Building an operating model to compete with digital natives
Incumbents may need to reassess and reinvent every aspect of their operating model to keep up with agile and asset-light rivals.
Digital operating models is one of four areas we focus on as part of the digital enterprise cross-industry theme. The other themes we examine are digital business models, digital talent and skills, and digital talent metrics.
To keep up with the digital natives, many incumbents will not just have to change their business model but also how they deliver that business model, re-examining every aspect of their operations. Leaders are already making these changes, with 90% of organizations saying that they have significantly adjusted their operations or are planning to do so¹.
Profits are increasingly shifting to asset-light, idea-intensive industries that revolve around intangibles such as brands and software, such that capital-intensive industries are witnessing a decline in margins. A recent study reveals that the profit share of asset-light companies in the West has increased from 17% in 1999 to 31% today, pointing to a migration in value toward more idea-intensive companies ².
In this article, we look at some of the steps that incumbents can take to build asset-light and agile operating models fit for the digital age.
Technology is not just a cost
A first step is for a company to reassess how it sees technology. The successful adoption of new technology and its integration into a company’s operations has considerable potential to bring about efficiencies and generate new sources of revenue.
Disruptive technologies, such as sensors, RFID, NFC, machine-to-machine, robotics, 3D-printing and blockchain, are already being applied or about to become reality. These new technologies have the potential to enable specific savings across functions and industries.
Cloud computing alone can lead to IT cost savings of 25 to 50%; crowdsourcing, AI and robotics could lead to key measures of R&D performance improving by as much as 20 to 40%; and AI has the potential to reduce the costs of the finance function by 40% by 2020.
Schneider Electric and Box
Box is a cloud computing solution that provides file-sharing, collaboration and other tools for working with files that are uploaded to Box’s servers. Schneider Electric uses Box for both internal and external sharing of files. Schneider currently has roughly 67,000 users on Box and adoption continues to increase. Approximately 20TB of Schneider’s data is currently stored on Box, none of which was previously accessible to IT. Schneider has been able to offload its on-premises file servers, cutting costs by 30%.
To realize the full benefits of digitalization, enterprises need to go further, taking a more holistic approach and creating a digital operating model.
Modular operating models
We have identified five successful digital operating models (see Figure 1) that have been applied across industries. They replace rigid approaches to technology, data and processes with flexibility, while also substituting a perfectionist and siloed culture with one that is open to innovation and interaction with customers and partners.
Here is an example of a company that has successfully implemented a digital operating model:
Xiaomi focuses on low-end Android smartphones. In 2014, it sold 61 million handsets bringing in annual revenues of more than $12 billion. Xiaomi promotes an entrepreneurial culture, fostering a family-like setup, focused on mentoring, collaborations and adhocracy. Xiaomi’s flat structures consist of its core founders, department leaders and 4,300 employees with an intense focus on performance and quality. The company engages with customers in an informal way by involving fans in discussions on product design, product development and promotions.
The results of this approach are illustrated by the fact that Xiaomi itself developed only three iOS languages; the remaining 22 were developed through crowdsourcing. Employees are required to spend 30 minutes every day interacting with customers. Xiaomi also established a peer-to-peer customer service platform.
Xiaomi’s innovative approach is paying off. Its year-on-year sales of smartphones tripled in 2014, and since June 2012, the company’s market valuation has increased tenfold to $45 billion.
Successfully identifying and implementing the most suitable flexible operating model will depend on other changes, particularly to strategy development and culture. Companies will also need to embrace a leaner organizational setup, moving away from traditional hierarchies to a flatter structure, with higher levels of employee empowerment enabling faster decision making and greater agility.
Here is an overview of some of the changes that incumbents may need to make to implement a more agile operating model:
Create an effective digital strategy
Many analog companies are developing dedicated digital strategies, with three-quarters of respondents to the 2015 Harvey Nash CIO Survey saying that they have or are working on a formalized digital strategy. However, the same study found that the biggest challenge businesses face in response to digital disruption is a lack of vision.³ To overcome this problem, companies may need to rethink their approach to strategy development.
Many companies still rely on traditional five-year strategic planning horizons. In today’s disruptive and uncertain market environment, this classic planning approach is destined to fall short. Instead, CEOs should consider moving to an experimentation-oriented focus that uses real-time data to give instant feedback about the effectiveness of their strategic initiatives. A move toward a one-year planning cycle would be beneficial. Responsibility for creating this corporate culture – and for driving digital transformation – ultimately rests with the CEO.
Embed lean startup principles
At the heart of the lean startup movement are two key ideas: eliminate all expenses that don’t contribute to creating value for the customer; and fail fast, fail often, while eliminating waste. A willingness to accept failure can bring benefits for businesses, by freeing up resources and people for other projects that could lead to future breakthroughs.
The fundamental idea is building minimum viable products (MVPs), i.e., creating the simplest possible product that can be brought to market. Once the product has been launched, the team can collect feedback from users and increase the chance of finding investors for the next round of development. Further methodologies to be considered by incumbents to close the cultural gap with startups and digital natives include design thinking, scrum, A/B testing, Jira, Basecamp or the Javelin Experiment Board.
Move to multi-speed IT operations
A recent Accenture survey found that 81% of CIOs believed that most IT organizations do not know how to operate as a ‘multi-speed IT’ enterprise. ⁴ Multi-speed IT is achieved by bringing together a network of skills, instituting a dynamic operating model and installing flexible governance models. In order to create a multi-speed IT infrastructure, four key actions are needed:
To achieve multi-speed IT, incumbents need to foster an open, impatient culture that celebrates innovation and looks to collaboration and partnerships to create technologies faster than they can be built independently. Companies are also turning to cloud and open-source technologies to enable rapid, scalable improvements. Finally, they need to employ iterative development disciplines, coupled with automated tests.
WhatsApp has achieved astonishing growth in users while retaining a lean operating model. At the time of its acquisition by Facebook in October 2014, WhatsApp had 450 million users but only had 35 engineers. By 2015, the user base doubled but the company had only recruited an extra 15 engineers.
A significant factor in WhatsApp’s ability to scale is its decision to use a programming language called Erlang to build its service, which is well-suited to juggling communications from a huge number of users and lets engineers deploy new code on the fly. Erlang allows coders to work at high speed by offering a way to deploy new code to an application even as the application continues to run.
Create an operating model that supports partnerships and platforms
Companies are already recognizing that new collaborations are emerging, with 81% of respondents to a recent Accenture survey believing that industry boundaries will dramatically blur as platforms reshape industries into interconnected ecosystems.⁵ Ecosystem partnerships offer benefits such as operational efficiencies, scalability, innovation and a better customer experience. However, to fully leverage those benefits, companies have to rethink several aspects such as culture (emphasizing sharing and openness), business process (tailoring them for collaboration) and technology (such as APIs, social networks and security).
1. Accenture, Workforce of the future report, 2015
2. McKinsey, The new global competition for corporate profits, 2015
3. Harvey Nash, Harvey Nash CIO Survey 2015 – In association with KPMG: Into An Age of Disruption, 2015
4. Accenture, Gearing Up For Growth Using Multi-Speed IT, 2015
5. Accenture, Digital Business Era: Stretch Your Boundaries – Accenture Technology Vision 2015, 2015
Digital enterprise is one of four cross-industry themes (along with digital consumption, societal implications, and platform governance) that have been the focus of the World Economic Forum’s Digital Transformation of Industries (DTI) 2016 project. An overview of the DTI program can be found here.
Our in-depth analysis of the digital enterprise cross-industry theme is available in a white paper, which can be downloaded here.
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