800-CEO-READ Excerpts

Let Go to Grow -- Part VI

The Business Platform

A business platform has three distinct elements:

• Governance rules and roles—Components are individual; a platform is designed for coordination and collaboration. Successful platforms require policies with teeth—governance rules—and allocation of authority and responsibility that ensures enterprise coordination plus localized application and innovation.
• Blueprints and interface standards—The degree of linkage, extension, and collaboration rests on technology standards, industry practices, and process interfaces.
• Integration capabilities—A platform coordinates many players in value webs and must be able to grow in reach, range, and robustness. Reach refers to the link with customers and partners; range, to the variety of roles a platform can play and services it can offer or support; robustness, to end-to-end quality and reliability.

The air traffic control system is a splendid illustration of these three platform elements. Governance rules and roles are the glue of ATC: its regulatory framework. The individual passenger is largely unaware that components, generating flight operations, check-in procedures, terminal operations, and facilities rely on these rules. ATC includes many blueprints to ensure coordination of components. The entire system must manage 5,000 planes in U.S. air space at any one time and synchronize all the many interactions this involves.

Let Go To Grow is an executive handbook for defining the business equivalent of the air traffic control system: your firm’s business platform. Agility is the key to profitable growth in commodity hell. It breaks the negative feedback loop of the “tighten control” strategy and creates options for growth.

We titled our book Let Go To Grow because letting go is the key management and cultural shift necessary to grow, to become a firm that combines speed, flexibility, adaptability, coordination, collaboration, and innovation. The role of the business platform is to enable growth, and the role of the corporate culture is to exploit the opportunities that the platform enables.

We base our analysis on an in-depth review of firms that have successfully made the shift to become agile firms—our work is not at all hypothetical. Although these leaders are very different in size, industry, strategy, and other ecosystem demographics, they show the same overall drive for growth. They accept commoditization and use their platforms as an ally. Wal-Mart and Dell sell commodity goods, and their supply chains are the coordination of components. GE’s governance rules componentize its back-office and administrative processes across its many diverse units. This GE standardization creates, rather than blocks, innovations in organizational design and location.

Growth leaders let go of the traditional value chain and build relationships everywhere, relying on partners for capabilities that used to be protected as “core” and kept in-house. They turn outsourcing of functions into insourcing of capabilities, drawing on collaborations in design, engineering, and distribution that they bring in-house even though outside parties handle them.

They grow through others’ growth. UPS handles close to two-thirds of all online e-commerce transactions. Its ads speak of its “synchronizing” its customers’ entire logistics, from warehousing to shipping to inventory management to financing. UPS gives up control to its customers in order to build growth, and in doing so, it fuels its partners’ profitable growth by providing logistical expertise, scale, and systems without the partner firms’ needing to make heavy investments of capital, organization, and people.

Growth leaders make the truisms about commitment to the customer a reality. They give up control of information and decision-making to the customer and facilitate customer innovation via their own platforms. Amazon’s platform synchronizes a set of components that even competitors like Borders use. Some 35,000 e-commerce technology developers use the Amazon technology platform as they want. Amazon associates are any person, company, club, public-sector group, or school anywhere that would like to earn commissions through connecting its customers to Amazon. FedEx gives customers complete control of their interactions with the company—FedEx gives up control to gain collaboration and growth. Similarly, eBay is explicitly, not accidentally, driven by its customers; eBay grows and grows as a result.

Above all, business-platform leaders are leaders because top management understands the platform issues. That is of critical importance to moving from component hell into platform-driven growth. Platforms rest above all on governance rules. Spot the component/commoditization trends early, and take charge of change.

This content is excerpted from Chapter 2 of the book titled, "Let Go to Grow: Escaping the Commodity Trap", authored by Linda Sanford, with Dave Taylor, copyright 2006 by International Business Machines Corporation, ISBN 0131482084, published Dec. 2005 by Prentice Hall Professional. Reproduced by permission of Pearson Education, Inc. All rights reserved.

Let Go to Grow -- Part V

The General Response: Tighten Control

The typical ecosystem reaction to commodity hell is control centered: Try to get on top of the changes. This “tighten control” strategy centers on cost cutting, outsourcing, efficiency, mergers and acquisitions, and restructuring. There is a truly hellish catch here, though: Control fuels the very forces that created the need for control in the first place, creating a terrible feedback loop (as depicted in Figure 2.1).

Figure 2.1 Commoditization cycle.

The Alternative: Let Go to Grow

There is an alternative response to commodity hell: an on demand business platform that we characterize as Let Go to Grow. The winners in creating and sustaining growth in the era of commoditization will profit and thrive by putting the pieces together in new ways and by changing their traditional thinking.

The term “platform” is used in many contexts, but it is fundamentally a foundation, launch pad, and set of standardized interfaces. A business platform is essentially a set of business capabilities on which other capabilities can be built, linked, and expanded to meet the pace of customer demand and relationship needs. In the technology world, a platform is a set of technologies on which other technologies are built. Windows is a software platform on which thousands of applications are built and linked. Microsoft was able to leverage Windows through its market might, but it appears that the company is seeing Linux, backed by IBM and a number of other players, as an increasing threat. The Linux platform provides similar capabilities but in a more open development arena, using open standards that have, through the inevitable forces described in this book, enabled Linux to take a significant foothold. Similarly, Intel’s individual products constitute the core hardware platform of the PC ecosystem. In the car industry, standardized manufacturing platforms have replaced independent model designs and facilitated reuse of components, global coordination of designs and production. In financial services, the credit card is a platform on which entirely new payment services have been developed. Through its links to a wide range of processing capabilities, the credit card has also been extended into non-credit areas. For example, credit cards now enable automated check-in at airports; the airline uses this standardized identification in a completely nonfinancial manner.

This content is excerpted from Chapter 2 of the book titled, "Let Go to Grow: Escaping the Commodity Trap", authored by Linda Sanford, with Dave Taylor, copyright 2006 by International Business Machines Corporation, ISBN 0131482084, published Dec. 2005 by Prentice Hall Professional. Reproduced by permission of Pearson Education, Inc. All rights reserved.

Let Go to Grow -- Part IV

Componentization Drives Commoditization

Low-cost producers look for advantages of scale, and specialist players tailor their strategies to standardized interfaces. Going back to the example of PC memory, have you ever heard of Kingston? Look at the ads in your newspaper and you’ll see that merchants now emphasize low-price components (including Kingston, just one of the commodity players). From a commoditization perspective, contract manufacturers, such as Flextronics, are why your printer, PDA, or digital camera costs less than it did six months ago; they are all built on componentized parts assembled through standardized interfaces to create branded products. HP is among the best-known printer brands, yet it has outsourced all manufacturing, and repairs are handled exclusively by UPS.

When you call a company for customer service or technical assistance, are you reaching a site in Ireland, India, or Omaha? Call centers are now viewed as a business component. So, too, are more and more manufacturing, back-office, and other previously in-house capabilities. How many hospital patients know that their X-rays and MRIs are sent directly to Makati in the Philippines? How many of the standard parts in an “American” or a “Japanese” car were made in the home country? Do customers need to know?

Competitive intensity creates ecosystem impact, and commoditization is the inevitable outcome. There will always be a space for the innovator to invent something truly “new.” But commoditization catches up quickly. “New” quickly becomes “standard,” which soon becomes “special price,” which then begets free printer, installation, or two for the price of one. Mortgages, computer storage, hotel rooms, medications, airplane tickets, mobile phone services: The list is long, and no ecosystem is immune to this commoditization drift.

Commodity Heaven and Hell

Commodity hell for producers is commodity heaven for customers. They pick channels, providers, and products on whatever basis they want, in complete control of the transaction. Customers may not necessarily choose on the basis of price; the key is that they have choices. In some instances, the choice favors design, or fashion is the deciding factor, and they will pay a little more for the same commodity functionality of, say, a printer or a mobile phone. They will in other instances favor a brand for a different reason.

In many cases, the owner of the brand may have little to do with the production, delivery, and servicing of the goods. One illustrative example is Hong Kong-based TAL Group, the coordinator of a value web that such retailers as JC Penney and Lands’ End use to produce customized dress shirts. JC Penney takes the order in the store, and TAL does the rest, synchronizing hundreds of raw materials providers, factories, and shippers to deliver as small an order as one shirt, with the appropriate logo sewn on, to JC Penney or even direct to the customer. TAL accounts for one in eight of all the dress shirts sold in the United States, but it is doubtful that their purchasers have ever heard of the firm. The customer gets a customized shirt at a commodity price. TAL is an instance of how coordination of value webs can help firms escape from commodity hell. They offer a services web that firms like JC Penney utilize as an extension of their value chain to create a new degree of coordination.

It is coordination of value web capabilities that drives every growth leader.

This content is excerpted from Chapter 2 of the book titled, "Let Go to Grow: Escaping the Commodity Trap", authored by Linda Sanford, with Dave Taylor, copyright 2006 by International Business Machines Corporation, ISBN 0131482084, published Dec. 2005 by Prentice Hall Professional. Reproduced by permission of Pearson Education, Inc. All rights reserved.

Let Go to Grow -- Part III

The Ecosystem Impact

The impact of these forces on the ecosystem is inevitable: overcapacity, customer power (which translates fairly immediately to price competition), and then componentization as a necessary response and commoditization as the inevitable outcome. These all interact, too. They feed back into the environment of globalization, deregulation, and technology; this is demonstrated by the competitive intensity of the consumer electronics ecosystem—manufacturers, supply chain services, contract manufacturers, designers, retailers, electronic commerce portals, and fabrication plant giants. This used to be a high-tech industry. Now, it is a commodity ecosystem characterized by overcapacity, customer power, componentization, and thus continually shrinking margins and price cuts.

The interaction of all these new competitive changes also produces a system of continual innovation in technology, methods, and services. Because these are rapidly componentized and incorporated into the products of all the main players in the mass market, the innovations themselves end up pushing these companies toward commoditization. Digital cameras, computer storage, mobile phones, and PDAs exemplify the breakneck pace of innovation and commoditization.

As competition intensifies, overcapacity grows. Technology generates competition; so does deregulation. Globalization adds to it. For example, China and India are fueling competition around the world by offering low-cost services and products. Customer power increases as a direct result of deregulation, compounded by the degree to which the Internet provides customers with information and new choices. When customer power is constrained by regulation, options are limited because of market protectionism, and information on services and prices carefully protects providers, the customer ends up at the end of the industry value “chains.” When customers learn how to pick and choose, they go for the best deal and increasingly know where to find it. Ecosystems reshaped by the deregulation globalization Internet combination of forces have seen prices drop at least 20 percent over a five-year period; telecommunications, air fares, consumer electronics, and, more recently, prescription drugs are leading examples.

The Ecosystem Response

The response to increased competitive intensity is componentization: the move to interchangeable parts. As carmakers, PC hardware product brands, and financial service firms respond to competitive intensity, they focus on cost efficiency. They abandon their in-house manufacturing and proprietary parts and seek out low-cost suppliers that can provide off-the-shelf resources. These resources increasingly also include off-the-shelf processes, such as customer service, back-office functions, distribution, and supply chain management. The Internet becomes the enabling vehicle for collaboration in componentized engineering, design, and research.

For all this to be efficiently managed, low cost, quality, and speed are essential. Companies in the mainstream of the ecosystem have no choice but to move toward standardized interfaces: shared agreements, some specific and some implicit, on how components link together. For instance, customers can now add more memory to their PCs without going through the manufacturer: They walk into a store like Best Buy or run a search on Google and quickly pick their best option. The component providers offer different prices and vary the details of their products, but their components interface directly to the PC.

This content is excerpted from Chapter 2 of the book titled, "Let Go to Grow: Escaping the Commodity Trap", authored by Linda Sanford, with Dave Taylor, copyright 2006 by International Business Machines Corporation, ISBN 0131482084, published Dec. 2005 by Prentice Hall Professional. Reproduced by permission of Pearson Education, Inc. All rights reserved.

Let Go to Grow -- Part II

COMMODITY MARKETS DEFINED
Where are the growth engines for businesses today? How do firms avoid the commoditization that is occurring across so many industries? The answer may surprise you: Commoditization forces the growth engine and is the ally of the growth business, though it will remain the enemy of the fixed-structure company. It’s time to reinvent your organization.

Here are the modern realities of business:

Profitable growth is difficult

It has always been difficult to build profitable growth and even more difficult to sustain a profitable growth path. Only a tiny fraction of firms have ever succeeded in doing so. The pragmatic reality is that most long-term business growth barely keeps up with economic growth, and revenue increases hover around the national inflation rate.

And getting exponentially more difficult

Even if you’re managing to keep up with the ever-increasing pace of competition, it is getting exponentially more difficult to grow profitably as the interaction of deregulation, globalization, and Internet-based technology fuels more and more competitive intensity. This is not a linear evolution but a compounded and accelerating steep curve. Each of these critical forces fuels competition; globalization of manufacturing and labor, Internet-enabled electronic commerce, Internet-enabled supply chain management, and the deregulation of telecommunications are obvious instances.

When these changes interact and feed on one another, entire competitive ecosystems lose their traditional identity and levers of control. At this point, there are very few industries that are not being reshaped by these changes, forced through the stages of creative destruction. Telecommunications, travel services, consumer electronics, auto manufacturing, computers, banking, software, and the music business have all been reinvented in the past decade. In some instances, deregulation is the pivot; telecommunications is the most obvious instance. In others, it is globalization, as in consumer electronics and auto manufacturing. In still others, the Internet subverts the status quo; travel services are an example. Once any of these forces gains critical mass, the others come into play, creating a new level of competitive intensity that accelerates. Almost inevitably, the three forces converge at some point; the Internet is in many ways part of the globalization of labor supply and in itself a form of deregulation in its removal of protective barriers to entry, control of channels, and constraints on the flow of information on prices and services.

This content is excerpted from Chapter 2 of the book titled, "Let Go to Grow: Escaping the Commodity Trap", authored by Linda Sanford, with Dave Taylor, copyright 2006 by International Business Machines Corporation, ISBN 0131482084, published Dec. 2005 by Prentice Hall Professional. Reproduced by permission of Pearson Education, Inc. All rights reserved.

Let Go to Grow - Part I

Let Go to Grow: Escaping the Commodity Trap
by Linda S. Sanford, Dave Taylor
Prentice Hall - December 2005
202 Pages - 0131482084

Let Go to Grow is based on the idea that almost every industry is becoming commoditized. Thus, companies need to "let go" of the standard practices in order to grow beyond commoditization. As the inside cover states, "Sanford and Taylor systematically review the On Demand Business processes, people strategies, technology shifts, governance practices, and leadership vision..."

The following excerpt is the first part of chapter 2 that explains the commodity market.