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Efficiency and Innovation drive growth

By Michael Bayler and Otto Schell
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Efficiency and Innovation drive growth

Efficiency and innovation must align

There is – and the authors have seen this repeatedly in digital transformation programmes
– a real danger of confusing the short-term benefits of process efficiency
with the long-term impacts of innovation-based, truly sustainable growth. Indeed,
notoriously, an exclusive focus on cost-cutting, while perhaps buying the board a few
happy years of improved profits, in the end severely threatens the growth potential
of any business.
However, this is not, gratifyingly, an “either-or” dilemma. As we will show in this
short essay, the genuinely transformed business learns to go beyond merely balancing
investment in process efficiency and value innovation. These can, and we believe
must, be actively managed in lockstep, ensuring that investment in innovation not
only delivers new value to the end customer, but is integrated both comprehensively
and efficiently into the enterprise and IT architectures.
Nowhere is this more critical than in the IoT, whose expansive promise of intelligent
automation of both core business processes and radically transformative customer
value offers perhaps the most tantalising of competitive opportunities, for the boards
that are able to commit with confidence to the necessary development programmes.
The real question is, developing exactly what, for whom, and why? What new models
of value will deliver meaningful and sustainable growth in IoT?
While in our view, a limited number of truly transformative cases have come to market,
and while key industries such as manufacturing and logistics are certainly changing
their game with significant and strategic investments, client-side leaders, when
pressed, more or less openly admit to a chronic shortage of coherent, convincing new
models of end customer value.
This is critical. In the end, an enterprise that fails, especially in a business environment
whose savage acceleration and melting barriers to entry are givens, to build
aggressively and single-mindedly towards an ever-faster, ever-smarter system for the
delivery of new customer value, can start counting its days.

What new models of value will deliver meaningful and sustainable growth in IoT?“

Panic in the boardroom
The race to outrun the disruptions introduced and now driven ruthlessly forward
by digital, is acknowledged as the biggest challenge facing the boards of most of the
world’s largest enterprises.
A confident commitment to a holistic view of the future, the implications for strategy,
as well as the corresponding structure of the business, are perhaps the hardest
elements of this challenge. The constant acceleration and divergence of change itself
add to the urgency.
Given the scale of the challenges, alongside the implications – not merely for the
careers of senior business leaders, but for the survival of the very companies whose
continued success they are responsible for – of calling the wrong shots, it’s understandable
that, in most cases, their instinct is to duck and cover. In a sharp contrast,
the dialogue now must be about attacking the current understanding, bold and frank
discussions of the unexpected, which in turn drive the necessary changes.

The problem of making small bets
The identification of and commitment of significant investment to a sufficient quality
and volume of the value innovations that are likely to survive and thrive in the brutal
marketplace of today and tomorrow, feels more or less impossible. The consequence
tends to be a proliferation of small bets: low-cost, often fragmented and isolated programmes
of invention.
Nothing wrong with this per se, nevertheless to look to such tentative, out-of-context
efforts to drag the whole enterprise up to the speed of the digital market is dangerously
naïve. Internal start-ups that at worst ignore, or are at best isolated from, the
broader and more foundational enterprise challenges, in the end feed or even become
the very silos that need to be broken down and connected, to ensure that digital
transformation can be truly effective, and fresh value evolves and is profitably taken
to the market.

The focus on process
While budgeted and executed at a more realistic scale, most large digital transformation
programmes remain focused on process optimisation – honing the capabilities
the business has needed until now, to make them faster, cheaper, more streamlined
and, quite naturally, far more data-centric.
And indeed, the efficiencies and cost savings introduced by such programmes make
for pretty compelling reading.
However, an exclusive focus on these outcomes, in the absence of an actively linked
programme of innovation in value- adding products and services, will in the end cripple
the very growth that such programmes demand.

Achieving true business transformation
Business transformation, at its most elemental, demands a fresh and robust balance
of cost efficiency and enabled growth. Cost efficiency here is not meant in traditional
terms, it is about consumer digitalization and how to appropriately attack consumer
markets. There is a widely shared illusion across business that the efficiencies introduced
by the above mentioned large digital programmes will, in themselves, enable
and drive successful new products and services at speed.
And theoretically, why not? The unmet challenge – the elephant in the boardroom,
we could say – is that enabling and driving value are by no means the same as identifying,
articulating, modelling and committing serious investment to it..

Efficiency and growth in lockstep
It’s worth noting here that, for example, smart manufacturing does not guarantee
smarter end products and services.
It’s typical for innovation programmes and digital transformation work to be envisioned,
planned, budgeted and executed in isolation from each other. Furthermore,
and importantly for this argument, the efficiency-based goals of DT tend to be weighted
towards optimising processes that serve the current, not the envisioned future,
requirements of the business.
In other words, while many DT programmes are theoretically geared to supporting
enterprise agility and speed to market of new products and services, in practice they
exist in separate silos from key innovation agendas.
What is needed is a radically new integrated development philosophy, one that enables
these two silos to actively align as fully as possible; methodologies that bring together
customer value innovation opportunities whose business cases are adequately
articulated (the return for the business investment), with the capability to flex both
enterprise and IT architecture in order to enable both excellent of customer experience
and optimised cost of delivery to market.
From here therefore, we turn to the other side of the challenge. Assuming we are able
to create and execute on these newly aligned development capabilities, we are still faced
with the profound challenge of aligning and adjusting the enterprise architecture
and, from there, the corresponding structures of OT and IT.

It’s typical for innovation programmes and digital transformation work to be envisioned, planned, budgeted and executed in isolation from each other.

A deeper level of disruption
The notorious chasm between business and IT is now critical, no longer merely for
the sake of process efficiency and competitive effectiveness, but to ensure enterprise
survival, in a market context whose consistent acceleration and increasing complexity
punish slow movers, while rewarding agility and speed.
This new market context is no longer definable in terms of the relative comfort of
more or less predictable change. The appropriate term from here on is “chronic turbulence”:
both opportunity and threat often arise without adequate warning, from
potentially any location in a landscape in rapid, unpredictable flux.
We have moved from a business dynamic of measured, linear change, bounded and
defended by both clear market sector divisions and traditional value chains, to one
of persistent uncertainty, featuring flimsy barriers to entry alongside chaotic, hostile
At an operational level, in terms of supplier relationships we have moved from a 1:1 to
an n:1 model, or on multiple data ownership vs. discrete to run services vs. simple products.
Hidden champions are still not recognizing that two aspects of IoT (Internet
of Things) will disrupt their current position. On one hand we will get more transparency
“anywhere-everywhere” on market behavior. This will change Supply Chains to
Supply Networks adding more competitiveness. On the other hand “data sources” are
not more fully protected by the issuer, availability and sharing matched with required
and appropriate security, will allow new in-bound and outbound services.

Redundant strategy, redundant processes
Strategy, while paying lip service to 21st century transformation, innovation and new
forms of customer value, still in practice refers back to the mid-20th century for its
model of the world, its assumptions about competitive drivers, the nature and location
of customer value, and above all, about the structure of markets and the corresponding
architectures required of successful enterprises.
Again, looking through the operational lens, the way in which projects/architectures
are structured is based on previous principles, practices and skills: this does not do
not carry through into agile. Companies doing agile establish “startups”, very rarely
linking end to end in a full blown strategy and process transformation.
The assumption that underpins this outdated way of doing strategy is that, while
things may be speeding up quite a bit, change today and tomorrow remains change
as we knew it, and equipped with the right information and the right technical architecture,
all will eventually be well again.
In this context, so-called digital transformation does little more than hard-wire the
enterprise into shapes, processes and capabilities that reflect an effectively static environment.
We insist on building systems that, by the time they are delivered, are
dangerously irrelevant to the current and future dynamics of the market.
In fact, digitalization is all about freeing up heads and hands for investigation into
future value.
Were everything standing still in the globally networked marketplace, such (astonishingly
naïve) beliefs would perhaps, as they have to a degree in recent years, be forgiven.
But leadership, while continuing to speak to the speed of change etc, stubbornly
refuses to acknowledge the true nature of disruption.

“This is not a pretty picture, and we must acknowledge that few CEO’s are at the time of writing showing signs of waking up to the commercial reality.“

The way forward
This is not a pretty picture, and we must acknowledge that few CEO’s are at the time
of writing showing signs of waking up to the commercial reality. This demands a
wholesale cultural change: neither adding new job titles or tweaking traditional job
descriptions will suffice.
In the meantime, there are two dimensions of real change that are demanded.
First, pressure needs to come off the CIO to magic up a transformative technical
architecture to take the enterprise into the digital future. It is not their job. They
need to be provided with and driven by a business architecture that is developed and
approved by the board. Nothing else makes the remotest sense.
Second – and this, believe it or not, is far more demanding still – the architecture
needs to be developed to reflect the new dynamics of business on the network.
What is the relevance to an organization of a product or a service must be the first
questions. Otherwise, we optimize and do not disrupt. Michael has written about the
key elements of this new environment in his latest book, The Liquid Enterprise, and
it is also mentioned in several whitepapers co-authored by Otto.
For now, we need to view these 3 strategic elements as 3 closely linked concentric
circles, with IT in the middle, business architecture wrapped around that, and the
market context – ever-shifting, highly liquid: an environment in which VALUE ITSELF
(alongside, of course, risk) is perpetually on the move.
Tracking the highly liquid behaviour of value and risk as petabytes of data (chronic
turbulence) flood the network becomes a central capability, enabled by IT. The lens of
enterprise purpose and strategy informs how and when we act and react.
In this sense, establishing a business architecture, and the consequent IT architecture
and portfolio, that are fit only for currently envisaged purposes, is to utterly miss
the point, and indeed to misunderstand the nature of the market dynamics.
Above all, transformation itself becomes the core competency of the new enterprise.

Above all, transformation itself becomes the core competency of the new enterprise.“

Recently, the authors spoke together at a large Internet of Things (IoT) event in Europe. As is often the case, the primary focus of the sessions was on the key enabling technologies of the IoT, alongside the process efficiencies and cost savings that significant implementations are estowing on the sectors most exposed to the opportunity; for example, manufacturing, logistics, and to an extent, retail. With this finding in mind, we chose to rethink our planned presentation – which had been about the impact of data on the evolution of connected vehicles. We explored instead the frictions imposed on the arrival of a more credible, mature IoT market by the profound challenges of identifying and articulating the radically new forms of end customer value that will
inform the huge investments typically required; strategic investments that may well take 5 to 10 years to achieve commercial benefits for the enterprise.
This was not a light-hearted session. The majority of our audience was in attendance to discuss what we might call, in strategic terms, “the how, the when and the where”. Our insistence on, instead, “the who, the what and, above all, the why” – the imperative of moving beyond the relatively obvious efficiencies introduced by any viable digital transformation, to understand, evaluate and commit to the models of value in IoT that will deliver true growth – was clearly something of a shock. Nevertheless, our argument, prepared loosely and only hours earlier, unfolded with a conviction and a clarity that we felt
demanded a more formal explanation.

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