Gaining Flexibility and Velocity in a Volatile World
The following definition by Adrian Slywotsky (1996, Value Migration) illustrates the aspects of business transformation:
"The Business Model is the totality of how a company selects its customers, defines and differentiates its offerings, defines the tasks it will do itself and what it will outsource, configures resources, goes to market, creates utility for customers, and captures profit - the entire system for delivering utility and earning a profit from the activity."
Facing Reality
HP historically approached our markets through independent product families. As our business world changes ever more rapidly, HP is transforming to a business model of interdependent solutions. This shift in focus allows us to collaborate globally with the full breadth and width of product offerings. As we make this transition, the way we approach our customers changes. Hewlett-Packard focuses on learning more about our customers and finding key segments that share purchase and delivery value. To meet and exceed our customer expectations, we collaborate across our value network and know our customers better, sooner. Along with our business partners and suppliers, we are shifting from "control" to "openness," building a portfolio of options and trust to provide velocity and flexibility.
Knowing our customers at Internet speed requires a flexible and continuous Internet-enabled process of customer interaction. The intellectual capital of our people allows us to focus on the critical gaps in our knowledge. We do this at the same speed with which we respond to our volatile business environment. We link customer decisions to a dynamic understanding of market opportunities. Using the Internet, we transform our complex value delivery network to maximize both customer and shareholder value. The net results are profit, market share, and revenue.
Hewlett-Packard developed a vision and a path to deal with this ever-changing business environment. Volatility provides the context - the continuously changing customer needs and the dynamic competitive environment. The path to address this volatility has two dimensions - velocity and flexibility. The pervasiveness of collaboration across the entire value delivery network reflects the level of integration between velocity and flexibility. Let us explore what these terms mean, starting with the business context - volatility.
Volatility
Changes in customer purchase behavior drive volatility. The fiercely competitive landscape increases this volatility by influencing the customer perceptions that drive their purchase behavior. Trust, collaboration, and coordination can help address the impact of volatility on our ability to respond. Volatility, defined as continuous and rapid change, is part of life. It is, by nature, not a fertile environment for flexibility nor velocity. If you are constantly forced to change, you will not be open to flexibility, as any member of an organization that has been repetitively reorganized will confirm.
Efficiency is not the answer, as it doesn't remove the changes in purchase behavior and relationships. We have no way to manage volatility. Even if we know what is coming - have all the gauges to monitor what is happening - we cannot respond if we don't have the ability to touch the relevant levers in our value delivery network. In Fall 1996, a Hewlett-Packard manager explained his frustration in adjusting his supply chains: "I feel like I'm sitting in a car moving at 100 miles an hour. I have all the information I need, with no way to steer, brake, or accelerate." The appropriate levers and gauges have a scale and time element."
The speed of change and response need to be aligned with the behavior of the network. Aggravating the Bullwhip1 through misaligned policies, processes, and network characteristics is a major risk associated with the call for "real-time" information. As anyone who has tried to shower in a hotel with low water pressure can acknowledge, trying to regulate the temperature in response to someone running water elsewhere in the system is a challenge - especially if you experience burning- hot and icy-cold water intermittently, while adjusting the spigots.
Concurrent forces intensify volatility. For example, we are dependent on global markets with global shortages, even when we respond regionally. The market and buying behavior are intertwined. What and where end-customers buy is constantly changing, driven by global forces. An Internet presence provides global market visibility and drives global responses, even if the portal is aimed at a regional market place. Our flexibility to cope with that volatility is more important than efficiency. We run the risk of losing growth and profit opportunities by not meeting end-customer needs at the point of purchase. A common understanding of the value delivery network-driven volatility and collaborate in capitalizing on market volatility is a key opportunity. That is, take advantage of spreading demand through collaboration with markets and customers and the invention of new purchase patterns.
Velocity
Velocity captures the increasing speed of our response to changes in customer purchase behavior at the places they buy. It's about meeting market windows, not technology changes. To learn, process, and act within business constraints is the ongoing operational aspect here. For example, a particular artist (say pop group or writer) becomes popular. Can you meet the associated end-customer purchase behavior in time to meet their needs where they buy - fulfilling a market share and profitability opportunity? This is a time-to-volume challenge that many companies and networks face.
Velocity is about speed of change where it counts - at the point of purchase. Note that nervousness is an undesired aspect of velocity. We like to achieve a precise response at increasing speed. This precision is important because velocity has a high associated risk - things can go wrong quickly with very severe consequences. Cycle time reduction can be part of this, but only where it impacts where customers buy. Some supplier lead times will be difficult to change. Similarly reducing final assembly cycle time by 20% will not likely have a major impact on the overall velocity, whereas a similar transit time reduction between nodes might have significant impact. Furthermore, the volatility in the velocity counts. Meeting velocity requirements is all about trust, collaboration, and coordination. The Internet is both a driver and an enabler for velocity, especially the information flow in the value collaboration network. A pitfall is to assume that real-time information to all decision makers in the network solves the lack of velocity in the material flows. The opportunity here is not information velocity as an isolated goal, but synchronization. Aligning the information on the gauges with the system response - material and finance flows - to lever changes.2
Flexibility
Our ability to respond to changes in purchase behavior is the competitive differentiator for exceeding our growth and profit objectives. To meet these requirements trust between partners that contribute to the end-customer value becomes key - communicating and reaching a common understanding of what opportunities can be pursued. The resulting precise actions are what drive flexibility. For example when customers purchase more directly than expected, are we flexible enough to meet that change in purchase behavior without sacrificing market share in another channel? The Internet allows us to know our customers and their purchase behavior and helps us drive flexibility requirements. Flexibility is the pay-off of our customer and network knowledge. It incorporates experience - act precisely based on what we experienced to have the highest impact. Finally, flexibility need not be expensive.
Collaboration
"It is all about trust." How to move from independent, separate perspectives that react to changes in an uncoordinated fashion to collaborative, common perspectives that pursue and capitalize opportunities in a coordinated fashion. Collaboration is the antidote for worsening volatility by damping its transfer through the network and respond with precision - jointly, eliminating harmful amplification and distortion. Moving from local constraints and cost-driven to network constraints and customer-behavior driven. From neglecting network strengths and weaknesses in adding value - one size-fits all, undifferentiated - to flexibility driven by network strengths and weaknesses where trust guides behavior. From the existing structure that is individual efficiency-driven to new processes that are common effectiveness-driven. Without collaboration a player might move with velocity, but is still dependent on the other players in the network. Where the players connect, the white space, is where most benefit can be achieved.
Collaboration provides a synchronized response based on confidence and innovation. The shared wealth of experience provides the most fundamental risk management strategy. The collaboration process feels uncomfortable, slow, and difficult - but the end quality is much higher. Finally, different than most current strategies, we are not going for closure. Pursuing opportunities on an ongoing basis with new meaning, new complexity arriving all the time.
Approach
The path to transformation starts with business objectives. Our required and desired growth in profit and market share drives our customer analysis. This analysis guides our customer segment focus. Within a segment we need to understand the differentiators and commonalities in purchase behavior. This market segmentation is not traditional in that it does not focus on company size or industry, but on purchase behavior. The connection of purchase behavior to market share and profit allows us to focus. That is to transform our business by selecting our customers and our value contribution. This approach provides us leverage by linking our investments to levers that accelerate purchase behavior for multiple customer (sub) segments.
A common perspective in what, how, where, and when customers buy allows us to focus on the gaps in our customer knowledge. We then harness the Internet and use small, fast, and focused research projects to amend our knowledge. Our customer knowledge provides us the gauges to monitor customer purchase behavior as a continuous process. Traditional market research provides a view of the situation at a given time. It does not reflect the dynamic nature in the volatile market place. Further, it lacks the connection to business imperatives, market share, and profit growth. Measures like the customer loyalty index don't provide us a balanced scorecard for customer purchase behavior. It measures a situation frozen in time, not the dynamic impact on our business. Without the link to repeated purchase behavior and the business environment, it does not support decision-making. We use a system dynamics model to provide a forward look, while continuously testing our assumptions with historic data.
Collaboration comes into play when we apply our customer knowledge to our channel strategy. Channel partners can provide us with the presence we need to serve customer segments that matter to us. However, the value our partners add becomes critical to achieve our business goals. We discovered that the cost of the partner itself should not be a selection criterion. Again we need to look at a holistic picture, are there other means of addressing the same customer segment how, when, and where it counts without cannibalizing existing sales channels. Channel cannibalization would risk our business objectives as well as threaten our relationships. It provides us a balanced and dynamic view on "channel conflict" and where we want to focus our collaboration efforts. The Internet enables us to support our channel relationships in a flexible, scalable, and effective manner. Market forces will judge the viability of overly expensive partners serving the same customers in the long run without voiding the investments we made. Collaborating with channel partners provides us with options and therefore with flexibility.
Competitive action influences the customer perceptions in each segment. The dynamic nature of competition requires continuous action. It erodes our value in the eyes of the customer. Our customer knowledge in the context of our channel strategy provides us the levers to overcome this erosion.
Finally, we evaluate constraints to the customer purchase rate. Barriers for reaching our potential are, for example, the awareness that drives the customer pull, our order fulfillment network, supply-side shortages, and misalignment between partners in our network. Addressing these constraints requires a holistic view of how we deliver value. Value collaboration networks, reflecting the non-linear nature of the processes and partnerships to serve customers, are our vision for dynamically and collaboratively dealing with constraints on customer purchases. The experience from HP at customer facing and channel facing organizations enables us to exploit our customer knowledge. Whereas, Hewlett-Packard's experience in collaboration with suppliers, contract manufacturers, and channel partners provides us the leverage to achieve this vision. Mutual readiness is a requirement. We achieve this through a common understanding, which precedes collaborative action. This succession of a common understanding and collaborative action builds trust.
The supply chain is one of the most critical constraints. Apart from value fulfillment it also involves product design, planning, forecasting, and life-cycle management. As solutions involve multiple processes that need to be transparently integrated for the customer, collaboration across multiple partners is key. This includes value definition, partner selection, pricing, scheduling, delivery, exception management, support, and return flows (including feedback). Our value collaboration requires flexibility and speed to accomplish this, where normally non-integrated processes with separate owners exist. The challenge is the integration of product and service supply chains into a single value instance for our customers.
Results
Our success in transforming to an Internet enabled, customer-centric approach is best illustrated by the opinion of the business Web project manager (November 2000): "As a result of this work, we have gained new understanding of the process that transforms HP's value proposition to customers, in response to the needs of a clearly defined segment. In particular, we were challenged to consider the contribution of services - off-line and on-line, direct customer relationships, and broad channel strategy in a Web-based business model."
Conclusion
Shifting market research to a business performance-driven fast and flexible process that exploits the intellectual capital that exists in a company is an enabler for transforming to an e-business. It allows us to link our Web presence and offerings to our customer knowledge and supply chain action. It solves the challenge of embedding our customer into our supply chain and product design. Collaboration provides us the necessary options - flexibility to respond with velocity to a volatile world.
Acknowledgments
I wish to thank Carol Blanchar, Adolfo Crespo-Marquez, Elisabeth Blaettermann, Lucien Repellin, Peter Berggren, Al Atkinson, Kurt Riffle, Corey Billington, and Ira Dember for the conversations that helped shape this article.
References
1 Aggravating the Bullwhip, 1997, Lee et all
2 Kuper, 1999.
