Strategy and the Influence of eBusiness

Overview

In this briefing, I would like to tackle the following questions:

“What is a "Virtual" organisation?"

“What is a "Virtual" strategy?”

"What is the influence of eBusiness on strategy?"

“What are the strategic options for a "Virtual Organisation?”

“Can Virtual Organisations exist alongside traditional structures?”

“Moving from the traditional organisation to the Virtual Organisation – what are the pitfalls?”

What is a Virtual Organisation?

A virtual organisation has three main characteristics that separate it from traditional organisations.  These are:

• Its physical presence is scattered broadly, frequently at different locations across the globe.
• People and processes are inter-changeable, rather like a Lego or Meccano set.
• Importantly, the ties that bind the people, processes and places are temporary, not permanent in nature.

It’s all about vertical integration.  Vertical integration has been a powerful strategic tool.  It allows an organisation to own and therefore influence every part of the value chain from the first component manufacturer to the ultimate end customer.  Henry Ford was a good example – he owned everything from the land on which the sheep grazed to provide the upholstery for his cars to the trucks that took the completed vehicles to the garages for sale.  But there’s one problem with vertical integration.  It doesn’t work very well if the environment, particularly customer needs or the general strategic “formula” used in an industry, changes.  In these circumstances, vertical integration is like a millstone, making the organisation slow to react.

Virtual organisations are an attempt (enabled by technology) to gain all the benefits of value chain dominance without the downsides.  Supply chain dominance without the millstones of physical ownership and proximity are the raison d’etre of the virtual organisation. 

Properly constructed, the virtual organisation can offer access to lower operating costs and, even more importantly, the capability to operate and even flourish within a competitive environment that is characterised by hyper-uncertainty.  Additional benefits that it is held accrue to the virtual organisation are:

• Increased focus upon the core competencies of the business.
• The restructuring of internal business areas that have resisted change - although some will argue that this is management’s primary responsibility not that of the outsource provider.Higher value adding and more flexible services than internal sources can offer.
• Access to best in the world knowledge sources to enhance innovation.
• The achievement of better cross process co-ordination than traditional organisational structures can deliver.

It can be seen that three distinguishing characteristics introduced above of the virtual organisation focus upon a temporal fluidity.  This is of course diametrically opposed to the characteristics of “normal” organisations that in turn focus upon permanent and physical proximity.

Strategically, don’t get too hung up about technology, as I have said, strategically technology isn’t a core characteristic of the virtual organisation, it is an enabling mechanism.

What is Virtual Strategy - What are the Strategic Options?

To answer these questions we have to understand that success in the virtual arena involves three issues:

1.       The definition of the “anchor point”.

2.       An appreciation of what virtual organisations can and cannot do.

3.       An understanding of the risks involved in implementation.

To start, we need a clear foundation of understanding.  And that understanding is an appreciation of how competitive strategy will change.  I have covered this subject in an earlier briefing (The Future of Strategy), but to summarise, we have to consider the following shifts.

Firstly, as Professor Michael Porter of Harvard Business School predicts, the cost reduction train is about to hit the buffers.  Throughout the 1990s, we have had a pre-occupation with cost reduction.  Cost minimisation has been at the heart of many organisations’ competitive strategies.  But it’s a train going nowhere.  As all organisations gravitate to the same cost base, there’s no unique source of competitive advantage left.  Operating using efficient processes is a fact of life.  It won’t be an approach that will successfully differentiate one competitor from another.

One of the defining characteristics of 21st century strategy will be a shift from costs and products to relationships as the primary focal point of strategy.  In the 1980s, products were the primary focal point of an organisation’s strategy.  Do we provide a commodity product? do we offer a product with many add-ons?  Do we supply products to a broad or narrow customer segment?  These were the questions that drove the shape of competitive strategy in the 1980s.  In the 1990s, we have had a pre-occupation with BPR, downsizing and cost reduction. 

In the 21st century it’s going to be different.  A combination of freedom of information, open standards and the outsourcing of product development functions means just one thing.  Product development lead times, the tradition bastion against new entrants, have been slashed.  As Palm found out, a new rival Handspring could make use of outsourced product developers and open standards to produce a rival product in a matter of months, not years.  This example is becoming the norm and organisations are starting to turn to relationships particularly with end customers as new sources of enduring competitive advantage.  This change in strategic focus will strongly influence your positioning within the virtual value chain – more of this later.

Innovation is therefore back in.  As I have observed, the cost reduction train is about to hit the buffers.  To stay ahead managers must focus upon innovation in three core areas – products, processes and relationships.

Finally, we have uncertainty.  We thought that life in the 1990s competitive arena was uncertain.  Now, managers have to cope with both economic and global uncertainty making it impossible to predict the exact trading environment one year out, let alone three or five.  In response, organisations are making more use of scenario planning – multiple views of a future environment and a response strategy for each.  This technique was pioneered by Shell and enabled it to move rapidly when the oil crisis of the 1970s unfolded.

Each of these characteristics of future competitive life must be factored into the construction of your virtual strategy.

To summarise, competitive strategy in the 21st Century can be considered as positioning within four strategic quadrants:

The next issue that I want to cover is the proposition that virtual strategies won’t fit every marketplace.  In other words, it’s not a cure all and must be applied with caution.  Applied in the wrong setting it can produce a substantial loss of market share.

Virtual strategies and virtual value chains only work well when three preconditions are set:

Precondition 1:      Universal codified core processes.  Here I mean common processes (such as in the general insurance industry quotation or claims handling) that are broadly similar from one organisation to another.

Precondition 2:      Inefficient core processes.  There must be scope for improvement both in the cost profile of the process and the quality of the process’s end product, whether this be tangible or intangible.Precondition 3:      Predictable interaction patterns between the end customer AND value chain members.  This is important.  Virtual value chains can’t, in my opinion, deal very well with unpredictable inter-action patterns.  Segment your target customer base with care.  Assuming that even all home insurance clients want to deal with your organisation in the same way can be a big mistake and could hand the competitive prize to a competitor. 

The competitive space capable of being operated by a virtual organisation is illustrated below.

Now I would like to move to what I believe to be one of the most important parts of this briefing.  This is the definition of the anchor point.  Definition of the anchor point is the single most important decision that an organisation must make is the single most important part of crafting a virtual strategy.

But what is the anchor point?

I will offer the following definition:

“The anchor point is the position occupied by the chain’s power player.  The position in the virtual value chain occupied by the power player is the position around which the virtual value chain is optimised and organised.”

Dell is the pre-eminent example of astute virtual value chain construction around the concept of the power player. 

The power player occupies one of two positions in the virtual value chain.  The first is the position of the dominant supplier of value to the end customer.  The second position is the owner of a product or process that cannot be replicated by another member of the value chain.

Through its position, the power player establishes the rules and shapes the competitive dynamics of the value chain.

Still using general insurance as our example, the next question that we must address is the identification of potential anchor points in the general insurance virtual value chain. 

For the purposes of simplicity the general insurance value chain can, at the highest level, be broken down into four components:

1.       Inter-action with the end customer

2.       Risk transfer – making client by client pricing and claims decisions

3.       Operations – management of the underlying core processes

4.       Asset management – decisions regarding the construction of the overall product portfolio and capital allocation. 

These can be illustrated as follows:

Choosing which point will be an effective anchor point depends upon an evaluation of at least four key questions:

1.       The capability to create unique relationships both with the end customers and other value chain members.

2.       The creation of unique knowledge within the value chain.

3.       The ability to lead innovation within the value chain.

4.       The ability to drive cost reduction across the value chain.

Assessing the capability of each the four value chain positions produces the relative importance of each as a potential anchor point as I illustrate below:

As can be seen two points, Customer Contact and Asset Management, come the fore as potential anchor points – points which should not be outsourced.

Virtual Strategy:  Some Conclusions

At this point, we can conclude that:

1.  Cost reduction train is hitting the buffers – cost will not be an enduring source of competitive advantage

2.  Relationship based competition is in

3.  Uncertainty: Flexibility and innovation are back in

4.  Virtual organisations can win but success depends upon the anchor point and customer segment selection.

Some Statistics

Recent surveys point to the fact that outsourcing may not be delivering.  Research indicates that nearly 80% of managers who have outsourced an IT function have terminated the contract early.  Another survey conducted by the American Management Association reveals that 75% of managers thought that outsourcing failed to live up to their expectations.  End customers don’t seem to have much confidence in the outsourcing process either with in one survey 81% feeling that the financial benefits of outsourcing won’t be passed onto the customer.  Others feel that outsourcing may be just another management fad or cure-all.It is essential therefore to get to grips with the true risks of outsourcing – which may not be the risks that we have evaluated in the past.I will deal with risk evaluation in a later briefing, but I would suggest the following risk hierarchy:

1.       People:  Impact on future competency portfolio and culture.  How will your most valuable resource react?

2.       Future strategic responsiveness.  Are you going to be more or less capable to operate in an uncertain environment?

3.       Innovation impact.  Are your going to outsource your ability to innovate?

4.       Supplier dependency.

5.       Supplier delivery continuity.

6.       Environmental response risk.  How will other stakeholders react?

Conclusion

Virtual strategies will work, and in the right setting they can help an organisation survive in an uncertain environment.  But remember:

1.   Green fielding.  May be the best option for established businesses.  Managing a virtual organisation requires a different management mindset and portfolio of competencies.  Additionally, remember that to date outsourcing has a chequered history - so safeguard your current business.

2.   Virtual organisations may be the organisations of tomorrow, but success is dependent upon astute risk assessment, segmentation and identification of the anchor point in multiple scenarios.

3.   Understand where your innovation trail starts and don’t outsource it.

4.   Virtual organisations are about strategic flexibility not costs.

5.   If you’re worried about costs challenge existing processes and buying arrangements.  The consultants McKinsey have calculated that most organisations can deliver process cost savings by conducting a ground up review of processes - for example up to 30% gains in direct labour productivity, lower material costs and reductions in establishment costs.