Building Profitable

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<ul><li> 1. Building ProfitableBusiness Growth: The IT Leadership Agenda Peter G.W. Keen Professor TU Delft, NetherlandsChairman, Keen Innovations Monterrey November, 2004</li></ul><p> 2. Managing (versus leading) Degree ofchangeTime Natural change: incremental, inevitable,paced by environment Priority is skilled management and execution Examples: the PC, standard outsourcing 3. Managing ChangeDegree ofchangeTime Accelerate change, innovate,mobilize and execute Examples: process innovation, Logistics, cycle time transformation 4. Leadership: announcing a discontinuity Degree ofchangeTime Examples:The newbusiness landscape The new IT conversation A new reality New imperatives A mission, not a strategy 5. The objectives of this workshop </p> <ul><li>Announce the discontinuity </li></ul><ul><li><ul><li>Bring the business landscape into sharp focus </li></ul></li></ul><ul><li><ul><li>Help define a new ITleadershipagenda for directly enabling growth and profits </li></ul></li></ul><ul><li><ul><li>Provide practical guidelines for action that balance risk and payoff </li></ul></li></ul><ul><li><ul><li>Herald the shift from IT to CT coordination technology </li></ul></li></ul><p> 6. The Challenges to Business and IT Leadership</p> <ul><li>Profitable growth is an oxymoron like jumbo shrimp, English cuisine </li></ul><ul><li>Commoditization is everywhere and increasing </li></ul><ul><li>Asia is defining much of the global competitive agenda </li></ul><ul><li>The new fashion is that IT doesnt matter </li></ul><ul><li> Outsourcing has become core, not peripheral, to more and more areas of business and IT</li></ul><p> 7. The IT agenda for helping respond to the challenges </p> <ul><li>Escape the commodity trap </li></ul><ul><li>Shift from traditional value chain to value webs </li></ul><ul><li>Move outsourcing to co-sourcing: the global search for talent </li></ul><ul><li>Help make the innovation shift </li></ul><ul><li>Contribute to the transformation of financial structures: Welcome to the Variable Cost Economy </li></ul><ul><li>Gain the coordination edge</li></ul><p> 8. Business growth as oxymoron </p> <ul><li>Of the 172 companies that had at some point been on the Fortune 50 list between 1955 and 1995, only 5% grew their revenues above the overall inflation rate.</li></ul><ul><li>Just 13% of a sample of 1,854 companies grew consistently over a ten-year period.</li></ul><ul><li>Only 16% of 1,008 companies tracked from 1962 to 1998 survived.</li></ul><ul><li>Of the original Forbes 100 announced in 1917, just one of the 68 companies still on the list in 1987 GE had surpassed the average return on the S&amp;P 500 over the seventy year period.</li></ul><ul><li>From 1997 to 2002, the 30 firms that constitute the Dow Jones index grew at a rate of under 5% in revenues and gross profits and just 0.5% in after-tax profits. </li></ul><p> 9. Commoditization Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? 10. Commoditization Examples (1) Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? PCs, standard IT hardware: from high tech toconsumer electronics 11. Commoditization Examples (2) Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Manufacturing: The global outsourcing scramble 12. Commoditization Examples (3) Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Consumer goods: Weakening of established brands Retailer pricing power 13. Commoditization Examples (4) Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Pharmaceuticals: Generics Challenges to Big Pharma from Canada, Mexico 14. Commoditization Examples (5) Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Airlines: The shattering of themajors business models Even low cost players going broke 15. Commoditization Examples (6) Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Telecommunications: Phone call pricestrending to zero cents AT&amp;T taken off theDow Jones 16. Examples of price erosion (1) </p> <ul><li>Consumer electronics: prices of component parts drops 1 percent per week, on average; it used to take ten years for the price of a product to drop from $1,000 to $100; now it takes eighteen months. </li></ul><ul><li>Security trades: 1996-2002, margins dropped by 50 percent. </li></ul><ul><li>Telecommunications: the deregulation of long distance phone services in any country typically cuts prices by 40 percent within five years. </li></ul><ul><li>Jewelry: close to five hundred stores closed in 2003 as Amazon and Blue Nile cut markups on fine jewelry from the industrys 60-100% range to 15% </li></ul><ul><li>Engineering services: the price of power plants fell by 50% in the 1990s. China graduated 1 million engineers in 2002. The United States graduates around 70,000 engineers.</li></ul><ul><li>Automotive: price of cars has grown slower than inflation since 1994 </li></ul><p> 17. Examples of price erosion (2) </p> <ul><li>Clothing: the price of mens jeans has dropped by over 40 percent in five years. For retailers, double figure margins are now in single digits in a good year</li></ul><ul><li>Financial services: in 1999, the average fee to send $300 from the U.S. to Mexico was $60, in 2004, under $10.</li></ul><ul><li>Processing fees for credit cards on track to drop by 40 percent in this decade, saving retailers as much as $100 billion. The average return for credit card issuers dropped from 3.5 to 1.5 percent between 1992 and 1998. </li></ul><ul><li>Groceries: prices in an area drop by 13-16 percent when Wal-Mart enters the neighborhood </li></ul><ul><li>Manufacturing: The prices of goods made in Hong Kong, Singapore, Taiwan and South Korea fell by 22 percent between 1996 and 2002. Half the worlds manufacturing is now carried out in Asia versus around 20 percent two decades ago. </li></ul><ul><li>BUT Energy costs do not commoditize and often cannot be passed on (e.g. airlines); this is the real China Syndrome </li></ul><p> 18. Commoditization Impact Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? For customers: commodity heaven Choice, price competition everywhere 19. Commoditization Impact Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? For companies: commodity hell Choice, price competition everywhere For customers: commodity heaven Choice, price competition everywhere 20. The commodity trap Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? What does a company do? Cut costs? Outsource? Price opportunistically? 21. The commodity trap Deregulation Globalization TechnologyOvercapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? What should a company do? Use IT and process innovation to build value web capabilities and roles 22. So who does make money? </p> <ul><li>Three exemplars: Dell, Southwest, Wal-Mart </li></ul><ul><li><ul><li>Returns to shareholders around 16,000% over several decades </li></ul></li></ul><ul><li><ul><li>Dominate their ecosystem to extent that competitors strategies based less of their own ambitions than to find a counterpunch </li></ul></li></ul><ul><li>Yet, there is no way they could ever make money </li></ul><ul><li><ul><li>No proprietary product or service </li></ul></li></ul><ul><li><ul><li>In commodity industries </li></ul></li></ul><ul><li><ul><li>Self-commoditizing: drive their own prices down all the time and push the industry to follow </li></ul></li></ul><p> 23. The coordination edge </p> <ul><li>All three companies have an explicitenterprisecoordination design owned at the top: </li></ul><ul><li><ul><li>Dell: complete synchronization of the demand chain, patented processes </li></ul></li></ul><ul><li><ul><li>Wal-Mart: supply chain/store replenishment integration end-to-end </li></ul></li></ul><ul><li><ul><li>Southwest: standardization of operations, incentive systems</li></ul></li></ul><ul><li>All three are superb users not of IT information technology but CT coordination technology </li></ul><p> 24. The IT leadership contribution </p> <ul><li>Open up a new executive conversation </li></ul><ul><li>Governance: extended architecture and policy </li></ul><ul><li>Standardized interfaces: technology and process capabilities </li></ul><ul><li>Value web enablement</li></ul><ul><li>Making IT a force for innovation in the commodity world </li></ul><ul><li>From IT platform to enterprise coordination design </li></ul><p> 25. Enterprise Coordination Designs (1) </p> <ul><li>FedEx : Coordinate customer logistics needs via cross-linking ground/air services through an integrated technology platform</li></ul><ul><li>Toyota : Coordinate global manufacturing via standardized process components; coordinate global product development</li></ul><ul><li>Li and Fung : Act as a global orchestrator for thousands of specialists in apparel manufacturing, contracting to create a mutual balance in value gains </li></ul><p> 26. Enterprise Coordination Designs (2) </p> <ul><li>Magna Steyr : Make coordination of customer processes the differentiator of commodity auto parts </li></ul><ul><li>Amazon:build from the customer contact point back via a modular platform that coordinates the complete customer relationship, partners, service providers, outside systems developers </li></ul><ul><li>TAL : Extend design, manufacturing and store inventory management into the customers processes and take responsibility for demand-supply coordination</li></ul><p> 27. Enterprise Coordination Designs (3) </p> <ul><li>EBay :create and grow a set of communities, acting as relationship coordinator</li></ul><ul><li>GE:optimize process capabilities through selective standardization, global centralization; turbocharge innovation by internal crosslinkages and reuse </li></ul><ul><li>Procter and Gamble:switch from in-house business and product development to a collaborative network of help and innovation </li></ul><p> 28. Commonalities among leading designs </p> <ul><li>Ownership at the top (FedEx, Dell, etc.) </li></ul><ul><li>Inheritance (Wal-Mart) </li></ul><ul><li>Innovative commoditization (Flextronics, AAM) </li></ul><ul><li>The Way: diffusion of the design, metrics, incentives across the organization (Cemex, Toyota) </li></ul><ul><li>Use of Coordination Technologyeverywhereto selectively centralize, co-source, standardize and reuse capabilities (GE, eBay) </li></ul><ul><li>Exploitation of standardized interfaces (BMW/Magna Steyr) </li></ul><ul><li>Value web principles not value chain </li></ul><p> 29. Examples of standardized interfaces </p> <ul><li>GSM/SMS: created and commoditized the European mobile phone industry; note the U.S. lag</li></ul><ul><li>USB: enabled and commoditized digital camera market </li></ul><ul><li>U.S. mortgage market transformed by XML </li></ul><ul><li>RFID: information moves with the goods </li></ul><ul><li>Credit cards: airport self-service check in </li></ul><ul><li>ANSI/EDIFACT EDI ontologies </li></ul><ul><li>Car manufacturing: the Toyota dominance </li></ul><ul><li>1-800 numbers: global call center outsourcing </li></ul><ul><li>Consumer electronics: HP printers with HP never involved </li></ul><p> 30. Value webs versus chains InboundLogistics Operations OutboundLogistics Marketing&amp; Sales Service Procurement Technology &amp; Development Human Resource Management Firm Infrastructure InboundLogistics Operations OutboundLogistics Marketing&amp; Sales Service Procurement Technology &amp; Development Human Resource Management Firm Infrastructure Value chain: Tidy, linear,Control-centered Supply-driven Value webs: Demand-driven, power laws Nonlinear Scale-free networks Yahoo, UPS as Hubble Space 31. Growth platforms: Value web roles </p> <ul><li>Focus Where growth comes from</li></ul><ul><li>ControlTraditional value chain: in-house</li></ul><ul><li>capabilities and M&amp;As </li></ul><ul><li>CoordinateYour own and partner capabilities</li></ul><ul><li>ServiceYour coordination on behalf of selective partners </li></ul><ul><li>CollaborateClose relationships with partners</li></ul><ul><li>that they make core to their own growth </li></ul><ul><li>EnableYou open up your platform, </li></ul><ul><li>inviting others to innovate on their own behalf </li></ul><p> 32. Product innovation and development</p> <ul><li>General agreement that radical innovation opportunities are disappearing </li></ul><ul><li>Value chain petrification: Big Pharma pipeline drying up, high tech is consumer electronics, no major innovation in auto manufacturing for four decades (until the hybrid car) </li></ul><ul><li>Collaborate or die: R&amp;D and development as value webs </li></ul><ul><li>Asia as innovation centers </li></ul><p> 33. Emerging trends </p> <ul><li>Contract manufacturers extending their value web roles: consumer electronics, cell phones (60% now made by third parties) </li></ul><ul><li>P&amp;G, IBM letting go of their protected patent base: license even to competitors </li></ul><ul><li>Eli Lilly InnovCenter portal for research problem-solving for a reward fee </li></ul><ul><li>Global centers of excellence: Motorola, GM, GE, synchronized labs in China, Europe, U.S.</li></ul><ul><li>Toyota blueprint for global design-production</li></ul><p> 34. The search for global talent </p> <ul><li>Relative labor cost burden </li></ul><ul><li>LowHigh </li></ul><ul><li>PremiumSpecialistCreative</li></ul><ul><li>Skillcapabilitieseconomy</li></ul><ul><li>base </li></ul><ul><li>Commodity AssemblyOutsourcing </li></ul><ul><li>economycrisis creator </li></ul><p> 35. The financial imperatives </p> <ul><li>Welcome to the variable cost economy </li></ul><ul><li>The CT platform changes the nature of scaling </li></ul><ul><li><ul><li>Supply chain management indicates the extent of the financial value of such a platform: halving of working capital per unit of sales, halving of overhead</li></ul></li></ul><ul><li><ul><li>The linkage between the CT architecture and process clusters cuts cycle times by around 40%; time really is money </li></ul></li></ul><p> 36. Business scaling: Up 19952000NOW2004InvestmentAdd people, systems, facilities Disruptive, expensive 37. Business Scaling: Down 19952000NOW2004I nvestment Cut people, systems, facilities Disruptive, expensive 38. Whats next? 19952000NOW2004Investment ? ? ? ? 39. An example from a superb company 40. The IT resource SUPERSTRUCTURES Priority targets: customer relationships,supply chain,financial, organizational, operational;Branding Innovation pathsBundling of distinctive capabilities via infrastructure clusters Process edge differentiation INFRASTRUCTURES: Clusters of services, Networks of providers and partners;business-, industry- or partnership-focused arrangements SUBSTRUCTURES: Highly standardized foundations; heat, power and light systemsAutomatically interconnected via common interfaces The Web as electricity;Largely usage-based variable cost Super Infra Sub 41. The IT resource SUPERSTRUCTURES Priority targets: customer relationships,supply chain,financial, organizational, operational;Branding Innovation pathsBundling of distinctive capabilities via infrastructure clusters Process edge differentiation INFRASTRUCTURES: Clusters of services, Networks of providers and partners;business-, industry- or partnership-focused arrangements SUBSTRUCTURES: Highly standardized foundations; heat, power and light systemsAutomatically interconnected via common interfaces The Web as electricity;Largely usage-based variable cost Super Infra Sub Cant innovate here: may relyon others innovations 42. The IT resource SUPERSTRUCTURES Priority targets: customer relationships,supply chain,financial, organizational, operational;Branding Innovation pathsBundling of distinctive capabilities via infrastructure clusters Process edge differentiation INFRASTRUCTURES: Clusters of services, Networks of providers and partners;business-, industry- or partnership-focused arrangements SUBSTRUCTURES: Highly standardized foundations; heat, power and light systemsAutomatically interconnected via common interfaces The Web as electricity;Largely usage-based variable cost Super Infra Sub 43. The IT resource SUPERSTRUCTURES Priority targets: customer relationships,supply chain,financial, organizational, operational;Branding Innovation pathsBundling of distinctive capabilities via infrastruct...</p>

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