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Archive - Edition 7: Composite Applications
To
Overview of Composite Applications Edition
Introduction
Leading and General Articles
- Packaged Composite Applications: A Liberating Force for the User Interface
- Next Generation Applications – What Are They?
- Acronyms and Glossary
Theoretical Foundations
- xApps – A New Practice for Next Practice
- Process Recombination: An Ontology-Based Approach for Business Process Re-Design
- The Agile Dance of Architectures – Reframing IT Enabled Business Opportunities
- Web Services and User Interaction
- Dissolving Boundaries with Distributed Cognition and xApps
Designing xApps, Examples of SAP xApps
- Prototype-Based xApps Design Process
- SAP xApp EPM – Employee Process Management
- SAP xApp Knowledge Network – From the Idea to the Product
Links & More
Building Momentum: Implementing New Strategic Architectures1
By John Hagel, III and John Seely Brown – 10/20/2003
It has become a tired platitude to say that change is accelerating and uncertainty is increasing in business. Perhaps it has become so tired because it is so patently obvious. Two primary forces – technology innovation and long-term public policy shifts – are destabilizing the business landscape and reshaping the world we live in. Information technology has systematically reduced interaction costs and made it easier for businesses to extend their reach on a global scale. Long-term public policy shifts around the world have tended to reduce (but certainly not eliminate) regulatory barriers to entry and competition.
Both of these forces have converged to intensify competition. The net impact has been very challenging for businesses. Perhaps the most graphic illustration of the increasing volatility and uncertainty in business is a chart prepared by Dick Foster in his book "Creative Destruction", showing the average life-time of companies on the S&P 500. Over a period of six decades, the average lifetime of these companies has declined by 80% from 75 years in the late 1930's (certainly a challenging time for business) to 15 years in the year 2000. Even the very largest companies in the United States have succumbed to volatility and uncertainty. Clearly, the old management tools are not working as well as they used to.
At one level, we all know that our approach to strategy has to change. In particular, we recognize that we need to pursue strategies that place much greater emphasis on waves of short-term (typically, six to twelve months) operating initiatives. Some companies, especially during the dot-com frenzy, went to the extreme of throwing out strategy altogether, putting their trust in tactical "hustle" as the only way to create economic value. It became fashionable to say that strategies of movement were replacing strategies of position. The retrenchment following the collapse of the bubble demonstrated that hustle alone could not build sustainable businesses.
Companies are beginning to realize that speed alone is not sufficient; it is also important to have a sense of direction. Long-term position still matters. Without some sense of long-term position, movement rapidly degenerates into random motion. Options tend to expand as change accelerates. Companies lacking a sense of direction tend to fall into reactive approaches, pursuing too many options at the same time. The result is that resources are spread too thinly and performance impact diminishes because all the initiatives are under-resourced.
Balancing these imperatives requires a new strategic architecture focused on two very different time horizons – a long-term horizon of five to ten years, creating a background for executive decision-making, and a much shorter-term horizon of six to twelve months, providing the foreground where operational and organizational initiatives play out. Without the sense of background to put events and actions into context, the foreground on the six to twelve month horizon where most line executives tend to operate begins to lose coherence. A sense of background becomes even more critical as environments become more turbulent and uncertain. Without this sense of background, one begins to lose any orientation or grounding. It becomes more difficult to make sense of events as they unfold. By forcing attention on the background, the new strategic architecture helps to create meaning and focus. It also helps to make choices, both in terms of what events and information to look for and in terms of what near-term actions will yield the greatest impact. This longer-term background also shifts attention away from the one to five year horizon that consumes traditional business strategies. All the real action occurs on the peripheries of this traditional horizon.
The background provided by the five to ten year horizon plays an additional role. It also helps to clarify for the organization the profound changes that most companies are likely to experience over a five to ten year period. This background does not, and in fact cannot, be described in detail. It is general enough that it can accommodate many different permutations of the future, yet specific enough to provide a framework for effective choice to be made regarding deployment of resources in the near-term.
Perhaps the classic example of an effective long-term statement of direction comes from the early days of Microsoft when the company developed a long-term direction that could be summarized in two sentences: "Computing power is moving inexorably to the desktop. If we want to be successful, we need to own the desktop." Simple and succinct, but clear enough to guide the company over at least two decades of massive change in the computer industry. Developing this long-term direction for the company requires a deep understanding of the likely impact of broader forces such as technology performance improvement trends, value migration trends and demographic trends.
In parallel, while the company is developing and refining this shared understanding of longer-term direction, senior management needs to focus on a different time horizon shaped by a second key business question: what can we do in the near-term (6-12 months) that will help us to accelerate movement toward this longer-term direction? In part, this question forces executives to identify and focus on the most promising two to three operational initiatives that can deliver tangible near-term performance impact and meaningfully move the company in the longer-term direction.
In focusing on near-term impact, it is important to differentiate between financial measures of impact and operational measures of impact. Financial measures of impact are generally not preferable because they are lagging indicators of performance. In defining the operational milestones to measure the progress of critical near-term operational initiatives, it is far better to focus on the operational levers that ultimately drive financial performance since these are usually leading indicators and provide a more granular view of the performance of the business. For example, if the operational initiative seeks deeper penetration of a target market segment, focus on measures like new customer acquisition rates, repeat purchase rates and retention rates rather than revenue growth.
These two to three operational initiatives differ from the notion of "experimentation" that has become quite popular in strategy writing recently. These initiatives are major resource commitments by the corporation that are complementary to, and often reinforce, each other rather than experiments to cover multiple options. These initiatives are designed to significantly impact the operating performance of the company over a 6-12 month horizon.
These initiatives are incremental in the sense that they are designed to yield near-term operational impact. They may or may not be incremental in the sense of supporting the previous trajectory of the business. If the business is performing well and does not confront significant market discontinuities over the next five to ten years – as in the case of a company like WalMart – this type of incremental initiative may be appropriate. On the other hand, if the business is not performing well or confronts significant discontinuities on the horizon – as illustrated by Kodak – the near-term operating initiatives may represent a significant departure from the current trajectory of the business. In this case, it is particularly important to focus on key operating metrics to measure progress, rather than financial measures. Financial measures tend to increase inertia. The core business will always appear to have a higher priority than new business initiatives given its much greater impact on overall corporate financial performance. For example, in a $10 billion business, a 1% improvement in performance in the core business will bring $100 million to the bottom line – swamping any possible impact that an entirely new business might be able to generate. Operating metrics like delivery of an operating prototype of a new product and acquisition of initial reference customers focus senior management attention on the necessary milestones new businesses must meet to become viable.
Often the near-term operating initiatives will represent a mix of both improvement of core business performance and fundamental new business creation initiatives, in the spirit of the "ambidextrous corporation" described by Michael Tushman and Charles O'Reilly. It is hard to over-emphasize the deep tensions that will need to be managed by senior executives in companies supporting both types of operating initiatives. The mindsets, cultures, risk profiles and metrics required to succeed in both types of operating initiatives are fundamentally different. Senior executives need to anticipate and honor these tensions, rather than applying a single management model in both areas.
By focusing the organization on rolling waves of near-term operating initiatives with aggressive performance objectives, this approach encourages innovations in practice that over time become reflected in the evolving competencies of the business. These incremental practice improvements are path dependent and become very difficult to replicate. Competitors may seek to copy the processes, but the advantage will remain in the practice that continues to advance in incremental waves.
On the same 6-12 month time horizon, executives need to ask what organizational barriers are preventing the company from moving even faster in the near-term. They can then determine a set of near-term organizational initiatives designed to strengthen capability to support even more aggressive near-term operating initiatives.
Overall, constant iteration between these two time horizons helps to accelerate learning and performance impact by establishing tight feedback loops and pressure to translate the learning into near-term action. The background provided by a longer-term direction for the business helps to provide grounding, orientation and sense making – all key requirements for effective learning. The foreground, with its emphasis on near-term action, helps the organization to rapidly develop real-world experience that can help to generate valuable insight into what works and what doesn't, both in the near-term and longer-term. The emphasis on near-term action also pushes the organization to translate learning quickly into action, thereby repeating the learning cycle. In effective, the foreground created by this strategic architecture provides a basis for first loop learning while the background provides the context for second loop learning. This learning dimension of the strategic architecture makes it particularly valuable in times of rapid change and high uncertainty – speed of learning becomes a key strategic advantage in these environments.
At one level, we all understand the need for this new strategic architecture. Yet, few companies have implemented this approach. Most are still consumed in the conventional five-year planning exercises that have contributed to the declining lifetimes of S&P 500 companies. Why is this the case? One of the primary reasons involves the rigidity of traditional IT architectures. This rigidity makes it difficult to imagine a fundamentally different business five to ten years out. It also makes it very challenging to mount aggressive near-term operating initiatives that have not already been anticipated by a longer-term plan. To embrace this new strategic architecture in practice we must also discover a new IT architecture.
Authors
John Hagel, III is an independent management consultant whose work focuses on the intersection of business strategy and technology. His most recent book, Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow, was published by Harvard Business School Press. He can be reached through his website www.johnhagel.com or by e-mail at john@johnhagel.com.
John Seely Brown was the director of Xerox PARC until 2000. He continues his personal research into digital culture, learning and Web services. His most recent book (co-authored with Paul Duguid) is The Social Life of Information. He can be reached at jsb@johnseelybrown.com.
