Future space. A new blueprint for business architecture

Although the Internet is an essential conduit for many business activities, it isn't rendering the physical world any less important, as the failures of many Web merchants demonstrate. People need social and sensual contact. The companies that succeed will be those best able to integrate the physical and the virtual. But that requires a new kind of business architecture--a new approach to designing stores, offices, factories, and other spaces where business is conducted. The author, a faculty member at Harvard Graduate School of Design, provides practical guidelines to help managers and entrepreneurs think creatively about the structures in which their businesses operate. He outlines four challenges facing designers of such "convergent" structures, so-called because they function in both physical and virtual space: matching form to function, allowing visitors to visualize the presence of others, personalizing spaces, and choreographing connectivity. Using numerous examples, from a fashion retailer that wants to sell in stores as well as through a Web site to a radically new kind of consulate, the author shows how businesses can meet each challenge. For instance, allowing customers to visualize the presence of others means that visitors to a Web site should be given a sense of other site visitors. Personalizing physical and virtual spaces involves using databases to enable those spaces to adapt quickly to user preferences. The success of companies attempting to merge on-line and traditional operations will depend on many factors. But without a well-designed convergent architecture, no company will fully reap the synergies of physical space and Internet technology.     

Growth outside the core

Growth in an adjacent market is tougher than it looks; three-quarters of the time, the effort fails. But companies can change those odds dramatically. Results from a five-year study of corporate growth conducted by Bain & Company reveal that adjacency expansion succeeds only when built around strong core businesses that have the potential to become market leaders. And the best place to look for adjacency opportunities is inside a company's strongest customers. The study also found that the most successful companies were able to consistently, profitably outgrow their rivals by developing a formula for pushing out the boundaries of their core businesses in predictable, repeatable ways. Companies use their repeatability formulas to expand into any number of adjacencies. Some companies make repeated geographic moves, as Vodafone has done in expanding from one geographic market to another over the past 13 years, building revenues from $1 billion in 1990 to $48 billion in 2003. Others apply a superior business model to new segments. Dell, for example, has repeatedly adapted its direct-to-customer model to new customer segments and new product categories. In other cases, companies develop hybrid approaches. Nike executed a series of different types of adjacency moves: it expanded into adjacent customer segments, introduced new products, developed new distribution channels, and then moved into adjacent geographic markets. The successful repeaters in the study had two common characteristics. First, they were extraordinarily disciplined, applying rigorous screens before they made an adjacency move. This discipline paid off in the form of learning curve benefits, increased speed, and lower complexity. And second, in almost all cases, they developed their repeatable formulas by studying their customers and their customers' economics very, very carefully.     

Getting real about virtual commerce

In its first generation, electronic commerce has been a landgrab. Space on the Internet was claimed by whoever got there first with enough resources to create a credible business. It took speed, a willingness to experiment, and a lot of cybersavvy. Companies that had performed brilliantly in traditional settings seemed hopelessly flat-footed on the Web. And despite their astronomical valuations, the new e-commerce stars have appeared to be just as confused. Many have yet to make a profit, and no one has any idea when they will. Now, the authors contend, we are entering the second generation of e-commerce, and it will be shaped more by strategy than by experimentation. The key players--branded-goods suppliers, physical retailers, electronic retailers, and pure navigators--will shift their attention from claiming territory to defending or capturing it. They will be forced to focus on strategies to achieve competitive advantage. Success will go to the businesses that get closest to consumers, the ones that help customers navigate their way through the Web. Indeed, the authors argue, navigation is the battlefield on which competitive advantage will be won or lost. There are three dimensions of navigation: Reach is about access and connection. Affiliation is about whose interests the business represents. And richness is the depth of the information that a business gives to or collects about its customers. Navigators and e-retailers have the natural advantage in reach and affiliation, while traditional product suppliers and retailers have the edge in richness. The authors offer practical advice to each player on competing in the second generation of e-commerce.     

The coming battle for customer information

Companies collect information about customers to target valuable prospects more effectively, tailor their offerings to individual needs, improve customer satisfaction, and identify opportunities for new products or services. But managers' efforts to capture such information may soon be thwarted. The authors believe that consumers are going to take ownership of information about themselves and start demanding value in exchange for it. As a result, negotiating with customers for information will become costly and complex. How will that happen? Consumers are realizing that they get very little in exchange for the information they divulge so freely through their commercial transactions and survey responses. Now new technologies such as smart cards, World Wide Web browsers, and personal financial management software are allowing consumers to view comprehensive profiles of their commercial activities-- and to choose whether or not to release that information to companies. Their decision will hinge, in large part, on what vendors offer them in return for the data. Consumers will be unlikely to bargain with vendors on their own, however. The authors anticipate that companies they call infomediaries will broker information to businesses on consumers' behalf. In essence, infomediaries will be the catalyst for people to start demanding value in exchange for information about themselves. And most other companies will need to rethink how they obtain information and what they do with it if they want to find new customers and serve them better.     

The four things a service business must get right

Many of the management tools and techniques used in service businesses were designed to tackle the challenges of product companies. Although they are valuable to service managers, they aren't sufficient for success. In this article, Harvard Business School's Frei explains why and urges companies to add some new ones to the mix. After years of extensive research and analysis, she offers an approach for crafting a profitable service business based on four critical elements: the design of the offering, employee management, customer management, and the funding mechanism. Just like a product that's going to market, a service needs to be compellingly designed, and management must field a workforce capable of producing it at an attractive price. Additionally, however, service firms must manage their customers, who do not simply use the service but also can be integral to its production: Because customers' involvement as producers can wreak havoc on costs, companies must also develop creative ways to fund their distinctive offerings, by providing a self-service alternative, for example, or by offsetting expenses with operational savings. A close look at successful service businesses--Wal-Mart, Commerce Bank, the Cleveland Clinic, and others--reveals that effective integration of the four elements is key. There is no "right" way to combine them; the appropriate design of one depends upon the other three. If managers don't get all four pulling together, they risk pulling the enterprise apart. Incumbents can fend off attacks from highly focused upstarts by becoming multifocused--that is, by pursuing multiple niches through optimized service models rather than trying to cover the entire waterfront with one model. Shared services within a firm (functions such as HR and finance) can help, since they will enable it to generate economies of scale and experience across models.     

The four faces of mass customization

Virtually all executives today recognize the need to provide outstanding service to customers. Focusing on the customer, however, is both an imperative and a potential curse. In their desire to become customer driven, many companies have resorted to inventing new programs and procedures to meet every customer's request. But as customers and their needs grow increasingly diverse, such an approach has become a surefire way to add unnecessary cost and complexity to operations. Companies around the world have embraced mass customization in an attempt to avoid those pitfalls. Readily available information technology and flexible work processes permit them to customize goods or services for individual customers in high volumes at low cost. But many managers have discovered that mass customization itself can produce unnecessary cost and complexity. They are realizing that they did not examine thoroughly enough what kind of customization their customers would value before they plunged ahead. That is understandable. Until now, no framework has existed to help managers determine the type of customization they should pursue. James Gilmore and Joseph Pine provide managers with just such a framework. They have identified four distinct approaches to customization. When designing or redesigning a product, process, or business unit, managers should examine each approach for possible insights into how to serve their customers best. In some cases, a single approach will dominate the design. More often, however, managers will need a mix of some or all of the four approaches to serve their own particular set of customers.     

Introducing T-shaped managers. Knowledge management's next generation

Most companies do a poor job of capitalizing on the wealth of expertise scattered across their organizations. That's because they tend to rely on centralized knowledge-management systems and technologies. But such systems are really only good at distributing explicit knowledge, the kind that can be captured and codified for general use. They're not very good at transferring implicit knowledge, the kind needed to generate new insights and creative ways of tackling business problems or opportunities. The authors suggest another approach, something they call T-shaped management, which requires executives to share knowledge freely across their organization (the horizontal part of the "T"), while remaining fiercely committed to their individual business unit's performance (the vertical part). A few companies are starting to use this approach, and one--BP Amoco--has been especially successful. From BP's experience, the authors have gleaned five ways that T-shaped managers help companies capitalize on their inherent knowledge. They increase efficiency by transferring best practices. They improve the quality of decision making companywide. They grow revenues through shared expertise. They develop new business opportunities through the cross-pollination of ideas. And they make bold strategic moves possible by delivering well-coordinated implementation. All that takes time, and BP's managers have had to learn how to balance that time against the attention they must pay to their own units. The authors suggest, however, that it's worth the effort to find such a balance to more fully realize the immense value of the knowledge lying idle within so many companies.     

Using VoIP to compete

Internet telephony, or VoIP, is rapidly replacing the conventional kind. This year, for the first time, U.S. companies bought more new Internet-phone connections than standard lines. The major driver behind this change is cost. But VoIP isn't just a new technology for making old-fashioned calls cheaper, says consultant Kevin Werbach. It is fundamentally changing how companies use voice communications. What makes VoIP so powerful is that it turns voice into digital data packets that can be stored, copied, combined with other data, and distributed to virtually any device that connects to the Internet. And it makes it simple to provide all the functionality of a corporate phone-call features, directories, security-to anyone anywhere there's broadband access. That fosters new kinds of businesses such as virtual call centers, where widely dispersed agents work at all hours from their homes. The most successful early adopters, says Werbach, will focus more on achieving business objectives than on saving money. They will also consider how to push VoIP capabilities out to the extended organization, making use of everyone as a resource. Deployment may be incremental, but companies should be thinking about where VoIP could take them. Executives should ask what they could do if, on demand, they could bring all their employees, customers, suppliers, and partners together in a virtual room, with shared access to every modern communications and computing channel. They should take a fresh look at their business processes to find points at which richer and more customizable communications could eliminate bottlenecks and enhance quality. The important dividing line won't be between those who deploy Vol P and those who don't, or even between early adopters and laggards. It will be between those who see Vol P as just a new way to do the same old things and those who use itto rethink their entire businesses.     

Moving upward in a downturn.

As the recent bursting of the new economy bubble has shown, business cycles are still wih us. The question, then, is, what executives should do to help their companies weather these downturns. As in so many instances, there are conventional approaches that appear to make sense in the short term. But while these approaches seem reasonable in the heat of the moment, they can eventually damage competitive positions and financial performance. Drawing on extensive research of Fortune 500 companies that have lived through industry downturns and economic recessions over the past two decades, Darrell Rigby, a director of Bain & Company, reveals how companies need to go against the grain of convention and exploit industry downturns to harness their unique opportunities for upward mobility. The author explains that every downturn goes through three phases. He examines each phase and shows how successful players navigate the huge waves of a downturn. Smart executives, he says, don't panic: they look bad news in the eye and institutionalize an approach to detecting storms. Rather than hedge their bets through diversification, they focus on their core businesses and spend to gain market share. They manage costs relentlessly during good times and bad. They keep a long-term view and strive to maintain the loyalty of employees, suppliers, and customers. And coming out of the downturn, they maintain momentum in their businesses to stay ahead of the competition they've already surpassed. Every industry will face periodic downturns of varying severity, says Rigby. But executives with the vision and ingenuity to take unconventional approaches can buoy their companies to new heights.     

Match your sales force structure to your business life cycle

Although companies devote considerable time and money to managing their sales forces, few focus much thought on how the structure of the sales force needs to change over the life cycle of a product or a business. However, the organization and goals of a sales operation have to evolve as businesses start up, grow, mature, and decline if a company wants to keep winning the race for customers. Specifically, firms must consider and alter four factors over time: the differing roles that internal salespeople and external selling partners should play, the size of the sales force, its degree of specialization, and how salespeople apportion their efforts among different customers, products, and activities. These variables are critical because they determine how quickly sales forces respond to market opportunities, they influence sales reps' performance, and they affect companies' revenues, costs, and profitability. In this article, the authors use timeseries data and cases to explain how, at each stage, firms can best tackle the relevant issues and get the most out of their sales forces. During start-up, smart companies focus on how big their sales staff should be and on whether they can depend upon selling partners. In the growth phase, they concentrate on getting the sales force's degree of specialization and size right. When businesses hit maturity, companies should better allocate existing resources and hire more general-purpose salespeople. Finally, as organizations go into decline, wise sales leaders reduce sales force size and use partners to keep the business afloat for as long as possible.     

Get the right mix of bricks & clicks

The bright line that once distinguished the dot-com from the incumbent is rapidly fading. Success in the new economy will go to those who can execute clicks-and-mortar strategies that bridge the physical and virtual worlds. But how executives forge such strategies is under considerable debate. Despite the obvious benefits that integration offers--cross-promotion, shared information, purchasing leverage, distribution economies, and the like--many executives now assume that Internet businesses have to be separate to thrive. They believe that the very nature of traditional business--its protectiveness of current customers, its fear of cannibalization, its general myopia--will smother any Internet initiative. Authors Ranjay Gulati and Jason Garino contend that executives don't have to make an either- or choice when it comes to their clicks-and-mortar strategies. The question isn't, "Should we develop our Internet channel in-house or launch a spin-off?" but rather, "What degree of integration makes sense for our company?" To determine the best level of integration for their companies, executives should examine four business dimensions: brand, management, operations, and equity. Drawing on the experiences of three established retailers--Office Depot, KB Toys, and Rite Aid--the authors show the spectrum of strategies available and discuss the trade-offs involved in each choice. By thinking carefully about which aspects of a business to integrate and which to keep distinct, companies can tailor their clicks-and-mortar strategy to their own particular market and competitive situation, dramatically increasing their odds of e-business success.     

Contextual marketing--the real business of the Internet

The painful truth is that the Internet has been a letdown for most companies--largely because the dominant model for Internet commerce, the destination Web site, doesn't suit the needs of those companies or their customers. Most consumer product companies don't provide enough value or dynamic information to induce customers to make the repeat visits--and disclose the detailed information--that make such sites profitable. In this article, David Kenny and John F. Marshall suggest that companies discard the notion that a Web site equals an Internet strategy. Instead of trying to create destinations that people will come to, companies need to use the power and reach of the Internet to deliver tailored messages and information to customers. Companies have to become what the authors call "contextual marketers." Delivering the most relevant information possible to consumers in the most timely manner possible will become feasible, the authors say, as access moves beyond the PC to shopping malls, retail stores, airports, bus stations, and even cars. The authors describe how the ubiquitous Internet will hasten the demise of the destination Web site--and open up scads of opportunities to reach customers through marketing "mobilemediaries," such as smart cards, e-wallets, and bar code scanners. The companies that master the complexity of the ubiquitous Internet will gain significant advantages: they'll gain greater intimacy with customers and target market segments more efficiently. The ones that don't will be dismissed as nuisances, the authors conclude. They suggest ways to become welcome additions--not unwelcome intrusions--to customers' lives.     

Strategy and the Internet

Many of the pioneers of Internet business, both dot-coms and established companies, have competed in ways that violate nearly every precept of good strategy. Rather than focus on profits, they have chased customers indiscriminately through discounting, channel incentives, and advertising. Rather than concentrate on delivering value that earns an attractive price from customers, they have pursued indirect revenues such as advertising and click-through fees. Rather than make trade-offs, they have rushed to offer every conceivable product or service. It did not have to be this way--and it does not have to be in the future. When it comes to reinforcing a distinctive strategy, Michael Porter argues, the Internet provides a better technological platform than previous generations of IT. Gaining competitive advantage does not require a radically new approach to business; it requires building on the proven principles of effective strategy. Porter argues that, contrary to recent thought, the Internet is not disruptive to most existing industries and established companies. It rarely nullifies important sources of competitive advantage in an industry; it often makes them even more valuable. And as all companies embrace Internet technology, the Internet itself will be neutralized as a source of advantage. Robust competitive advantages will arise instead from traditional strengths such as unique products, proprietary content, and distinctive physical activities. Internet technology may be able to fortify those advantages, but it is unlikely to supplant them. Porter debunks such Internet myths as first-mover advantage, the power of virtual companies, and the multiplying rewards of network effects. He disentangles the distorted signals from the marketplace, explains why the Internet complements rather than cannibalizes existing ways of doing business, and outlines strategic imperatives for dot-coms and traditional companies.     

The ambidextrous CEO

Although most managers publicly acknowledge the need to explore new businesses and markets, the claims of established businesses on company resources almost always come first, especially when times are hard. When top teams allow the tension between core and speculative units to play out at lower levels of management, innovation loses out. At best, leaders of core business units dismiss innovation initiatives as irrelevancies. At worst, they see the new businesses as threats to the firm's core identity and values. Many CEOs take a backseat in debates over resources, ceding much of their power to middle managers, and the company ends up as a collection of feudal baronies. This is a recipe for long-term failure, say the authors. Their research of 12 top management teams at major companies suggests that firms thrive only when senior teams lead ambidextrously--when they foster a state of constant creative conflict between the old and the new. Successful CEOs first develop a broad, forward-looking strategic aspiration that sets ambitious targets both for innovation and core business growth. They then hold the tension between innovation unit demands and core business demands at the very top of the organization. And finally they embrace inconsistency, allowing themselves the latitude to pursue multiple and often conflicting agendas.     

M&A needn't be a loser's game

Three out of four acquisitions fail; they destroy wealth for the buyer's shareholders, who end up worse off than they would have been had the deal not been done. But it doesn't have to be that way, argue the authors. In evaluating acquisitions, companies must look beyond the lure of profits the income statement promises and examine the balance sheet, where the company keeps track of capital. It's ignoring the balance sheet that causes so many acquisitions to destroy shareholders' wealth. Unfortunately, most executives focus only on sales and profits going up, never realizing that they've put in motion a plan to destroy their company's true profitability--its return on invested capital. M&A, like other aspects of running a company, works best when seen as a way to create shareholder value through customers. Some deals are sought to help create better value propositions for the business or to better execute current strategies--or to block competitors from doing these things. But most deals are about customers and should start with an analysis of customer profitability. Some customers are deliciously profitable; others are dismal money losers. The better an acquirer understands the profitability of its own customers, the better positioned it will be to perform such analyses on other companies. In this article, the authors show that customer profitability varies far more dramatically than most managers suspect. They also describe how to measure the profitability of customers. By understanding the economics of customer profitability, companies can avoid making deals that hurt their shareholders, they can identify surprising deals that do create wealth, and they can salvage deals that would otherwise be losers.     

Price smarter on the Net

Companies generally have set prices on the Internet in two ways. Many start-ups have offered untenably low prices in a rush to capture first-mover advantage. Many incumbents have simply charged the same prices on-line as they do off-line. Either way, companies are missing a big opportunity. The fundamental value of the Internet lies not in lowering prices or making them consistent but in optimizing them. After all, if it's easy for customers to compare prices on the Internet, it's also easy for companies to track customers' behavior and adjust prices accordingly. The Net lets companies optimize prices in three ways. First, it lets them set and announce prices with greater precision. Different prices can be tested easily, and customers' responses can be collected instantly. Companies can set the most profitable prices, and they can tap into previously hidden customer demand. Second, because it's so easy to change prices on the Internet, companies can adjust prices in response to even small fluctuations in market conditions, customer demand, or competitors' behavior. Third, companies can use the clickstream data and purchase histories that it collects through the Internet to segment customers quickly. Then it can offer segment-specific prices or promotions immediately. By taking full advantage of the unique possibilities afforded by the Internet to set prices with precision, adapt to changing circumstances quickly, and segment customers accurately, companies can get their pricing right. It's one of the ultimate drivers of e-business success.     

Lead from the center. How to manage divisions dynamically

Conventional wisdom holds that a company's divisions should be given almost total autonomy--especially under conditions of uncertainty--because they are closer to emerging technologies, customers, and competitors than corporate headquarters could ever be. But research from Michael Raynor and Joseph Bower suggests that the corporate office should be more, not less, directive in turbulent markets. Rapid changes in an industry make it difficult to predict where and when synergies among divisions might emerge. With so many possibilities and such uncertainty, companies can't afford to sacrifice their ability to flexibly execute business strategy. Corporate headquarters must play an active role in defining the scope of division-level strategy, the authors say, so that divisions do not act in ways that undermine opportunities to collaborate in the future. But neither can companies afford to sacrifice the competitiveness of their divisions as stand-alone businesses. In creating corporate-level strategic flexibility, a corporate office must balance the need for divisional autonomy now with the potential need for cooperation in the future. Through an examination of four corporations--Sprint, WPP, Teradyne, and Viacom--the authors challenge traditional approaches to diversification in which a company's divisions are either related (they share resources and collaborate) or unrelated (they compete for resources and operate as stand-alone businesses). They argue that companies should adopt a dynamic approach to cooperation among divisions, enabling varying degrees of relatedness between divisions depending on strategic circumstances. The authors offer four tactics to help executives manage divisions dynamically.     

Transforming corner-office strategy into frontline action

When CEOs push decision making out to the far reaches of an organization, good things happen: fleeting business opportunities are seized quickly and workers are motivated to innovate and take risks. But it's tricky to achieve both decentralized decision making and coherent strategic action at a company. If everyone is a decision maker, things can spin out of control. In this article, Bain consultants Orit Gadiesh and James Gilbert explore the concept of the strategic principle--a memorable and actionable phrase that distills a company's corporate strategy into its unique essence and communicates it across an organization. If it's devised and disseminated properly, a strategic principle can empower employees to seize business opportunities but also focus everyone in an organization--executives and line managers alike--on the same strategic objectives. The authors outline the three defining characteristics of a good strategic principle--it should force trade-offs between competing resource demands, it should serve as a test for the strategic soundness of a particular action, and it should set clear boundaries for employees to operate within even as it grants them freedom to experiment. They explain how managers can create a strategic principle, how they should test it, and when they should revisit it. The authors present real-world examples of how companies use their strategic principles. For instance, they describe how South-west Airlines stopped flying to Denver after it measured the high costs of providing flight service in that part of the country against its strategic principle of offering customers short-haul air travel at fares competitive with the cost of automobile travel. This tool is increasingly useful in today's rapidly changing business environment, the authors conclude, and it is likely to become even more crucial to corporate success.     

Don't homogenize, synchronize.

To be more responsive to customers, companies often break down organizational walls between their units--setting up all manner of cross-business and cross-functional task forces and working groups and promoting a "one-company" culture. But such attempts can backfire terribly by distracting business and functional units and by contaminating their strategies and processes. Fortunately, there's a better way, says the author. Rather than tear down organizational walls, a company can make them permeable to information. It can synchronize all its data on products, filtering the information through linked databases and applications and delivering it in a coordinated, meaningful form to customers. As a result, the organization can present a single, unified face to the customer--one that can change as market conditions warrant--without imposing homogeneity on its people. Such synchronization can lead not just to stronger customer relationships and more sales but also to greater operational efficiency. It allows a company, for example, to avoid the high costs of maintaining many different information systems with redundant data. The decoupling of product control from customer control in a synchronized company reflects a fundamental fact about business: While companies have to focus on creating great products, customers think in terms of the activities they perform and the benefits they seek. For companies, products are ends, but for customers, products are means. The disconnect between how customers think and how companies organize themselves is what leads to inefficiencies and missed opportunities, and that's exactly the problem that synchronization solves. Synchronized companies can get closer to customers, sustain product innovation, and improve operational efficiency--goals that have traditionally been very difficult to achieve simultaneously.     

Discovering new points of differentiation

Most profitable strategies are built on differentiation: offering customers something they value that competitors don't have. But most companies concentrate only on their products or services. In fact, a company can differentiate itself every point where it comes in contact with its customers--from the moment customers realize they need a product or service to the time when they dispose of it. The authors believe that if companies open up their thinking to their customer's entire experience with a product or service--the consumption chain--they can uncover opportunities to position their offerings in ways that neither they nor their competitors though possible. The authors show how even a mundane product such as candles can be successfully differentiated. By analyzing its customers' experiences and exploring various options, Blyth Industries, for example, has grown from a $2 million U.S. candle manufacturer into a global candle and accessory business with nearly $500 million in sales and a market value of $1.2 billion. Finding ways to differentiate one's company is a skill that can be nurtured, the authors contend. In this Manager's Tool Kit, they have designed a two-part approach that can help companies continually identify new points of differentiation and develop the ability to generate successful differentiation strategies. "Mapping the Consumption Chain" captures the customer's total experience with a product or service. "Analyzing Your Customer's Experience" shows managers how directed brainstorming about each step in the consumption chain can elicit numerous ways to differentiate any offering.