Boulder, CO - Zurich, CH - San Francisco,CA
303.786.9000
720.282.5800

The Current State of Digital Strategies

Co-Authored By Glen Allmendinger and Alex Glaser

The Blind Leading the Vision Impaired

A year ago, the Chairman of a large industrial equipment manufacturer was reading a report on GE Digital, one of many formidable competitors. Flipping the pages, he came upon something that seemed unbelievable. He read it over several times, certain he was misreading it. But it was right there in black and white: his competitor derived over 50 percent of its revenues directly from the sale of services. Even more astounding was what he read after, that half or more of the competitor’s services were from connected equipment “digital” support contracts and that these contracts were being sold as software; in fact, software as a service.

The Chairman asked himself what percentage of his own company’s revenue could be traced directly to the sales of services (not even connected services). Unfortunately, he knew the answer: zero percent.

His company certainly provided services to its customers, but those services were bundled as part of equipment sales. Things had always been done that way. His company had no model for selling services per se; certainly not digital services.

The Chairman called in one of his lieutenants and waved the GE report in the air. “How is it that GE Digital has so much services revenue and we have zero?” he demanded. “Explain this to me.”

“We don’t sell services,” answered the lieutenant. “We’re an equipment company.”

“But we provide services,” the Chairman replied, as if he had just caught the Lieutenant stealing.

“Yes, sir, we do,” said the Lieutenant. “We have to provide services. If we didn’t, no one would buy our equipment.”

The Chairman slapped the table. “We must start charging our customers for services… digital services.”

“We can’t do that, sir,” said the Lieutenant. “They won’t stand for it.”

“We must make them stand for it,” said the Chairman. Then he paused, not liking the sound of that. “No, not stand for it,” he said. “Desire it…. desire our new digital and connected services.”

This was the crux of the matter, but the crux was a tall order indeed. “I don’t want our customers to tolerate us unhappily,” the Chairman went on. “I want them to be happy. I want them to give us more money and love us for it. What would make them do that?”

The lieutenant was now feeling slightly faint, but he mustered on bravely. “No one wants to pay for something that was free before, and just because you call the new services ‘digital’ doesn’t mean the new services are necessarily adding any new value” he said. “Therefore, the only way that the customer can pay more money and be happy about it is this: The services must be something the customer wasn’t getting before, and the services must have such real value that they make the customer more successful and profitable in the end.”

“Wonderful!” said the Chair. “Excellent. I knew you were here for a reason.”

He stood up behind his desk and handed the lieutenant the GE report. “I give you one year to develop a plan that will shift our business model to 20 percent of revenue from digital services. Succeed, and I make you my successor. Fail, and…,” he stopped, trying to imagine the perfect fate for his underling. “Fail, and you play your electric guitar in the subway.”

“I don’t even have an electric guitar, sir.”

“Your severance package will include one,” said the Chairman. And then he waved the lieutenant to the door.

The End of Senselessness

We’re trying to build a future on inadequate structures from the past. For all the silicon-based “intelligence” permeating every aspect our lives, we still live in a brutally dumb world. It’s as if we’re wandering through the uncharted jungles of the 21st century with reconnaissance reports and walkie-talkies from about 15 years ago, but now it is all about smart phones, tablets and the myriad of new digital devices. At times, it seems we are caught in an era where everything is still all about people, people “surfing” to Web sites, people looking at screens with their eyes, people typing on keyboards with their fingers. People, people, people.

People are great, but for many important tasks they’re an impediment. Unless you’re living in ancient Egypt, people are not the proper resource for the excavating and heavy-lifting of skyscraper construction. We have machines for that now—backhoes, bulldozers, cranes, and so on—and no one seems to lament “the old days” when thousands of slaves carried pyramid-blocks on their backs.

The vision we need is not in itself new. It has been freely available at least since the 1950s, when such thinkers as Jay Forrester (System Dynamics) and MIT’s Norbert Weiner (Cybernetics and The Human Use of Human Beings) wrote landmark books describing a world transformed by automation, machine intelligence, and cyber-physical systems.

If you applied this vision in a practical way to business, it might simply be called “electronic commerce”—but not the e-commerce of the dot-com era.

 

Genuine smart systems re-configure the relationship of people, machines and devices to business systems and society. It must be built upon true, across-the-board digital computing and automation, accomplished by enabling everyday electronic devices to communicate with and control each other, along with a whole new generation of information and communications tools for managing rich, vast streams of meaningful data and intelligence. The goal is to network devices into smart systems that are self-sensing, self-controlling, and self-optimizing—automatically, without human intervention. It would not be far-fetched to call them “self-aware.”

Inside such systems, reliable and blindingly fast microprocessors do what they are very good at doing (and what people are very bad at doing): digesting billions of data-points, talking to each other about the data, controlling each other based upon the state of the data. All in a matter of nanoseconds. Human beings cannot do this, nor should they; this incessant stream of ongoing data interactions and business intelligence should be “invisible” to people. At the same time, all this invisible machine activity makes the state of (i.e., the information about) a business’s assets, costs, and liabilities vastly more visible to managers and to the decision-making process—when decision-makers need or want to know.

Such systems will open an entirely new portfolio of “killer apps” that will transform the way business is done around the world, and profoundly impact and improve commerce, healthcare, education, the environment and more.

When it comes to preparing for the global information economy of the 21st century, most people assume that “the technologists are taking care of it.” They take it on faith that the best possible designs for the future of digital organizations will emerge from large IT organizations and centralized authorities. But those are big, unfounded assumptions.

The business paradigms to which companies seem to cling today are far too limiting, moribund, and too expensive to foster and sustain new innovation. In fact, even GE still has challenges getting its people to break away from entrenched practices. Even though we have everyone and their mothers writing about digital futures most people and organizations are showing little appetite for radical departures from current practice. Yet current practice will not serve the needs of a genuinely connected digital world.

So why is this so hard to see and do?

Has Anyone Seen a Real True-To-Life Digital Organization?

We believe that in most companies there is too much disconnection between people, functions, processes and knowledge to design and create organic smart systems growth opportunities.

Large organizations have many rules and policies that often seem completely disconnected. They have been creating language, processes and systems that seem to be a triumph of technique over originality. General managers, like cost accountants, claim to have developed uniform approaches for just about everything — including “organic” growth.

In our view, mounting evidence suggests that most of the existing approaches to creating new growth businesses are of little value when it comes to emergent and disruptive opportunities like the Internet of Things. These days all large manufacturers have a so-called “business system” which seems to have severely diminished managers’ ability to focus on new smart systems opportunities, take risks or do just about anything creative. These robotic processes lead organizations further and further away from any kind of innovation and blur management’s vision.

Most knowledge comes from human experience and expertise; but today, knowledge and expertise largely resides in functional silos dispersed across organizations. Acting singularly, those siloed systems are constrained by the resources under their control. Legacy processes and habits inhibit any natural ability to communicate and collaborate on solving big problems or creating new solutions. In many companies, lean practices have been applied so aggressively that people are simply consumed by “running the business.” They fail to harness the collective intelligence available throughout the company and its networks; thus, they fail to develop creative products, systems and solutions.

So how have manufacturers been able to continue to grow and create value in the equity markets? Global expansion; re-engineering; lean practices; mergers and acquisitions — all reasonable strategies for growth and value creation. But the marketplace is rapidly consolidating, and the world is increasingly driven by new and unfamiliar technologies. What worked in the past is less likely to work now or in the future. For many companies, those strategies have already reached the point of diminishing returns. Besides which, almost every major manufacturing segment has gone through twenty plus years of consolidation and there are not enough acquisition candidates left to “move the value needle.” 

Unfortunately, while most businesses are now embracing the concept of growth-creating services and making bold pronouncements about digital maneuvers, many are not yet embracing the epochal changes of this shift. Thus they are in serious danger of moving aggressively to implement—by about 2020—a late 1990s strategy in which the blind continue to lead the vision impaired. In so doing, they will destroy value rather than create it.

Need help understanding what your digital strategy should be? Contact us here.

This blog post is part of our smart systems design newsletter – sign up here

Related Posts