and Edwards, Tech comes out swinging

[20 ]

Christopher Koch, IBM’ s new hook [Online] http://cio.com [accessed 1 July 2003]

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IBM’S SOLUTIONS JOURNEY IBM is responding to the needs of its customers for e-business solutions on-demand. Solutions are not new to IBM. According to Michael Hammer, In the 1950s, IBM rose to great success with such a strategy (more value-added)?IBM’ s genius was to recognize that none of its customers wanted computers per se. What they wanted were solutions to their business problems of the day: payroll processing, accounting, and inventory management. IBM surrounded its basic computers with a host of related products and services that would help the customer solve these problems, such as application software packages, system analysis services, installation, training, and ongoing maintenance?Every business generation seems to forget, and then rediscover, this very basic principle. [21 ] The Lou Gerstner era When Lou Gerstner joined IBM, the company refocused on customer needs and solutions. By that time, the IT industry had changed, and IBM was in crisis. Indeed, one of Gerstner’ s first tasks was to refocus the company on its customers. McKinsey reports: Two months after taking the helm as CEO of IBM, in 1993, Lou Gerstner asked each of his top 50 managers to speak to at least five customers and report back on how to meet their needs. The 50 managers’immediate subordinates were encouraged to do so as well. Operation Bear Hug involved more than 1,000 conversations with customers and led IBM to change its thinking on their needs and then to create distinctive offerings to meet these needs – developments that led to the company’ s entry into the market for total business solutions. [22 ] Their discussions with customers and market research indicated that there was a growing demand for services. Gerstner recalls: I believed that the industry’ s disaggregation into thousands of niche players would make IT services a huge growth segment of the industry overall?For IBM, this clearly suggested that we should grow our services business?which was still seen as a second-class citizen next to IBM’ s hardware business However, the more we thought about the long-term implications of this trend, an even more compelling motivation came into view. If customers were going to look to an integrator to help them envision, design, and build end-to-end solutions, then the companies playing that role would exert tremendous influence over the full range of technology decisions – from architecture and applications to hardware and software choices. [23 ] Lou Gerstner’ s second big bet was that stand-alone computing would give way to networks. Gerstner wrote: That may not sound like a very big or risky bet today [2002]. But, again, this was in the context of the 1994 time frame, well before the Internet became mainstream. The first rumblings of change were there. You could find certain industries, particularly telecommunications, that were buzzing about the ‘ information superhighway’ , a dazzling future of high-speed broadband connections to the workplace, home, and school. If this kind of ‘ wired world’came about, it would change the way business and society functioned. It would also change the course of computing in profound ways. For one thing, it was virtually certain that world would be built on open industry standards. There would be no other way to fulfil the promise of ubiquitous connections among all the businesses, users, devices, and systems that would participate in a truly networked world. If that standards-based world came to pass, it would represent a major shift in the prevailing competitive landscape. [24 ] According to Gerstner, There were several reasons customers were pouring so much investment into services. First, skilled IT professionals were in such short supply that millions of IT jobs went unfilled. Customers simply couldn’ t staff up to do what needed to be done. But the main reason came back to?the customer’ s overpowering desire for someone to provide integration. At first that was just the integration of technologies. But as the networked computing model took hold, it created whole new dimensions around integration, forcing customers to integrate technologies with core business processes, and then to integrate processes –

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like pricing, fulfilment, or logistics – with one another. [25 ] Under Lou Gerstner and his team, IBM Global Services became the world’ s largest IT and business services organization. The Sam Palmisano era When Sam Palmisano took over the reins from Lou Gerstner in 2002, the IT industry was changing again. The network economy was emerging. Competition was intense and change discontinuous. There was increasing pressure to reduce costs and find new sources of innovation and growth. Palmisano set about transforming IBM into a more responsive, variable, focused and resilient ‘ on demand’business. His aim was to enable IBM (along with its partners, suppliers and customers) to better respond to changes in demand, market opportunities and threats. IBM plans to help its customers become on demand businesses too. The ‘ e-business on demand’vision required an industry agenda-setting strategy, a plan to acquire new capabilities and enablers. ‘ On demand’involves more than sophisticated pricing agreements; technology must support fluctuating usage and business processes must be transformed and integrated. Business Week reports: The project?puts Big Blue in the vanguard of a massive computing shift. The company starts by helping customers standardize all of their computing needs. Then, in the course of the next 10 years, it will handle growing amounts of this work on its own massive computer grids?The eventual goal is to imbue these systems with deep industrial expertise so that IBM is not only crunching numbers and dispatching e-mails but also delivering technology that helps companies solve thorny technical problems – from testing drugs to simulating car crashes. [26 ] IBM’ s‘ on demand’model requires business expertise and consulting capabilities. At the time of IBM’ s acquisition of PWC Consulting, Sam Palmisano commented, Clients are not only looking for innovative ideas to improve their businesses, they are seeking a partner with deep business expertise and the ability to exploit leading open standards-based technology to turn these ideas into bottom-line business benefits. This acquisition underscores our commitment to this strategy. [27 ] According to The Economist, Technology no longer sells itself simply because it is new. Real power is flowing to those firms that have begun to work out not what to sell, but how to sell it. IBM’ s answer to this problem was its purchase, last July [2002], of PWC Consulting. This deal merged PWC’ s business consulting with IBM’ s hardware, software and IT consulting businesses?By packaging business consulting with IT, IBM now hopes to sell its customers full, allsinging, all-dancing, business ‘ solutions’ , rather than vague promises about the benefits of new hardware or software. [28 ] The article goes on to cite how IBM is helping car industry customers in Detroit use data sucked out of engines during services to reduce car recalls and how, at a research centre near White Plains, New York, technologies have been combined to allow people to shop from home via an infra-red scanner built into a handheld computer. It claims: IBM hopes that from these consulting engagements will cascade demand for its software, hardware and systems specialists. From the customer’ s perspective, however, IBM is now selling something quite different – a commitment to improve a specific part of the business, with payment more clearly linked to results. The famously weak accountability of consulting and IT should improve. [29 ] The article observes, ‘ O]n demand?has acquired a broad, business-consulting message (the new sales model), pointing customers to the ability of technology to increase the flexibility of their businesses in response to volatile, unpredictable customers – thus making the leap to an n-demand business.’[30 ] [21 ]

Michael Hammer, The Agenda, pp 39–40

Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no. 6696, 2003 (p 121) [22 ]

[23 ]


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[24 ]

Gerstner, Who Says Elephants Can’ t Dance? (p 125)

[25 ]

Gerstner, Who Says Elephants Can’ t Dance? (p 132)

[26 ]

Business Week, cover story, ‘ The new Blue’ , 17 March 2003

Linda Rosencrance, IBM to acquire PWC Consulting for $3.5 billion [Online], http://computerworld.com [accessed 30 July 2002] [27 ]

[28 ]

The Economist, Is Big Blue the next big thing? [Online] http://economist.com [accessed 19 June 2003]

[29 ]

The Economist, Is Big Blue the next big thing?

[30 ]

The Economist, Is Big Blue the next big thing?

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INFORMATION TECHNOLOGY IN THE ‘ON DEMAND’WORLD Companies that want to transform themselves from product providers to services providers will need this kind of infrastructure to connect with and add value for their customers. This requires what IBM calls on demand computing. The way IT has evolved has left most companies with a computing infrastructure that is heterogeneous, widely distributed and increasingly complex. Moving to solutions provision requires a new computing architecture that allows them to leverage their own existing assets as well as those outside traditional corporate boundaries. On demand computing is the latest stage in the evolution of e-business technology. e-Business changes a business’ s interactions with customers in many ways:  New distribution channels. For example, new distribution channels are created through the use of pervasive technologies – technologies that allow customers to be reached anywhere, from anywhere. e-Business also facilitates disintermediation – the bypassing of existing agency and intermediary networks – and has the power to disrupt existing value chains.  New markets. Once a brand has established a significant online following, new markets can be reached and others can be created.  New business models. e-Business enables direct and simultaneous interaction between all parties in the value chain: buyers, sellers, information providers, regulators, etc. This has the potential to create disruptive business models such as the e-marketplace.  Transparent marketplace. In its ultimate incarnation, the World Wide Web offers unlimited information about an unlimited number of products and services to the entire population of the world. Where this is applied to virtual or information-intense products, the entire value chain can become transparent to all its members. Buyers can have access to real-time information on current prices, interest rates and commission charges, and can at any time select the most advantageous deal. In a transparent market, only the fittest will survive; only those suppliers with the most responsive products and service coupled with the lowest cost bases will be able to compete.  e-CRM. Electronic interactions with customers are by nature 100% computer-recorded. Every customer action can be tracked, yielding far more information about customers than was available in the past. When this tracking is coupled with the ‘ deep computing’capabilities of modern technology, individuals can be analysed and targeted on a one-to-one basis in a way never possible hitherto. The ‘ transparent marketplace’is some way off, but in the meantime, e-CRM offers a powerful means of attracting and retaining customers.  Reduced costs and improved service. Last but by no means least, e-business facilitates lower prices by reducing operational costs, while enabling better customer service, and product flexibility through business optimization. e-Business has a big impact not just at the point of customer sales and service, as commonly understood, but because many processes can be made much more effective and efficient through e-automation, knowledge management and self-service. Note that in large companies, e-business often helps to overcome the disadvantages of size, allowing them to reap advantages. So many applications are focused on internal transactions and communication. For many companies, a much higher proportion of e-business applications relate to their dealings with outside parties: customers, suppliers, business partners, and the like. For larger companies, internal communication (including training) can be problematic simply because there are so many people to keep informed, and here e-business has certainly come into its own, particularly for staff who are customer-facing and therefore often need to have access to the same information as the customer. Critical success factors in e-business The critical success factors in exploiting e-business to enhance customer management include the following:  Value proposition. The products and services offered must add up to a truly compelling value proposition for the target audience.

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html 

 



Trusted brand. Interacting with a computer can be highly impersonal, so effort must be invested into creating an experience for customers that encourages trust. Multi-channel customer management. In many industries, customers expect consistent sales and services over all channels, both physical and virtual. Web site quality. There are many aspects of quality in Web sites, eg usability, ‘ stickiness’ , resilience, security, continuity of service. All must be of a high standard if the e-business value proposition is to be well received in practice. Culture/language/geography. Despite the global nature of the World Wide Web, the reality is that geography and ethnicity create huge differences in culture and of course language. Successful e-businesses recognize that different Web sites are required for different audiences.

Modelling stages of evolution of e-business states IBM uses a particular model of e-business evolution. We define six ‘ Internet states’ . Businesses move from state to state according to their organization’ s needs or goals, so it is not necessarily right for a particular company to move to more advanced states as soon as possible. It is normal to find different business units in very different Internet states. It is not uncommon to find large companies with an advanced, successful Internet-only arm, but with many of its employees not having access even to an intranet. The six states may be summarized as follows. Each assumes the existence of all of the previous ones: 1. 1. Access – some people or everyone has access to the Internet, usually just for e-mail. A very simple Web site may be maintained. static’multi-page Web site for information purposes only. 2. 2. Publish – a ‘ 3. 3. Transact – the Web site supports one- or two-way transactions with the end user, but does support fully integrated processing of transactions. 4. 4. Integrate internally – use of e-business to transform the internal organization and processes, radically reducing costs and optimizing the business. 5. 5. Integrate externally – use of e-business to create a seamless, transparent process across the entire value chain, from customer through intermediary through all supplier tiers. 6. 6. Adapt dynamically – use of Internet technologies as the foundation for operating in a digital, virtual community. For example, a fully e-integrated institution can seamlessly in-source or outsource processing functions as demanded by market conditions and changing company structures. These are summarized in three main stages, as shown in Figure 5.1.

Figure 5.1: The IBM model of stages and states of e-business The main determinants of the need for continued investment and movement between states are usually organizational capabilities, rather than technical capabilities. Let us consider the model in more detail.

Early stage The e-business journey often begins with simple initiatives that extend market reach. This involves experimentation. Network capabilities and technologies are used to interact and transact with

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customers, suppliers, partners and employees.

Access Employees communicate via e-mail, and a single, static home page provides contact information. The approach is straightforward and low cost, but employees may not have all the required skills. However, for most companies the Web is now essential. It gives staff an easy way to search for ideas as well as a way to communicate with customers, suppliers and colleagues.

Publishing A multi-page Web site is used to communicate with prospects and customers. Much valuable information is provided through the Web site, but resulting interactions are handled by phone, fax or e-mail. The approach is still straightforward and low cost, but value is hard to quantify. However, even this approach helps the company reach new markets, often at very low cost.

Transactions Customers, suppliers and/or employees carry out transactions online. Existing stand-alone applications are adapted with a browser interface. In larger companies there may be several different initiatives: the finance department has one for credit control; the sales department one for prospecting; customer service has one for managing queries, complaints and service calls; human resources has one for employees; and the buying department one for suppliers. Each function thereby improves its efficiency and quality. However, fears about feasibility, return on investment, security and privacy start to occur.

Integrating stage – internal Here, the volume and complexity of customer, supplier, partner and employee transactions handled via the Internet site increase. The company needs a reliable, scalable e-business infrastructure that supports e-commerce and supply chain management and customer relationship management initiatives by integrating disparate applications and data inside and outside the organization. Most companies streamline their own operations first, linking their internal systems before turning their attention to integrating their systems with those of their partners, suppliers or customers. Here, the main problem is lack of critical integration skills. However, if these can be overcome, integrating processes enterprise-wide leads to increased productivity, streamlined operations, reduced costs and better customer service.

Integrating stage – external Business processes are transformed to integrate customers, suppliers and partners in a consistent application environment, whether Internet, intranet or extranet based. Examples include supply chains integrated across organizations and collaborative product development systems. Integration with external partners involves a cultural shift that many companies find hard, owing to fear of lock-in or of a shift in the balance of power in the relationship. In cases where one or more parties to the cooperation are ‘ mobile’ (eg with calling sales or service people, or involved in the logistics business), this stage involves extensive use of wireless and pervasive computing technology. In less developed countries, where telecommunications infrastructures are often weak and where wireless technology is helping countries ‘ skip a stage’ , wireless may be a necessity, not a luxury.

Advanced stage Here, a company re-examines its business model to determine which functions are essential to its value proposition. Support functions, such as human resources, accounting, information technology and perhaps even sales and marketing, are outsourced to increase efficiency and reduce costs. The Internet is used as the computing platform for transactions and interactions, to create a fluid environment where suppliers, partners, customers and employees come together in new ways, integrating business processes and sharing knowledge within and across organizational boundaries.

Dynamic adaptation

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Here, business processes that have been integrated using software and systems infrastructure are dynamically assembled as needed to address a specific problem or business opportunity – without the intervention of information technology staff. This new business model, called a ‘ business web’ , allows companies to respond quickly to changing customer needs and market conditions. Although few companies have reached this stage, those that have show that great competitive advantage can be achieved by narrowing their focus to their core competencies – complementing them with a network of outside specialists connected through the Internet. However, security, privacy, skills and technology issues, as well as legal, governmental and regulatory considerations, must be addressed. Standards are critical to success at this stage. In this, the most advanced, form, companies have so focused their businesses that they can provide their products and services on demand, because their processes and systems are fully linked with customers and suppliers and able to respond to individual customer needs automatically. This has been achieved by very few companies but has been a target ever since we were introduced to the concept of ‘ just in time’ . Successful diffusion of a new approach to management takes time. Success depends strongly on how familiar the different participants in the network of firms, suppliers, partners and customers are with the technology as well as their ability to deal with the management issues involved. [31 ]For example, a study of the diffusion of e-business in consumer goods marketing (where many of the suppliers involved are small agencies) identified many different diffusion processes at work (see Figure 5.2).[32 ]We must also remember that many of the next generation of entrepreneurs will have grown up in a consumers’e-world. Here, the statistics showing the number of people using e-business technology to manage many aspects of their lives (whether playing multi-player Web-based games or using text messaging to take part in television competition or to lobby governments) confound even the most optimistic experts. [33 ]

Figure 5.2: Diffusion processes taking place within the diffusion of the Internet in branded consumer goods products

On demand IT On demand IT operations have four main characteristics: integration, openness, virtuality and autonomy.

Integration Businesses become more powerful when they integrate horizontally, connecting the vast amounts of data, legacy systems and custom business applications that are spread across their internal operations, partners, suppliers and customers. Real-time transaction processing capabilities and data integrity of the highest order will be necessary to handle the choreography of customer data, capital, healthcare records and engineers’designs. Data-mining and decision support systems will supply the analysis needed to extract insight and make decisions on the fly.

Openness Open standards allow all technologies to connect and integrate. They have been adopted widely in the form of Java, XML, Web services, emerging grid protocols and Linux. Open standards make IT – and

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business itself – more modular. Many partners can come together, and their systems and applications talk to each other to allow them to work together. Companies can quickly implement new end-to-end solutions to meet their current business needs. They can choose best-of-breed solutions tailored to their environment.

Virtuality Increasingly, customers are using computing provided in a utility-like manner, whether from their own internal systems or acquired across the Internet. Technologies such as grid computing allow distributed computing resources to be shared and managed as if they were one large, virtual computer. They are typically first implemented inside companies, as ‘ intra-grids’ , allowing businesses to increase the utilization of their existing computing assets. Then they move beyond corporate boundaries. The ultimate pay-off will come when businesses tap into only what they need, when they need it.

Autonomy In an on-demand world, business leaders must be free to focus on managing the intricacies of business rather than the complexities of technology. Security, workload balancing, software upgrades, storage – the technology will eventually be able to manage itself. IBM is creating technologies that can self-diagnose, self-configure and selfheal, much like the human autonomic nervous system. Already, many of its software and hardware offerings include some autonomy. [31 ]

E M Rogers, The Diffusion of Innovation, Free Press, New York, 1983

T Stone, A study of the effects of the Internet on branding in FMCG companies, unpublished BA dissertation, International Business Unit, Manchester Metropolitan University, 2002 [32 ]

[33 ]

M Lindstrom with P Seybold, BRANDchild, Kogan Page, London, 2003

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SUMMARY In this chapter we looked at some aspects of transformation in the IT industry. We outlined Nicholas Carr’ s argument that IT infrastructure has become commoditized, and presented the response of some industry customers, suppliers and commentators to Carr’ s ideas. We described some of the innovations happening in IT and the role of the Internet in many of them. We suggested that many customers want ‘ on demand’products, services and solutions. We outlined the evolution of services and solutions in IBM and presented some views on how IBM is responding to the needs of its customers with e-business products, services and solutions on demand. We explained that ‘ on demand’computing is the latest stage in the evolution of e-business. We described some of the ways that e-business changes a business’ s interactions with customers. We presented some of the critical success factors in e-business and provided an overview of IBM’ s model of e-business evolution. Finally, we outlined the four main characteristics of ‘ on demand’IT operations: integration, openness, virtuality and autonomy. In Chapter 6 we describe how change is creating opportunities to create and deliver business solutions on demand in many industries – not just the IT industry.

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NOTES 1. Steve Hamm, Steve Rosenbush and Cliff Edwards, Tech comes out swinging [Online], Business Week Online [accessed 23 June 2003] 2. Nicholas G Carr, Harvard Business Review, May 2003 (pp 3–10) 3. Carr, IT doesn’ t matter, p 4 4. Carr, IT doesn’ t matter, p 4 5. Carr, IT doesn’ t matter, p 5 6. Carr, IT doesn’ t matter, pp 5–6 7. Carr, IT doesn’ t matter, p 6 8. Carr, IT doesn’ t matter, p 9 9. Bob Evans, Business technology: IT is a must, no matter [Online], http://informationweek.com [accessed 19 May 2003] 10. Rick Whiting, CIOs sure think IT matters [Online], http://informationweek.com [accessed 23 May 2003] 11. Richard Wallace, Intel’ s Barrett fires back in IT relevance debate [Online], http://eetimes.com [accessed 15 May 2003] 12. Peter Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, Oxford, 2001 (p 109) 13. John Seely Brown, Research that reinvents the corporation, Harvard Business Review, August 2002 (p 108) 14. Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House Business Books, London, 2002 (p 167) 15. Hammer, The Agenda, p 171 16. Peter Drucker, Innovation and Entrepreneurship, p 99 17. Rental CRM is on the rise, says Aberdeen Group [Online] http://crmforum.com [accessed 27 June 2003] 18. Steve Lohr, NYT, Ringing the death knell on tech’ s high-growth era [Online] http://iht.com [accessed 5 May 2003] 19. Hamm, Rosenbush and Edwards, Tech comes out swinging 20. Christopher Koch, IBM’ s new hook [Online] http://cio.com [accessed 1 July 2003] 21. Michael Hammer, The Agenda, pp 39–40 22. Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no. 6696, 2003 (p 121) 23. Louis Gerstner, Who Says Elephants Can’ t Dance?, HarperCollins, London, 2002 (p 124) 24. Gerstner, Who Says Elephants Can’ t Dance? (p 125) 25. Gerstner, Who Says Elephants Can’ t Dance? (p 132) 26. Business Week, cover story, ‘ The new Blue’ , 17 March 2003 27. Linda Rosencrance, IBM to acquire PWC Consulting for $3.5 billion [Online], http://computerworld.com [accessed 30 July 2002] 28. The Economist, Is Big Blue the next big thing? [Online] http://economist.com [accessed 19 June 2003] 29. The Economist, Is Big Blue the next big thing? 30. The Economist, Is Big Blue the next big thing? 31. E M Rogers, The Diffusion of Innovation, Free Press, New York, 1983 32. T Stone, A study of the effects of the Internet on branding in FMCG companies, unpublished BA dissertation, International Business Unit, Manchester Metropolitan University, 2002 33. M Lindstrom with P Seybold, BRANDchild, Kogan Page, London, 2003

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Chapter 6: Industries transforming Mark Cerasale, Merlin Stone, Glenn Taylor and Bryan Foss

INTRODUCTION Many business leaders in manufacturing and service industries are transforming their companies and their industries with solutions strategies. Some companies plan to introduce solutions over time; others plan to reinvent themselves through more ambitious transformation. According to Peter Drucker, market and industry structures are brittle and disintegrate, often quickly. When this happens, every member of the industry has to act. To continue to do business as before is almost a guarantee of disaster and might well condemn a company to extinction. At the very least the company will lose its leadership position; and once lost, such leadership is almost never regained. But a change in market or industry structure is also a major opportunity for innovation. In industry structure, a change requires entrepreneurship from every member of the industry. It requires that each one ask anew: ‘ What is our business?’And each of the members will have to give a different, but above all a new, answer to that question.’[1 ] Changes in a market or an industry are often spotted first by outsiders. Industry incumbents tend to rely too long on their traditional business models, particularly if they have been successful in the past. The challenge for industry incumbents, leaders and laggards alike, is to focus on innovation and growth, to reinvent their own industries and companies, and to create new ones. In this chapter we examine the solution transformation in business-to-business retailing, broadcast technology (media and entertainment), aerospace and defence, freight and distribution and retail financial services, as a stimulus to this process. [1 ]

Peter Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, Oxford, 2001 (p 69)

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FAST-MOVING CONSUMER GOODS INDUSTRY Despite high demand for products, some areas of retailing experienced creeping commoditization as early as the 1960s. Particularly in business-to-business sales, greater availability and familiarity with many household products made customers more sophisticated and discerning. Increased competition between manufacturers made retailers more powerful. This was seen in the British market for frozen food and chilled ready meals (see Chapter 2). Retailers introduced their own labels, and prices started to fall as the shadow of commoditization fell across some packaged consumer goods markets. As large retailers became more powerful and knowledgeable, their buyers needed less help from manufacturers’ salespeople. Salespeople were forced to abandon their traditional product focus in favour of new value adding activities. The role of the salesperson was transformed. Manufacturers attempted to fight commoditization by building their brands through advertising, which became more expensive as channels proliferated (print, radio, television, etc). When buyers were relatively unsophisticated and consumer demand was high, the role of business-to-business salespeople was to provide information about products and deal with the administration of orders. As their products became increasingly commoditized, manufacturers questioned how salespeople could best add value. They asked themselves what benefit could be provided to their customers (the retailers) when the customer bought their products. They concluded that what the retailer actually valued from the manufacturer was managerial services – that is, advice on procurement, inventory management and display. The role of the salesperson shifted from communicating the value of products to creating customer value by improving the way products were bought, held in stock, presented and sold to consumers. Peter Drucker explains: The salesman has become a serviceman whose first responsibility is to help the customer work out his own problems. He will, of course, push the company’ s products. But he is expected to advise the customer objectively and impartially on how much of the competitor’ s products he needs, how to display them, how to sell them. And he is being judged by service standards and paid first for service performance. Selling the company’ s own product has become a by-product. [2 ] According to Michael Hammer, Over the last decade, vendor-managed inventory (VMI) has become widespread in the supermarket industry, where it is often called CRP (continuous replenishment of product) or ECR (efficient consumer response). Given the similarities among brands in the same product category, retailers have acquired new power in their relationships with their vendors. Indeed, the latter can now succeed in only one way – by solving the retailers’business problems in addition to supplying them with goods. Consumer goods manufacturers have come to recognize that supermarkets do not care about their products as such, but they do care about the profits they can derive from those products. Supermarkets see products as merely a troublesome means to a triumphant end. [3 ] The relationship between retailers and suppliers has been transformed by communication and information technologies such as Electronic Data Interchange (EDI) and, more recently, the Internet. In many cases, new technologies have replaced costly salespeople altogether. Retailers, distributors and manufacturers come together in virtual networks. These are often led and coordinated by retailers, whose direct relationship with consumers gives them power over other partners in the value chain. The power to coordinate a coalition of partners in a value network is illustrated through the Wal-Mart example in Chapter 2, and is described in more detail in Chapter 15. The value added services provided by suppliers in the retail industry are not restricted to food products: they extend to nonperishable goods such as newspapers and magazines too. People still read a lot, but they want to read more selectively, so the range of weekly and monthly magazines has exploded. At the same time, cost pressures have favoured supermarkets, which take a much larger share of the magazine market than traditional newsagents. However, this has brought a new set of problems for supermarkets, whose management systems and processes are more suited to food. The distribution systems used by magazine suppliers differ from those for other categories. Retailers found that the category was getting out of control. Display was poor; there were problems with unsold stock. So, in the United Kingdom, retailers have turned to the concept of category leader to make this category work for them. For example, Sainsbury, Tesco and Asda (a subsidiary of Wal-Mart) have turned

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html to Associated Newspapers Ltd, publisher of the United Kingdom’ s leading, and very profitable, mid-market Daily Mail, granting it preferred supplier status – in effect, making it a category partner. The Daily Mail has developed new delivery and display systems for Sainsbury, and has introduced Sainsbury to the Retail Display Agreements (RDA) concept. It is now generating revenue from RDAs at the checkouts and on newspaper display racks with customized magazine displays. The Daily Mail exchanges this for space to promote other titles within the Associated Newspapers portfolio. This is one of the best recent examples of industry knowledge being used by a company to add solutions to what was formerly just a range of physical products. [2 ]

Peter Drucker, The Practice of Management, Butterworth-Heinemann, 2001 (p 51)


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THE MEDIA AND ENTERTAINMENT INDUSTRY The media and entertainment industry includes major television networks, cable programming networks, radio broadcasters, film and television production companies, interactive media companies, and publishing and printing companies. Industry players are facing dramatic process and technology changes as a result of industry consolidation, new government regulations and global competition. At the same time, the industry is in the midst of a transformation as technology moves from analogue to digital. This transformation is challenging traditional business models and creating new opportunities for innovation and growth. Media and entertainment companies are under intense pressure to work faster and more efficiently. Continuous innovation and creativity are critical to success, and ‘ content is king’ . The major players compete fiercely to create, manage and distribute information, news and entertainment. This was once done using analogue technology, and relied on processes performed by people. Today the content is often in digital format, and many processes are automated or have been eliminated. During the 1990s the Internet became a dominant communications channel. The industry looks set for another period of change as broadband networks become more widely adopted. As the cost of access to broadband technologies goes down, more people will use broadband services for work, shopping, entertainment, etc. Sony’ s strategy aimed at exploiting the opportunity this provides was described in Chapter 1. Broadcast technology manufacturers Broadcast technology manufacturers have traditionally supplied the media and entertainment industry with products, including television cameras, outside broadcast and editing equipment, microphones, professional monitors, and sophisticated content management and transmission systems. By the late 1990s, broadcast technology manufacturers’customers had largely replaced their analogue technology with newer digital equipment. Most television production studios, for example, had a mixture of digital broadcast and media management equipment, together with a small amount of older analogue technology. Broadcast technology had reached maturity. There were fewer product innovations, and new innovations that did emerge were quickly imitated. Standardization on digital technology led to commoditization and pressure to lower prices. The number of product suppliers continued to increase – many of them now coming from emerging countries with low labour costs. Customers became less loyal, and adopted a ‘ pick and mix’approach. The convergence of broadcast and information technology (IT) has led to more competition from the top end of the consumer electronics market. Many digital products such as video cameras have become commodities. Indeed, many consumer video cameras are now considered ‘ good enough’to be used in professional markets. The relaxing of public broadcast legislation and the opening of markets to competition in many countries has led to a proliferation of broadcasters, some with fewer than a dozen employees. Broadcasters at the lower end of the market often use lower-cost ‘ consumer’technology to match their budgets. By contrast, digital broadcast infrastructure has become more complex. Convergence between media, telecommunications and information technology industries has meant that traditional broadcast technology manufacturers are faced with new competitors (many from the IT industry). Physical analogue devices traditionally used for capturing, managing and distributing content can be replaced by software applications. Furthermore, customers need more specialist support to integrate their complex broadcast and information technology systems. Specialist consulting and systems integration companies have entered the industry. Media and entertainment solutions The needs of customers in the media and entertainment industry are changing. Some customers want a product or service at the lowest possible cost; others want end-to-end solutions. In response to the need for lower-cost products, many broadcast technology manufacturers have adopted lower-cost sales and distribution models. They have set up Web sites to supply and support dealers and selected end customers with lower-end products such as entry-level cameras and microphones. The customers using the Web site (technicians, engineers or resellers) are generally knowledgeable about the products. They can access product information and other services such as stock availability directly on the manufacturer’ s computer systems without the need to meet a salesperson.

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By contrast, the digital broadcast systems end of the market is increasingly consulting and services-led. Many broadcast technology manufacturers have service capabilities that were originally developed to support their products. They include systems consultancy and implementation, integration, project management, operational support and maintenance. Experts are often available to advise customers on less technical issues. Some broadcast technology providers are reconfiguring their various services divisions and partnering with third parties (ie distributors and specialist software houses) to enter the market for broadcast technology solutions. Corporate communications solutions Some broadcast technology manufacturers have seen new opportunities for corporate communications solutions in markets outside the media and entertainment industry. They have sensed a growing need for content in many forms (information, news, entertainment, etc) and plan to reach customers over broadband networks via various platforms: personal digital assistants, mobile cellular phones, etc. By using broadband technology, content can be delivered to anybody, anywhere, at any time. Many organizations, such as large multinational companies, could set up their own broadcasting functions using the Internet and broadband networks to communicate more effectively with their employees. There are many applications for corporate communications solutions: companies looking to lower education or travel costs by using videoconferencing and ‘ Web casts’ ; hospitals performing medical procedures remotely, making use of limited specialist medical resources; commercial sports organizations such as professional baseball and soccer teams launching media services; advertisers directly promoting their brands on giant screens in shopping malls and airports – and many more. While engineers and technicians bought broadcast technology products in the past, solutions customers will be line-of-business executives (from human resources to marketing). Broadcast technology manufacturers must learn to work with these new customers. Strategy and transformation The media and entertainment industry is transforming. Faced with stronger competition and commoditization, some manufacturers have begun the transition to ‘ solutions provider’ . They are entering their existing ‘ media and entertainment’markets with new solutions and entering entirely new markets with ‘ communications’solutions (in some cases even creating new markets). This strategy requires substantial transformation: of culture, organizational structure, roles, responsibilities, skills, processes, policies, procedures and measurements.

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THE AEROSPACE AND DEFENCE INDUSTRY Aerospace and defence is a global industry made up of designers, manufacturers, and companies that service military and commercial aircraft, ships and spacecraft, and related equipment. These products are manufactured in low volumes over long periods of time, so there are limited cost benefits from traditional economies of scale. Product research and development effort is intense and constant. The aerospace and defence industry has its origins in government defence and space exploration. As a result, the industry is strongly influenced by governmental regulations and legislation. Governments traditionally focused on product performance and have often been willing to pay product development costs in advance. Consequently, product development cycles have been long, and design and production requirements have been stringent. This practice of financing and initiating programmes has tended to generate high overheads for aerospace and defence manufacturers. Governments usually provide operating capital throughout the initial design phases of the contract. Aerospace companies have become large and bureaucratic, and their programmes frequently run over budget. In the 1990s the industry consolidated through mergers and acquisitions. Consolidation in the commercial air transport market left only two global players: Airbus and Boeing. These are conglomerates each containing several aircraft companies. Emerging nations such as China and other Far Eastern countries are beginning to establish themselves in the market. The commercial airline industry has suffered a setback in the period since 11 September 2001. By contrast, in view of the greater global geopolitical uncertainty, defence budgets may rise. Procurement in the defence industry Each government has a department of defence, or a similar body, which provides and maintains the country’ s defence capability. The procurement process is usually long and drawn out, and can change radically over time. Costing, feasibility assessments, political or defence issues of the day for the country and its allies, predictions of peace or war, and home economic conditions can all have an effect on purchasing decisions. Bidders are sought to own the prime contract. However, one contractor cannot provide the whole product alone, so joint ventures or alliances are needed. In the early stages, the major suppliers of each component align themselves as potential partners with one or more bidders so as to improve their chances. When a bidder (or consortium) is chosen, confirmation of the initial design mock occurs and the manufacturing programme starts. Programme partners often have many alliances with suppliers. Each supplier has a complex set of supply relationships. Project management is a key capability in this environment. Costs are typically fixed, and usually some payment is made in advance. Occasionally this appears in the form of government grants. Investments are usually large. Initial costing and expected return calculations rely heavily on benefits being realized within expected timescales. This complexity means that learning and knowledge management are key supplier capability requirements. Leading suppliers are normally part of the design team and are involved in deciding which components are used. They own the intellectual capital for the life cycle of any given component. During the design and manufacturing process, members of the alliance work as a virtual team, sharing knowledge, financial risk and goals. The ‘ operator’is typically the military (air, sea or land) of whichever government is buying the product. Once operational, the product is managed by the operator. The operator maintains configuration and asset tracking for each individual machine, together with a permissible alternative to certain components and the maintenance and service intervals for some current components. Suppliers develop and modify some key components and work closely with the operator to ensure that updated configurations are introduced at the right time. The aircraft is monitored, and usage information is used for scheduling services. Politics and the pressure to reduce costs The level of spending available for defence and related activities usually depends on a country’ s disposition to hostilities. Most countries are members of at least one alliance. ‘ Sharing’among several alliance members helps to keep costs down. The economic health of a country may not greatly affect

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spending on defence – the perception being that threats must be prepared for regardless of expense. However, in stable environments the amount of money available for the military is usually under constant scrutiny. The big savings often demanded cannot be achieved by ‘ tinkering’ , so procurement efficiency initiatives are common. Initiatives to lower costs often appear in the form of price negotiations or more innovative uses of resources such as ‘ power by the hour’ . e-Business and the need for efficient logistics Service providers must consider the frequently changing location of aircraft and associated assets. When a decision is made to service equipment, it must be out of service for a minimum time. There are two major cost implications. First, the right resources (men, equipment, skill and technical data) must be brought together with the right parts. Failure to coordinate the process extends the service time, increasing costs. Second, the number of equipment items needed assumes a certain turnaround capability for maintenance and repair. An efficient support service can minimize these costs. Coordinating logistics depends on getting the right information to the right part of the supply chain. e-Business techniques can cut the time and complexity of collecting and sharing such information, and remove the knowledge barrier to market entry. If information is made openly available, any company with the right service capability can participate. The nature of aircraft products The maintenance of an aircraft depends on hours in use but also elapsed time. Service requirements depend on activity. A unit must be ready for action at short notice. Therefore, a support infrastructure must be in place even if it is not being used, which means that high fixed costs are incurred. The average military aircraft is about 10 years old and was designed about 10 years before that. Since most aircraft were designed and built, there have been advances in electronics, particularly in avionics for enemy tracking, flight management and diagnostics. Coordination in international air traffic has improved. It is now mandatory to have standard flight tracking and communication facilities to operate in many countries. Environmental impact of noise and emissions also relate to the aircraft’ s age. These factors create a growing market in retrofit of components, and offer new service opportunities. New product programmes The number and type of new product programmes determines which service providers are present in the market. In the past, customers bought a product that included some initial support. When that agreement terminated, the service was provided in-house or through subcontracts. In the future, customers may no longer buy the product, choosing a service instead. Service levels will be determined according to the number of equipment items available at any one time. There will be variable cost parameters according to requirement. This reverses the traditional sequence of events: product supply followed by service is replaced by service provision that includes the product. Companies that can do only one thing will be disadvantaged. They will be less able to attribute costs across the different stages of the product life cycle. Companies offering global solutions are most likely to take prime contractor roles, adopting an intermediary position between smaller service companies and the customer. Solution capabilities and enablers The number of electronic and digital components in an aircraft is likely to continue to increase. Suppliers will require new knowledge and skills in this area. They will have to invest in new equipment and provide global support. Defence products are, by their nature, mobile, and customers are spread across the globe. Any company offering a credible service must be able to operate globally. The service provider must also have a local infrastructure and workforce to support the contract. Companies will have to learn to collaborate in new ways or grow through acquisition. Friendly nations looking for opportunities to reduce costs by sharing supplier services will demand that their suppliers collaborate. More focus on outsourcing Outsourcing is set to increase. In many countries the military are finding it harder to recruit skilled people. Systems are more complex. Service staff and maintenance engineers need constant training, even for simple service tasks. Constant training is costly. Moreover, the industry competes for software development talent with games manufacturers, IT specialist developers and other high-tech industries that seem more attractive to candidates. Moreover, the strength of a force is often measured by its headcount. Outsourcing non-fighting roles is seen as a way of redirecting personnel without much political impact, while cutting costs.

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html Conclusion Defence suppliers have always provided some support services. Usually this support took the form of contracting, where the supplier managed major programmes. These services are evolving into solutions in which suppliers take responsibility for solution provision, maintenance programmes for in-service equipment, training, information management, and dealing with logistics and the supply chain. Service and support markets are immature but growing quickly. Total solutions such as lifetime maintenance are increasingly introduced on new purchases. It may take suppliers many years before some of these relationships become profitable (perhaps 10–15 years). Initial investments are high. In the short term, suppliers are trying to maximize opportunities to provide value added services in relation to existing products.

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THE FREIGHT AND DISTRIBUTION INDUSTRY The freight and logistics industry is faced with customers, many of whom now demand:  a partnership relationship rather than a shipper relationship;  easier access to shipment information in real time;  greater levels of service;  reduced shipment handling times;  lower user costs, including much more accurate on-time delivery, allowing them to manage their own logistics more tightly. Technology is important because one service that logistics companies supply to their customers is information about the shipment. Having up-to-date, accurate information about where the goods are, what condition they are in, who signed for receiving the shipment, when it was picked up and when it was delivered is just as important as transporting the goods. The increasing emphasis on customer service here has made the information that accompanies a consignment as important as the movement of the physical goods itself. Customers want either to access this information easily and in real time or get it automatically if any deviation from the planned shipment occurs. Because of the increased emphasis on customer service and logistics, freight and logistics companies are beginning to work more closely with their customers, their customers’ customers, and sometimes even with their competitors. Many of these companies are finding themselves acting as allies, competitors and customers all at the same time. They are realizing that each company is an integral part of the supply chain. However, as a company shifts roles, communication between companies can be confusing. The challenge confronting logistics companies is to seek competitive advantage through using IT to improve customer service and cut costs while developing new logistics offerings. This makes IT an important part of the corporate agenda. IT is now one basis of a freight or logistics provider’ s business capabilities and competitive edge. Globalization, supply chain management and e-commerce are transforming the industry. The trend is towards manufacturers and distributors outsourcing logistics to strategic partners. This is leading to alliances, acquisitions, mergers, subcontracting and niche marketing. Consolidation produces larger companies that have an expanded traffic base, reduced overhead costs and improved service. Suppliers can also become global entities by recreating themselves as virtual global companies. By forming partnerships with other companies that complement their offerings, these companies can provide end-to-end services to their customers. These partnerships allow companies to provide expanded services without making additional investments. A new trend is the rapid movement of national postal services into the transportation segment. Because letters are increasingly being created in a digital format and delivered over the Internet, these postal services are pursuing other revenue possibilities. The most aggressive ones are the German, Dutch and UK postal services, followed closely by the United States Postal Service (USPS). Other postal units around the world are expected to follow this movement. Many of these national postal services are moving into transportation by becoming privatized and then acquiring companies that allow them to expand their offerings. After privatization, they purchase companies such as global forwarders, logistics companies and express integrated carriers. The fastest-growing segments in the industry include the express and integrated carriers such as Federal Express, UPS and DHL. These carriers are growing faster than the carriers in other transportation markets because their services allow shippers and consignees to reduce costs in areas such as inventory, insurance and labour. As customers focus on core competencies, they are outsourcing these operations to third parties. The growth of these companies has been helped by transformation since the mid-1990s from service to solution companies. Previously the service was ‘ productized’– typically, differentiated by the characteristics of the individual shipment: size (from letter to shipload), frequency, urgency, fragility, and so on. However, in the early 1990s, many client-side companies came under pressure, whether because of costs or because they found it hard to manage their increasingly complex logistics operations. This

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applied particularly to the electronics manufacturing industry. Here, product life cycles were collapsing and reliability was increasing, increasing the risk of manufacturers and distributors being left with obsolete inventory. Companies tried to cut costs by moving from servicing by replacing components to servicing by replacing modules – even asking customers to do it themselves. This brought the spectre of expensive, rapidly obsolescing inventories of expensive modules being scattered at different levels of the inventory chain all over the world. However, when the modules were needed, they were needed quickly, increasing the cost of movement. Similar pressures were appearing in many other industries, particularly those with a strong science or technology element, such as the pharmaceutical and automotive industries. But the same general pressures were also visible in almost every industry that produced physical goods for distribution over countries and continents. Typically, the lower the cost/bulk ratio of the good being transported and the higher the daily volumes, the more the ‘ heavy end’of the logistics industry was involved (ie firms used to shipping container-loads of the same product rather than individual packages). So, client companies turned to their logistics providers with the question ‘ How can we do it better?’Of course, the wiser logistics companies had noted the pressures and were already approaching their clients with the statement ‘ We think we can do this better for you – give us the chance!’It became clear that although the slightly more complex service products (eg those offering faster delivery, bookable at shorter notice, with more comprehensive and rapid tracking and tracing) could help client companies cope with some of the pressures on them, the only comprehensive answer lay in outsourcing of the complete logistics operation. This meant the outsourcing supplier taking full responsibility for some of or all the physical movement element of the client’ s supply chain and many of the associated information, communication and documentation systems. This required suppliers to transform themselves from simple service product suppliers to services suppliers, though the core offering of the supplier normally stayed the same. In most cases it needed to be more comprehensively and clearly modularized, so that those configuring the services for their clients could establish and then deliver against standards promised to customers. In most cases, special divisions were set up, sometimes focusing on the needs of one sector, eg electronics. Market research and related analysis and planning were used to identify the needs of each segment and to determine how the services needed to be configured and then delivered. Staff had to understand the language, organization, needs and operating norms of the client industries, and in many cases staff were recruited from the target industry. New types of logistics staff needed to be recruited too, especially by the high-speed logistics companies. In their original form, these companies were not used to managing inventories. Their vision of success was based on rapid order-taking, with goods being moved through buildings that emptied every day, prior to the next batch of shipments. Suddenly they were being required to manage and account for stock. They also needed to adopt e-business technology even more rapidly. They had already found it useful in terms of reducing costs for their traditional business: customers could now log on, order pick-up, and then track and trace a consignment using the Web, thereby cutting the supplier’ s call-centre costs sharply. But now their clients’logistics managers required advanced, consolidated information and reporting, enabling them to focus on ensuring that the outsourced contract was running smoothly. A particularly crucial area was pricing. Before, these companies were used to pricing using a relatively simple formula based on the characteristics of individual shipments or combinations of shipments. Now they had to price for contracts in which the service being delivered was inventory availability, not movements. In many cases they were being asked for ‘ value pricing’by their clients – pricing that could demonstrate not just improved performance but overall cost saving. In fact, this proved to be a boon for many of these suppliers, as they found that once they were organized to supply services, they could do it far more cheaply than their clients, not just because of their knowledge and because of their shared infrastructure of transport, warehousing and information systems, but also because their disciplines of fast movement allowed their clients to save significant sums in terms of avoided product obsolescence, deterioration and pilferage, and also reduced inventory finance costs. There was simply far less inventory lying around or being transferred between different levels of distribution. The value price was therefore much more profitable to both parties. Today, the global logistics management industries is one of the very best examples of how companies can transform themselves – indeed, must transform themselves – into services companies to meet the needs of their most demanding customs. This case study shows that this can apply even when the company already considers itself to be one of the best service companies in the world – as UPS, FedEx

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html and DHL certainly did in the field of global rapid logistics. [4 ] For more on how the outsourced services works, most major providers’Web sites provide many case studies. For a description of the transformation at UPS, see G Hamel, Leading the Revolution, Harvard Business School Press, Boston, 2002, ch 7 (pp 211–21). For more on the development of the logistics industry, see D Waters (ed), Global Logistics and Distribution Planning, 4th edn, Kogan Page, London, 2003, especially ch 13: A McKinnon, Outsourcing the logistics function (pp 212–32) [4 ]

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RETAIL FINANCIAL SERVICES The financial services industry is a strange mixture of innovation and conservatism. At the innovative extreme are the new companies that have emerged to dominate the credit card (eg MBNA in the United States), short-term savings (eg ING Bank in the Netherlands) and general or property and casualty insurance markets (eg Direct Line in the United Kingdom). They have achieved their dominance by focus on simplification, using the best direct marketing techniques in all channels – direct mail, call centres and the Internet – and wherever possible outsourcing non-core activities and partnering with larger financial services and other companies. They have been joined by other companies with a very strong cost focus, such as the Royal Bank of Scotland, which has partnered with companies such as retailers to provide own-label financial services. At the other extreme are the life and pensions companies, whose good investment performance until the stock market boom ended allowed them to persist with deeply inefficient, paper-bound practices and complex distribution systems, in some countries underpinned by complex, low-quality and ever-changing regulatory regimes that never allowed these companies to focus on efficiency. Somewhere in the middle are conventional banks, some of which have adopted efficient approaches, including outsourcing, partnering and improved supply chain management, but many of which are still very inefficient by manufacturing industry standards. However, things are changing. Extreme cost and regulatory pressures are now forcing these companies to consider radical approaches to management. The clear separation of manufacturing from distribution in the life and pensions sector is just the first step – and is still uncompleted by many companies. However, the most significant development is the emergence of a new range of services allowing these companies to outsource much of their activity to suppliers specializing in the provision of the relevant services. These suppliers include systems companies such as IBM and the growing number of information services suppliers in countries such as India (for systems development and call-centre activity). The more closely financial services companies work with these services specialists, the easier it is for them to focus on their own customers and on strategies for ensuring that these customers get the best value for money. In the past 20 years or so, several financial services companies have pioneered a move towards services provision, although progress towards a solutions business model continues slowly and in isolated areas. In the 1980s and 1990s, UK niche commercial insurer Independent Insurance developed full-service packaged solutions for sale through a tiered broker network. Examples included:  Prior risk management assessments and advice designed to help the client understand and manage operating risks. These detailed surveys and risk assessments enabled Independent Insurance to help the client reduce its insurance costs while making the most attractive, yet viable, premium offer.  Delivery of product and service combinations that would assist the insured with the early recovery of its business. This also enabled the insurer to limit or reduce its liability for business interruption and total loss to be recovered. In turn, this may have enabled lower reinsurance premiums to be paid.  Recognition that in small business the owners can benefit from simplified and packaged insurance arrangements, for example combining the insurance for directors’ cars with that for goods vehicles, property, liability, health, etc. Unfortunately, Independent Insurance became insolvent for balance sheet reasons and no longer trades, but St Paul’ s Insurance continues to provide similar services for commercial clients. Since its launch as the first major UK direct insurer, Direct Line has developed a wide range of additional services for its customers. These were at first limited to small supportive services for motor policies, such as legal assistance for financial recoveries (eg policy excess) resulting from road accidents. Over time, further services were developed, including breakdown recovery, new and used car sales, and loans and other financial products. When each service was launched, access was often initially given preferentially to selected customers, then broadened later. A major composite insurer planned to offer total solutions for retirement, health, home, travel and car ownership. The idea was to package together an extensive collection of products and services that recognized customers’need for a simplified and full-scope service. The boundaries between previously separate insurance products would have become blurred (eg between health and travel insurance, or

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between travel insurance and contents insurance), enabling both the provider and the customer to benefit from cost reductions. Despite a significant planning exercise, the insurer eventually decided not to proceed, as the results were unlikely to provide a reasonable return on investment. Its life products continued in a relatively stable fashion, although its distribution channel strategy changed dramatically from direct to via alliances. Globally, the life insurance and investment business continues to be product based. However, intermediaries play a strong role, and this provides a services-like context for advice and total offerings. Traditional and novel products can be combined to meet the needs of clients who can afford these offers. New custom-built investment plans and personalized pensions portfolios can be profitably offered to customers with a reasonable amount to invest, with advice and product set-up often provided on a fee basis. While the financial services industry has trialled various solutions approaches over the years, much of the industry remains product focused. Progress is constrained by tradition, regulation and market inertia. Only those companies with mass customization capabilities, or the ‘ craft’customization capabilities required to service the combined needs of smaller numbers of higher-value customers, have made progress towards becoming solutions businesses.

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SUMMARY In this chapter we have described how opportunities to create and deliver exceptional customer value through solutions are emerging in several industries. We provided examples from the media and entertainment, aerospace and defence, freight and distribution, and retail financial services industries. There are many more examples. In some industries, such as retailing, solutions and collaboration between customers and suppliers are already well established. In others, such as retail financial services, they are less so. Often the first steps towards introducing solutions are modest, and limited in scope. Solution transformation can take many years. In other cases, change is occurring more rapidly. Some broadcast technology providers, for example, are in the process of creating new industries and reinventing old ones. Chapter 1 assessed some key factors determining successful business strategy and transformation. It was suggested that business strategy should be oriented towards innovation and growth. In Chapter 7 we will explore the concept of innovation and explain why innovation is more important than ever. We will provide some definitions of innovation, how it can be managed and why it can be difficult to achieve. We also look at three ways to encourage successful innovation: by providing leadership, by cultivating the environment and through idea management. Finally, we use Peter Drucker’ s‘ systematic innovation’ approach to explore some of the most common signs of solution opportunity. We hope this will help readers identify opportunities for innovation and growth in their own industry, providing the basis for successful business strategy and transformation.

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NOTES Peter Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, Oxford, 2001 (p 69) Peter Drucker, The Practice of Management, Butterworth-Heinemann, 2001 (p 51) Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House Business Books, London, 2001 (p 44) For more on how the outsourced services works, most major providers’Web sites provide many case studies. For a description of the transformation at UPS, see G Hamel, Leading the Revolution, Harvard Business School Press, Boston, 2002, ch 7 (pp 211–21). For more on the development of the logistics industry, see D Waters (ed), Global Logistics and Distribution Planning, 4th edn, Kogan Page, London, 2003, especially ch 13: A McKinnon, Outsourcing the logistics function (pp 212–32)

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Chapter 7: Business Innovation Abigail Tierney and Mark Cerasale

INTRODUCTION Last year, one of the authors of this chapter wanted a bottle of perfume for her birthday, but this year she wants some rest and to have some fun. The currency of the transaction is changing, and she is now willing to pay for time as well as lovely smells. She is not unusual in this. Six out of ten Europeans feel they have all the things they need. [1 ]We are all increasingly overloaded with information – and this applies to sellers as well as buyers. How often do you buy something from someone who knows more about what you are buying than you do? These points illustrate why businesses face a potentially hostile environment in which the customer is increasingly at the centre of the stage. In today’ s business environment, change is constant and discontinuous, and its pace ever-increasing. Suppliers must find new ways to create and deliver exceptional customer value. To turn change into opportunity, companies must become more innovative, and embrace innovation to maximize exploitation of opportunities generated by turbulent markets. Companies must learn to keep reinventing themselves and their industries. Opportunities for growth will not come through operational efficiency alone. Even in industries and markets that are shrinking, leading innovators are continually reinventing their products, their solutions, their processes and even their customers. Business history over the past 50 years is littered with companies (some very large) that fell by the wayside by failing to innovate. There are, however, many examples of companies that embraced innovation and survived and prospered. 3M, for example, one of the leading innovative organizations, views innovation as a crucial instrument for winning in this highly competitive and unpredictable environment, and for countering turbulent economic times. [2 ]In contrast, low performers view innovation as an unaffordable luxury, rather than the opportunity to move ahead of competitors. They are preoccupied with cutting costs and with survival. Innovators like 3M are exploiting the opportunity to reassess business performance and organizational strategy, to out-think and out-learn their competitors, to emerge stronger and more competitive. Lou Gerstner, the CEO who led IBM’ s turnaround during the 1990s, commented: In almost every industry, globalization is leading to overcapacity, which is leading to commoditization and/or price deflation. Success, therefore, will go to the fittest – not necessarily the biggest. Innovation in process – how things get done in an enterprise – will be as important as innovation in the products a company sells. [3 ] Strategic imperatives for innovation Let’ s look at some of the facts relating to innovation. On average, a 10 per cent increase in the percentage of turnover from new products and services is correlated with a 2.5 per cent increase in the rate of revenue growth. [4 ]There is a clear positive correlation between research and development intensity (R&D spend as a proportion of sales) and sales growth. [5 ]A 10 per cent increase in the percentage of turnover from new products and services is associated with an increase in total shareholder revenue of nearly 9 per cent, year on year. [6 ]Companies with less than 10 per cent of their turnover from new products and services have a 30 per cent chance of shrinking rather than growing. [7 ] Given these facts, why are so many companies not committed to innovation? Perhaps it is because they don’ t really know what innovation is! Martin Hayward (the Henley Centre), Why business will be harder in the future, presentation given at ‘ The Third Horizon: An evening with inspired leaders’ , 9 June 2003 [1 ]

B Brullo, A tradition of innovation, in Innovation: Making it happen, Confederation of British Industry, 2002 (p 22) [2 ]

[3 ]


[4 ]

T Davis, Innovation and Growth: A global perspective, PricewaterhouseCoopers, London, 2001 (p 23)

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[5 ]

129

T Bradshaw, The innovation imperative, in Innovation: Making it happen, Confederation of British Industry, London, 2001 (p 42) [6 ]

[7 ]

T Davis, Innovation and Growth (p 23)

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WHAT IS INNOVATION? Innovation is one of those words that appears straightforward, but ask someone to explain what they mean by it and you get many different answers. To confuse things further, it is often interchanged with ‘ invention’ . Peter Drucker provides a useful definition of innovation and the role of the entrepreneur: ‘ Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service.’[8 ]It is more than product-line extensions or clever branding. In Innovation and Entrepreneurship, Drucker suggests that a change is needed in our approach to innovation similar to the one that occurred in scientific research in the 19th century. Invention was once associated with a lone genius struggling against tremendous odds, relying on flashes of inspiration to generate a new idea. Over time, invention was transformed. It acquired quasi-‘ scientific’planning, organization, predictability, disciplines and credibility. Drucker argues that if companies are to become more entrepreneurial and innovative, then something similar must happen with regard to innovation. Innovation should no longer be seen as the domain of a few bright sparks toiling away in R&D departments. Innovation must become continuous, enterprise-wide, collaborative and customer focused. A company that is serious about innovation is committing itself to a long, and often unfamiliar, journey. Entrepreneurs are individuals and companies that use innovation to their advantage. They see change as normal and embrace opportunities to do things differently. The French economist J B Say was perhaps the first to define the term ‘ entrepreneur’ . He wrote, ‘ The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.’[9 ]Say defined entrepreneurship in terms of supply, as changing the yield of resources. However, entrepreneurship can also be explained in demand terms, as changing the value and satisfaction obtained from resources by the consumer. Gary Hamel, a leading thinker on innovation, and chairman of innovation consulting firm Strategos, believes that innovators typically view the world through four lenses. According to Hamel, they look for deeply held conventions and challenge them; they look for change in the world and understand the revolutionary potential of the change; they empathize with customers and anticipate their needs; and they view their organizations less as businesses and more as skill sets. [10 ]Innovative companies search continuously for new and different ways to create and deliver value. They are constantly on the lookout for change, because change provides the opportunities for the new and different. [8 ]


[9 ]

P Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, Oxford, 2001 (p 17)

[10 ]

P Drucker, Innovation and Entrepreneurship (p 19)

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CAN YOU MANAGE FOR INNOVATION? There is some disagreement over whether it is possible to manage for innovation. One school of thought says that the most successful innovation is based on serendipity, and you cannot manage for this; you can only create an environment where it is more likely to occur. The second, and increasingly dominant, school of thought believes that innovation is a disciplined, systematic and organized process. The best-known proponent of this approach is Peter Drucker, who upholds the belief that ‘ entrepreneurs need to search purposely for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation. And they need to know and apply the principles of successful innovation.’[11 ]Bob Brullo, the managing director of 3M UK and Ireland, agrees with Drucker, stating that ‘ the innovative success 3M has enjoyed has never depended on one-off discoveries or moments of eureka. It has been based on a deliberate and rigorous commitment to the technological development of customer-focused products.’[12 ] In reality, both a sense of unpredictability and a sense of process are critical to success. An open style that fosters eureka moments is one side of the equation. This means thinking differently about the boundaries of your organization, and the relationships between internal functions, potential partners and national contexts. This approach is not mutually exclusive with the line favoured by Drucker and 3M. The other side of the equation is a systematic process that channels creativity towards innovative new solutions. Even if you opt for a ‘ white-space’approach at the start, it is absolutely critical to have a process in place to ensure that the ideas that emerge get quickly to market. Viewed in this way, innovation and entrepreneurialism are disciplines with rules that can be learned, applied and managed. [11 ]

G Hamel, Innovation Now, Fast Company, 65, December 2002 (p 115)

[12 ]


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WHAT ARE COMMON INHIBITORS TO INNOVATION? Too many companies are constrained by inertia. They opt for optimization and incremental, continuous improvement rather than radical change – which, when required, can be more rewarding. Their management culture and systems – metrics, measurement systems, compensation, policies and processes – encourage modest incremental progress. However, in competitive markets, modest improvement is often not enough. Instead of avoiding change as something that is uncomfortable, innovative companies embrace change and turbulence; they see the opportunities in Schumpeter’ s‘ creative destruction’to grow and evolve. Many companies avoid making the needed changes because they believe change is ‘ risky’ . Their belief is correct, particularly if change is handled poorly, but there is risk in most economic activity. Also, it is often riskier to do nothing, or make small changes when bigger ones are needed. There is also a tendency to look back to more successful times with nostalgia. Managers often continue with outdated practices for too long, hoping for a return to the ‘ good old days’ , which may never materialize. Some people are simply unwilling to change, learn about new things and adapt accordingly. Innovation is often restricted because creativity by itself is not enough. Innovation without execution is meaningless, because it never delivers value. 3M makes the distinction between creativity as thinking about novel ideas, and innovation as the successful implementation of those ideas. [13 ]John Kao, the founder of the ‘ Idea Factory’ , argues that if all innovation practices are based on the creation of ideas (ideation) alone, all you will produce is a collection of ideas. [14 ] Many companies lack the ability to sense and respond to the changes around them. In large hierarchical organizations, senior managers often focus on day-to-day management. With some exceptions, they spend more time with subordinates than with customers, and so lose touch with changing customer needs. As they rise in seniority, managers tend to take more responsibility for strategic and structural decisions, and less for decisions that transform operations or that transform the experience of customers or staff. Lack of customer insight can be an inhibitor to innovation, such as whether to invest in creating solution delivery capabilities. [13 ]

B Brullo, A tradition of innovation (p 21)

[14 ]


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HOW YOUR COMPANY’S PROCESSES, STRATEGIES AND ORGANIZATIONAL STRUCTURE CAN SUPPORT INNOVATION The requirements for successful innovation fall into three broad categories. Leadership Being innovative is a strategic choice. Leaders need to be disciplined to achieve their objectives. This means defining a clear strategy for delivering innovative results. It means defining what is meant by ‘ results’ . It means abandoning projects that are not delivering the results. This is often the most difficult part of innovation. Abandoning an idea in which you invested, one that you initiated and nurtured, means admitting failure and disappointing those who gave birth to the original concept. In the solutions enterprise, this obstacle is more serious, because failure can lead to an impasse where you must either reinvent your company or die. To survive and be innovative, leaders must not only create new strategies, but also question whether their current strategies could be different. There is a strong relationship between leadership practices and innovation, as it is leaders who create the environment for innovation and support the transformations triggered by innovations. Every leader calls for new products and new solutions, but often these same leaders disparage new thinking. Companies move in the direction that its leaders define and push towards. However, if radical innovation is the objective, management rules and processes that are designed to produce predictable, reliable, repeatable results are not going to work. These traditional management methods will produce predictable, reliable and repetitive solutions. Leaders should seize the opportunities to loosen their grip on the organizational mind, and embrace management techniques that encourage organizations to thrive in ambiguity. It is important to focus an entire corporation on innovation. For example, 3M’ s strategy is designed to go beyond incremental improvements. 3M aims for 10 per cent of sales to come from products and solutions developed in the previous year, and communicates this objective throughout the organization. This target focuses the whole of 3M on innovation, and creates a sense of urgency and momentum across all lines of business. [15 ] Another task for aspiring innovative leaders is to develop a brand identity for innovation. Employees are the most critical asset for innovation, so innovation depends on executives developing a sense of membership and responsibility among their employers. The brand should foster the belief that the impossible is possible, and give employees the courage and motivation to step into the unknown. As the impassioned leader of Apple, Steve Jobs developed an innovation strategy that famously fostered confidence and belief in all his employees. Jobs chose to involve all employees in the innovation process, and fostered a sense of ownership. With this trust came empowerment, and passion for the products and solutions that were being developed. Cultivating an innovative, creative environment Innovation is a supreme motivator of people. New ideas generate excitement among employees and create an atmosphere of expectation, of being part of developing something new. Cultivating an environment that encourages employees to be creative will ultimately benefit many components of the business, which in turn will feed back into the innovation process. Creativity comes naturally to some, but is difficult for others. Innovation is a discipline. As with other disciplines, one can teach the needed skills, including creative thinking, logging ideas, representing ideas, securing senior sponsorship and understanding the different stages of idea development. As well as creativity training, staff should be encouraged to ask obvious questions. Often people fail to speak up not because they have no ideas or questions, but because they do not want to look stupid. Singapore’ s National Library Board tackled this issue by running a series of ‘ Ask Stupid Questions’forums for employees. These events, where ignorance was applauded, generated more than 300 ideas. [16 ] Companies that are serious about innovation must also give their staff time to think about new horizons. Advanced Tissue Science Inc replaces or repairs damaged tissues and organs. Employees devote 80 per cent of their time to existing product lines, but for the remaining 20 per cent they are allowed to work on anything they find exciting and longer term. According to their vice-chairman, Gail Naughton, this

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deliberate strategy ‘ keeps their energy and enthusiasm alive’ . Furthermore, this programme is not just the prerogative of the R&D department, but also reaches departments such as corporate communications. [17 ] An innovative organization is one that takes risks. This calls for a high level of commitment to doing something original, because by its very nature, taking risks means there will be unpleasant as well as pleasant outcomes. An innovative organization needs to tolerate failure, because if you want change you need variety, and with variety comes risk of failure. Lack of failure is evidence of a lack of imagination. So, innovative companies give staff the freedom to take risks, and ensure that they understand that a well-managed failure does not reflect badly on them. Most companies that take innovation seriously reward employees for it. The most popular form of reward is stock option. Interdigital Communications Corp, which develops wireless technologies, rewards its employees with 2,000 options, one-third given when the patent is filed and two-thirds once it is granted. It also encourages an atmosphere of competition by holding an annual Inventors’Dinner for those who have filed or been awarded patents. At the dinner, some cash rewards are presented, including one for the individual or team named as inventor of the year’ s most valuable patent. [18 ] In a solutions business, sustaining your innovation depends upon your people, who conceive and deliver your solutions, so you need to make sure you keep them. The ‘ war’for talent that raged during the 1990s means that corporations recruited many new voices not afraid of challenging the status quo because they do not fully understand how things are ‘ supposed to be done’ . They are full of fresh ideas and have a desire to be heard. [19 ]While innovative organizations depend on managers who actively recruit talented people, the real winners are those managers who are able to manage the talent pool by developing, exciting and retaining the talent. The new recruits, sometimes labelled ‘ maverick’ , are bursting with entrepreneurial enthusiasm, but will move on if they don’ t receive a sympathetic ear when questioning the status quo. New voices alone are not enough for innovation. A solutions enterprise must balance what Thomas Kuhn calls ‘ the essential tension between tradition and innovation’ . [20 ]Successful exploitation of creative ideas demands people who think out of the box, bend the rules, and spot connections that others miss. However, it also relies on individuals who know all the rules and understand how the company works, as they will be key champions in ensuring that an innovation passes through all the processes. While this combination of innovation and tradition can sometimes be found in a lone individual, this is rare, so Kuhn claimed that it is the professional group rather than the individual innovator who must display the characteristics of tradition and innovation simultaneously. Under such conditions, ‘ the nature of the job to be done will invariably combine, to ensure that all group members will, to a greater or lesser degree, be pulled in both directions’ . [21 ] Enterprises are paid to create wealth, not control costs. However, this is not reflected in traditional measurements. It would be interesting to see how many chief executives and board directors know what proportion of their turnover comes from new products and services. It is difficult to improve what you cannot see, so innovative companies need to measure innovative output in terms not just of profits, but also of customer perceptions over time. One reason why many companies do not measure their innovation process is that doing so is too hard. The result is that they do not know how successful they are at innovating. Those that do measure tend to focus on the internal measurements such as revenue growth and sales volume. Return on investment and customer satisfaction are also popular measures. However, there is little use of customerfocused measurements, which is worrying, given the growing importance of customers. One option for measuring innovation performance is a balanced scorecard that reflects the relationships between the results and the steps that produced them, and provides the required depth while being simple to use. [22 ]A possible metric in the balanced scorecard could be the number of patents that have been filed. While this is not a perfect measure of a company’ s innovativeness, businesses that spend money on patents are protecting earlier investments in R&D, and those investments indicate a commitment to innovation. Idea management If leadership and the business environment encourage new ideas, a mechanism is needed for managing and harvesting these ideas. There is a direct relationship between the number of ideas generated and the number of innovations that bear fruit. [23 ]This means that entrepreneurs should never bank on one big

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idea. Instead, they should develop an innovations portfolio. A portfolio approach to innovation increases the probability of a successful launch, as well as the quantity of new ideas. [24 ]Each idea in the portfolio is pursued or abandoned as conditions warrant and resources allow. With this approach, executives play the role of editor, looking for the patterns that emerge from the collection of ideas and ensuring they receive a fair hearing. While whiteboards and Post-it notes are still the most common repository for ideas collection, systems such as ‘ Idea Central’from Imaginatik are becoming more popular. The concept behind ‘ Idea Central’is simple. According to Imaginatik Research, corporate innovation programmes tend to produce higher-value ideas if they are limited to a specific time period and focused on a specific corporate objective or challenge. In contrast, many corporate suggestion systems are open-ended (they have no start or end dates) and are not focused on a specific objective. This tends to result in a small quantity of poor-quality ideas. [25 ]With systems such as ‘ Idea Central’ , all ideas, both successful and unsuccessful ones, are catalogued so that they can be extracted in the future. Storing them in this way also enables knowledge-sharing across the organization. Innovative companies give much attention to market research, because a critical success factor for innovation is the ability to predict future market and business trends. These companies create close connections with external work, to help them figure out what is needed in the market and which new product designs might be feasible. Marketing research should play a crucial role by orchestrating market probes, delving into the latent needs of consumers, working with leading users and watching competitive moves. Marketing is responsible for interpreting and communicating what has been learned about emerging needs and the scenarios that might develop. This ensures that new solutions remain aligned with emerging needs, and adapt to competitive moves. Strategic partnering with customers, academic institutions and industry leaders can create this kind of foresight. Teamwork of this kind is an important source of new and differentiating solutions. It brings people with different perspectives together to focus on a particular strategic issue. Although these alliances have been facilitated by developments in collaborative technology, few companies systematically manage for this kind of collaboration. They therefore fail to harness the creativity that stems from the tensions between different cultures and approaches. One company that is connecting itself to external sources of innovation is Procter & Gamble, whose goal is to have at least 50 per cent of its new products originate outside the organization. This programme is called ‘ Connect and Develop’ , and is managed on a global scale by Larry Huston, whose title is ‘ R&D manager, innovation and knowledge leadership’ . According to Huston, organizations need to look outside their own walls, because current spending on R&D is not sustainable. [26 ]To get access to the best brains, Huston taps into established networks that already have contract mechanisms in place. These can range from a group of suppliers, a government lab, a venture capital network, and even Procter & Gamble’ s own alumni. A critical community to connect with is that of customers. As successful innovation is customer driven, all innovation strategies should include tactics for getting close to customers so as to understand their current needs and how they are evolving, along with the intensity and the urgency of those needs. The vice-chairman of Advanced Tissue Sciences Inc believes that customer contact is imperative for motivating folks in the trenches. Naughton explains that they ‘ bring in burn victims and families of burn victims, or diabetic patients who have been spared an amputation because of our product, and we make sure that all of our associates understand how their work has touched people’ s lives’ . [27 ] This strategy tackles the challenge of globalization. After a period of mass customization, customers now want local diversity. Globalization has become localization. So a key challenge is how to benefit from global scale while delivering personalized or local solutions. This concern has a trust component, which has come to the fore partly as a result of the fall of Enron, Andersen and WorldCom. All this means that consumers feel that it is hard to find trustworthy providers. In this cynical world, referral and word of mouth are becoming more significant in buying decisions. Martin Hayward of the Henley Centre suggests that the way to tackle this distrust is to get rid of smoke and mirrors and make things real again, by putting a personal face on products and services and by creating solutions for your customers that are local and specific, and that come with guarantees, provenance and substance. [28 ]Customers want a solution the way they want it. They don’ t want to hear anything other than ‘ made for me’ .

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For innovators, an accelerated pace of knowledge and innovation is both vital and natural in today’ s information-driven marketplace. The home of innovation has shifted from the centralized R&D groups to innovation as an enterprise-wide process that affects all aspects of the organization. At its core, innovation is knowledge production – a social process that accounts for evolution not just in products and technologies, but in every fabric of the company, touching all aspects of its culture, strategy, processes, solutions and organization. True innovation is based on the recognition that a solution embodies a number of design variables, all of which must be constantly revisited and the assumptions on which they are based challenged. Innovation cannot be a part-time strategy; it must be engrained into how you manage your organization. Leaders who want to make innovation a reality in their organization must see it in terms of capability and commit the same kind of commitment, persistence, energy and investment that they commit to other capability challenges, such as supply chain management and customer service. [15 ]

http://www.dialogonleadership.org/Kao-2000cp.html

[16 ]


T A Stewart, Singapore learns to innovate: are creativity and effective management irreconcilable?, www.business2.com, 21 November 2001 [17 ]

L Buchanan and T Singer, The innovation factor: a field guide to innovation, www.inc.com/magazine/20020801/24449.html, 1 August 2001 [18 ]

[19 ]

L Buchanan and T Singer, The innovation factor

B Axelrod, H Handfield-Jones and E Michaels, The War for Talent, Harvard Business School Press, Boston, 2001 [20 ]

20 change in a creative environment, see R J Sternberg, What is the common thread of creativity? Its dialectical relation to intelligence and wisdom, American Psychologist, 56 (2001), pp 360–62, and Liam Hudson, Contrary Imaginations: A Psychological Study of the English School Boy, Penguin, Harmondsworth, 1967 [21 ]

B Axelrod et al, The War for Talent (p 343). For further discussion on the requirements for stability and change in a creative environment, see R J Sternberg, What is the common thread of creativity?, andLiam Hudson, Contrary Imaginations [22 ]

[23 ]


[24 ]


[25 ]


[26 ]

http://www.innovationtools.com/Resources/ideamgmtdetails.asp?ContentID=84

E Schonfeld, Outsourcing innovation: if you want to find the best new ideas, follow Procter & Gamble’ s lead and enter the nexus, www.business2.com, 30 May 2003 [27 ]

[28 ]

L Buchanan and T. Singer, The innovation factor

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WHAT ARE THE SIGNS OF SOLUTION OPPORTUNITY? Peter Drucker argues that innovative companies should adopt a structure, method and discipline for innovation. According to Drucker, ‘ systematic innovation’consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation. Most innovations exploit change that is already under way. Systematic innovation is a diagnostic discipline. It involves a continuous and systematic examination of the areas of change that typically offer opportunities to create value. Drucker cites seven signs of innovation opportunity. [29 ]Innovation opportunities come from unexpected occurrences such as successes or failures within the enterprise, or unexpected outside events such as incongruities, new process needs, demographic changes, changes in perception and new knowledge (often a new scientific invention). The seven signs provide a structure for identifying opportunities for innovation. The signs can be used to help identify opportunities to create and deliver value through solutions. Unexpected occurrences: successes A sure sign of emerging solution opportunity is unexpected successes. Many companies operate in mature industries with commoditized products and services. Salespeople selling industrial machinery might find their win rate much improved by consistently focusing on business value rather than product features and functions, while collaborating with business partners to create a comprehensive offering. Managers may dismiss such unexpected ‘ solution’successes because they are unfamiliar. Sometimes managers do not even see unexpected solution successes because their reporting systems do not capture them. If a distributor is involved, a manufacturer may be unaware that a new customer segment has been created. So managers should investigate and analyse unexpected successes to identify and exploit solution opportunities. Reporting systems should capture relevant information. Unexpected occurrences: failures Another sign of solution opportunity is ‘ the failure that should never have happened’ . Why do companies with market-leading products sometimes lose to inferior competitors with products that are no more than ‘ good enough?’Even the most carefully planned products and services often fail. Unexpected failures may be put down to ‘ politics’or irrational customer behaviour. A series of unexpected failures can act as a wake-up call to complacent companies. According to Peter Drucker, ‘ if something fails despite being carefully planned, carefully designed, and conscientiously executed, that failure often bespeaks underlying change and, with it, opportunity’ . [30 ]Further investigations through ‘ loss reviews’ and meetings with customers are learning opportunities and often the first steps in recognizing solution opportunity. Unexpected outside events Unexpected successes or failures take place within the (often extended) boundaries of an enterprise. Events outside an enterprise also create opportunities to introduce solutions. Markets maturing, new geopolitical landscapes, economic crises or booms, social upheaval, changing buying behaviour or new technologies can all create solution opportunities. Companies can use existing capabilities to exploit changes caused by outside events. Drucker asserts that the unexpected outside event ‘ may be the area that is particularly suited for innovation by the large and established enterprise. It may be the area in which expertise matters the most, and in which the ability to mobilize substantial resources fast makes the greatest difference.’[31 ] Incongruities Have you ever considered an industry or a process and thought, ‘ There must be a better way of doing this?’Those working in the industry or managing part of a process often ask themselves that question, but nobody does anything about it. Incongruities are often taken for granted. You may hear, ‘ That’ s just the way we do things around here.’Incongruities are symptoms of the need for change and indicate opportunities for innovation. If a company’ s sales are increasing more slowly than its competitors’in a rapidly growing market (despite having similar products and services), then an incongruity exists. People often make unfounded assumptions about reality. This can lead to wasted effort and

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inefficiencies. Innovative companies are quick to sense and respond to differences between perception and reality. For many years, a common belief was that personal computers should be sold to business customers through a dedicated field sales force or distributors. Today, most PCs are sold to businesses through direct sales and distribution channels such as the Internet. Direct Line did the same in motor insurance in the United Kingdom. Differences between perception and reality are often found at an industry level. Innovations often appear simple and obvious once they are established. The difference between what suppliers believe their customers value and what they actually value is another area of opportunity for innovation. Suppliers often misunderstand what the customer is buying, believing that the customer values their product or service just as the supplier does. One enlightened cosmetics company executive was once famously quoted as saying, ‘ In the factory we make cosmetics, in the shops we sell hope’– he or she clearly understood the difference. Customers rarely see themselves as buying what the producer or supplier delivers. Customers’expectations and values are often very different. Innovative companies look for differences between supplier and customer perceptions of value and attempt to exploit those differences. Process needs According to Michael Hammer and James Champy, writers on business process re-engineering, a process is ‘ a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer’ . [32 ]Process need is a fertile area for solution opportunity. According to Peter Drucker, The incongruity within a process, its rhythm or its logic, is not a very subtle matter. Users [customers] are always aware of it?There is, however, one serious limitation. The incongruity is usually available only to people within a given industry or service. It is not something that somebody from the outside is likely to spot, to understand, and hence is able to exploit. [33 ] It is therefore often easier for a company already operating in an industry or market to be the first to introduce solutions in that industry. Core processes, those that define and differentiate a company, usually cut across organizational boundaries and are not confined to single functions. Many experts in business process re-engineering believe that selling is not a core process. The activities involved in traditional selling are, indeed, generally confined to the sales function. Traditional product-led marketing, sales and distribution do not create value for solution customers. Selling is a connected series of tasks and activities that are just one part of an overall value-providing process. In the solutions area we call this the ‘ solution creation and delivery process’ . Solution customers gain value from the tasks and activities performed in the process of solution creation and delivery. These tasks and activities must be closely connected. They must also be performed in new ways. Introducing solutions often requires substantial business transformation. These ideas are described in detail in Chapter 9. Industry and market changes In May 2003, Nicholas Carr published an article in the Harvard Business Review entitled ‘ IT doesn’ t matter’ . [34 ]In it, Carr argues that just like many widely adopted technologies such as railways and electrical power, information technology is now a commodity. He claims that since IT is affordable and accessible to all, it no longer offers strategic value to anyone. There are signs of commoditization in some parts of the IT industry. Many manufacturers have responded to increasing commoditization of PCs with direct sales and distribution – they have introduced low-cost business models. Faced with falling margins caused by such commoditization, many technology companies are introducing IT-enabled solutions. Chapter 5 provided further analysis of the transformation occurring in the IT industry. Industry convergence can also provide opportunities to introduce solutions. The computing, communications and media industries are converging. So there is, for example, a growing market for ‘ telematics’solutions. The next generation of motor vehicles will probably be fitted with technology enabling new information and entertainment services to be provided directly to the dashboard. In Chapter 6 we illustrated the convergence of the IT, communications and media industries with the example of a broadcast technology manufacturer aiming to exploit its existing customer base and enter new markets with ‘ communications solutions’ . Demographics Demographic changes in population size, age structure, employment, education, status and income provide solution opportunity. As customers become more sophisticated and less homogenized, more

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html customer segments emerge. New segments such as older parents, older singles, single-parent children, minority ethnic groups, urban vis-?vis rural, younger and richer retirees, destitute retirees, and uneducated graduates are emerging. These offer opportunities for innovation. Consider today’ s generation of working ‘thirty-somethings’ . They can no longer rely on a job for life, or on a reasonable state pension. Their investments in stocks (shares) may be worth less than they expected. However, the products and services available to them such as bank accounts, mortgages, life assurance and pensions often require expert knowledge to manage successfully. In the future, banks may introduce long-term ‘ personal financial solutions’to satisfy the (often latent) needs of the ‘ thirty-something’ workforce. Opportunities for innovation may be obvious to industry outsiders, and therefore new entrants are often quick to exploit them (so perhaps the supermarkets will get there first with that one). Changes in perception There may be differences between reality and perception in an industry or market. However, perception is an uncertain barometer. It may be hard to know whether real differences exist. Even after extensive analysis and planning, it may be wise to start small and test the water when introducing new solutions based on changes in perception. Drucker gives the example of ship containers. Established shipping companies focused on cutting transit time and cost by making ocean-going ships faster and more cost-effective. However, this was not the issue, as ships were already very efficient in transit. The real problem lay in loading and unloading cargo, which kept ships in port and tied up valuable harbour space. When the shipping container was developed, it could be pre-loaded on land before the ship arrived, then quickly loaded on to the ship when the latter arrived in port. So, ocean transit became much more cost-effective and efficient. New knowledge New knowledge is perhaps the best-known form of innovation. It is often associated with technology and science, and has two characteristics. First, there is a long lag between a discovery and its practical application. Thus it was 26 years before chemotherapy translated into sulpha drugs, and 38 years before the diesel engine led to diesel propulsion. Second, it is nearly always the result of the convergence of several discoveries and breakthroughs. The computer, for example, was the result of five different developments in technology. In business settings, new knowledge is usually acquired through research and development (into either products or services). R&D can provide opportunities for competitive advantage in companies providing solutions. IBM, for example, is developing new self-diagnosing, self-healing and self-managing technologies to create and deliver on demand computing solutions. Further analysis of the role of research and development in a services-led solutions company is provided in Chapter 15. [29 ]

Martin Hayward, Why business will be harder in the future

[30 ]

P Drucker, Innovation and Entrepreneurship (pp 32–118)

[31 ]


[32 ]


Michael Hammer and James Champy, Reengineering the Corporation, Nicholas Brealey, London, 2001 (p 38) [33 ]

[34 ]


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SUMMARY In this chapter we have explained why innovation is more important than ever. We provided some definitions of innovation and have shown how it can be managed and why it can be difficult to achieve. We looked at three ways to encourage successful innovation: by providing leadership, by cultivating the environment and through idea management. We then used Peter Drucker’ s‘ systematic innovation’ approach to explore some of the most common signs of solution opportunity. In the next chapter, Abigail Tierney will provide insight into one of her roles in IBM, that of Business Innovator. She describes how she became interested in innovation and what she now does to enable innovation within IBM, with its business partners and customers. Abigail provides some examples to show how IBM is trying to put innovation into everything it does. In Chapter 9 we explore the process of solution creation and delivery, in which continuous innovation is critical to success.

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NOTES 1. Martin Hayward (the Henley Centre), Why business will be harder in the future, presentation given at ‘ The Third Horizon: An evening with inspired leaders’ , 9 June 2003 2. B Brullo, A tradition of innovation, in Innovation: Making it happen, Confederation of British Industry, 2002 (p 22) 3. Louis Gerstner, Who Says Elephants Can’ t Dance?, HarperCollins, London, 2002 (p 270) 4. T Davis, Innovation and Growth: A global perspective, PricewaterhouseCoopers, London, 2001 (p 23) 5. T Bradshaw, The innovation imperative, in Innovation: Making it happen, Confederation of British Industry, London, 2001 (p 42) 6. T Davis, Innovation and Growth (p 23) 7. T Davis, Innovation and Growth (p 25) 8. P Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, Oxford, 2001 (p 17) 9. P Drucker, Innovation and Entrepreneurship (p 19) 10. G Hamel, Innovation Now, Fast Company, 65, December 2002 (p 115) 11. P Drucker, Innovation and Entrepreneurship (p 17) 12. B Brullo, A tradition of innovation (p 21) 13. B Brullo, A tradition of innovation (p 21) 14. http://www.dialogonleadership.org/Kao-2000cp.html 15. B Brullo, A tradition of innovation (p 24) 16. T A Stewart, Singapore learns to innovate: are creativity and effective management irreconcilable?, www.business2.com, 21 November 2001 17. L Buchanan and T Singer, The innovation factor: a field guide to innovation, www.inc.com/magazine/20020801/24449.html, 1 August 2001 18. L Buchanan and T Singer, The innovation factor 19. B Axelrod, H Handfield-Jones and E Michaels, The War for Talent, Harvard Business School Press, Boston, 2001 20. B Axelrod et al, The War for Talent (p 343). For further discussion on the requirements for stability and change in a creative environment, see R J Sternberg, What is the common thread of creativity? Its dialectical relation to intelligence and wisdom, American Psychologist, 56 (2001), pp 360–62, and Liam Hudson, Contrary Imaginations: A Psychological Study of the English School Boy, Penguin, Harmondsworth, 1967 21. B Axelrod et al, The War for Talent (p 343). For further discussion on the requirements for stability and change in a creative environment, see R J Sternberg, What is the common thread of creativity?, andLiam Hudson, Contrary Imaginations 22. T Davis, Innovation and Growth (p 23) 23. T Davis, Innovation and Growth (p 33) 24. T Davis, Innovation and Growth (p 33) 25. http://www.innovationtools.com/Resources/ideamgmtdetails.asp?ContentID=84 26. E Schonfeld, Outsourcing innovation: if you want to find the best new ideas, follow Procter & Gamble ’ s lead and enter the nexus, www.business2.com, 30 May 2003 27. L Buchanan and T. Singer, The innovation factor 28. Martin Hayward, Why business will be harder in the future 29. P Drucker, Innovation and Entrepreneurship (pp 32–118) 30. P Drucker, Innovation and Entrepreneurship (p 41) 31. P Drucker, Innovation and Entrepreneurship (p 50) 32. Michael Hammer and James Champy, Reengineering the Corporation, Nicholas Brealey, London, 2001 (p 38) 33. P Drucker, Innovation and Entrepreneurship (p 61) 34. Nicholas G Carr, IT doesn’ t matter, Harvard Business Review, May 2003 (pp 3–10)

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Chapter 8: The Business Innovator Abigail Tierney

INTRODUCTION I am not the once-typical blue pinstripe suit IBM salesperson. I am also not the white-coat technical kind of IBMer. I am somewhere in between. It was not IBM as a technology company that attracted me; it was IBM as a change organization. I am not a technology expert, but I’ m passionate about what technology can do. I am the Marketing Manager for IBM’ s Strategy Consulting Practice. For the purpose of this chapter, however, I am going to describe one particular aspect of my job: the part that focuses on innovation. I have to answer questions like: s consulting business?  How do I facilitate innovation within IBM’  How do I take that innovation to customers, so they become aware of our capabilities?

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MY BACKGROUND I first became fascinated by the concept of innovation when I studied history and philosophy of science at the University of Leeds. As I learned more about the process of ‘ doing science’ , I was intrigued by the social factors that lead to scientific discovery and by what drives the people who make the breakthroughs. After completing my degree, I went to Oxford to do a doctorate in which I examined the factors that facilitate innovation in organizations. I chose to focus on a network of neurophysiologists that spanned 100 years and four generations. Nineteenth-century British physiology is generally considered among commentators to have been ‘ stagnant’and lagging far behind its leading European counterparts. However, within a couple of decades of the turn of the 20th century, the discipline underwent an experimental revolution, and a group of four Cambridge-trained scientists and their prot were leading the world. The purpose of my thesis was to uncover the factors that facilitated the achievements of these scientists. Drawing on many primary sources, the thesis showed that the ‘ lone genius’idea of scientific achievement failed to explain the achievements of the neurophysiologists or the mechanisms by which these achievements became recognized. It showed that a broader understanding of scientific achievement, combining a collective view of scientific creativity with the cultural context of institutional structures and social networks, offered a more powerful way of analysing scientific achievement and innovation. What emerged was a picture of innovation via collaboration, driven by creative networks, informal structures and passionate individuals. While still studying for my doctorate, I realized I did not want to be an academic. I found that academia was an ideas factory with little opportunity for the ideas to influence the world. I was worried that I would write books that only my students would read. In the United States you can be an academic and work at the same time; but in the United Kingdom this is still unusual. Since joining IBM I realize there are many people who do this, but as a student I had no way of knowing that.

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MY JOB After deciding to build a career outside academia, I began to look for an organization where the ideas I had developed in my graduate studies would be valued. I was also seeking a learning organization, where I would be encouraged to continue developing my ideas in collaboration with my colleagues. After meeting Paul Horn, the Senior Vice-President for Research at IBM, IBM went straight to the top of my list. When I joined IBM in October 2002, my manager reinforced my opinion of IBM as an innovative company by asking me to write my own job description. This told me that IBM was interested not just in my CV, but also in new ideas. I joined the UK marketing team as a Marketing Innovator. My job description was to develop a marketing programme to help IBM build stronger relationships with business buyers. The central aim was to change these buyers’perceptions of IBM from that of a pure technology company to that of an innovative solutions provider. To reach this aim, we developed a cross-industry thought leadership programme to engage our clients directly with IBM’ s innovation. It had three main components:  Collaboration. Chapter 7 argued that innovative companies do not rely solely on their own resources for new ideas. Instead, they cultivate creativity through collaboration rather than contemplation. They work with customers, academics and influencers to enhance their own creativity, and to bring new perspectives to bear on their business design, strategic objectives, and portfolios of products and services. Collaboration also helps innovation, because if customers are involved from the start, it is more likely that the resulting product or solution will meet their needs. Also, communication and knowledge transfer are much easier than when innovation is done in isolation from the market.  Trust. It was, and it still is, a tough time for IT companies to try to build trust. The market was less than receptive. So, we needed to find a way of regaining trust. One aim of the programme was to build relationships with customers that would help us to become seen as the ‘ passionately curious trusted adviser’ . This required a change in mindset on our part. The previous mindset was that we had the answers. Now, the relationship we aim to build with our customers is more cooperative. We want to help customers think through the issues and move forward. The environment is full of clutter. Customers need to know that if a particular IBMer doesn’ t have the answers they are looking for, we’ ve got a huge organization behind us that will help find them.  IT buying behaviour. After the dot.com era, IT spending is under close scrutiny by line-of-business executives. The changing decision-making unit means that to succeed we must build customer relationships beyond but not excluding the IT manager. To do this, we must engage in issues that keep the CEO awake at night, and find ways to produce content that adds value in these discussions. On the basis of these strategic imperatives, I worked with a team to develop a customer-driven innovation programme. Each pillar of the programme already existed in IBM, so I wasn’ t creating anything from scratch. Instead, my aim was to find a way of bringing together the various parts so as to generate ideas of interest to UK businesses and encourage our customers to participate. Let’ s examine the various aspects of the programme, and explain how they lead to innovation inside and outside IBM. The emerging business opportunities Chapter 7 explored the tension between eureka- and goal-based innovation. The innovation work that I do is based on the idea that while eureka innovation must be encouraged, innovation can be managed as a systematic process. Today, we take for granted such IT staples as the Internet, wireless communication and IT outsourcing. These too were just concepts – created in the laboratory or conceived of in the mind. Their commercial success came partly from IBM’ s ability to bring these ideas to the market. Our customers expect us to continue to deliver new, leading-edge solutions. We must keep extending our boundaries. We need to help clients succeed, by identifying and exploring the movements that are going on ‘ below the radar’ . IBM calls these ‘ emerging business opportunities’(EBOs). Identifying and nurturing them plays a vital role in transforming technologies from IBM’ s R&D laboratories into innovative solutions that address customer needs. They are also an essential element in creating and nurturing an innovative company culture. IBM manages EBOs very differently from other business. Rather than focusing on traditional

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measures, such as revenues and signings, we look at what products may result and what milestones should be achieved before more investment is committed. EBOs currently represent a relatively small part of total Global Services revenue, though they are growing at a faster rate than our core businesses. However, EBOs mean more to IBM than just the revenue they can deliver. They challenge IBM’ s ability to sense changes in the marketplace, and respond to them in a rapid and relevant manner. The mission of EBOs is to develop new products and solutions. Somewhere in our current EBO portfolio there may be a concept as big as the Internet. If we’ re able to identify it and be the first to lead it to its potential, we’ re going to create almost incalculable value for IBM, and our customers. The Cynefin Centre EBOs are not limited to the newest software or hardware, but also include innovative consulting methods. One such is the Cynefin (pronounced Kun-ev’ in) Centre for Organizational Complexity. This virtual centre is at the forefront of an emerging management discipline and practice based on the science of complex adaptive systems. Moving beyond the very traditional, process-bound ways of doing things that stifle creativity and out-of-the-box thinking, it is creating a rich, diverse environment for people to reconsider intractable problems in new ways. The approach is truly collaborative, and harnesses a range of perspectives. The Cynefin leaders draw on a variety of business functions, as well as academic and scientific disciplines around the world. The Cynefin Centre focuses on high-participation action research projects, seeking fresh, practical insights into the nature of organizations and markets, using models that recognize the inherent uncertainties of social systems. The basis of all programmes is creating focused interactions between many sources of knowledge to enable the emergence of new meaning and insight. One Cynefin project that I helped to lead was ‘ Conflict and Continuity’ . This was developed in response to the demand for a new style of leadership development that would fit the challenges that leaders face. In contrast to traditional classroom-based development, this programme was founded on the understanding that leaders learn more from each other, and in practical situations, than they do from educators. Our response to this need was to set up an action research initiative led by IBM and Lancaster University Management School (LUMS) in association with Burnley Partners. We pioneered an innovative approach to leader development, bringing leaders from the community and business sector together to look at leadership in conditions of uncertainty. The model was to be based on LUMS’ s highly acclaimed leadership programme for National Health Service chief executives working with senior leaders in other organizations such as the police. The approach was designed to give leaders the opportunity to work together to broaden their thinking, create new models and theories, and to put the results into practice immediately in the organizations they lead. The aim of IBM and LUMS in designing this new leadership initiative was to create a different learning environment in which leaders could refresh and renew their understanding of leadership within their own situation, through working with leaders in an entirely different context on their intractable leadership problems. We wanted to create a learning environment in which business leaders could learn from others’perspectives and leadership dilemmas, and at the same time give back some leadership insights into the intractable problem they were working on. This successful project will be followed by the ‘ Paradox of Culture’programme. This will be the flagship Discovery Programme, and will draw on eclectic influences such as complexity, narrative, philosophy and anthropology. The Institute for Business Value I am also the marketing lead for the Institute for Business Value (IBV). The aim of the IBV is to provide senior executives with strategic insights that address critical challenges faced by organizations in their quest for business value in today’ s rapidly changing, technology-enabled environment. The Institute provides research and analysis, dialogue with industry experts, and client events focused on critical industry and cross-industry issues. Formed in December 2001, the IBV is staffed with experienced industry consultants worldwide. Throughout the year, IBV teams collaborate with business executives from leading companies and with IBM professionals on studies. With access to resources such as IBM Research, the Institute staff can provide ‘ insider’business guidance prior to widespread knowledge and adoption of new technologies. My daily involvement with this unit includes ensuring that the IBV interfaces with the marketing organization. This is absolutely critical for success, as the marketing leaders for the industries and service areas within our consulting practice are charged with sensing the key issues in the market and working out a strategy for how IBM should respond, and help customers

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respond. This extensive marketing network ensures that the Institute produces innovative ideas that hit our customers’‘ sweet spots’ . Another mechanism that ensures that the IBV does not become an ivory tower is its membership programmes, including the Marketing and Customer Strategy Forum and the Knowledge and Organizational Performance Forum. Participants on these programmes have access to insights into key events that are transforming business and entire industries. They also provide a forum for multi-client interaction with thought leaders, practitioners, outside industry experts, consultants and researchers. Here too, leaders are brought into the centre of the idea generation process and are encouraged to drive IBM’ s strategic agenda. On Demand Innovation Services The traditional heartlands of innovation in IBM are the laboratories. However, until a couple of years ago, the typical employee of IBM Global Services would have found it difficult to collaborate with the R&D departments. However, the recent acquisition of PricewaterhouseCoopers Consulting and the creation of Business Consulting Services (BCS) placed IBM firmly on the map of solutions providers and led to a reassessment of the relationship between R&D and services. This triggered the decision to create a new research division called On Demand Innovation Services (ODIS), which enables IBM’ s scientists to contribute to the services part of the business. Instead of focusing on software and hardware development, the new division will assist IBM consultants. ODIS will comprise a team of researcher consultants who possess deep understanding of business process in specific industries and have a proven track record of creating innovative technologies and standards for business. ODIS will pursue three goals in partnership with BCS:  give customers the research, innovation and deep business insight they need to transform to an ‘ on demand’business model; s transformation to an ‘ on demand’  leverage this expertise to accelerate IBM’ model;  stimulate new research initiatives to create the solutions practices of tomorrow. These objectives support the three components that I listed at the beginning. The opportunity to take our customers into our previously out-of-bounds laboratories will take us further towards our goal of building relationships with customers based on trust. ODIS’ s collaborative model will also increase the innovations’speed-to-market. Clients will be able to tap directly into the expertise of researchers by having them craft solutions that might not appear in off-the-shelf products. From a marketing perspective, ODIS is also a valuable way of facilitating relationships with key business decision-makers. ODIS will use our Innovation Teams. These are laboratories for business practices, made up of a mix of people from consulting, creative and technical from both IBM and the client. The joint staffing of Innovation Teams represents a long-term investment from IBM and the client in committing leadership, technology and openness in sharing to create an innovative environment focused on transforming a company. My role in these centres is threefold. My own background in innovation means that I am called upon to advise on project delivery and the cultural issues around innovation. Marketing also has a role to play, especially in terms of creating new value propositions and new markets for the products and solutions that result. The final role, and perhaps the one I enjoy the most, is providing thought leadership to the customer, often bringing together the full breadth of IBM’ s capabilities, including the IBV and the Cynefin Centre. Extreme Blue: an IBM idea incubator A further source of innovation for IBM is Extreme Blue, a summer internship programme designed to strengthen IBM’ s ability to attract and retain top developers and entrepreneurs while incubating leading-edge technology projects. IBM started Extreme Blue during the Internet boom in order to attract and nurture top-talent. Extreme Blue’ s vision is to be the leading vitality programme for talent, technology and business innovation within IBM. The programme is organized around IBM’ s emerging business opportunities, and interns get hands-on experience working on these strategic projects. By focusing on discovery-driven, proof-of-concept projects that are designed to answer a crisp business question, Extreme Blue projects provide clear validation for emerging business opportunities.

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The three-year-old programme spans seven laboratories: three in the United States (at Austin; Cambridge, Mass.; and Silicon Valley, California) and, for the first time, four outside the United States, in the United Kingdom, Israel, Germany and Switzerland. The UK and German sites are development laboratories; those in Israel and Switzerland are research laboratories. Extreme Blue internship students work for various organizations, from IBM Global Services to IBM Server Group. The programme has two objectives:  To be a leading internship for attracting, motivating and retaining diverse top business and technical talent, specifically for both university interns and early-career IBMers.  To be a leading laboratory for innovating, implementing and testing strategic, discovery-driven projects focused on emerging business opportunities. Students who participate in the programme are actively encouraged to forget the rules, and are given the freedom to do so without the bounds of a tight structure. Staff members interview potential sponsors for ideas surrounding emerging technologies and business opportunities from IBM Research and each of IBM’ s divisions. Project selection is based on the expertise, vision and ‘ passion’of the business and technical mentors who will work as team members in the summer. The mentors act as domain experts and are fully immersed in the project teams throughout the summer. The mentor provides the vision and experience to the team, and extends the interns’network into IBM so they access the depth of resource and expertise IBM offers. Mentors provide this expertise to all Extreme Blue internship teams and help foster a creative and collaborative environment where great ideas are incubated into real business for IBM. A recent Extreme Blue project focused on security. Although it was the hottest IT topic in the business world, it meant different things to different people. In many ways, this chaos was reminiscent of the early days of e-business, when elements did not easily come together to form a whole. One effective solution for e-business was the development of a maturity model, and this same approach offered the promise of simplifying the view of security as well. IBM Global Services funded an Extreme Blue team that conceived and built a new model for security, focused on senior executives, mapping business plans and goals to levels of security and their associated technical details through a new ‘ trust chain’model. Initial testing with real IBM customers received positive feedback.

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CONCLUSION I love my job. I also realize how fortunate I am to be able to say that. I think what I enjoy the most is that because I am working at the very heart of innovation, no day is ever the same. Everything is also evolving and new challenges emerging. That is one reason I have found this chapter difficult to write, as I don’ t have such a thing as ‘ an ordinary day’ . I am always learning and my brain is always working.

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Chapter 9: Solution Creation and Delivery Mark Cerasale and Alan Clark

WHAT SOLUTION PROVIDERS DO Solution providers do three things to create exceptional customer value: 1. They help customers understand the issues and opportunities they are facing. Some of these are unique to individual customers; others are common to many players in the same industry. 2. They help customers to assess the options for solving the problems or exploiting the opportunities. Some options can be provided entirely by the provider; others require partners. 3. They work with customers to create and deliver a unique solution. Solutions are services-led but differ from traditional services because they must be customized to create and deliver exceptional value. Solution creation and delivery is performed in teams, often by people from many functional areas, including sales, marketing and consulting. Salespeople play a central role in solution creation and delivery. However, traditional business-to-business field sales forces are usually poorly equipped to create and deliver solutions. The role of the salesperson in many companies today is to communicate product value. Many salespeople know little about the processes in which their products are used and do not understand the issues and opportunities the products and services are being used to resolve or exploit.

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THE NEED FOR BUSINESS TRANSFORMATION Many companies lack people who are able to create and deliver solutions. Most also lack the required processes, organization, tools, knowledge and infrastructure for solution creation and delivery. Solution creation and delivery requires business transformation. Modest operational improvements are rarely enough. Traditional sales incentives, for example, do not encourage salespeople to invest time and resources in developing enduring customer relationships – a prerequisite for solution creation and delivery. They encourage product salespeople to push products at customers instead of working with customers to generate a new type of value-creating pull. Existing measurement systems are based on product-selling business models – a single piece of business rather than continuing revenue streams that might start small and grow over time. New management systems are needed. Most business-to-business field sales forces survived the programmes that transformed manufacturing, design, engineering and supply chains in the 1980s and 1990s. Many companies introduced customer relationship management (CRM) programmes in the late 1990s. Most of these aimed to improve productivity by adopting best practice and reducing costs through initiatives such as call-centre automation and consolidation. Fewer CRM programmes aimed at innovation and growth through business transformation. Many companies now recognize the need to do things differently (rather than the same things better). Sales and distribution must change dramatically in companies that plan to introduce solutions.

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TRADITIONAL SALES AND DISTRIBUTION While demand for products and services was high, selling often focused on the needs of the seller. Sellers were preoccupied with their need to convert their products into cash. For much of the 20th century, sales forces existed to communicate value, not create and deliver it. Value was largely created and delivered by the product. Salespeople were less interested in satisfying buyer needs by means beyond the product itself. Rackham wrote: Even in sophisticated business-to-business sales, until the late 1970s most corporations taught salespeople that their role was simply to thrust products forcefully at potential customers. An influential sales book of the time, Compelling Selling by Philip Lund, advised readers to concentrate exclusively on the product, not to let the customer talk more than absolutely necessary but instead to ‘ close whenever possible, even if you’ re miles from the order’ . [1 ] Traditional sales and distribution channels were established to push products on to the market. They were created as much for the convenience of suppliers as of customers. Many sales, marketing and distribution functions became organizational silos, often working almost entirely in isolation. The inefficiencies of this model were sustainable in a seller’ s market but not today. Many manufacturers focused on production and passed responsibility for sales and distribution entirely to intermediaries such as dealers and retailers. Manufacturers needed long production runs that produced large inventories of finished goods (products waiting for customers to order them). Stock was usually held by distributors. If the manufacturer made an unpopular product, the distributor took the risk of it not selling. Traditional distribution channels also allowed manufacturers to avoid the cost of processing and administering many small orders. The distributor collates them into fewer, larger orders and carries the cost incurred (on behalf of the manufacturer). Today’ s distribution channels have changed little. They continue to be made up of independent companies that buy and sell products and services (adding margin) until they reach the final consumer. In the 1980s and 1990s, many companies adopted new management approaches, best practices and build-to-order techniques, and implemented related software applications (such as inventory management systems). Distribution was often improved but less frequently transformed. Perhaps the greatest opportunity for transformation came with the emergence of the Internet in the late 1990s. Some business models, such as book retailing, were disrupted. The majority were made more productive through improvement (companies were able to do much the same thing but cheaper, faster or more accurately). Solution creation and delivery differs from traditional selling. It requires business transformation. However, traditional product selling will not disappear overnight; it will dominate many industries for years to come. Many customers have built up great expertise in the use of some products and will continue to buy products rather than solutions (although many will choose to make their purchases through lower-cost channels). Some products and services (in areas such as biotechnology, for example) are complex and require considerable explanation. Customers may need consultation to understand a product and how it compares to competitive offerings. Over time, new methods, processes and practices will replace and complement traditional selling. New models for selling, marketing and distributing products and services are emerging. [1 ]


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THE EMERGING DEMAND FOR SOLUTIONS Enormous changes have taken place in purchasing departments. These once quiet backwaters (in many companies) are attracting talented employees looking for opportunities to innovate. Purchasing managers and other business buyers have become more demanding, powerful and knowledgeable. They are identifying new opportunities for value creation and are willing to invest resources in working with selected suppliers. New management techniques, tools and approaches such as supplier segmentation, supplier reduction and total cost of ownership have been introduced. Purchasing departments have also been transformed by the adoption of e-business, which allows better collaboration between buyers and sellers. In business-to-business sales, traditional product buyers are often more concerned with features, functions, price and availability. For solution customers, the specifications of the product or service are less important than their economics. Value is defined in terms of how the product is used and therefore resides at the process level. As a result, responsibility for purchasing decisions tends to move from technical specialists to senior administrators, line-of-business managers and executives who are responsible for solving business problems and exploiting opportunities for business innovation and growth. Industry, market or organizational knowledge is more valuable to solution customers than product knowledge. Solution customers can also be technical, especially in new and emerging industries. Some customers require a different type of technical solution from their suppliers. McKinsey notes that Corning Cable Systems faces this challenge as it moves from providing fibre-optic cable to offering complete opticalinterconnection solutions. To work with the customers for such solutions – the builders and operators of server farms and Internet data centres – Corning must learn to deal with these ‘eheads’ as opposed to the ‘ Bell-heads’of its traditional telecommunications customers. [2 ] Technical expertise may also be required when a customer is growing rapidly (when access to specialist resources inside the company may be limited). A solution creates exceptional customer value by solving a problem or exploiting an opportunity. Some problems and opportunities are obvious; others are latent and less explicit. Solution providers must have expert knowledge and know the customer’ s business at least as well as the customer does if latent opportunities and problems are to be identified and addressed. Sometimes outsiders are best placed to identify a customer’ s problems and opportunities. According to Handy, Organizations find it very easy to grow accustomed to their blemishes. Remarks like ‘ that is a characteristic of this industry’often mean ‘ we’ ve had this squint for so long that it has become part of our identity’ . The usefulness of outsiders in organizations, as consultants, directors or advisors, often consists mainly in pointing out that one does not necessarily have to have a squint. [3 ] Some companies are not short of good ideas; they are just short of people who can execute them. Levitt argues that creative types tend to confuse the getting of ideas with their implementation – that is, confuse creativity in the abstract with practical innovation; not understand the operating executive’ s day-to-day problems; and underestimate the intricate complexity of business organizations. The trouble with much of the advice business is getting today about the need to be more vigorously creative is, essentially, that its advocates have generally failed to distinguish between the relatively easy process of being creative in the abstract and the infinitely more difficult process of being innovationist in the concrete. He goes on to say, ‘ What is often lacking is not creativity in the idea-creating sense but innovation in the action-producing sense, i.e. putting ideas to work.’He claims, ‘ The scarce people are those who have the know-how, energy, daring, and staying power to implement ideas.’[4 ] Core competency thinking has led many companies to focus on the things they do well. Many have outsourced functions such as information technology and retain only a skeleton staff in areas considered to be ‘ non-core’ . As a result, they depend more on external suppliers to act as ‘ agents of change’to help with the management of transformation within their own organizations. Successfully managing change

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requires expert knowledge. Transformation management expertise that is provided by external suppliers may be invaluable to companies with a history of failed internal change programmes. However, most change programmes require a team of internal and external people, each bringing different skills and knowledge. Many customers do not have the specialist knowledge or the resources required to address some problems or opportunities and must look to partners and suppliers for support. For example, a procurement manager looking to reduce the cost of purchasing office equipment might look to external suppliers with knowledge of online buying processes and technology integration skills. A team might be put together which would include some of the customer’ s employees who would have knowledge of existing corporate procurement processes, technology infrastructure or company culture. Solutions are often created and delivered by teams made up of people from the solution provider, its business partners and the customer’ s organization. In this example, the customer might select a supplier that demonstrated: s industry;  knowledge of the customer’ s organization;  knowledge of the customer’  a willingness to be flexible and collaborate to create the best solution;  knowledge of online purchasing processes and re-engineering skills;  knowledge of Internet technologies and integration skills;  the ability to make things happen;  the ability to manage and improve the solution over time. Solution customers want more than standard products and services – many of which they can buy or provide themselves. Solution customers demand customization. Product mass customization allowed products to be tailored to customers’individual needs. Mass customization of products set a precedent. Today, many customers demand the same level of tailoring and customization from service providers. Solutions are created and delivered through customization and are services-led. Product mass customization represented a paradigm shift for many manufacturers. Companies that once saw themselves as manufacturing companies with distribution capabilities began to see themselves as distribution companies with manufacturing capabilities. Focus shifted from production to distribution, with the production process becoming a function of sales and marketing. A similar paradigm shift is required to move successfully from products and services to solutions. In a world of discontinuous change, the challenge for many companies is to turn fixed costs into variable costs. Fluctuating demand creates inefficiencies for suppliers and customers. When demand is low, companies have excess capacity. When demand is high, they often do not have enough. Many service delivery contracts today are agreed over a fixed period of time to a fixed service level at a fixed price and are packaged much like a tangible product. Customers want their service providers to be more flexible and adaptive. They want their suppliers to act more like partners, sensing and responding to their needs, and sharing more of the risk. More flexible services such as ‘ power by the hour’are emerging. The Internet has lowered transaction costs between business units and companies. When information technology, such as microchips, is embedded in products, services can be delivered at the speed of light and varied according to demand. Over time, customers may become dissatisfied with services that lack flexibility. The business environment is constantly changing, and competition is fierce in many industries. Customers are under pressure to innovate, grow and reduce costs simultaneously. Inflexible service delivery contracts restrict the customer’ s ability to change and innovate. As a result, many service contracts are terminated early and are replaced with new ones (often with an alternative service provider). The challenge for service providers is to continue to provide exceptional value over the long term if they are to maintain enduring customer relationships. Many customers want continuous innovation during the delivery phase (after the solution has been created, when the service is up and running). An increasing number of customers want business solutions on demand. Nathaniel W Foote, Jay Galbraith, Quentin Hope and Danny Miller, Making solutions the answer, McKinsey Quarterly, no 3, 2001 (p 3) [2 ]

[3 ]

Charles Handy, Understanding Organizations, Penguin Books, London, 1999 (p 326)

Theodore Levitt, Creativity is not enough, Harvard Business Review, August 2002 (pp 137–38) (first published in 1963) [4 ]

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SUPPLIERS INTRODUCE SOLUTIONS Rifkin poses the question How, then, does a company successfully win market share when the quality of its goods is virtually indistinguishable from its competitors’and everyone’ s making too much of the same product? The answer, say a growing number of companies, is to abandon sales altogether. In a buyer’ s market, getting in the customer’ s door means letting go of the idea of selling a good or service, as radical as that might seem. The supplier has to represent zero cost to the customer. But without sales, how does the vendor make money? By co-managing the customer’ s operations, improving its performance and profit, and sharing in the gains. The point that needs to be emphasized is that the supplier sells nothing to the customer. Instead he lends his know-how and expertise to help run the customer’ s business. The customer, in effect, becomes a client and partner. [5 ] Solutions are unique, although many are similar. Solution creation and delivery requires more than complementary product and service ‘ bundling’ . Bundling allows core products and services to be differentiated but starts with the needs of the supplier. Solutions start with the needs of the customer – one customer at a time. According to Michael Porter, ‘ Bundling simplifies the buyer’ s shopping task. Offering the bundle may also reassure the buyer that all the items in the bundle will work, and reduce the buyer’ s perceived risk of purchase. A single point of responsibility, a single place where complaints can be lodged, and a single service organization may also be valued by buyers.’[6 ]Solutions provide a single point of responsibility but are different from product and service bundles. Solutions are uniquely configured and customized to create exceptional customer value. Solutions are highly differentiated. According to Porter, ‘ Differentiation will not lead to a premium price in the long run unless its sources remain valuable to the buyer and cannot be imitated by competitors. Thus a firm must find durable sources of uniqueness that are protected by barriers to imitation.’[7 ]A solution is customized during the process of creation. This makes it difficult for competitors to imitate or make price comparisons (often allowing higher prices to be charged). Prices can be based on value to the customer rather than supplier cost-plus. Suppliers that continue to innovate during service delivery can differentiate their solutions even after they have been created. By sensing and responding to the customer’ s needs over the long term, the solution provider becomes a partner as much as a supplier. According to IBM’ s Institute of Business Value, Sense and respond is an integral part of the Johnson Controls International (JCI) business – in fact, the company has taken the concept quite literally. For customers across the United States, JCI designs and maintains building systems – including temperature-control systems, mechanical equipment, building automation systems, lighting, and fire and security systems. As part of its maintenance offerings, JCI can design a custom service strategy exclusively for a particular customer, based on that customer’ s specific business goals. JCI’ s service strategies include traditional aspects of support like fixing equipment when it breaks (reactive) and performing scheduled maintenance like lubrication and cleaning (preventative). But what sets JCI apart are its predictive and proactive support capabilities. By putting sensors in place, JCI can detect signs of a problem and correct it before the customer ever experiences an equipment failure. And because it knows which building areas and equipment are most critical to the customer – like operating rooms in hospitals – the company can use specialized analysis techniques in those areas to identify the root cause of equipment problems and implement a true solution – not simply fix problems. JCI has proven so adept at sensing and responding to customer needs that it can now offer its customers guaranteed responsiveness – and share in the value that it helps create. For example, in some performance contracts, JCI guarantees an increase in positive cash flow, which the customer can then use to pay for major facilities improvements that JCI implements. By increasing the customer’ s overall revenue, JCI becomes difficult to replace – an indispensable part of the customer’ s own valuecreation process. [8 ] [5 ]


[6 ]

Michael Porter, Competitive Advantage, Macmillan, Basingstoke, 1985 (p 428)

[7 ]

Michael Porter, Competitive Advantage (p 153)

Sharon Arthur and Jonathan Cooper, Industrial Enterprise Business Transformation: Three parts structure, two parts flexibility, IBM, White Plains, NY, 2002 (p 7) [8 ]

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SOLUTION CREATION AND DELIVERY PROCESS Many companies have tried to provide their customers with solutions and had limited success. Many fail because they do not recognize the degree of business transformation required to create and deliver solutions. Improvement is about doing the same things better; transformation is about doing things differently. While it is possible to have some short-term success without major change, generally companies that want to move from products to solutions must transform themselves. Sales, marketing and distribution activities must be oriented towards value creation and less towards value communication. They must become less focused on pushing products and more focused on helping customers buy and use them. Hammer wrote: From the customers’point of view, a company exists only to create value for them, to provide them with results. Yet in far too many companies, the actual creation and delivery of customer value is not the responsibility of any particular individual. One searches in vain for people who are focused on and responsible for the end-to-end work of filling customer orders; on seeing new products through from conception to realization; or on resolving customer problems. Instead, the work that creates results for customers is broken into pieces and scattered across numerous departments and units. In these companies, workers, managers, and departments focus on each of the steps that lead to creating results for customers, but no one focuses on all the steps together as a unit. One person takes the customer call, another gathers needed information, a third decides what is to be done, a fourth takes action, and no one oversees the whole thing. These companies?suffer from a crisis of process. [9 ] Hammer and Champy define a business process as ‘ a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer’ . [10 ]Core processes define and differentiate a company. Solution creation and delivery is a core process of a company providing solutions. Existing processes may require reengineering and new sub-processes may need to be created. Some organizations failed to achieve substantial benefits through process re-engineering in the past and have become sceptical of the approach. By contrast, many companies have found that solutions can be created and delivered only by taking a process approach – by removing the artificial boundaries that exist between activities (or putting some entirely new ones in), or by making hand-offs easier (or removing them altogether). During the 1980s and 1990s, re-engineering programmes were aimed at improving product design, engineering and manufacturing processes. During the late 1990s, many companies began re-engineering their customer relationship management processes. Ned Lautenbach, a senior vice president in charge of worldwide sales and service at IBM, has commented on the role of process in customer management at IBM: Success in a global marketplace demands disciplined processes. You can’ t run a successful business without them. To be the best solution provider, we must have processes that allow us to leverage all of our strengths and resources on a worldwide scale. CRM is the way we run our business. It gives us the ability to support our customers anywhere in the world. It’ s what brings the different parts of our business together to design, develop, and install unique solutions for customers, large or small. [11 ] Processes usually cut across organizational boundaries; they are rarely confined to single functions. Solution creation and delivery is usually performed by people from many functional areas (from many internal business units, external business partners and the customer’ s organization). A solution creation and delivery process is needed to allow people to focus on the work they are performing, not the way it is organized. It can allow solution creation and delivery to become ‘institutionalized’(passing from the individuals who perform it to the organization). Process design is important, because without it, activities might be performed differently every time. Processes and subprocesses can provide discipline and structure to complex activities – enabling consistency and raising the bar for everyone. Without an opportunity management sub-process, for example, opportunities are often managed on an ad hoc basis, with individuals deciding what constitutes a good opportunity (everyone has their own definition). Bidding a solution often requires the involvement of numerous skilled professionals such as technical consultants, who are scarce and whose time can be expensive and must therefore be managed carefully. Without an opportunity management process, teams can spend too much time providing unnecessary detail on bids that are poorly qualified, which increases the overall cost of bidding and reduces win-rates. A solution opportunity management subprocess can improve solution sales

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html forecasting and human resource management (solutions are services-led). Many companies have developed solution creation and delivery processes and sub-processes including solution selling, opportunity management, solution design and delivery, offerings development and customer satisfaction management. Solution sales management subprocesses may also require re-engineering. Michael Bosworth claims, ‘ Whether we manually implement solution selling or use automated tools, solution selling is a change not only in the selling process but in the sales management process.’[12 ] Solution customers generally perform the following sequence of steps when creating and consuming a solution. They: 1. assess the business environment – identifying problems and opportunities; 2. create a business strategy (decide what to do); 3. develop a plan of execution based on their needs to solve problems or exploit opportunities; 4. explore the options for solving a problem or exploiting an opportunity; 5. select a solution option based on an understanding of value to be created; 6. make a purchase – after they have addressed their concerns; 7. create the solution with the supplier; 8. evaluate success continuously during solution delivery with the supplier; 9. look for further value-creation opportunities during consumption with the supplier. Solution providers generally perform the following sequence of steps when creating and delivering a solution (corresponding to the solution creation and consumption steps performed by the customer). They: s business environment – identifying their problems and 1. understand the customer’ opportunities; 2. create a solution strategy (decide where to try to create value for the customer); s 3. develop a plan of execution with the customer – helping to shape the customer’ vision; 4. describe their capabilities – deciding at this stage whether to go any further; 5. define the solution in collaboration with the customer; s concerns; 6. sign contracts – after resolving the customer’ 7. create the solution with the customer; 8. evaluate success continuously during solution delivery with the customer; 9. look for further value-creation opportunities during delivery with the customer. This list of steps or activities does not constitute a solution creation and delivery process. Such a process differs by industry and solution type and must be tailored to both. The list does, however, provide a broad outline of many of the steps or activities that are often performed. The solution provider must align solution creation and delivery activities to those performed by the customer in solution creation and consumption. There are similarities between the process of solution creation and delivery and the way in which professional services are sold and delivered. Maister claims, ‘ The single most important talent in selling professional services is the ability to understand the purchasing process (not the sales process) from the clients’perspective. The better a professional can learn to think like a client, the easier it will be to do and say the correct things to get hired.’[13 ] Challenges with the process of solution creation and delivery relate less to the hand-offs between activities and sub-processes and more to the need to create order, discipline and consistency within them. The management of solution creation and delivery activities can be improved by defining steps and putting milestones in place. Milestones might be in the form of a letter from the customer confirming an opportunity (during the solution creation phase) or a completed customer satisfaction questionnaire (during the solution delivery phase). These milestones can be used to improve solution sales forecasting, since they enable sales executives to view all prospects via a consistent grading system. Milestones can help less experienced solution salespeople because they are often based on what worked well in the past. The process approach and the use of tools such as milestones help to shift information and knowledge from the individual to the organization. This is increasingly important as employees become more transient. Peter Drucker once wrote, ‘ The essence of economic activity is the commitment of present resources to

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future expectations, and that means to uncertainty and risk.’[14 ]Customers tend to work with suppliers they know and can trust to reduce uncertainty and risk. Personal relationships are important in solution creation and delivery. Trust moves from the product to the individuals involved in creating and delivering the solution. Similarly, Maister has recognized the importance of trust in selling professional services, ‘ First and foremost, it is most firms’experience that time spent marketing to existing clients is more likely to result in new business: Existing clients represent higher-probability prospects. This is because the ability to win the client’ s trust and confidence is a dominant influence in the sales process of professional services.’[15 ] Many suppliers underestimate the time required to develop mutual understanding and trust. In solution companies, less time is spent pushing general information at customers and more time is spent listening to their needs. Similarly, Maister writes, ‘ For professional service firms, no less than for other kinds of business, a primary means of achieving a competitive advantage is to have a better understanding of the wants and needs of clients than does the competition. This deeper understanding, if it is to be obtained, comes from a very straightforward activity: listening to clients.’[16 ]A deep understanding of the customer’ s business and industry is a prerequisite to solution creation and delivery. Solution customers expect suppliers to invest resources (often a lot of time) into getting to know them and their business. Knowledge about a customer’ s industry, market and business (how they operate, their threats and their opportunities) is essential in solution creation and delivery. According to Michael Bosworth, ‘ People want to buy from people who validate them, who understand their business, who see the world through their eyes, who share their vision, and who empower them to see themselves in control of their problem.’[17 ] Slywotzky writes: [I]n business to business settings, understanding a customer’ s decision system means knowing as much (or more) about the customer’ s business as its management does. It requires a level of relationship well beyond the traditional sales re-purchasing agent, supplier–customer structure. It means understanding functionality, systems economics, customer power, and the customer’ s entire decision-making system. [18 ] According to McKinsey, Solutions take longer than products to sell; typically, three or four times as many calls are needed to close deals. The longer sales cycle means that companies offering solutions to their customers must usually change their sales teams and selling styles – the bigger the problem and the larger the deal, the more people must be persuaded. In sales of a product, by contrast, only a single representative or team is typically needed to explain its value for the customer, and sales cycles are relatively short. A team selling solutions must understand the business of the customer at least as well as the customer does while developing partnerlike relationships with its senior decision makers. A technology company that revamped its sales and incentive structures to focus on solutions, for example, came to understand its customers so completely that when asked for a bid, it would submit two: the one the customer had requested and one it thought would actually meet the customer’ s needs. [19 ] Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House Business Books, London, 2002 (p 53) [9 ]

Michael Hammer and James Champy, Reengineering the Corporation, Nicholas Brealey, London, 2001 (p 38) [10 ]

[11 ]


[12 ]

Michael T Bosworth, Solution Selling, McGraw-Hill, New York, 1995 (p 184)

David H Maister, Managing the Professional Service Firm, Free Press Paperbacks, New York, 1993 (p 111) [13 ]

[14 ]

P Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, 2001 (p 23)

[15 ]

David H Maister, Managing the Professional Service Firm (p 98)

[16 ]


[17 ]

Michael T Bosworth, Solution Selling (p 38)

[18 ]

Adrian Slywotzky, Value Migration, Harvard Business School Press, Boston, 1996 (p 15)

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no 6696, 2003 (p 122) [19 ]

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SOLUTION CREATION AND DELIVERY PEOPLE Solutions are services-led. They are created and delivered by teams of people (often enabled by processes, knowledge and technology). Solution teams usually include supplier, business partners and customer employees. Every solution provider is different, but most have at least the following four roles:  solution salespeople (client managers, principals, partners, etc);  specialist consultants (technical architects, process experts, etc);  project managers (programme managers, etc);  service delivery managers (outsourcing managers, etc). Solution salespeople The solution salesperson is primarily responsible for developing and managing customer relationships and leading teams of people in the creation and delivery of solutions. He or she is often called a partner, principal or client manager, depending on the type of organization he or she represents. Partners and principals are usually found in professional services firms or consulting divisions. Partners and client managers can both be found in solution companies such as IBM. According to McKinsey, They [solution providers] typically structure account teams around a customer-relationship owner supported by industry experts and technical specialists, target relatively small pools of customers with similar business needs, and try to focus more on senior executives who have fiscal responsibility for business units and less on the buyers or technical managers whom product sellers usually approach. [20 ]

What type of person makes a good solution salesperson? Solution salespeople must demonstrate an in-depth knowledge of the customer’ s business and industry. They must be able to build strong personal relationships through their ability to continuously create and deliver value for the customer over time; solution companies tend to avoid moving their salespeople too often, to allow this to happen. They must become a trusted adviser. This may demand specialist knowledge (about an industry, for example). With product sales, the customer must have trust in the product. By contrast, with solutions the customer must trust the people involved in creating and delivering the solution. Customers look to solution salespeople to facilitate innovation. Processes should be designed to allow the solution salesperson enough freedom for creativity and customization while providing appropriate governance (to ensure quality, consistency and profitability). Solution salespeople must be able to lead teams of people, because solutions are created and delivered in teams. These skills can be found in many professional services firms and solutions companies but are less frequently found in product sales organizations, where salespeople tend to be more independent and are less used to having control over the creation of what they are selling (the product is predefined). Maister comments: Partners’autonomy has been justified in the professions because of the need to customize work activities to fit each client’ s needs. Professionals have demanded (if not always retained) the right to practice as they see fit, subject to minimal constraints: Only the service provider knows a particular client’ s circumstances and needs; no one can second-guess. This view, however, was more valid in the days of the generalist than in today’ s marketplace of specialization. Partners are more interdependent than when each served his own stable of clients: Now, coordination of a number of specialists is a requirement, bringing with it a demand for leadership. [21 ] Building value-based relationships, selling consultatively and team orchestration are unfamiliar territory to many salespeople, who are often more comfortable working alone in hierarchical organizations. Some are unwilling to change; some are unable to change. However, few companies introducing solutions can (or indeed want to) replace their entire sales force. Instead, they adopt a number of strategies to acquire the capabilities they need over the long term. This may mean that the transformation takes longer but can be less disruptive in the short term. Sales force transformation programmes often involve the sales force being trained in solution selling techniques and provided with industry knowledge, new solution selling processes, methods and tools. The cultural change required to introduce solutions should not be underestimated. According to Neil Rackham,

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Consultative selling rests on salespeople who become close to the customer and who have an intimate grasp of the customer’ s business issues?selling consultatively involves a mutual investment of time and effort by both seller and customer. Listening and gaining business understanding are more important selling skills than persuasion; creativity is more important than product knowledge?Because these are demanding skills, good consultative salespeople are hard to find. Organizations that want to develop an improved consultative selling capability can easily become hostage to highly paid ‘ rock-star’sales performers. For this reason?effective consultative sales efforts increasingly use diagnostic tools, sales processes, and information systems to allow ordinary mortals to perform well in the increasingly sophisticated consultative selling role. [22 ] Many companies choose to transform their existing sales force; others also hire externally, targeting business executives with strong network relationships and deep industry knowledge. Some companies look for solution salespeople from within their own management teams. Business managers often have considerable expertise in and knowledge of business processes and know how to manage people and change. Solution sales professions and new career paths offering opportunities for career progression can be used to encourage senior managers to take on new roles in solution creation and delivery. Solution sales managers In traditional product-led companies, first- and second-line sales managers spend much of their time managing their business, performing tasks and activities such as gathering and reporting forecasts. Some meet regularly with customers to maintain relationships. Many do so only during an escalation process – to help close a critical sales opportunity or resolve a particularly messy dispute. By contrast, in successful solution organizations, senior managers spend much of their time with customers, working with solution salespeople to develop opportunities, and they continue to nurture key customer executive relationships. According to Charles Handy, ‘ Professional organizations, for instance, never use the word anager?but find expressions like Senior Partner?That is because they have traditionally separated the traditional leadership role from the administrative or fixing roles.’[23 ] Solution sales managers can improve the performance of their teams through coaching. Coaching provides the reinforcement needed to maintain and enhance solution creation and delivery skills. However, sales managers who became successful in product-led sales businesses often have little experience in solution creation and delivery. Transformation programmes should be targeted towards the needs of sales managers as much as salespeople. Further insight into how to manage the change from products to solutions is provided in Chapter 16. Specialist consultants Solutions companies usually employ specialist consultants, although some choose to partner for consulting capabilities. Convergence is occurring between many consulting, outsourcing and solutions companies. Betsy Kovacs, president and CEO of the Association of Management Consulting Firms, wrote: [T]here’ ll be a further broadening of what we mean by ‘consultancy’ , and a blurring of boundaries between industries and professions. This will be caused by consulting firms adding new services to their existing portfolio, particularly in outsourcing, and offering a broader array of services such as law, as well as competition from non-traditional sources such as nonconsulting organisations. Why would a parcel distribution company, like FedEx, launch a consulting service? Because it realises that it’ s delivering ‘ solutions’as much as parcels. [24 ] Specialist consultants are required to create and deliver solutions. Some companies choose to hire from the outside; others attempt to retrain their existing employees, who may already have a great deal of expertise in and knowledge of a particular process or industry. Consultants are often organized into teams by industry, sector, customer or competency area. This allows resources to be managed and enables knowledge to be shared more effectively. Knowledge management systems allow consultants (and others) to collaborate in communities. Some aspects of solution creation and delivery, such as solution design, are often managed as projects and delivered by teams that may come together only for short periods of time. According to McKinsey, Nokia’ s front-end Customer Operations unit, which supplies turnkey systems to wireless service

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companies, includes consultants with deep experience of the customers’business who try to ensure that the solution makes customers more competitive. Meeting these staffing requirements can cause organizational stress: young, open-minded people are hired from the outside and leapfrog older, less flexible staff. Toughest of all can be finding unit leaders who are both talented business builders and effective negotiators with senior managers inside and outside the organization?these front-end units are amorphous. They configure and reconfigure their teams according to the project and its various stages. [ 25 ]

Project managers In many product-led companies, project management (for example, to coordinate the installation of some new industrial machinery) is often performed on an ad hoc basis or not at all. Some product-led companies have dedicated project managers but do not charge the customer for their time. When product margins were high, many product-led companies absorbed the cost of additional services (such as project management) in the price of the product. By contrast, solution creation and delivery activities are often complex, and are performed by teams of people who must be coordinated and managed. Some resources, such as specialist software programmers, are scarce, and their time must be scheduled long in advance. Project management is essential for managing costs and quality. In solution companies, project management is often a fulltime job with distinctive competencies, skills, professions and career paths. Service delivery managers Service delivery managers often provide their expertise during the creation of solutions, but their prime responsibility is for ongoing delivery after the solution has been created. They must ensure that contracts perform to agreed service quality levels and maintain control over ongoing service delivery costs. The objective for companies introducing solutions is to create exceptional customer value – becoming less of a supplier and more of a partner. Service delivery managers must look beyond the basic service and identify opportunities for improvement and innovation if enduring relationships are to be maintained over the long term. Further assessment of the role of innovation in solution creation and delivery was provided in Chapter 7. [20 ]

Juliet Johansson et al, Solving the solutions problem (p 123)

[21 ]


[22 ]


[23 ]

Charles Handy, Understanding Organizations (p 322)

Fiona Czerniawska, Management Consultancy, What Next?, Palgrave Macmillan, Basingstoke, 2002 (p 140) [24 ]

Nathaniel W Foote, Jay Galbraith, Quentin Hope and Danny Miller, Making solutions the answer, McKinsey Quarterly, no 3, 2001 (p 6) [25 ]

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SUMMARY In this chapter we described how the business environment is changing. We assessed and explained the growing demand for business solutions on demand. We argued that product and service suppliers must transform their sales and distribution functions and their entire business models if they are to be successful as solution providers. We explained how traditional sales and distribution evolved, and argued that neither supports solution creation and delivery. We suggested that traditional product sales and distribution will not disappear overnight because they still create value for some customers. However, we put the case that low-cost and solution business models will emerge and, in many cases, will replace product sales and distribution. We looked at the benefits of introducing solutions from the supplier’ s perspective. We argued that companies should adopt a process approach to solution creation and delivery. We explained that enduring customer relationships are based on trust and the ability of solution providers to continuously create and deliver customer value. This requires innovation in solution creation and delivery. Finally, we outlined the roles of solution salespeople, specialist consultants, project managers and service delivery managers. In Chapter 10, Glenn Taylor provides insight into his role as a Customer Relationship Manager (a solution sales role) at IBM.

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NOTES 1. Neil Rackham, Rethink ing the Sales Force, McGraw-Hill, New York, 1998 (p 125) 2. Nathaniel W Foote, Jay Galbraith, Quentin Hope and Danny Miller, Making solutions the answer, McKinsey Quarterly, no 3, 2001 (p 3) 3. Charles Handy, Understanding Organizations, Penguin Books, London, 1999 (p 326) 4. Theodore Levitt, Creativity is not enough, Harvard Business Review, August 2002 (pp 137–38) (first published in 1963) 5. Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 91) 6. Michael Porter, Competitive Advantage, Macmillan, Basingstoke, 1985 (p 428) 7. Michael Porter, Competitive Advantage (p 153) 8. Sharon Arthur and Jonathan Cooper, Industrial Enterprise Business Transformation: Three parts structure, two parts flexibility, IBM, White Plains, NY, 2002 (p 7) 9. Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House Business Books, London, 2002 (p 53) 10. Michael Hammer and James Champy, Reengineering the Corporation, Nicholas Brealey, London, 2001 (p 38) 11. Neil Rackham, Rethink ing the Sales Force (p 196) 12. Michael T Bosworth, Solution Selling, McGraw-Hill, New York, 1995 (p 184) 13. David H Maister, Managing the Professional Service Firm, Free Press Paperbacks, New York, 1993 (p 111) 14. P Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, 2001 (p 23) 15. David H Maister, Managing the Professional Service Firm (p 98) 16. David H Maister, Managing the Professional Service Firm (p 61) 17. Michael T Bosworth, Solution Selling (p 38) 18. Adrian Slywotzky, Value Migration, Harvard Business School Press, Boston, 1996 (p 15) 19. Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no 6696, 2003 (p 122) 20. Juliet Johansson et al, Solving the solutions problem (p 123) 21. David H Maister, Managing the Professional Service Firm (p 292) 22. Neil Rackham, Rethink ing the Sales Force (p 26) 23. Charles Handy, Understanding Organizations (p 322) 24. Fiona Czerniawska, Management Consultancy, What Next?, Palgrave Macmillan, Basingstoke, 2002 (p 140) 25. Nathaniel W Foote, Jay Galbraith, Quentin Hope and Danny Miller, Making solutions the answer, McKinsey Quarterly, no 3, 2001 (p 6)

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Chapter 10: The Customer Relationship Manager Glenn Taylor

INTRODUCTION My name is Glenn Taylor and at the time of writing (2003) I work for IBM United Kingdom as a Client Executive. Today, everyone seems to have the title ‘ manager’ ,‘ executive’or ‘ leader’ . My business card is blank. This allows me to explain in 10 seconds what I do and why it is of value. My aim here is to do the same, but in more detail. I am one of those people who constantly question how they do things. I am open to new ideas and like to learn from many sources. Over the years, I have learned to update my competencies to gain more of the success I seek. My career in the IT industry I started my career in the early 1970s when I was lucky enough to fall into a job in information technology (IT) operations as a Data Control Clerk (then one of the lowest functions). At that time, the demand for IT skills was exploding, and I quickly moved up through the ranks, from operations through management and eventually into programming. From programming, like many of my peers I progressed into systems analysis. As a Systems Analyst, I sat down with people and tried to work out what they were trying to do and whether information systems could help. When we found opportunities to do something better using IT, I would help my customer go through a change programme. We would choose the right technologies, configure them, and deploy them to achieve specific business objectives that were laid down in advance. During the mid-1980s I switched to the supplier side of the fence as a programme manager. From programme management I moved quite quickly into a sales role. I realized it was just like running a programme but with different milestones. It was better paid and there was more glory. It seems to be that talkers often get paid more and have bigger cars than doers! I joined IBM in 1996. First I sold products, then services. In my current job as Client Executive, I sell (and help customers to buy) everything IBM does.

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SOLUTION SELLING IBM searches constantly for ways to keep its products and services competitive – for new areas of innovation. Since I joined IBM, we have introduced many new services that generate revenues in their own right. I have seen outsourcing grow over the past few years. It seems to me that helping customers achieve their objectives by doing non-core activities for them is an opportunity for every business. In my opinion, solution selling is the art of adding as much value for your customer as possible. My role as a solution salesman is to understand and manage the continuing cycle of interactions between my company and the customer, and to ensure that the cycle results in business growth. A good starting point in explaining the role would be to look at how business gets done. A number of activities must happen for business to grow through this cycle. Many people believe creating awareness is the job of marketing. I believe it extends to any interaction with a customer that leaves them with an impression of you. Sometimes one can create awareness deliberately through marketing and promotions such as product brochures or personal calls. At other times, awareness is created less deliberately. An impression can be left by customers talking to each other about a salesperson, or even by how a salesperson is dressed. I am conscious of this when I meet with customers, even socially. At IBM we also follow formal guidelines for business conduct. At IBM we use a solution selling method with steps linked to a process. Most selling starts when awareness leads to demand. This is where I help customers to get curious about what we can offer, and I try to turn that curiosity into real interest. I do this by relating our offerings to the customers’specific situation – their problem or opportunity. This often involves being innovative and being open to many options. One of the benefits of the solution sales process is that it contributes to customers’awareness of me as a salesman and the organization I work for. A feedback loop is created that presents opportunities for more business. Better awareness creates more demand and the cycle continues. When done well, solution selling improves customer satisfaction. This is important, particularly if the solution involves delivering a service over time. If you set an expectation and fail, you will leave customers upset by the experience. That can be a real problem if, like me, you work with the same clients over a number of years. On the other hand, if you meet or exceed customers’expectations, they will be warmed by the experience. Customer satisfaction is important, and we measure it regularly. I know from experience that customer satisfaction contributes to loyalty. Customers may open additional opportunities in other parts of their business and may refer you to other customers. I have learned too the importance of ‘ doing what you say’ . Customers will tell other individuals in the same company about a bad experience, and that can cause problems for future campaigns. The loyalty sword cuts both ways. If you let customers down by not ‘ doing what you say’ , the solution selling process breaks down. It is very hard to talk yourself out of something you have acted yourself into. Trust is key to successful solution selling. So, if you fail customers by delivering a poor service, you risk leaving a wound that stays open for many years. Customers have lots of choice about whom they do business with. It’ s critical to get things right, even after the solution has been sold. Delivery is important too. Following a solution selling process and delivering against expectations are both vital for success. However, contacts with customers are complicated. Many interactions are needed between my team and our customers, often over long periods. The sum of these interactions makes up the customer relationship. It is my job to make sure that that relationship remains strong. It has to be said that each individual has the power to improve that relationship, and it is my job to help him or her. Understanding and managing a team of customer-facing resources, often from different parts of IBM, is critical in creating solutions. How we are organized I look after customers from the same industry grouping. This grouping is deliberate. We call it ‘ clustering’

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, and it improves industry value. The customers who buy IBM’ s solutions, as opposed to our products and services, are often line-of-business managers, not IT managers. The sales team assigned to an account is expected to call at line-of-business level and should be capable of engaging in a conversation that creates value for customers. Customers talk about business problems, so industry knowledge is important. Being in a cluster makes it easier to learn and understand my customers’industry. It makes me feel more comfortable engaging outside their IT department, at line-of-business director level. To have value added discussions with senior line-of-business customers, I need to know about their markets and understand their strategic and tactical issues and opportunities. The product and services sales teams are also aligned to specific clusters. This improves industry and market knowledge. We also get better consistency in the way the team builds solutions and engages with customers. What I do My job is to build and manage customer relationships. I analyse individual players within our customers and decide which we need to know and who needs to know us. IBM has had relationships with most of its customers for many years. However, individuals change, and in a business development situation we need to know all the right people. I maintain a profile of each important person, which I am happy to share with them if they ask. The profile is a living document that captures a customer’ s biography, current role and their responsibilities. It also describes our strategy for developing the relationship. The relationship development strategy is a quarter-by-quarter plan to move the relationship from the current status to a stronger one. This might include corporate hospitality as well as IBM and customer meetings. We use trade associations, links with education establishments, and country and industry forums as opportunities to engage with the targeted customer. Of course, we also ask for meetings! After all, value has to be exchanged – it can’ t be just one-way! This does not mean I am the only one who calls on the customer. On the contrary, we plan coverage using the whole team, so we have the right people engaged with the customer at the appropriate time. Opportunities may emerge from all levels of the customer’ s organization and with any member of our team. We use a formal tracking process that highlights opportunities when they are identified and communicates them automatically to the team for further attention. I am responsible for developing a value proposition to meet the customers’individual needs. The value proposition describes how IBM could create value for the customer. To sell successfully, I must understand IBM’ s capabilities well enough to position a competence and its relevance to the situation. I also need to know enough to coach IBM’ s specialists and business partners in the customer needs. In practice, my background and interests determine the level of detail I go into. The sales leader is responsible for selling individual products and services, ‘ owning’opportunities and updating our reporting systems, which allow management, and other interested parties, to monitor progress and pipeline. Sharing responsibility is hard in a matrix organization. Line management need information and expect their respective customer-facing teams to know all the issues relating to each opportunity in some detail, so they can step in if required. Creating a solution I rarely make a cold call on a line-of-business executive without having done some research on issues of interest to him or her. It is important to be able to offer a comment or two on a potential opportunity or threat the customer is facing – the beginnings of the relationship plan. This gets easier as experience of the industry grows. It also gets easier with practice at articulating value propositions. Longevity on the account helps too. Most new customers are both interested and surprised to hear how many touch points exist between IBM and their company. We work right across our customers’organizations. Customers are usually keen to discuss their issues and explore how we can help. They want to make sure they are getting full value from us. We have a business consulting capability in a division called Business Consulting Services (BCS), formed following IBM’ s acquisition of PricewaterhouseCoopers Consulting and merger with IBM Business Innovation Services. This enables us to discuss strategic issues with the customer and focus on very specialist business areas. BCS helps to shape the customer’ s thinking and provides the consultants who help to create many of our solutions. We also have a services division called

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Integrated Technology Services (ITS); I use them when specialist information technology skills are needed. Many customer line-of-business managers and directors are focused on operations. They are often more concerned with immediate activities rather than future projects we like to discuss with them. They rarely have time to step back and explore alternatives. This is understandable. I am always looking for new opportunities to discuss impending business issues and possible solutions. Through these discussions I try to get ‘ mind-share’with the customer and present IBM as offering a way forward. We rarely discuss products or even our services during those early discussions. Sometimes the challenge looks similar to something we’ ve done with another customer, so we can address it quickly. At other times, IBM’ s capabilities need to be reconfigured to suit the particular circumstance. In many ways, the first type of challenge is more attractive. If we’ ve done something similar before, we can approach it with more predictability, we can reuse knowledge and we have more credibility at the outset, so it’ s lower-risk. As the opportunity gets clearer, we have to shape it. I try to do what makes most sense for the customer. A team is put together which is responsible for creating the solution. It is my role to act as the customer’ s friend, to ensure we’ re doing the right things and to make sure we’ re leveraging all of our capabilities. The individual product businesses that are represented in the solution each have their own perspective. We often debate the best way forward. A big difference between solution selling and product selling is visible at this step of the cycle. In a product selling situation the opportunity is often clearer: someone else has previously thought through the change project and specified the requirement for a product of particular characteristics. Product salespersons tend to sell against that requirement; they arrive quite late in the buying process. This approach still works on many occasions; parts of our business are still product-led. A solution approach is different in two key areas. First, calling on customers earlier in the buying process means we can help to shape their thinking. It also gives us advanced warning of the emerging opportunity. Second, by working with customers to explore their needs, I can introduce other IBM capabilities that customers may require. This increases the size and attractiveness of the opportunity. This approach often uncovers additional elements of the project that need to be considered, such as organizational change management, but that are not directly linked to the technology (though they are important all the same). In any change programme, success depends as much on changing people’ s behaviour and the processes by which they work as on the quality of the technology used. The solution approach tries to balance all the components needed. At the same time, it gives us the opportunity to increase our involvement with the customer. This affects how customers perceive us in terms of added value. As the opportunity progresses, I need to ensure that our relationships are healthy. I call this ‘ check and balance’ . I try to ensure that we are on the right track. I input my knowledge of the customer’ s priorities and how things get done within that organization. I must justify the investment of resources to my management. We cannot pursue every opportunity. We must be sure that our solutions create value for the customer and are good business for IBM. We have a formal opportunity management process for this. It is my responsibility to ensure that the process is adhered to. From there on, my role is a consultative one, throughout the deal closure process up to solution delivery. I oversee the delivery mechanism to ensure that customer satisfaction is maintained. If customer satisfaction becomes a problem, then I step in and own the resolution of the issue. Once the solution is up and running, I meet with the customers with whom we’ ve developed new relationships during the engagement and look for additional opportunities that may be available?and so the cycle continues. As you can imagine, we may have many transactions with a customer happening at the same time. It is a challenge to keep everyone who is working on the account up to speed with what they need to know. I have learned from experience that the best way to do this is to appoint myself as communications hub. I become the centre of communications, and all the team regularly update me on activity. I absorb the information and pass back relevant knowledge from other areas. People also have to decide how to act

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upon this knowledge. This is my approach to communicating ‘ dynamic’information. We use knowledge management systems too, and they can be really useful. For example, we have a formal structure for account planning and documentation that helps the team share understanding of business issues and ongoing activity. We do several things to help with building and managing teams. The alignment of teams on to the same cluster helps put some structure around how we work together. Sometimes it is best not to over-manage things. Building a shared vision, trust, leadership and fellowship is left to the individual teams, and it takes deliberate management to engineer these attributes in a team. As team communicator, I work to build trust within the team. Sometimes I take the role of team leader – in the sense that I shape the composition of the team. I also try to shape the strategy we follow, so that we have the right ingredients for success. I don’ t mean ‘ leader’in the sense that I make all decisions. The aim is to get ownership of the way forward by the team and commitment to deliver against that. For each opportunity, we assign the lead role to the most appropriate person. Trust between team members must be built over time. It is easier to get commitment and agreement on actions when there is trust – and with trust comes what I call ‘ followship’ : that is, people willing to be led by their peers. ‘ Followship’allows each product representative to feel more comfortable about the idea of their product or service being part of a wider solution from IBM. It means they will allow another product representative to take the lead in a sales opportunity even if they are not from the same division. Gaining that level of trust can only be achieved over time and requires much team-building and effective communication. My team is very experienced. Any one of the brand leaders could hold a discussion with the customer, a senior line-of-business executive, and do the team justice. Since we can all ‘ call high’ , we try to make coverage of the key customers a shared task rather than an individual bottleneck, so I am not always the one who identifies and shapes an opportunity at the beginning. Also, when experienced business consultants are engaged from the outset, I do not usually need to be involved. I do, however, ‘ ghost’all opportunities to make sure we are leveraging the value of our entire organization, ie by broadening the overall relationship, helping with internal processes and ‘ care-taking’the cycle through to delivery.

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CAREER DEVELOPMENT I joined IBM as an ‘ experienced hire’ . At my previous company I had undertaken many professional selling training courses and workshops, and had performed the role in a number of situations. Therefore, my starting point for career development was very different from that of somebody new to sales. IBM has ‘ professions’for many job families, including sales. To achieve accreditation and certification in a profession, specific competencies must be acquired and demonstrated. Certification as Client Executive is important because it is a gateway for access to promotions, and determines the size of the accounts that you are allocated. To become an accredited Client Executive, I had to achieve a number of goals that required some training. I had to prove I possessed certain competencies. We compared my capabilities with a profile of the skills and competencies that IBM judges are those that a Client Executive should exhibit. They include insight into the customer environment; ability to discuss at line-of-business level; knowledge of IBM offerings; and personal behaviour styles. As soon as the gap is bridged, the next formal step is nomination to attend the Client Executive training, which is held at a prestigious European business school. The course aims at improving knowledge of strategic and operational issues. Three one-week modules are interspersed with distance learning activities. We write a strategic white paper on a business issue facing our customers, which helps us to put the learning into practice. I produced a report outlining the opportunities and threats facing my customer in the aerospace and defence industry. After completing the training and submitting the paper, I had to demonstrate a track record in building appropriate customer relationships, and I had to explain an executable account strategy and present a tactical plan for achieving the expected growth. My knowledge in this area was tested in a series of one-on-one interviews and a presentation. Salespeople should revisit this certification every four years or when moving to a customer in a different industry.

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CONCLUSION Being a Client Executive is a very satisfying job in IBM. It allows you to create opportunities from your own knowledge and relationships and those of your colleagues. It can be frustrating. The challenges of delivering customer satisfaction can be overwhelming – but it is well worth it. My job is also largely portable, as most of my skills involve understanding customers and fostering a team approach to delivering value. My individual influence over this is directly related to the respect that I win (or not) from the other team members, and so building a team with strong team attributes is critical. IBM believes that this role is vital to the development of commercial business relationships. This is especially true in today ’ s markets.

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Chapter 11: Solution Marketing Mark Cerasale

INTRODUCTION Solution marketing is much more than services marketing, although there are some similarities between the two. Marketing must be transformed to support the creation and delivery of solutions. Solution marketing combines industry marketing, offerings marketing and relationship marketing. Marketing strategy must create exceptional customer value. For it to do this, marketing must be at the heart of business strategy. Accordingly, new marketing roles and responsibilities are needed. The growth and widespread adoption of the Internet in the late 1990s created new opportunities for marketers. It gave marketers unprecedented access to customers. New online approaches were adopted for researching and measuring customer needs, testing new marketing concepts and introducing new products. Marketing departments, agencies and other suppliers were quick to adopt e-mail and set up extranets. During the 1990s, some companies began using new information technologies, such as data mining, to support marketing activities. Marketers expected these technologies to herald the beginning of a new era of innovation. Unsurprisingly, the recent economic slowdown appears to have dampened the spirit of marketing innovation. Marketing has become less strategic and more operational. Yet the need for marketing transformation has never been greater. IBM conducted research in 2002 to test the marketing climate. Senior marketing executives were asked about their most pressing challenges and priorities. Participants were representatives from large UK-based organizations, including not-for-profits, from many industries including retail banking, consumer electronics, government, insurance, retail, travel, telecommunications and transportation. The research found that the top 10 challenges are (in order of priority): 1. measuring marketing effectiveness; 2. managing and executing campaigns; 3. building a customer-centric information system to support decision-making; 4. fostering the brand through innovation; 5. improving the return on marketing technology investments; 6. reducing the cost and complexity associated with using multiple agencies; 7. developing a customer information strategy across the enterprise; s brand online; 8. developing and managing the company’ 9. distributing marketing information to decision-makers via marketing intranets; 10. customer relationship management through the use of extranets. [1 ] The findings suggest a strong focus on operational effectiveness, productivity and cost reduction. Improving the return on marketing technology investments and reducing the cost and complexity associated with using multiple agencies, for example, both ranked highly. In a depressed economy, marketing budgets are often cut, and there is more pressure to improve productivity. Fewer resources are expected to do more. Marketing operations are measured and inspected for opportunities to improve operational effectiveness. Running a tight ship is no bad thing. However, problems begin when there is too much focus on short-term operations and too little focus on longer-term innovation and growth. Operational changes at best provide opportunities for marginal improvement. At worst, they can be disruptive and are not worthwhile. They are in effect like ‘ moving deckchairs on a sinking ship’ . Marketing strategy should be oriented towards innovation and growth. Marketing innovation and transformation is about doing things differently for superior results. The IBM research found that innovation has not been entirely neglected. ‘ Fostering the brand through innovation’was indeed one of the priorities. When marketing focuses too much on cost (and not enough on innovation and growth), it relegates itself to the operational level of a support function. Yet it has long been understood that marketing is far more than a support function. Marketing is strategic, and a central function of every company. We (the authors of this book) agree with Drucker’ s view:

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Because it is its purpose to create a customer, any business enterprise has two – and only these two – basic functions: marketing and innovation?Marketing is the distinguishing, the unique function of the business?It is the whole business seen from the point of view of the final result, that is, from the customer’ s point of view. Concern and responsibility for marketing must therefore permeate all areas of the enterprise. [2 ] When marketing strategies are planned and executed well, they create exceptional customer value and competitive advantage. In some industries, such as fast-moving consumer goods, marketing permeates the enterprise. However, in many other manufacturing and service industries, the marketing function is often a lonely functional silo. Some employees do not know what marketers do; they confuse marketing with advertising or selling. Ironically, for a function that has image as one of its main concerns, marketing too often has an image problem. It is time for marketing to re-establish itself, to be transformed in both style and substance. It must become synonymous with customer value, innovation and growth. To achieve this, the focus of marketing must change from communicating the value of products and services to creating value for customers. [1 ]

Anthony Marsella, IBM Special Report, Marketing Transformation: An agenda for change, 2003 (p 2)

[2 ]

Peter Drucker, The Practice of Management, Butterworth-Heinemann, Oxford, 2001 (pp 35–36)

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FROM PRODUCT TO CUSTOMER VALUE For most of the 20th century, manufacturing was the engine of growth in most economies. Customer demand for products was high, and under-supply made suppliers powerful. Economic growth after the Second World War made consumers wealthier. In Western economies, social status was achieved through product ownership. New products were introduced and improved to satisfy customers’every need, and customers snapped them up. The greatest challenge for many companies was to maintain levels of production to satisfy growing demand while managing costs to maintain a healthy profit. Management resources were invested in improving the product and production; distribution and consumption were of less concern. The 20th century was an era of product-led consumerism. Marketing was primarily a broadcast discipline. It was grounded in practices developed for selling mass-produced goods to homogeneous markets. Marketers were responsible for creating and broadcasting messages about their products and services through the mass media. Brand-building was centred on awareness. Marketers would create a position for a product and use the mass media to advertise it. In this way, brands became known for specific attributes. Marketing aimed to target products at customers. Some customer needs were obvious and explicit; others were less so (like those fulfilled by the Sony Walkman). Product benefits were often communicated in terms of features, functions and performance – for example, ‘ Daz washes whiter’ . Consumers were less discerning and poorly equipped to challenge such claims. As more products and services entered the market and consumers became more familiar with them, customers became more sophisticated and discerning. Products were differentiated by adding new features and functions. Performance improvements made them faster, cheaper, bigger or, sometimes, smaller (the Sony approach). Some marketing tools and techniques that emerged during that era are less relevant today. The effectiveness of focus groups, market research, surveys and the like can be limited. Focus groups, for example, were more effective when markets and customers had similar, often less complex, needs. It is less likely that a focus group – made up of carefully selected individuals, who are paid for their time and asked a series of carefully crafted (and therefore somewhat restrictive) questions – will provide insight into the needs of today’ s more sophisticated and less homogeneous customers. During the era of product-led consumerism, marketing planning was often little more than incremental tactical planning. Targets were set out in strategic business plans, market share being a common metric. Marketing planning was about making the numbers add up, about achieving short-term shareholder expectations. As demand steadily increased and markets grew, change was predictable and could be planned. While marketing planning was focused on growth, it often had less to do with innovation. Innovation is about doing things differently. Few senior marketing executives were willing to rock the boat by trying something different. They focused their energies instead on glamorous, high-profile advertising campaigns. Why take unnecessary risks? In many markets, a strong hand on the organizational tiller was enough to achieve most marketing objectives. The causes of change Powerful forces such as globalization, deregulation and greater access to capital transformed business during the 1980s and 1990s. Competition increased, and over-supply caused many markets to become saturated. Today, change is discontinuous and unpredictable. Workers are more mobile and knowledgeable about products. Technology and processes are quickly imitated. The rate of product innovation is slowing, and rapid imitation is commoditizing many products and services. Products and services are more similar and less easily differentiated; features, functions and performance count less, many being perceived as ‘ good enough’ . Widespread adoption of new management approaches and the use of information technologies such as the Internet have improved productivity. Quality programmes and the pervasive use of best-practice manufacturing processes have raised the bar in product design and manufacturing. There is now little room for sustainable competitive advantage through the activities involved in production. The customer, not the product, is now the scarce resource. Product-led consumerism has been replaced by customer-led consumerism. Signs of this change have been around for many years. As was mentioned in Chapter 4, in a landmark article in the Harvard Business Review in 1960, entitled ‘ Marketing myopia’ , [3 ]Theodore Levitt argued that companies were too concerned with the products they produced and not concerned enough with the customers they served. He argued that businesses should

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html plan from the customer backward rather than from production forward. It is now much more important for companies to understand and quantify customer needs and to focus on maintaining or increasing their share of customers’business. Customer relationships have come to the fore. It is harder to compete on products’attributes and more difficult to sustain a competitive advantage through products and production. However, the need for productivity improvements has not gone away: knowledgeable and powerful customers are still sensitive to pricing anomalies. Suppliers must simultaneously compete on the quality and ingenuity of their products and the quality of their customer relationships. Many more companies are looking to create and deliver customer value through things that are extrinsic to their products, focusing more on how they are used. The competitive battleground has moved from production to marketing, sales and distribution. Indeed, IBM’ s research results suggest an overall shift in focus towards improving customer relationship management. Building a customer-centric information system to support decision-making and customer relationship management through the use of extranets, for example, was a high marketing priority. The Internet and the Net generation The Internet creates innovation opportunities, but also the need for different approaches to marketing. The Internet is a disruptive technology; it has disrupted marketing. It may not have changed the world in the way suggested (unrealistically) by commentators during the heady days of the dot.com boom in the late 1990s, but it has undoubtedly transformed our social and commercial landscape. The Internet and the mobile phone have changed how we work, making it easier for companies and individuals to communicate and collaborate, and they have changed the way we live. For example, young people today expect to have access to information, to communicate and interact in ways that were impossible just a few years ago. The Internet and the mobile phone are the main media for engaging with today’ s teenagers, who spend millions of dollars each year on clothes, food, music, movies and games. [4 ] According to a recent report on youth marketing sponsored by IBM, [The teenage] group is seen as a lucrative market in its own right, but as interests, consumer choices and a variety of experiences fracture the demographic, marketers need to look beyond demographics, numbers and media speak. Teens these days are?independent entities, who alone and with aligned peers create their own rules of engagement and social behaviour. Overall, in today’ s society teens are still motivated by the same aspirations of previous generations?The difference today is the new channels and content distribution that they use. The report concludes: The core value of the teen is to communicate and be heard. While teens complain that they have less and less public spaces to hang-out in, they are making the on-line world their milieu, their domain where they develop personal relationships with others and get closer to those who they admire and respect, the realm where they play and learn new things?Teen brands should learn to understand such emerging behaviour to get closer to their target audience to establish more truthful binds with them. [5 ] Teen marketers have come to realize that above-the-line advertising and sales promotions are less effective than online teen communities in getting many products and services adopted. Marketing to teenagers has been transformed. Teenagers are used to highly flexible personalized environments that they can influence. They are used to trying things out for free, so marketers will have to think of new business models – perhaps giving the basic service away for free, then charging later for value added services. As teenagers enter the workforce, in just a few years’time, they will bring with them the habits and norms of their online world: chat sites, role-playing games, 3D virtual reality and viral mobile messaging. The Internet is not the exclusive domain of the young. It is used by consumers in most socio-economic groups, mostly for gathering information. The Internet allows customers to make supplier comparisons quickly, conveniently and cheaply. It has transformed the buying process. Many customers no longer rely on salespeople for the information they require to make informed buying decisions. Instead, they are willing to search for information and inform themselves. The Internet makes switching suppliers easier too. As a result, customers are becoming less loyal to traditional suppliers. Communities of interest and buying groups have emerged on the Internet. However, the Internet has also facilitated the tying of business customers and their suppliers more closely together, in a services relationship.

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[3 ]

Theodore Levitt, Marketing myopia, Harvard Business Review, 38, July–August 1960 (pp 45–56)

[4 ]

Martin Lindstrom, BrandChild, Kogan Page, London, 2002

[5 ]

Agents of Change White Paper, Teenagers: Mobile lifestyles trends, Spero Communications, 2003 (p 1)

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THE IMPORTANCE OF SERVICES CAPABILITIES AND ENABLERS Growth in business services is due in large part to core competence thinking. In 1990, C K Prahalad and Gary Hamel published an article entitled ‘ The core competence of the corporation’[6 ]in which they suggested that companies should exit activities that do not use core competencies. Core competencies (or capabilities) are things a company does well. They are bundles of skills and technologies that enable a company to provide a particular benefit to its customers and are, therefore, unlike strategic business units (SBUs), which are usually defined by specific product-markets. Companies are abandoning many more non-core activities and are turning to external suppliers to provide them instead. Services industries such as IT outsourcing are growing rapidly. A major challenge for marketers, as suppliers of consumer and business services, is to move their brands from the product level to the capability level. IBM, for example, was once synonymous with mainframe computers. In the 1990s the brand became associated with e-business transformation services and in the new millennium will become increasingly associated with on demand transformation services. Enablers are the tangible and intangible assets a company has that enable things to get done. They include offices, factories, brands, products and employees. Today, many companies are attempting to improve their balance sheets by selling off costly physical assets that depreciate, often preferring to lease them instead. This has further fuelled the growth in business services. Companies increasingly look for outside partners to do things for them. A network economy is beginning to emerge. The widespread adoption of the Internet and new technologies has made working with external partners cheaper and easier. Lower transaction costs mean that more services can be sourced externally. In the emerging network economy, companies can access capabilities and enablers without taking ownership of them. Marketing managers often outsource activities to third parties, including creative thinking for advertising campaigns and the management of customer databases. The network economy will allow further collaboration to take place. Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May– June 1990 (pp 79–90) [6 ]

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MARKETING: THE LOW-COST ROUTE Customers that demand value through lower costs are usually familiar with the products they need (which are often commodities). Cost is the key factor in determining which suppliers they choose. They will research their options, compare prices and shop around for the best deal. These customers often join communities of interest where they can get advice and recommendations. They are able to choose and buy without a great deal of expert advice and guidance from traditional intermediaries such as salespeople. They use consumer reports, read Internet or magazine reviews and listen to recommendations from friends. They use the Internet to access relevant information, conduct research, compare buying options and purchase with the minimum of cost and inconvenience. They value lower costs above all else, so they often have little brand loyalty. To succeed with customers demanding value through lower costs, suppliers must improve the buying experience by making sure it is simpler and allows self-help. Suppliers must also take cost out of everything they do while retaining as much value as possible. The low-cost business model requires low-cost sales, marketing and distribution. New technologies such as the Internet are key enablers to providing low-cost value. But it doesn’ t stop there. If competitive advantage is to be sustained, supporting business functions such as supply-chain management must continuously be transformed to remove costs and increase customer value. Working from the customer backwards, the extended enterprise (including suppliers and business partners) must be transformed and aligned to create and deliver low-cost customer value. Since the early 1990s, PCs have become largely commoditized. PC manufacturers satisfy the needs of customers for low-cost personal computers with low-cost business models. Working from the customer backwards, they have adopted low-cost distribution channels such as the telephone and Internet while removing operating costs through innovations such as build to order and efficient inventory management. Web sites can be a cost-effective way to help customers access the information they need. Field sales forces are often costly. Most PC manufacturers have replaced their field sales forces (for all but the largest business customers) with a direct sales channel. Low-cost customer support can be provided through call centres, and self-help through Web sites. Technologies such as the Internet provide opportunities to lower marketing costs. Companies tend to start with simple publishing. There are many benefits from providing ‘ brochure-ware’on the Internet. Paper-based publishing can be expensive compared to digital alternatives. Content in digital form can be used in more ways than traditional print. Publishing on the Internet also allows information to remain current; traditional methods may require a new print run. Online publishing also extends reach, so customers in distant markets have easy access to up-to-date information. As customers become more familiar with new technologies such as the Internet and more people go online, companies can introduce two-way interaction. The Internet provides opportunities for interaction and personalization that are too costly in the offline world. The ability to personalize, configure and compare products can be provided by stand-alone applications and configurators. These are often integrated into backoffice systems and give the customer access to real-time information through Web sites. Companies providing a forum for online discussion can monitor customer feedback. Business intelligence technologies such as data-mining software can be used to track, analyse, evaluate and examine complex trends and behavioural patterns. Personalized messages and offers can then be targeted at individual customers, improving timeliness and response rates. Data management technologies allow a more comprehensive view of customer interactions. Databases enable low-cost e-mail campaigns. The tools, techniques and technologies of low-cost and interactive marketing are familiar to many marketers. The IBM research suggests that information technology and the Internet are high on the marketing agenda. Building a customer-centric information system to support decision-making and developing and managing the company’ s brand online were identified as priorities.

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SERVICES MARKETING VERSUS SOLUTIONS MARKETING Some customers demand exceptional value through solutions. Solution customers need to solve complex problems or exploit new opportunities for value creation. They may not have the specialist knowledge or the resources required, and often look to partners and suppliers for support. Solution providers do three things: 1. They can help customers understand their issues and opportunities. 2. They help with assessing the options available. 3. They can work with the customer to create and deliver a unique solution. Solutions are customized and services-led. While solutions marketing and services marketing have some similarities, they are fundamentally very different. Towards the end of the 20th century, service industries replaced manufacturing industries in many developed countries. As labour costs increased in developed countries, manufacturing and assembly activities migrated to the developing world. Four characteristics should be considered with respect to services marketing:  intangibility (a service cannot be seen or tested in some way before it is bought);  inseparability (a service is sold, then produced and consumed at the same time);  variability (quality depends on who provides the service and when, where and how it is provided);  perishability (services cannot be stored for later sale or use). [7 ] Traditional product marketing techniques do not always work well with services. In a product business, products are often standardized and can be stored in some way. In a services business, the customer interacts with a service provider, whose service quality may be inconsistent. The service outcome is affected by the service provider and its supporting processes. So, service providers must consider the quality of the performance of employees who are in contact with customers. Employees must be marketed to. Equally, attention must be paid to the interaction between buyer and seller. In product marketing, product quality usually depends less on how the product is acquired. In services marketing, service quality depends on the service and the quality of its delivery. A service company can differentiate its service delivery in three ways: through people, through the physical environment and through process:  People. One way a company can distinguish itself is by having the best employees in the industry. However, workers have become more mobile, changing jobs every few years – so attracting and retaining the best employees can be difficult (particularly in industries requiring specialist skills).  Physical environment. A service provider can develop a superior physical environment for delivering the service. More people work from home today. Consultants, salespeople and other service professionals often provide their services at the customer’ s office or factory, thus removing opportunities to differentiate the offer through the physical environment.  Process. A service provider can develop a superior process for providing a service, although knowledge is quickly disseminated (often through mobile workers), and processes can be rapidly imitated. Service industries are quick to adopt ‘ best practices’because fewer of them are embedded in physical goods. Despite the differences, many companies package, market, sell and deliver their services like products. Service products are preconfigured, often with a fixed price and duration (eg a night at a hotel or a trip on an aeroplane). In the 20th century, as we have seen, the introduction of product mass customization, allowing products to be tailored to the needs of customers, represented a paradigm shift for many manufacturers. Companies that once saw themselves as manufacturing companies with distribution capabilities began to see themselves as distribution companies with manufacturing capabilities. Focus shifted from production to distribution, with the production process becoming a function of sales and marketing. Mass customization of products set a precedent. Customers now require the same level of tailoring to their needs from service providers. There are similarities between solution marketing and services marketing. Solutions are services-led. However, solutions differ from traditional products and services. Each solution is unique – customized to

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create and deliver customer value. Solutions cannot be preconfigured since they are constantly defined and redefined during the solution creation and delivery process. Delivery can form the basis of enduring customer relationships that evolve over many years. These characteristics make solutions difficult to imitate and commoditize. A new approach to marketing must be adopted to succeed with solutions. Marketing must become synonymous with the creation and delivery of customer value. For more on definitions and classifications of services, see John E Bateson, Managing Services Mark eting: Text and readings, Dryden Press, Orlando, FL, 1989, and Christopher H Lovelock, Services Marketing, Prentice Hall, Englewood Cliffs, NJ, 1991 [7 ]

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SOLUTION MARKETING Solution marketing is more like professional services marketing than product marketing. Three approaches are emerging: industry marketing, offering marketing and relationship marketing.  Industry mark eting demonstrates that the solution provider understands the customer’ s industry and has unique insight. This is a prerequisite to solution creation and delivery.  Offering mark eting helps customers understand what value can be created and delivered.  Relationship mark eting ensures that value is communicated, created and delivered to the right customers at the right time. It is likely that new tools, techniques and methods will appear in coming years as companies introduce solutions and innovate further through experimentation. There are similarities between solution marketing and professional services marketing. Maister claims that the following tactics can be used to attract new professional services customers: t spread your marketing activity too thinly. It is always better to give more  Don’ attention to a smaller, well-selected audience.  Marketing works when it demonstrates, not when it asserts. s competence such as seminars and speeches  Marketing tactics that illustrate one’ are more powerful than brochures or direct mail. In person’marketing tactics have more impact than the written word – unless it is in  ‘ the form of something like a highly customized letter. Professional services are not a ‘ mass’business; clients are acquired one at a time, and any marketing program must reflect this. [8 ] According to Maister, Finally, marketing must be a seduction, not an assault. It must not scream, ‘ hire me!’but must gently suggest ‘ Here is some concrete evidence as to why you may want to get to know me better’ . Marketing is truly about attracting clients – doing something that causes them to take the next step (such as telling you about their problems). Since all clients are sceptical, they need to be given a good reason to expose their problems to you, and need to do so without feeling that, by responding, they are committing themselves to go all the way. The marketing tactics that best meet these tests are small-scale seminars, speeches, articles, and proprietary research. What all four have in common is that they all involve giving something to the prospective clients – new facts, new knowledge, new ideas. They pass the test of trying to capture the market’ s attention by ‘demonstrating’the firm’ s usefulness, not just asserting it. [9 ] Price Traditional products and services (sold as products) are usually priced on a cost-plus basis. By contrast, solutions can be priced according to value created and delivered to the customer. A solution aims to create exceptional customer value, greater than is usually factored in to the cost-plus model. If the solution involves services delivery through outsourcing, for example, the supplier and customer may agree to share the benefits of any productivity improvements. Value pricing through shared risk and reward contracts can benefit the customer. Less investment may be required in the start-up phase, reducing the customer’ s risk. Value pricing may give the solution provider additional incentive to be responsive in the delivery phase. Value pricing can also benefit the solution provider. If the solution creates and delivers exceptional value, the supplier can receive greater than annual returns – more than could be negotiated on a fixed price basis. Moreover, solutions are made up of products and services that are customized and integrated in a way that makes it very difficult for a customer to attempt to pick and choose individual components. Since solutions are highly customized, competitors struggle to make like-for-like price comparisons. The brand An established brand can be an advantage for traditional product and service companies trying to

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introduce solutions; for some it is a disadvantage. Strong banner brands can be extended, but brand value alone is not enough to succeed with solutions. Trust is a key component of solution creation and delivery – trust in people, not products. Solutions are services-led. The customer must trust the individuals providing the service. An established brand may allow the salesperson to start a dialogue with a customer, but equally it may discourage a customer who sees the supplier as a ‘ box shifter ’ . Some product-led companies have chosen to establish separate brands for their solution businesses. Others have chosen to extend their banner brands. According to Gary Hamel and C K Prahalad, [W]hat Sony and other global brand leaders have done is to consciously build ‘ banner brands’that span multiple products and businesses and which help customers transfer great experiences with today’ s products into great interest in and enthusiasm for tomorrow’ s products. A trusted brand is a ‘ warrant’to customers that the new product or service will perform to a high standard. Such a warrant may be particularly important when the goal is to establish new competitive space by creating an entirely new product category. The more innovative the product, the more customers are likely to require the security of a brand that has proven itself trustworthy in the past?The goal of a banner brand is simple: to help customers transfer the goodwill that has been built up through positive experience with one of the company’ s products to other products it offers or intends to offer. [10 ] Team working Solution creation and delivery requires marketers, salespeople, service delivery managers, partners and customers to work in teams. Rackham claims, ‘ One of the hardest silos to break down in any cross-functional sales effort is the pernicious and often impenetrable wall that has grown up in many corporations between the sales and the marketing functions. Sales behaves as if marketing were an impediment between the sales force and its customers. Marketing treats sales as a low-level execution arm.’[11 ]In solution creation and delivery, ‘ offering your honour’and ‘ honouring your offer’are combined, requiring close teamwork. Many companies that market solutions encourage staff from different functions to move to the same location to work in small teams, often on a project or campaign basis. To exploit emerging solution opportunities in a dynamic market, for example, solution marketers and salespeople may need to meet regularly to share information, or they may come together in communities enabled by knowledge management systems. According to Gary Hamel and C K Prahalad, ‘ market research carried out around a new product or service concept is notoriously inaccurate. Market research is great for refining existing product concepts, but is of little use in helping a company better target its development efforts around emerging markets.’[12 ] Industry marketing Companies in a given industry may be unique but they have similar problems, opportunities and operating models. They share customers, competitors and suppliers. A solution provider must help the customer understand issues and opportunities that are often determined by the industry in which the customer operates. To do this, a solution provider must know individual customers and their industry well. Industry expertise is also a key factor in determining the selection of professional services suppliers. Maister claims, ‘ In any professional service there are three key benefits that clients seek: expertise, experience, and efficiency.’[13 ]He asserts: Clients increasingly select their professional service providers not only on the basis of local presence and functional expertise, but also on the extent to which the provider has experience and special insight into the peculiar problems and needs of the client’ s industry. Now the professional firm must coordinate its activities across office boundaries not only as to functional speciality, but also its industry experience. [14 ] Traditional product-led companies often lack industry-specific knowledge. Many hire industry experts as they make the transition from products to solutions. Marketers must work with these experts to disseminate their industry knowledge more widely. Solution marketers become educators: they educate customers, business partners, their colleagues and themselves. Knowledge management systems can be used to make available industry information such as trends and key issues. [15 ] Thought leadership marketing

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Customers expect solution providers to have more than the minimum of information about their industry, their issues and their opportunities. They expect solution providers to be trusted advisers, providing insight and value added ideas. They expect them to provide thought leadership. Thought leadership may be a prediction (based on expert knowledge), a point of view, or insight into a particular issue or opportunity. It is often communicated through white paper publications, articles, books and brochures; a publishing strategy may be required. The aim of thought leadership marketing is to communicate a point of view that engages the customer. More than communicating value, thought leadership creates value for customers, perhaps educating them on an issue. It may offer them insight into a problem, or provide suggestions on how to exploit an opportunity. Thought leadership can be used to enhance a brand image, perhaps by demonstrating a propensity to innovate, or expertise in a certain field. The aim of thought leadership can be to plant a thought or provide an idea that ultimately grows into an opportunity to create value. Best practice is often about keeping up, while thought leadership creates opportunities for innovation and growth. Offering marketing You cannot market or sell a solution just as you would a product or service. You must create and deliver a solution for a customer. A product can be defined in terms of features and functions and certain tangible qualities. A service can be ‘ productized’and defined in terms of attributes such as duration and price (eg a hotel room for the night). By contrast, every solution is unique. It is tailored to the needs of individual customers and therefore difficult to articulate before it is created. Offerings enable marketers to communicate solution value. The relationship between offerings, solutions, capabilities and enablers is shown in Figure 11.1.

Figure 11.1: Relationship between offerings, solutions, capabilities and enablers According to Rackham, Because most organizations see the role of the sales force as value communication rather than value creation, they provide their salespeople with a range of value-communicating tools such as product descriptions, brochures, or even multimedia presentations?But relying on brochures doesn’ t work for the consultative sale, where product complexity and customized solutions make these one-way communication tools less and less effective. It would clearly be a more powerful contribution to value creation if the sales organization provided tools that helped their salespeople to diagnose customer problems or understand customer issues more deeply – tools, in other words, that played an active role in helping salespeople to identify and create value. [16 ] A solution creates and delivers customer value; an offering communicates it. An offering is a framework that enables a discussion with a customer about that customer’ s unique needs – the issues and opportunities facing the customer. An offering is a tool for communicating value and may also include a high-level implementation route map. Solutions are often created in projects that are structured into a series of discovery phases. An offering is best presented in around four slides in a presentation format or on a single poster-sized sheet of paper. The message should be uncomplicated and describe at least the following four things: 1. how much customer value will be created; 2. what will be done; 3. how it will be done;

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html 4.

where something similar has been done before.

An offering is similar to a sales reference story. Bosworth claims: I have learned that buyers will allow sellers to make intelligent assumptions early in the relationship?My definition of an intelligent assumption is one that relates to both a buyer’ s industry and job title, and that based on your product’ s or service’ s capability, there is a high probability critical issue about which that the buyer is likely to be curious. In other words, in a reference story, we are telling a potential buyer a story about how someone in his industry, with his job title, has already figured out how to solve a difficult problem to which the buyer relates. [17 ] Of course, the problem or opportunity may not have been solved or exploited; it may be based on an entirely original idea. As a minimum, the offering provides an opportunity to engage in a dialogue and discover the customer’ s real problems and opportunities. Offerings allow the solution provider to demonstrate competence and experience. According to Maister, most clients recognize that their problems have probably been faced and dealt with by other companies, require less complete customization, and are probably not crisis issues. Accordingly, they will be shopping less for the sheer brain power of critical individuals and more for an organization that can bring past experience to bear in solving these problems. A high level of expertise is still required, and efficiency is not irrelevant, but extensive experience with similar problems is worth more to the client than an extra degree of intellect or a few dollars of savings. [18 ] A common error is to excessively pre-configure or ‘ productize’a solution. Suppliers often attempt to describe the solution like a product – in terms of its features and functions. Some detail can be reassuring to customers who want to reduce their risks. Many customers do not want to be at the ‘ bleeding edge’ . There may be many possible service and product combinations and configurations to a solution. Components must be configured and customized according to each customer’ s needs, which are discovered during the solution creation process. Suppliers that can present all the right information in advance of any discovery activity, which is when the supplier and customer understand the problem or opportunity in detail, may give the customer the impression that they are selling a ‘ one size fits all’ product or service rather than creating and delivering a solution. Thinking of an offering in product terms can be helpful sometimes. An offering should allow the solution provider to offer value to one customer that has already been created for another customer (although the solution can never be identical, because it must be customized). For example, if a solution provider creates a solar-powered factory in India, there may be demand from a different customer for a similar one in Australia. The second factory will not be the same (it must be customized) but will create similar customer value (which can be articulated in an offering). Markets can be segmented, and detailed qualitative and quantitative market research performed on the number of similar solution opportunities in an industry or market – much in the same way as product market research is performed. According to Johansson et al, vendors generally offer a solution when they can solve a problem by applying some level of expertise and, at times, a proprietary method. They must develop unique insights into the customer and its industry and use those insights to create an integrated, customized solution that really works better than the available alternatives. What makes a solution valuable and distinctive is that it focuses on results and is meaningful to a broader customer base. Only then will vendors have the kind of offering – one delivering measurable value to customers – that is needed for a winning solution. [19 ] Foote and co-workers observe that ‘ IBM’ s Global Services unit, for example, creates repeatable solutions. It takes ideas developed by front-end industry units and makes those ideas more modular and scalable so that they can be used by customers in many sectors; thus an e-banking solution created for a leading-edge customer has been adapted as a general e-commerce solution.’[20 ]This is shown schematically in Table 11.1.

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html Table 11.1: Replicable solutions development process' simplified Stage

Conceptio n

Assessme nt, developm ent and leadershi p

Final developm ent and launch preparatio n

Launch and roll-out

What

Creates the initial product for the first customer (often known as FOAK first of a kind).

Identifies product as a solutions candidate. Designates the successful individual solution as having priority for resources. Forms the team. Provides resources.

Codifies and standardiz es.

Delivers a solutions platform to many customers. Rolls it out across region and world, according to IBM customer priorities, customer needs, patterns of innovative takeup of services, profitability .

Who by

IBM customer account team, working with product and service specialists , consultant s, project managers, IT architects and other IBM profession s.

Cross-unit geographic leadership team, eg Americas, EMEA (Europe, Middle East, Africa), Asia Pacific.

Cross-unit Global Services team, including hardware, software, services and industry units.

Global and regional industry teams. Customer account teams.

Maister points out that some companies ‘ are focused on the services they bring to market, and build their success by investing heavily in the chosen areas. They succeed through focus, muscle, and concentrated efforts in a few hand-picked areas.’[21 ]Solution creation and delivery resources such as consultants are expensive. Marketing must play an instrumental role in understanding the market and in deciding where to invest. Marketers must work with salespeople, resource deployment specialists and business managers to ensure that the right offerings are being developed to maximize customer value creation and market opportunity. Marketers become central to strategic business decisions (deciding what to do and where). Companies need to carry out much market and customer research before committing too many

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resources to an offering or solution area. Solution opportunities may be selected on  their strategic value (perhaps when entering a new sector);  their attractiveness (often in terms of their size in revenue and profit terms);  how easy they are to exploit (often determined by which capabilities and enablers are available). Some solution providers have developed more formal offerings development processes based on existing new product introduction processes (used to bring traditional products and services to market). The process approach can help to make offerings development more efficient and effective. Relationship marketing Relationship marketing is an approach adapted from product and service marketing. It is perhaps the most mature of the three emerging approaches in solution marketing. It has its roots in key account management, customer service and direct marketing. In many ways, relationship marketing is the antidote to advertising. Relationship marketing ensures that value is communicated, created and delivered to the right customers at the right time. [22 ] Relationship marketing allows a solution provider to establish enduring customer relationships. According to Maister, ‘ Most professional firms say that their existing clients represent the most probable (and often the most profitable) source of new business.’[23 ]As has been stated repeatedly in this book, in many industries today the customer (not the product) is the scarce resource. The amount of investment required to attract and develop a relationship with a solution customer can be substantial. When a customer commits him- or herself to working with a competitor, a second supplier may be excluded for many years – particularly if service delivery is provided in the form of an outsourcing contract or some similar arrangement. Information technologies such as databases and Web sites can be used to improve relationship marketing. Community marketing Relationship marketing can be targeted at individuals and groups of individuals (or communities) with similar interests, issues and opportunities. Business community marketing is similar to lifestyle marketing, which is usually targeted at consumers. According to Rifkin, The goal of lifestyle event marketing is to create lifelong relationships with niche communities and interest groups by positioning the company as an active cultural partner and player?Marketing forecasters predict that the next major wave of lifestyle and event marketing initiatives will involve grass-roots community events and activities?For example, neighbourhood and community-wide festivals have risen by 10 percent every year for the past five years, and companies have made sure to be very visible in both the financing and the overseeing of the events. [24 ] Business community marketing events might include seminars and conferences on areas of interest and value to the customer. A solution provider might host a business community Web site. David H Maister, Managing the Professional Service Firm, Free Press Paperbacks, New York, 1993 (pp 121 –22) [8 ]

[9 ]

David H Maister, Managing the Professional Service Firm (pp 121–22)

Gary Hamel and C K Prahalad, Competing for the Future, Harvard Business School Press, Boston, 1996 (pp 277–78) [10 ]

[11 ]


[12 ]

Gary Hamel and C K Prahalad, Competing for the Future (p 262)

[13 ]


[14 ]


[15 ]

For more on the use of knowledge in solution creation and delivery, see Chapter 13

[16 ]


[17 ]

Michael T Bosworth, Solution Selling, McGraw-Hill, New York, 1995 (p 74)

[18 ]


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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no 6696, 2003 (p 121) [19 ]


[21 ]


For an introduction to relationship marketing, see Merlin Stone, Neil Woodcock and Liz Machtynger, Customer Relationship Mark eting, 2nd edn, Kogan Page, London, 2002 [22 ]

[23 ]


[24 ]


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SUMMARY In this chapter I explained why I believe that marketing needs transforming. I argued that marketing must change if it is to create and deliver value to emerging customer groups who demand more value. I outlined how better access to information, increased competition and over-supply in many industries have made some customers more knowledgeable, powerful and discerning. I suggested that customers are becoming a scarce resource and customer relationships are more important. I argued that competition is moving from production to marketing, sales and distribution. I explained how the Internet allows opportunities for marketing innovation. For some groups, such as teenagers, it has become a prime marketing channel. I described the needs of some customers for more value through lower costs, and explained how marketing can add value in the low-cost business model. I presented some of the approaches, tools and technologies currently being adopted. I described the needs of some customers for more value through solutions, and explained how marketing can add value in solution creation and delivery. I explained some of the similarities and differences between solution marketing and services marketing (particularly professional services marketing). Finally, I provided a brief outline of three approaches that are evolving in solution marketing: industry marketing, offering marketing and relationship marketing. In Chapter 12, Lucia Cuttle provides insight into her role as an Industry Marketing Manager at IBM.

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NOTES 1. Anthony Marsella, IBM Special Report, Mark eting Transformation: An agenda for change, 2003 (p 2) 2. Peter Drucker, The Practice of Management, Butterworth-Heinemann, Oxford, 2001 (pp 35–36) 3. Theodore Levitt, Marketing myopia, Harvard Business Review, 38, July–August 1960 (pp 45–56) 4. Martin Lindstrom, BrandChild, Kogan Page, London, 2002 5. Agents of Change White Paper, Teenagers: Mobile lifestyles trends, Spero Communications, 2003 (p 1) 6. Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May–June 1990 (pp 79–90) 7. For more on definitions and classifications of services, see John E Bateson, Managing Services Marketing: Text and readings, Dryden Press, Orlando, FL, 1989, and Christopher H Lovelock, Services Marketing, Prentice Hall, Englewood Cliffs, NJ, 1991 8. David H Maister, Managing the Professional Service Firm, Free Press Paperbacks, New York, 1993 (pp 121–22) 9. David H Maister, Managing the Professional Service Firm (pp 121–22) 10. Gary Hamel and C K Prahalad, Competing for the Future, Harvard Business School Press, Boston, 1996 (pp 277–78) 11. Neil Rackham, Rethink ing the Sales Force, McGraw-Hill, New York, 1998 (p 199) 12. Gary Hamel and C K Prahalad, Competing for the Future (p 262) 13. David H Maister, Managing the Professional Service Firm (p 21) 14. David H Maister, Managing the Professional Service Firm (p 346) 15. For more on the use of knowledge in solution creation and delivery, see Chapter 13 16. Neil Rackham, Rethink ing the Sales Force (p 155) 17. Michael T Bosworth, Solution Selling, McGraw-Hill, New York, 1995 (p 74) 18. David H Maister, Managing the Professional Service Firm (p 21) 19. Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no 6696, 2003 (p 121) 20. Nathaniel W Foote, Jay Galbraith, Quentin Hope and Danny Miller, Making solutions the answer, McKinsey Quarterly, no 3, 2001 (p 7) 21. David H Maister, Managing the Professional Service Firm (p 321) 22. For an introduction to relationship marketing, see Merlin Stone, Neil Woodcock and Liz Machtynger, Customer Relationship Mark eting, 2nd edn, Kogan Page, London, 2002 23. David H Maister, Managing the Professional Service Firm (p 97) 24. Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 176)

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Chapter 12: The Industry Marketing Manager Lucia Cuttle

BACKGROUND Over the past nine years I have enjoyed various roles in business-to-business marketing. I spent a third of my career in a traditional product marketing role at Lucas Aftermarket Operations, a global automotive parts manufacturer and distributor. There I was responsible for marketing a range of electrical automotive parts in Europe, the Middle East and Africa (EMEA). I spent another third of my career as a marketing manager in the professional services environment at PricewaterhouseCoopers, then the world’ s largest professional services firm. There I was responsible for marketing audit, tax, corporate finance, business recovery and management consulting services to the global automotive industry. The past three years have been spent with IBM, where I have held several industry marketing positions. My current position is Automotive Marketing Manager, where I am responsible for marketing IBM’ s services, solutions and products to the automotive industry across EMEA. I have a Diploma from the Chartered Institute of Marketing and a BSc degree in Management Sciences, with a specialism in marketing from the University of Manchester Institute of Science and Technology (UMIST).

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INTRODUCTION In this chapter I aim to share my perspectives as an Industry Marketing Manager in today’ s business environment at IBM, reflecting on a role in which I am neither a pure product marketing manager nor a pure services manager, but somewhere in between. By exploring the main differences between the product-led as against the services-led marketing approach, drawing on my own experience, I shall compare the reality with the theory of marketing and suggest how the role can deliver real business value in a services-led matrix organization.

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THE ROLE As the Automotive Industry Marketing Manager for EMEA, I spend most of my time focused on three key areas: market planning, relationship-based marketing and ‘ Team IBM’ , with the aim of delivering relevant go-to-market campaigns that help increase mind share and a market leadership position for IBM in the automotive industry. Working closely with my colleagues in sales, I develop relationship-based marketing campaigns that help to generate new opportunities for our industry thought leaders and key account partners to build deep, lasting relationships with the most senior board members of our target accounts. By developing these business relationships, IBM becomes better placed to win the more strategic business and technology transformation engagements. This in turn helps produce revenue for the more traditional IBM hardware and software products. Our ultimate measure of success in industry marketing is to secure trusted business adviser status, as perceived by the ‘ C-level’executives and line-of-business directors in our main customers. This requires from us relentless focus on the business issues that matter most to auto industry executives. From a marketing perspective, it means working closely with the rest of IBM’ s marketing community in product marketing, brand and country marketing teams to deliver clear, consistent, relevant and credible messages to position IBM as the business partner of choice to customers in the automotive industry.

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MARKET PLANNING In my experience there are different approaches to market planning, depending on whether you are working within a product-led or a services-led environment. The product-led approach requires marketing to be in the driving seat, owning the market and business planning activity through which product range and market segments are defined. It focuses on the traditional marketing mix elements such as the product, pricing strategies, channel enablement and promotional activity, to ‘ push’products into the market. Marketing takes responsibility for this activity so as to determine and drive the strategy to enable the organization to meet its business objectives. In a services-led world there are fewer tangible product attributes that help differentiate your product from those of competitors. You cannot see or touch the service in the same way as you can with a product. In most cases, your customers have to buy it first before experiencing it. There is more risk associated with buying a service, and heavy reliance on the people delivering it, so the business planning process in a services-led world requires the alignment of many stakeholders, including marketing, but not just marketing. In a services-led organization, marketing still plays a key role in market and business planning activity by providing the marketplace with insight and analysis. However, marketing is not fully accountable for this process, as it is in a product-led world. IBM manages a very well-defined process. We complete two business planning cycles during any given year: one that takes a long-term view – a three- to five-year planning horizon, and one that focuses more on the short term, defining the business planning goals and objectives for the following year. The marketing function is responsible for kick-starting and then driving the market planning process, but the end result is a business plan that is ‘ owned’by the business unit – be it a product or services brand or an industry practice area. We follow a top-down approach, driven globally, with well-defined objectives, milestones and deadlines. Marketing plays an important role in this process by highlighting marketplace trends and opportunities. This market analysis is an important input, enabling our business leaders to make strategic choices about the future direction of their business. At the end of the planning cycle IBM has a set of interlocked plans with a consistent look and feel that have clearly stated business and financial metrics explicitly communicating the contribution of each business unit to the overall global IBM business plan. While IBM is successful in managing an effective global strategic planning cycle in which all its constituent parts actively participate, the characteristics and structure of the market planning process as defined today are still, at their core, product based, though they are moving towards the services model. This is not uncommon with organizations whose roots are in a traditional product structure. IBM recognizes this and is taking steps to change fundamentally how it will operate its planning cycle in the future. Rather than emphasizing the product brand (such as Z-series, Websphere or Business Consulting Services), as it does today, IBM in future will place the emphasis on the industry dimension. In this way, IBM will be more able to examine closely the issues that matter to the enterprises in the main industries on which IBM focuses, and to plan strategically the end-to-end solutions that deliver real business value to these customers in a way that differentiates IBM from competitors. To me, as an industry marketing manager, this makes absolute sense, and gives me a very exciting challenge. Of course, I will be watching carefully to see if the tilting of the matrix towards the industry dimension will change how marketing budgets are allocated; in the past they have been product brand driven. This will tell me whether IBM truly embraces the services model, which normally goes to market by industry. Of course, quite a lot of IBM’ s customers still like to buy advanced IT products, so the balance is a delicate one.

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RELATIONSHIP MARKETING IBM has recognized for some time that there is an increasing need to focus on building relationships with line-of-business executives, owing to their increasing importance in the decision-making authority associated with strategic business and IT projects. While relationship marketing is not a new marketing concept or approach, it has not been an area of focus until recently. This focus is mainly in IBM’ s industry marketing community, and has gained greater momentum since the acquisition of PWC Consulting (which was integrated in to IBM’ s Business Consulting Services division); their marketing approach was more relationship based. A good proportion of my marketing budget and time, as an industry marketing manager, is allocated to developing and executing a targeted relationship marketing programme that drives:  a fully collaborative sales and marketing effort at an account level, creating opportunities to develop key relationships within an account – here marketing acts as the door-opener to enable new line-of-business relationships to be established;  additional opportunities within selected accounts/industry segments – focusing on driving wallet share growth for target accounts;  improved awareness and consideration for IBM as a business consultant with deep industry insight, with a unique perspective and execution capability, specifically with the most senior executives and functional decision-makers and influencers of the selected top companies. My view is that this marketing-led approach is essential for IBM to continue to differentiate itself in the market as well as being able to deliver the ‘ full equation’– that is, IBM’ s ability to deliver real value to its customers through demonstrating innovative thinking, rapid and effective execution, and accountability for results. The higher up the value chain we position our capability, the more we must speak to customers in their language. Mass marketing campaigns or even direct marketing initiatives cannot deliver this level of personalization today. IBM must focus relentlessly on the issues that matter to the line-of-business executive at a specific customer and translate each value proposition into the language of the customer so that it will resonate more effectively with that customer. Not only must we demonstrate IBM’ s understanding of our customers’unique business issues, but we must also show clearly why IBM is better placed to help solve their business problems and convince them that we can deliver meaningful results that produce real business value for them. The critical elements for the delivery of an effective relationship marketing programme of this kind are:  Strong business leader sponsorship, committed industry consultants and subject matter experts (SMEs), and a truly collaborative approach across the organization.  Recognition that it is resource intensive. It demands a truly joined-up sales and marketing effort. In particular, industry thought leaders and SMEs must make personal commitments to the programme for it to succeed.  A measurement system that supports relationship programme objectives, including metrics and indicators that go beyond the traditional ‘ opportunity identification’and ‘ revenue won’targets.

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‘TEAM IBM’ Working in a complex matrix organization such as IBM requires considerable teamwork, especially in an industry marketing role, where a key objective is to present clear, consistent messages to the industry. In theory this sounds straightforward, but in practice it is one of my biggest challenges. With IBM’ s broad portfolio of products, services and solutions, and an army of marketing specialists responsible for building marketing campaigns to stimulate demand for them, I must spend a lot of my time on internal marketing and communication activities. This helps to ensure that communications to our customers in the auto industry are consistent and to build on the research papers (‘ points of view’ ) and solution focus that we have developed for the industry. I work closely with four major internal audiences: the extended marketing community; the dedicated automotive sales and consulting teams; corporate communications, which includes media relations; and the sales and marketing teams focused on the small and medium business (SMB) market. Collaboration with these important stakeholders is essential to enable effective industry-based marketing programmes. Each group has a unique role to play, to help make the right impact that produces business results for IBM in the automotive industry. The commitments I have made to ‘ Team IBM’as part of IBM’ s formal people management process are as follows:  Team IBM marketing: excite the relevant brands and primary country marketing teams across EMEA such that they choose to invest in auto-specific marketing campaigns;  Team IBM sales: team with the focus automotive account teams to deliver relevant marketing programmes that help them build deep relationships with the C-level and line-of-business executives;  Team IBM corporate communications: work seamlessly with corporate communications to ensure that we make a significant impact in terms of coverage with the major media and analyst reporters who cover the auto industry;  Team SMB: team with the extended auto network, in particular SMB, such that the sector-led industry campaigns can be effectively leveraged and reused to help grow revenue and share in the SMB market.

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CONCLUSION I have tried to share some perspectives on what life is like as an industry marketer at IBM. I should also highlight some of the personal attributes needed for success in this role. First, I believe that passion about the industry you are marketing to is essential. This is an important motivating force, and helps distinguish someone who is good at the job from someone who does an outstanding job. Second, some experience of working in the industry is also important. This helps position you credibly with the industry thought leaders and earns you the right to participate actively in the business strategy discussions – essential for you to translate the strategy into strong marketing programmes. Third, the ability to excite and influence others about your industry is central to securing commitment in terms of the budget and resources needed to make a visible difference in the industry. Finally, you must have the personal belief and determination that you really can make a difference and deliver real business value to the team and to your industry.

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Chapter 13: Knowledge Management John Griffiths, Mark Cerasale and Merlin Stone

WHAT IS KNOWLEDGE? Data, information and knowledge are often used interchangeably in conversation. They are, however, very different. Data are the building blocks of information that have not yet been arranged into meaningful patterns, eg map coordinates. Today, data are usually numerical, binary and represented in a form suitable for processing by computer. Information adds intelligence to data and puts it into context, eg a place name on a map. Knowledge comes from the ability to interpret information, and hence add value to it. Thus, being able to interpret a map and find the best route from A to B is a knowledge-building activity. The trainee taxi driver in London spends several months riding around the capital on a motorcycle acquiring ‘ The Knowledge’ . Knowledge is characterized as either explicit or tacit. Knowledge that can be captured and communicated is often referred to as explicit knowledge. Tacit knowledge is less tangible. Nonaka and Takeuchi, in their ground-breaking work The Knowledge Creating Company, [1 ]were the first to articulate the differences between these two types of knowledge in a business context. It was their contention that Japanese companies drew their competitive edge from their abilities to convert tacit knowledge into explicit forms. Explicit knowledge Explicit knowledge is often obvious and articulated. It consists of facts, interpretations, ideas, expertise, conclusions and insights that can be communicated to others via words, symbols, pictures, video and audio. We know that we know explicit knowledge, but all too often it is not captured. When a major defence manufacturer in the United Kingdom moved its production facilities from an ancient factory to a brand new site, it started having quality problems in final vehicle production. Only after discussion with the production workforce did management come to understand that a number of final assembly ‘ procedures’or workarounds had been documented on the walls of the old factory, now demolished. Formal knowledge captured in manuals, training guides or instruction sheets is explicit. Formal knowledge may include beliefs or guidelines to behaviour, if set down as formal policies. Formal or explicit knowledge can be recorded and retrieved using knowledge management systems. Immediate benefits are often achieved in organizations purely through better access to such knowledge. In the past, formal knowledge was often captured on paper and retrieved from filing systems. Today, it is more often captured electronically, stored on databases and made available over networks. Intranets, for example, are used in many companies to provide access to such knowledge. Intranets and new technology enable customization. Customization allows individuals to extract information that is relevant to them, allowing them to turn information into knowledge. Tacit knowledge Tacit knowledge is often less obvious and unarticulated. Tacit knowledge comprises ‘ soft’information about markets, customers, processes and activities. It is a valuable enterprise resource but is normally implicit, rarely stated and seldom captured. An example is the repertoire of skills, such as use of words and body language, that facilitate customer acceptance in a foreign country. Making tacit knowledge explicit can be rewarding but is difficult to achieve. Attempts to formalize or capture it can cause it to lose its value. Poor interpretation and articulation of tacit knowledge can lead to all manner of distortions. Tacit knowledge cannot be explained fully even by an expert. Often, it can be transferred from one person to another only via a long apprenticeship. For example, learning to whip cream to exactly the right consistency is best done by practice. Polanyi’ s famous saying ‘ We know more than we can tell’[2 ] highlights the idea that many human skills remain unarticulated, known only to the person who has that skill. Once, tacit knowledge was conceived of at the individual level. However, it is now recognized that it exists in the organization as well. Tacit knowledge is hard to manage because often we do not know that we know it. It resides in mental models, behaviours, organizational culture, intuition, hunches, experiences, etc. Knowledge can also be

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embedded in organizational understanding manifested in processes, products, services, structures, methods, techniques, etc. Tacit knowledge must be made explicit before it can be managed and communicated so that others learn and build on it. [1 ]

I Nonaka and H Takeuchi, The Knowledge Creating Company, Oxford University Press, Oxford, 1995 (p 9)

[2 ]

M Polanyi, The Tacit Dimension, Routledge and Kegan Paul, London, 1966

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KNOWLEDGE WORKERS For much of the 20th century, manual workers were common in most organizations. Managers were concerned with how to organize their work to improve their productivity. Today, knowledge working has replaced physical labour in many industries. The knowledge worker is now predominant. Knowledge-intensive industries, such as software and biotechnology, have emerged. Even industries such as manufacturing and retailing rely on more information. The job for life is a thing of the past. Few workers have career horizons of more than five years, and many have several careers. Valuable information exists in employees’heads in the form of knowledge – of how a process works, a machine operates or a technology integrates. Knowledgeable employees are in short supply and prone to move on if they are not treated well. As they move between companies, they disseminate valuable knowledge. While that often cannot be avoided, knowledge management systems can be used to capture and retain much of that knowledge. As Maister puts it, ‘ I could think of two groups of assets for a professional. The first group of assets on which my career was based was my inventory of knowledge and skills. Professionals get paid for their time, but that’ s not what we sell. We sell knowledge and skill. The second asset was my client relationships.’[3 ]The challenge for many organizations is to transfer as much of that knowledge as possible from the individual to the enterprise. Otherwise, workers can take it with them when they go. David H Maister, Managing the Professional Service Firm, Free Press Paperbacks, New York, 1993 (p 144) [3 ]

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KNOWLEDGE PRODUCTS The nature of products is changing too. Many products have information technology embedded, enabling them to be connected to the Internet and remotely accessed, managed and upgraded. As information technology content and connectivity increase, the value a product creates migrates to the services it provides access to. Products are becoming devices through which services can be accessed. Many customers prefer services to product ownership. They ask themselves why they should buy a product when it may be out of date before it is even paid for. Many products will become knowledge based, and they will be created by knowledge-based businesses. According to Stan Davis and Jim Botkin, Smart products, created by knowledge-based businesses, can be identified by a variety of characteristics: they are interactive, they become smarter the more you use them, and they can be customized?Customers become learners when they use smart products, which both oblige and help them to learn. Businesses will move toward making their offerings smarter because they will profit from doing so. When their customers use those products, they will be engaging in an educational process. [4 ] In the Information Age, the rapid pace of change means that people must continue learning way beyond minimum years offered by government, religious and charitable organizations. People will need to update their education throughout their lives. Employees will have to continually add to their knowledge base to increase their value and their earning power. Most companies do not yet see their customers as learners, nor do they see themselves as educators. This will require a major change in thinking. Davis and Botkin claim: Consumers as a learning segment are also underestimated: they will be the newest and largest learning segment in the twentyfirst-century marketplace. As information technologies become so much friendlier and smarter, and as they become intrinsic to more and more products and services, learning will become a by-product (and by-service) of the customer’ s world. They also assert: Business, more than government, is instituting the changes in education that are required for the emerging knowledge-based economy. School systems, public and private, are lagging behind the transformation in learning that is evolving outside them, in the private sector at both work and play, with people of all ages. Over the next few decades, the private sector will eclipse the public sector as our predominant educational institution. Stan Davis and Jim Botkin, The coming of knowledge-based business, Harvard Business Review, September–October 1994 [4 ]

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CUSTOMER KNOWLEDGE Customers are more demanding: some want exceptional value through lower costs, others want it through solutions. The Internet allows many customers to search and find information, making them more knowledgeable. Customers can make quick and easy product comparisons and shop around for the best price. Hence, the Internet has become a prime channel for low-cost sales and distribution. Some products, however, are more complex and require integration into broader networks. This forces customers to develop new knowledge or acquire it from suppliers as a service. Many customers are not particularly interested in product and price. They are more interested in exploiting the opportunities to create exceptional value, which exists in changing the broader set of processes and activities in which the product is used. As a result of higher demand and knowledge complexity, customer-serving personnel must answer increasingly difficult questions more quickly. The questions that now come to a human being such as a ‘ product expert’or ‘ process expert’now require more sophisticated logic and even judgement. The questions are not only from consumers; service customers may also include a co-worker or a collaborator at another company. Retail, financial services, high-tech, pharmaceuticals and many other industries face this knowledge work challenge. Using the most up-to-date knowledge separates industry leaders from their competition. Increasingly, a firm’ s success depends on its ability to respond rapidly to any type of opportunity or threat. Having knowledge on demand – what is needed, when it is needed – is critical for firms to function optimally in a demanding business environment. The aim is to get work done faster, more accurately, with individuals and groups making decisions more quickly and with better insight. Using knowledge to inform complex decision-making is a key driver of competitive advantage in today’ s economy. Because service activity has overtaken manufacturing as the engine of the industrialized economy, the knowledge that service-providing personnel need has become more important. The success of product manufacturing firms – and the services surrounding the design, development, sales and use of their products – depends on responsive, adaptable and resilient knowledge processes and systems. So, to thrive in increasingly complex business environments, service providers and manufacturers must be able to tap into knowledge ‘ on demand’ .

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THE VALUE OF KNOWLEDGE ‘ What you don’ t know won’ t hurt you.’Quite why this old proverb became popular is not very clear. Not knowing what foods to eat or which animals are dangerous is not a good recipe for survival. In business today, what you do not know can hurt you. What you know can mean the difference between success and failure. Being effective in business depends on ‘ knowing’a great deal – not just about your customers, but also about yourself: your capabilities, processes, systems, successes and failures. As competitors catch up with their technology, knowledge-rich, knowledge-managing companies can move to new levels of efficiency, quality and creativity. Drucker asserted that a commercial enterprise has only two functions, to innovate and to market, concluding that all its other activities are costs. He also wrote, ‘ [W]e now know that the source of wealth is something specifically human: knowledge. If we apply knowledge to tasks we already know how to do, we call it productivity. If we apply knowledge to tasks that are new and different, we call it innovation. Only knowledge allows us to achieve those two goals.’[5 ]Knowledge is a key enabler for the successful enterprise, knowledge management a key capability. Both allow a company to achieve operational efficiencies, to innovate, and to create and deliver exceptional customer value. As Slywotzky and Morrison put it, ‘ [the scope of what companies do] will change as smart companies aggressively shift their offerings from high physical content to high knowledge content. Knowledge content is harder to create and is often more highly value by customers. It is how value will be created in the future.’[6 ] Knowledge in a network economy Rifkin believes that access to experiences through services is replacing product ownership in the network economy. He argues that tangible property is becoming more marginal to the exercise of economic power, while intangible property is becoming more central. Ideas – in the form of patents, copyrights, trademarks, trade secrets, and relationships – are being used to forge a new kind of economic power composed of megasuppliers in control of expanded networks of users?Being able to control the ideas of commerce, rather than just the tools, operating processes, and products, gives the new genre of global corporate suppliers an advantage unmatched in previous economic history. Having a monopoly over ideas in each commercial field allows a few firms to grab hold of the workings of an entire industry. [7 ] Knowledge and operational efficiency The demand for more learning and management education grew during the 1980s and 1990s and is likely to continue to increase in the 21st century. Best-practice knowledge has spread throughout executive ranks through management training programmes such as those leading to an MBA. Professional services industries have evolved, and specialist advisory and consulting firms have emerged to propagate new management ideas. Companies have achieved new levels of efficiency and effectiveness through the widespread adoption of new management approaches, techniques and tools. Lean manufacturing, just-in-time (JIT) inventory management, total quality management (TQM), business process re-engineering (BPR), e-business and core competencies are just a few of the concepts that transformed many companies in the final decades of the 20th century. There are, however, disadvantages to the widespread sharing and adoption of common management and production techniques. Without appropriate regulation against customer demand, productivity improvements have led to over-production and oversupply. A further effect of homogeneity in production techniques and business practices has been a reduction in product and service innovation and differentiation. The speed of new product introduction has increased. Customers have become more sophisticated and discerning, and are demanding more of their suppliers. This has increased pressure on suppliers to bring new products to market more frequently and more quickly than ever before. New information technology systems and design, manufacturing and product management techniques have greatly reduced new product introduction times. You only have to browse car manufacturers’Web sites to see how many new cars are introduced every year in the automotive industry. Knowledge and innovation Greater competition has increased the need for product innovation. However, the speed of product innovation is decreasing. The frequency of ground-breaking product and service innovations has slowed

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in most industries. As products become embedded with technology such as microchips and are connected to the Internet, they allow access to new services. In future, product innovation may take place in the services more than in the core product. As everyday devices at home and work become ‘ intelligent’with information technology, and connected to the Internet, the opportunities for innovation will be limitless. While the rate of new product innovation may be falling, the speed of innovation imitation is increasing. Increasingly transient employees, many of whom are knowledge workers, take valuable knowledge with them when they leave. Transient workers, flexible manufacturing and the proliferation of information have greatly reduced imitation cycle times. When features and functions are embedded in software and services or can be provided as upgrades over the Internet, imitation can occur almost instantaneously. Innovation imitation is not confined to products and the production process. It also extends to other processes and, indeed, whole business models. The increasing frequency of new product introductions – mostly imitations – has shortened product life cycles. Products and services are becoming obsolete more rapidly. Rapid product obsolescence and over-production have resulted in over-supply. Surplus stock and costly inventories have led to price discounting and profit erosion. How do you institutionalize (in a company) something like innovation? Innovation takes talent, ingenuity and, above all, knowledge. The history of invention is littered with good ideas and products brought to market by one company but successfully exploited by others. Drucker[8] cites the example of the passenger jet aircraft, brought first to the market by the British company De Havilland but exploited more successfully as a commercial product by Boeing and Douglas. De Havilland forgot to take account of where customer value might lie (payload and size for routes on which jet engines would give an airline competitive advantage). Peter Drucker, The new productivity challenge, Harvard Business Review, November–December 1991 (pp 69 –79) [5 ]

[6 ]

Adrian J Slywotzky and David J Morrison, The Profit Zone, Three Rivers Press, New York, 2001 (p 33)

[7 ]


[8]

Peter Drucker, The new productivity challenge

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KNOWLEDGE MANAGEMENT Knowledge management seeks to develop the techniques and technologies for identifying, cataloguing and sharing enterprise know-how. The central idea is that companies have a huge potential for new ideas and increased creativity but may not be able to access the knowledge that they already possess. Quantifying or even cataloguing existing knowledge can be a daunting task, but the results can be startling. Davenport and Prusak cite an example from a consortium of hospitals in New England that undertook a knowledge-sharing programme between heart surgeons. The result was a 24 per cent reduction in mortality rates for coronary bypass operations. Indeed, they claim that even a simple company ‘ yellow pages’exercise can yield dramatic results. In one study they undertook, managers spent up to 30 per cent of their time just directing people to the right sources of knowledge. [9 ] A recent survey of the market capitalization of companies reveals a growing difference between the market value and their net assets, particularly in ‘ knowledge-intensive’industries such as consultancies, pharmaceutical companies and software businesses. [10 ]Knowledge management is therefore an enabler to obtaining further investment. The effective management of knowledge in the enterprise should also become a core competency in businesses today if they are to maximize their value in the eyes of a potential buyer. According to Handy, the relationship between the price paid for new acquisitions and the book value of their assets was measured for 391 large US organizations between 1981 and 1993. The mean price was 4.4 times the book value. The difference was not entirely due to goodwill, but was the buyers’best estimate of the intangible assets lying behind the official balance sheet. [11 ] Once people with the same interests and problems are connected, this opens up great potential for creativity and innovation. Even small companies can buy the technological tools. Most people are equipped with a PC linked to a network and to the Internet; they have personal productivity tools such as word processors and spreadsheets. They could therefore share information over an intranet, a shared database or through the use of groupware. Knowledge management is not exclusively about technology. Many companies look to create offline opportunities to get people together too. Social events, conferences and regular meetings between people with similar interests (including customers) can be organized. Yet very often, in companies both large and small, vital customer knowledge is inside someone’ s head. How can this be shared? Effective knowledge management involves building on the intellectual capital and assets of those who have attempted to solve the same problems previously, reusing their knowledge. The idea here is to try to improve the corporate memory of the enterprise by bringing together the complex web of knowledge that includes the skills and experience of the staff, intellectual capital assets such as R&D, and corporate information systems. Knowledge management tends to focus on unstructured information, although there is an overlap with structured information systems such as decision support, data warehousing and data mining. If this flow of formal and informal information can be brought together coherently, the enterprise will be able to innovate and obtain a real competitive advantage. Knowledge management ultimately offers a perspective on the overall use of information in an organization. Tools are now being developed for the analysis of large amounts of unstructured information, a process known as document mining. How knowledge management improves customer relationship management Conversations around the coffee machine by knowledge workers sharing what they know may become the most important form of work. One of the greatest opportunities for the future lies in a company’ s ability to identify, capture, create and use the knowledge that it has of its customers, their needs and the relationship they share. By the same token, one of the greatest challenges facing companies is the management of customer knowledge. It is not easy, even in small organizations, to capture the knowledge passed on by customers. Data from perhaps dozens of points of contact with a single customer have to be codified in databases, managed properly and then recalled at the right time to benefit both the company and the customer. Nor is it easy to identify those people or teams in the organization who have very positive relationships with customers, understand the real elements of this relationship and then replicate them. The core proposition in knowledge management is that competitive advantage depends on being able to marshal and exploit what is known not just by individuals but also by teams. Customer relationship

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management adds a new dimension. It focuses not only on what managers know about their own customers and prospects and those of the competition but also on what customers know about their own needs. At the same time, customers may have different states of knowledge about suppliers’ characteristics and abilities to meet their needs. This means that they may have a different view of the current state of the relationship between themselves and their suppliers. For example, a mistaken belief about the level of a supplier’ s knowledge may lead to a worse relationship. The customer may expect the supplier to have knowledge of transaction patterns and of their requirements based on the customer’ s past behaviour, which the supplier is unable to action. Some pizza companies can ‘ recall’the preferred toppings of their regular customers. If the pizza company can do this, the customer may expect the utility company, the travel company and the financial services company to match that level of knowledge-based service. Where intermediaries are present, companies need to focus on the transfer of customer knowledge through distribution channels. The focus of knowledge management must be broadened to encompass the knowledge of all the participants in the value chain, including the final customer. This generates lots of data. In some cases the data can be pulled together relatively sensibly to produce information about the customer. However, the data do not, in themselves, enable the organization to act knowledgeably in its relationships with the customer. The critical success factor is to develop a learning process that enables the organization to identify key information needed to sustain the relationship with customers. In a services-based relationship this information is much ‘ deeper’than in a product-based relationship. [9 ]

T H Davenport and L Prusak, Working Knowledge, Harvard Business School Press, Boston, 1998

[10 ]

Charles Handy, The Hungry Spirit, Arrow, London, 2002 (p 160)

[11 ]

Charles Handy, The Hungry Spirit (p 160)

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KNOWLEDGE MANAGEMENT IN TRADITIONAL COMPANIES For much of the last century, change was continuous and could be planned. Markets were product-led, not customer-led, and there was a long lead-time for product changes. Even today, in more competitive markets, functional towers are the dominant organizational structure. Charles Handy described this organizational form as Apollonian. He comments: The organization chart, a series of boxes piled on top of each other, was his logo, reductionism his methodology. Take the work of the organization, break it down to its component parts, put those parts in a logical and hierarchical relationship and then, if you have got the logic right and everyone does what their role requires and the manual lays down, inputs will be transformed into outputs with maximum efficiency. [12 ] Work is divided up to achieve maximum efficiency and economies of scale. There is little knowledge-sharing between towers, since each function focuses on its own tasks and activities. Knowledge is seen as a basis for power. There is little incentive or need to share the knowledge base because this would devalue the current work structure. Large Apollonian companies therefore tend to compartmentalize knowledge. The idea of mass production, for example, is that benefits come from knowing how to operate your piece of a repetitive process at lowest cost, so knowledge in most manufacturing companies is highly specialized. Normally, tacit and explicit knowledge are limited to working procedures and workarounds for specific tasks. There is little need to share knowledge except within a small specialist group, ie the small group of workers who perform the same tasks. Products tend to be designed and developed on a one-off basis, although development costs are now forcing companies to share common components. In some ways, every business is a knowledge business. According to Philip Evans and Thomas Wurster, In many industries not widely considered information businesses, information actually represents a large percentage of the cost structure. About $300 billion – is the cost of capturing, storing, and processing such information as patients’records, physicians’notes, test results, and insurance claims. More fundamentally, information is the glue that holds together the structure of all businesses. [13 ] [12 ]

Charles Handy, The Elephant and the Flea, Random House, London, 2001 (p 59)

Philip B Evans and Thomas S Wurster, Strategy and the new economics of information, Harvard Business Review, September–October 1997 [13 ]

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KNOWLEDGE MANAGEMENT IN LOW-COST COMPANIES Explicit knowledge resides in formulae, textbooks, manuals or technical documents. Zuboff makes a useful distinction between embodied, or action-centred, skills and intellective skills. [14 ]Action-centred skills are developed through actual performance (learning by doing). In contrast, intellective skills combine abstraction, explicit reference and procedural reasoning, so they can be represented as symbols and therefore easily transferred. Some customer contact staff know exactly how a customer wants to be handled in a wide range of situations. This expert knowledge is hard to capture and share. On the other hand, the script provided for call-centre agents on their VDU screen makes available explicit knowledge about how a dialogue should be sustained. So the answer has to be to make it easy for customers and let them personalize for themselves and then embed that in computer systems (the low-cost business model). Evans and Wurster comment: When information is carried by things – by a salesperson or by a piece of direct mail, for example – it goes where the things go and no further. It is constrained to follow the linear flow of the physical value chain. But once everyone is connected electronically, information can travel by itself. The traditional link between the flow of product-related information and the flow of the product itself, between the economics of information and the economics of things, can be broken. What is truly revolutionary about the explosion in connectivity is the possibility it offers to unbundle information from its physical carrier?the explosion in the number of people and organizations connected by networks are [ sic] freeing information from the channels that have been required to exchange it, making those channels unnecessary or uneconomical. [15 ] According to Neil Rackham, one cost-effective way to improve low-cost sales and distribution is to make sure that knowledge is embedded in systems rather than people: ‘ Most sales forces spend an inordinate amount of money and effort trying to teach product knowledge to their salespeople. It’ s a cheaper and better approach to put knowledge into an easy and accessible electronic format. Although this is especially true of transactional sales, it’ s probably good advice for sales of all kinds.’[16 ] A key factor in the effective exploitation of knowledge in any enterprise is the understanding that much of the total knowledge base comes from customers and suppliers, ie the extended enterprise. So, a knowledge management strategy must incorporate the ability to capture, store and disseminate knowledge coming from these external sources. While some of this requirement can be met through the deployment of customer relationship management (CRM) and supply chain management systems, we shall see later that these systems are only part of the solution. Smart use of Web-based tools can automate the process of knowledge capture, particularly with a base of customers that are willing to perform ‘ self-service’and reveal their preferences through interactive questionnaires. Equally, where companies have opened up their knowledge management processes to their suppliers, great results have been achieved through incorporating their suggestions for innovation and cost reduction into process re-engineering activities or product development. A good example of this is the Chrysler ‘ Score’programme in the 1990s. It took ideas for improvement from suppliers and shared the benefits back with them when implemented. This eventually saved Chrysler over $1 billion per annum in reduced costs. [14 ]

S Zuboff, In the Age of the Smart Machine, Basic Books, New York, 1988

Philip B Evans and Thomas S Wurster, Strategy and the new economics of information, Harvard Business Review, September–October 1997 [15 ]

[16 ]


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KNOWLEDGE MANAGEMENT IN SOLUTION COMPANIES Knowledge is both an enabler and an essential capability for the creation and delivery of solutions. Companies now realize that their ability to add value through their operations is no longer simply the combination of capital investment in land, plant and raw materials, and the labour required to process the materials into finished products. Much more value can now be delivered through the knowledge of how those products can be used to create further value for the customer, or the knowledge itself can become the ‘ product’ , as it is with consultancy. Further analysis of how services such as business consultancy grow out of products was provided in Chapter 4. In a solutions enterprise, knowledge management is of special significance. There is an intimate connection – strategic and operational – between suppliers and customers. Each day, the company can learn new ways of meeting its customers’needs. Customers also can learn new ways in which they can get better service from suppliers. Far more than in a product-based relationship, this learning will depend on soft factors – how the processes and people of each party interact with each other to create value for both. However, this all takes place within the flux of everyday activity, and so this learning risks being lost. It is therefore absolutely essential for solutions enterprises to work with their customer-partners and their supply chain partners to develop shared approaches to knowledge management that go across organizational boundaries. Service and solution-based companies require a wider knowledge base, and reuse of existing knowledge. They require a networked community-based approach to knowledge sharing, focusing on:  Market dynamics. Is the market growing or shrinking, by geography or sector?  Competitor activities. Which competitors are active in the sector?  How can we differentiate our offerings?  Customer business drivers. What are the customers’priorities, and what pressures is the customer facing?  Customer organization and politics. Who in the customer organization has the power and the ability to make decisions? Whom do they rely on for advice?  Requirements definition. What requirements does the customer have in mind? Can we influence these requirements by doing some initial consultancy work? s problem?  Problem-solving. What is the root cause of the customer’  Have we met this problem elsewhere? Is the problem well defined?  Potential solutions. What solutions have we proposed elsewhere? How successful were they at delivering benefit to the customer? What are the risks associated with each solution?  Potential business partners. Where do we need to use partners to provide the complete solution? What other risks does this create? Who are our business partner contacts? What is their delivery track record?  Best-practice service delivery approaches. What worked elsewhere? Who was involved and are they available to work on this opportunity?  Commercial factors (cost, pricing, scope, customer satisfaction criteria, etc) on a global basis.  Contract management (cost-tracking, deliverables, etc). Which contracts are making a loss? What actions should be taken to correct the situation?  l References (industry related, solution related, etc). Which customers are willing to act as a reference for this opportunity? What benefits did they achieve? Consultancies and other professional services companies are among the most advanced in using knowledge to enable the creation and delivery of solutions. According to Maister, ‘ In any professional service there are three key benefits that clients seek: expertise, experience, and efficiency.’[17 ] Knowledge management supports these through capturing and diffusing data on people and offerings (expertise), client references (experience) and efficiency (methods). Further explanation of how knowledge management enables solution creation, delivery and marketing was provided in Chapters 9 and 11. Knowledge management infrastructure The creation and delivery of solutions is dependent on the effective management of information and knowledge. New information and knowledge management technologies are key enablers in most

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companies providing solutions. Many companies, particularly manufacturers, require new information technology systems to support the new business model, and for knowledge management: CVs and skills databases, planned resource availability, opportunity management systems for opportunity tracking and pipeline management, virtual team rooms for project communications, account planning and contact management, online training and education, links to transactional systems. New systems may be required to support, for example, time recording such as utilization (recording what consultants do with their time). Knowledge to support team working Solutions are created and delivered by teams. In enterprise terms, a team of workers brings to a task knowledge that is embedded in its members and their interactions as a team. The potential for new knowledge is embedded in the team and its interactions. The team possesses embedded knowledge. New products and services, innovative ideas, represent embodied knowledge (realized knowledge). Therefore, the customer-facing team’ s task is to manage the transition from embedded to embodied knowledge in order to improve the way in which customer relationships are handled at different points of contact, and to feed back new insights to product and service development teams. As soon as members of a team get together, there is the potential to create new knowledge. This new knowledge is the result of a combination of both explicit and tacit knowledge. Combining explicit knowledge is rather easy. However, the degree to which the potential new knowledge resulting from the integration of tacit knowledge is realized depends on several variables. Madhavan and Grover use the term ‘ embedded knowledge’[18 ]to describe the potential knowledge resulting from the combination of individual team members’stores of tacit knowledge. A cross-functional team is brought together because its members have collective knowledge that cannot be held efficiently by any of its individual members. However, this collective knowledge is not present when the team is assembled; it is only potentially present. Knowledge and organizational design In the network economy, companies will increasingly collaborate with each other to create and deliver exceptional customer value. Knowledge management is an essential capability to support collaboration between business partners and customers. The Internet has lowered transaction costs, allowing companies to collaborate in ways that were not previously possible, redefining company boundaries. Ronald Coase and Oliver Williamson suggest that the boundaries of the corporation are defined by the economics of exchanging information. [19 ]While organizations allow the exchange of rich information in a narrow internal group, markets allow the exchange of less rich information in a larger external group. Where one mode becomes less cost-effective than the other determines the boundaries of the company. Further information on the network economy will be provided in Chapter 15. Charles Handy suggests that organizations will become more federal in the future as fixed hierarchies break down under pressure to be agile and satisfy the needs of all stakeholders. He proposes that businesses will break down into manageable business units, with more autonomy than the strategic business units of today’ s large organizations. These individual units, however, can still be co-ordinated centrally provided that the right information is available at the right time. Information, however, is one of the few things that we seem to be certain to have in more abundance and in greater variety than ever before. It is just as well because one of the few consistent findings of the research on organization structures has been that more decentralization is always accompanied by more information. [20 ] The benefits of knowledge management In a traditional product-led company it has often been difficult to justify an investment in knowledge management. However, there are several benefits coming from successfully implementing a knowledge management strategy, particularly in a solutions enterprise:  The storage of explicit knowledge in electronic form means that it can be quickly retrieved and reused for the next proposal or project. This can dramatically reduce the time taken to respond to customer queries or requests for information and proposals.  The time put into creating templates for deliverables saves many times that effort across multiple projects and improves the quality of the deliverable for the customer. This could be the difference between winning and losing in a

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



  

[17 ]

competitive situation. The reduced time for access to previous solutions will also drive down the cost of solution design, through reuse of solution components. This will also reduce the risk of failure during delivery, through the use of ‘ tried and tested’approaches. The proficiency of practitioners will be increased, owing to their ability to quickly pick up knowledge and expertise from others in the organization, increasing their confidence in tackling complex problems. There will be reduced loss of intellectual assets from turnover of staff, as assets will be captured when they are created. Faster ‘ on-boarding’of new employees will be possible, owing to their ability to access knowledge more readily. There will be reduced risk from failed projects, and also reduced risk of rogue projects with costs that go out of control, through the sharing of best practice and experience from previous projects.

David H Maister, Managing The Professional Service Firm (p 21)

R Madhavan and R Grover, From embedded knowledge to embodied knowledge; new product development as knowledge management, Journal of Marketing, 62 (4), 1998 (pp 1–12) [18 ]

R H Coase, The nature of the firm, Economica, 4 (4), 1937 (p 386), and Oliver E Williamson, Mark ets and Hierarchies: Analysis and antitrust implications, Free Press, New York, 1975 [19 ]

[20 ]

Charles Handy, Understanding Organizations, Penguin Books, London, 1999 (p 365)

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SUCCEEDING WITH KNOWLEDGE MANAGEMENT There are four major elements that need to be in place to form a successful knowledge management strategy. These can be summarized as:  making knowledge visible;  building knowledge intensity;  building a knowledge infrastructure;  developing a knowledge culture. Making knowledge visible One of the first steps in creating a knowledge management strategy is to understand who in the organization has experience and expertise in any particular area. The old adage ‘ it’ s not what you know but whom you know’still holds good in a knowledge-based organization. A simple survey of the organization, asking the questions ‘ what knowledge do you need to do your job?’and ‘ who do you go to, or where do you go to get this knowledge?’ , will reveal the underlying knowledge network and knowledge flows. The question ‘ what knowledge do you need to do your job?’will also reveal the taxonomy or categorization of knowledge elements. These knowledge elements can also be categorized in terms of tacit or explicit, and the taxonomy can be published to the organization, together with a definition of each term. A good idea early on in the development of a knowledge management strategy is to publish the results of the knowledge survey in the form of an internal yellow pages, or ‘ knowledge map’ , available to all in the organization. This will help with the ‘ on-boarding’of new employees and can form part of the induction process. A restricted version of the yellow pages could also be used with customers and suppliers. Putting the results in a document on an intranet means that each employee can ensure that his or her entry is kept up to date. A qualification process should follow on from the survey, so that for key competencies some form of accreditation should be part of the career structure for knowledge workers. Building knowledge intensity Once competence has been established in the organization, the leading practitioners can come together to promote and improve their areas of interest. This can be achieved either through co-location or, more likely, through regular meetings, telephone calls and videoconferences. Where co-location is not practical, or less suitable for the business, an alternative approach is to build a virtual centre around a community of practice. This community requires a leader who will set standards for the practice, and decides who has the competency to join the community. There can be several levels of community status, typically ‘ core team’ ,‘ practitioners’who have been trained by the core team, and other interested members. The leader of a community of practice is also responsible for knowledge management processes, for example the editing of journals, and controlling the content of knowledge systems. Knowledge evolves and requires constant maintenance and updating. Recognition and reward for outstanding contributions encourages others to contribute. Networking is facilitated via communities of practice. New employees can quickly find out who else shares their interests. This speeds up the establishment of networks of like-minded practitioners. Building a knowledge infrastructure Building the infrastructure means building a common network across the organization serving all the communities, alongside other traditional communication vehicles such as journals, newsletters and corporate newspapers. The aim is to give easy access to both external and internal information/knowledge sources. This used to be done by means of a library with relevant books and journals, but today is done via Internet and intranet access through browsers from the office desk or home computer. Today’ s knowledge tools vary from access to transactional information (eg Siebel as an enabler for CRM) to document-based systems such as Lotus Notes or Web-based browsers for intranet/Internet access. The advantage of the latter browser-based tools is that the same user interface can be used for a wide variety of information sources. Collaborative tools such as Lotus Sametime can also be used to support communities for real-time interactions on a global basis.

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In the future, wireless technologies and pervasive computing devices will enable access. Knowledge will be accessible on different devices in any location in a form controlled by the knowledge worker. Intelligent data analysis and ‘ fuzzy logic’technologies will enable the filtration of irrelevant information and ensure that the knowledge worker receives only the latest version of the information needed to perform his or her role. Future systems will also include virtual reality training simulators: putting the user into training scenarios based on real-time inputs. These facilities will combine skills training and development with interactive knowledge systems to provide ‘ just-in-time’access to the right knowledge repositories and experience. Developing a knowledge-based culture The move to a knowledge-based culture in a large organization must be sponsored at the highest level. BP’ s CEO, John Brown, made knowledge management a cornerstone of his business strategy. He was visibly committed and supported change to a new culture. As with any other organizational change, rewards must be given by senior management to members who show the behaviour needed to increase the effectiveness of the knowledge management strategy. These include attending knowledge management training sessions or courses, taking on knowledge management roles and responsibilities, and contributing to repositories of intellectual capital. A key behaviour that must be measured and rewarded is knowledge-sharing. This requires trust in each other, knowing that intellectual capital will not be misused by others in the organization and that the originator of significant steps forward in terms of knowledge assets will be recognized and rewarded. Leadership and mentoring are essential to ensure that senior management understand the value of knowledge management and support the development of programmes and policies to make them a reality. High-level support is essential. Senior executives must understand what knowledge management offers, and play an active role in the decision-making process. Executive input is essential, because knowledge management touches almost everyone in the organization. Many of the processes in knowledge management involve human interaction, so the support of top human resource executives is important. Potential problems ‘ Knowledge is power.’Organizations usually run into major cultural problems when adopting a knowledge management initiative. People do not like to share their best ideas. They believe that doing so dilutes their standing in the organization and can impede their ability to get ahead. Most people are used to an environment that is highly competitive, and have never learned to share. In a highly political corporate environment, knowledge equals power. Getting people to understand that knowledge-sharing is for the greater good of all requires significant culture change. People do not like to use other people’ s ideas for fear of making themselves look less knowledgeable. People also like to consider themselves experts at their own job and prefer not to collaborate with others. Changing this mindset is not easy, because most people have operated within a knowledge-hoarding environment for a long time. Once people start to see the value of sharing knowledge, barriers begin to fall and a transformation in thinking and action can start. Of course, a receptive organization also needs people with the skills and willingness to learn. Openness and diversity are key issues for effective learning in organizations. Confidence and trust are important too, if existing personal or corporate beliefs are to be challenged openly and changed. Advocacy and the ability to put a personal view persuasively are often rewarded more than an ability to inquire into complex problems. It is usually true that people at the top of an enterprise have more turf to protect than anybody else. They are often the people who shaped the enterprise in its present form as they rose through the ranks. It needs a mature team and a supportive culture before most people will admit in public that they do not understand something or, indeed, will change their beliefs or say they are willing to change. To deal with this, the enterprise should set up competency networks. These are initiatives to promote the sharing of knowledge. When these initiatives fail, it is usually for one of a number of reasons. Sometimes they are under-resourced. They may be unrecognized as part of the personnel appraisal procedure or they may be seen as threatening, non-core activities that cut across organizational structures. In these circumstances, sharing of best practice is the first thing to be dropped when

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something important needs doing that is on the boss’ s performance contract.

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CONCLUSIONS Knowledge management is a fundamental capability for tomorrow’ s successful solutions enterprise. However, increasing knowledge implies changing sets of beliefs. The higher the level of management, quite often the more ingrained the beliefs, so the bigger the change effort required. Learning involves both personal and team skills. It cannot happen without resources such as time, money, leadership and rewards. Nor can it happen without a culture that encourages the capture of tacit knowledge in explicit forms. Knowledge management must be supported technologically by an easy vehicle for data capture such as an intranet. Groupware such as Lotus Notes is good for this purpose. The material technology must be backed up with social technology (training, coaching and appraisal) and with reward and recognition systems. The captured knowledge must be analysed and distributed to the people who can best use the information through intelligent software and knowledge management processes.

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SUMMARY In this chapter we described the differences between data, information and knowledge. We suggested that knowledge intensity is changing the nature of employees, products and customers. We argued that knowledge enables operational efficiencies and innovation, and is therefore valuable in business. We suggested that knowledge must be managed for many reasons, not least to improve customer relationship management. We described how knowledge is managed in traditional service and product-led companies. We also assessed the role of knowledge and its management in emerging low-cost and solutions business models. Finally, we outlined some of the benefits of knowledge management and described the four elements that need to be put in place to form a successful knowledge management strategy. In Chapter 14, Kevin Wheatly provides insight into the role of the Knowledge Manager at IBM.

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NOTES 1. I Nonaka and H Takeuchi, The Knowledge Creating Company, Oxford University Press, Oxford, 1995 (p 9) 2. M Polanyi, The Tacit Dimension, Routledge and Kegan Paul, London, 1966 3. David H Maister, Managing the Professional Service Firm, Free Press Paperbacks, New York, 1993 (p 144) 4. Stan Davis and Jim Botkin, The coming of knowledge-based business, Harvard Business Review, September–October 1994 5. Peter Drucker, The new productivity challenge, Harvard Business Review, November–December 1991 (pp 69–79) 6. Adrian J Slywotzky and David J Morrison, The Profit Zone, Three Rivers Press, New York, 2001 (p 33) 7. Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 57) 8. Peter Drucker, The new productivity challenge 9. T H Davenport and L Prusak, Working Knowledge, Harvard Business School Press, Boston, 1998 10. Charles Handy, The Hungry Spirit, Arrow, London, 2002 (p 160) 11. Charles Handy, The Hungry Spirit (p 160) 12. Charles Handy, The Elephant and the Flea, Random House, London, 2001 (p 59) 13. Philip B Evans and Thomas S Wurster, Strategy and the new economics of information, Harvard Business Review, September–October 1997 14. S Zuboff, In the Age of the Smart Machine, Basic Books, New York, 1988 15. Philip B Evans and Thomas S Wurster, Strategy and the new economics of information, Harvard Business Review, September–October 1997 16. Neil Rackham, Rethink ing the Sales Force, McGraw-Hill, New York, 1998 (p 270) 17. David H Maister, Managing The Professional Service Firm (p 21) 18. R Madhavan and R Grover, From embedded knowledge to embodied knowledge; new product development as knowledge management, Journal of Marketing, 62 (4), 1998 (pp 1–12) 19. R H Coase, The nature of the firm, Economica, 4 (4), 1937 (p 386), and Oliver E Williamson, Mark ets and Hierarchies: Analysis and antitrust implications, Free Press, New York, 1975 20. Charles Handy, Understanding Organizations, Penguin Books, London, 1999 (p 365)

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Chapter 14: The Knowledge Manager Kevin Wheatly I have been a Knowledge Manager for almost 10 years. It is a job that does not exist in every company. In the past 10 years I have seen the role of knowledge manager become more prominent within organizations that have adopted knowledge management (KM) strategies. I have also seen several changes in the role and of its title. I have been called a Knowledge Manager, Knowledge Officer, Knowledge Broker and, my least favourite, a Knowledge Integrator. The role has changed as many times as the job title. Today, knowledge manager is a respected position within many organizations. It is also, I am pleased to say, a role that is often far more closely linked to the business goals and strategy of the organization than ever before. What are the goals and objectives of knowledge management? Ultimately, a company wants to understand and use better what it knows. It also wants to identify what it should know that it does not know, which helps it avoid constantly reinventing the wheel. It may involve tapping into previously unrecognized capabilities of either an individual or, possibly, a department within the firm. When a company understands what gaps there are in its knowledge, it can create or acquire the missing knowledge – enabling the company to retain its competitive advantage. When I started my KM career I was at a top 5 global consulting company in the United Kingdom. Knowledge management was then closely linked to the traditional business research role. Most people in KM jobs had a library/research background. This made sense, as the role was biased towards content management. So, it was logical for the team looking after external research/information also to be the team that managed internally produced content. However, it became clear that the role of a knowledge manager was very different from that of the secondary researcher. The researcher role was often reactive: responding quickly to questions and requests from practitioners. KM, on the other hand was more about reusing knowledge, packaging it so that it could be easily accessed, identifying gaps in knowledge and also understanding who knew what within a community. A knowledge manager needed to be proactive – seeking to change people’ s behaviours, encouraging and promoting sharing, acting as a catalyst for change. Knowledge management, and so the knowledge manager, started to look towards the business direction of the firm. Rather than concentrate on just location and storage of knowledge, there was a concerted effort to understand where the business was moving. The focus moved to equipping consultants with tools that would help them sell and deliver initiatives derived from the business strategy, as well as changing the behaviours and attitudes towards knowledge-sharing. As the role moved from simply looking at content management issues, eg posting and finding materials in databases, knowledge managers have had to work more closely with the business to understand its needs. The position has become more one of trusted business adviser, suggesting and identifying issues where KM can increase the business’ s effectiveness. An excellent example is the identification of knowledge gaps. Many knowledge managers wax lyrical about this, but identifying and filling these gaps is not easy. The newly created Learning and Knowledge organization in IBM’ s Business Consulting Services has been working with the business, first to understand its needs to win and deliver projects, second to identify significant gaps in knowledge that hinder the winning and delivering of work. However, the third and final step is critical: the Learning and Knowledge organization has an internal budget it can use to enlist consulting practitioners who are not currently working on projects (who are ‘ on the bench’ ). They can be used to help create, shape and harvest what is needed to fill the knowledge gaps. The role of the Knowledge Manager here is to partner with the business to identify the gaps and then manage the process by procuring the appropriate subject matter experts and ensuring that the end materials are captured and communicated to the community. This third step has been a significant change. By using ‘ benched’resources to help develop the business, we ensure that valuable resources are not wasted and that those resources can further develop their expertise. Now the KM team is working more closely and proactively with the business. There is a shared purpose and goal. The relationship is truly collaborative and partnered rather than that of customer and supplier.

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This change in focus from content management has also meant that a very different skill set is needed. The emphasis is more on people than on tools such as databases. As the focus of the knowledge manager has shifted, so has the type of person who makes a good knowledge manager. Although research skills are useful, the main skill is the ability to establish, maintain and develop strong working relations with management and project teams. The knowledge manager must listen to all sides and have a clear view of the overall knowledge management strategy. To illustrate this, let me use a recent example from IBM. In IBM, small communities often come together and provide their own solutions to sharing and collaborating. Typically these efforts work well. However, they can be less effective as the number of people involved increases. Wider visibility of capabilities and skills may be left purely to chance meetings and exchanges. Clearly, this could lead to missed opportunities, both for the company and for individuals in the small community. One particular team came to me with a problem. The database they had used was no longer going to be supported and they wondered if I knew how to ensure that their database continued to exist. My first reaction was one of excitement and amazement that such a small community had been running so successfully for such a long period of time without wider recognition in what was a burgeoning subject area. In this case it would have been easy to provide a solution that allowed the community’ s database to remain as it had been before, with limited access and visibility. This would have been a missed opportunity. Instead, why not provide the team with their own collaborative space but within a much wider community, so that they could have the opportunity to grow, and to promote their expertise? They chose the latter option. This shows an important ability a knowledge manager needs: to take a step back from the detail and look at the bigger picture. This may mean that the solution of a local problem is not always the one the local team wants, but it allows the knowledge strategy to remain coherent and focused. A second KM skill is communication. The knowledge manager must be able to articulate messages and themes. Communicating change is very important. I have spent much time promoting people and projects that have shared or reused knowledge, or used subject matter experts by involving them in communities. Simple success stories are a powerful, easy way of demonstrating the value of knowledge management. They also show leaders the value that knowledge managers can bring to the business! The role is often one of mediation and collaboration. Here, knowledge managers must link various other supporting functions. This applies particularly in marketing, where goals are often shared between different teams. Human Resources are involved too, because encouraging and promoting knowledge-sharing involves incentives and measurements. When knowledge managers focused on research and content management, their role was a lonely one. The new role encourages and cries out for collaboration. In IBM and in my previous company, a community of knowledge managers was developed. Common processes and practices were developed, shared and implemented. This greatly increased the effectiveness of knowledge management worldwide by cutting duplication and also by allowing innovation to be replicated. Within IBM, this community of knowledge managers has increased dramatically over the five years I have been with the company. With the recent acquisition of the former PricewaterhouseCoopers Consulting (PWCC) group, it has become important for knowledge managers across geographies, industry and solution areas to collaborate. Although the knowledge manager encourages project teams to share and collaborate, it is all too easy for the community of knowledge managers to forget to share and collaborate among themselves! Besides giving greater credibility to the knowledge manager, practising what they preach can give knowledge managers a rich source of examples. Often, in various knowledge manager communities in which I have worked, ideas that have been shared grow to become company-wide practice, as the idea is built upon and cross-fertilized by the whole community. The effective reuse of ideas and collaboration is after all one of the major themes that knowledge managers promote. It is always far easier to illustrate with real case studies than just theories. There is a real danger of knowledge managers’over-elaborating and concerning themselves with the strategic end of KM. Many papers have been written about the importance of knowledge management. But how does this help knowledge managers start to implement a KM programme in their organization? I strongly believe that there is no one right way to launch a KM programme. An analogy I often use to explain KM is this: when a new set of buildings on a university campus was finally completed, the builders and campus authorities decided not to lay pathways between the buildings. Instead they opened the buildings and then waited to see which way people would take between the buildings. Over the period of a few weeks clear pathways could start to be observed where the grass had been worn

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away. The next step was for the builders to go back in to pave over these worn dirt tracks so people could get to the buildings by the best route. Knowledge management is like this. People are all different. Companies are made up of people. So the best way to manage knowledge will vary from company to company. Successful approaches to KM even within one company may vary from community to community. Using my time at IBM as a case study, let me show how KM can grow in an organization. I shall give examples that can be initiated on a local community level and indicate the directions that IBM as a whole took that really helped embed knowledge management into its culture. When I first joined IBM Global Services there were very few other Knowledge Managers in the company. There was an overall strategy, but few people were in a position to ensure that the strategy became reality. As my manager at the time suggested, ‘ You have a blank canvas; paint a picture. That will really help us.’At that time, KM was relatively piecemeal. I realized it would not be practical to use my previous company’ s current model as a starting point. Instead, it could be used as a benchmark of where IBM could go, but with the benefit of ensuring that we did not make the same mistakes, and also maximizing innovation and creativity, which were stronger in the IBM culture. Knowledge management can all too often become overcomplicated. As a knowledge manager you can lose sight of where you want to be. Developing a strategy is key, but just as important is developing a map to assist your journey there. Identifying quick wins and key influencers is absolutely critical. The more people you can have on your side, the better. If your community appreciates and understands where you are trying to go, then it is far easier to deliver the benefits of effective KM. As the group that I had joined was relatively new within the company and was hiring new people all the time, it became obvious that people did not know where to find important knowledge. This also meant that they did not have a place to share their knowledge. A simple quick win was to create pointers to where some of the best existing content was. IBM is a very large, complex organization. It has content in many places. It also became clear that as this new community of people grew, they needed a single place to start to collaborate and share knowledge. At this time I was working in the European oil and gas consulting practice, so I set out to find where other, similar practitioners were within IBM. Once a large enough group of people had been identified, the next task was to bring them together as a community. The KM system we had at the time was called the ICM AssetWeb (ICM stands for Intellectual Capital Management). This was made up of several community databases ‘ owned’by the practitioners. The practitioners were responsible for the quality of the content in the database and also for identifying gaps in the community’ s knowledge. So the Knowledge Manager’ s role was crucial as the catalyst to get the community and database launched, as well as in providing continuing support to ensure that the community remained active. Knowledge management is not just a technology issue, so launching a database was never going to solve this particular community’ s knowledge problems. The role I had as the Knowledge Manager was to embed the knowledge-sharing ethos into the community and keep it alive. This involved communication and education, two activities that have always taken up much of my time as a knowledge manager. People are creatures of habit. In most communities where I have worked, sharing is not a habit that comes easily. It is for the knowledge manager to challenge and change this by demonstrating the value of sharing and reusing knowledge. Within IBM, innovation is the culture, but this culture had to be changed to encompass the following simplified steps: 1. Check whether someone has created this before. 2. If not, then create it. 3. Think how the new creation could be useful to someone else. 4. Share. In these four simple steps there is much work. First I had to understand why people were not checking whether something had been created before. Navigation of the information was the main problem, owing to the many sources available. Education classes and time spent with individual practitioners paid dividends here. We also now use ‘ webinars’(intranet-based education to deliver basic training). The value

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of individual sessions cannot be overestimated: they enhance the relationship knowledge managers have with the community they serve. The knowledge manager learns through these processes: several initiatives have resulted from hearing at first hand about the frustrations of communities. Repeatedly in IBM, an effective communication strategy has greatly helped to point people to the best places and to other people. The third and fourth steps are probably the most difficult of all. Here is what I did. Knowledge management is a work stream that can operate effectively when it runs parallel to the business strategy. Unfortunately, all too often it sits as a support function to the main business. Knowledge management is far more effective when it is linked with other parts of the business. To address the sharing issue identified above, I began to examine the annual appraisal process. I found that contribution to the KM system was part of everyone’ s commitments, but it was not being measured effectively. So, I started to work closely with the HR function. First we communicated to everyone that we would be measuring the KM contribution more strictly. We started an incentive programme involving public recognition for the winners, to get the practitioners to contribute. Knowledge management is often a journey of discovery, and this was certainly so with our programme. Many practitioners were just contributing knowledge to the system at the very end of the year. A mythical figure of ‘ two documents’suddenly sprang up in conversation, but no one really knew where it had come from. However, we weren’ t too disheartened, as at least we had encouraged practitioners to understand where the important places were on the KM system and had educated some for the first time on how to contribute. So we started to work with HR again to change the contribution measurement process for the next year. Rather than focus on the individual, we decided it would be better to measure projects and teams. Also, we would clearly state that success would be based on consistent contribution throughout the year. At first when we looked at the results at the end of the year we did not find much difference in the number of contributions. However, when we looked closely we saw that contributions were of far higher quality and that much more thought had gone into how they could be reused. The final stage of the journey was for us to add, in the following year, some measurements of reuse of knowledge. KM is clearly not just about process. As I mentioned earlier, IBM is an innovative company and has tried successfully on a number of occasions to use some of its technological innovations to assist with KM. We have run a number of truly global discussions forums over the past two years that have been tremendously successful. Examples include ConsultantJam and WorldJam. These forums were run over a fixed period of 72 hours with over 50 managed sub-forums. All the forums were open, everyone was free to express their view and anyone participating in a forum was encouraged to vote on ideas. At the end of the 72 hours a work group was in place to go through all the sub-forums and identify actions the company could take to improve the way we worked, identify possible new opportunities, etc. As mentioned before, educating colleagues is an important task for knowledge managers. This used to involve educating people about knowledge tool sets, how to contribute, where to find material, etc. In IBM we have now linked learning and knowledge functions together. Some Knowledge Managers are now involved in planning and implementing education for our consultants. This is a relatively new development. It makes sense, as the two areas are very closely linked. We take direction from the business leaders as to what education is required. The KM programme is then developed to support this. For the past two years, the IBM knowledge management function has been driven from a community perspective. This meant a strong focus on putting together communities of practitioners with a common goal. Less emphasis was put on managing the content and identifying knowledge gaps, as there have not been enough people to do this. The emphasis has been on connecting people and utilizing collaborative technology. With the acquisition of PWCC, IBM now has a much larger KM community. The KM approach in PWCC placed strong emphasis on content management – typically, harvesting knowledge, identifying gaps, packaging, and posting to databases. With the new combined team’ s capability, the community initiatives will become far more powerful, with tools containing far deeper and richer content. In addition, the scope and breadth of the KM community has widened considerably. Now KM has been grouped with learning, secondary research methods and also benchmarking. This combined ‘ Learning

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and Knowledge’organization collaborates extensively and brings a full range of services to the business. So, rather than having numerous groups contacting key stakeholders in the business, we now have a closer relationship with leadership. Expertise is brought in to support resolution of the most critical issues. All this allows a more focused approach to be developed and ensures more reliable delivery. In summary, the role of the knowledge manager has changed much in the past 10 years. It has become closer to the business, and increasingly part of the business rather than a function that runs parallel to it. When KM, and so knowledge managers, are directly involved in the strategic direction a corporation is taking, then KM is genuinely at its most effective. Until then, it is really achieving only half its potential. I believe KM still has a way to go yet to be fully integrated into the strategies of most companies. However, the fact that there are an ever-increasing number of knowledge managers in existence is testament to how far this discipline has come. If someone had told me 10 years ago that I would be involved in the learning and education aspects of a company such as IBM, I would not have thought that it would have any relation to KM as I saw it then. I look forward to seeing what the next development of my career path will be! One thing is sure: the role of the Knowledge Manager will become even more integral to the success of a services-focused organization such as IBM.

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Chapter 15: Business Design Mark Cerasale

INTRODUCTION A business design is a high-level blueprint for creating and delivering customer value. Business designs change: they are transformed, often over years, to best serve industries, markets and customers. Change takes place in political and legal environments, in the economy, in technology and in customer needs, and new opportunities are discovered to innovate with evolving technology. New business designs emerge to satisfy the needs of society, suppliers and partners, employees, shareholders and customers. Both lower-cost and solution-based business designs develop. Solutions business designs are enabled by the network economy in which cross-functional and interorganizational teams and projects predominate. Traditional product-led business models are less dynamic and must be transformed to enable solution creation and delivery.

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ECONOMIC CHANGE Dramatic economic change happens through revolution, not evolution. Economic revolutions create the bridge between one type of economy and the next one (its replacement). Hunting and gathering was replaced by the agricultural economy during the Agricultural Revolution. The agricultural economy was replaced by market capitalism during the Industrial Revolution. Market capitalism was replaced by managerial capitalism during the Managerial Revolution. Today, the customer (not the product) is often the scarce resource. We are in the midst of a Customer Revolution in which managerial capitalism is being replaced by the customer-focused network economy. Managerial capitalism was the dominant economic model for much of the 20th century. It worked well when customer demand for products was high. Managerial capitalism had access to collective capital and consisted of large organizations employing many people. Large companies were able to produce goods, such as automobiles, in sufficiently high numbers and low cost to create customers and substantial markets for their products. Managerial capitalism achieved its strategic goals through planning, which allowed companies to take a long-term view. Planning was as important as market forces in allocating resources. This worked well when change was evolutionary and could be planned. In the 20th century, economic growth was driven, in large part, by big companies and their strategic planning. Growth was achieved through massive investment, managerial control, mass production, standardization, and the creation of large markets through reduced costs and prices. Aggregation worked well when customer needs were relatively homogeneous. As companies grew, the number and pay of managers rose dramatically. Management dealt with the complexity and scale of their organizations by dividing them into chunks and assigning each to a different manager. Large companies came to control brands and technology, access to markets, customers, capital and business talent. The vertically integrated company, containing multiple strategic business units (SBUs), emerged as the dominant business design. Powerful forces such as globalization, deregulation and greater access to capital transformed business during the final decades of the 20th century. Competition increased, and over-supply caused many markets to become saturated. Today, change is discontinuous and unpredictable. Workers are more mobile and knowledgeable. Many are ‘ knowledge workers’and take valuable knowledge with them when they leave. The assembly line has largely been automated. Technology and processes are quickly imitated. The rate of product innovation is slowing, and rapid imitation is commoditizing many products and services. Features, functions and performance often count for less, and many products are perceived as ‘ good enough’ . In the past, management focused its resources on improving the product and the processes of production. Widespread adoption of new management approaches and the use of information technologies such as the Internet improved productivity. Quality programmes and the adoption of best-practice production processes raised the bar in product design and manufacturing. There is now much less room for dramatic improvement, and there are fewer opportunities for achieving sustainable competitive advantage in those areas. Competition for customers is intense in many industries. As has been pointed out already, the customer, not the product, is now the scarce resource. As a result, focus is now on the customer and the process of consumption. Customer relationships have come to the fore. Suppliers must simultaneously compete on the quality and ingenuity of their products and the quality of their customer relationships. Many markets have separated and become smaller. Niches are increasingly the norm. According to Charles Handy, Penetration, not concentration, is the aim now; penetration of the market-place, penetration of the technology, penetration of the future. To be lean and flexible rather than big and cheap is what most organizations want. But it is hard to be lean if you are concentrated and hard to be flexible if you are too narrowly specialized. The old formula (concentration plus specialization equals efficiency) has had its day in the new automated and fastchanging world. [1 ] Suppliers relentlessly search for the best customers, products, technologies, suppliers, employees, partners and business designs. In the past, business designs were created to serve the needs of

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suppliers. Successful business designs in today’ s hyper-competitive environment must create exceptional customer value – starting with the needs of the customer, working back towards the supplier. [1 ]

Charles Handy, Understanding Organizations, Penguin Books, London, 1999 (pp 347–48)

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THE CUSTOMER REVOLUTION Many customers want more value through solutions. They need to solve complex problems or exploit new opportunities for value creation. They may not have the specialist knowledge or the resources required and often look to partners and suppliers for support. Suppliers help them to understand their issues and opportunities. They can provide assistance in assessing the options and will often create and deliver unique solutions by customizing services and products. Solutions are services-led. Solutions business models are emerging. IBM, for example, satisfies the needs of its customers for information technology-enabled solutions. Similar solutions business designs are emerging in many industries. Technology enables many products to be provided as services. Falling information and communication technology costs mean that information technology, such as microchips, can be embedded in products. When technology-rich products are connected to the Internet they become devices for providing services. If well managed, services can be more profitable than products. Organizational structures have become flatter as companies try to become more flexible and responsive to customer demand. In the past, assets and managerial structure were added to organizations to enable growth. In the future, many will be taken away. Capabilities and enablers, from internal divisions and external partners, will be combined in networks to create exceptional customer value. As they search for greater agility and focus, integrated companies are moving to network organizational forms. Networks can form between independent companies and between divisions within companies. Core competency thinking and the widespread use of outsourcing have given a boost to the virtual enterprise.

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CORE COMPETENCIES In today’ s competitive markets, success can be achieved only by focusing on the very few powerful forces operating in any arena and harnessing them to create exceptional customer value. In 1990, C K Prahalad and Gary Hamel published an article entitled ‘ The core competence of the corporation’that has been referred to in some previous chapters of this book. In it they advocated a focus on learning rather than physical assets and suggested that companies should exit activities that do not use their core competencies. [2 ]Core competencies are bundles of skills and technologies that enable a company to provide a particular benefit to its customers. Core competencies are, therefore, unlike strategic business units (SBUs), which are often defined by specific product-markets. The aim of the core competency approach was to enable companies to grow by focusing resources on areas of strength. Many companies have chosen to outsource activities considered to be non-core. According to Prahalad and Hamel, ‘ The commitment a firm makes to building a new core competence is a commitment to creating or further perfecting a class of customer benefits, not commitment to a specific product-market opportunity.’[3 ]They go on to claim: We have argued for growth and diversification around core competencies. Core competencies are the connective tissue that holds together a portfolio of seemingly diverse businesses. Core competencies are the lingua franca that allows managers to translate insights and experience from one business setting into another. Core competence-based diversification reduces risk and investment and increases the opportunities for transferring learning and best practice across business units. [4 ] Many large corporations have become a collection of business units responding to market forces rather than a chain of command. They are more focused, flexible, and responsive to customer needs and market requirements. As the core competency approach has attained popularity among academics, management researchers and managers, market-based definitions of businesses have shifted towards more competence-based definitions – for example, from IT products to ITenabled solution creation and delivery. Many companies are becoming more ‘ modular’ . They look for opportunities to selectively link up with other companies to utilize the specific skills, capabilities and enablers they require. Networking allows companies to avoid the trade-offs between the needs of customers (for efficiency and a broad range of resources and skills) and the needs of companies (to manage their resources effectively and achieve economies of scale). Companies no longer have to choose between market efficiency and corporate effectiveness; the network economy can allow both. Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May– June 1990 (pp 79–90) [2 ]

Gary Hamel and C K Prahalad, Competing for the future, Harvard Business School Press, Boston, 1996 (p 219) [3 ]

[4 ]

Gary Hamel and C K Prahalad, Competing for the future (p 322)

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THE HOLLYWOOD STUDIO OPERATING MODEL The Hollywood studio operating model has been offered as a future model for companies in the network economy. Jeremy Rifkin has noted that the Hollywood culture industries have a lot of experience with network-based approaches to organization. The entertainment industry has had to deal with the risks that accompany products with a truncated life cycle. Each film is a unique experience that has to find a quick audience if the production company is to recoup its investment, making a network approach to doing business a matter of necessity. [5 ] Every film production brings together a team of specialized production companies and independent contractors, each with its own expertise, along with the talent. Together the parties constitute a short-lived network enterprise whose life span will be limited to the duration of the project. The major studios still exercise control over much of the process by their abilities to partially finance production and to control distribution of the product. Aksoy and Robins claim that the key to maintaining effective control over the industry has always revolved around controlling access to the distribution channels: ‘ By holding on to their power as national and international distribution networks, the majors were able to use their financial muscle to dominate the film business and to squeeze or to use the independent production companies.’[6 ] In an article entitled ‘ Why every business will be like show business’in Inc magazine, Joel Kotkin wrote, ‘ Hollywood [has mutated] from an industry of classic huge vertically integrated corporations into the world’ s best example of a network economy?Eventually, every knowledge-intensive industry will end up in the same flattened atomized state. Hollywood just has gotten there first. [7 ] [5 ]


[6 ]

Jeremy Rifkin, The Age of Access (p 27)

[7 ]


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THE NETWORK ECONOMY According to Rifkin, Everywhere in the world, companies large and small are in a frenzied scramble to become part of expanding commercial networks. In the Age of Access, a company’ s biggest concern is not being included in the commercial webs and relationships that create economic opportunities. Having access to networks is becoming as important in cyberspace commerce as enjoying market advantage was in the industrial era. Being left out of the loop can mean instant failure in this new world of ever changing alliances. [8 ] Widespread adoption of the core competency approach has led to greater specialization and has increased the need for companies to form partnerships and enter into alliances. Yves Doz and Gary Hamel comment: Ironically, a decade of reengineering and refocusing has made many corporations more needful than ever of strategic allies. Most management teams have addressed demands for greater shareholder value creation by a mix of refocusing around core competencies and core businesses – becoming more selective about what they do – and reengineering, downsizing, and delayering – becoming leaner and more productive in doing what they still do. The self-contained, vertically integrated companies of yesteryear are largely extinct. [9 ] Doz and Hamel claim that alliances are essential for three reasons. First, many of the great opportunities of the information age call for the melding of skills and resources that few individual companies now possess in their entirety. Second, the revolution is not being built on vertically integrated structures of single corporations. More and more, it is being built on ‘ seamless’networks that must be standardized across vast expanses and complementary applications. Third, the uncertainty inherent to the information economy, with its myriad of new markets to create and emerging technologies to define, calls for alliances to serve not only the usual purpose of bringing together complementary strengths but also that of combining insight and understanding to reduce uncertainties and accelerate learning. [10 ] Doz and Hamel argue that the benefits of alliances can be summarized as co-option, co-specialization, learning and internalization. Cooption turns potential competitors into allies and providers of the complementary goods and services that allow new businesses to develop. Co-specialization is the synergistic value creation that results from the combining of previously separate resources, positions, skills and knowledge sources. Doz and Hamel claim that partnerships and alliances may also be an avenue for learning and internalizing new skills, in particular those that are tacit, collective and embedded (and thus hard to obtain and internalize by other means). When these skills can be learned from a partner, internalized, and exploited beyond the boundaries of the alliance itself, they become all the more valuable. [11 ] In networks, the most dominant player can adopt a nodal position from which it can orchestrate the activities of partners. Michael Hammer wrote: Everyone knows that Cisco Systems makes routers, switchers, and all the other plumbing that underlies the Internet. What is less well known is that this is not true. In fact, Cisco makes almost none of its own equipment. A great majority of Cisco’ s orders go out without ever being touched by a Cisco employee. Cisco’ s own term for virtual integration is the Single Enterprise Program (SEP). Cisco initiated this effort because it realized that it was playing in a world that changes overnight. Between 40 and 60 per cent of its revenues comes from products that are less than a year old. How can Cisco stay on the leading edge of such a rapidly changing environment without losing ground to nimble start-up competitors? The answer is focus. The company’ s managers have decided they will do two things and two things only. They will develop cutting-edge products, and they will maintain close relationships with their customers. Everything else will be left to partners. [12 ] According to Aurik, Jonk and Willen, There is huge value in becoming a Cisco-like orchestrator – if coordination happens to be both an important capability in your output and a significant source of value in the industry. But be attentive to

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changes in the competitive environment and wary of getting too comfortable in the integrator role: The value of a capability recombination can erode over time as products mature and new technology hits the market. [13 ] Ronald Coase, winner of a Nobel Prize for economics in 1991, has argued that companies tend to expand their organizational boundaries until the costs of organizing an extra transaction inside the company equal the costs of carrying out the same transaction on the open market. Transaction costs, therefore, determine a company’ s shape and size. The Internet is an enabler of the network economy. It has lowered transaction costs, allowing cheaper and better collaboration between partners, suppliers and customers. The Internet allows new services to be provided remotely. Internet-enabled process integration and automation has enabled companies to outsource more activities considered to be non-core. [8 ]


[9 ]

Yves L Doz and Gary Hamel, Alliance advantage, Harvard Business School Press, Boston, 1998 (p xiv)

[10 ]

Yves L Doz and Gary Hamel, Alliance advantage (p 2)

[11 ]

Yves L Doz and Gary Hamel, Alliance advantage (p 4)


Johan C Aurik, Gillis J Jonk and Robert E Willen, Rebuilding the Corporate Genome, John Wiley, New York, 2003 (p 168) [13 ]

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SOLUTIONS BUSINESS DESIGNS Michael Hammer claims: The advent of the virtual enterprise has vertiginous implications. As it reverses Henry Ford’ s vertical integration, it shatters many of our fundamental assumptions about doing business. It forces managers to make unprecedented critical decisions about what they really do: Which of our processes define us and our business? Where should we place our bets? What should we choose to do and not to do? Which processes should we dispose of, and which should we acquire? UPS is branching out from delivery and is adding new capabilities in inventory management and financial services. Manufacturers of electronics and automobiles are easing out of their role as assemblers while upgrading their skills as marketers and brand managers. [14 ] Companies that decide to make solution creation and delivery a core competency must decide what activities they will develop and retain in-house and what will be outsourced to suppliers or provided by partners. Peter Drucker once wrote, ‘ Only two key activities are always present in any organization: there is always the management of people and there is always the management of money. The rest has to be determined by the people within looking at the enterprise and at their own jobs, values and goals.’[ 15 ]In a solutions company, money and people must be managed differently as compared with the way they are managed in a product-led company. The management of money IBM began to grow its service business under Lou Gerstner, exchairman of IBM. He recalled a conversation with Dennie Welsh (an IBM manager) when arriving at IBM in the early 1990s: [Dennie] pointed out that the economics of a services business were very different from those of a product-based business. A major services contract might last six to twelve years. An outsourcing contract for, say, seven years might lose money in the first year. All of this was foreign to the traditional world of product sales and would create problems for our sales compensation systems and the financial management system. [16 ] Gerstner continued: [S]ervices businesses are much more difficult to manage. The skills required in managing services processes are very different from those that drive successful product companies. We had no experience building a labor-based business inside an assetintensive company. We were expert at managing factories and developing technologies. We understood cost of goods and inventory turns and manufacturing. But a human-intensive services business is entirely different. In services you don’ t make a product and then sell it. You sell a capability. You sell knowledge. You create it at the same time you deliver it. The business model is different. The economics are entirely different?we had to learn how to be disciplined – how to negotiate profitable contracts, price our skills, assess risk, and walk away from bad contracts and bad deals. [17 ] The management of people Solutions companies are services-led. However, they are more similar to professional services firms than to traditional product- or service-led companies. David Maister claims that the key to ensuring any professional firm’ s future is wise management of its two key assets: its inventory of skills, talents, knowledge and ability; and the strength of its client relations and reputation. [18 ]According to Maister, ‘ The defining characteristic of the professional service organization as an organizational type is the expectation of all professionals that they will, with time and personal development, proceed through the ranks to be considered for some form of ownership or partnership. Professionals want careers, not jobs.’ [19 ]He goes on to claim, ‘ In the next decade and beyond, the ability to attract, develop, retain, and deploy staff will be the single biggest determinant of a professional service firm’ s competitive success.’[20 ] Access to skilled staff is a key determinant of the extent to which, and the speed at which, a company can introduce solutions. A significant challenge for many product-led companies will be to attract and retain the right kind of employees as they move to solutions. Many skilled service professionals seek employment in smaller firms such as management consultancies. Stock options have become more

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popular in many public companies as means of rewarding and retaining highvalue employees. In the future, other reward systems may emerge. [14 ]


[15 ]

P Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, Oxford, 2001 (p 182)

[16 ]

Louis Gerstner, Who Says Elephants Can’ t Dance?, HarperCollins, London, 2002 (p 129–30)

[17 ]

Louis Gerstner, Who Says Elephants Can’ t Dance? (pp 133–34)

David H Maister, Managing the Professional Service Firm, Free Press Paperbacks, New York, 1993 (p 359) [18 ]

[19 ]


[20 ]


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SOLUTION CAPABILITIES AND ENABLERS In theory, the network economy allows suppliers to become almost entirely virtual (except for a few key functions). Why not rely on partners to provide most of the capabilities and enablers needed to create and deliver solutions? Enablers, such as technology, and capabilities, such as business consulting, can be accessed through service agreements and partnerships. Most companies have a long history of contracting with external service providers and partners. Why not extend that collaboration further? Few suppliers have all the capabilities and enablers they require. Most companies choose to partner other firms to some extent. Partnering can allow co-option, co-specialization, learning and internalization. It can also allow quick access to resources, enabling suppliers to be more agile and responsive to changes in the market. By focusing on just a few activities, companies can improve their skills and knowledge through specialization. There are, however, disadvantages to partnering. It can be difficult to coordinate the resources of independent suppliers (although the challenge can be equally great between divisions of the same company). Independent suppliers can compete with each other, particularly if they have similar service portfolios or similar strategies, or lack experience in managing partner relationships. Companies choose to develop and retain solution capabilities and enablers in-house for many reasons. Some resources are scarce and provide exceptional value to the customer. As a result, they are a source of sustainable competitive advantage that one supplier would not want to make available to its competitors. Some capabilities allow one supplier, such as the Cisco example, to adopt and sustain a dominant position in its network of partners (although the relationship should create value for all players). Many customers want end-to-end solutions and prefer the accountability of a ‘ one-stop shop’ . If appropriate management systems are in place and a shared vision established, coordinating the activities of employees can be easier than managing external partners. According to McKinsey, Providers of products need only offer good ones at competitive prices – perhaps with innovative features to secure the deal. Solution providers, however, must combine the product and service elements of their offerings in more economical and efficient ways than their competitors do. That could mean bringing in third parties to flesh out offers. Yet many of the best solutions providers size up the complexity and coordination costs of that approach – not to mention the delays and quality problems it might introduce – and decide to go it alone. The bar is higher when a company sells solutions, because it is responsible not only for the performance of its products but also for business outcomes. When things go wrong, customers prefer to have one throat to choke. If a solutions provider does enlist partners, it must take responsibility for coordinating their efforts – and, should the need arise, offer up its throat. [21 ] Solution enablers include skilled employees, company culture, methods, products, knowledge, brands, technology, incentives, factories and offices, customer relationships, and business partners. Some can be sourced externally; others (such as culture) must be developed internally. While this is not an exhaustive list, most solution companies tend to develop and retain the following capabilities in-house:  solution creation;  solution delivery;  continuous innovation;  thought leadership creation and knowledge management;  partner relationship management. Some new capabilities must be acquired, and existing capabilities must be transformed. Michael Hammer states, ‘ [C]ore competencies are not straightjackets: just as old ones can be exploited, new ones can be developed.’He explains that companies that have started to introduce solutions have managed to develop the new capabilities they required: They were not offering these capabilities in a stand-alone fashion but as extensions to businesses in which they were already very strong. Moreover, when they begin to focus on broad customer needs, many companies discover that they possess competencies of which they were previously unaware. Such secondary capabilities (like project management) that are not intrinsic to a company’ s primary offerings can be highlighted and exploited in the context of a solutions strategy. [22 ]

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ABC Amber CHM Converter Trial version, http://www.processtext.com/abcchm.html Solution creation Solution creation and delivery, which includes customer relationship development, solution marketing, solution selling and solution design, are very different from traditional sales, marketing and distribution. Solutions are created and delivered by teams of people who come together often for short periods of time. Solution salespeople help customers understand their issues and opportunities, and assess the options for addressing them. They can then work with customers to create and deliver unique solutions. Solution salespeople focus primarily on customer value creation, the product often being of secondary concern. By contrast, product salespeople tend to push products and focus on communicating their value. Lou Gerstner recognized the challenges (many caused by cultural differences) of introducing solutions through the traditional sales force at IBM in the early 1990s. [23 ]According to McKinsey, however, Successful solutions providers, including ABB, IBM, and Nokia, have ridden out the discomfort and realigned their organizations. They have formed strong ‘ front-end’units responsible for developing and delivering integrated solutions, refocused product business units as ‘ back-end’supporters of solutions, and developed ‘ strong centers’to mediate between the two. At IBM, for example, the product business units for PCs, servers, software, and technology still sell direct to some customers but have also become internal suppliers to the company’ s newer solutions units, which serve industry-based customer segments such as banking, insurance, and manufacturing. Another backend unit works to turn products into solutions. To manage relations between the two types of units, IBM has defined new central functions, including finance centers to manage solutions and transfer pricing, as well as regionally based leadership groups to allocate resources. [24 ] The McKinsey authors go on to claim that product business units feel the pain first when they lose control over the accounts of customers targeted for solutions. New front-end units, given profit-and-loss-type responsibility, are formed to develop and deliver solutions for such customers. They suggest that these front-end units, with their focus firmly on solutions, are new creatures in product organizations in several ways. They have no product responsibilities or even loyalties. They source the products and services for a solution from the backend product units and, quite likely, from outside parties as well. While few solution companies (or consulting firms) claim to be entirely product independent (unless product independence is explicitly requested by the customer), most attempt to be transparent. Solution customers are less concerned with the features and functions of products and more concerned with the value-creating activities in which they are used. Many customers do not expect solution providers to provide competitive products from third parties if there is no substantial benefit from their doing so. Many customers prefer the increased accountability of buying an end-to-end solution from one supplier. Many large sales organizations today are organized by integrated accounts, aligned customers and geographic territories. There is often a great deal of formalized structure and control in traditional sales coverage models. ‘ Hunter and farmer’models are common too. When market demand outstripped supply, the ‘ hunter and farmer’approach worked. In a buyer’ s market, where value must be created on a customer-by-customer basis, the seller must spend more time with customers than hunting allows. Moreover, solution creation and delivery require greater flexibility. New coverage models are required that allow better team working. According to Charles Handy, ‘ Sales executives, developed in a job with a fairly high degree of structure and control, and promoted to posts of marketing responsibility with numbers of staff marketing experts reporting to them, often find the new and more lexible requirements of task and subordinates a big challenge to their habitual style.’[25 ] Some companies (particularly smaller ones) focus on niches. Many companies (particularly larger ones) face customers with different needs. Some customers want products (increasingly at the lowest possible cost); others want solutions. Segmentation allows both to be served. Neil Rackham suggests, ‘ If we truly believe that sales forces must create customer value, then it’ s logical to ask why we continue to segment the sales effort primarily by customer size?Account size, at best, tracks only approximately with the value creation needs and expectations of buyers. Why not also segment the selling effort according to the value requirements of customers?’[26 ] Rackham argues that some companies can afford to focus on just one type of customer – transactional or consultative – but for others, especially large companies, this level of focus is not practical. Most major organizations need to cover both types of customers to achieve their financial goals. He suggests

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that the answer is to structure the organization with separate and distinct approaches for each customer type, sharing elements where that makes sense, without compromising the ability to serve distinctly different value creation needs. Starting with the sales organization itself, Rackham proposes two separate approaches: an efficiency-driven structure to serve transactional customers, using low-cost elements (telesales, electronic commerce, and so on), and an effectiveness-oriented structure for consultative customers, organized around key accounts, vertical markets or products. This allows a dual structure that lets sales forces build capability to deal with each type of customer. [27 ] As Michael Porter wrote, Industries are not homogeneous?Industry segmentation is the division of an industry into subunits for purposes of developing competitive strategy. Industry segmentation for competitive strategy must be broader than the familiar notion of market segmentation, though encompassing it?Industry segmentation is necessary to address the central question of competitive scope within an industry, or what segments of an industry a firm should serve and how it should serve them. [28 ] Companies can provide both products and solutions. To do both, they must become more modular and federal. They must transform their vertically integrated business designs. A federal structure allows the autonomy of some parts of the organization with the economics of coordination. Management systems must be established to allow more than one type of value creation. Solution delivery In the past, business designs best served the needs of suppliers. Many service providers created and delivered their services like products. The ‘ productized’service approach was often easier to manage. This approach worked well for customers too when change was continuous and more predictable. Change today is discontinuous, making planning difficult. Many companies want to turn their fixed costs into variable costs. Fluctuating demand creates inefficiencies for suppliers and customers. When demand is low, companies have excess capacity. When demand is high, they often do not have enough. Many service delivery contracts today are agreed over a fixed period of time to a fixed service level at a fixed price. Many customers want their suppliers to be more flexible and adaptive. They want them to act more like partners – sensing and responding to their needs, and sharing more of the risk. There is more demand for services such as ‘ power by the hour’ . Service providers must transform their systems and structure to allow greater flexibility. According to Maister, In a service in which the ‘ technology’is well established, which can be delivered with a reasonably routine set of actions, specialization and division of labour are possible (and demanded by the marketplace); organizations that deliver this type of service tend to be bureaucratic, hierarchical, and ‘ managed’ . Where a service is so customized or complex that its execution remains more of an art than a science, organizations tend to be more freeform, less hierarchical, and less bureaucratic. Sociologists of business refer to these two extremes as ‘ mechanistic organizations’and ‘ organic organizations’ … professional service firms are becoming less ‘ organic’and more ‘ mechanistic’ . If they wish to avoid a bureaucratic future, they must strive to get work that truly demands a high proportion of creative, artlike approaches. Routine work, though temptingly profitable because past experience can be leveraged to cut costs, inevitably results in a routinized work environment – anathema to those who choose professional careers. [29 ] Continuous innovation Peter Drucker once wrote, ‘ The customer is the foundation of a business and keeps it in existence. He alone gives employment. And it is to supply the customer that society entrusts wealth-producing resources to the business enterprise?Because it is its purpose to create a customer, any business enterprise has two – and only these two – basic functions: marketing and innovation.’[30 ]In a solutions company, innovation must be continuous and pervasive. Solutions are services-led, requiring a broadening of perspective from product innovation to business innovation. The network economy allows research and development to extend beyond traditional boundaries. According to Henry Chesbrough, ‘ [T]he role definition of esearch?has to change?I think research must be more broadly defined to include internal discovery, but also to admit external knowledge as an equal

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part of the task. A second change is that businesses need to think less about the iece parts?and more about the integration of the parts into a system. Less depth and more breadth, you could say.’He also predicts changes in the development process: ‘ In the new regime, business planners would share their needs with the internal research people, but both groups would actively solicit inputs and proposals from external research providers as well?Internal projects would be started to fill in the gaps, or to define the architectures that could connect the disparate external threads into a coherent whole.’[31 ] Solution providers will focus more resources on services innovation. According to Dean Takahashi, Where researchers once may have worked in ivory-tower isolation developing hardware and software, they are now tagging along with IBM services staff to visit customers and get hands-on experience solving their problems?IBM’ s transition from traditional hardware and software toward services is giving its research operations a new focus. By 2005, about 200 of IBM’ s researchers will be designated as ‘ services researchconsultants’who help customers do everything from targeted electronic marketing to mining data for retail operations to analyzing statistics on auto warranty claims. ‘ This is the start of a trend where the large companies with research capability will take on more of the burden of innovation, especially in services,’said Alie Young, an analyst at Gartner. [32 ] According to Brent Schlender, CEO Sam Palmisano is betting that by turning IBM Research itself into a service business of sorts and getting his top thinkers out into the field, not only might they use their world-class smarts to help solve some knotty real-world problems and drum up new business, but they might also get a better sense of how to tailor their blue-sky research efforts to coincide with the future needs of the IT marketplace. Says Palmisano: ‘ IBM Research has reinvented itself many times over the decades as technical challenges and customer problems have changed. A generation ago, most of our researchers grappled with challenges in physics, materials science, and magnetics because so much of our business depended on devices.’But today, he notes, ‘ many of the toughest, most fascinating problems are in services.’[33 ] Product innovation is important for solution companies, particularly those that continue to sell products independently as well. Products can be a source of competitive advantage, particularly if innovations can be protected over time through the use of patents, etc. Product research and development can give a solution provider unique insight and early warning of future product development. Sometimes a product can be used to differentiate a service or solution, particularly if it is not made immediately available to competitors. Solution salespeople and consultants can also be involved in product development, providing product developers with information on emerging customer needs that can then be built in to the product. Thought leadership creation and knowledge management Solution customers seek expertise, experience and efficiency. They choose solution providers that have expert knowledge about their industry, their issues and their opportunities. Solution customers want suppliers to provide thought leadership, new insight and original ideas. Thought leadership may be a point of view, specialist knowledge of an issue or an opportunity that is valued by the customer. Traditional marketing techniques work less well in engaging solution customers. Thought leadership differentiates one solution provider from its competitors. Expert knowledge is highly valued and can allow a supplier to adopt a nodal position in a network of partners. The ability to manage knowledge is critical in a solution company in which many employees are knowledge workers. Fewer workers today have career horizons of more than five years, and many have several careers. Valuable information exists in employees’heads in the form of knowledge – of a customer, how a process works, a machine operates or a technology integrates. Knowledgeable employees are in short supply and prone to move on. As they move between companies, they disseminate valuable knowledge. Knowledge management systems can be used to capture and retain knowledge. Partner relationship management Most solution companies depend on partners to some degree. Some partnerships or alliances are ‘ marriages of convenience’ , opportunistic and operational in nature. Others are more strategic, established between a few selected partners who come together for joint planning activities to which they

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often commit considerable resource. Successful partner relationships are built over many years and are based on mutual understanding and trust, often between senior business leaders. According to Neil Rackham, ‘ As a good basic rule for initiating enterprise relationships, start at a very senior level in each organization. With an increasing top management focus on growth, there are few better ways for a CEO to have impact than to initiate selective enterprise-wide value-creating relationships with customers, suppliers and collaborators.’[34 ] Customers must also make changes to their own systems and structure to get the most value from service-based relationships with suppliers. Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no 6696, 2003 (p125) [21 ]

[22 ]


[23 ]

Louis Gerstner, Who Says Elephants Can’ t Dance? (pp 129–30)


[25 ]


[26 ]


[27 ]

Neil Rackham, Rethink ing the Sales Force (pp 264–65)

[28 ]

Michael Porter, Competitive Advantage, Macmillan, Basingstoke, 1985 (pp 231–32)

[29 ]


[30 ]

Peter Drucker, The Practice of Management, Butterworth-Heinemann, Oxford, 2001 (p 35)

Henry Chesbrough, Open innovation: using research from everywhere for new product and service development [Online] http://ibm.com [accessed May 2003] [31 ]

Dean Takahashi, IBM shifting research attention, Mercury News [Online] http://bayarea.com [accessed 24 March 2003] [32 ]

[33 ]

Brent Schlender, Big Blue is turning geeks into gold [Online] http://fortune.com [accessed 27 May 2003]

[34 ]


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SOLUTION CULTURE Organizational culture is an important aspect of solutions business designs. Solution companies are services-led. People are their greatest assets. Organizational culture (how people think, what they do, how they communicate, etc) in a solution company is different from that in a product-led business. Organizational cultures are built over the years by dominant groups in an organization. However, what suits them and the organization at one stage is not necessarily appropriate for ever. Product-led cultures continue to dominate most companies, even after many years of transformation to solutions. To be successful with solutions, companies must develop and nurture an appropriate solution culture (across the entire organization or in targeted areas). Product-led organizational cultures are often described as mechanistic or role based. They have centralized, formalized systems and procedures that are appropriate to stable environments. Jobs and career progression are clearly defined. Appraisals are formalized and centrally managed. The assumption is often made that good performance at one level is the best predicator of performance at the next. Individuals are not expected to perform over and above their predefined job descriptions. A certain amount of job security is assumed, and rules, regulations and bureaucracy are accepted as the norm. Role cultures can be found in traditional product and service organizations. According to Charles Handy, The role organization will succeed as long as it can operate in a stable environment. When next year is like this year, so that this year’ s tested rules will work next year, then the outcome will be good he role organization will be found where economies of scale are more important than flexibility or where technical expertise and depth of specialization are more important than product innovation or product cost. Organizations used to operating in a sellers’market until the mid 1950s, or with the state as their only customer, were quite properly operating in a role culture since there was a high premium on product reliability and few penalties for cost or lack of product innovation. [35 ] By contrast, solutions are unique and often highly customized, requiring a culture often described as organic or task oriented. In solution companies, people work in teams to perform tasks. They may come together on projects for short periods. According to Charles Handy, The task culture therefore is appropriate where flexibility and sensitivity to the market or environment are important. You will find the task culture where the market is competitive, where the product life is short, where speed of reaction is important?Essentially control is retained by the top management by means of allocation of projects, people and resources. [36 ] According to Maister, The scheduling of work assignments is the single most important managerial activity in a professional services firm. Whoever makes the work assignment decisions is the person really managing the practice?By allocating the right resources to different assignments, there is the opportunity to influence the cost of the work, its quality, and the timeliness of its delivery. Scheduling has longer-term consequences as well. Over time, the pattern of assignments given to professionals will profoundly influence their professional development, their worth to the firm and to clients, their satisfaction with the firm, and, as a result, their motivation and productivity. [37 ] Companies can have more than one culture. In a federal organization, several cultures may exist. Charles Handy wrote: In general, the availability of people with the right orientations will be a significant element in the freedom that an organization has to move towards a particular culture. The individual orientations of the key people in an organization will have a large say in determining what the dominant culture is, irrespective of what it should be. You decide, in large part, on your culture when you decide on your people. [38 ] According to Handy, ‘ [A]lthough beloved of many theorists and idealists, task cultures appear to be extremely difficult to manage well, particularly when surrounded by other cultures. Perhaps it is that organizations have more experience with the management of steady-state activities?perhaps?people are more role-oriented, more fond of the steady state than they are prepared to admit. [39 ] [35 ]


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[36 ]

Charles Handy, Understanding Organizations (pp 188–89)

[37 ]


[38 ]


[39 ]


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CONCLUSION Some companies try to transform themselves entirely into solution companies; others introduce solutions gradually over time. Many companies focus primarily on transforming the sales force with new processes, skills and systems. Some companies aim to transform through acquisition, acquiring business consulting firms or key individuals. Acquisition can provide quick access to specialist resources and solution customer relationships, although managing mergers and acquisitions brings its own challenges. Acquisition can help transform organizational culture (particularly when individuals are moved to senior management positions in the acquiring company). How far a company transforms itself to the solutions business design depends on many factors, including the size of opportunity, organizational propensity to change and the availability of resources.

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SUMMARY In this chapter I argued that a Customer Revolution is taking place. Managerial capitalism is being replaced by the network economy. I explained how new business designs are emerging to satisfy the needs of customers for exceptional value. I described the core competency approach and the ‘ Hollywood ’studio operating model in the context of the emerging network economy. I explored the differences between traditional product-led business designs and solution business designs. I argued that solution creation and delivery is a core competency of a solution company. I suggested that most solution companies tend to develop some key enablers and capabilities in-house (rather than seek partners that have them). Key capabilities include solution creation, solution delivery, continuous innovation, thought leadership creation, knowledge management and partner relationship management. I argued that organizational culture is an important aspect of solutions business designs. I suggested that an appropriate solution culture should be nurtured. Finally, I explained that the extent and speed of transformation to solution business designs depend on many factors and differ between companies. In Chapter 16, Julie Adams, an Organizational Change Management Consultant at IBM, explores how to successfully manage the transition to a solutions business design.

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NOTES 1. Charles Handy, Understanding Organizations, Penguin Books, London, 1999 (pp 347–48) 2. Gary Hamel and C K Prahalad, The core competence of the corporation, Harvard Business Review, May–June 1990 (pp 79–90) 3. Gary Hamel and C K Prahalad, Competing for the future, Harvard Business School Press, Boston, 1996 (p 219) 4. Gary Hamel and C K Prahalad, Competing for the future (p 322) 5. Jeremy Rifkin, The Age of Access, Penguin Books, London, 2000 (p 24) 6. Jeremy Rifkin, The Age of Access (p 27) 7. Jeremy Rifkin, The Age of Access (p 27) 8. Jeremy Rifkin, The Age of Access (p 28) 9. Yves L Doz and Gary Hamel, Alliance advantage, Harvard Business School Press, Boston, 1998 (p xiv) 10. Yves L Doz and Gary Hamel, Alliance advantage (p 2) 11. Yves L Doz and Gary Hamel, Alliance advantage (p 4) 12. Michael Hammer, The Agenda: What every business must do to dominate the decade, Random House Business Books, London, 2002 (p 212) 13. Johan C Aurik, Gillis J Jonk and Robert E Willen, Rebuilding the Corporate Genome, John Wiley, New York, 2003 (p 168) 14. Michael Hammer, The Agenda (p 218) 15. P Drucker, Innovation and Entrepreneurship, Butterworth-Heinemann, Oxford, 2001 (p 182) 16. Louis Gerstner, Who Says Elephants Can’ t Dance?, HarperCollins, London, 2002 (p 129–30) 17. Louis Gerstner, Who Says Elephants Can’ t Dance? (pp 133–34) 18. David H Maister, Managing the Professional Service Firm, Free Press Paperbacks, New York, 1993 (p 359) 19. David H Maister, Managing the Professional Service Firm (p 185) 20. David H Maister, Managing the Professional Service Firm (p 189) 21. Juliet Johansson, Chandru Krishnamurthy and Henry Schlissberg, Solving the solutions problem, McKinsey Quarterly, no 6696, 2003 (p125) 22. Michael Hammer, The Agenda (p 48) 23. Louis Gerstner, Who Says Elephants Can’ t Dance? (pp 129–30) 24. Nathaniel W Foote, Jay Galbraith, Quentin Hope and Danny Miller, Making solutions the answer, McKinsey Quarterly, no 3, 2001 (p 4) 25. Charles Handy, Understanding Organizations (p 111) 26. Neil Rackham, Rethink ing the Sales Force, McGraw-Hill, New York, 1998 (p 17) 27. Neil Rackham, Rethink ing the Sales Force (pp 264–65) 28. Michael Porter, Competitive Advantage, Macmillan, Basingstoke, 1985 (pp 231–32) 29. David H Maister, Managing the Professional Service Firm (p 292) 30. Peter Drucker, The Practice of Management, Butterworth-Heinemann, Oxford, 2001 (p 35) 31. Henry Chesbrough, Open innovation: using research from everywhere for new product and service development [Online] http://ibm.com [accessed May 2003] 32. Dean Takahashi, IBM shifting research attention, Mercury News [Online] http://bayarea.com [accessed 24 March 2003] 33. Brent Schlender, Big Blue is turning geeks into gold [Online] http://fortune.com [accessed 27 May 2003] 34. Neil Rackham, Rethink ing the Sales Force (p 178) 35. Charles Handy, Understanding Organizations (p 186) 36. Charles Handy, Understanding Organizations (pp 188–89) 37. David H Maister, Managing the Professional Service Firm (p 175) 38. Charles Handy, Understanding Organizations (p 199) 39. Charles Handy, Understanding Organizations (p 269)

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Chapter 16: Change Management Julie Adams

INTRODUCTION Introducing solutions, or changing a company to become a solutions enterprise, requires significant change for the organization and for the people who work in it. A big challenge for both the organization and its people is to manage this change while continuing with ‘ business as usual’ . There are many ways for a company to transform itself. Some companies choose a ‘ Big Bang’approach; others prefer evolutionary change over a longer period. The choice depends on many factors. Regardless of approach, change should be planned and managed, or there is risk of failure. Leadership throughout the change is vital. It must be sustained throughout the transition. Communication is also vital: employees must be kept informed about what is happening even if they are not directly involved. A business case is often created to assess the viability of introducing solutions. This business case may become the basis of a transformation story for employees, to explain why the change is happening. The story should be communicated widely and repeatedly. Introducing solutions requires that changes take place outside the organization as well, with business partners and customers; they too need to hear and understand this story. The greatest change will be within the company itself. For example, employees will need to be trained to use new skills and to be motivated to perform their new roles in solution creation and delivery. These roles usually require employees to work in teams across different functions. Pay and other rewards may need to be changed to support and encourage the new way of working. Companies that fail to make changes of this kind often blame cultural issues. Business leaders must be sensitive to their company’ s current culture and be clear about the culture they want for the future. The journey from one to the other can be long and difficult. One way to make the transition easier is to establish a change ‘ infrastructure’ , to include various management frameworks and plans. A governance framework led by an executive-level steering committee provides a structure for implementing a transformation programme. This should be supported by a comprehensive transition plan that maintains momentum and enables the transformation to be broken down into manageable pieces of work (‘ work streams’ ). These should be carefully monitored to ensure that objectives are met.

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CHANGE ON THIS SCALE IS ORGANIZATIONAL AND PERSONAL Many companies claim to be used to change. Defining and executing new commercial strategies, introducing and manufacturing new products and decommissioning old lines are considered ‘ business as usual’ . However, introducing solutions or transforming entirely to a solutions enterprise is not business as usual. It demands a fundamental organizational shift. In a world of discontinuous change, companies must learn to be flexible. This applies at two levels: to the organization and to its people. It is unlikely that the optimal organizational model will be achieved immediately. IBM’ s evolution (until just before the acquisition of PricewaterhouseCoopers’consultancy business) is shown in Figure 16.1. Since 2002 our business consulting capability has resided in a division called Business Consulting Services (BCS), formed following IBM’ s acquisition of PricewaterhouseCoopers Consulting and its merger with IBM Business Innovation Services.

Figure 16.1: IBM Global Services' organizational history A company passes through several phases of change as various capability building blocks and customer offerings are put in place. Employees experience many changes as the company passes through different phases of solution maturity, but they must keep up the quality of their daily work. A big challenge for any company and its employees is to combine major change with business continuity. The degree of change experienced depends partly on the approach taken to building the organization needed for the solutions enterprise. The revolutionary or ‘ Big Bang’approach means big changes: creating a new organization from scratch very quickly, with some completely new business processes and IT systems. New employees may need to be recruited as experienced hires, bringing experience from other solutions companies. Companies may be acquired. New subsidiaries may be set up. The alternative is an evolutionary approach that involves developing the organization over time, building on existing structure and resources. Each approach has advantages and disadvantages. The revolutionary approach enables a company to move quickly and get the benefits of its strategy early. However, this way of proceeding often involves more disruption. Mergers and acquisitions, for example, must be managed carefully. In contrast, the evolutionary approach is often easier to execute. It can allow fewer issues to be dealt with at a time. However, if the change process is too slow, fewer benefits may be realized. This may be a bigger problem in highly competitive markets, where first mover advantages can be great.

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THE VALUE OF CHANGE MANAGEMENT Given the depth and breadth of change at both corporate and individual level, the change must be managed in a planned and controlled way if it is not to go out of control. An organization making big changes to its business model needs energy to sustain momentum. The inevitable effect on performance – both personal and organizational – must be taken into account. Executives transforming their organizations into solutions enterprises should be aware that one of the most important areas of uncertainty is how their employees will adapt to new ways of working. Change must be planned and managed, otherwise there is risk of failure. A recent study[1] of change programmes in 40 organizations found that 58 per cent failed to meet their targets. The remaining 42 per cent – companies that reached or exceeded their expected returns – had strong change management capabilities and a change management infrastructure in place. The US Department of Labor has estimated that organizational productivity can drop by as much as 45 per cent while major change is taking place, as employees focus on changes (see Figure 16.2).

Figure 16.2: Management of organizational change helps to cut the drop in productivity Put simply, managing the transition helps reduce the dip in performance and maximize the return on the (often large) investment required by an organization to become a solutions provider. Direct management of the change will:  help allay any personal fears employees have about what is expected of them in a solutions business;  focus on creating the right organizational environment for people who need to change, helping them to thrive and the company to succeed;  help to explain and set expectations about the changes that are needed, a prerequisite for the development of new capabilities;  get commitment from parts of the organization which may not undergo deep change themselves, but which must provide vital support, such as Finance. The decision to act is the first step. Real value is achieved by using the right change management ‘ infrastructure’ , whose core components include: strong leadership;  a clear case for the change;  continual two-way communication;  active involvement of those affected;  investment in the resources needed to support the company through the transition.  This should also allow employees to understand the challenges and opportunities involved in moving to a solutions enterprise. It should ensure that objectives are set and measures of success established, and that there is a plan for delivery during the transition. [1]

Jennifer A LaClair and Ravi P Rao, Helping employees embrace change, McKinsey Quarterly, no 4, 2002

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LEADERSHIP IS VITAL Company leaders need to inject personal energy to secure the transformation. The idea of becoming a solutions enterprise often comes from one visionary leader or group with a strong view that radical change is needed and that old ways must be abandoned. This individual or group is likely to be supported by leaders and others who can help to lead the transition. Sometimes there is no single individual change leader, instead there are many people in different roles who support the change in business direction. Leadership must be sustained. The change agenda should be wider than the core project team. Leaders may need support from other groups from inside and perhaps outside the organization. External people such as consultants can help bring people and ideas together. Managers with different agendas and perspectives often oppose a change if they fear loss of power or influence, and externals can help by introducing an independent perspective. External help should be chosen with care, however. Teams that already exist within the company are essential to the creation of the new enterprise (although they may require expert external support). When given opportunities to apply their specialist knowledge, teams often create practical and effective approaches that take into account the unique aspects of the organization. Buy-in can be improved by involving many teams from across the business.

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DEVELOPING A BUSINESS CASE Most companies create a business case for two main reasons. First, it gives management a quantitative and qualitative assessment of whether the introduction of a solutions approach is sensible, and should be prioritized ahead of other initiatives. Second, the business case can be used to support communications throughout the transformation programme – reminding people why the change is taking place and providing hard underpinning to the reasons why it should be made. Aims often expressed in the business case for solutions-based transformation include:  the higher percentage of revenue to be gained from services;  the greater value of each service contract;  better product and service profitability;  wider adoption of common management processes;  the greater skills and improvement in morale of the sales force likely to ensue;  the new markets and opportunities that can be developed.

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BUILDING COMMITMENT AND COMMUNICATION Different agendas and perspectives can emerge during the change programme. Opposition to the ‘ solutions provider’proposition can develop among the company’ s employees unless the rationale of ‘ why we are doing this’is clearly understood. Any change results in a disruption of people’ s expectations and creates uncertainty. Uncertainty may cause distress for employees with strong product orientation: they may find the prospect of discussing solutions with customers daunting. Employees may be uncomfortable with the change for two reasons. Some may have seen similar initiatives come and go without achieving anything (a fact of life in some large organizations) and will want to see good evidence that this change is for the better. Equally, they may lack the personal ability to make the changes demanded of them, and may need reassurance that support will be provided. The first step in building employee commitment is to develop a persuasive story of why adopting a solution strategy is the right thing (or perhaps an essential thing) to do. This story should be based on a well-researched and credible premise that people at all levels can understand. The business case will often form the basis of the story. Messages will also typically centre on market and customer demand, coupled with competitive pressures. Customer-facing employees should be involved in creating the story, as they are often among the first to sense a shift in customer behaviour or attitude towards requiring solutions and services. Once a clear story is in place, it should be communicated widely and repeatedly. The ‘ why, what and how’about the transition engages the rational side of employees’minds. This formal communication of information should be supported by relationship-based communication (eg one-to-one discussion), which engages the emotional element. Business leaders should focus on the beliefs and assumptions people have made about the change. Some assumptions (eg the possibility of job losses) may be negative and should be addressed. Communication can take the form of developmental coaching, the development of new skills needed for the changed environment, or direct conversations about the employee’ s own part in the transition. External communication and engagement with customers is also vital to avoid those leading the change becoming too inwardly focused. The way a supplier does business with its customers will change significantly when it introduces solutions. A company making this transition will need its customers to be active partners in creating and adopting the new ways of doing business. Early adopters and enthusiastic advocates should be targeted and prioritized.

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ABILITY DEVELOPMENT AND ADDRESSING CAPABILITY GAPS Business leaders should question whether their organization’ s employees have the ability to make the changes demanded of them. Most people will probably require training or development. Employees are likely to be concerned about their ability to perform, whether they have the skills needed and whether their income will be affected. Taking time at the outset to understand each individual’ s capabilities (eg in identifying opportunities or developing or delivering solutions) sends a clear signal to employees that their concerns are recognized and that training and support will be provided. Once a company decides on its offerings – the areas on which it will focus – it can identify the skills needed to create and deliver solutions. Employees can then assess their capabilities against these needs. They may have some already. The company’ s HR specialists should be able to lead or support this assessment. Any gaps should be filled through training and development. As the transformation moves ahead, new skills may be required, so training needs should be monitored frequently.

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MOTIVATION AND PERFORMANCE MEASUREMENT During a transformation programme, business leaders often expect employees to change smoothly along with the organization. This does not always happen. There may be a change in the contract between the organization and the employee (reward and job satisfaction for performance and commitment). Employees expect to be rewarded for creating and delivering solutions. The emphasis of remuneration and reward might need to change. Employees might even need to be rewarded for developing the skills they will need to perform their new roles. Changing how employee performance is measured and rewarded signals to employees the importance of the change and encourages the right behaviour from employees, such as refocusing their efforts from product sales to solution creation and delivery. Establishing the right set of employee performance measures at the start of the transformation programme is an important step in changing behaviour. Measures should be refined over time, as capabilities and employee performance improve. It can take an organization many years to become a solutions provider, so rewards should change over time. Rewards can take many different forms. In addition to basic salary, incentives include cash awards, stock options, recognition via promotion, increased authority, and more involvement in leadership activities such as decision-making.

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CREATING THE RIGHT ORGANIZATIONAL FRAMEWORK Having the right measures and rewards in place is only part of the organizational equation. Solution creation and delivery requires working ‘ end to end’across divisions. The company may have been structured in strategic business units by product, and its employees focused on working in those units. Solutions provision demands that people work cross-functionally. Usually, people from many functions (eg salespeople, consultants, project managers and service delivery managers) come together to create and deliver solutions. Thus the solutions offered by an IT services provider might combine technology infrastructure, computing hardware and software (products) and consultancy. Solutions are created and delivered through teamwork and require leadership. They are not created by the salesperson as ‘ lone hero’selling products. Changes to the organization’ s structure may be needed to encourage cross-functional working. Barriers preventing employees from working together need to be identified and removed. The structure is important: behaviour conditioned by the structure should not be overlooked. Irrespective of the organizational structure, individual roles will have to be redefined. Solutions are more complex to sell than pure products, and this complexity will require new skills and responsibilities for most people (those in support roles as well as those in the front line). Opportunity spotters and owners, field sales teams, solutions designers, delivery resources and support staff must collaborate. One way to encourage collaboration is to develop and deploy a system of shared targets and rewards for all those involved in solution creation and delivery. This helps create an employee ‘ value chain’in which all members of the wider team partly depend on the performance of others for their own financial success.

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CULTURE: DON’T BLAME AND DON’T IGNORE When companies fail to make significant changes, ‘ culture’is often the scapegoat. ‘ We tried to make it work but the culture was against us’is very frequently heard. People recognize the important role culture plays in any company. Cultural change should be explicitly factored into business transformation programmes. Figure 16.3 gives an example of a process for doing this. Success in changing an organization’ s culture demands four things:  business leaders’acceptance of the need to address cultural issues;  understanding of the attributes of the current culture;  some knowledge of the attributes of the desired culture;  assessment of the overlap between current and desired culture. The desirable cultural attributes of a solutions-led business include the following:  leadership – bringing in new blood where required;  flexible delivery of services, using replicable assets;  focus on customers’needs and wants from services;  being prepared to challenge what customers think they need and want;  use of role models and coaches when making the transition;  leverage of intellectual capital and past experience in delivering solutions; given away’ .  commercial – solutions and advice are not ‘

Figure 16.3: Changing the organization's culture The next stage is to build on the overlapping areas, to shape the culture change and create an action plan aimed at helping to sustain it. Changing the culture is rarely a one-off. Organizational culture must be refined as the company develops as a more sophisticated solutions enterprise and its business strategy evolves to reflect changes in the competitive and customer environments. Figure 16.4 shows the various areas for focus in creating culture change.

Figure 16.4: Areas of focus for culture change Changing to a customer-focused ‘ solutions’culture cannot be mandated by just telling senior executives to ‘ get on with the job’ . The change is most successful when implemented through a broad range of activities taken by different groups of people in the organization.

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MAKING IT HAPPEN: AN INTEGRATED IMPLEMENTATION APPROACH Most large companies transforming themselves towards solutions provision are likely to have other initiatives under way. Every attempt should be made to align and coordinate the transformation programme with other programmes. Areas such as ‘ culture’are often considered ‘ soft’because they focus on the human side of the transition rather than the ‘ hard’elements such as business process and systems changes, but both should be treated as integral elements of the transformation programme and managed as such. Most companies that have succeeded in business transformation have had a strong governance framework for their various initiatives (including the softer ones), together with a defined structure for implementing the programme, supported by a rigorous transition plan. Business transformation is best managed when broken down into manageable initiatives or work streams. This helps to reduce the impact of the programme on the daily running of the business. Commitment from executives can be achieved by having the right programme delivery structure in place, with initiatives owned by business leaders under the guidance of an executive-level steering committee. An example of a delivery structure is provided in Figure 16.5.

Figure 16.5: Goverance framework example

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LESSONS LEARNED The following list contains some of the lessons learned by the authors of this book in assisting and guiding organizations in making the transformation to a solutions business model: 1. All business leaders need to agree on the end state and the strategies to get there. s executives need to appreciate the extent to which making the 2. The company’ change may affect many constituencies in the organization. 3. Use scenario testing combining business processes, roles and responsibilities, and typical customer situations to find flaws in the new business model and to develop new principles of operation. 4. Ensure that the organizational infrastructure (eg principles of operation, processes, meeting formats) conforms with the new business model, or the old model and behaviour will be reinforced. 5. It is impossible to over-communicate in a large-scale change of this type. Messages must cascade through the organization over many months. 6. Fixing the processes that engage the workforce and enable them to fulfil their new roles takes time and must therefore begin early. front office’staff are closed and 7. Ensure that capability gaps in the sales force and ‘ that these people are comfortable with the proposition before engaging with customers. 8. For critical path projects, use an executive-led project office, an executive-led steering committee and transition leaders from the business. 9. Process financial and administrative data at the same time, to detect flaws in the new reporting systems. Do this as early as possible. 10. Have a high-performance internal/external consultant team to save your sanity!

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SUMMARY The extent of the change experienced by a company, its employees and its business partners when making the transition to solutions provider should not be underestimated. This change is best managed and turned to advantage by recognizing the new demands the change brings and managing those demands as a programme requiring a change management ‘ infrastructure’ . Companies must accept that becoming a solutions provider will take time. Milestones must be in place to guide the journey and measure achievements. The development of this infrastructure must be supported by decisions taken at executive level, defining both the approach to be taken (revolutionary or evolutionary change) and how the approach will be enabled through changes in corporate culture, rewards, performance measurement and organizational structure. Finally, leaders must develop a credible story proving why the change is necessary and use it to engage the support and commitment of employees and business partners.

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CONCLUSION FOR THE BOOK It is right to end this book on transforming companies to selling true solutions with a chapter on change management. In this book we have steered a careful course between the strategic and technical sides of managing this transformation, and the people side. As this chapter stresses, transformation depends most of all on people: those who work in the business, those who as customers buy and use the services, and those who as business partners help a company create and deliver solutions. Their involvement in defining and implementing the change, and then in making the transformed company deliver its promise and value, is critical. Without it, the transformation is likely to be a hollow achievement, promising much and delivering little.

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NOTES 1. Jennifer A LaClair and Ravi P Rao, Helping employees embrace change, McKinsey Quarterly, no 4, 2002

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Index Numbers 3M 113-17

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Index A ABB 247 Aberdeen Group 77 Adams, J xiii, 255, 258–74 Advanced Tissue Science Inc 118, 122 aerospace 99–104 Airbus 100 Andersen 122 Apple Computers 117 Asda 96 Associated Newspapers 96 Association of Management Consulting Firms 158 Aurik, J 242 automotive industry 195–201

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Index B Barrett, C 75 Bejam 27 benchmarking 7 Birds Eye 24–28 Boeing 209 Booz Allen Hamilton 2 Bosworth, M 151, 154 Botkin, J 205–06 BP 222 broadcast technology 97–99 Brown, J 222 Brown, J S 75–76 Brullo, B 115 Buffett, W 7 business partners 3–6 business process re-engineering 8, 41, 63, 125–26, 150

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Index C Carr, N 42, 73–75, 90, 126 Cerasale, M xi, 1, 2, 22, 38, 55, 73, 93, 112, 141, 202, 235 Champy, J 63, 125, 150 Chesbrough, H 250 chilled meals 22–37, 94 Chrysler 215 Cisco 241–42, 245 Clark, A xiii, 141, 141–61 client executive 162–70 Coase, R 218, 242 consultants 158–59 Corning Cable Systems 144–45 corporate responsibility 2–3, 5 Courtney, D 67 Cox, H xiii, 22–37 Coy, P 46 Culture 253–54, 268–70 customer relationship management xiv, 17, 42, 77, 142, 162–70, 182–83, 191–92 Cuttle, L xiv, 193, 195–201 Cynefin Centre 135

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Index D Daily Mail 96 Davenport, T 210 Davis, S 205–06 De Havilland 209 defence 99–104 DHL 105 Direct Line 108–09, 125 Douglas 209 Doz, Y 240–41 Drucker, P 11, 75, 77, 93, 111, 112–30, 153, 207, 209, 243, 250 Dunlop 67

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Index E-F Economist, The 4, 6, 11 Edwards, C 42, 73, 78 Enron 122 enterprise resource planning 42, 76 Evans, B 74 Evans, P 212 Federal Express 105 financial services 58, 108–09, 127–28 Findus 25 Foote, N 89 Ford 4, 58 Foss, B xiv, xix, 93 freight 105 frozen food 22–37, 94

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Index G-H Gartner Group 251 General Electric 45, 57, 59 General Motors 43–44, 58, 74–75 Gerstner, L 3, 9, 57, 63, 79, 80, 113, 243 Griffiths, J xiv, 202 Gross, N 46 Grover, R 218 Hamel, G 14, 56, 58, 114, 177, 184–85, 238–39, 240–41 Hamm, S 42, 73, 78 Hammer, M 63, 66, 76–78, 95, 125, 150, 241–42, 246 Handy, C 145, 158, 212, 218, 248, 253–54, 237 Hawken, P 3 Hayward, M 122 Heinz 28 Hollywood Studios 239, 255 Horn, P 132 Huston, L 121

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Index I IBM xiii–xv, xix, 3, 13–17, 57, 59, 63, 64, 71, 72, 78–82, 84, 90–91, 108, 113, 128–29, 131–40, 149, 151, 160 , 162–70, 172, 176, 178, 190, 195–201, 226–34, 243–44, 247, 259 IBM Business Consulting Services 166, 198, 227 IBM Business Innovation Services 166, 260 IBM Global Services 190, 230 IBM Institute for Business Value 136–37, 149 IBM Integrated Technology Services 166 Imaginatik 120–21 Independent Insurance 109 information technology 73–92 ING Bank 108 innovation 8–9, 112–30, 209, 230–51 Intel 45, 72 Interdigital Communications Corporation 119

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Index J-K Jauhal, P 6 Jobs, S 117–18 Johansson, J 70 Johnson Control Industrial 149 Jonk, G 242 Kao, J 116 K-Mart 35–37 knowledge and knowledge management 4–5, 14–15, 58–59, 202–25, 226–34, 252 Koch, C 78 Kotkin, J 240 Kovacs, B 158 Krishnamurthy, C 70 Kuhn, T 119

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Index L Lancaster University Management School 135–36 Lautenbach, N 150 leadership 117–18, 264 Levitt, T 65, 175 Lohr, S 77 Lotus 221 Lovens, A 3 Lovens, H 3 Lucas 195 Lucier, C 2 Lund, P 143 Lyons, J 25

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Index M Madhavan, R 218 maintenance 59 Maister, D 153–54, 156, 183, 185–86, 189, 191–92, 204, 217, 244, 249–51 Marks & Spencer 27–33 MBNA 108 McKinsey 79, 144–45, 154–55, 159, 245, 247 Microsoft 45 Monsanto 56 Moody, F 5 Moore, J 36 Moore’ s Law 45 Morita, A 14 Mowatt, S xiv, 22–37

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Index N National Library Board of Singapore 118 Nattermann, P 7 Naughton, G 118, 122 Nestle 25, 28 Nobuyuki I 18 Nokia 159, 247 Nonaka, I 202 Noon Food Products 32

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Index O-P on demand 80–91, 137–38 outsourcing 60–83, 69 Palmisano, S 78–80, 251 personal computers 50–52, 71, 179 Polanyi, M 204 Port, O 46 Porter, M 51, 148, 249 postal services 105 Prahalad, C 14, 56, 58, 177, 184–85, 238–39 Prevezer, M xiv, 22–37 Procter & Gamble 36, 121 project managers 159 Prusak, L 210 PWC 195 PWC Consulting 81, 137, 166, 198, 229, 233, 259

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Index R-S Rackham, N 67, 157, 187–88, 214, 248 retailing 22–37, 94 Rifkin, J 46, 48, 148, 207–08, 239–40 Rolls-Royce 62 Rosenbush, S 42, 73, 78 Ross Group 25, 28 Royal Bank of Scotland 108 Sainsbury’ s 25–33, 96 Sakaura, T 45 SAP 76 Say, J B 114 Schlissberg, H 70 Schumpeter, J 116 Scott, T 75 service delivery managers 150–60 Shapiro, R B 56 Siebel 221 Slywotzky, A 13, 154 Sony 14, 17–18, 97, 174–78 St Paul’ s Insurance 109 Stone, M xi, 22, 73, 93, 202 Szygend, R 43, 74

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Index T-U Takahashi, D 250–51 Takeuchi, H 202 Taylor, G xiv, 93, 160, 162–70 Tesco 33, 96 Tierney, A xv, 112, 129, 131–40 training and education 58–59 Unilever 22–37 UPS 105, 243 US Department of Labor 261

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Index V-W Vodafone 40 Von Clausewitz, C 15 Wallace, R 75 Wal-Mart 35–37, 95, 96 Welch, J 45, 59 Welsh, D 243 Wheatly, K xv, 226–34 Whiting, R 75 Willen, R 242 Williamson, O 218 WorldCom 122 Wurster, T 212

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Index X-Y Xerox 76 Young, A 251

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List of Figures Chapter 4: The Solutions Business Model Figure 4.1: Companies providing business solutions: capabilities and enablers

Chapter 5: Transformation in the Information Technology Industry Figure 5.1: The IBM model of stages and states of e-business Figure 5.2: Diffusion processes taking place within the diffusion of the Internet in branded consumer goods products

Chapter 11: Solution Marketing Figure 11.1: Relationship between offerings, solutions, capabilities and enablers

Chapter 16: Change Management Figure 16.1: IBM Global Services' organizational history Figure 16.2: Management of organizational change helps to cut the drop in productivity Figure 16.3: Changing the organization's culture Figure 16.4: Areas of focus for culture change Figure 16.5: Goverance framework example

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List of Tables Chapter 11: Solution Marketing Table 11.1: Replicable solutions development process' simplified

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Business Solutions on Demand: Transform the Business to Deliver Real Customer Value

Business Solutions on Demand: Transform the Business to Deliver Real Customer Value

Harvard Business Review on Customer Relationship Management

Customer Fraud and Business Responses

Drupal 7 Business Solutions

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Alfresco 3 Business Solutions

Business to Business Marketing

Customer Value Investment: Formula for Sustained Business Success

Business to Business Electronic Commerce: Challenges and Solutions

Harvard Business Review on the Business Value of IT (Harvard Business Review Paperback Series)

The Real Business of Photography

Stand Back and Deliver: Accelerating Business Agility

Shareholder Value: A Business Experience

Achieving Business Value From Technology

Using Technology to Transform the Value Chain

Family Business Models: Practical Solutions for the Family Business

Основы Microsoft Business Solutions-Navision

The CRM Handbook: A Business Guide to Customer Relationship Management

Real Business Cycles: A Reader

Maximising Value on the Sale of a Business (Hawksmere Report)

Business & Corporate Aviation Management : On Demand Air Travel

Capitalizing on Knowledge: From E-Business to K-Business

From .Com to .Profit: Inventing Business Models That Deliver Value and Profit

Business Process Mapping: Improving Customer Satisfaction

Leaders on Ethics: Real-World Perspectives on Today's Business Challenges

The Mobile Multimedia Business: Requirements and Solutions

Business to Business Market Research: Understanding and Measuring Business Markets

The Real Business of Web Design

Business Solutions on Demand: Transform the Business to Deliver Real Customer Value