“To extend a systematic approach to
strategy, I suggest that a company be viewed not
as a member of a single industry but as part of a business ecosystem that crosses a variety of industries. In a business ecosystem, companies coevolve capabilities around a new innovation: they work cooperatively and competitively to support new products, satisfy customer needs, and eventually incorporate the next round of innovations.” (Moore, 1993).
Wednesday, September 10, 2014
Why Business Models Fail: Pipes vs. Platforms By Sangeet Paul Choudary
Why do most social networks never take off? Why are marketplaces such difficult businesses? Why do startups with the best technology fail so often?
There are two broad business models: pipes and platforms. You could be running your business the wrong way if you’re building a platform, but using pipe strategies.
More on that soon, but first a few definitions.
Pipes
Pipes have been around us for as long as we’ve had industry. They’ve been the dominant model of business. Firms create stuff, push them out and sell them to customers. Value is produced upstream and consumed downstream. There is a linear flow, much like water flowing through a pipe.
We see pipes everywhere. Every consumer good that we use essentially comes to us via a pipe. All of manufacturing runs on a pipe model. Television and Radio are pipes spewing out content at us. Our education system is a pipe where teachers push out their ‘knowledge’ to children. Prior to the internet, much of the services industry ran on the pipe model as well.
This model was brought over to the internet as well. Blogs run on a pipe model. An ecommerce store like Zappos works as a pipe as well. Single-user SAAS runs on pipe model where the software is created by the business and delivered on a pay-as-you-use model to the consumer.
Platforms
Had the internet not come up, we would never have seen the emergence of platform business models. Unlike pipes, platforms do not just create and push stuff out. They allow users to create and consume value. At the technology layer, external developers can extend platform functionality using APIs. At the business layer, users (producers) can create value on the platform for other users (consumers) to consume. This is a massive shift from any form of business we have ever known in our industrial hangover.
TV Channels work on a Pipe model but YouTube works on a Platform model. Encyclopaedia Britannica worked on a Pipe model but Wikipedia has flipped it and built value on a Platform model. Our classrooms still work on a Pipe model but Udemy and Skillshare are turning on the Platform model for education.
Business Model Failure
So why is the distinction important? Platforms are a fundamentally different business model. If you go about building a platform the way you would build a pipe, you are probably setting yourself up for failure.
We’ve been building pipes for the last few centuries and we often tend to bring over that execution model to building platforms. The media industry is struggling to come to terms with the fact that the model has shifted. Traditional retail, a pipe, is being disrupted by the rise of marketplaces and in-store technology, which work on the platform model.
Pipe Thinking vs. Platform Thinking
So how do you avoid this as an entrepreneur? Here’s a quick summary of the ways that these two models of building businesses are different from each other.
User acquisition: Getting users onboard is fairly straightforward for pipes. You get users in and convert them to transact. Much like driving footfalls into a retail store and converting them, online stores also focus on getting users in and converting them.
Many platforms launch and follow pipe-tactics like the above. Getting users in, and trying to convert them to certain actions. However, platforms often have no value when the first few users come in. They suffer from a chicken and egg problem, which I talk extensively about on this blog. Users (as producers) typically produce value for other users (consumers). Producers upload photos on Flickr and product listings on eBay, which consumers consume. Hence, without producers there is no value for consumers and without consumers, there is no value for producers.
Platforms have two key challenges:
1. Solving the chicken and egg problem to get both producers and consumers on board.
2. Ensuring that producers produce, and create value.
Without solving for these two challenges, driving site traffic or app downloads will not help with user acquisition.
Startups often fail when they are actually building platforms but use Pipe Thinking for user acquisition.
Pipe Thinking: Optimize conversion funnels to grow.
Platform Thinking: Build network effects before you optimize conversions.
Product design and management: Creating a pipe is very different from creating a platform. Creating a pipe requires us to build with the consumer in mind. An online travel agent likeKayak.com is a pipe that allows users to consume air lie tickets. All features are built with a view to enable consumers to find and consume airline tickets.
In contrast, a platform requires us to build with both producers and consumers in mind. Building YouTube, Dribbble or AirBnB requires us to build tools for producers (e.g. video hosting on YouTube) as well as for consumers (e.g. video viewing, voting etc.). Keeping two separate lenses helps us build out the right features.
The use cases for pipes are usually well established. The use cases for platforms, sometimes, emerge through usage. E.g. Twitter developed many use cases over time. It started off as something which allowed you to express yourself within the constraints of 140 characters (hardly useful?), moved to a platform for sharing and consuming news and content and ultimately created an entirely new model for consuming trending topics. Users often take platforms in surprisingly new directions. There’s only so much that customer development helps your with.
Pipe Thinking: Our users interact with software we create. Our product is valuable of itself.
Platform Thinking: Our users interact with each other, using software we create. Our product has no value unless users use it.
Monetization. Monetization for a pipe, again, is straightforward. You calculate all the costs of running a unit through a pipe all the way to the end consumer and you ensure that Price = Cost + Desired Margin. This is an over-simplification of the intricate art of pricing, but it captures the fact that the customer is typically the one consuming value created by the business.
On a platform business, monetization isn’t quite as straightforward. When producers and consumers transact (e.g. AirBnB, SitterCity, Etsy), one or both sides pays the platform a transaction cut. When producers create content to engage consumers (YouTube), the platform may monetize consumer attention (through advertising). In some cases, platforms may license API usage.
Platform economics isn’t quite as straightforward either. At least one side is usually subsidized to participate on the platform. Producers may even be incentivized to participate. For pipes, a simple formula helps understand monetization:
Customer Acquisition Cost (CAC) < Life TIme Value (LTV)
This formula works extremely well for ecommerce shops or subscription plays. On platforms, more of a systems view is needed to balance out subsidies and prices, and determine the traction needed on either side for the business model to work.
Pipe Thinking: We charge consumers for value we create.
Platform Thinking: We’ve got to figure who creates value and who we charge for that.
However, platform thinking applies to all Internet businesses. If the Internet hadn’t happened, we would still be in a world dominated by pipes. The Internet, being a participatory network, is a platform itself and allows any business, building on top of it, to leverage these platform properties.
Every business on the Internet has some Platform properties. I did mention earlier that blogs, ecommerce stores and single-user SAAS work on pipe models. However, by virtue of the fact that they are Internet-enabled, even they have elements that make them platform-like. Blogs allow comments and discussions. The main interaction involves the blogger pushing content to the reader, but secondary interactions (like comments) lend a blog some of the characteristics of platforms. Readers co-create value.
Ecommerce sites have reviews created by users, again an “intelligent” platform model.
The End of Pipes
In the future, every company will be a tech company. We already see this change around us as companies move to restructure their business models in a way that uses data to create value.
We are moving from linear to networked business models, from dumb pipes to intelligent platforms. All businesses will need to move to this new model at some point, or risk being disrupted by platforms that do.
There are two types of business models: Pipes and Platforms. Startups that don’t realize this fail. Startups with the best technology often fail because they build for the wrong business model.
In the future, every company needs to be a tech company. This is why most social networks and marketplaces fail.
Sangeet Paul Choudary is a widely published technology analyst, startup advisor and innovation researcher. Retrieved from http://www.wired.com/2013/10/why-business-models-fail-pipes-vs-platforms/
What were the challenges and opportunities facing Gerstner when he took control of IBM in 1993?
When Gerstner took control of a beleaguered IBM, he began what would
become a fruitful decade of transformation. IBM, or Big Blue, had until
recently been an industry giant, and in 1990 was the second most
profitable company in the world. Known world-wide for its multiple
products and services, most notably its mainframe servers powering the
data centers of most of the world's largest corporations, organizations
and governments, IBM was such a standard that people often joked that
"no one ever got fired for buying IBM" products. Little did they know
that IBM was in big trouble and the solid ground of dominating market
share and profitability was about to disappear beneath their feet.
Beginning in 1991 IBM started posting quarterly losses, and by 1993 losses mounted to over $16 billion. It seemed that IBM's customer base and market share had disappeared and its product offering were suddenly no longer relevant in an industry known for rapid change. Gerstner was brought in to break the company up and sell off its assets and business units. But rather than put an end to the vast organization, its resources and its venerable brand, Gerstner saw a unique opportunity embedded in the challenges confronting IBM.
In brief, IBM had lost sight of its mission. Although it had core values that stressed customer service, IBM had grown too large and bureaucratic. Its central executive committee had lost its sense of leadership and existed to maintain a status quo. Its main revenue generating product line, mainframe servers had been dominant and successful for so long, that IBM had been blinded to the rise of PCs and the emerging dominance of software, particularly operating systems. By the time IBM recognized this shift, Intel and Microsoft were already dominant players in the new segments. Although IBM had profitable elements, they were swamped by the high overhead and unproductive assets dedicated to the failing product line.
An interesting diagnosis of this problem is found in a seminal work by Marco Iansiti and Roy Levien, "Strategy as Ecology" in the Harvard Business Review (2004). Iansiti and Levien present the idea of a business ecosystem which looks at the interdependence of multiple firms within an industry. Ecosystems work best when there are collaborative value creation networks of productive niches. A big threat to ecosystem health is the presence of a dominator, a firm that integrates vertically and horizontally and becomes solely responsible for most of the value creation and capture leaving few productive niches for others. While this might seem like a successful strategy initially, it drives out innovation, collaboration and the creation of new opportunities.
"During the heyday of mainframes, IBM dominated the computing ecosystem, providing most of the products and services its customers needed. The strategy was effective, allowing IBM to create and extract enormous value for long periods of time. But it failed when IBM encountered the PC ecosystem, which was much more open and distributed, supported by effective keystone strategies put forth by the likes of Microsoft and Apple (and, yes, even IBM itself), and which reached much higher levels of innovation and flexibility." (Iansiti & Levien, 2004).
So how to avoid the dominator trap? An ecosystem is healthy if all of the many species are healthy, not just if one is. How to replicate this in a business environment? The answer is found in platforms. Platform innovation allows for niche creation and productive exchanges of value within a business ecosystem. Gerstner saw such an opportunity in the newly emerging Internet, what could become a perfect "e-business" platform creating and sustaining numerous profitable niches. To seize this opportunity, Gerstner pivoted IBM's strategy to become "One IBM" and stress a new "e-business” strategy that was an IT-enabled business advantage known as "Innovation On Demand."
The implications of this shift were two fold; first IBM discarded many of its existing proprietary product offerings and focused on integrating across vendors using middleware, a software or utility program that serves as an interconnection between different types of hardware and software from different vendors. This harnessed IBM's vast technical know-how to help customers manage their own IT operations and to build and integrate their own business platforms. The second implication was that IBM began to widen its customer base by providing its own products to new customers that before had always viewed IBM as an "all or nothing" dominator. Now IBM consultants were recommending and demonstrating how IBM servers could fill a role within the customers stack while still allowing PCs and operating systems from other providers.
Both of these opportunities derived from a willingness to adopt a business ecosystem mindset rather than a dominator mindset and to view the creation of platforms as a tool to create multiple thriving niches. By the end of the decade of transfromation, IBM had completely changed its outlook, strucure, strategy and product offerings. It focused on customers and provided consulting and system integration expertise to manage the increased complexity of the customer's stack. It was devoted to platforms and integrated niches, rather than products and dominator strategies. IBM seemed poised for another long period of profitability and growth.
Works Cited
Iansiti and Levien, "Startegy as Ecosystem" Harvard Business Review (2004).
Beginning in 1991 IBM started posting quarterly losses, and by 1993 losses mounted to over $16 billion. It seemed that IBM's customer base and market share had disappeared and its product offering were suddenly no longer relevant in an industry known for rapid change. Gerstner was brought in to break the company up and sell off its assets and business units. But rather than put an end to the vast organization, its resources and its venerable brand, Gerstner saw a unique opportunity embedded in the challenges confronting IBM.
In brief, IBM had lost sight of its mission. Although it had core values that stressed customer service, IBM had grown too large and bureaucratic. Its central executive committee had lost its sense of leadership and existed to maintain a status quo. Its main revenue generating product line, mainframe servers had been dominant and successful for so long, that IBM had been blinded to the rise of PCs and the emerging dominance of software, particularly operating systems. By the time IBM recognized this shift, Intel and Microsoft were already dominant players in the new segments. Although IBM had profitable elements, they were swamped by the high overhead and unproductive assets dedicated to the failing product line.
An interesting diagnosis of this problem is found in a seminal work by Marco Iansiti and Roy Levien, "Strategy as Ecology" in the Harvard Business Review (2004). Iansiti and Levien present the idea of a business ecosystem which looks at the interdependence of multiple firms within an industry. Ecosystems work best when there are collaborative value creation networks of productive niches. A big threat to ecosystem health is the presence of a dominator, a firm that integrates vertically and horizontally and becomes solely responsible for most of the value creation and capture leaving few productive niches for others. While this might seem like a successful strategy initially, it drives out innovation, collaboration and the creation of new opportunities.
"During the heyday of mainframes, IBM dominated the computing ecosystem, providing most of the products and services its customers needed. The strategy was effective, allowing IBM to create and extract enormous value for long periods of time. But it failed when IBM encountered the PC ecosystem, which was much more open and distributed, supported by effective keystone strategies put forth by the likes of Microsoft and Apple (and, yes, even IBM itself), and which reached much higher levels of innovation and flexibility." (Iansiti & Levien, 2004).
So how to avoid the dominator trap? An ecosystem is healthy if all of the many species are healthy, not just if one is. How to replicate this in a business environment? The answer is found in platforms. Platform innovation allows for niche creation and productive exchanges of value within a business ecosystem. Gerstner saw such an opportunity in the newly emerging Internet, what could become a perfect "e-business" platform creating and sustaining numerous profitable niches. To seize this opportunity, Gerstner pivoted IBM's strategy to become "One IBM" and stress a new "e-business” strategy that was an IT-enabled business advantage known as "Innovation On Demand."
The implications of this shift were two fold; first IBM discarded many of its existing proprietary product offerings and focused on integrating across vendors using middleware, a software or utility program that serves as an interconnection between different types of hardware and software from different vendors. This harnessed IBM's vast technical know-how to help customers manage their own IT operations and to build and integrate their own business platforms. The second implication was that IBM began to widen its customer base by providing its own products to new customers that before had always viewed IBM as an "all or nothing" dominator. Now IBM consultants were recommending and demonstrating how IBM servers could fill a role within the customers stack while still allowing PCs and operating systems from other providers.
Both of these opportunities derived from a willingness to adopt a business ecosystem mindset rather than a dominator mindset and to view the creation of platforms as a tool to create multiple thriving niches. By the end of the decade of transfromation, IBM had completely changed its outlook, strucure, strategy and product offerings. It focused on customers and provided consulting and system integration expertise to manage the increased complexity of the customer's stack. It was devoted to platforms and integrated niches, rather than products and dominator strategies. IBM seemed poised for another long period of profitability and growth.
Works Cited
Iansiti and Levien, "Startegy as Ecosystem" Harvard Business Review (2004).
Tuesday, September 9, 2014
IBM's Turnaround
Rather than stifle innovation and value creation. this new
breed of open standard networked IT infrastructure has
dramatically increased the
range of business building oppot1unitics that can be
pursued, while also dramatically
decreasing the cost and time required to launch them. IBM
executives call this new
era of IT-enabled business advantage "Innovation On
Demand.'' An executive familiar
with the emerging On Demand IT architecture model explained
their impact:
I would argue that the
commoditization of technology is the very thing that enables
innovation in what
many industry leaders now call an "On Demand"' world. An On Demand
enterprise is one that
leverages standards-based componentized technology to support
integrated and
flexible business processes. ln a world where customer needs and global
market forces are more
dynamic than ever, it is these component-based technologies
and flexible business
processes that enable organizations to sense and respond to m:w
opportunities and threats
and to turn on a dime to meet new challenges. While technological
innovation continually
provides us with more powerful and efficient tools that do become
commoditized and
ubiquitous. strategic innovation using the technology-how we put the
hardware and software
together to solve pressing business problems and transform business
models- is very much
alive and well.
Applegate, 2008. pg 103.
As IT infrastructure costs were reduced and operations were centralized, Gerstner
also focused on reengineering back-office business processes: for example, finance,
enterprise resource planning (ERP), and payroll. In late 1993, each member of the corporate
executive committee was assigned responsibility for one of these reengineering
projects. He set two priorities: (1) get cost out as quickly as possible and (2) "clean
sheet" the process and redesign it for global use. By 1996, these process reengineering
efforts had reduced annual costs within newly centralized corporate procurement,
HR, and finance units by another 50 percent, representing an additional $1 billion in
direct savings per year.
Within a few short years of Gerstner's arrival, he had completed Phase I of the
turnaround. The company was back on solid financial footing. After losing $5 billion
on revenues of US$64 billion in 1992, IBM generated $3 billion in net profits on a
slightly smaller revenue base in 1994. Further, the shift of IT infrastructure services
and corporate back-office functions (e.g., finance, ERP, and HR) from decentralized
silos to a centralized shared-services model was the first step in the executive
team's strategic vision to return the company to a position of industry leadership by
bringing the power of IBM's products and services together to solve its large global
customers' most pressing business problems. As such, the centralized, streamlined IT
infrastructure and corporate services functioned as a platform and a testing ground as
the company tackled more complex business process reengineering projects aimed at
streamlining core operating processes (e.g., supply chain, new product development,
and customer-facing sales, marketing, and service) and driving revenue growth.
Applegate, 2008. pg 109.
Returning to the story of IBM's transformation, Phase 2 (during the late 1990s) was
focused on driving profitable growth. Given that the entire industry was entering a
period of rapid growth associated with the build out of Internet-based businesses and
infrastructure upgrades associated with Y2K, IBM focused initially on building capabilities
to meet high demand, customize solutions, and go to market as "One lBM.'' This
required that the company reengineer and centralize its core operating processes (e.g.,
supply chain; new product development; customer acquisition, retention, and service).
The new product development process was among the first revenue-generating
processes targeted for improvement. Benchmark studies had shown that, in over 85
percent of new product launches, IBM's time to market was at least 1.5 times slower
than best-in-class competitors, and IBM's development expense to revenue-generation
ratio was over 2 times higher than best in class. By 1995, IBM executives had streamlined
and integrated the new product development process to reduce time to market
and lower development costs: abandoned project expenses were decreased by over
90 percent, the warranty expense to revenue ratio decreased by 25 percent, and time
to market for new products improved by 67 percent. Overall, product development
expenses were decreased by 50 percent, generating over $1.6 bi1lion per year in cost
savings and, more importantly, yielding increased revenues from the accelerated rate
of successful new products that entered the market.
Having learned from earlier back-office reengineering efforts, in 1995, IBM also
began to reengineer and centralize its global supply chain processes. The goal was to
standardize and streamline core operating processes to enable IBM to go to market as
"One IBM."
An executive explained:
In 1995, each of our key brands handled its own procurement, logistics, and fulfillment
activities. As a result, we had silos of these activities all over the company. During 1994 and
1995, we began to reengineer and standardize these activities. If there was someone on the
outside that could perform the activity better, faster, and cheaper than us, we outsourced the
physical activity and kept the strategy, planning, and management. For example, in logistics,
we now handle all of the planning and management centrally, but we outsource all of the
warehousing and distribution to a third-party partner. In addition, we decided to exit many
of our software products that competed with enterprise application software vendors that our
customers used and, instead, we partnered with former competitors, like SAP, PeopleSoft,
and Siebel, so that we could run the same software internally as our customers used.
With in one year, procurement costs were down 20 percent and the time needed to complete
and confirm supply orders had decreased from an average of 48 hours to 2.5 hours.
By 2000, 94 percent of goods and services, representing $4.3 billion, were procured online
from 24,000 worldwide suppliers at a cost savings of over $370 million annually. And
even as year-over-year growth in procurement volume increased by 60 percent between
1999 and 2000, no new staff were added. More importantly, the ability to control supply
chain operations enabled IBM to deliver the complex, customized solutions customers
had begun to demand. Finally, real-time information was available to manufacturing.
sales and marketing. customer service, and consultants who used the information to
make more timely, customer-focused decisions---decisions that drove revenue.
As information became available from streamlined standardized real-time
IT-enabled operating processes. IBM provided tools and IT support to help teams of
employees create their own portals that would provide access to actionable information
to support decision making and the collaboration tools needed to coordinate
work. IBM Global Services consultants were among the first to develop a business
intelligence portal to keep track of dynamically changing technology and customer
requirements. At a cost of only $25,000 invested over several weeks. the consultants
launched the portal and within one year had used the improved information and collaboration
tools to decrease consultant engagement times by 40-80 percent, increase
revenues per consultant by 20 percent, and improve contribution margin per consultant
by 400 percent. In addition, the portal was also used to shift a significant portion
of IBM's eLeaming training programs online, saving $350 million in training costs
per year.
While the initial return to profitability and a positive return on equity were driven
by cost savings, during the late 1990s, IBM turned the corner and began to grow revenues.
At only 5.7 percent average growth per year, however, IBM's revenue growth
lagged the double-digit growth experienced by others in the industry. It was at this
point that IBM began to look for ways to leverage its assets to continue to drive efficiency
while also achieving sustainable proprietary advantage.
Applegate, 2008. pg 110-112.
As IT infrastructure costs were reduced and operations were centralized, Gerstner
also focused on reengineering back-office business processes: for example, finance,
enterprise resource planning (ERP), and payroll. In late 1993, each member of the corporate
executive committee was assigned responsibility for one of these reengineering
projects. He set two priorities: (1) get cost out as quickly as possible and (2) "clean
sheet" the process and redesign it for global use. By 1996, these process reengineering
efforts had reduced annual costs within newly centralized corporate procurement,
HR, and finance units by another 50 percent, representing an additional $1 billion in
direct savings per year.
Within a few short years of Gerstner's arrival, he had completed Phase I of the
turnaround. The company was back on solid financial footing. After losing $5 billion
on revenues of US$64 billion in 1992, IBM generated $3 billion in net profits on a
slightly smaller revenue base in 1994. Further, the shift of IT infrastructure services
and corporate back-office functions (e.g., finance, ERP, and HR) from decentralized
silos to a centralized shared-services model was the first step in the executive
team's strategic vision to return the company to a position of industry leadership by
bringing the power of IBM's products and services together to solve its large global
customers' most pressing business problems. As such, the centralized, streamlined IT
infrastructure and corporate services functioned as a platform and a testing ground as
the company tackled more complex business process reengineering projects aimed at
streamlining core operating processes (e.g., supply chain, new product development,
and customer-facing sales, marketing, and service) and driving revenue growth.
Applegate, 2008. pg 109.
Returning to the story of IBM's transformation, Phase 2 (during the late 1990s) was
focused on driving profitable growth. Given that the entire industry was entering a
period of rapid growth associated with the build out of Internet-based businesses and
infrastructure upgrades associated with Y2K, IBM focused initially on building capabilities
to meet high demand, customize solutions, and go to market as "One lBM.'' This
required that the company reengineer and centralize its core operating processes (e.g.,
supply chain; new product development; customer acquisition, retention, and service).
The new product development process was among the first revenue-generating
processes targeted for improvement. Benchmark studies had shown that, in over 85
percent of new product launches, IBM's time to market was at least 1.5 times slower
than best-in-class competitors, and IBM's development expense to revenue-generation
ratio was over 2 times higher than best in class. By 1995, IBM executives had streamlined
and integrated the new product development process to reduce time to market
and lower development costs: abandoned project expenses were decreased by over
90 percent, the warranty expense to revenue ratio decreased by 25 percent, and time
to market for new products improved by 67 percent. Overall, product development
expenses were decreased by 50 percent, generating over $1.6 bi1lion per year in cost
savings and, more importantly, yielding increased revenues from the accelerated rate
of successful new products that entered the market.
Having learned from earlier back-office reengineering efforts, in 1995, IBM also
began to reengineer and centralize its global supply chain processes. The goal was to
standardize and streamline core operating processes to enable IBM to go to market as
"One IBM."
An executive explained:
In 1995, each of our key brands handled its own procurement, logistics, and fulfillment
activities. As a result, we had silos of these activities all over the company. During 1994 and
1995, we began to reengineer and standardize these activities. If there was someone on the
outside that could perform the activity better, faster, and cheaper than us, we outsourced the
physical activity and kept the strategy, planning, and management. For example, in logistics,
we now handle all of the planning and management centrally, but we outsource all of the
warehousing and distribution to a third-party partner. In addition, we decided to exit many
of our software products that competed with enterprise application software vendors that our
customers used and, instead, we partnered with former competitors, like SAP, PeopleSoft,
and Siebel, so that we could run the same software internally as our customers used.
With in one year, procurement costs were down 20 percent and the time needed to complete
and confirm supply orders had decreased from an average of 48 hours to 2.5 hours.
By 2000, 94 percent of goods and services, representing $4.3 billion, were procured online
from 24,000 worldwide suppliers at a cost savings of over $370 million annually. And
even as year-over-year growth in procurement volume increased by 60 percent between
1999 and 2000, no new staff were added. More importantly, the ability to control supply
chain operations enabled IBM to deliver the complex, customized solutions customers
had begun to demand. Finally, real-time information was available to manufacturing.
sales and marketing. customer service, and consultants who used the information to
make more timely, customer-focused decisions---decisions that drove revenue.
As information became available from streamlined standardized real-time
IT-enabled operating processes. IBM provided tools and IT support to help teams of
employees create their own portals that would provide access to actionable information
to support decision making and the collaboration tools needed to coordinate
work. IBM Global Services consultants were among the first to develop a business
intelligence portal to keep track of dynamically changing technology and customer
requirements. At a cost of only $25,000 invested over several weeks. the consultants
launched the portal and within one year had used the improved information and collaboration
tools to decrease consultant engagement times by 40-80 percent, increase
revenues per consultant by 20 percent, and improve contribution margin per consultant
by 400 percent. In addition, the portal was also used to shift a significant portion
of IBM's eLeaming training programs online, saving $350 million in training costs
per year.
While the initial return to profitability and a positive return on equity were driven
by cost savings, during the late 1990s, IBM turned the corner and began to grow revenues.
At only 5.7 percent average growth per year, however, IBM's revenue growth
lagged the double-digit growth experienced by others in the industry. It was at this
point that IBM began to look for ways to leverage its assets to continue to drive efficiency
while also achieving sustainable proprietary advantage.
Applegate, 2008. pg 110-112.
Why IS Organizations Do Not Do BPM
Based on the 1997 Gartner Group note "Nine Reasons Why
IS Organizations Do Not Do BPM" referenced in the Smith and Fingar
article, "BPM's Third Wave: From Modeling to Management" I have
identified the following two reasons why IS organizations do not do BPM:
1) "We cannot
keep business and IT models in synch."
When business process models were mainly used as planning tools to help
in the development of software and IT applications, it was somewhat easier to
keep them in alignment, but when strategic BPM considerations entered into the
picture, it became increasingly difficult to maintain a business/IT alignment. Consequently, business process modeling now
relies of business process or enterprise architectures which maintain the
business/IT alignment. A major concern
to both IT and general business managers should be the alignment of the IT
strategy to the overall business/organizational strategy, a concept referred to
as business/IT alignment and identified by Pearlson and Saunders as the
Information Systems Strategy Triangle.
As Pearlson and Saunders put it, “business strategy should drive IS
decision making, and changes in business strategy should entail reassessments
of IS.” But according to Luftman, it is
not so much a matter of aligning business with IT or IT with business strategy,
but rather "how business and IT are aligned with each other."
2) "Business
changes too quickly to model it."
The hypercompetition models described by Pearlson & Saunders draw attention to the "speed and
agressiveness of the moves and countermoves in any given market." In such a hypercompetitive environment (as
described more fully in Peter Fingar's video "Extreme Competition")
advantages are both created and lost with increasing rapidity. Since the focus is on a company's agility,
not on gaining and holding a specific competitive advantage, the relationship
between IT capability and corporate responsiveness is a critical
necessity. Defining IT capability as the
“extent to which a firm is good at managing its IT resources to support and
enhance business strategies and processes” is really another way of saying business/IT
alignment. How does the IT investment
increase a company's agility is the same as asking how well does the company
align its business model or business process with its IT strategy. Through the use of business process
architectures, the need to "synchronize" different models for business
and IT is eliminated. Consequently ,
firms are able to respond more quickly and are better able to adapt to the
"rapid evolutions required by the market."
Works Cited
Luftman, J., Kempaiah, R. (September 2007). An Update on Business-IT Alignment: ‘A Line’
Has Been Drawn, MIS Quarterly Executive, Vol. 6 No. 3
Pearlson, K., Saunders, C. (2009). Managing and Using
Information Systems: A Strategic Approach. Hoboken, New Jersey: John Wiley
& Sons, Inc.
Smith, H., & Fingar, P. (2003, February 3). BPM's Third
Wave: From Modeling to Management. Retrieved October 8, 2012, from
http://www.ebizq.net/topics/eai/features/1515.html
e-engineering
"IBM, for instance, reengineered most of its processes in the mid-
1990s, but has just embarked on it again, this time to "Web-enable"
these same processes for electronic commerce. Business Week recognized
the relationship between the Internet and reengineering in
its first special report on electronic business: It dubbed the implementation
of e-commerce "e-engineering." The Internet demands
new ways of working, and reengineering is the tool that can create
them."
1990s, but has just embarked on it again, this time to "Web-enable"
these same processes for electronic commerce. Business Week recognized
the relationship between the Internet and reengineering in
its first special report on electronic business: It dubbed the implementation
of e-commerce "e-engineering." The Internet demands
new ways of working, and reengineering is the tool that can create
them."
Hammer, M. & Champy J. (2003). Reengineering the
Corporation: A Manifesto for Business Revolution. New York, NY: HarperCollins Business
Essentials.
Monday, September 8, 2014
IBM's experience in attempting to transform to "One
IBM" provided a glimpse of both the opportunities
and challenges that IBM's customers would face.
Gerstner believed that, while the technology
platform was a critical catalyst, value creation
would demand business innovation on a scale that
most enterprises were ill-equipped to handle.
(Applegate, 2008).
"As Palmisano considered the opportunities
and threats that IBM faced in the decade ahead,
he recalled the dark days of the early 1990's, and
he was committed to not just define strategic
direction for the company but to set a course
that would enable IBM to return to its former
"greatness." Palmisano summed up his vision:
"History suggests that a sustained period of growth
is about to begin for the $1.4 trillion information
technology industry. At the same time, new markets
opening up on its borders. But the rewards will
not be shared equally. Over most of our nearly
100-year history, IBM was consistently a company
that outperformed others in our markets and generated
superior returns. And that was because we were
singularly focused on leading and most often creating
and defining, the high-value spaces in our industry ..
But it's also apparent that somewhere along the line
we became more focused on defending our existing
leadership position than on creating the next one. We
weren't particularly bold or imaginative in getting into
new markets or developing new businesses, products
and services, even when our strategic analyses indicated
that something new was coming. And just as important,
we hesitated to reinvent or get out of businesses that
no longer represented high value for either clients or
shareholders. In a word we lost sight of IBM's mission.
of what had always set us apart. Well, we've regained our
focus now. IBM is an innovator - in every dimension of
that word. We know that IBM and IBMers are at their
best when they create value that our clients cannot get
from anyone else. That means we will provide leading edge
technology, services, expertise and intellectual
capital and will integrate these capabilities for each
client to provide them with competitive advantage. We
commit to that. We commit to innovating to deliver client
success.
S. Palmisano, "Letter to Shareholders, IBM Annual
Report, 2003.
IBM" provided a glimpse of both the opportunities
and challenges that IBM's customers would face.
Gerstner believed that, while the technology
platform was a critical catalyst, value creation
would demand business innovation on a scale that
most enterprises were ill-equipped to handle.
(Applegate, 2008).
"As Palmisano considered the opportunities
and threats that IBM faced in the decade ahead,
he recalled the dark days of the early 1990's, and
he was committed to not just define strategic
direction for the company but to set a course
that would enable IBM to return to its former
"greatness." Palmisano summed up his vision:
"History suggests that a sustained period of growth
is about to begin for the $1.4 trillion information
technology industry. At the same time, new markets
opening up on its borders. But the rewards will
not be shared equally. Over most of our nearly
100-year history, IBM was consistently a company
that outperformed others in our markets and generated
superior returns. And that was because we were
singularly focused on leading and most often creating
and defining, the high-value spaces in our industry ..
But it's also apparent that somewhere along the line
we became more focused on defending our existing
leadership position than on creating the next one. We
weren't particularly bold or imaginative in getting into
new markets or developing new businesses, products
and services, even when our strategic analyses indicated
that something new was coming. And just as important,
we hesitated to reinvent or get out of businesses that
no longer represented high value for either clients or
shareholders. In a word we lost sight of IBM's mission.
of what had always set us apart. Well, we've regained our
focus now. IBM is an innovator - in every dimension of
that word. We know that IBM and IBMers are at their
best when they create value that our clients cannot get
from anyone else. That means we will provide leading edge
technology, services, expertise and intellectual
capital and will integrate these capabilities for each
client to provide them with competitive advantage. We
commit to that. We commit to innovating to deliver client
success.
S. Palmisano, "Letter to Shareholders, IBM Annual
Report, 2003.
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