AI in the Boardroom: The Next Realm of Corporate Governance 10-25

Just as artificial intelligence is helping doctors make better diagnoses and deliver better care, it is also poised to bring valuable insights to corporate leaders — if they’ll let it. 

Image Credit : Shyam's Imagination Library

At first blush, the idea of artificial intelligence (AI) in the boardroom may seem far-fetched. After all, board decisions are exactly the opposite of what conventional wisdom says can be automated. Judgment, shrewdness, and acumen acquired over decades of hard-won experience are required for the kinds of complicated matters boards wrestle with. But AI is already filtering into use in some extremely nuanced, complicated, and important decision processes.

Consider health care. Physicians, like executives and board members, spend years developing their expertise. They evaluate existing conditions and deploy treatments in response, while monitoring the well-being of those under their care.

Today’s medical professionals are wisely allowing AI to augment their decision-making. Intelligent systems are enabling doctors to make better diagnoses and deliver more individualized treatments. These systems combine mapping of the human genome and vast amounts of clinical data with machine learning and data science. They assess individual profiles, analyze research, find patterns across patient populations, and prioritize courses of action. The early results of intelligent systems in health care are impressive, and they will grow even more so over time. In a recent study, physicians who incorporated machine-learning algorithms in their diagnoses of metastatic breast cancer reduced their error rates by 85%. Indeed, by understanding how AI is transforming health care, we can also imagine the future of how corporate directors and CEOs will use AI to inform their decisions.

Complex Decisions Demand Intelligent Systems

Part of what’s driving the use of AI in health care is the fact that the cost of bad decisions is high. That’s the same in business, too: Consider that 50% of the Fortune 500 companies are forecasted to fall off the list within a decade, and that failure rates are high for new product launches, mergers and acquisitions, and even attempts at digital transformation. Responsibility for these failures falls on the shoulders of executives and board members, who concede that they’re struggling: A 2015 McKinsey study found that only 16% of board directors said they fully understood how the dynamics of their industries were changing and how technological advancement would alter the trajectories of their company and industry. The truth is that business has become too complex and is moving too rapidly for boards and CEOs to make good decisions without intelligent systems.

We believe that the solution to this complexity will be to incorporate AI in the practice of corporate governance and strategy. This is not about automating leadership and governance, but rather augmenting board intelligence using AI. Artificial intelligence for both strategic decision-making (capital allocation) and operating decision-making will come to be an essential competitive advantage, just like electricity was in the industrial revolution or enterprise resource planning software (ERP) was in the information age.

For example, AI could be used to improve strategic decision-making by tracking capital allocation patterns and highlighting concerns — such as when the company is decreasing spending on research and development while most competitors are increasing investment — and reviewing and processing press releases to identify potential new competitors moving into key product markets and then suggesting investments to protect market share. AI could be used to improve operational decision-making by analyzing internal communication to assess employee morale and predicting churn, and by identifying subtle changes in customer preference or demographics that may have product or strategy implications.

The Medical Model: Advances That Have Enabled AI in Health Care

What will it take for boards to get on board with AI supplements? If we go back to the health care analogy, there have been three technological advances that have been essential for the application of AI in the medical field:

• The first advance is an enormous body of data. From the mapping of the human genome to the accumulation and organization of databases of clinical research and diagnoses, the medical world is now awash in vast, valuable new sources of information. 

• The second advance is the ability to quantify an individual. Improvements in mobile technology, sensors, and connectivity now generate extraordinarily detailed insights into an individual’s health.

• The third advance is the technology itself. Today’s AI techniques can assimilate massive amounts of data and discern relevant patterns and insights — allowing the application of the world of health care data to an individual’s particular health care situation. These techniques include advanced analytics, machine learning, and natural language processing.

As a result of the deployment of intelligent systems in health care, doctors can now map a patient’s data, including what they eat, how much they exercise, and what’s in their genetics; cross-reference that material against a large body of research to make a diagnosis; access the latest research on pharmaceuticals and other treatments; consult machine-learning algorithms that assess alternative courses of action; and create treatment recommendations personalized to the patient.

Three Steps Companies Can Take to Bring AI Into the Boardroom

A similar course will be required to achieve the same results in business. Although not a direct parallel to health care, companies have their own components — people, assets, history — which could be called the corporate genome. In order to effectively build an AI system to improve corporate decision-making, organizations will need to develop a usable genome model by taking three steps:

Create a body of data by mapping the corporate genome of many companies and combine this data with their economic outcomes

Develop a method for quantifying an individual company in order to assess its competitiveness and trajectory through comparison with the larger database; and

Use AI to recommend a course of action to improve the organization’s performance — such as changes to capital allocation.

Just as physicians use patient data to create individualized medical solutions, emerging intelligent systems will help boards and CEOs know more precisely what strategy and investments will provide exponential growth and value in an increasingly competitive marketplace. Boards and executives with the right competencies and mental models will have a real leg up in figuring out how to best utilize this new information. While technology is growing exponentially, leaders and boards are only changing incrementally, leaving many legacy organizations further and further behind.

It’s time for leaders to courageously admit that, despite all their years of experience, AI belongs in the boardroom.



View at the original source

An Interview with Dr. David Norton 06-25

An Interview with Dr. David Norton 

Image credit : Shyam's Imagination Library

In an interview with James Creelman, head of Palladium’s Knowledge and Research
Center, Palladium Chairman Dr. David Norton explains why more and more
government organizations are using tools such as the Balanced Scorecard and
Execution Premium Process™ (XPP) to effectively manage complexity in the 21st
century.

With particular reference to the military and police sectors, he explains how globalization and technology are changing the way work gets done and how this is driving government entities to adopt these tools so to better visualize and deliver to their mission and to manage inter- and intra-agency collaborations.

The Balanced Scorecard was in the right place at the right time. By the early 1990s the economic model was changing from one that was product-based to service-based. In this new economy there were requirements for a model to manage knowledge and tools for managing intangible assets. Many organizations were realizing that in this new economy measuring financial performance was still critical but that they needed a new approach to understanding the more intangible drivers of fi nancial success, and the Balanced Scorecard offered a way to do that.

It has endured because it delivered transformational results in many of the early adopters. Also, although originally a way to balance fi nancial and non-fi nancial measurement it developed into more of a management system than just a measurement tool. The adding of the Strategy Map was also an important milestone as this enabled organizationsto better visualize the strategy and what they had to do to deliver it.

The Balanced Scorecard concept is now almost 25 years old. Why has it proven to be so enduringly popular?

Since the mid-1990s the government sector has been a big user of the Balanced Scorecard, but usage has increasedsignifi cantly in recent years and across the globe. 

What has driven this uptake?

Leaders of government entities increasingly saw the Balanced Scorecard as a good idea. They had seen others succeed with its usage and decided to try it. Some of the early government successes, such as the City of Charlotte in the USA in the mid-1990s also helped to spread the message that this new way of managing could work in the  government or not-for-profi t sectors. A small number of early adopters inspired a growing number of followers. It is not unusual for any new idea to take time to trickle through and 20 years is a relatively short time.

The Balanced Scorecard is primarily a strategy implementation framework, yet many defense sector organizations have adopted it and focused more on “battle readiness.” In what important ways have defense organizations, such as Balanced Scorecard Hall of Fame™ inductees the Royal Norwegian Air Force and the US Army, tailored the Balanced Scorecard methodology for their own needs?

I would argue that “battle readiness” is a strategy. Every organization that we have worked with has a set of strategic themes that they must deliver to, rather than a one-dimensional strategy. Private sector fi rms have themes such as managing the core business, customer management, innovation, etc. The same is true for the military, which will have several themes that they must manage, such as operational effi ciency and battle readiness. The Strategy Map enables them to see those themes and how they work together.

Specifi cally related to police organizations, Abu Dhabi Police, Dubai Police, the FBI, and the Royal Canadian Mounted Police are also inductees into the Hall of Fame. What did they do well that others can learn from?

Most organizations have complex missions, but these organizations have very complex missions. The reason I say this is because to succeed to their mission they have to interface with many other organizations - success is impossible without doing so. For example, tackling the problem of drugs requires interfacing with many other agencies such as customs or the coast guard. The Royal Canadian Mounted Police, for example, built strategic themes around pieces of their mission to drive such cooperation in areas related to drugs and gangs, in which they did not have all the knowledge required to deal with the problems on their own. The Balanced Scorecard provided these organizations with a way to visualize and put into practice that integration and come up with a new paradigm for effective policing.

The Execution Premium framework is not just about strategy execution, but more broadly strategy management.

Why did you think it was important to expand on the original Balanced Scorecard concept?

This has been a natural evolution grounded in practical experience. Bob Kaplan and I began looking at a problem with measurement, and from that we developed the original Balanced Scorecard idea. From that we realized that the framework was most powerful when the strategic objectives were laid out as a map showing cause and effect, and this took us to Strategy Maps. There was an evolution from how we measure to how we manage. The Balanced Scorecard also became a bridge to the management system – as examples, how we set performance objectives for individuals and how we align investments in ways that best show the organization is delivering results. Measurement
itself does not guarantee results; for this to happen metrics have to be integrated into a broader management system. We also realized early on the important of leadership in using the Balanced Scorecard.

This takes us to the role of leadership, which along with Bob Kaplan you have repeatedly highlighted as the critical determinant of successful strategy execution and was deemed as such by a recent global survey by the Palladium Group. When it comes to strategic leadership, what must organizations do right?

The success of the Balanced Scorecard is always linked to the visible usage by and buy-in of leadership. Leaders will see it as a tool and they have lots of tools to choose from. Those leaders that get the most from a Balanced Scorecard really use it as an agent of change, and strategy is just another word for change. I need to build effective teams at the senior level – how do I do that? I have to get the organization to support a change of direction – how do I do that? I need to build a high-performing culture across the globe – how do I do that? So the CEO or equivalent
sees the Balanced Scorecard as their framework for describing critical strategic goals and a tool for managing that change.

To do this, a good leader has to combine both right brain and left brain thinking. The right brain is unstructured and about intuition and creativity - seeing opportunities, inspiring others, etc. The left brain is about structure – using management tools, measuring performance, etc. Both sides of the brain are important and together deliver change.

For good reasons, defense and police organizations tend to be much more hierarchical than others in the public and private sectors.

Does this lead to any unique challenges when implementing the Balanced Scorecard or the Execution Premium framework?

Absolutely. Strategy is horizontal in nature and not vertical. Strategy is about delivering solutions to common challenges that the organization is facing and this is at odds with a vertical structure.

This is why a Strategy Map and in particular strategic themes are powerful within organizations with fairly rigid hierarchies. By indentifying and laying out strategic themes on a map, these organizations are able to overlay a horizontal form of management onto the necessary hierarchical structure. The themes enable the organizations tomore effectively drive and manage cross- and intra-organizational  teamwork and pursuit of common goals.

How do you see the Balanced Scorecard/Execution Premium framework evolving over the next 3-5 years and are there any particular implications for those organizations in the defense/police sectors?

The Balanced Scorecard and Execution Premium framework will become increasingly used to manage complexity.

And this complexity has two main drivers that are greatly impacting all fi rms and military and police agencies in profound ways: globalization and technology.

First there’s globalization. As I have stressed, defense agencies now have to cooperate with other agencies across the world to tackle increasingly globalized security and criminal activities: the Balanced Scorecard will help them better manage the inherent complexities in doing so.

And then there’s technology. Obviously technology has changed the world in ways we were not able to even comprehend a few decades ago and is further changing the world as we speak. This is having signifi cant impacts on military and police agencies: think about how social media and video are now used to both prevent and solve complex crimes. Technology is enabling more seamless interaction within and among government agencies acrossthe world and is becoming more integrated into the structures of these organizations.

The need for a framework that allows the focus on managing such complexity will become increasingly mission-critical.

The content rights for this interview belong to The Palladium Group

10 Principles of Strategy through Execution 03-07

“We are all in the gutter,” wrote Oscar Wilde, “but some of us are looking at the stars.” That is the nature of strategy through execution. You operate deep in the weeds, managing countless day-to-day tasks and transactions. At the same time, you keep a steady gaze on your company’s long-term goals  and on ways you can stand out from your competitors.

Having a close link between strategy and execution is critically important. Your strategy is your promise to deliver value: the things you do for customers, now and in the future, that no other company can do as well. Your execution occurs in the thousands of decisions made each day by people at every level of your company.

Quality, innovation, profitability, and growth all depend on having strategy and execution fit together seamlessly. If they don’t fit — if you can’t deliberately align them in a coherent way — you risk operating at cross-purposes and losing your focus. This problem is all too common. In a recent Strategy& global survey, 700 business executives were asked to rate their company’s top leaders in terms of their skill at strategy creation and at execution. Only 8 percent were credited as being very effective at both.

Strategy&, the strategy consulting business of PwC, has been studying the relationship between strategy and execution for years. We have found that the most iconic enterprises — companies such as Apple, Amazon, Danaher, IKEA, Starbucks, and the Chinese appliance manufacturer Haier, all of which compete successfully time after time — are exceptionally coherent. They put forth a clear winning value proposition, backed up by distinctive capabilities, and apply this mix of strategy and execution to everything they do.

Any company can follow the same path as these successful firms, and an increasing number of companies are doing just that. If you join them, you will need to cultivate the ability to translate the strategic into the everyday. This means linking strategy and execution closely together by creating distinctive, complex capabilities that set your company apart, and applying them to every product and service in your portfolio. These capabilities combine all the elements of execution — technology, human skills, processes, and organizational structures — to deliver your company’s chosen value proposition.

How do you accomplish this on a day-to-day basis? How do you get the strategists and implementers in your company to work together effectively? These 10 principles, derived from our experience at Strategy&, can help you avoid common pitfalls and accelerate your progress. For companies that truly embrace strategy through execution, principles like these become a way of life.

1. Aim High

Don’t compromise your strategy or your execution. Set a lofty ambition for your strategy: not just financial success but sustained value creation, making a better world through your products, services, and presence. Apple’s early goal of making “a computer for the rest of us,” which effectively shaped the personal computer industry, is a classic example.

Next, aim just as high on the execution side, with a dedication to excellence that seems almost obsessive to outsiders. Apple, for instance, has long been known for its intensive interest in every aspect of product design and marketing, iterating endlessly until its notoriously demanding leaders are satisfied. The company’s leaders do not consider execution beneath them; it is part of what makes Apple special.

Together, a strong long-term strategy and a fierce commitment to excellent execution can transform not only a company, but a regional economy. After the 1992 Olympics in Barcelona, a group of local political and business leaders realized, with some disappointment, that the event hadn’t triggered the economic growth they had expected. So they resolved to change the region’s economy in other ways. Led by the mayor, the group created a common base of technologies and practices and set up training programs for local enterprises. By 2014, after two decades of persistent effort, the city had become a hub for research and technology companies. One legacy of the Olympics is a group of about 600 sports-related companies with a collective annual revenue of US$3 billion and 20,000 employees.

In carrying out this first principle, the top executives of your company must lead the way. They must learn to set lofty goals, establish a clear message about why those goals are relevant, and stick to them without compromise. This may take a while, because lofty goals require patience. You need to persevere without lowering your standards, and the confidence to believe you can reach the goals soon enough. Leaders must demonstrate that courage and commitment, or no one else will. At the same time, don’t be surprised if the rewards start to appear sooner than you expect — both financial rewards and the intrinsic pleasure of working with highly capable people on relevant projects. With high aspirations (for example, IKEA’s goal of “creating a better everyday life for the many people” or Amazon’s self-proclaimed role as the “everything store”), you recruit talented people who are deeply committed to being there. That’s one way you’ll know that you’re aiming high enough: The whole organization will start to feel like a better place to work.


2. Build on Your Strengths.

Your company has capabilities that set it apart, things you do better than anyone else. You can use them as a starting point to create greater success. Yet more likely than not, your strongest capabilities have been obscured over the years. If, like most companies, you pursue opportunities that crop up without thinking much about whether you have the prowess needed to capture them, you can gradually lose sight of what you do best, or why customers respond to it.

Take an inventory of your most distinctive capabilities. Look for examples where you have excelled as a company, achieving greatly desired outcomes without heroic efforts. Articulate all the different things that had to happen to make these capabilities work, and figure out what it will take to build on your strengths, so that you can succeed the same way more consistently in the future.

Sometimes a particular episode will bring to light new ways of building on your strengths. That’s what happened at Bombardier Transportation, a division of a Canadian firm and one of the world’s largest manufacturers of railroad equipment. To win a highly competitive bid for supplying 66 passenger train cars to a British rail operator, Bombardier shifted its manufacturing and commercial models to a platform-based approach, which allowed it to use and reuse the same designs for several different types of railway cars. “Platforming,” which was a new operational strategy for the industry, required adjustments to Bombardier’s supplier relationships and product engineering practices. But the benefits were immediate: lower costs, less technology risk, faster time-to-market, and better reliability.

Bombardier won the bid — and, more importantly, learned from the experience, making the episode a model for other bids and contracts. When some Bombardier engineers complained about the platform approach on the grounds that it curtailed their creativity, the leadership had an immediate answer: The platform demonstrated capabilities that competitors couldn’t match and the company’s creativity could be focused on innovation. Additional contracts soon followed.

The more knowledge you have about your own capabilities, the more opportunities you’ll have to build on your strengths. So you should always be analyzing what you do best, gathering data about your practices, and conducting postmortems. In every case, there is something to learn — about your operations, and also about the choices you make and the value you’re able to deliver.


3. Be Ambidextrous

In the physical world, ambidexterity is the ability to use both hands with equal skill and versatility. In business, it’s the ability to manage strategy and execution with equal competence. In some companies, this is known as being “bilingual”: able to speak the language of the boardroom and the shop floor or software center with equal facility. Ambidextrous managers can think about the technical and operational details of a project in depth and then, without missing a beat, can consider its broader ramifications for the industry. If strategy through execution is to become a reality, people across the enterprise need to master ambidexterity.

Lack of ambidexterity can be a key factor in chronic problems. For instance, if IT professionals focus only on execution when they manage ERP upgrades or the adoption of new applications, they may be drawn to vendors for their low rates or expertise on specific platforms instead of their ability to design solutions that support the company’s business strategy. When the installation fails to deliver the capabilities that the company needs, there will be an unplanned revision; the costs will balloon accordingly, and the purchase won’t fulfill its promise.

We recognize, of course, that not everyone needs to be equally conversant in the company’s strategy. A typical paper goods manufacturer, for example, employs chemists who research hydrogen bonds to discover ways to make paper towels more absorbent. They may not need to spend much time debating strategy in the abstract, but they do need to be aware of how their role fits in. Like the apocryphal bricklayer who sees himself as building a cathedral, the highly skilled technologists on your team must recognize that they are not merely fulfilling a spec but rather developing a technology unlike anyone else’s, for the sake of building highly distinctive capabilities. They might even help figure out what those capabilities should be.

Similarly, your top leaders don’t have to be experts on hydrogen bonds or cloud-based SQL server hosting, but they do have to be conversant enough with technological and operational details to make the right high-level decisions. No longer can a senior executive credibly say, “I don’t use computers. My staff is my computer.” If your leaders aren’t ambidextrous, they risk being eclipsed or outperformed by someone who is.

In The Self-Made Billionaire Effect: How Extreme Producers Create Massive Value (Portfolio, 2014), John Sviokla and Mitch Cohen suggest using the word producers to describe ambidextrous individuals. Self-made billionaires, such as Spanx founder Sara Blakely, POM Wonderful cofounder Lynda Resnick, Uniqlo founder Tadashi Yanai, and Morningstar founder Joe Manseuto have this quality. They can both envision a blockbuster strategy and figure out in detail how to develop and sell it to customers. There are similarly ambidextrous people in every company, but they often go unappreciated. Find them, recognize and reward them, and give them opportunities to influence others. 

Foster ambidexterity in practices and processes as well as in people. For example, in your annual budgeting exercises, ask people to explain the relationship of each line item to the company’s strategy, and specifically to the capability it is enabling. Over time, this approach will channel investments toward projects with a more strategic rationale. 


4. Clarify Everyone’s Strategic Role

When the leaders of the General Authority of Civil Aviation (GACA) of Saudi Arabia decided to improve the way they ran the country’s 25 airports, they started with the hub in Riyadh, one of the largest airports in the country. They had already outsourced much of their activity, redesigning airport practices and enhancing operations. But not much had changed. Convening the directors and some department leaders, the head of the airport explained that some seemingly minor operational issues — long customs lines, slow boarding processes, and inadequate basic amenities — were not just problems in execution. They stood in the way of the country’s goal of becoming a commercial and logistics hub for Africa, Asia, and Europe. Individual airport employees, he added, could make a difference.

The head of the airport then conducted in-depth sessions with employees on breaking down silos and improving operations. In these sessions, he turned repeatedly to a common theme: Each minor operational improvement would affect the attractiveness of the country for commercial travel and logistics. A wake-up call for staff, the sessions marked a turning point for the airport’s operational success. Other airports in the Saudi system are now expected to follow suit.

The people in your day-to-day operations — wherever they are, and on whatever level — are continually called upon to make decisions on behalf of the enterprise. If they are not motivated to deliver the strategy, the strategy won’t reach the customers. It is well established that financial rewards and other tangible incentives will go only so far in motivating people. Workers cannot make a greater personal commitment unless they understand why their jobs make a difference, and why the company’s advancement will help their own advancement.

Successful leaders spend a great deal of time and attention on the connection between strategy and personal commitment. One such leader has run the trade promotion effectiveness (TPE) capability at two global consumer products goods (CPG) companies over the past several years. CPG companies use this capability to build the momentum of key brands. It involves assembling assortments of products to promote, merchandising them to retailers, arranging in-store displays and online promotions, adjusting prices and discounts to test demand, and assessing the results. A great TPE capability consistently attracts customers and compels them to seek out the same products for months after the campaign ends. TPE and related activities often represent the second-largest item (after the cost of goods sold) on the P&L statement. This in itself indicates the capability’s strategic importance for CPG companies.

In both enterprises, this executive took the time to go up and down the organization, making a case for why the specific mechanics of trade promotion matter to the value proposition of the company and, ultimately, to its survival. He made it a point to talk numbers but didn’t limit the conversation to them. “We spend billions at this company on promotions,” he might say. “We have to get back $100 million in added revenue next year, and another $100 million on top of that the year after.” He then urged employees to develop better promotions that would attract more consumers and increase their synergies with retailers. This combination of numbers and mission made it clear how people’s individual efforts could affect the company’s prospects. 


5. Align Structures to Strategy

Set up all your organizational structures, including your hierarchical design, decision rights, incentives, and metrics, so they reinforce your company’s identity: your value proposition and critical capabilities. If the structures of your company don’t support your strategy, consider removing them or changing them wholesale. Otherwise, they will just get in your way.

Consider, for example, the metrics used to track the results delivered by call center employees. In many companies, these individuals must follow a script and check off that they’ve said everything on the list — even at the risk of irritating potential customers. Better instead to get employees to fully internalize the company’s strategy and grade them on their prowess at solving customer problems.

Danaher, a conglomerate of more than 25 companies specializing in environmental science, life sciences, dental technologies, and industrial manufacturing technologies, is intensely focused on creating value through operational excellence. Critical to this approach are metrics built into the Danaher Business System, the company’s intensive continuous improvement program. Only eight key metrics, called “core value drivers” to underline their strategic relevance, are tracked constantly in all Danaher enterprises. The financial metrics (core growth, operating margin expansion, working capital returns, and return on invested capital) are used not just by investors but also by managers to evaluate the value of their own activities.

Danaher also tracks two customer-facing metrics (on-time delivery and quality as perceived by customers), and two metrics related to employees (retention rates and the percentage of managerial positions filled by internal candidates). Lengthy in-person operating reviews, conducted monthly, are very data driven, focusing on solving problems and improving current practices. The metrics are posted on the shop floor, where anyone can see the progress that’s being made — or not being made — toward clear targets. The meetings are constructive: People feel accountable and challenged, but also encouraged to rise to the challenges.

Data analytics is evolving to the point where it can help revitalize metrics and incentives. A spreadsheet is no longer enough to capture and analyze this body of material; you can use large information management systems programmed to deliver carefully crafted performance data. No matter how complex the input, the final incentives and metrics need to be simple enough to drive clear, consistent behavior. More generally, every structure in your organization should make your capabilities stronger, and focus them on delivering your strategic goals.

6. Transcend Functional Barriers

Great capabilities always transcend functional barriers. Consider Starbucks’ understanding of how to create the right ambience, Haier’s ability to rapidly manufacture home appliances to order, and Amazon’s aptitude for launching products and services enabled by new technologies. These companies all bring people from different functions to work together informally and creatively. Most companies have some experience with this. For example, any effective TPE capability brings together marketing, sales, design, finance, and analytics professionals, all working closely together and learning from one another. The stronger the cross-functional interplay and the more it is supported by the company’s culture, the more effective the promotion.

Unfortunately, many companies unintentionally diminish their capabilities by allowing functions to operate independently. It’s often easier for the functional leaders to focus on specialized excellence, on “doing my job better” rather than on “what we can accomplish together.” Pressed for time, executives delegate execution to IT, HR, or operational specialists, who are attuned to their areas of expertise but not necessarily to the company’s overall direction. Collaborative efforts bring together people who don’t understand each other or, worse, who pursue competing objectives and agendas. When their narrow priorities conflict, the teams end up stuck in cycles of internal competition. The bigger a company gets, the harder it becomes to resolve these problems.

You can break this cycle by putting together cross-functional teams to blueprint, build, and roll out capabilities. Appoint a single executive for each capability team, accountable for fully developing the capability. Ensure this person has credibility at all levels of the organization. Tap high-quality people from each function for this team, and give the leader the authority to set incentives for performance.

There’s always the risk that these cross-functional teams will be seen as skunkworks, separate from the rest of the enterprise. To guard against this risk, you need a strong dotted line from each team member back to the original function. Sooner or later, the capabilities orientation will probably become habitual, affecting the way people (including functional leaders) see their roles: not as gatekeepers of their expertise, but as contributors to a larger whole.


7. Become a Fully Digital Enterprise

The seventh principle should affect every technological investment you make — and with luck, it will prevent you from making some outdated ones. Embrace digital technology’s potential to transform your company: to create fundamentally new experiences and interactions for your customers, your employees, and every other constituent. Until you use technology this way, many of your IT investments will be wasted; you won’t realize their potential in forming powerful new capabilities.

Complete digitization will inevitably broaden your range of strategic options, enabling you to pursue products, services, and innovations that weren’t feasible before. For example, Under Armour began as a technologically enabled sports apparel company, specializing in microfiber-based synthetic fabrics that felt comfortable under all conditions. To keep its value proposition as an innovator, it aggressively expanded into fitness trackers and the development of smart apparel. The company is now developing clothing that will provide data that can both help athletes raise their game and point the way to design improvements.

Adopting digital technology may mean abandoning expensive legacy IT systems, perhaps more rapidly than you had planned. Customers and employees have come to expect the companies they deal with to be digitally sophisticated. They now take instant access, seamless interoperability, smartphone connectivity, and an intuitively obvious user experience for granted. To be sure, it is expensive and risky to shift digital systems wholesale, and therefore you need to be judicious; some companies are applying the Fit for Growth approach to IT, in which they reconsider every expense, investing more only in those that are directly linked to their most important capabilities. (See “Building Trust while Cutting Costs,” by Vinay Couto, Deniz Caglar, and John Plansky.)

Fortunately, cloud-based technologies provide many more options than were available before. To boost agility and reduce costs, you can outsource some tech activities, while keeping others that are distinctive to your business. You also can use embedded sensors and analytics to share data across your value chain and collaborate more productively (an approach known as “Industry 4.0” and the “Industrial Internet of Things”). The biggest constraint is no longer the cost and difficulty of implementation. It’s your ability to combine business strategy, user experience, and technological prowess in your own distinctive way. 


8. Keep It Simple, Sometimes

Many company leaders wish for more simplicity: just a few products, a clear and simple value chain, and not too many projects on the schedule. Unfortunately, it rarely works out that way. In a large, mainstream company, execution is by nature complex. Capabilities are multifaceted. Different customers want different things. Internal groups design new products or processes without consulting one another. Mergers and acquisitions add entirely new ways of doing things. Although you might clean house every so often, incoherence and complexity creep back in, along with the associated costs and bureaucracy.

Many company leaders wish for more simplicity. Unfortunately, it rarely works out that way.

The answer is to constantly seek simplicity, but in a selective way. Don’t take a machete to your product lineup or org chart. Remember that not all complexity is alike. One advantage of aligning your strategy with your capabilities is that it helps you see your operations more clearly. You can distinguish the complexity that truly adds value (for example, a supply chain tailored to your most important customers) from the complexity that gets in your way (for example, a plethora of suppliers when only one or two are needed).

As Vinay Couto, Deniz Caglar, and John Plansky explain in Fit for Growth: A Guide to Strategic Cost Cutting, Restructuring, and Renewal (Wiley, 2017), effective cost management depends on the ability to ruthlessly cut the investments that don’t drive value. Customer-facing activities can be among the worst offenders. Some customers need more tailored offerings or elaborate processes, but many do not.

For example, Lenovo, a leading computer hardware company with twin headquarters in China and the U.S. (Lenovo’s ThinkPad computer business was acquired with its purchase of IBM’s personal computer business), has a strategy based on cross-pollination of innovation between two entirely different markets. The first is “relationship” customers (large enterprises, government agencies, and educational institutions), which purchase in large volume, need customized software, and are often legacy IBM customers. The second is “transactional” customers (individuals and smaller companies), typically buying one or two computers at a time, all seeking more or less the same few models; these customers, however, are sensitive to cost and good user experience.

Lenovo has a single well-developed hardware and software innovation capability aimed at meeting the needs of both types of customers. But its supply chain capability is bifurcated. The relationship supply chain is complex, designed to provide enterprise customers with greater responsiveness and flexibility. Lenovo’s computer manufacturing plant in Whitsett, N.C., which opened in 2013, was designed for fast shipping, large orders, and high levels of customization. Meanwhile, the company maintains a simpler supply chain with manufacturing sites in low-cost locations for its transactional customers.

The principle “keep it simple, sometimes” is itself more complex than it appears at first glance. It combines three concepts in one: First, be as simple as possible. Second, let your company’s strategy be your guide in adding the right amount of complexity. Third, build the capabilities needed to effectively manage the complexity inherent in serving your markets and customers.


9. Shape Your Value Chain

No company is an island. Every business relies on other companies in its network to help shepherd its products and services from one end of the value chain to the other. As you raise your game, you will raise the game of other operations you work with, including suppliers, distributors, retailers, brokers, and even regulators.

Since these partners are working with you on execution, they should also be actively involved in your strategy. That means selling your strategy to them, getting them excited about taking the partnership to a whole new level, and backing up your strategic commitment with financing, analytics, and operational prowess. For example, when the Brazilian cosmetics company Natura Cosméticos began sourcing ingredients from Amazon rain forest villages, its procurement staff discovered that the supply would be sustainable only if they built deeper relationships with their suppliers. Beyond paying suppliers, they needed to invest in the suppliers’ communities. The company has held to that commitment even during down periods.

Use leading-edge digital technology to align analytics and processes across your value chain. In the past, companies that linked operations to customer insight in innovative ways did it through vertical integration, by bringing all parts of the operation in-house. For example, Inditex created a robust in-house network that linked its Zara retail stores with its design and production teams. Real-time purchase data allowed designers to find out what was selling — and what wasn’t — more quickly than their competitors could. This approach has helped Zara introduce more items that would sell quickly while keeping costs down. And it has helped Inditex outpace its rivals in both profitability and growth.

At the time Inditex developed its system, vertical integration was a prerequisite for that kind of integration. But now the technology has changed, and in a cloud-based computer environment, you no longer need full vertical integration. You can achieve the same result through integrated business platforms (some managed by third-party logistics companies such as Genpact, and others being developed as joint ventures). By allowing several companies to share real-time data seamlessly, these platforms enable each participating company to set more ambitious strategic goals. 


10. Cultivate Collective Mastery

The more bound your company is by internal rules and procedures for making and approving decisions, the slower it becomes. Hence the frustration leaders have with the pace of bureaucracy, in which people can’t make decisions because they don’t know what the strategic priorities are — or even what other stakeholders will think. In a world where disruption has become prevalent, your company can’t afford the time or expense of operating this way.

The alternative is what we call collective mastery. This is a cultural attribute, often found in companies where strategy through execution is prevalent. It is the state you reach when communication is fluid, open, and constant. Your strategists understand what will work or not work because they talk easily with functional specialists. Your functional specialists know not only what they’re supposed to do, but why it matters. Everyone moves quickly and decisively, because they have the ingrained judgment to know who to consult, and when. People trust one another to make decisions on behalf of the whole.

Many of the attributes of Silicon Valley companies owe a great deal to the high level of collective mastery in the area. The culture of these companies encourages risk taking, because it’s expected that people will make mistakes — not as a goal, of course, but in the process of learning. People expect their colleagues to be informal, quick-thinking, and unassuming. They rely on systems and processes only when they add value, and are willing to jettison them at other times. With this type of culture, people can focus on getting results.

Collective mastery builds over time when people have the support and encouragement they need to work easily and readily across organizational boundaries, with a high level of trust and frequent informal contact. Even when they hold different perspectives, they get to the point where they understand one another’s thinking.

To operate this way, you have to be flexible. That doesn’t mean giving up your strategy; you still should pursue only opportunities with which you have the capabilities to win. Indeed, knowing what you do best allows you to be closer to the customers who matter, and to give more autonomy to employees. Because you are less distracted by nonstrategic issues, you have the attention and resources to pursue worthwhile opportunities as soon as they arise. Collective mastery also makes it easier to conduct an experiment: to launch a project and learn from the response without making a huge commitment. This high level of fluidity and flexibility is essential for navigating in a volatile economic landscape.

In the end, the 10 principles of strategy through execution will do more than help you achieve your business goals. They will also help build a new kind of culture, one in which people are aware of where you’re going and how you’re going to get there. The capabilities you build, and the value you provide, are larger than any individual can make them. But by creating the right kind of atmosphere, you make it possible to not just stand in the weeds and look at the stars, but reach a higher level than you may ever have thought you would.


View at the original source

Squeezing more ideas from product teardowns 01-22

Some companies are using product teardowns to dismantle silo culture in product development.

Engineers and purchasers love product teardowns—the practice of dismantling products into parts as a way to spark fresh thinking. Few manufacturers, however, elevate the practice above Skunk Works status, and many executives pigeonhole it as a tactical exercise in cost cutting. Some companies, however, are throwing open the doors of their Skunk Works labs and using teardowns as opportunities to increase cross-functional collaboration. Along the way, they are saving more money, capitalizing better on customer insights, and improving the revenue potential of their products.


Technophiles of all stripes love product teardowns—the timehonored practice of dismantling products to their constituent parts to spark fresh thinking. Yet few manufacturers get the full value teardowns afford. Many senior executives marginalize the practice, viewing teardowns as Skunk Works exercises for engineers  or cost-cutting tactics on the part of the purchasing department. Such views retard creativity and ensure that the ideas generated  in teardowns go unexplored, moldering in functional silos.

But some companies go further. This interactive explores marginimprovement opportunities from teardowns that we’ve identified in our research and examines how companies are rethinking  their approaches to teardowns to save more money, break down the silo mentality, and even improve the revenue potential of  their products.

Industrial: Redesign for lower costs A manufacturer of materialshandling equipment was developing a new forklift truck with the goal of minimizing  both its own manufacturing costs and the customers’ cost of operating the product. Recognizing that the vehicle’s weight was the key design factor (a lighter vehicle would require less fuel to run  and would have lower materials costs) the company’s R&D engineers conducted systematic teardowns of competitor’s products to study new design possibilities.

Meanwhile, executives brought in marketers, who learned that customers would indeed value the  lower cost of ownership—and reduced CO2 emissions—brought about by the new design, but they would be unwilling to pay a premium for them. This knowledge spurred the company’s engineers and purchasers to work together to reduce the weight of the new forklift truck by 7% (200 kg), while ultimately lowering manufactur- ing costs by 12% through a combination of design changes, sourcing from low-cost countries, “clean-sheet” costing, and other traditional approaches.

The resulting vehicle con- sumed 4% less fuel than  its predecessor and emitted eight tons less CO2 over  its lifespan—making it more appealing to customers.

Front-tire diameter reduced, and front axle moved closer to payload allowing for lighter counterweight in rear of vehicle

Engine, gearbox moved closer to rear of vehicle, shifting center of gravity rearward to support new counterweight Counterweight reduced, repositioned to support vehicle’s new center of gravity
Front-tire diameter reduced, and front axle moved closer to payload allowing for lighter counterweight in rear of vehicle

Changes in fan design  from blower fan to box fan: 35% cheaper

Elimination of metal base-plate on product’s  cart: 4% reduction in cost of cart

Integrated plug and fuse assembly: 12% cheaper; faster to assemble

Fewer printed circuit  boards (PCB): 14% reduction  in PCB cost

Self-tapping screws  versus threaded inserts:  50% cheaper

High tech: Break down silos A medical-products company planned a series of teardowns to improve the design of its therapeutic medical device. To generate new ideas, executives invited colleagues from purchasing, marketing, engineering, and sales to see how their product stacked up against four rival ones.

Seeing the products together was an “Aha!” moment for the purchasers, who quickly identified a series of straightforward design changes that, while invisible to customers, would significantly
lower the cost of manufacturing the device. Meanwhile, seeing the configurations of competitors’ circuit boards spurred the team’s salespeople, marketers, and engineers to discuss the manufacturing implications of the company’s modular approach to design. The engineers had long assumed that being able to mix and match various features after final assembly was advantageous and had emphasized this capability in the product’s design. Yet the salespeople reported that most customers hardly ever ordered more than a handful of modules at purchase and rarely ordered more after assembly.

The conversations ultimately led to simplifications in the product’s circuitry that lowered purchasing costs  by 23% and helped marketers identify a new customer segment where the product might command a higher price.

Consumer goods: Reduce packaging costs The use of product teardowns extends to a product’s packaging too. However few companies examine the cost of trade-offs implicit in their packaging decisions, much less look to their competitors for ideas. Such decisions tend to be the domain of
marketers, given the importance of packaging in communicating a company’s brand to consumers. Yet we have seen organizations reap considerable savings. One consumer goods maker we know reduced its packaging costs for a key product by 10% by making straightforward design changes that allowed it to use less plastic in manufacturing the product’s bottle.

In this example, based on McKinsey research into packaging and manufacturing costs in the European fast-moving-consumergoods industry, we highlight selected cost trade-offs associated with shampoo.

S h a m p o o
S h a m p o o S h a m p o o
Recycled materials. White or clear-colored

                

Interactive
           

Squeezing more ideas from product teardowns

Some companies are using product teardowns to dismantle silo culture in product development.

In this interactive, we explore margin-improvement opportunities from teardowns that we’ve identified in the consumer goods industry and highlight how companies in the high-tech and construction-equipment industries are using this venerable tool in new ways.

View at the original source

How to Monetize Your Data 01-22

These days, most companies are awash in data. But figuring out how to derive a profit from the data deluge can help distinguish your company in the marketplace. 

Image credit : Shyam's Imagination Library

The possession of rich amounts of data is hardly unique in today’s world. Indeed, data itself is increasingly a commodity. But the ability to monetize data effectively — and not simply hoard it — can be a source of competitive advantage in the digital economy.

Companies can take three approaches to monetizing their data: (1) improving internal business processes and decisions, (2) wrapping information around core products and services, and (3) selling information offerings to new and existing markets. These approaches differ significantly in the types of capabilities and commitments they require, but each represents an important opportunity for a company to distinguish itself in the marketplace.

Theoretically, companies can pursue more than one approach to data monetization at the same time. In practice, adopting each approach requires management commitment to specific organizational changes and targeted technology and data management upgrades. Thus, it’s best to identify your most promising opportunity and start there. In doing so, you will enhance your data in ways that will accelerate subsequent efforts related to the other approaches. More importantly, you’ll build your company’s capacity for monetizing its data.

Improving Internal Processes

Using data to improve operational processes and boost decision-making quality may not be the most glamorous path to monetizing data, but it is the most immediate. Executives often underestimate the financial returns that can be generated by using data to create operational efficiencies. Companies see positive results when they put data and analytics in the hands of employees who are positioned to make decisions, such as those who interact with customers, oversee product development, or run production processes. With data-based insights and clear decision rules, people can deliver more meaningful services, better assess and address customer demands, and optimize production.

When Satya Nadella became CEO of Microsoft Corp. in February 2014, he urged employees to find ways to improve the company’s processes with data. Within sales, executives believed that, with the right tools and systems, they could improve the productivity of their salespeople by 30%. To do so, Microsoft’s sales leaders sought to deploy tools that would help salespeople spend more of their time engaging with customers — and in more effective ways — by arming them with key computed insights such as how likely a sale is to close and when.

To deliver actionable insights, sales executives first had to define shared concepts (for example, what is meant by “a lead”). They then needed to locate data sources that could be used to calculate performance. They quickly learned that sales data was located in too many different systems to easily create a comprehensive snapshot of a salesperson’s business. Within a year, they created a new, integrated customer system that could produce 360-degree views of Microsoft’s relationships with corporate customers, including what those customers bought, what issues they encountered, and how the company engaged with them.

The new system saved 10 to 15 minutes per sales opportunity by eliminating the need for Microsoft salespeople to manually search for and prepare data. The system also helped sales executives more accurately manage their pipelines; it used predictive analytics and machine learning to compute the likelihood of a successful sales engagement based on data that the salesperson provided about an opportunity. For example, buying and deploying enterprise software is complex and often requires a partner’s involvement, so the system may calculate a higher likelihood for success when customers already have partners involved. Information about an opportunity’s likelihood of success, along with suggestions on how to advance engagements along the sales pipeline, helped salespeople prioritize their leads and act in ways most likely to achieve their goals. Over time, Microsoft salespeople learned how to forecast more accurately (for example, the accuracy of forecasts regarding global accounts has risen from 55% to 70%), which has led to better sales-pipeline data and, in turn, improved pipeline management.

Wrapping Information Around Products

Most companies have opportunities — often quite significant ones — to enrich their products, services, and customer experiences using data and analytics, a phenomenon that we call “wrapping.” Companies are wrapping their offerings with data to escape commoditization and satisfy increasingly hard-to-please customers — with the goals of generating sales increases, higher prices, and deeper customer loyalty. FedEx Corp. was an early exemplar of wrapping when it introduced online package tracking as a free service in the 1990s. Now examples abound as companies bundle reporting, alerts, and other information to add value to products ranging from credit cards to health monitors.

Wrapping is a creative exercise in which companies identify what problems their customers have and then find ways to solve those problems using data and analytics. For example, Capital One Financial Corp., a diversified bank based in McLean, Virginia, learned that many of its credit card holders are concerned about fraudulent transactions but find the task of examining every charge to be tedious. So the company helps customers identify fraud more easily and more quickly by displaying merchant logos and maps with each transaction in online statements. The visual cues jog cardholders’ memories about whether they made a purchase or not. As a result, customers are more satisfied with the credit card and more likely to use it more often.

Johnson & Johnson has discovered the value of providing pattern identification to users of its health-monitoring products, including those for diabetics. The company offers its OneTouch Verio Sync Meter customers historical reporting on their blood glucose levels along with tools to help them understand patterns of changes. The reporting is intended to help customers identify the possible causes for the glucose level variations and thus identify behavioral changes that can result in healthier living.

Wrapping activities are best viewed as extensions of a company’s product management processes. This means offering data and analytics to customers at the same level of quality as the core product. Doing so requires comparable levels of scrutiny and control. Most companies don’t manage and cannot deliver data and analytics in this way. In fact, exposing data to customers could reveal quality problems and a lack of analytical sophistication. Thus, in most cases, wrapping requires companies to “up their game” in their information capabilities so that wrapping doesn’t damage their reputation or undermine their value proposition. This effort may entail heavy investment in data-quality programs, advanced computing platforms (for instance, Hadoop), or data-science talent.

Selling Data

Many executives are eager to sell their company’s data, convinced that it has inherent value and can generate important new revenues for the company. We caution that selling represents the hardest way to monetize data, mainly because it requires a unique business model that most companies are not set up to execute. Yet it can be done to potentially great effect under the right circumstances.
State Street Corp. is a Boston, Massachusetts–based financial services company that reported $10.4 billion in 2015 revenue. It provides products and services to institutional investors such as mutual funds, corporate and public retirement plans, and insurance companies.

In 2013, State Street announced a new information-business division called State Street Global Exchange that would combine existing State Street data and analytics capabilities with new research to develop information-based solutions that clients would be willing to buy independently of the company’s core services. State Street established a new division for the information business in recognition of its unique business model needs — something the company had not done in 30 years.

Even though it started out as a discrete unit, State Street Global Exchange focused on developing products that were tightly associated with State Street’s core business. For example, State Street is one of the largest administrators of private equity assets, which means that it collects data about the financial capital that is not noted on a public exchange; this kind of data is of great value to markets that require an accurate representation of the private equity industry. State Street Global Exchange appreciated that the data was not automatically monetizable. Executives secured permission from 3,000 private equity clients to aggregate and anonymize that data — and then created an index that conveyed the financial performance of the private equity industry.

State Street leaders realized that they would need an entirely new operating model to support the information business. For one, sales processes had to change because, although State Street Global Exchange often sold to State Street clients, a buyer of Global Exchange products was frequently a different person or cost center than the kind of buyer traditional State Street products attract. In addition, the information business required salespeople with different selling experience and skills in selling stand-alone data and analytics-based products.

State Street understood that establishing an information business is hard and takes time. State Street Global Exchange had to learn to achieve balance between maintaining key ties with State Street (to create benefits from being a part of the larger organization) and responding quickly to new markets and new needs. Executives believe that State Street Global Exchange is gaining significant traction with its clients — and that their commitment will pay off. But we caution that such a model is not easy to replicate. Other companies should think carefully about the operational capabilities, investment, and commitment required to successfully sell data.

The Importance of Accountability

Chances are you have two major obstacles to monetizing your data. The first is the accessibility and quality of your data. Our research has found that only about a quarter of companies offer employees and customers easy access to the data they most need. You can’t monetize data no one can use.
The second obstacle is lack of accountability. All three approaches to data monetization require committed leaders who can redirect the behaviors of employees to deliver an important new value proposition.

Your inclination may be to solve the data quality issue first with big investments in new infrastructure. We propose that addressing the second issue of accountability will create urgency and commitment to addressing data quality issues — and so we recommend starting there.
Data monetization through process improvement requires strong process leaders. These leaders systematically use data to analyze the outcomes of existing processes and test hypotheses about proposed improvements. At Microsoft, for example, sales managers designated specific people to reshape and institutionalize new ways of selling. Process leaders are ultimately responsible for the design of best practices, the capture of the right data, the availability of tools, and the training of all staff regarding how to use data to do their jobs.

Data monetization through wrapping requires strong product leaders. These leaders treat the data that accompanies a core product or service much like any other product innovation — they hold it to the same quality standards. At Capital One, product leaders know the value of adding a data or analytics feature to a credit card because they predict — and then track — the lift in revenue from the information as well as the cost of providing it. Product leaders assemble teams to design experiments and methodologies that help analyze the impacts of information features and make appropriate adjustments.

Monetizing data by selling it requires a strong business-unit leader. That leader, in turn, must assemble a team that can launch and grow what is for most companies a new line of business. The head of that business will start by ensuring the value of the data and related services to potential customers. But the business head and his or her team must also design data, analytics, and dashboards to monitor the business and enable rapid response to new business opportunities.
Each of the data-monetization strategies requires new processes, new skills, and new cultures to generate maximum returns. Companies with data-monetization experience have learned that it is insufficient to simply put data and tools into the hands of employees. Microsoft refined goals, cleaned up data, honed reports and algorithms, grew talent, and changed habits. Capital One and Johnson & Johnson reshaped product-management talent, platforms, and capabilities. State Street redesigned its organization and created a new profit formula that would generate stand-alone revenues from information.

Impressive results from data monetization do not transpire from single “aha” moments. Instead, they stem from a clear data-monetization strategy, combined with investment and commitment.

View at the original source