Strategy Formulation
What to Expect
We are just a few minutes past the e-business "big bang." e-Business technology is creating a seismic shift in the way companies do business. e-Business innovation is a "top of mind" issue for most business leaders, driven in part by the rapid rates of innovation in customer, internal, and supplier-facing processes. Also, the next wave of Internet development—the integration of offline and online assets—requires novel strategies.
An urgency to innovate is sweeping across all industries as managers search for the next big idea that will transform their businesses or rewrite the rules of competition. Just knowing the importance and structure of e-business is not enough. You need to create and to implement a plan that allows you to make the transition from an old business design to a new, e-business design.
The e-business planning process may sound like common sense, but doing it right requires an ongoing, unrelenting commitment of time and energy. Many, if not most, companies are unwilling to make the commitment. Yet in a dynamic marketplace, that's a perilous strategy because the distance from hero to zero is rather short.
This chapter is designed to help new entrepreneurs and managers in traditional companies unlock the mysteries of e-business strategy formulation. The chapter is meant to help organize and gather the information managers need to initiate a highly focused e-strategy aligned with corporate goals.
By answering the questions posed here, managers can gain a better understanding of issues, tradeoffs, bottlenecks, and traps in setting an appropriate direction.
The monster was upon him. One of the snake-like heads darted out at him. Swinging his sword, Hercules cut it off. Immediately two new heads grew from the Hydra's bloody neck. Hercules cut them off also—but four new heads grew in their places. Hercules gasped, "I fear that before I am finished it will have nine hundred heads!"
—The Twelve Labors of Hercules
Creating an e-business strategy is like fighting the multiheaded Hydra. For each challenge you resolve, many more rise to take its place. Creating e-solutions requires simultaneously melding multiple disciplines—business strategy, enterprise applications, and technology implementation.
Pursued alone, none of these three by itself is sufficient. A synergy of all three is needed to create sophisticated digital solutions to intricate business problems.
When preparing their e-business designs, the key strategic issue confounding today's managers is how to transform an old business design, based on the physical realities of business-as-they've- known-it, into a new design rooted in the digital re quirements of tomorrow. The requirements of the old business design tend to focus on implementing cost-cutting, back-office improvements. The requirements of the new, digital-based business design focus on implementing revenue-enhancing, customer-facing improvements, such as new ways of selling to help spur profit growth by making it easier for businesses to market products, to fully utilize customer data, and to manage relationships with suppliers and consumers.
Few traditional companies still deny that technology will change the way they do business. So, why is it that many say they want to change but most stay mired in the old way of doing things? These companies are paying lip service to the idea that reinvention is a core doctrine of e-business. History has taught the lesson again and again: Successful companies can go from winning to losing rather quickly. Clearly, managers of profitable companies must anticipate the need for self-transformation and change when they can, not when their backs are against the wall. A company's refusal to change can mean stagnation and losing its ability to generate new value through innovation. We call this
"the legacy effect."
At the same time, we caution managers not to treat e-business as a silver bullet or as a corporate cure-all. e-Business is simply another technique for reinventing business—appropriate in some cir- cumstances but not in others.
Consider the transition under way at Intel. Founded in 1968 by a trio of engineers, Robert Noyce, Gordon Moore, and Andy Grove, Intel revolutionized the electronics world with its innovative chip designs. Quietly toward the end of 1990s, Intel began transforming itself from a chip-maker into the leading "building block supplier" to the Internet and wireless Web. Fearful of sluggish growth in its traditional PC microprocessor business, Intel is storming into the new markets of networking, wire- less appliances, communications equipment, and Web hosting. It's spending billions of dollars to buy Internet-related companies and invest in start-up ventures. In short time, Intel snapped up 22 companies for over $9 billion. The largest deals: Level One for $2.2 billion, DSP Communications for $1.6 billion, and Giga, an optical-networking firm, for $1.3 billion. Financial metrics are dictating the strategic move from a dominant chip company to a communications and server company. As the traditional PC market slowed and Internet related networking grew, Intel's healthy 30+ percent revenue growth rate over the 1990s slipped to a lukewarm 15 percent in 1999. The aggressive transformation of Intel from a PC-centric giant into an Internet-centric company bears careful watch- ing. Bottom-line: Few companies in history have successfully undergone such sweeping changes.
At stake is the long-term health of one of the pillars of the new economy.
Moving Physical to Digital: The Case of OfficeMax
An excellent example of a company's successful transition from a legacy infrastructure and culture to an e-business infrastructure and culture is OfficeMax, one of the largest high-volume, deep- discount office products superstores. The company operates more than 780 full-size stores featuring more than 10,000 office products, computers, and related items in more than 330 markets. Office- Max also operates CopyMax and FurnitureMax, store-within-a-store modules devoted exclusively to print-for-pay services and office furniture, respectively.
With the launch of OfficeMax Online in 1995, OfficeMax became the first office products retailer selling products over the Internet. In addition to a vast assortment of products, officemax.com offers search and browse features, customer order and usage reports, and customized express-order templates. The e-channel is supported by call centers 7 days a week, 24 hours a day, and 17 delivery centers around the country guarantee next-day delivery. Clearly, success requires integration of online and offline components.
OfficeMax has invested more than $50 million to upgrade its online systems and process controls, and the company intends to continue investing aggressively in infrastructure to support growth. A replatforming project, FutureMax, will provide the firm with integrated applications and technology.
The project will implement three major application suites: merchandising, inventory management, and financial systems. Their integration will provide seamless connectivity to a number of special- purpose applications delivering comprehensive, decision support information in a timely manner.[1]
If you're like OfficeMax, you're probably in the early stages of transitioning your company to a digital future. You and your firm find yourselves at the be ginning of the twenty-first century, unsure of the next steps to take and of your ultimate destination. You struggle with the question: What is the right strategy for our company in a highly uncertain business environment? For some executives, shaping
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their companies' future means high-risk, high-return investments. Other, more conservative exec- utives hedge their bets by making a number of smaller investments. Still others favor investments in flexibility to allow their companies to adapt quickly as markets evolve. Which e-strategy is right for you?
Roadmap to Moving Your Company into e-Business
The answers to five questions—who, what, when, where, and why—form the foundation of your e- business strategy. Even in a technology-crazed world, a good business strategy comes first. Many organizations fail to create an effective e-business strategy detailing their end goal and target before choosing the map they'll use to get there. As a result, they risk pouring valuable resources into an initiative that will eventually fail. You must first decide on your destination before attempting to map your e-business journey.
But don't underestimate the implementation task that lies ahead. Talking about e-business is easy;
making it happen is the difficult part. The methods for achieving e-business success are simple to grasp. After all, isn't it obvious that you should serve your customers better? Implementation is difficult because it forces you to not only question your past business behavior but also to change it. You have to look at what you do in a different way, throwing out traditional methods and acquiring new skills.
Making e-business a reality involves three key elements: the e-business strategy, the e-blueprint formulation, and tactical execution. e-Business strategy helps figure out the why and what of cus- tomer value creation. e-Blueprint formulation is the how and when of customer value creation. Tac- tical execution is where the rubber hits the road and things happen.
In Chapters 12–Chapter 14, we discuss each component's role in the roadmap to e-business suc- cess. In this chapter, we delve into strategy formulation. In Chapter 13, we detail how to turn your e-business strategy into a blueprint for action. In Chapter 14, we reveal how to turn your blueprint into executable projects.
e-Business Strategy Formulation
In this phase a company builds awareness and makes a plan to create a new customer value. To do so, you need to develop a clear vision of what the customer needs are and what the customer is looking for. Develop a clear understanding of what capabilities you need in order to address the customer needs. At the same time, take a critical look at yourself. Formulating an e-business strat- egy requires a company to be conscious of its own abilities and limitations. The last thing you want to do is fight a high-tech war with sledgehammers.
e-Business strategy formulation—what to do—includes the following phases.
• Knowledge building helps the company understand what the customer is looking for and where the industry is going. This phase opens a window on the future and provides an opportunity to really understand what customers value.
• Capability evaluation defines the existing business and identifies what capabilities it has today and what capabilities it needs to have tomorrow. This phase allows companies to question whether they have what it takes to serve customers' changing priorities.
• e-Business design asks what value proposition a business must provide to take advantage of digital capabilities. How is this value going to be packaged into products, services, or experien- ces? This phase involves developing a coherent design that lays the foundation to address the new customer needs. The design is also a roadmap that helps the company get where it needs to go.
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Formulating an e-business strategy can seem like a mystical exercise in which the truth is difficult to pin down. However, following a few guidelines can help managers to reduce the mystique. We present these guidelines in the form of strategic questions. Spend a few quiet hours contemplating and answering them. The answers will form the foundation of your e-business initiatives. Once you have worked through the questions, meet with other senior executives and compare answers. This meeting will reveal gaps—the closing of which is your starting point on your e-business journey.
The Process of e-Business Strategy Formulation
According to Niccolo Machiavelli, the sixteenth-century Florentine philosopher, "There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the reformer has enemies in all those who profit from the old order."[2]
e-Business has a lot of similarities to the quality revolution in the 1970s. The quality wave dramat- ically changed the way many organizations conducted business. For example, Xerox watched its share of the U.S. copier market drop from a dominant 85 percent in the early 1970s to 13 percent in the early 1980s.[3] Other companies experienced similar crises. Quality, as many businesses quickly learned, was a matter of life and death. Some of the biggest casualties of the quality war were U.S. consumer-electronics manufacturers, many of which went out of business before they could react.
Today, established companies face a similar transition as they urgently attempt to revitalize their businesses as to adapt to the new economy. e-Business strategy is about addressing the require- ments of an uncertain, as yet defined, future. e-Business strategies are based on our assumptions and beliefs about what this future will mean to our businesses. It helps us reflect on the changes our companies must make as customer priorities shift, technology advances, competition increases, and new core competencies must be developed.
Three popular approaches to formulating an e-business strategic plan are top-down analytical plan- ning, bottom-up tactical planning, and continuous planning with feedback. Top-down analytical planning takes a broad view of the business environment, identifies the company's options, and then defines the firm's mission and strategic direction. Bottom-up tactical planning takes a narrower view of the business environment, identifying and performing the activities required to produce short- term results in specific areas. Continuous planning with feedback is a mix of both approaches.
However, before selecting an approach for creating an e-business strategy, a company must first define where it wants the strategy to take it and the concrete business results it seeks to achieve.
The most important question: What result do I want to get? Creating an e-business strategy confuses even the most seasoned managers. We are continually amazed at how experienced managers who achieve incredible results on a daily basis and who are extremely customer and market focused in their thinking are at a loss when required to create an e-strategy. These managers suddenly shift their orientation from meeting customer needs to meeting the needs of Wall Street and the com- pany's stockholders. These managers become concerned with what to tell the market analysts about the decision to develop an e-business strategy and the financial message this decision sends. They want to demonstrate the revenue opportunities the strategy makes possible and also to gloss over the fact that these revenues may not be realized for months or even years.
e-Business strategic success requires focusing on the business results you want, not on what others
—the markets, the stockholders—think. Managers must function as change agents helping their firms transition to an e-business future. The primary purpose of an e-strategy is to guide the cor- porate change effort in the direction the company knows it must go.
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The first priority when defining an e-strategy is the change effort's destination. Think of the e-strategy creation as a journey on which you take your company. Your company starts at point X and ends up at point Y. Whenever you take a trip, the first thing you want to know is where you're going, because that directs all your planning—the type of transportation you take, your accommodations, expenses, and clothing. In our planning process, we call the destination point Y. It's where you want your company to be when your e-business implementation is complete.
What's your point Y? Try to answer in this form:
• When we are done, my customers will __________ or
• When we are done, my employees will __________ or
• When we are done, my company will ___________.
Fill in the blank with one or two words to denote a single, specific destination. However difficult it may be to narrow your focus, it's an essential discipline. A single destination can be observed and measured. However, the process of setting this destination can differ dramatically, depending on the planning approach chosen. Let's look at the three different approaches to planning in more detail.
Top-Down Analytical Planning
The top-down method attempts to systematically define a vision of the business's future. This ob- jective is to define a vision as precisely as possible in order to assess cost and to prepare a capital budget. This approach values creating a data-rich environment and is numbers driven and analyt- ically based. Managers review alternative future scenarios, testing how sensitive their predictions are to changes in key variables. The goal of their analysis is to identify the most likely outcome and to create their strategy based on it.
The top-down approach serves companies well in stable business conditions that lend themselves to predictive analysis and modeling. As with wood that's been eaten by termites, the troubles facing companies in the e-world aren't obvious in a top-down planning model. Revenue is growing, spend- ing is under control, and systems function well. The e-world is anything but stable and predictable.
It is characterized by its customer-centrism and the rapid execution required to fulfill changing cus- tomer needs. When such stresses are applied to an apparently stable company, problems quickly become evident. When there is greater uncertainty about the future, top-down planning is only mar- ginally helpful and often ex tremely risky.
The separation of strategy formulation (analysis) and implementation (execution) is the single great- est problem with top-down planning. It can lead to the following flawed plans:
• The never-seen-again strategic plan. —Once-a-year top-down strategic planning is often a joke, a "paralysis by analysis" bureaucratic nightmare. Too many businesses invest countless hours of their top managers' valuable time in endless meetings. They spend thousands of dollars cre- ating a plan only to file it away and never use it.
• The no-goals strategic plan. —A strategic plan with no targets and goals is worthless! Successful plans need to include specific performance goals that the company must meet and use as a baseline measure the following year. Also, a strategic plan is simply a wish list unless you identify the software applications needed to meet its goals and the resources—human, technological, and financial—needed to develop these applications. Many companies are great at top-down planning but falter when it comes to crossing the chasm and implementing the plan.
• The no-feedback strategic plan. —The absence of accurate feedback from customers, suppliers, and employees leads to disaster in environments in which sensitivity to changing needs or re- quirements is key to success. Traveling on the wrong road never leads to the right destination.
Because e-business deals with future opportunities, much of the information required to make
strategic decisions is at best uncertain and at worst unreliable. Customer requirements are con- tinually changing, and new opportunities are always being discovered. What looked like an ex- cellent project 6 months ago can suddenly be not so promising. Continuous feedback is essential for identifying course corrections that need to be made.
No matter how intelligently drawn the big picture is, it is a static creation. Today's volatile environ- ment does not lend itself to systematic analysis. Organizations and industries face tremendous structural change, uncertainty, and decisions with huge opportunities and risks. Making smart choices in this environment demands creativity, insight, and intuition more than systematic thought.
Bottom-Up, "Just Do It" Planning
Today's unstable, often chaotic business environment has eroded faith in traditional strategic plan- ning. The idea of planning as an orderly process assumes the future to be a continuation of the present. At a minimum, strategic planning assumes that the future will arrive slowly, at a predictable pace, allowing plenty of time to adapt. In many industries, these assumptions are rarely true.
In an environment in which change is the norm, the insights of employees on the front line take on new importance. Salespeople and others who deal directly with outside clients are the first to be aware of changes in customer needs. Organizations with hierarchical decision-making structures have few mechanisms in place for ensuring that the insights of front-line staff reach the strategy makers. This limitation makes it nearly impossible to respond quickly to the demands of the mar- ketplace.[4]
As a result, bottom-up strategic planning is flourishing. Managers are abandoning the analytical rigor of traditional planning processes and are basing their strategic decisions on solving immediate needs. Often, many individual projects are heroically executed. Frequently, however, no integrated plans link these individual projects into a cohesive program designed to achieve corporate-wide objectives.
A bottom-up strategy can result in a fractured pattern of authority, with individual managers basing their strategic decisions on their business units' needs, not the needs of the enterprise as a whole.
This approach impedes comprehensive planning and the systems integration required for success- ful e-business initiatives. For example, when brick-and-mortar banks invested in Web banking in the mid 1990s, they failed to integrate their existing channels into their strategy.
Many Fortune 1,000 corporations have grown dissatisfied with the first generation of applications developed to support the "just do it" approach to e-commerce. These applications were implemented without considering how they would work with the rest of the service/delivery infrastructure. Com- panies are now pausing to ask how e-commerce fits with the rest of their corporate strategy.
Continuous Planning with Feedback
We believe that the most successful e-business strategy is one in which planning is an ongoing company activity using feedback from the company's customers, suppliers, and staff. In a fluid business environment, the best approach may be to allow strategy to evolve through the discovery of what works and what doesn't.
Why integrate planning and execution through a feedback loop? The landscape in which companies operate has changed. Everything moves much more quickly today, which means that there is a lot less room for error. As a result, the hard distinction between formulating and implementing a stra- tegic plan will blur. Planning cycles will shorten and become more organic as plans are adapted to business environment changes. The perceived distinction between strategy and tactics also blurs, especially because conditions often require such quick responses that tactics will dictate or at least shape strategy.
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