The Executive Edge Newsletter February 2008
The Case for Dynamic Specialization
Four Ways to Identify New Opportunities
Exclusive White Paper: A Corporate Guide to Better Decisions Through IT
Boost Business Efficiency with Data Visibility
QuickStat: SMBs Increasing IT Spending
The Case for Dynamic Specialization
By John Hagel III and John Seely Brown
Most executives react negatively to arguments for specialization. Specialization for many of them implies shrinkage and stagnation. Who in their right mind could want that? Successful companies grow and evolve rapidly – specialization takes companies in the opposite direction. Or does it?
Others have made the case for specialization largely in static terms. Companies should specialize for greater efficiency, so the argument goes, by shedding what they do unexceptionally well and concentrating on what they do distinctively well. But specialization based on today’s capabilities is static specialization.
Executives facing this argument often obsess over the perceived risks of specialization in a dynamic economy. If my company specializes in one area, then what happens if something disrupts the marketplace and renders my specialization worthless? Images of buggy whip manufacturers haunt these executives. After all, a diversified portfolio of activities would more effectively manage the risk of business obsolescence, right? In this view, specialization favors deeper exploitation of increasingly narrower capabilities, whereas diversification favors broader exploration of new capabilities.
But, if we focus on dynamic specialization rather than static specialization, then we can turn this argument on its head. In fact, dynamic specialization may be a far superior way to accelerate the development of new capabilities and the best way to protect against business obsolescence.
By dynamic specialization, we mean the commitment to eliminate resources and activities that no longer differentiate the firm and to concentrate on accelerating growth from the capabilities that truly distinguish the firm in the marketplace. Consequently, firms cannot simply focus on differentiation but must also shed non-differentiating activities. But how can one grow by shedding assets and activities? In fact dynamic specialization increases the incentive, opportunity, and capability for businesses to intuit their environment and to grow rapidly through innovation. …
Dynamic specialization creates innovation incentives
Companies that specialize in one business area cannot afford to fail in that business activity. This focus, combined with a grasp of both the opportunities and the challenges created by rapidly evolving markets, fosters throughout the organization a sense of urgency that larger, diversified companies rarely replicate. This urgency drives both faster performance improvement and alertness to potential threats from changing market needs. Companies with diversified activities often grow complacent—after all, if one element of the business fails or falls short, then other elements will probably prevail, even in very dynamic markets.
For example, a product or service company that runs a call center internally may worry about call center performance, but no obsess over it, especially if the company is succeeding in other dimensions of its operations. On the other hand, a focused call center service provider operating in this highly competitive business will continually strive to reach new levels of performance. This specialized company will also have a strong incentive to search out new technologies to enhance its operations, as well as look at potential substitutes for its current services.
Dynamic specialization opens innovation opportunities
Highly specialized companies can work with a broader range of customers in their area of specialization than would be feasible for comparative operations in larger, diversified companies. This may seem paradoxical—after all, doesn’t a more diversified company by definition serve a broader range of customers than a more specialized company serves?
Consider a call center embedded within a larger company. The call center really has only one “customer”—the parent company. The center is supporting only that company’s products and services. No matter how good the call center operation is, that company still provides only one set of experiences to drive learning and performance improvement, whereas a specialized call center provider working with a broad range of companies can offer a more diverse set of products and services to the marketplace. This provider not only achieves greater scale but also realizes more variance in the customers served. A broad range of customers can offer much greater diversity in practices, policies, and processes as a context for the call center operator’s learning and innovation. This diversity provides an excellent early-warning platform to alert the specialized provider about potential shifts in the marketplace or disruptive technologies that might threaten its business. By explicitly targeting and working with leading-edge customers, the specialized provider will likely see potential changes in its relevant market sooner than would a captive provider.
But, you might argue, the call center that is operating as a part of a larger corporation could serve other companies as well and access similar learning opportunities, right? Of course, relatively few captive operations do so. Significant internal organizational challenges confront companies that seek to make their internal operations available on the marketplace. Somebody will probably lose—either the external customers or the internal customers. Even if these challenges can be overcome, these “hybrid” operations confront an external difficulty as well. They will not attract the competitors of the parent company—thereby significantly limiting their customer reach relative to specialized, independent service providers.
Specialized software services providers like Wipro and Infosys in Bangalore are working with a diverse set of customers to rapidly enhance their own software development capabilities. The companies are implementing systematic performance feedback processes that help them continually refine their software development methodologies. More fundamentally, Wipro and Infosys are also developing insight regarding the fit between specific development methodologies and specific customer environments. Thus, not only are the methodologies themselves rapidly refined by exposure to a broad range of customers, but the choice of methodologies to provide the most value is also enhanced. Software development operations within traditional companies would typically have more limited opportunity for testing and refining their methodologies.
Dynamic specialization builds innovation capabilities
Companies that are more specialized are also better positioned to act on the innovation opportunities they identify. In part, this innovative flexibility is because these companies have less organizational inertia than do companies that are less operationally focused. Executives of these specialized companies usually have more freedom than do their counterparts embedded in the larger organizations. Along with enjoying more freedom, senior executives of specialized companies typically have a much deeper understanding of the operational details of their business and are therefore more able to assess the opportunities and risks of specific innovations. These executives also have organizations that need not balance the conflicting needs and interests of the other businesses. The organizations are more aligned around a single set of economics, skills, and culture. Though they may have legacy issues of their own, these executives need not confront the legacy issues of a more diversified company.
In general, specialized companies serving a broad range of customers have probably developed more loosely coupled interfaces between their own activities and the activities of their customers. These specialized companies can better modify their own operations without causing unanticipated disruptions in the operations of their customers. They can also test new approaches to their business without adverse consequences. In contract, captive operations are generally more hardwired into the broader business processes of their parent company, so that introducing innovation is difficult.
John Hagel III is a business strategist and former McKinsey & Co. consultant who has advised senior executives around the world for 25 years.
John Seely Brown is former Chief Scientist of Xerox Corp. and served as director of the Xerox Palo Alto Research Center for 12 years.
Four Ways to Identify New Opportunities
Growth and innovation require you to have the business vision to identify key opportunities and jump on them. A dangerous impediment to clear business vision is a heads-down focus on the day-to-day demands of running a company.
Try these four tactics to keep your sites on important expansion or profitability opportunities:
Assess outside factors
Internal company issues are front and center and can easily become the influencer of all business decisions if you are not careful. To keep a balanced view, track and carefully consider external powers such as competition, new legislation or regulations, shifts in the economy, changes in global markets and other factors. These outside influencers provide valuable information about emerging opportunities and threats to your business.
Profile customers
A thorough understanding of your existing customers will help you to find more customers as well as new opportunities to serve the ones you have. Analyze customer demographic and psychographic characteristics such as who they are, what they do and how they make purchases. This process will likely reveal multiple customer segments with different purchasing personalities, enabling you to develop profiles of your best customers. Armed with this, opportunities will be more evident. In business-to-business selling, go a step further and identify your customer’s customers.
Determine profitability
Do you know the value that each of your customers or segments provides to your company? Only by understanding which type of customer is the most and least profitable for your company can you seek out and vet opportunities. A detailed analysis of the sales, delivery, customer service and other effort required for each customer or customer type can provide a clear picture of customer value. If you are new to tracking customer profitability, a good starting point is to assess the income you receive against the time and effort it takes to serve a certain customer or segment.
Look for occasions to cross-sell and up-sell
New opportunities don’t have to include new customers. Your current customer base may actually be the most fertile (and profitable) ground for new business. Consider what other products or services you can sell to your current customers. Does your marketing plan include tactics that ensure the long-term loyalty of your existing clients? In other words, the new opportunities you may need to take advantage of might be right there in your current customer list.
Exclusive White Paper: A Corporate Guide to Better Decisions Through IT
Like many SMB executives, you're making critical business decisions based on the information available to you. But here's the catch: a 2007 report conducted by the Economist Intelligence Unit (EIU) and commissioned by Business Objects found that nine out of ten executives admit to making important decisions on the basis of inadequate information. This suggests that SMB leaders are making uninformed decisions on a regular basis. This white paper discusses ways to create an accurate 360-degree view of your business to give you the confidence and information to make better decisions. Download PDF.
Boost Business Efficiency with Data Visibility
What do you really know about your business’ operations?
In today’s hyper-competitive, global marketplace, business owners and managers must make instant decisions that can affect sales, customer service and the bottom line. Can we handle a rush order without affecting other contracts? What marketing program will generate the most cost-effective leads? How can we reduce inventory costs? How should we deploy our sales team to achieve quota? While the pressure to make good decisions seems to grow constantly, the information on which to make those decisions is often incomplete or out-of-date.
Data visibility
The answer to this dilemma may seem obvious: to make well-informed, timely decisions, you need easy access to accurate information. Business decisions can’t just be based on gut feelings or guesstimates – you need real-time information that can tell you what the actual situation is…right now. This is often called “data visibility.”
Data visibility encompasses more than the ability to access data; it refers to seeing data from all departments and locations of your company. Visibility into companywide data – even in a small business – provides insight into relationships and trends that may not otherwise be apparent.
Choosing the right solution
Integrated business management software can make an enormous difference in how smoothly and profitably your company runs. These applications, such as SAP Business One, consolidate information about accounting, customers, manufacturing, e-commerce and inventory for consistent, accurate information. They let you identify both opportunities and problems early enough to take advantage of – or resolve – them most efficiently.
Small businesses that have implemented integrated business management software report other advantages as well:
- Cost reductions through elimination of multiple systems and improved purchasing and inventory management
- More efficient planning and forecasting through better reporting
- Error reduction through elimination of redundant activities
- Improved customer satisfaction through access to consolidated customer records
How data visibility helps small businesses
Points North Contracting Ltd. (PNC) in Fort St. John, Canada, a fast-growing pipeline construction and facilities management firm, wanted to improve the way it managed its field projects and staff. It needed real-time information and a consolidated database so that it could gain greater insight into the progress of more than 150 individual projects annually and how they affected resources across the company.
“As the company grew and the ability to manage became more difficult, senior managers needed a tool that could supply them with the real-time information,” says Scott Gordon, PNC’s business manager. “They needed to manage the company based on more than just a gut feeling.” So PNC replaced its legacy accounting software with the SAP Business One application. Using the integrated software enabled PNC “to manage our field staff and projects with confidence and track employees, vendors, and clients all on one database,” Gordon said.
For the most effective results in achieving data visibility through the deployment of a software application, consider working with a technology consultant – often called a value-added reseller (VAR) or a channel partner. Find one with experience serving your industry. With the right consultant and business management application, your small business can become even more agile.
QuickStat: SMBs Increasing IT Spending
64% of SMBs will increase their IT spending in 2008 by an average of 5.3%, according to a study by AMR Research. The main reasons for this increase? Outside-in pressures such as meeting customer demand and handling increased competition, and internal pressures such as increasing efficiencies and decreasing costs, the report contends.
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About SAP Business All-in-One
The SAP Business All-in-One solution enables midsize companies to optimize all facets of their operations – and manage both operational efficiency and growth. ERP and CRM software support core business processes. Business analytics and reporting capabilities offer visibility into business operations and performance. SAP Business All-in-One solutions are industry-specific and can be tailored by our partners to meet most specific business needs.
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