PERF RMANCE 04 - The Performance Portal - Ernst & Young
PERF RMANCE 04 - The Performance Portal - Ernst & Young PERF RMANCE 04 - The Performance Portal - Ernst & Young
PERF RMANCE 04 Volume 3 Connection as competitive advantage: Bridging space and building community to drive performance in today’s social enterprise Making a world of difference: Collaboration.Excellence for inter-cultural teams Advanced solution center: Drive change when it is most important
- Page 2 and 3: Foreword One of the fundamental sou
- Page 4 and 5: Article Coolfarming: discovering th
- Page 6 and 7: “ Whereas a coolhunter observes c
- Page 8 and 9: “ Just like great farmers, their
- Page 10 and 11: Internet banking case study: increa
- Page 12 and 13: Article Choosing the right technolo
- Page 14 and 15: On which level to innovate? We iden
- Page 16 and 17: Figure 5. Technological evolution i
- Page 18 and 19: digital watches and other portable
- Page 20 and 21: Use discipline to select technologi
- Page 22 and 23: Article Making a world of differenc
- Page 24 and 25: Setting the scene (take I) My first
- Page 26 and 27: “ When cultural awareness trainin
- Page 28 and 29: Figure 1. The PerformanceSystem.map
- Page 30 and 31: Article Measuring corporate sustain
- Page 32 and 33: “The objective of a sustainable m
- Page 34 and 35: “ The true benefit of the EVA is
- Page 36 and 37: Case study Connection as competitiv
- Page 38 and 39: Boundary-spanning and helpseeking b
- Page 40 and 41: The new era of community value Conn
- Page 42 and 43: Figure 2. Community “critical suc
- Page 44 and 45: Case study Advanced Solution Center
- Page 46 and 47: Case study 1 — Developing a globa
- Page 48 and 49: Case study Supply chain transformat
- Page 50 and 51: Transforming the EMEALA supply chai
<strong>PERF</strong> <strong>RMANCE</strong> <strong>04</strong><br />
Volume 3<br />
Connection as competitive advantage:<br />
Bridging space and building community to drive performance in today’s<br />
social enterprise<br />
Making a world of difference:<br />
Collaboration.Excellence for inter-cultural teams<br />
Advanced solution center:<br />
Drive change when it is most important
Foreword<br />
One of the fundamental sources of organic<br />
growth in an increasingly competitive<br />
market is innovation. New products<br />
or services developed and brought to<br />
market speedily and effectively is what<br />
differentiates high- and low-performing<br />
global organizations. Innovation<br />
management can be described as the<br />
application of external evolution on<br />
internal business processes. As<br />
external evolution becomes more<br />
varied and volatile, the challenge for<br />
organizations to keep ahead of the pack is<br />
increasingly difficult.<br />
In this issue of <strong>Performance</strong>, we<br />
examine different aspects of innovation.<br />
For example, in “Choosing the right<br />
technology,” we consider a framework<br />
which can help organizations make<br />
informed decisions about their<br />
technological development. <strong>The</strong> article<br />
explains the four challenges which<br />
businesses need to confront in order to<br />
master technological change.<br />
<strong>The</strong> importance of networks and<br />
connections on innovation is explored in<br />
two different articles. <strong>The</strong> first looks at the<br />
powerful impact of online collaborative<br />
communities. By harnessing the power<br />
of these networks, organizations can tap<br />
into a collective knowledge which is far<br />
broader than could be achieved by more<br />
traditional methods. <strong>The</strong> article introduces<br />
the concept of “coolfarming,” enabling<br />
companies to lead in the development of<br />
the next hot phenomenon.<br />
“Connection as competitive advantage,”<br />
examines some of the risks inherent<br />
in these new social, collaborative<br />
communities, and offers some options as<br />
how to manage those risks well.<br />
<strong>The</strong> theme of effective collaboration<br />
is also strong in “Making a world of<br />
difference,” which gives some great,<br />
practical insight into how to improve the<br />
performance of intercultural teams. In<br />
the past, cultural awareness training has<br />
tended to focus solely on communication<br />
whereas, in reality, when problems occur,<br />
they are due to dissimilar expectations<br />
about how the work should be done and<br />
how performance should be managed.<br />
If your challenge is more around how<br />
to improve the speed with which your<br />
organization can react to or anticipate<br />
change, then there are two case studies<br />
which will be of interest. “Advanced<br />
Solution Center” examines how you can<br />
drive change at a faster pace. In a separate<br />
case study, we explain how transforming<br />
Fresenius Medical Care’s supply chain<br />
enabled the organization to respond more<br />
quickly to changes in customer buying<br />
patterns and, as a result, make cash<br />
savings of over 15 million euros from a<br />
reduction in stock holding.<br />
I hope the articles in this edition of<br />
<strong>Performance</strong> provide inspiration as you<br />
rise to the challenge of how to grow<br />
your business.<br />
Enjoy reading this issue!<br />
Markus Heinen<br />
Chief patron, <strong>Performance</strong>
Global Business <strong>Performance</strong> Thinktank<br />
Global Business <strong>Performance</strong> Thinktank (GBPT) is a community of colleagues from the <strong>Ernst</strong> & <strong>Young</strong> Advisory Practices around the<br />
world. <strong>The</strong> concept of GBPT started in early 2008 with its first initiative called <strong>Performance</strong>: a quarterly business journal which, since<br />
its launch, has achieved a global footprint with circulation spanning top business executives and leading academics from across Asia,<br />
Australia, Europe and the Americas.<br />
GBPT has already launched <strong>Performance</strong> in several international languages with region-specific content addressing local business issues<br />
in China, Japan, Latin America, Middle East, Russia, France and Germany. <strong>Performance</strong> has become a strong lever for the promotion of<br />
GBPT’s intellectual capital with its ideal synthesis of business practice and applied academic research.<br />
In the GBPT conference calls, guest speakers from academia and industry bring valuable external perspectives to the forum.<br />
<strong>The</strong> webcasts and podcasts of these calls will soon be available for download.<br />
<strong>The</strong> web portal for GBPT is an open platform to amplify the activities and connect a wider audience. All GBPT-generated content as well<br />
as articles/case studies of <strong>Performance</strong> are accessible through this vehicle: www.ey.com/performance. GBPT has become an integral part<br />
of <strong>Ernst</strong> & <strong>Young</strong> Global Advisory to foster innovation, performance, sustainability and to become one of the key pillars of “Quality In<br />
Everything We Do.”<br />
Contents<br />
Articles<br />
<strong>04</strong> Coolfarming: discovering<br />
the surprising power<br />
of social networks<br />
12 Choosing the right<br />
technology: a framework<br />
for success<br />
22 Making a world of difference:<br />
Collaboration.Excellence for<br />
intercultural teams<br />
30 Measuring corporate<br />
sustainability, maximizing<br />
shareholder value<br />
Case studies<br />
36 Connection as competitive<br />
advantage: driving<br />
performance via community<br />
44 Advanced Solution Center:<br />
giving stakeholders a voice<br />
48 Supply chain transformation:<br />
a blueprint for success<br />
58 Competing for market<br />
share in rural India
Article<br />
Coolfarming:<br />
discovering<br />
the surprising<br />
power of social<br />
networks<br />
Author<br />
Peter A. Gloor, Research Scientist, MIT Center<br />
for Collective Intelligence, Chief Creative<br />
Officer, galaxyadvisors AG, MIT Sloan School<br />
of Management, Cambridge, MA, US<br />
This article applies the<br />
principles of social<br />
networking to corporate<br />
leadership, arguing that<br />
we need a new brand<br />
of company, where<br />
customers become one<br />
with the leaders and product developers<br />
of the company, working in collaborative<br />
communities fostered by the internet and<br />
online social networks. It offers proven,<br />
practical steps on how to transform an<br />
organization into one capable of unleashing<br />
the power of self-organizing swarms — a<br />
process we call coolfarming (Gloor 2010).<br />
Many of the best innovations have come<br />
not from the individual inventor, or even<br />
in a large corporate research laboratory,<br />
but from the collective efforts of groups<br />
of people. We see these groups of idea<br />
creators motivated by their love of the idea<br />
itself and by their devotion to a process of<br />
working with ideas predicated on nothing<br />
more than the positive feelings success<br />
breeds. <strong>The</strong>y set out initially not with<br />
the thought of realizing a financial gain<br />
but rather to meet a challenge or solve a<br />
puzzle and, in doing so, make the world a<br />
better place. We call this swarm creativity<br />
because “swarm” ideally describes the<br />
positive behavior that results in the kinds<br />
of collective mindsets that generate such<br />
powerful “creativity.” In biology, the term<br />
swarm is used to describe the behavior of<br />
a group of animals traveling in the same<br />
direction, and for us the swarming of bees<br />
is an example of our concept. Without<br />
central direction, bees self-organize to build<br />
nests, feed and grow their offspring, gather<br />
food and even decide on who becomes<br />
their next queen.
Coolfarming<br />
“ Swarm describes the positive<br />
behavior that results in the<br />
kinds of collective mindsets that<br />
generate powerful creativity.”<br />
5
“ Whereas a coolhunter observes<br />
communities, a coolfarmer becomes<br />
personally engaged in the process<br />
of creating cool trends — not taking<br />
control of a new idea to make it<br />
succeed, but working in swarm<br />
creativity to bring a shared vision<br />
to reality.”<br />
We find the creativity unleashed by groups<br />
of humans swarming together to be<br />
particularly compelling. So often, humans<br />
traveling together in the same creative,<br />
innovative direction produce the trends<br />
that are most interesting and exciting.<br />
Tapping into the collective mind can offer<br />
tremendous benefits. Within a business<br />
organization, unleashing collaborative<br />
innovation can be key to increasing<br />
performance, efficiency and overall<br />
creativity. With the tremendous expansion<br />
of online communication, the ability of<br />
humans to engage in swarm creativity has<br />
grown exponentially. Creative swarms can<br />
form instantaneously and collaborate on<br />
innovative tasks from almost anywhere on<br />
the planet, crossing all organizational lines.<br />
In every large organization as well, we find<br />
groups of creative individuals swarming<br />
together to explore ideas about which they<br />
care deeply, irrespective of any direct or<br />
immediate connection to the bottom line.<br />
Our approach is based on the concept<br />
of the Collaborative Innovation Network<br />
or COIN, small groups of intrinsically<br />
motivated people who collaborate, mostly<br />
over the web and in online social networks,<br />
to create something radically new. <strong>The</strong>y<br />
recruit their friends and family as a<br />
“Collaborative Learning Network“ — the<br />
group of early adapters who try out and<br />
further develop the early prototypes — to<br />
help them refine and polish their products,<br />
deciding on what will be “cool” for the<br />
swarm of loyal customers. This expanded<br />
group of early users and beta-testers<br />
then reaches out to the wider group of<br />
thousands of people in the Collaborative<br />
Interest Network who help them get their<br />
new product over the tipping point to be<br />
widely accepted by the marketplace.<br />
Based on the concept of COINs, we have<br />
developed the idea of coolfarming — getting<br />
involved in the actual creation of new<br />
trends by nurturing and cultivating new<br />
ideas. Whereas a coolhunter observes<br />
communities, networks and even broader<br />
society, a coolfarmer becomes personally<br />
engaged in the process of creating cool<br />
trends — not taking control of a new idea<br />
to make it succeed, but working in swarm<br />
creativity to bring a shared vision to reality.<br />
Coolfarming is based on four principles.<br />
<strong>The</strong>y are a logical consequence of using<br />
coolhunting (Gloor & Cooper 2007) to<br />
discover new trends and trendsetters.<br />
<strong>The</strong> first is to gain power by giving it away.<br />
It is the most important principle. Give<br />
everyone involved in a COIN, no matter<br />
what their level of involvement, the<br />
feeling that they have come up with the<br />
new ideas, so that all members feel a<br />
strong sense of ownership.
Coolfarming<br />
<strong>The</strong> second principle is to seed a<br />
community with ideas, to come up with the<br />
new ideas that are outside the box. This<br />
entails thinking the unthinkable, engaging<br />
others in collective brainstorming and<br />
establishing a common vision.<br />
Third, mandate intrinsic motivation and<br />
thus unleash swarm creativity. This ties in<br />
with giving power to the community, letting<br />
it self-organize while providing a nurturing<br />
ground for creative ideas to flower. Trends<br />
can be created with good ideas. Set an<br />
innovative idea free and share knowledge<br />
for free in a community or network. If<br />
the community accepts the new idea and<br />
the community begins to grow, the idea<br />
becomes a new trend. Coolfarmers provide<br />
everything at their disposal to potential<br />
swarms to be creative, and then they let<br />
swarm creativity happen. In a sense, they<br />
“mandate” swarms into action to create<br />
something cool.<br />
<strong>The</strong> fourth principle is to recruit<br />
trendsetters. To create intrinsically<br />
motivated teams, they need<br />
crystallization points in the form of<br />
leaders who embed themselves in their<br />
networks not to be stars but to function<br />
as galaxies. <strong>The</strong>se kinds of leaders have<br />
succeeded in setting trends that literally<br />
changed the world at zero budgets.<br />
COINs ask for a new style of selforganizing,<br />
emergent leadership. Leaders<br />
of self-organizing swarms need to be<br />
“balloon pilots,” not “race car drivers.”<br />
<strong>The</strong>y need to know how to nurture and<br />
create an environment of innovation.<br />
Such leaders must be able to let go,<br />
empowering individual and swarm<br />
creativity by personal example and<br />
trust, not by organizational authority.<br />
This new style of leadership is based<br />
not on best practices, not on cook book<br />
recipes of how to do it one right way,<br />
but on creativity — individual creativity,<br />
and swarm creativity. <strong>The</strong> step I am<br />
proposing is a bold one — empowering<br />
individual people at the company, instead<br />
of collecting power in the hand of the chief<br />
executive who is also the chief executor.<br />
In this new type of organization, there<br />
is no chief executor anymore, this role<br />
has been given away to the stakeholders<br />
of the company. Stakeholders are the<br />
employees, the customers, the suppliers<br />
and the management of the company. <strong>The</strong><br />
managers are not CEOs anymore, but they<br />
are “chief creators,” chief creative officers.<br />
Being highly creative themselves, they<br />
stand out by unleashing the creativity of<br />
their swarm — their employees, their lead<br />
users, their customers and anybody they<br />
touch through their vision and products.<br />
If we look at the leaders who stand out<br />
today, Steve Jobs, Larry Page and Sergey<br />
Brin, founders of Google, Mark Zuckerberg<br />
at Facebook, or Oprah Winfrey, they are<br />
all leaders of multibillion-dollar businesses<br />
which are highly resilient in today’s difficult<br />
economic climate. None of these leaders<br />
has come up the conventional management<br />
way. <strong>The</strong>y were never the CEOs of their<br />
companies in the conventional sense,<br />
never the chief executors. Rather, they<br />
are the chief creators of their respective<br />
enterprises. <strong>The</strong>y might have assumed<br />
the CEO title to make them recognizable<br />
in their role to the rest of the world.<br />
What they really did, however, is not<br />
execute somebody else’s strategy, but<br />
create radically new products, and create<br />
real, sustainable value. <strong>The</strong>y did what<br />
they thought would be the right thing;<br />
7
“ Just like great farmers, their main task as coolfarmer is<br />
to provide a nurturing environment, and let the swarm<br />
do the work by itself.”<br />
listening first and foremost to themselves<br />
and to their swarm, instead of listening<br />
to management gurus, business school<br />
professors, and strategy consultants.<br />
<strong>The</strong>se leaders don’t just listen but immerse<br />
themselves into their swarm. While<br />
conventional businesses are scrambling, the<br />
businesses of these creators are thriving.<br />
Leaders like Oprah, Mark Zuckerberg, or<br />
Steve Jobs are not afraid to go to the front<br />
line every day, listening to what their swarm<br />
has to say. When Steve Jobs started Apple,<br />
instead of obtaining an MBA, he immersed<br />
himself into his swarm. He first listened<br />
to what others did in the same space,<br />
visiting world famous Xerox Parc research<br />
lab to learn about personal computers<br />
and computer mice, and landing a job at<br />
a computer company to learn even more,<br />
until he had figured it out and was ready to<br />
start building his own computers at Apple.<br />
<strong>The</strong>se creators also give back to their<br />
swarm. Google famously encourages its<br />
employees to be creative, come up with new<br />
product ideas which are then given away<br />
for free in some form until the company<br />
has figured out a way of making money<br />
from it. Google acquired picture sharing<br />
website Picasa, set up the social networking<br />
community Orkut, and converted a startup<br />
into Google Docs, the web-enabled office<br />
suite, all available free to users. When<br />
Steve Job’s swarm of fanatic iPhone<br />
owners complained about a new price cut,<br />
he immediately gave back the difference<br />
in price to anybody who had bought the<br />
iPhone at the old, higher price.<br />
In short, chief creative officers, other than<br />
conventional CEOs, immerse themselves<br />
into their swarm, they share with their<br />
swarm, and go where their swarm wants<br />
to go. Just like great farmers, their main<br />
task as coolfarmer is to provide a nurturing<br />
environment, and let the swarm do the<br />
work by itself.<br />
While these principles have been developed<br />
for “real” bricks-and-mortar organizations,<br />
they are no less valid in the virtual world,<br />
where they allow the identification of<br />
hidden leaders and innovators in online<br />
social networks such as Facebook and<br />
online forums. <strong>The</strong>se leaders can then<br />
be recruited as lead users and extended<br />
members of a product development team.<br />
I would now like to illustrate these concepts<br />
by describing two case studies, based<br />
on my actual projects, which have been<br />
ongoing for the last few years.<br />
Healthcare case study:<br />
creating Collaborative<br />
Chronic Care Networks<br />
(C3N) by connecting online<br />
social networks<br />
Collaborative Chronic Care Networks (C3N)<br />
are based on the concept of Collaborative<br />
Innovation Networks (COINs). COINs are a<br />
radically new concept to chronic illness care<br />
and, while many use the web for health<br />
information, existing health-related social<br />
networks separate patients from providers,<br />
despite the fact that patient-provider<br />
interaction is key to chronic illness care.<br />
In this project, a team of medical<br />
researchers collaborates with patients of<br />
a chronic disease, their family members,<br />
their doctors and other researchers. <strong>The</strong><br />
goal of the project is to improve the living<br />
conditions of people with Crohn’s disease,<br />
also called inflammatory bowel disease<br />
(IBD), which affects about 100,000 young<br />
people in the United States. Toward that<br />
goal, a small group of about 20 medical<br />
researchers, doctors and patients works<br />
together as a COIN. <strong>The</strong>y are reaching out<br />
to Crohn’s patients on Facebook, where<br />
about 100,000 people are organized in<br />
about a dozen Facebook groups (see<br />
Figure 1). Members of these groups are<br />
recruited as volunteers for patient data<br />
collection, and to get advice on what works<br />
and doesn’t for patients in their daily lives.
Coolfarming<br />
Figure 1. Facebook social network of<br />
IBD-related fan pages, each dot is a<br />
person, each connecting line a friendship<br />
link, different groups shown in different<br />
colors. Note the fragmented structure<br />
of the entire network, split into the<br />
different groups, only the red dots are<br />
people with membership in multiple<br />
Facebook IBD-related groups.<br />
We have tested new communication<br />
approaches to create a successful<br />
innovation network comprised of<br />
patient advocates, public health and<br />
social scientists, community organizers,<br />
film makers, designers, informaticists,<br />
engineers and social network researchers.<br />
Our research shows that the IBD patient/<br />
parent community is only loosely<br />
connected, that patients experience<br />
isolation and that the community is<br />
not organized or activated around a<br />
vision of improving health through<br />
active collaboration with clinicians and<br />
researchers. We have been able to create a<br />
more engaged community, as measured by<br />
number of patients/parents engaged in the<br />
Collaborative Chronic Care Network and<br />
in community leadership. Our patients<br />
also form a more networked community,<br />
as measured by the number and density<br />
of community network ties. Finally, we<br />
measurably increased collaboration<br />
among patients/parents, clinicians and<br />
scientists, as measured by number and<br />
metrics of network centrality of patients<br />
and parents as part of the research<br />
team. Further improvements include<br />
an increase in trust, as measured by<br />
survey data and by consent rates for<br />
participating in the IBD patient registry,<br />
and an increase in data sharing, as<br />
measured by number of patients willing<br />
to share patient reported outcomes.<br />
9
Internet banking case study:<br />
increasing organizational<br />
performance by analyzing<br />
knowledge flow<br />
Sandy Pentland, a professor at the MIT<br />
Media Lab, has been developing jointly<br />
with his graduate students a series of<br />
“sociometric badges.” <strong>The</strong> sociometric<br />
badges combine a radio sensor to measure<br />
the relative locations of the wearer, an<br />
infrared sensor that analyzes if people<br />
wearing the badges are facing each other,<br />
an accelerometer that measures how<br />
excited the people wearing the badges are<br />
and a microphone that measures the pitch<br />
of the voice of the wearer, as a further<br />
indicator of the level of excitement. Using<br />
these badges, Sandy and his students have<br />
been able to predict if people were paying<br />
attention to the speaker in meetings, and<br />
in speed-dating situations, whether the two<br />
people would end up exchanging phone<br />
numbers. Together with Sandy and his<br />
students, we used these social badges to<br />
identify social interaction networks on a<br />
much more granular and interpersonal<br />
level than by just mining email, blogs and<br />
online forums.<br />
In particular, we analyzed the interaction of<br />
20 employees at a German bank, as well as<br />
the interaction among nurses in a Boston<br />
area teaching hospital. In the German bank,<br />
20 members of the marketing department<br />
wore the badges for the duration of one<br />
month. Collecting the interaction data from<br />
the badges and comparing it with the social<br />
network constructed from emails already<br />
exchanged, showed us that different people<br />
were central to the email and the<br />
face-to-face interaction networks (see<br />
Figure 2). For example, the department<br />
head was very central in the face-toface<br />
social network; obviously he was a<br />
“floor-walker,” someone who was talking<br />
personally and continuously with the<br />
members of his group. On the other<br />
hand, the department secretary was quite<br />
peripheral in the face-to-face network but<br />
very central to the email network.<br />
Figure 2. Combined interaction network<br />
(email and sociometric badges) among<br />
employees in bank department. Note the<br />
automatic identification of hidden leaders<br />
by their social network position, and<br />
the split of the department into a “high<br />
performing” and a “creativity” group.
Coolfarming<br />
Even more interesting things can be found<br />
out by combining the face-to-face and<br />
email social networks. Interpreting the<br />
readings of the sociometric badges allowed<br />
us to predict if people were introverts or<br />
extroverts, if they were neurotic, if they<br />
were agreeable and if they were open to<br />
new things. Combining the readings on<br />
the team level for five different teams also<br />
allowed us to find the creative and not-socreative<br />
teams. This was very valuable for<br />
the bank, as some of the teams, such as the<br />
one developing new marketing campaigns,<br />
were looking for creative people, while<br />
the team giving phone support didn’t<br />
particularly need creativity, but rather<br />
agreeable people. We also found some<br />
people who had quite important roles as<br />
communicators, but, as it turned out, spent<br />
most of their time tucked away in their<br />
offices. Based on our findings, the bank<br />
was therefore able to realign people based<br />
on their real strengths and weaknesses.<br />
Another interesting finding was that the<br />
most extroverted people had a hard time<br />
finding discussion partners, whereas<br />
introverts and moderately extroverted<br />
people were much more likely to be chosen<br />
for a chat.<br />
Summary<br />
Whether you’re an entrepreneur<br />
or business leader, what you want<br />
most is to be at the head of the pack<br />
with the latest, hottest consumer<br />
enthusiasm: a product or service that<br />
comes across as brilliant, original,<br />
and trendy; the kind of thing that<br />
not only seems cool in and of itself,<br />
but makes the lucky consumer who<br />
uses it feel cool. Coolhunting refers<br />
to the process of seeking out and<br />
finding the latest trends. Coolfarming<br />
shows you how to dig deeper<br />
and become a part of the initial<br />
development phase of what will be<br />
the next hot phenomenon, converting<br />
creative dreams into cool products by<br />
enlisting the help of dedicated<br />
and passionate collaborators.<br />
11
Article<br />
Choosing the right technology:<br />
a framework for success<br />
Many of today’s new<br />
products employ<br />
new technologies.<br />
But it’s often hard for<br />
companies to decide<br />
which technology will<br />
work best or be most<br />
successful for these products in the future.<br />
Yet the success of the product may depend<br />
on choosing the right technology. No<br />
wonder there is a huge race in technologydriven<br />
markets.<br />
This race is particularly visible in the<br />
automotive field. Companies around<br />
the globe are vying to build a new, less<br />
polluting automobile engine that does<br />
not run on gasoline. In the US, for<br />
instance, General Motors (GM) spent over<br />
US$1 billion on developing an electric<br />
car that runs on a hydrogen fuel cell. It<br />
originally chose hydrogen fuel as the basis<br />
for the engine. Yet mass production of an<br />
electric car for sales to the public is not<br />
expected until 2013.<br />
In contrast, Tesla Motors 1 , spent about<br />
US$105 million on developing a new<br />
electric automobile. Its electric motor<br />
uses a radical configuration of 6831<br />
lithium-ion batteries. <strong>The</strong> car can be<br />
recharged at home from a regular electric<br />
socket. This is a much simpler solution<br />
than the one originally developed by GM,<br />
which required the costly storage and<br />
transportation of corrosive hydrogen<br />
fuel. A new Tesla car was launched in<br />
early 2008.<br />
1<br />
Tesla Motors Inc. is a Silicon Valley startup that engages in the design, manufacture, and sale of electric vehicles based on lithium-ion batteries. At present Telsa produces<br />
around 15 cars per week — mostly custom-ordered vehicles manufactured to owners' specifications. Adapted from Wikipedia, 22 August 2010.
Choosing the right technology<br />
Authors<br />
Gerard J. Tellis, Professor of Marketing, Neely<br />
Chair of American Enterprise and Professor of<br />
Marketing, Director of Center for Global Innovation,<br />
Marshall School of Business, University of Southern<br />
California, U.S.<br />
Ashish Sood, Professor of Marketing, Goizueta<br />
School of Business, Emory University, U.S.<br />
Notes: This research benefited from a grant<br />
by Don Murray to the USC Marshall Center for<br />
Global Innovation.<br />
In this case, as in others before, a small<br />
outsider — Tesla Motors — seems to have<br />
jumped ahead of an incumbent industry<br />
giant to develop a radical new technology<br />
for an ongoing product. <strong>The</strong> outcome is<br />
still to be decided. However, at this point<br />
in time, the lithium-ion battery seems to<br />
have an edge over the hydrogen fuel cell<br />
because it is more efficient, cheaper, safer,<br />
more widely available and more easily<br />
recharged. Indeed, after observing Tesla’s<br />
success, GM has abandoned the hydrogen<br />
cell in favor of a lithium-ion cell for its new<br />
electric car due to be launched in 2013.<br />
<strong>The</strong> core question — which<br />
technology is best?<br />
This raises the question, “Which is a better<br />
technology for the automobile engine:<br />
hydrogen, lithium-ion, methanol, ethanol<br />
or any one of the other options in the<br />
market?” And secondly, “How should firms<br />
choose in a timely way?” This is probably<br />
the main challenge facing companies<br />
in technology-driven markets because<br />
technological change is such a powerful<br />
force in today’s markets. New technologies<br />
can merge old markets (e.g., music and<br />
voice), create new growth markets (e.g.,<br />
online networking) and destroy established<br />
ones (e.g., travel agencies). Moreover,<br />
technological change transforms the<br />
market power of firms in these markets.<br />
It fuels the growth of new brands (e.g.,<br />
iPod), brings down incumbents that fail to<br />
innovate (e.g., Walkman), and transforms<br />
small outsiders into industry leaders (e.g.,<br />
Google). Companies need to understand<br />
technological evolution to shape and<br />
master competition and thrive<br />
in contemporary markets (Sood and<br />
Tellis 2009 2 ).<br />
Figure 1. Seven markets studied<br />
1<br />
Display<br />
monitors<br />
External<br />
lighting<br />
Analgesics<br />
Desktop<br />
printers<br />
2<br />
Desktop<br />
memory<br />
3 4 5<br />
6 7<br />
Energy<br />
storage<br />
devices<br />
Data<br />
transfer<br />
technologies<br />
To understand how firms flourish in the<br />
new environment, we studied technological<br />
evolution in seven markets: external<br />
lighting, desktop memory, display<br />
monitors, desktop printing, data transfer,<br />
analgesics and energy storage devices (see<br />
Figure 1). We covered these markets over<br />
quite a varied time period, from almost 200<br />
years for analgesics to 30 years for desktop<br />
printers. From our in-depth analysis, we<br />
identified four challenges that firms need<br />
to confront to master technological change<br />
(see Figure 2).<br />
Figure 2. Four questions to ask when<br />
confronting technological evolution<br />
On which level to innovate?<br />
What is the pattern of evolution?<br />
Which is the appropriate dimension<br />
of performance?<br />
Which technology to back?<br />
For companies in technology-driven<br />
markets, these challenges are a good<br />
point to start from when thinking about<br />
developing a growth strategy. Each<br />
challenge can be considered as a question.<br />
Even if a firm cannot fully answer each<br />
of these questions, just grappling with<br />
them can reveal the dilemmas it faces<br />
and help it define a coherent strategy. We<br />
now discuss the issues involved in each of<br />
these challenges.<br />
2<br />
Sood, Ashish and Gerard J. Tellis (2009), “Do Innovations Really Payoff? Total Stock Market<br />
Returns to Innovation,” Marketing Science, May/Jun 2009. Vol. 28, Iss. 3; p. 442.<br />
13
On which level to innovate?<br />
We identified three key levels of technology<br />
innovation: platform, design or component<br />
(Figure 3).<br />
• A platform innovation is an underlying<br />
technological level that relies on a<br />
unique scientific principle, distinctly<br />
different from other principles, to<br />
achieve some function. For example,<br />
in the display monitor category, we<br />
identified four different technologies:<br />
CRT, LCD, plasma, and OLED. Each of<br />
these uses a distinct scientific principle<br />
for forming an image on a screen. For<br />
any technology, firms can use a variety<br />
of design innovations.<br />
• A design innovation is a layout or linkage<br />
of parts to achieve some function. For<br />
example, a flash drive stores data as a<br />
charge in a capacitor to compact its size<br />
relative to a hard drive, though both<br />
are based on the principle of magnetic<br />
memory. At the same time, a variety of<br />
component innovations may be used on<br />
any platform or design.<br />
• A component innovation is one that<br />
uses new parts or materials to achieve<br />
some function. For example, a fuel cell<br />
could use hydrogen or methanol to<br />
generate electricity.<br />
“ Companies<br />
have a tough<br />
time keeping up<br />
with technological<br />
change and<br />
selecting the right<br />
technologies for<br />
their products.”<br />
Innovation occurs almost constantly at the<br />
level of designs and components. Indeed,<br />
day-to-day competition often occurs at<br />
these two levels. Platform innovations are<br />
less frequent, but when they do occur,<br />
they have the potential to transform<br />
markets and cause upheaval among<br />
firms. <strong>The</strong> great danger to firms is to be<br />
so immersed in design and component<br />
innovation as to miss the change in a<br />
technological platform. For example, Sony’s<br />
pre-occupation with improving its CRT<br />
television sets with Trinitron technology<br />
perhaps led it to miss the oncoming<br />
revolution in flat screen LCD televisions.<br />
Samsung invested heavily in the latter<br />
technology so that Sony had to license<br />
technology from Samsung and enter into<br />
an alliance in order not to miss out on the<br />
new generation televisions.<br />
This discussion suggests that companies<br />
have a tough time keeping up with<br />
technological change and selecting the<br />
right technologies for their products. That<br />
is one reason we have used our data to<br />
develop a more systematic framework of<br />
analysis for these decisions. Our framework<br />
has the advantage of not using after-thefact<br />
definitions of technologies based on<br />
their effects, as do the terms radical or<br />
disruptive technologies.<br />
Figure 3. Three key levels of technology innovations<br />
Level of technology<br />
innovation<br />
Definition<br />
Examples in display monitor<br />
technologies<br />
Platform Unique scientific principle CRT, LCD, plasma, OLED<br />
Design<br />
Linkage or layout within 5”, 25”, 45” size in LCDs<br />
same scientific principle<br />
Component<br />
Material or content within<br />
same scientific principle<br />
Glass, plastic in LCDs
Choosing the right technology<br />
For example, we do not know whether<br />
lithium-ion battery, the hydrogen fuel cell,<br />
or the methanol fuel cell will disrupt the<br />
automobile market. Anyway, once such<br />
disruption occurs, the answer is no<br />
longer relevant. But we do know they<br />
constitute different levels of innovation.<br />
A further advantage of this framework<br />
is that we provide a method and metrics<br />
to analyze technological change to make<br />
informed decisions.<br />
How can a firm choose among such<br />
platform technologies? A firm can do so<br />
by evaluating the pattern of evolution on<br />
various dimensions of performance, as we<br />
describe next. A dimension is a measure of<br />
performance such as resolution (dots-perinc)<br />
of printers or brightness (lumens-perwatt)<br />
for lighting.<br />
What is the pattern of<br />
evolution?<br />
<strong>The</strong> received wisdom is that technological<br />
performance evolves along an S-shaped<br />
curve (see Figure 4a). <strong>The</strong> S-curve arises<br />
because the performance is initially low for<br />
a new technology, then improves rapidly<br />
after some breakthrough and ultimately<br />
levels out in maturity. A new technology’s<br />
performance supposedly starts a new<br />
S-curve below that of the old technology,<br />
crosses it once and then reaches a<br />
superior level of performance (see Figure<br />
4b). Managers were supposed to jump to<br />
a new technology before its S-curve of<br />
performance crossed that of the old one.<br />
However, our analysis of these six<br />
markets shows that technological evolution<br />
violates this simple S-shape pattern. Figure<br />
5a-f shows what we found. It illustrates the<br />
evolution of performance in the six markets<br />
we considered.<br />
Figure 4a. Technological S-curve<br />
<strong>Performance</strong><br />
Inflection<br />
Figure 4b. <strong>The</strong>ory of S-curve<br />
<strong>Performance</strong><br />
Old<br />
Single crossing<br />
New<br />
1 2<br />
Time/effort<br />
Time/effort<br />
A review of Figure 5 reveals several novel<br />
aspects about the pattern of technological<br />
evolution. First, where a new technology<br />
enters the market provides no evidence<br />
of its future trajectory. For example, in<br />
Figure 5d, laser enters the printer market<br />
above dot matrix while inkjet enters below<br />
dot matrix. Second, once it enters, the<br />
performance path of each technology<br />
is typically neither linear nor S-shaped<br />
but rather a series of step-functions.<br />
Importantly, a big spurt in performance can<br />
come after a period of apparent stagnation.<br />
For example, in 1980, gas discharge<br />
shows its biggest jump in performance and<br />
surpasses arc discharge in brightness after<br />
a period of flat performance for almost<br />
20 years (see Figure 5a). Third, some<br />
technologies show a steady trajectory of<br />
performance. For example, dot matrix<br />
improves in performance over time but<br />
at a steady, lower rate relative to other<br />
technologies (see Figure 5d). Most<br />
importantly, these curves cross multiple<br />
times. This pattern implies that superiority,<br />
when attained, is never permanent.<br />
A case in point is the competition in<br />
performance between inkjet and laser in<br />
the printer market (see Figure 5d). In the<br />
mid 1980s and again in the mid 1990s,<br />
laser was superior to inkjet in resolution.<br />
Indeed, inkjet got a reputation for being a<br />
cheap and low-level printing technology.<br />
However, that was no reason to abandon<br />
inkjet. Wisely, HP did not so, because in<br />
1997, inkjet surpassed laser in resolution<br />
and has stayed above laser. But that<br />
again is no reason to now abandon laser<br />
technology. To HP’s credit, it has supported<br />
both technologies simultaneously. An<br />
important implication of our findings is<br />
that firms should consider investing in or at<br />
least monitoring a portfolio of technologies<br />
so they are neither blindsided nor overly<br />
enthralled by the sudden growth of a<br />
new technology.<br />
15
Figure 5. Technological evolution in six markets<br />
5a) External lighting<br />
5b) Desktop memory<br />
Lighting efficacy<br />
Areal density (MBPSI)<br />
Year<br />
Incandescent Arc discharge Gas discharge<br />
LED<br />
MED<br />
Year<br />
Magnetic Optical Magneto-optical<br />
5c) Display monitors<br />
5d) Desktop printers<br />
Resolution<br />
Resolution<br />
Year<br />
Year<br />
CRT LCD PDP OLED<br />
Laser<br />
Ink jet<br />
<strong>The</strong>rmal<br />
Dot matrix<br />
5e) Data transfer<br />
5f) Analgesics<br />
Bits per sec<br />
Efficacy (1/NNT)<br />
Year<br />
Year<br />
Cu/Al wires Fiber optics Wireless<br />
Acupuncture Opiods (Narcotics) NSAIDs<br />
Non-opiods Non-anti-inflammatory<br />
Note: <strong>The</strong> values for all graphs have been kept confidential
“ Good decisions require<br />
careful analysis of all data.<br />
It is critical to consider<br />
the appropriate dimension<br />
of performance.”<br />
Choosing the right technology<br />
<strong>The</strong> S-curve is definitely a simple and<br />
appealing rule of thumb for evaluating<br />
technological evolution. However, in-depth<br />
analysis of all technologies in numerous<br />
markets shows that it can be seriously<br />
misleading. Unfortunately, the real world is<br />
quite messy. Good decisions require careful<br />
analysis of all data. Such analyses do reveal<br />
patterns that can help make informed<br />
decisions about investing in technologies<br />
and the potential payoff. Figure 5 shows<br />
the performance in various markets, each<br />
on only one dimension of performance.<br />
It is critical to consider the appropriate<br />
dimension of performance.<br />
What is the appropriate<br />
dimension of performance?<br />
A dimension is a measure of performance<br />
such as resolution (dots-per-inch) of<br />
printers or brightness (lumens-per-watt)<br />
for lighting. <strong>The</strong> received wisdom is that<br />
the dimension or performance is primarily<br />
a demand issue, determined by consumer<br />
tastes. Some authors go so far as to assert<br />
that tastes are genetically wired within<br />
human nature. However, our analysis of<br />
seven markets shows that at any point in<br />
time, a dimension may stand out as the one<br />
on which firms compete most and which<br />
consumers value the most. That is by no<br />
means the only dimension of performance.<br />
Actually, at any point in time, multiple<br />
dimensions are at play. What makes the<br />
world particularly interesting is that these<br />
dimensions are in a state of constant<br />
flux. This change is neither random nor<br />
one driven primarily by consumer<br />
demand. Rather it is change driven by<br />
the emergence and evolution of new<br />
platform technologies.<br />
When a new platform technology enters<br />
the market, it often introduces one or more<br />
new dimensions of performance. <strong>The</strong><br />
new technology is sometimes (but not<br />
always) superior to the old technologies<br />
on those new dimensions. <strong>The</strong> new<br />
entry sensitizes consumers to the new<br />
dimensions and changes the configuration<br />
of consumer demand.<br />
For example in displays, in the 1970s and<br />
in early 1980s, when the cathode ray<br />
tube (CRT) display monitor was the sole<br />
platform, consumer interest focused on<br />
resolution, especially as that dimension<br />
improved rapidly till about mid 1980<br />
(see Figure 5c). When the liquid crystal<br />
display monitor (LCD) came on the scene,<br />
it created excitement and interest in two<br />
new dimensions, thinness and lightness.<br />
Consumers had the option to trade off<br />
lower resolution (at least initially) for lighter,<br />
thinner displays. In the 1990s, when<br />
plasma came on the scene, it introduced<br />
two more dimensions, brightness and large<br />
screen size. Now, the organic light emitting<br />
diode (OLED) display monitor has come<br />
with foldable screens, introducing the new<br />
dimension of convenience. Table 4 shows<br />
how dimensions changed in the other<br />
markers we studied.<br />
Is evolution of dimensions<br />
driven by consumer demand or<br />
technological evolution?<br />
It’s a philosophical issue whether desire<br />
for these dimensions is inherent in<br />
human nature or created by the emerging<br />
technologies. In our opinion, technological<br />
evolution is what brings dimensions into<br />
play, makes them salient to consumers and<br />
shapes consumer demand.<br />
As technologies improve on these<br />
dimensions, they also target new<br />
applications in new, promising<br />
environments or markets. <strong>The</strong> new<br />
market may redefine selection criteria,<br />
performance thresholds and price/<br />
performance trade-offs 3,4 . <strong>The</strong>se<br />
factors, together with the abundance of<br />
opportunities in the new market,<br />
enable rapid growth in performance<br />
of the new technology. For example,<br />
wireless communication technology was<br />
initially applied to wireless telegraphy,<br />
then to broadcast radio and recently<br />
to voice communications over cellular<br />
telephone markets.<br />
In some cases, the new technologies may<br />
not even compete directly in the same<br />
market because of low performance. For<br />
example, LCD did not compete directly with<br />
CRT for many years as the technology did<br />
not offer high resolution. <strong>The</strong> technology<br />
was initially used for pocket calculators,<br />
3 Romanelli, E. and Tushman, M. (1994), “Organizational Transformation as Punctuated Equilibrium:<br />
An Empirical Test,” Academy of Management Journal, 37(5), 1141-1166.<br />
4 Levinthal D. (1998), “<strong>The</strong> slow pace of rapid technological change: gradualism and punctuation in<br />
technological change,” Industrial and Corporate Change, 7, 217–247.<br />
17
digital watches and other portable display<br />
applications before being considered for<br />
notebook and desktop computer monitors.<br />
Yet today, the demand for LCD monitors<br />
outstrips the demand for CRT monitors.<br />
Hence, the incumbent technology can<br />
be taken by surprise as the competitive<br />
technology improves at a faster rate than<br />
the incumbent technology and enters<br />
new markets.<br />
<strong>The</strong> three critical issues for managers to<br />
keep in mind are that a) new dimensions<br />
are constantly emerging, b) their<br />
importance is in a state of constant<br />
flux, and c) this state is driven primarily<br />
by technological evolution not innate<br />
consumer tastes. To understand the nature<br />
of competition on these dimensions,<br />
managers need to analyze the range of<br />
current and potential platforms, on current<br />
and emerging dimensions, over time,<br />
along the lines shown in Figure 1. <strong>The</strong>y<br />
also need to monitor related markets<br />
that use the new technologies to identify<br />
progress and opportunities posed by the<br />
new technologies.<br />
Which technology should a<br />
company back?<br />
This discussion brings us back to the<br />
key question that managers face. Which<br />
technology to back? In GM’s case, it turned<br />
out to be a billion-dollar question. How can<br />
our framework help managers to identify<br />
the most promising technology to back? We<br />
argue that the multidimensional analysis of<br />
multi-technology dynamics provides a rich<br />
and insightful picture of a firm’s options.<br />
An example of how to use the<br />
new framework<br />
Let’s consider the automobile battery<br />
market shown in Figure 6. In this<br />
market, we can identify three platform<br />
technologies: galvanic cells, fuel cells<br />
and flow cells. An important dimension<br />
to evaluate the choice of a technology<br />
is its effectiveness in miles per kilowatt.<br />
Figure 6a shows the evolution of these<br />
Figure 6. An example of using the new framework<br />
technologies on this dimension. Within<br />
each of these platform technologies, there<br />
are numerous design and component<br />
technologies that were commercialized<br />
in the auto-battery market. For example,<br />
within galvanic cells, lead-acid, nickelmetal-hydride<br />
(NiMH) and lithium-ion<br />
technologies are all alternate component<br />
technologies. Similarly, the proton<br />
exchange membrane fuel cell (PEMFC)<br />
and zinc-air are alternate component<br />
technologies based on fuel cell and flow cell<br />
platforms respectively.<br />
Zinc-air was better in performance<br />
prior to 2005 and the other technologies<br />
had comparable performance to each<br />
other. Lithium-ion began showing a<br />
sharp increase in effectiveness soon after<br />
its introduction in 1997 (see Figure 6b).<br />
By 1999, lithium-ion crossed fuels cells<br />
and NiMH. In 2006, it crossed lead-acid<br />
and zinc-air as well. It has stayed on top<br />
ever since.<br />
6a. Evolution of platform innovations in the auto-battery market<br />
Efficiency (miles/kW)<br />
Year<br />
Flow cell<br />
Galvanic cell<br />
Fuel cell
Choosing the right technology<br />
6b. Component innovations in portable storage market<br />
Efficiency (miles/kW)<br />
Lead Acid<br />
PEMFC<br />
NiMH<br />
Zinc-air<br />
Many firms were taken by surprise by<br />
the sudden dominance of lithium-ion.<br />
Managers could have predicted the promise<br />
of success of lithium-ion in the auto-battery<br />
market much before 2006 by using our<br />
framework. Lithium-ion batteries were<br />
initially used in portable electronic products<br />
(e.g., laptop computers, cellular phones<br />
or cordless power tools). <strong>The</strong> demands of<br />
performance and power are less stringent<br />
in these markets than in the auto-battery<br />
Year<br />
6c. Component innovations in auto-battery market<br />
Specific energy (w-hr/kg)<br />
Lead-acid<br />
NiMH<br />
Lithium Ion<br />
Ni-Cd<br />
NaS (ZEBRA)<br />
Lithium Ion<br />
Year<br />
market. <strong>The</strong> key dimension to evaluate<br />
performance in these markets is specific<br />
energy in watt-hr/kg. Figure 6c shows the<br />
dynamics of technological evolution of<br />
batteries on this dimension. <strong>Performance</strong><br />
of lithium-ion batteries improved drastically<br />
in portable electronic markets even though<br />
similar improvements were not evident in<br />
auto-battery markets (see Figure 6b). Thus,<br />
as early as 1997 and certainly after 1999,<br />
firms should have considered lithium-ion<br />
as part of their portfolio of investment<br />
choice for the auto battery. Lithium-ion also<br />
performs well on other dimensions such as<br />
safety, availability and cost. Our framework<br />
can alert firms of such opportunities before<br />
rivals take advantage of them.<br />
GM invested heavily in the hydrogen fuel<br />
cell, probably at the cost of alternate<br />
technologies. Our analysis shows that such<br />
decisions need not be left to gut feelings<br />
or undefined creativity. Rather, they can<br />
emerge from a careful, scientific evaluation<br />
of technology dynamics on multiple<br />
dimensions. For years, GM argued that fuel<br />
cells were the only long-term alternative to<br />
the internal-combustion engine yet ignored<br />
improvements in lithium-ion technology.<br />
However, both fuel cells and flow cells have<br />
serious disadvantages to lithium-ion on<br />
other dimensions of safety, portability, cost<br />
and infrastructure. <strong>The</strong> following quote<br />
explains the firm’s focus on fuel cells while<br />
competitors were experimenting with<br />
alternate technologies using lead-acid,<br />
NiMH, and lithium-ion batteries. “GM had<br />
the technology to do hybrids back when<br />
Toyota was launching the first Prius, but<br />
we opted not to ask the board to approve a<br />
product program that’d be destined to lose<br />
hundreds of millions of dollars,” said GM<br />
Vice Chairman Mr. Bob Lutz, in a blog post 5 .<br />
“In the end, it cost us much more than that;<br />
it cost us our reputation for technology<br />
leadership and innovation.”<br />
Recently, GM seems to have belatedly<br />
reversed its strategy and adopted a more<br />
multi-technology approach. “We made<br />
that mistake once,” GM Vice Chairman Mr.<br />
Bob Lutz said. “We won't make it again.”<br />
However, he did not specify how or why<br />
he would avoid such mistakes. This paper<br />
offers a framework to do so.<br />
5<br />
Lutz, Bob, (2008), “Thank You, Citizens of Volt Nation,” retrieved 8 June 2008,<br />
http://fastlane.gmblogs.com/?s=Thank+You%2C+Citizens+of+Volt+Nation<br />
19
Use discipline to select<br />
technologies<br />
For firms facing rapid technological<br />
change, knowing which technology to back<br />
need not be a guessing game or a purely<br />
creative exercise. We provide a framework<br />
for informed decisions as shown in Figure<br />
7. <strong>The</strong> framework consists of identifying<br />
the levels of innovation, the competing<br />
technologies at each level, the dimensions<br />
of performance on which to compare<br />
them and the patterns of evolution on<br />
each dimension.<br />
Our study has shown that some prior beliefs about<br />
technology evolution and selection are wrong. It<br />
refutes the “confirmed wisdom” that technology<br />
evolution patterns follow simple successive S-shaped<br />
curves. Rather, patterns of evolution are complex,<br />
on multiple dimensions and only partly predictable.<br />
Importantly, firms need to invest in, or<br />
at least monitor, a portfolio of technologies in<br />
order to appreciate which technology to back.<br />
Figure 7. Suggested tellis/sood framework for technology selection<br />
1. Do not rely on simplistic models such as the “S-curve.”<br />
2. Identify the different levels of innovation (platform, design, or<br />
component?).<br />
3. Identify the competing technologies at each level.<br />
4. Identify the dimensions of performance on which to compare them.<br />
5. Follow the patterns of evolution on each dimension.<br />
6. Continuously monitor a portfolio of technologies in order to<br />
appreciate which technology to back.<br />
7. Be ready to change technologies if one seems to be improving<br />
faster than others.<br />
Note: <strong>The</strong> tellis/sood framework for technology evaluation study examined the<br />
evolution of all the technologies in seven markets. <strong>The</strong> study used data from as early<br />
as 1879 to 2001.
Choosing the right technology<br />
“ For firms facing rapid technological<br />
change, knowing which technology<br />
to back need not be a guessing<br />
game or a purely creative exercise.”<br />
21
Article<br />
Making a world of difference:<br />
Collaboration.Excellence for<br />
intercultural teams<br />
Authors<br />
Luise Schneider, CPT, is General Manager at performance<br />
design international GmbH, Germany. She provides HPT<br />
expertise in Europe, Asia, and the US for public organizations<br />
and private companies. She is on the Board of Directors of<br />
International Society for <strong>Performance</strong> Improvement.<br />
Claudia Romberg is President of Romberg Consulting,<br />
Germany. She is an expert in intercultural cooperation<br />
and supports medium and large-sized companies in their<br />
collaboration with Japanese partners (Toyota production<br />
system and implementation).
Making a world of difference<br />
Cultural awareness<br />
training that emphasizes<br />
communication delivers<br />
only a partial solution to<br />
the challenges faced by<br />
intercultural work teams.<br />
Improving collaboration<br />
requires a strong<br />
foundation of performance<br />
management. <strong>The</strong> program<br />
Collaboration.Excellence<br />
offers a three-phase<br />
approach that performance<br />
improvement professionals<br />
can take to build effective<br />
intercultural work teams.<br />
23
Setting the scene (take I)<br />
My first project in<br />
Sri Lanka began<br />
in July 2005. <strong>The</strong><br />
project goal was to<br />
enable untrained<br />
coaches from<br />
technical colleges to<br />
successfully counsel and coach students in<br />
career planning.<br />
After my proposal was accepted by the<br />
sponsoring organization, I contacted the<br />
local Sri Lankan partner and shared my<br />
project plan. We immediately established<br />
a good working relationship, agreeing<br />
to all steps in the plan, particularly the<br />
preparation phase. This was the first of<br />
what would be many times that I heard<br />
the phrase, “No worries, Miss”. In frequent<br />
phone calls and a lively email exchange, I<br />
followed the status of the arrangements<br />
and the preparation was working well.<br />
In addition to the training, I was to have<br />
the opportunity to introduce the program<br />
to other organizations at the Chamber<br />
of Commerce in Colombo, Sri Lanka.<br />
During my flight there, I reviewed the<br />
training plan, changed a few details, and<br />
landed in Colombo on a Sunday morning,<br />
immediately impressed with the welcoming<br />
spirit of this charming country.<br />
On Monday at 7:30 a.m., I took a threewheeler<br />
(one of those motorbikes with a<br />
shell) to the local partner’s office where the<br />
training was to start at 9:00 a.m. I arrived<br />
well in advance (8:10 a.m.) and had to<br />
wait at the entrance until 8:55 a.m. until<br />
someone came to let me know that I could<br />
enter the office. A nice lady brought me tea<br />
and exchanged pleasantries that I did not<br />
understand. At 9:30 a.m., my local partner<br />
arrived. “I need to prepare the training<br />
room,” I said. He shook his head vaguely<br />
and said, “No worries, Miss. <strong>The</strong> room will<br />
be cleaned within the next hour.” This was<br />
how it began.<br />
“ How people live affects their work<br />
life and their expectations about<br />
work performance.”<br />
At 11:00 a.m., the participants arrived and<br />
let me know that they would love to have<br />
tea and something to eat. <strong>The</strong> materials<br />
were printed by noon. By the time lunch<br />
was over, we were ready to start training –<br />
it was 2:30 p.m. I was confused but had the<br />
feeling I was the only one with a problem.<br />
So I said to myself, “Luise, don’t get<br />
German now!” I reminded my local partner<br />
that we had missed a whole training day<br />
and that this was a problem because I<br />
had planned to spend the last day of the<br />
week at the Chamber of Commerce to give<br />
my presentation. “No worries, Miss,” he<br />
said, “We will simply invite people to the<br />
Chamber in the evening, after the training.”<br />
I frowned, “But the presentation was<br />
supposed to be this week; it might be too<br />
late to change now.” He shook his head<br />
vaguely, “Well, yes, theoretically, but we<br />
have not invited them yet. We can still<br />
change that.”<br />
<strong>The</strong> sympathetic reader might think that<br />
this chain of events would lead to chaos – at<br />
least my German colleagues would think so<br />
— but no, things proceeded very well. <strong>The</strong><br />
training participants were enthusiastic and<br />
diligent, and the invitees reacted more than<br />
flexibly. All went extremely well.<br />
A failure to communicate?<br />
Would it have helped the situation had I<br />
asked my local partner to explain what<br />
exactly “No worries, Miss” meant?<br />
Probably not. What would have really<br />
helped is information about local customs<br />
and constraints:<br />
• In Sri Lanka, it is hard to plan ahead<br />
because the infrastructure and the<br />
resources are not as reliable as in some<br />
other countries<br />
• Everybody in Sri Lanka knows about the<br />
problems of planning ahead, so people<br />
are very flexible and adjust quickly and<br />
calmly to changes<br />
• Participants could not afford to book a<br />
hotel in Colombo and had to travel three<br />
hours in the morning from the suburbs<br />
by bus, in the humid climate, which<br />
explains why they were late and hungry<br />
when they arrived<br />
When we work in another culture, we need<br />
not only to understand the constraints of<br />
communication, but also, and perhaps<br />
most importantly, the conditions in which<br />
people operate. How people live affects<br />
their work life and their expectations about<br />
work performance.<br />
My story of Sri Lanka highlights some<br />
of the challenges and adventures of<br />
working in another culture. But what if the<br />
differences in culture happen in your own<br />
team — every day? What are the constraints<br />
for an intercultural team and how can we<br />
solve them?
Making a world of difference<br />
Setting the scene (take 2)<br />
Intercultural teams often claim the work<br />
does not “flow” — even if they try to be<br />
tolerant and have a sense of sympathy for<br />
each other, conflicts pop up repeatedly.<br />
When intercultural teams have difficulty<br />
performing, the usual response is to<br />
provide cultural awareness training.<br />
In these classes, cultural backgrounds<br />
and traditions are discussed, general<br />
communication rules in the respective<br />
cultures are analyzed, and more effective<br />
interaction techniques are taught.<br />
What’s missing?<br />
First, the different cultural groups are<br />
trained separately from one another, and<br />
the scenarios used for practice are rather<br />
general. What is needed is for participants<br />
to focus together in one group on situations<br />
that are relevant to their collaboration, that<br />
have an impact on the team’s performance.<br />
Second, cultural awareness training tends<br />
to focus almost entirely on communication.<br />
While this is a helpful approach, it doesn’t<br />
go far enough. Participants get the<br />
impression that they simply have to invest<br />
more effort to communicate successfully<br />
and all differences will then be resolved.<br />
What’s needed?<br />
Intercultural teams need support in their<br />
collaboration. Most goal conflicts come<br />
from dissimilar expectations about how the<br />
work should be done and how performance<br />
should be managed. <strong>The</strong>se expectations<br />
can differ for any factors influencing<br />
performance. <strong>The</strong> aim of performance<br />
improvement for intercultural teams should<br />
be to understand each other’s expectations<br />
towards performance management and<br />
to reach an agreement about how to<br />
collaborate. Once the expectations match<br />
and the mechanics of the collaboration are<br />
specified and agreed to, the interactions on<br />
the communicative level can be resolved.<br />
“ <strong>The</strong> aim of performance improvement<br />
for intercultural teams should be to<br />
understand each other’s expectations<br />
towards performance management<br />
and to reach an agreement about<br />
how to collaborate.”<br />
Setting the scene (take 3)<br />
Let’s imagine two companies, Otto<br />
Normalverbraucher GmbH (the German<br />
equivalent of John Doe Ltd.) and Saito<br />
Corp. (the Japanese equivalent of John<br />
Doe Ltd.), have merged, and new mixed<br />
work teams have been established. Six<br />
months later, it is a fact: the collaboration<br />
has failed. <strong>The</strong> German colleagues<br />
question their Japanese colleagues’<br />
need for extensive consultations over<br />
tiny details. It makes the Germans doubt<br />
the qualifications of the Japanese team<br />
members. From the German perspective,<br />
the Japanese need much more leadership<br />
than they consider normal among<br />
colleagues, because the Japanese<br />
continually come back with new questions.<br />
<strong>The</strong> Japanese sense similar difficulties in<br />
the collaboration. <strong>The</strong>y feel that they lack<br />
information about the overall project and<br />
consider the Germans to be individualistic,<br />
rude, and extremely unproductive due to<br />
their maverick work style.<br />
Even if the Japanese and the Germans<br />
communicated with the tongues of angels<br />
they still could not work together smoothly.<br />
At the root of the problem are their<br />
dissimilar expectations about collaboration<br />
— a world of differences.<br />
Sustainable collaboration<br />
When cultural awareness training focuses<br />
on communication barriers, the foundation<br />
for a high performing intercultural team<br />
is missing. Like most performance<br />
improvement solutions, this one calls for<br />
a phased approach where collaboration is<br />
constructed on a solid base.<br />
<strong>The</strong> program Collaboration.Excellence<br />
strives to create sustainable improvements<br />
in the collaboration of intercultural teams<br />
and thus acknowledges the requirement<br />
that intercultural teams need to pass<br />
through three phases geared specifically to<br />
their performance in the workplace:<br />
• Intercultural awareness<br />
• Shared performance system<br />
• Intercultural skills<br />
25
“ When cultural<br />
awareness<br />
training<br />
focuses on<br />
communication<br />
barriers, the<br />
foundation for a<br />
high-performing<br />
intercultural team<br />
is missing.”<br />
Phase 1 — Intercultural awareness<br />
In our example, to make both the<br />
Japanese and German group more open<br />
to negotiating and reconsidering their<br />
work expectations, the first step is to<br />
raise awareness of the differences and<br />
the inner logics of both cultures. This is<br />
best demonstrated through concrete work<br />
examples from the collaboration of this<br />
specific team, enabling the Germans to<br />
understand that their Japanese colleagues<br />
are used to a continuous exchange of<br />
information about their work within the<br />
team. Consequently, the desire to discuss<br />
work on a micro-level does not signal a<br />
lack of ability. <strong>The</strong> Japanese learn that, for<br />
Germans, teamwork does not necessarily<br />
mean working together intensively to<br />
develop a result, but that it may mean<br />
putting together the results produced by<br />
individual performers into one piece — like<br />
a puzzle.<br />
Clearly, different underlying values<br />
and expectations can easily be<br />
misinterpreted as differences in the style of<br />
communicating: “Germans are snippy and<br />
arrogant,” “Japanese ask way too much.”<br />
If we only address the communication,<br />
we will not reach the real sources of<br />
misunderstanding: Germans value<br />
individual performance, Japanese favor<br />
working in a group. Once this is clarified,<br />
communication misunderstandings are<br />
turned into understandable outcomes<br />
based on different perspectives, values<br />
and behaviors.<br />
Initially, the goal is not to understand the<br />
other culture fully, but rather to accept<br />
that each culture has a valid logic. Team<br />
members need to understand that, for<br />
the team to perform effectively, new and<br />
different conclusions must be drawn about<br />
collaboration. This might sound simplistic<br />
but, depending upon the cultural origins of<br />
the team members, this realization can be a<br />
significant step.<br />
<strong>The</strong> team is now ready for change.<br />
Phase 2 — Shared performance<br />
system<br />
Germans have a different idea of<br />
performance than Japanese. Germans<br />
strive for self-monitoring: transparent goals<br />
and consequences, discretionary decisions<br />
and minimal oversight. <strong>The</strong> Japanese<br />
strive for group membership: group goals<br />
and consequences, decisions based on<br />
consensus, lots of mutual support and<br />
close interaction.<br />
<strong>The</strong>se cultural differences have a<br />
strong impact on the team. If there<br />
is little agreement about what<br />
performance should look like, it is hard<br />
to work together cohesively.<br />
<strong>Performance</strong> is influenced by a number<br />
of factors, from goals, feedback and<br />
consequences, to resources available and<br />
the role of management. Each of these
Making a world of difference<br />
factors is viewed differently in different<br />
cultures. Thus, various expectations can<br />
exist about feedback, consequences and<br />
the like, and how they should be designed.<br />
After we have raised team awareness in<br />
Phase I, we now need to reach a shared<br />
understanding.<br />
<strong>The</strong> <strong>Performance</strong>System.mapping tool<br />
captures all these factors and makes them<br />
visible (see Figure 1). <strong>The</strong> performance<br />
system — all relevant factors influencing<br />
performance and their interrelationships<br />
— is transparent and understandable.<br />
Now each element can be discussed and<br />
understood, offering a systematic and<br />
systemic approach to clarifying different<br />
views and negotiating solutions. Everyone<br />
can see where different expectations are<br />
coming from. This is particularly helpful<br />
since most of us are not aware of why we<br />
do certain things. We have absorbed our<br />
cultural behaviors since infancy. As we<br />
learn about others and ourselves, we gain a<br />
bit of distance and it becomes easier to<br />
accept different perspectives.<br />
Once the different expectations are<br />
understood through the elements in the<br />
performance system, the team starts to<br />
negotiate a shared performance system.<br />
<strong>The</strong>y ask: which rules or procedures will<br />
be helpful? Do we want group goals or<br />
individual goals? How are we going to share<br />
information?<br />
<strong>The</strong> team starts to function.<br />
27
Figure 1. <strong>The</strong> <strong>Performance</strong>System.mapping tool<br />
1<br />
2<br />
3<br />
Workplace-relevant intercultural<br />
awareness<br />
<strong>Performance</strong> expectations<br />
match<br />
Workplace-relevant intercultural<br />
communication<br />
Collaboration<br />
excellence<br />
Enabling elements<br />
Steering elements<br />
Management<br />
Adequate coordination<br />
Are all elements<br />
coordinated adequately?<br />
Sufficient knowledge<br />
about customers<br />
Are customers‘ needs<br />
and expectations <br />
sufficiently known?<br />
Promoting job<br />
design<br />
Is the design<br />
of the workplace<br />
performance<br />
enhancing?<br />
Sufficient<br />
resources<br />
Are all<br />
necessary<br />
resources<br />
available?<br />
Sufficient<br />
support<br />
Do the<br />
performers<br />
get sufficient<br />
support?<br />
Appropriate<br />
consequences<br />
Are consequences<br />
connected to<br />
action and are<br />
they performance<br />
enhancing?<br />
Clear aims<br />
Do the goals +<br />
performance<br />
standards meet<br />
the customer‘s <br />
needs, are they<br />
sufficiently clear,<br />
and have they<br />
been accepted?<br />
Adequate<br />
feedback<br />
Is there adequate<br />
performance<br />
feedback?<br />
Proper input<br />
Does input<br />
meet desired<br />
standards?<br />
Work flow (part of any business process)<br />
Competence<br />
Does the<br />
performer have<br />
enoughabilities,<br />
skills,<br />
competencies?<br />
Desired execution<br />
Is the work<br />
being carriedout<br />
according to the<br />
standards?<br />
Desired output<br />
Does the output<br />
conform to the<br />
requirements?<br />
Customer<br />
Drivers<br />
Performer<br />
Source: Wittkuhn, Klaus; Das <strong>Performance</strong> System auf der Aufgabenebene in: Wittkuhn, Klaus D., Bartscher, Thomas (Hrsg.): Improving <strong>Performance</strong>, Leistungspotenziale in<br />
Organisationen entfalten, Luchterhand 2001.
Making a world of difference<br />
<strong>The</strong> <strong>Performance</strong>System.<br />
mapping tool<br />
Benefits:<br />
• All factors influencing, enabling<br />
and driving performance are<br />
visible as one system.<br />
• <strong>Performance</strong> management<br />
becomes easily comprehensible<br />
without oversimplifying.<br />
• <strong>Performance</strong> problems are no<br />
longer equated with performer<br />
problems (suddenly there is more<br />
than skills and motivation).<br />
Phase 3 — Intercultural skills<br />
After a shared performance system has<br />
been developed, it is not unusual for team<br />
members to still exhibit insecurities in<br />
interactions with each other. Indeed, the<br />
group has found a shared perspective<br />
on how to collaborate, but how will they<br />
resolve conflicts? To learn how to<br />
react effectively in work situations, skills<br />
training is now appropriate. Once typical<br />
work scenarios have been rehearsed, all<br />
team members will be more secure in<br />
their collaboration.<br />
<strong>The</strong> team is ready to perform in excellence.<br />
“Improving<br />
collaboration<br />
cannot be<br />
accomplished<br />
by improving<br />
communication<br />
alone.”<br />
• Each element can be discussed<br />
singly without losing sight of the<br />
interrelations within the system.<br />
• Cultural differences in the design<br />
of performance management<br />
are displayed and can be<br />
discussed objectively.<br />
• A shared concept of performance<br />
can emerge, which is understood<br />
and supported by all members of<br />
the team.<br />
• <strong>The</strong> visualization helps to<br />
reduce misunderstandings in the<br />
course of discussion (especially<br />
important for intercultural teams).<br />
Summary<br />
Cultural awareness training that emphasizes communication delivers only a partial solution<br />
for the challenges faced by intercultural work teams. Improving collaboration cannot be<br />
accomplished by improving communication alone.<br />
To achieve sustainable changes in collaboration, performance improvement professionals<br />
must help create a shared performance system owned by all involved parties. This will<br />
make different expectations transparent, manageable and comparable, and will establish a<br />
strong foundation for continued, ongoing collaboration.<br />
29
Article<br />
Measuring corporate<br />
sustainability, maximizing<br />
shareholder value<br />
Although sustainability issues are omnipresent, a company’s<br />
contribution to sustainability is still hard to measure. This<br />
article reconciles the concepts of corporate sustainability and<br />
the shareholder value management. <strong>The</strong> model of Sustainable<br />
Value Added is introduced, balancing the synergies and<br />
challenges of integration.<br />
With sustainability<br />
issues high on<br />
the agenda for<br />
business, it is no<br />
surprise to find<br />
that more than<br />
80% of Fortune<br />
500 companies have sustainability issues<br />
on their websites. Yet, even though 90%<br />
of major US corporations demonstrate<br />
a commitment to sustainability issues,<br />
only 35% are able to prove they stick to<br />
their principles (Parisi & Maraghini, 2010,<br />
p. 131). <strong>The</strong>re is a definite gap when it<br />
comes to performance measurement<br />
and sustainability. This article attempts<br />
to bridge that gap by considering the<br />
principles of corporate sustainability.<br />
We also ask if it is possible to integrate<br />
corporate sustainability and shareholder<br />
value management, i.e., the maximization<br />
of shareholder value.
Measuring corporate sustainability<br />
Authors<br />
Christian Faupel, M.A., Project Manager,<br />
University of Paderborn, Germany<br />
Susanne Schwach, B.A., University of<br />
Paderborn, Germany<br />
31
“<strong>The</strong> objective of a sustainable measure<br />
is to assess the contribution of an<br />
entity (e.g., a company) to sustainability<br />
comprising all three dimensions:<br />
environmental, social and economic”<br />
(Figge & Hahn, 20<strong>04</strong>a, p. 176).<br />
One of the most common methods for<br />
measuring corporate sustainability is<br />
called the triple bottom line approach. It<br />
incorporates the three dimensions referred<br />
to by Figge & Hahn:<br />
• Environmental — measuring the impact<br />
on resources, such as air, water, ground<br />
and waste emissions (Baumgartner &<br />
Ebner, 2010, p.79)<br />
• Social — relating to corporate<br />
governance, motivation, incentives,<br />
health and safety, human capital<br />
development, human rights and<br />
ethical behavior<br />
• Economic — referring to measures<br />
maintaining or improving the company’s<br />
success. For example, innovation and<br />
technology, collaboration, knowledge<br />
management, purchase, processes and<br />
sustainability reporting<br />
Measuring corporate<br />
sustainability<br />
As a general rule, there are two approaches<br />
when measuring corporate sustainability.<br />
<strong>The</strong> first is called the absolute Sustainable<br />
Value Added, and the second is the relative<br />
Sustainable Value Added (SVA). <strong>The</strong> former<br />
is expressed as follows (Figge & Hahn,<br />
20<strong>04</strong>a, p. 177):<br />
Absolute Sustainable Value Added =<br />
Value added — external environmental<br />
and social cost + relative Sustainable<br />
Value Added<br />
<strong>The</strong> absolute SVA shows how much value<br />
a company has created or damaged as<br />
a result of its economic, environmental<br />
and social resources, compared to a<br />
benchmark. Crucially, the concept of<br />
SVA is the first value-based approach to<br />
measure corporate sustainability. While the<br />
conventional approach focuses on the costs<br />
of using a particular set of resources, the<br />
SVA approach focuses on the return that<br />
can be achieved from using the same set of<br />
resources (Figge et al., 2006, p. 17). <strong>The</strong><br />
concept of the relative SVA is particularly<br />
useful as it strips out external factors and<br />
“ <strong>The</strong> concept of Sustainable Value<br />
Added is the first value-based<br />
approach to measure corporate<br />
sustainability.”<br />
instead gives a comprehensive view of a<br />
company’s contributions to sustainability.<br />
<strong>The</strong> SVA can be expressed in monetary<br />
terms, thus the user is able to assess to<br />
what extent a company has made a positive<br />
or negative contribution to sustainability.<br />
Put simply, the relative SVA represents<br />
the size of a company’s contribution to<br />
increased sustainability expressed in<br />
monetary terms.<br />
Calculating the relative SVA comprises four<br />
important steps:<br />
• First, the change in use of resources<br />
compared with the previous period<br />
is determined.<br />
• Second, the opportunity cost of the<br />
increase or decrease in consumption of<br />
those resources is calculated with the<br />
help of a suitable benchmark.<br />
• Third, the sets of resources are<br />
considered. This is unlike conventional<br />
approaches where resources are<br />
typically investigated individually. By<br />
averaging the opportunity cost of all<br />
resources employed, the total value<br />
and the total opportunity cost are taken<br />
into consideration.<br />
• Finally, the total opportunity cost is<br />
compared to the economic growth of<br />
the company. Provided that the<br />
economic growth exceeds the<br />
opportunity cost, a positive outcome is<br />
established, i.e., the company has made<br />
a positive contribution to corporate<br />
sustainability. <strong>The</strong> calculation is<br />
summarized in Figure 1:
Measuring corporate sustainability<br />
Figure 1. Procedure for calculating SVA<br />
Changes in usages of resources compared<br />
to previous period<br />
Opportunity cost of increased or decreased<br />
consumption of resources<br />
Average of opportunity cost<br />
of all resources<br />
Average and economic growth<br />
Result: Sustainable Value Added<br />
Source: According to Figge & Hahn, 20<strong>04</strong>b, p.132<br />
We will now look at the formula for<br />
calculating the sustainable value in a little<br />
more detail, as this will be the starting point<br />
for further examination in this article<br />
(Ang & Van Passel, 2010, p. 1):<br />
SV = 1 R y<br />
∑<br />
i R r x<br />
i<br />
ir<br />
y<br />
x r<br />
x<br />
Where:<br />
SV i = Sustainable Value of companyi<br />
R = Total amount of resources considered<br />
y i = Economic output of companyi<br />
y = Economic output of benchmark<br />
x ir = Resource of companyi<br />
= Resource of benchmark<br />
x r<br />
ir<br />
First of all, the economic output of<br />
〖company〗i is determined in relation to its<br />
use of a particular resource Xir. This is<br />
then compared to the benchmark which<br />
gives the relevant opportunity costs. <strong>The</strong><br />
benchmark’s factor is then subtracted<br />
from the company’s factor resulting in<br />
the value spread. <strong>The</strong> value contribution<br />
of a resource, which 〖company〗i uses, is<br />
calculated by multiplying the value spread<br />
by the amount of the resource. To avoid<br />
double counting, after adding up all value<br />
contributions, the figure is divided by the<br />
total amount of resources considered.<br />
This calculation measures a company’s<br />
sustainable value for just one period and<br />
so in order to develop a more dynamic<br />
process, the sustainable value for two<br />
periods needs to be calculated. This is<br />
arrived at as follows:<br />
〖SVA〗i,t0 =〖 EG〗i,t0 — (〖SV〗i,t1— 〖SV〗i,t0)<br />
Where:<br />
〖EG〗i,t0 = Economic growth of 〖company〗i in<br />
〖period〗t0<br />
<strong>The</strong> sustainable value of 〖period〗t1 and 〖<br />
period〗t0 are subtracted to obtain the<br />
change in use of resources of 〖company〗i.<br />
As 〖period〗t0 is the period we are looking at,<br />
this figure is deducted from the economic<br />
growth in 〖period〗t1. <strong>The</strong> result is the relative<br />
SVA of 〖company〗i in 〖period〗t0 representing<br />
the change in use of a set of resources<br />
which has contributed to an increase in<br />
sustainable value.<br />
Links with Economic Value<br />
Added<br />
If we now consider the Shareholder Value<br />
Approach, its main purpose is in long-term<br />
shareholder wealth maximization. This is<br />
particularly true for medium-sized firms<br />
which view increased shareholder value<br />
as essential to a company’s success. In<br />
order to operationalize and implement<br />
the Shareholder Value Approach, there<br />
are a few indices of measurement but it is<br />
the Economic Value Added (EVA) method<br />
which is one of the most applied indices<br />
when it comes to putting the Shareholder<br />
Value Approach into practice. <strong>The</strong> EVA<br />
approach is the prevalent concept and has<br />
a multitude of benefits compared to other<br />
approaches (Kunz et al., 2007). A survey<br />
with 186 major US enterprises which<br />
was performed in 1999 concluded that a<br />
majority of 87% was already familiar with<br />
value-based management. <strong>The</strong> value-based<br />
accounting concept EVA achieved 94% and<br />
was therefore by far the most well-known<br />
concept (Ryan & Trahan, 1999, p. 49).<br />
<strong>The</strong> EVA is given after deduction of all<br />
interest on net operating capital. In other<br />
words, the EVA comprises the profit for a<br />
period after subtracting all capital costs.<br />
A positive value means there are residual<br />
earnings or excess profits. Typically, the<br />
formula comprises:<br />
E = NOPAT – (Invested capital × WACC)<br />
Where:<br />
NOPAT = Net operating cash profits of the<br />
company after taxes but before any interest<br />
expenditure<br />
Capital invested = Economic capital<br />
invested in the business includes both<br />
equity and debt but does not include noninterest<br />
bearing current liabilities<br />
WACC =Weighted average cost of capital 1<br />
1 For the calculation of WACC see Faupel et al. 2010, p. 57.<br />
33
“ <strong>The</strong> true benefit of the EVA is the<br />
ease with which it can be calculated<br />
and communicated.”<br />
<strong>The</strong> economic profit is excess of NOPAT<br />
over capital costs (invested capital x<br />
WACC), and therefore represents the<br />
return the firm has to generate in order to<br />
satisfy its shareholders who have “rented”<br />
capital to the firm. In practice, the true<br />
benefit of the EVA is the ease with which it<br />
can be calculated and communicated. <strong>The</strong><br />
process of value creation quickly and easily<br />
becomes apparent. Value drivers can be<br />
characterized by profit maximization, by<br />
the decrease in the capital invested, or by<br />
the reduction of the WACC.<br />
Using the EVA terminology, the investors’<br />
expectations are taken into account with<br />
the Market Value Added (MVA). This<br />
approach relates to the market value<br />
minus capital:<br />
MVA = Market Value – Capital = present value<br />
of all future EVAs = ∞ EVA<br />
(1 + WACC)<br />
In this way, future EVAs are estimated. If<br />
the increase in market value is added to the<br />
business assets (BA) of a company, then we<br />
can arrive at the firm value (FV) (Faupel et<br />
al. 2010, p. 59):<br />
FV = BA + MVA<br />
<strong>The</strong> adoption by businesses of EVA will<br />
assist in the decision-making process by<br />
encouraging decision-making which is<br />
better aligned to maximizing shareholder<br />
value. One of the main benefits of EVA<br />
is greater transparency, which means<br />
shareholders have a much better<br />
understanding of the business and its<br />
interaction with external influences<br />
(which could also be viewed as external<br />
costs). In addition, EVA represents a very<br />
flexible index as it can adjust to particular<br />
requirements using specific conversions.<br />
<strong>The</strong> EVA index provides great potential<br />
for integration with not only the absolute<br />
but also the relative SVA. Although both<br />
concepts are backward looking (the<br />
conventional method of SVA always<br />
measures the SVA of the previous period<br />
instead of the current period), a clear<br />
difference exists. While the new concept<br />
of the SVA represents a dynamic process,<br />
as shown in formula (3), the EVA index<br />
does ignore periodical interdependencies.<br />
<strong>The</strong> introduction of the MVA attempts to<br />
compensate for this problem with the EVA.<br />
By incorporating the future perspective<br />
provided by the SVA, an analogue model<br />
to the MVA index could be derived. <strong>The</strong><br />
concept of the Total Sustainable Value<br />
Added (TSVA = a company’s contribution<br />
to increased sustainability in total) could be<br />
calculated as follows:<br />
MSVA = MSV — Resources = present value of<br />
all future SVAs= ∞ SVA<br />
(1 + WACR)<br />
Where:<br />
MSVA = Market SVA = market's<br />
contribution to more sustainability<br />
WACR = weighted average cost of<br />
resources 2<br />
By estimating all future SVAs, the increase<br />
in the MSVA is taken together with the<br />
resources a company owns (resources<br />
owned = RO) resulting in the TSVA:<br />
TSVA = RO + MSVA<br />
In this way, a method for measuring the<br />
performance of a company’s contribution<br />
to increased sustainability in total is<br />
achieved. If the SVA is adopted in addition<br />
to the EVA or the MVA, when measuring<br />
performance, companies will see increased<br />
motivation among employees and will be<br />
in a better position to facilitate a dialogue<br />
with shareholders.<br />
Realizing synergies<br />
<strong>The</strong> links between the concept of SVA,<br />
shareholder value management and EVA<br />
provide enormous potential for synergies.<br />
<strong>The</strong> concept of SVA goes well beyond<br />
the generally accepted standard tools for<br />
performance measurement, which typically<br />
consider only return on capital. It is not<br />
just the opportunity cost considerations<br />
but also the introduction of the three<br />
dimensions of corporate sustainability<br />
which make the use of SVA so unique. As a<br />
consequence, what is normally a restricted<br />
view of standard financial performance<br />
measurement, can instead be expanded.<br />
Moreover, the concept of SVA relies on the<br />
patterns of shareholder value management<br />
and on the performance measurement of<br />
financial markets.<br />
At the heart of the concept of SVA is<br />
the measurement of the size of a<br />
company’s contribution to increased<br />
sustainability and an indication of the<br />
strengths and weaknesses of corporate<br />
sustainable performance.<br />
2 <strong>The</strong> calculation of the WACR is made analogously to the WACC, where the equity is equalized with the<br />
resources owned by the company and the debt is related to the resources loaned by the company.
Measuring corporate sustainability<br />
“ At the heart of the concept of Sustainable Value<br />
Added is the measurement of the size of a company’s<br />
contribution to increased sustainability and an<br />
indication of the strengths and weaknesses of corporate<br />
sustainable performance.”<br />
A win-win situation<br />
<strong>The</strong> aim of corporate sustainability is<br />
to satisfy the needs of both the direct<br />
and indirect stakeholders. <strong>The</strong> primary<br />
purpose of the shareholder value<br />
approach is to maximize shareholder<br />
value or wealth. <strong>The</strong>refore, a significant<br />
win-win situation occurs when both<br />
concepts are used together. <strong>The</strong> economic<br />
dimension, previously considered, has as<br />
its goal “raising the firm’s value” which is<br />
intricately linked to the goal of maximizing<br />
shareholder value. Hence, the economic<br />
pillar of the triple bottom line approach<br />
could be described as an integral part of<br />
both the shareholder value approach and<br />
the concept of corporate sustainability.<br />
Figure 2 illustrates this hypothesis.<br />
Provided the requirements of the two other<br />
dimensions (i.e., the ecological and the<br />
social ones) are fulfilled, a maximization<br />
of one dimension (here, the economic<br />
one), when also taken together with the<br />
objective of increasing shareholder value,<br />
gives a win-win situation. <strong>The</strong> arrows on<br />
the left side depict influences which effect<br />
corporate sustainability from the outside.<br />
<strong>The</strong> “…” stand for other influencing<br />
factors such as demographic, political or<br />
climate change. Any examples of influences<br />
could be listed there, therefore, the “…”<br />
were chosen.<br />
<strong>The</strong> emphasis on looking to the future is<br />
also fostered by both approaches.<br />
Summary<br />
<strong>The</strong> TSVA could serve as an excellent<br />
model for companies looking to measure<br />
sustainability performance.<br />
In addition, due to their similarities,<br />
the practical advantages of the EVA<br />
can also be seen with the SVA<br />
approach. Improved communication,<br />
transparency and simplicity of<br />
calculation contribute to a company’s<br />
ability to implement and measure valuebased,<br />
sustainable objectives.<br />
Figure 2. Economic pillar as a connecting factor<br />
Sustainable development<br />
Macro level<br />
Corporate sustainability<br />
Micro level<br />
Technological<br />
...<br />
Social<br />
Cultural<br />
Economic<br />
Shareholder<br />
value<br />
management<br />
Ecological<br />
Social<br />
...<br />
...<br />
35
Case study<br />
Connection as competitive<br />
advantage: driving performance<br />
via community<br />
Leading organizations<br />
are investing in the<br />
connections between<br />
people, leveraging a<br />
strong foundation of<br />
management scholarship<br />
and leading practices to<br />
increase returns on<br />
these investments.<br />
New ways of doing things<br />
and perceptions of work<br />
can contribute to a new<br />
era of community value in<br />
an enterprise.<br />
Authors<br />
Loretta Lenzke is a Senior Manager in the Advisory<br />
Services, <strong>Ernst</strong> & <strong>Young</strong>, U.S<br />
Brad Kenney is a Manager in the Advisory Services,<br />
<strong>Ernst</strong> & <strong>Young</strong>, U.S<br />
Bill Dixon, PhD is a Client Engagement Leader in the EY<br />
Global Knowledge, <strong>Ernst</strong> & <strong>Young</strong>, U.S<br />
Colleen Powers is a Senior Advisor in the Advisory<br />
Services, <strong>Ernst</strong> & <strong>Young</strong>, U.S
Connection as competitive<br />
advantage<br />
If you polled 100 enterprise CEOs tomorrow, the overwhelming<br />
majority of these leaders would surely agree with the idea that<br />
“our people are our most valuable resource.” While people<br />
are truly an essential asset worthy of the huge organizational<br />
commitments to talent and recruiting seen in many leading<br />
enterprises, the full realization of this value largely depends<br />
upon the strength and diversity of connections that people<br />
have with each other.<br />
Even in the best of times, forging these connections is not easy.<br />
Many enterprises have aggressively globalized operations to build<br />
top-line growth and build or maintain market share around the world;<br />
simultaneously, many of these same firms have had to cut headcount<br />
aggressively in order to deal with capital constraints and bottom-line<br />
pressures brought on by the global financial crisis. <strong>The</strong> convergence<br />
of these two trends has left gaping holes in once-robust internal<br />
networks of colleagues — and these gaps have very real consequences<br />
in the form of missed market opportunities, deficiencies in<br />
organizational agility and innovation flows, regulatory compliance<br />
risks and operational inefficiencies from duplication of effort.<br />
In such an environment, it is no longer enough to invest in acquiring<br />
and developing talent simply; instead, it is organizations that skillfully<br />
invest in bridging the gaps between their people that will achieve and<br />
maintain high performance and secure competitive advantage.<br />
“ It is organizations that skillfully invest in bridging<br />
the gaps between their people that will achieve and<br />
maintain high performance and secure competitive<br />
advantage.”<br />
37
Boundary-spanning and helpseeking<br />
behaviors<br />
<strong>The</strong> idea of building a “connected<br />
enterprise“ seems a commonsense<br />
goal. <strong>The</strong> study of connectivity in large<br />
organizations follows a long tradition of<br />
academic and management scholarship. In<br />
his landmark 1973 article, “<strong>The</strong> strength<br />
of weak ties,” sociologist Mark Granovetter<br />
observed the extent to which bi-directional<br />
communication taking place between two<br />
colleagues is indicative of the strength of<br />
their social ties to one another. He argued<br />
that weak ties, represented by infrequent<br />
interactions among peers, had significant<br />
value for organizations as they formed a<br />
channel for the exchange of information.<br />
Granovetter linked weak ties directly to<br />
cohesion among peers and saw the analysis<br />
of social ties as a way to highlight valueproducing<br />
relations between groups.<br />
In his 1992 book Structural holes: <strong>The</strong><br />
social structure of competition, theorist<br />
Ronald S. Burt argued that two people<br />
who provide novel and non-redundant<br />
information in a social structure represent<br />
holes in the social network — and that<br />
the spanning of these structural holes<br />
provides the mechanism relating weak<br />
ties to positive outcomes. In Burt’s theory,<br />
“<strong>The</strong> value a manager adds to a firm<br />
is his or her ability to coordinate other<br />
people: identifying opportunities to add<br />
value within an organization and getting<br />
the right people together to develop the<br />
opportunities. Knowing who, when, and<br />
how to coordinate is a function of the<br />
manager's network of contacts within<br />
and beyond the firm” (1997). Thus, the<br />
value of employees within an organization<br />
largely lies in the contacts that they<br />
develop over time.<br />
<strong>The</strong>se well-functioning ties can translate<br />
into more efficient operations via improved<br />
information flows; one clear example of<br />
which can be found in “help-seeking”<br />
behaviors within the enterprise.<br />
In his 2010 book Enterprise 2.0,<br />
MIT research scientist Andrew McAfee<br />
describes an employee at a large<br />
firm, searching for someone who can<br />
do the following:<br />
“. . . keep her from reinventing the wheel,<br />
answer her pressing questions, point her<br />
to exactly the right resource, tell her about<br />
a really good vendor or consultant, let her<br />
know that they were working on a similar<br />
problem and had made some encouraging<br />
progress, or perform any of the other<br />
scores of helpful activities that flow from a<br />
well-functioning tie.” (McAfee 2010)
Connection as competitive<br />
advantage<br />
Studies have shown that the help seeker<br />
must have enough knowledge of the<br />
formal and informal structure of the<br />
organization to find the right colleague<br />
with the right answer — and if they do<br />
not, the resulting “information search<br />
cost” has a bottom-line impact in lost<br />
productivity for all concerned, lowered<br />
morale due to frustration, as well as other<br />
perceived “social costs” such as furthering<br />
a perception of incompetence (Bulkley<br />
2007, Lee 2002). Multiply this isolated<br />
issue across the whole organization and the<br />
potential for widespread inefficiency due to<br />
the lack of connection between colleagues<br />
quickly becomes evident.<br />
<strong>The</strong> fact that enterprise-wide inefficiencies<br />
of this kind exist is not exactly news. In<br />
fact, most executives could likely recount<br />
as many examples of how their efforts<br />
have been hampered by the scale of<br />
their organization as they could give<br />
examples of that leverage successfully<br />
harnessed. And yet, despite the apparent,<br />
commonsense value of connection, most<br />
large organizations lack an effective,<br />
scalable employee connection and network<br />
development strategy.<br />
Why might having a coherent strategy and<br />
mechanism for connecting employees be<br />
important? In “Wellsprings of Knowledge”<br />
Dorothy Leonard (1995) used the term<br />
creative abrasion to describe one of four<br />
key activities necessary to sustain the flow<br />
of intelligence across an enterprise, thereby<br />
producing value. In Leonard’s research,<br />
integrating problem-solving across business<br />
units enabled new levels of creativity and<br />
innovation. This was the direct result of<br />
having made reasonably possible use<br />
of the incredible diversity of knowledge<br />
existing within the organization. It is<br />
only in a connected organization, where<br />
leadership has invested in the white space<br />
between colleagues, that information,<br />
knowledge and intellectual capital can<br />
flow in a capillary network between a<br />
colleague’s communities and networks,<br />
and the leveraging of scale can happen<br />
spontaneously, from the ground up.<br />
When connections are successfully<br />
encouraged, those handicaps so often<br />
experienced by larger organizations instead<br />
become strengths. It is specifically the<br />
size of the organization which provides a<br />
significant opportunity for engagement and<br />
the formation of cross-boundary networks<br />
that leading thinkers from Granovetter<br />
to McAfee to Leonard have marked as<br />
essential to high performance.<br />
“It is only in a connected<br />
organization, where leadership<br />
has invested in the white<br />
space between colleagues,<br />
that the leveraging of scale<br />
can happen spontaneously,<br />
from the ground up.”<br />
39
<strong>The</strong> new era of community<br />
value<br />
Connecting many thousands of<br />
geographically dispersed global employees<br />
can seem daunting. However, two trends<br />
ease the difficulty of this task: the first<br />
is the rise in self-organized behavior of<br />
individuals within the enterprise, and<br />
the second is the development of nextgeneration,<br />
social-enabled communities<br />
which achieve connections and bridge<br />
white space.<br />
<strong>The</strong> dramatic and continuing rise in usage<br />
of the social web across all demographic<br />
groups has increased the everyday<br />
employee’s familiarity with transparent,<br />
interactive online behavior, leading to<br />
an equally dramatic change in cultural<br />
behaviors both outside and within the walls<br />
of most organizations. As a direct impact of<br />
this trend, employees have<br />
become increasingly comfortable<br />
knowing, and sharing, more about<br />
themselves and each other, setting the<br />
stage for increased connectivity.<br />
Rather than looking to discourage these<br />
connections, leading organizations are<br />
harnessing this trend by channeling the<br />
desire for connection into value-producing<br />
communities. <strong>The</strong>se communities may<br />
have many purposes — improving technical<br />
competency, problem-solving, innovation,<br />
customer or partner relationships, or<br />
affinity groups, to name a few — but<br />
perhaps just as crucially, they serve the<br />
vital purpose of segmenting an enterprise<br />
of thousands of people into smaller, more<br />
human-sized units (Dunbar, 1993).<br />
Well-functioning communities are crucial<br />
for the formation of well-functioning<br />
ties. <strong>The</strong>y can provide a mechanism for<br />
“ <strong>The</strong>se communities serve the vital<br />
purpose of segmenting an enterprise<br />
of thousands of people into smaller,<br />
more human-sized units.”<br />
employees to build up social capital,<br />
form personal networks based on shared<br />
interests and experiences, and develop<br />
trust with one other. Engaged and vibrant<br />
communities can quicken time-to-value for<br />
new employees and become an incentive<br />
for them to remain, while also serving<br />
as a vehicle for capturing and retaining<br />
the knowledge of employees leaving the<br />
organization — creating greater cultural<br />
durability in good times and bad. <strong>The</strong>se<br />
communities can become the keepers of<br />
intellectual capital, continually refreshing,<br />
refining and extending it over time — as well<br />
as archiving it via a process that satisfies<br />
shifting compliance requirements. <strong>The</strong>y can<br />
create a channel for employees to provide<br />
value, as well as a channel for recognition<br />
of that value in a compelling and credible<br />
context — and at the scale and level that has<br />
maximum impact on the individual.<br />
Communities can also promote innovation.<br />
Once formed, many of these communities<br />
can — through a combination of active<br />
management, competency development,<br />
training and engagement programs —<br />
be effectively transformed into small<br />
startups within the enterprise. Generation<br />
and harvesting of pioneering ideas from<br />
within and across these “intrapreneurial“<br />
communities can provide crucial<br />
differentiation in crowded product and<br />
capital markets. And coordinated correctly,<br />
this small office culture can be distributed<br />
among employees who then feel loyalty to<br />
the same set of organizational priorities —<br />
no matter where in the world they may sit.<br />
For these communities to flourish and<br />
provide differential value, they must<br />
be explicitly sponsored, appropriately<br />
resourced, and actively managed (see<br />
Figure 1 and 2).<br />
For enterprise executives looking to the<br />
future, the skills used in managing and<br />
driving internal communities to create<br />
value can directly translate into market<br />
differentiation. Strong and weak ties<br />
already span the boundaries between<br />
suppliers, partners and customers — they<br />
are not, however, being invested in at a<br />
rate or level that equals their potential<br />
value. This is especially true with external<br />
engagement for those enterprises with<br />
historic legacies and flagship brands.<br />
By investing in strong community<br />
management skills today, executives<br />
can take a first step toward developing<br />
talented mangers for tomorrow’s<br />
external communities.
Connection as competitive<br />
advantage<br />
Figure 1. Communities follow a life cycle with definite phases of value<br />
Building<br />
Sustaining<br />
Closing/transferring<br />
Plan<br />
• Identify sponsor and engage<br />
stakeholders/core team<br />
• Identify business requirements<br />
and timescales<br />
• Identify success measures<br />
• Create community charter<br />
Develop<br />
• Identify community processes<br />
• Identify community business and<br />
functional requirements<br />
• Build IT systems and processes<br />
(conference calls, dbase, etc.)<br />
• Define rewards and recognition<br />
Implement<br />
• Launch community<br />
• Train/equip community members<br />
• Capture and implement initial<br />
lessons learned from rollout<br />
Feedback<br />
• Meet with sponsor and<br />
stakeholders regularly<br />
• Survey/poll participants on<br />
progress and direction<br />
• Monitor usage of technology<br />
systems<br />
• Review and report against<br />
success measures<br />
Evolve<br />
• Refine/evolve business purpose<br />
• Enhance IT systems and<br />
processes<br />
• Review rewards and recognition<br />
in context of participation/results<br />
• Standardize approach<br />
Ongoing<br />
• “Wash, rinse and repeat” the<br />
cycle of lessons learned and<br />
course corrections<br />
Reinvigorate (option 1)<br />
• Identify new sponsor and<br />
members<br />
• Change processes and<br />
procedures<br />
• Discuss state of community with<br />
participants (as they “own” it)<br />
Transfer (option 2)<br />
• Change scope<br />
• Identify other networks to link<br />
to, transfer or partner<br />
Close (option 3)<br />
• Understand why closing is<br />
necessary<br />
• Have an honest discussion with<br />
sponsor, core team and<br />
membership<br />
• Explain alternatives<br />
• Close and transfer knowledge to<br />
permanent repository<br />
41
Figure 2. Community “critical success factors”<br />
Explicit, agreed-upon<br />
expectations for<br />
measurement and<br />
metrics<br />
Supporting<br />
technology<br />
that meets<br />
community<br />
needs<br />
Connecting<br />
people<br />
Strong, visible<br />
sponsorship and<br />
governance<br />
Community<br />
Rewards and<br />
recognition<br />
Relevant<br />
content<br />
A clear business case,<br />
community charter<br />
and goals/objectives<br />
Engaged<br />
members with<br />
defined<br />
roles and<br />
responsibilities<br />
Clear<br />
expectations<br />
for activities<br />
and deliverables<br />
Successful enterprise communities<br />
must be explicitly sponsored, appropriately<br />
resourced and actively managed to<br />
develop and maintain momentum over<br />
time. Although they may look quite<br />
different from the outside, successful<br />
communities often have many things in<br />
common, including:<br />
1. Strong, visible sponsorship and<br />
governance<br />
2. A clear business case, community<br />
charter and goals/objectives<br />
3. Engaged members with defined roles<br />
and responsibilities<br />
4. Clear expectations for activities and<br />
deliverables<br />
5. Mechanisms and support for<br />
developing trusted relationships<br />
6. Knowledge generation, capture and<br />
transfer processes<br />
Incentives,<br />
recognition and<br />
rewards that<br />
match the culture<br />
Knowledge generation,<br />
capture and transfer<br />
processes<br />
Mechanisms and<br />
support for<br />
developing trusted<br />
relationships<br />
7. Incentives, recognition and rewards<br />
that match the culture<br />
8. Supporting technology that meets<br />
community needs<br />
9. Explicit, agreed-upon expectations for<br />
measurement and metrics<br />
Figure 3. (A) Disconnected groups (B) Boundary-spanning behaviors<br />
Not every successful enterprise community<br />
will have every single one of these;<br />
however, these nine elements form a<br />
good checklist for those looking to begin a<br />
community, or to find ways to add value to<br />
existing communities.
Connection as competitive<br />
advantage<br />
<strong>The</strong> risks of the social<br />
software-enabled enterprise<br />
However exciting the convergence of social<br />
and technological trends might be, there<br />
are risks for both sides.<br />
Any community initiative not positioned<br />
correctly and championed by both formal<br />
and informal leaders will be slow to achieve<br />
a return on investment. Social initiatives<br />
must be explicitly supported by the<br />
hierarchy of leaders, from the executive to<br />
the line management level. Just because<br />
it’s “social technology” doesn’t mean<br />
people will use it — the usual enterprise<br />
change management rules apply, and<br />
leadership support is often a crucial<br />
constraint at the best of times.<br />
<strong>The</strong> definition and modeling of desired<br />
behaviors is another essential element.<br />
One informal law often cited is that the<br />
collaboration technology used in an<br />
organization will default to the lowest<br />
level of comfort of the most powerful<br />
person in the collaboration — a correlation<br />
also reflected in Burt’s research on social<br />
structures and seniority (Burt, 1997).<br />
<strong>The</strong>refore, engaging credible leaders in<br />
a visible manner in the initiative, and<br />
equipping them to succeed, is one key step<br />
on the path to success.<br />
Non-verbal and behavioral cues have<br />
always impacted human behaviors, and<br />
perhaps even more so in a connected<br />
organization. Resources need to be<br />
made available to encourage risk taking,<br />
boundary spanning (see Figure 3) and the<br />
courage to innovate. Success stories need<br />
to be harvested and told far and wide, using<br />
all available channels, by leadership at<br />
multiple levels in the organization.<br />
<strong>The</strong> new capability from the social web<br />
comes with a new set of user expectations.<br />
If the community tool you launch internally<br />
falls short of these user expectations, then<br />
user adoption will be low. This means you<br />
will have failed before you even started,<br />
as low user rates means no network and<br />
therefore no value to the organization.<br />
Business and IT leaders need to have<br />
frank discussions about how to balance<br />
the needs of the user base to connect<br />
and collaborate with the needs of the<br />
organization. This will help to control costs<br />
and keep technology portfolios in order.<br />
Because the technologies involved can be<br />
sourced from the internet with low startup<br />
costs, many social-forward managers are<br />
already piloting social business software<br />
applications for various purposes.<br />
<strong>The</strong> effect of this is a “traffic jam” of<br />
disaggregated applications with no overall<br />
strategy or link to your organization’s<br />
enterprise architecture. If your goal is<br />
an eventual enterprise-wide platform,<br />
tread carefully, as each of these pilots is<br />
an emergent community that must be<br />
carefully and skillfully brought within the<br />
fold. Do it wrongly and you risk creating<br />
a hundred social brushfires from a wellnetworked<br />
group of dissident employees.<br />
To forestall this, focus on their needs early<br />
and often, and integrate their requirements<br />
wherever possible.<br />
<strong>The</strong> technologies used both inside<br />
and outside the organizational firewall<br />
play a key role in connecting people,<br />
but serious challenges associated with<br />
adoption and productive use of such<br />
tools is common. In fact, the very userfriendliness<br />
of social tools produces one<br />
of the greatest risks of this new toolset.<br />
Without clear guidelines and governance,<br />
technology-enabled communities have the<br />
potential to create “shadow repositories“<br />
of authoritative documents that may<br />
be critical to organizational success.<br />
Content management challenges, such as<br />
document version control and adherence<br />
to intellectual property rules, are emerging<br />
as significant sources of risk to a firm’s<br />
information architecture from improperly<br />
governed activities on social business<br />
software platforms.<br />
Technology must be compatible with<br />
employee workflow in a very pragmatic<br />
way. Changes to well-entrenched<br />
enterprise-wide process workflows are not<br />
easily adopted. Training programs, even on<br />
highly usable technologies, can play a key<br />
role in change management efforts and<br />
the achievement of organizational goals.<br />
SharePoint 2007 has been deployed by<br />
many clients for years as an enterprise<br />
collaboration platform. However, basic<br />
challenges of adoption and proper use still<br />
remain at the individual and departmental<br />
level, leading to a landscape of duplicate,<br />
redundant and abandoned Sharepoint<br />
sites — most of which could have been<br />
avoided given more targeted investments in<br />
embedding proper processes into employee<br />
workflows around the Sharepoint platform.<br />
In sum, these technologies stand poised<br />
to deliver significant value to large<br />
organizations — but offer significant risks<br />
as well. A methodical current state analysis<br />
can pay dividends in identifying current<br />
organizational, cultural and governanceoriented<br />
gaps, as well as illuminating<br />
any social projects flying under the<br />
radar for the purposes of evaluation and<br />
engagement. Gaining this understanding<br />
and engagement are crucial first steps on<br />
the road to the social enterprise.<br />
43
Case study<br />
Advanced Solution Center:<br />
giving stakeholders a voice<br />
This article examines how the Advanced Solution Center (ASC) can drive<br />
change at a faster pace. <strong>The</strong> ASC brings together key decision-makers<br />
from across an organization and allows them to create and develop better<br />
solutions to complex problems in a short time period.<br />
<strong>The</strong> economic turbulence<br />
we have seen in recent<br />
years has underlined the<br />
importance of companies<br />
having a fast and reliable<br />
decision-making process<br />
which enables them to<br />
act quickly when necessary. <strong>The</strong> ability to<br />
respond immediately, not just regarding<br />
processes and management tools but<br />
also the flexibility to adapt the business<br />
model to a rapidly changing environment<br />
becomes paramount for short- and longterm<br />
success. Driving major changes<br />
or transformation projects within your<br />
organization can be painful. However,<br />
there are ways to likely reduce that pain.<br />
Turbulent times offer the chance to<br />
outperform your competitors by taking<br />
quick, decisive action. To do this, you need<br />
the rapid buy-in and collective support<br />
of your management team so you can be<br />
confident of bringing your employees along<br />
with you.<br />
<strong>Ernst</strong> & <strong>Young</strong>’s Advanced Solution Center<br />
(ASC) approach follows a particular<br />
concept, designed to increase the speed<br />
and efficiency of decision-making, change<br />
initiatives and transformation programs.<br />
It offers an effective way to bring together<br />
key decision-makers from across your<br />
organization and allow them to create<br />
and develop solutions jointly to complex<br />
challenges over the course of only a few<br />
days. Detailed preparation is vital but<br />
experience shows using the ASC can<br />
likely reduce the time needed for major<br />
transformations by up to 30%. It can also<br />
dramatically improve other factors, such as<br />
commitment and buy-in, which play a key<br />
role in every change-related initiative.<br />
Authors<br />
Christian Mertin is a Partner in the CBS<br />
Practice, <strong>Ernst</strong> & <strong>Young</strong>, India<br />
Frank Broetzmann is a Partner in the Advisory<br />
Practice, <strong>Ernst</strong> & <strong>Young</strong>, Germany<br />
Wolfgang Holzhauer is a Manager in the<br />
Advisory Practice, <strong>Ernst</strong> & <strong>Young</strong>, Germany
Advanced Solution Center<br />
Common objectives realized with Advanced<br />
Solution Center Events are:<br />
• Better solutions developed in a faster,<br />
more collaborative way<br />
• Stronger buy-in and commitment across<br />
the organization<br />
• Innovative strategies and solutions<br />
designed with multiple stakeholders<br />
• Effective launch of new programs across<br />
the organization<br />
• Seamless communication, creating<br />
mutual understanding<br />
• Likely reduced risk, even in large and<br />
complex transformations<br />
<strong>The</strong> secret to the success of ASCs lies in<br />
the combination of proven group-based<br />
learning techniques, leading tools, fresh<br />
and focused facilitation, carefully designed<br />
creative environments and professional<br />
information design.<br />
<strong>The</strong> concept is founded on scientific<br />
principles which stimulate participants’<br />
ability to create new ideas and work<br />
together to develop innovative solutions.<br />
Each event has a customized design, with<br />
a diverse mix of individual, small group<br />
and plenary exercises, which encourage<br />
participants to think outside the box as<br />
well as reaching mutual agreement. <strong>The</strong><br />
output from an ASC is a solution to which<br />
all participants contributed and therefore<br />
accept as their own creation. <strong>The</strong> effect<br />
is long-lasting engagement and a<br />
motivated team.<br />
Over the past few years, we have further<br />
developed our ASC concept including<br />
virtual elements and Web 2.0 technologies,<br />
turning customized event documentation<br />
websites used in earlier years into powerful<br />
transformation tools. One significant<br />
advantage is the way we make the<br />
transformation process more efficient by<br />
enabling hundreds of people across the<br />
globe to be involved in the process without<br />
incurring travel time and expenses. For<br />
example, we use crowd-sourcing platforms<br />
to actively engage large audiences in<br />
important stages of the transformation<br />
process, such as issue identification, idea<br />
generation or feedback collection. In this<br />
way, the spirit and momentum created<br />
at the initial ASC event extends and<br />
continues to provide lasting and sustainable<br />
transformation support long after the<br />
event itself.<br />
“ What most excites me is the way<br />
we are doing this all together,<br />
with people from all parts of the<br />
organization. It got every single<br />
person involved in every key aspect<br />
of the transformation.”<br />
45
Case study 1 — Developing a<br />
global finance strategy<br />
A global client and industry leader, with<br />
operations across the world, faced the<br />
challenge of globally aligning its disparate<br />
and bespoke finance organization. This<br />
included harmonizing process scope,<br />
organizational structures, target setting<br />
processes, people development and<br />
IT systems.<br />
Working with a small team from the client’s<br />
side, we developed an overarching vision<br />
and mission statement for the finance<br />
function, outlining the key principles of<br />
the future operating model for finance.<br />
<strong>The</strong> team developed three possible<br />
scenarios. Each looked at the implications<br />
for the finance functions with respect to<br />
processes, organization and governance,<br />
HR and people development, as well as IT<br />
systems. Together this formed the input for<br />
the Advanced Solution Center.<br />
" It’s different<br />
to our usual<br />
approach, there<br />
is much more<br />
involvement.<br />
This is about true<br />
ownership."<br />
“ It was the first time<br />
we had the chance<br />
to impact a strategic<br />
discussion”<br />
We brought together over 40 key<br />
decision-makers from around the globe,<br />
with representatives from all regions,<br />
business areas including shared service<br />
organizations and stakeholders from<br />
outside of finance for a two day event.<br />
After learning about the key aspects of<br />
the three scenarios, participants worked<br />
in small groups to develop their own<br />
interpretations of how the future finance<br />
operating model would function. Already<br />
on the first day, the groups presented<br />
their results to the plenary. By using<br />
our specific Advanced Solution Center<br />
techniques, it became quickly apparent<br />
that the individual groups had designed<br />
almost identical solution. This meant<br />
about 80% of the new finance strategy<br />
was agreed upon right away, including an<br />
updated version of the finance vision and<br />
mission statement. Before moving on to<br />
explore further details of the strategy, a<br />
leading academic on organizational design,<br />
as well as two representatives from other<br />
leading global companies, shared their<br />
views and experiences on finance strategy.<br />
This provided the chance to hear fresh<br />
perspectives and enabled the group to<br />
challenge established practices when they<br />
met the following day.<br />
At the end of the event, the key aspects<br />
of the finance strategy centered around<br />
the operating model, including processes,<br />
organization, people and IT, was defined<br />
and agreed upon. Documentation of the<br />
results was completed and circulated to<br />
the participants just two days after the<br />
event. <strong>The</strong> results formed the basis for the<br />
detailed strategy document agreed upon by<br />
the 40 key finance decision-makers.<br />
<strong>The</strong> key benefits achieved from the ASC<br />
event included:<br />
• Agreement of the finance strategy by all<br />
major decision-makers and stakeholders<br />
• Reduction in the time for alignment by<br />
about 30%<br />
• A strategy reflecting views and<br />
requirements from all regions and<br />
business areas, not just corporate<br />
headquarters
Advanced Solution Center<br />
“ It is astonishing what we have<br />
achieved in just one and a half days.”<br />
Case study 2 — Rolling<br />
out a global markets and<br />
organizational strategy<br />
<strong>The</strong> client, an international leader in<br />
the professional services industry, had<br />
developed a new strategy for one of its<br />
business units. <strong>The</strong> challenge was to<br />
involve the top 500 global managers and<br />
motivate them to engage actively in the<br />
implementation of the strategy, thereby<br />
achieving a strong sense of momentum<br />
around the transformation process.<br />
To jump start the transformation process,<br />
we designed a series of ASC events<br />
around the globe to involve the 500<br />
managers in the strategy rollout. <strong>The</strong><br />
events took place across Asia, Europe,<br />
North and South America in parallel,<br />
bringing together managers from different<br />
business areas and support functions.<br />
Working with a core team from the client’s<br />
leadership, we developed the key messages<br />
that needed to be communicated and<br />
to where input and feedback from the<br />
participants is required. With the help<br />
of designers, we applied multi-sensory<br />
learning techniques by creating, for each<br />
strategic focus area, a visual expression<br />
of the content. This made the content<br />
much more memorable than if it had<br />
been presented in a written format. By<br />
doing this, we achieved several important<br />
aspects. Firstly, it had the effect of making<br />
the participants feel this was something<br />
different right from the start. <strong>The</strong>y were,<br />
more willing to contribute and to be<br />
involved. It also enabled complex issues<br />
to be communicated in a memorable and<br />
concise format. This approach and the<br />
subsequent output also provided the basis<br />
for an internal communications toolkit<br />
which could be re-used to consistently carry<br />
the message forward.<br />
All the events were structured in three<br />
successive parts. <strong>The</strong> first part was as<br />
described above focusing on understanding<br />
the strategy content with a short reflection<br />
on personal implications. <strong>The</strong> second<br />
part was about detailing certain aspects<br />
of the strategy, defining implementation<br />
requirements, and providing feedback to<br />
the central strategy team. <strong>The</strong> third part<br />
was about developing a transformation<br />
roadmap at a corporate level and also at a<br />
very personal level. In the second and third<br />
part of the events, we used techniques that<br />
enabled all participants to contribute to all<br />
aspects of the strategy while focusing on<br />
the parts that were most relevant to them.<br />
At the same time, we made sure that, at<br />
each event, a common view on every topic<br />
was reached among participants. We also<br />
aligned the content across the event series,<br />
taking key insights from one event to enrich<br />
the discussions on the following events.<br />
After the event series, we consolidated<br />
the results into one detailed document<br />
for the central strategy team. It contained<br />
the developed content on detailing and<br />
operationalizing the strategy as well as the<br />
transformation road map. <strong>The</strong> documented<br />
results formed the basis for the next stages<br />
of the transformation process.<br />
In total, the event series achieved a<br />
number of fundamental objectives. All<br />
500 participants gained a common<br />
understanding of the new strategy,<br />
provided valuable input for the rollout<br />
(detailing and operationalizing) of the<br />
strategy and its implementation, as well<br />
as creating personal action plans for<br />
everyone’s individual contribution to the<br />
transformation process. It enabled the<br />
central strategy team to refine the strategy,<br />
taking into account a more detailed<br />
regional and functional perspective,<br />
as well as setting up a transformation<br />
team and providing them with concrete<br />
and actionable tasks to turn strategy<br />
into reality.<br />
<strong>The</strong> key benefits achieved from the ASC<br />
events included:<br />
• Complete and consistent communication<br />
of the new strategy at a global level in a<br />
very short timescale<br />
• Actionable and attainable strategy,<br />
thoroughly challenged by all regions and<br />
all business areas, including regional<br />
and functional specific requirements<br />
• Great momentum for change<br />
which enabled swift and decisive<br />
follow-up actions based on the event<br />
series’ outcomes<br />
Summary<br />
<strong>The</strong> Advance Solution Center<br />
methodology is versatile and can be<br />
applied to a wide range of situations.<br />
It is particularly valuable when you<br />
need the input and agreement of many<br />
stakeholders and time is a crucial factor.<br />
When it is important that you have<br />
your whole team on board and truly<br />
committed to a common goal, and you<br />
need tangible and actionable outcomes,<br />
that is when you want to use the<br />
Advanced Solution Center.<br />
47
Case study<br />
Supply chain transformation:<br />
a blueprint for success<br />
A case study examining<br />
how we helped Fresenius Medical<br />
Care EMEALA transform its supply<br />
chain operations, enabling it to<br />
make cash savings of 15 million<br />
euros from the reduction in stock<br />
holding and laying the foundations<br />
for future growth.
Supply chain transformation<br />
Authors<br />
Peter Leather is a Senior Manager in the Advisory Practice,<br />
<strong>Ernst</strong> & <strong>Young</strong>, Switzerland<br />
Juergen Peukert is a Partner in the Advisory Practice,<br />
<strong>Ernst</strong> & <strong>Young</strong>, Germany<br />
This case study brings to<br />
life the journey which<br />
Fresenius Medical Care<br />
(FME) has been on<br />
over the last three years<br />
in redefining supply<br />
chain management<br />
across Europe, Middle East, Africa and<br />
Latin Americas. Along this journey,<br />
<strong>Ernst</strong> & <strong>Young</strong> has helped coach and<br />
support the FME team, enabling them<br />
to achieve some significant milestones<br />
in what has been a challenging and<br />
exciting transformation initiative for<br />
an organization which is on the way<br />
to become the world’s leading renal<br />
therapy company.<br />
<strong>The</strong> transformation project was named<br />
SCALE, which stands for Supply<br />
Chain ALignment EMEALA (EMEALA<br />
represents Europe, Middle East, Africa<br />
and Latin America.) SCALE launched<br />
in early 2009 and was a key strategic<br />
initiative in laying the foundations for<br />
the future growth of the company. As Dr.<br />
Emanuele Gatti, Global chief strategist<br />
and chief executive officer EMEALA said<br />
at the time: “As we seek to transform FME<br />
into a leading renal therapy company,<br />
reliability in supply chain performance is a<br />
key success factor in our strategy.”<br />
With more than three decades of<br />
experience in dialysis and innovative<br />
research, FME is the world's largest<br />
integrated provider of products and<br />
services for individuals undergoing dialysis<br />
because of chronic kidney failure. FME is<br />
widely regarded as the organization which<br />
sets the standard in terms of treatment for<br />
patients with this condition, which affects<br />
just under two million people worldwide.<br />
<strong>The</strong> following extract from the annual<br />
report 2009 gives an insight into what FME<br />
stands for: “Together with our employees,<br />
we focus on pursuing strategies that will<br />
enable us to uphold our technological<br />
leadership. As a vertically integrated<br />
company, we offer products and<br />
services for the entire dialysis value<br />
chain. <strong>The</strong> highest medical standards<br />
are our benchmark.”<br />
49
Transforming the EMEALA<br />
supply chain operations<br />
For FME, supply chain is a key driver in not<br />
only supporting the growth of the business,<br />
but also generating cash and laying the<br />
foundations for the future, such as an<br />
integrated business model and harmonized,<br />
cross-company working practices.<br />
Thomas Dimt, at that time Head of<br />
commercial department and logistics<br />
EMEALA, observed: “A key part of our<br />
mission in building FME into a leading renal<br />
therapy company is that we continually<br />
face the challenge across the company<br />
of how best to re-invent ourselves in a<br />
fast changing business environment. How<br />
best to change the way in which we are<br />
organized, the way we work together and<br />
collaborate to ensure that we achieve both<br />
business and personal goals as well as<br />
deliver real benefits and results.”<br />
This challenge is especially significant in<br />
the highly cross-functional and complex<br />
world of FME’s supply chain operations.<br />
Here, there is a focus on core processes<br />
that must always be “done well” across all<br />
functions and countries throughout the<br />
EMEALA regions. <strong>The</strong> goal is to ensure that<br />
FME efficiently services the needs of both<br />
its internal and external customers.<br />
<strong>The</strong>se core, supply chain processes include:<br />
• Producing accurate forecasts that drive<br />
the supply chain process<br />
• Optimizing stock levels so as to balance<br />
efficiency and customer service<br />
• Sharing transparent and reliable<br />
information for decision-making<br />
<strong>The</strong>se ambitions are clearly reflected in the<br />
goals of SCALE which include:<br />
• Striving for simplicity and efficiency<br />
• Reducing complexity and barriers<br />
• Aligning and transforming processes,<br />
tools and organization across the<br />
supply chain<br />
• Target results included:<br />
• Create stock transparency for effective<br />
inventory management<br />
• Increased forecast accuracy<br />
• Flexible and customer-focused<br />
production<br />
• <strong>The</strong> rollout of a standard replenishment<br />
approach throughout FME EMEALA<br />
Leaders who serve<br />
Discussions between the FME supply chain<br />
leadership team and <strong>Ernst</strong> & <strong>Young</strong> began<br />
in 2008 when we were engaged to provide<br />
support at company headquarters in Bad<br />
Homburg, Germany. Initially, this involved<br />
some executive coaching for the head of<br />
the supply chain operations, concerning<br />
potential reorganization issues. We were<br />
also asked to help in developing the content<br />
for the annual Logistics summit meeting,<br />
which was scheduled to take place in<br />
Portugal in October 2008.<br />
Leadership wanted to use this summit<br />
meeting to introduce the need for change<br />
and the intended mission to transform<br />
supply chain operations, getting<br />
people involved and creating the<br />
momentum for change.
Supply chain transformation<br />
<strong>The</strong>se initial interventions were very<br />
successful and, in early 2009, SCALE<br />
was established with <strong>Ernst</strong> & <strong>Young</strong> as<br />
a strategic advisor. Since then we acted<br />
as "transformation guides" and "change<br />
coaches", working alongside the supply<br />
chain leadership team and the SCALE<br />
workstream leaders to help them launch<br />
and drive forward the SCALE initiative.<br />
Setting sail from Porto<br />
We started the journey of exploration and<br />
transformation in Porto, Portugal, when<br />
the supply chain EMEALA logistics team<br />
came together for their annual summit.<br />
This was a key moment. An opportunity to<br />
really create momentum and connect with<br />
those people who would be most involved<br />
and affected by the transformation project.<br />
We agreed upfront with the leadership<br />
team that the whole meeting would focus<br />
only on the need for transformation. In this<br />
way, they were involved right from the start<br />
in the plans for the new initiative.<br />
<strong>The</strong> theme for the Porto summit in<br />
November 2008 was “managing change<br />
together.” Working with around 60<br />
members of the global team, we spent<br />
three days building the case for change<br />
Figure 1. Supply Chain Alignment EMEALA<br />
across FME’s supply chain. Dr. Emanuele<br />
Gatti reinforced the importance of supply<br />
chain both in safeguarding cash flow and in<br />
laying the foundations for the company’s<br />
future growth.<br />
<strong>The</strong> Porto summit was key not just<br />
because it provided the opportunity to<br />
engage people in the need for change<br />
within the organization’s global supply<br />
chain operations, it was also the start of<br />
generating a real feeling and need for a<br />
common “community of spirit” across the<br />
different supply chain functions.<br />
One of the first things we did at the<br />
summit was to identify the perceived<br />
strengths and weaknesses in FME’s<br />
supply chain operations. <strong>The</strong>n we<br />
developed expectations for the future. (as<br />
summarized Figure1).<br />
FME before<br />
FME tomorrow<br />
This was a pivotal moment in our<br />
relationship with FME and marked<br />
the beginning of a shared journey of<br />
transformation and organizational change.<br />
During this journey, we used a variety of<br />
techniques to assist FME and some of the<br />
most important ones are highlighted in the<br />
remainder of this article.<br />
• High stock levels<br />
• Low forecast accuracy<br />
• Lack of flexibility<br />
• Missing transparency<br />
• Targets in conflict<br />
• Diverse and unconnected systems<br />
• Transforming the way we work across the supply chain<br />
• Ensuring reliability in our supply chain performance<br />
• Supporting the growth of FME as a leading renal therapy company<br />
Source: Fresenius Medical Care<br />
• Demand driven<br />
• Global process optimization<br />
• Customer focused<br />
• Optimization across company<br />
• Proactive<br />
• Transparency<br />
• Common SAP based platform<br />
51
“ We followed a simple rule which was to give the<br />
overall SCALE program a series of distinct targets<br />
at a strategic level while having specific and tangible<br />
tactical milestones and change goals.”<br />
Juergen Peukert, <strong>Ernst</strong> & <strong>Young</strong><br />
Other sessions focused on introducing<br />
the overall objective and goals of the new<br />
program and there was also some specific<br />
training around how to embrace, be ready<br />
for and get fully involved in the upcoming<br />
process of change.<br />
During the summit, we also asked<br />
participants to make short videos<br />
which, working in breakout groups, they<br />
scripted, designed and filmed themselves<br />
based on proven methods from the<br />
<strong>Ernst</strong> & <strong>Young</strong> advanced solution center<br />
. This team-building exercise gave them<br />
a voice through which they could express<br />
what they saw as the benefits and<br />
advantages of transforming the supply<br />
chain operations.<br />
Participants also brainstormed what they<br />
believed were the necessary principles<br />
for country involvement and which would<br />
prove to be key to the program’s success.<br />
<strong>The</strong> results of their brainstorm are<br />
summarized in Figure 2.<br />
Figure 2. Brainstorming results<br />
Finally three key messages were agreed by<br />
all participants as the driving principles for<br />
the new initiative (see Figure 3).<br />
Figure 3. Driving principles for the new<br />
initiative<br />
• Ensuring reliability of supply chain<br />
performance<br />
• Driving change in the way that we work<br />
together<br />
• Enabling “one supply chain community”<br />
Source: Fresenius Medical Care<br />
Change-leadership in action<br />
In parallel to the Porto summit, we<br />
worked with the existing FME supply chain<br />
management team to develop the vision,<br />
mission and values for what would be the<br />
new, integrated supply chain operations.<br />
We did this via a series of very challenging<br />
facilitated workshops.<br />
Following the workshops, once the vision,<br />
mission and values had been agreed, we<br />
then started working at a more detailed<br />
level with the leadership team to develop<br />
the tactical milestones and deliverables<br />
that would form the foundation for<br />
implementing the new business model.<br />
<strong>The</strong> leadership team members described<br />
these workshops as enlightening because<br />
they not only had the chance to discuss the<br />
practical details of the proposed changes<br />
but also it was their first step towards<br />
operating as change leaders. <strong>The</strong> beginning<br />
of their own personal change journey.<br />
<strong>The</strong> output from this intensive series of<br />
leadership workshops is articulated in<br />
Figure 4.<br />
Active country participation to ensure that in standardizing our<br />
supply chain processes together we:<br />
• Consider freedom for entrepreneurship/local needs<br />
• Build strong understanding of new processes and provide excellent<br />
training on IT tools to ensure that we are able to use them properly<br />
• Ensure that we do not complicate work more than today<br />
• Guarantee availability of goods in the markets<br />
Countries are therefore be expected to:<br />
• Provide input/resource to each phase of the project<br />
• Nominate local people to prepare for/lead SCALE transition<br />
• Be open for change<br />
Source: Fresenius Medical Care
Supply chain transformation<br />
Figure 4. Articulating the strategy for the supply chain organization EMEALA<br />
Vision<br />
Mission<br />
Values<br />
Drivers<br />
We stand for a<br />
• Reliable<br />
• Customer focused and<br />
• Integrated supply chain<br />
across EMEALA driving FME<br />
cash flow<br />
As a key success factor we<br />
enable FME to become a Renal<br />
<strong>The</strong>rapy company<br />
• We understand our markets and<br />
customers<br />
• We balance customer<br />
requirements with financial and<br />
supplier resources<br />
• We support the FME strategy of an<br />
integrated business model<br />
• We strive for simplicity and<br />
efficiency<br />
We continuously improve our cash<br />
positions<br />
• We are open and honest<br />
• We are committed to quality<br />
• We are team workers and<br />
collaborate across borders<br />
• We are looking for continuous<br />
improvement<br />
• We are professional and open for<br />
change<br />
• We are cash flow minded<br />
We, as the supply chain EMEALA organization get there by:<br />
Supply chain transparency<br />
for fact based, optimized<br />
decision making<br />
Aligned supply chain goals for<br />
executing FME’s EMEALA<br />
strategy<br />
Integrated operating model<br />
supply chain for driving a<br />
seamless supply chain in balance<br />
Empowerment of the supply<br />
chain community for enabling<br />
and motivating our employees<br />
Strategicobjectives<br />
Our strategic objective is to<br />
create transparency on the<br />
supply chain performance,<br />
inventories, cost , SLAs<br />
and policies in order to<br />
balance customer requirement<br />
with financial and<br />
supplier resources.<br />
Our strategic objective is to<br />
agree on key performance<br />
indicators and service levels<br />
reflecting FME strategic<br />
goals, driving reliability<br />
and performance across<br />
value chain.<br />
Our strategic objective is to build<br />
aligned supply chain processes<br />
across the company and to<br />
understand our markets,<br />
customers and suppliers<br />
in order to drive supply<br />
chain performance.<br />
Our strategic objective is to<br />
collaborate within the supply<br />
chain community based on<br />
defined roles and responsibilities,<br />
core values and knowledge,<br />
in order to achieve operational<br />
excellence, simplicity<br />
and efficiency.<br />
Source: Fresenius Medical Care<br />
53
In mid 2009 the SCALE change leadership<br />
team decided that a broader coalition from<br />
across the EMEALA countries and<br />
functions should be mobilized and<br />
empowered as key influencers and<br />
sponsors for the transformation process at<br />
a local country level.<br />
Consequently, a supply chain network<br />
of change ambassadors was set up.<br />
<strong>The</strong> network quickly became involved in<br />
working closely with their country general<br />
managers, particularly in the rollout of the<br />
new sales and operations planning process<br />
launched as part of SCALE.<br />
This SCALE “guiding change coalition”<br />
within FME is represented in Figure 5.<br />
Charting for success<br />
<strong>The</strong> SCALE program presented a series<br />
of complex challenges across three<br />
dimensions (Figure 6): people, process<br />
and technology. <strong>The</strong>se challenges can be<br />
summarized as follows:<br />
• Orchestrating a series of parallel<br />
workstreams across the complete span<br />
of supply chain operations<br />
• Each workstream with its own scope,<br />
stakeholders, timeline, deliverables and<br />
go-live date including specific impact of<br />
change assessments<br />
• Integrating the work of an<br />
organizational design initiative with the<br />
more operational workstreams<br />
Figure 5. SCALE guiding change coalition<br />
Every operational unit impacted in the project plan will be engaged<br />
SCALE project team<br />
“Build processes and tools; <br />
coach rollout teams“<br />
SCALE ambassadors<br />
Supply chain champions<br />
Source: Fresenius Medical Care<br />
Figure 6. SCALE is the program delivering this supply chain transformation<br />
Supply chain standard<br />
New shared processes One integrated system New “one team“ setup<br />
Common approach across all functions and countries<br />
Transition framework for smooth implementation<br />
Supplier Production Central Warehouse<br />
(CWH)<br />
Source: Fresenius Medical Care<br />
Headquarter<br />
Initiating change sponsors<br />
“Provide strong backing and sponsorship”<br />
Country General Managers/Plant Managers<br />
“Own rollout with personal objectives”<br />
Change Implementation Leaders<br />
“Drive country rollout”<br />
Country rollout team<br />
“Execute rollout processes, behaviors and tools”<br />
All Local<br />
Warehouses (LWHs)<br />
And building one supply chain community across EMEALA<br />
Countries<br />
Customer
Supply chain transformation<br />
• Managing the many critical linkages<br />
between the output of the different<br />
workstreams while managing the critical<br />
path for the implementation of the overall<br />
SCALE program<br />
• Managing the ongoing rollout of the<br />
program deliverables through a series of<br />
waves or pilots<br />
• Sharing lessons learned during the<br />
journey and tracking the real tangible<br />
values being realized<br />
• And building one supply chain community<br />
at the same time<br />
We followed a simple rule which was to give<br />
the overall SCALE program a series of<br />
distinct targets at a strategic level while<br />
having specific and tangible, tactical goals<br />
for the separate workstreams.<br />
Team charters were completed by all of the<br />
SCALE workstreams. As well as covering<br />
the usual issues such as scope, timeline,<br />
deliverables, roles, work-plan, linkages and<br />
dependencies, these charters also became<br />
another change instrument by addressing<br />
the potential areas for transformation and<br />
change impact (see Table 1).<br />
Table1. Potential areas for transformation impact<br />
Criteria Description Stakeholder management Critical<br />
Resulting change<br />
impacts to be<br />
managed<br />
• Local stock is legally no longer<br />
under the responsibility of the<br />
subsidiary.<br />
• Local management Low<br />
Potential<br />
resistance to<br />
these changes<br />
Recommended<br />
next steps to<br />
manage change<br />
• Local management might be<br />
afraid that they no longer control<br />
stock levels and run into stock-out<br />
situations.<br />
• In the kick-off meetings and<br />
all presentations make very<br />
transparent that the responsibilities<br />
regarding stock levels will not<br />
change because of the D-GmbH<br />
ownership.<br />
Criteria Description Stakeholder management Critical<br />
Resulting change<br />
impacts to be<br />
managed<br />
Potential<br />
resistance to<br />
these changes<br />
Recommended<br />
next steps to<br />
manage change<br />
• <strong>The</strong> handling of processes related to<br />
stock changes (e.g.,goods entry of<br />
different plants) or becomes more<br />
difficult (e.g., scrapping, customer<br />
returns) because two legal entities<br />
are involved.<br />
• Local employees might be afraid<br />
of the changes in their daily<br />
work because they do not fully<br />
understand the extent.<br />
• Explain the concrete process/<br />
handling changes in detail already<br />
in an early stage of the project and<br />
invest sufficient time for training<br />
before go live.<br />
• Employees in the<br />
warehouse (goods<br />
entry, goods issue on<br />
different plants)<br />
• Logistics clerk/<br />
manager (scrapping on<br />
D-GmbH cost center,<br />
handling of customer<br />
returns)<br />
Medium<br />
Source: Fresenius Medical Care<br />
55
All hands on deck<br />
In the words of the SCALE Program Leader<br />
Joachim Hoehler: “With over 30 people<br />
from our supply chain management team<br />
actively involved in SCALE and with the<br />
participation of representatives from all the<br />
EMEALA countries in the project, we are<br />
truly building one supply chain community.”<br />
As well as the normal, more standard<br />
program management techniques and<br />
governance meeting cycles, we also<br />
worked with the FME workstream leaders<br />
to develop some additional, innovative<br />
techniques, which are certainly worthy of<br />
note due to the way in which they helped<br />
the process in FME.<br />
A program integration meeting structure<br />
was established to run on a monthly basis.<br />
This involved not only project workstream<br />
updates but also deep dive working<br />
sessions which ran along the complete<br />
supply chain (see Figure 7).<br />
Figure 7. SCALE process walkthrough<br />
A<br />
B<br />
Working agenda<br />
SCALE progress update<br />
<strong>The</strong>se program integration meetings<br />
became an excellent vehicle for the SCALE<br />
team members to share knowledge and<br />
experience across each other’s areas of<br />
specialism. <strong>The</strong> opportunity this provided<br />
to learn together and often problem<br />
solve in a collaborative way, was certainly<br />
breaking new ground within FME.<br />
We also recognized that the annual<br />
supply chain summit meetings could<br />
play an important role as milestones in<br />
the ongoing change process, and in the<br />
growth and development of FME’s supply<br />
chain community.<br />
For example, in Porto, we identified<br />
that the supply chain teams recognized<br />
they were very good at fire-fighting and<br />
problem solving but needed to improve in<br />
proactively working together across the<br />
value chain and across countries to find<br />
better operational solutions.<br />
In response, one of the key developments<br />
during 2009 was the establishment of<br />
bi-monthly supply chain community<br />
conference calls which were typically joined<br />
by over 50 participants, representing most<br />
of the countries within the EMEALA region.<br />
During each call, there would be a mix of<br />
project updates both from headquarters<br />
and the countries, deep dive working<br />
sessions on a particular part of the value<br />
chain, and a brainstorm around operational<br />
hot spots and potential solutions.<br />
In the following summit meeting, in October<br />
2009, in Seeheim, Germany, the supply<br />
chain community focused on a practical<br />
walk-through of the complete new SCALE<br />
processes. With a theme of “Moving into<br />
operations” for this summit, experiences<br />
were shared, particularly from the initial<br />
pilot countries, about the benefits being<br />
realized from the new forecast and demand<br />
planning process. This meeting really<br />
signaled the birth for this community of the<br />
new supply chain operations.<br />
By the time of the 2010 supply chain<br />
summit meeting, held near Dublin, in<br />
Ireland, participants at these events had<br />
more than doubled. <strong>The</strong> theme for the<br />
summit was “Landing, learning and living<br />
together” in the new, integrated and<br />
harmonized supply chain world.<br />
SCALE<br />
processes<br />
C<br />
D<br />
SCALE deep dive<br />
Decisions, next steps<br />
and closing comments<br />
Source: Fresenius Medical Care<br />
Deep dive: “End to end“ SCALE process walk-throughs<br />
Forecast<br />
APO DP<br />
Net demand planning<br />
Sourcing<br />
Distribution<br />
planning<br />
Value tracking<br />
By involving both sales and production in<br />
the work of the program and the summits,<br />
we were able to develop a shared goal<br />
aimed at creating a more agile and flexible<br />
production facility. An additional goal was<br />
also to develop, as well as improve, forecast<br />
accuracy and reduce stock levels.<br />
An evening, team-building event at the<br />
Guinness Storehouse in Dublin also helped<br />
grease the wheels of change and ease the<br />
transformation toward working together<br />
across the silos!
Supply chain transformation<br />
Delivering results<br />
Throughout 2010, SCALE was already<br />
beginning to deliver significant and<br />
tangible results:<br />
• Inventories merged into an EMEALA<br />
replenishment hub<br />
• Consolidation of selected warehouses<br />
into an EMEALA central warehouse<br />
• Tax benefits leveraged as appropriate<br />
• Do self-aligned sales and operations<br />
planning across EMEALA<br />
Supply chain reliability today begins<br />
with forecasting. A new harmonized<br />
SCALE forecasting process and tool<br />
has been implemented and the country<br />
feedback is positive: “We can calculate<br />
forecast for products more accurately; it<br />
becomes easier to check items that have<br />
high deviation, saving time. We focus on<br />
exception handling with product<br />
managers and communication with Sales<br />
has improved.”<br />
Alexander Gruening, Head EMEALA<br />
forecast and demand planning<br />
In addition, the new forecasting tool, called<br />
the Demand Planner (part of the SAP<br />
Advanced Planner and Optimizer), has<br />
been implemented and rolled out in 151<br />
markets. Sales and operations planning<br />
pilots have been deployed in selected<br />
countries to provide a platform for aligning<br />
demand and supply.<br />
<strong>The</strong> rollout was organized in five waves<br />
during which users in more than 30<br />
countries were trained over three days in<br />
how to use the system. Most of the training<br />
was held at head office in Bad Homburg,<br />
but there were also regional training<br />
sessions in local countries, e.g., the SCALEworkshop<br />
in Sao Paulo which brought<br />
together key users from the six most<br />
important Latin American countries.<br />
<strong>The</strong> SCALE stock merger initiative recently<br />
completed and, by the end of 2010, FME<br />
EMEALA saw cash savings of 15 million<br />
euros from the reduction in stock holding.<br />
“SCALE is following a well-articulated<br />
strategy, agreed with senior business<br />
management, to deliver a target of more<br />
than 35 million euros reduction of supply<br />
chain managed cash and cost positions by<br />
the end of 2012.”<br />
Thomas Dimt, Present CFO EMEALA<br />
Leveraging lessons learned<br />
We also worked closely with an internal<br />
FME consultancy group, called People,<br />
Organizational Change, Implementation<br />
(POI), to complete an extensive lessons<br />
learned exercise at the end of the second<br />
year of the SCALE program. This helped to<br />
establish the framework which we used for<br />
moving forward to complete the work.<br />
A flagship for the future<br />
"Feedback clearly shows the SCALE<br />
program has been a tremendous success<br />
within FME. It is widely recognized as<br />
a “flagship initiative” for the company,<br />
delivering in the region of 15 million euros<br />
stock reduction within the first 12 months<br />
of the ongoing implementation of this<br />
transformation program."<br />
Dr. Ulrich Weingarten, Head of supply<br />
chain operations EMEALA<br />
We are now working closely with the supply<br />
chain leadership at FME, coaching them on<br />
how to bring the program to a finish with<br />
the same professionalism and attention to<br />
detail that went into the initial launch and<br />
mobilization activities.<br />
57
Case study<br />
Competing<br />
for market<br />
share in<br />
rural India<br />
Authors<br />
Raghu Venkatnarayan is an Executive Director in the<br />
Advisory Practice, <strong>Ernst</strong> & <strong>Young</strong>, India<br />
Anant Sood is a Senior Manager in the Advisory<br />
Practice, <strong>Ernst</strong> & <strong>Young</strong>, India
Competing for market share in<br />
rural India<br />
This article discusses how the project team assisted a<br />
manufacturing company to improve its market share performance<br />
by focusing on growth opportunities in semi-urban and rural<br />
markets in India. It highlights an approach which has successfully<br />
enhanced market share performance and could be adopted by<br />
other product-based businesses.<br />
India is among the few markets<br />
which has shown some resilience to<br />
the general slowdown in the global<br />
economy and is on track to continue<br />
in this direction, with high growth<br />
rates anticipated over the next<br />
few years.<br />
A key contributor to India’s strength has<br />
been the significant growth in consumption<br />
from its rural market. Estimates put the<br />
Indian rural market close to 45% of the total<br />
Indian GDP. <strong>The</strong> rural population is defined<br />
as those who live outside the top 400<br />
cities/towns 1 (see Table 1).<br />
1 NCAER (National Council of Applied Economic<br />
Research, India) reports, Industry classification,<br />
<strong>Ernst</strong> & <strong>Young</strong> Analysis<br />
2 Industry reports, NCAER data, <strong>Ernst</strong> & <strong>Young</strong> Analysis<br />
3<br />
NSSO (National Sample Survey Organisation, NCAER<br />
reports<br />
Table 1. Population distribution in India<br />
Number % of population Typical population (in 100,000)<br />
Metros 8 7 50+<br />
Cities 19 4 10+<br />
Towns 396 9 1 to 10<br />
Semi-urban towns 4,738 8 Less than 1<br />
Villages 600,000 72 Less than 5<br />
Categorised as rural India<br />
Rural India accounts for more than 70% of the total number of Indian households and close<br />
to two-fifths of total consumption 2 3 (see Table 2).<br />
Table 2. Rural vs. urban population<br />
Rural Urban Total<br />
Households 145m 61m 206m<br />
Population 732m 295m 1,027m<br />
Earners/<br />
household<br />
1.4m 1.3m -<br />
59
In demographic terms, rural India is more<br />
advantageously placed, with the number of<br />
working population there outnumbering the<br />
total urban population (see Table 3).<br />
Table 3. Age distribution of rural<br />
population in India<br />
Age group<br />
Population (rural) mn<br />
Greater than 70 22<br />
61 to 70 33<br />
51 to 60 56<br />
41 to 50 77<br />
31 to 40 107<br />
21 to 30 127<br />
Less than 20 311<br />
Total working population<br />
A clear demonstration of the importance<br />
of rural India is shown by looking at the<br />
number of organizations which derive a<br />
significant proportion of their overall sales<br />
from outside of the country’s largest towns<br />
and cities (see Table 4).<br />
Table 4. Company presence in rural<br />
markets<br />
concentrated. For example, there are<br />
4,700 towns and over 600,000 villages<br />
spread across the length and breadth of<br />
India. Yet more than half of the population<br />
and approximately 60% of the total rural<br />
wealth is concentrated in just 17% of these<br />
same villages.<br />
Given these characteristics, deploying an<br />
optimal distribution structure for such<br />
a market becomes a challenge for any<br />
company, especially those which have been<br />
geared toward managing a distribution<br />
chain predominantly in urban markets. For<br />
instance, decisions on distribution networks<br />
have to take into account both the size of<br />
the potential market as well as the cost<br />
required to service the dispersed demand<br />
that rural India represents. <strong>The</strong> two maps<br />
(see Map 1 and Map 2) demonstrate this<br />
point. Map 1 is an evaluation of all districts<br />
in a particular state MP (Madhya Pradesh)<br />
on the basis of market potential and the<br />
second is based on cost-to-serve. It is clear<br />
that both present very different outcomes<br />
for any district.<br />
Company Category % sales from<br />
rural markets 4<br />
Hindustan Household<br />
45%<br />
Unilever products<br />
Hero Honda Two wheelers 60%<br />
Dabur Personal<br />
40%<br />
products<br />
Dish TV Media 33%<br />
TVS Two wheelers 50%<br />
However, while rural India has tremendous<br />
market potential, there are some inherent<br />
characteristics which make it significantly<br />
different from urban India. In particular,<br />
the way in which the population is<br />
simultaneously dispersed and yet<br />
“ Distribution equity refers to<br />
the maturity and flexibility of a<br />
business’s distribution network.”<br />
4 Publically available information
Competing for market share in<br />
rural India<br />
Map 1. Assessment of districts in Madhya Pradesh based on market potential<br />
Ujjain<br />
Market potential 14.35<br />
Income 3.84<br />
Consumption 4.63<br />
Awareness 5.12<br />
Mkt. support 0.76<br />
Panna<br />
Market potential 1.47<br />
Income 0.39<br />
Consumption 0.44<br />
Awareness 0.55<br />
Mkt. support 0.08<br />
Chhindwara<br />
Market potential 4.60<br />
Income 1.07<br />
Consumption 1.39<br />
Awareness 1.86<br />
Mkt. support 0.27<br />
Excellent Good Decent Poor<br />
Map 2. Assessment of districts in Madhya Pradesh based on market potential and ease-to-serve<br />
Market unattractive based<br />
on ease-to-serve approach<br />
Excellent Good Decent Poor<br />
61
Given this situation, organizations<br />
need to relook at their “distribution<br />
equity,” i.e., their ability to drive market<br />
share performance through their<br />
distribution network.<br />
<strong>The</strong> various elements that need to be<br />
addressed while evaluating and leveraging<br />
a firm’s distribution equity are shown in<br />
Figure 1.<br />
Background<br />
Figure 1. Factors affecting firm’s distribution equity<br />
Client: a top three agricultural equipment<br />
manufacturer in India, facing deteriorating/<br />
stagnating market share in some key states<br />
in India.<br />
<strong>The</strong> root cause identified during the initial<br />
assessment was an ineffective channel, i.e.,<br />
the inability of the company to drive sales<br />
in line with market growth.<br />
Distribution structure<br />
Deployment of the distribution network structure<br />
Distribution funding<br />
Presence of adequate network funding to enable<br />
flow of credit as required<br />
Market coverage<br />
Effective coverage of the markets allocated<br />
Additional sales<br />
enablers<br />
Enablers including BTL activities, advertising, pricing mechanisms<br />
Each of the elements mentioned typically<br />
gets addressed as part of separate<br />
functional structures (sales, marketing,<br />
dealer development/management,<br />
finance, etc.) and consequently do not<br />
get adequate attention as part of an<br />
overarching strategy.<br />
<strong>The</strong> remainder of this study looks at how<br />
the various elements of the distribution<br />
equity of an Indian manufacturing company<br />
were addressed as part of an initiative to<br />
yield significant improvement in marketshare<br />
performance.<br />
Competitive environment: the existing<br />
Indian market consisted of a large number<br />
of domestic and international players<br />
comprising well-entrenched market leaders<br />
and aggressive new entrants.<br />
How we addressed the challenge:<br />
we carried out a detailed assessment<br />
(see Figure 2) of our client’s existing<br />
performance structure, evaluating<br />
both brand and distribution equity. We<br />
conducted in-depth primary interviews<br />
with more than 750 respondents<br />
comprising customers (farmers) and<br />
influencers (bankers, NBFCs 5 , competition<br />
dealers, etc.) to identify the key areas for<br />
improvement.<br />
5 Non-banking financial institutions
Competing for market share in<br />
rural India<br />
Figure 2. Assessment framework<br />
1.1 Market presence<br />
Brand equity<br />
1.2 Customer acceptance<br />
Market share<br />
performance<br />
1.3 Consistent customer experience<br />
2.1 Network strategy<br />
2.2 Channel management<br />
Distribution equity<br />
2.3 Sales force effectiveness<br />
2.4 Market enablers<br />
<strong>The</strong> brand effect<br />
Analysis revealed there was a little<br />
correlation between the level of brand<br />
recognition/awareness and the market<br />
shares of players (see Figure 3).<br />
Additional analysis revealed a positioning<br />
mismatch between customer requirements<br />
and recognition of product benefits by the<br />
client (see Figure 4).<br />
While analysis of brand equity revealed<br />
some findings, none of them adequately<br />
addressed the level of underperformance<br />
by the client in key markets.<br />
Figure 3. Market share vs. awareness for<br />
different brands<br />
89%<br />
84%<br />
Figure 4. Mismatch between customer requirements and product benifits<br />
Percentage of respondents recognizing<br />
a brand as leading for different<br />
applications/usage<br />
Product usage by variants<br />
35%<br />
9%<br />
16%<br />
11%<br />
60% 57%<br />
45% 43% 39%<br />
11% 0% 4%<br />
Player 1<br />
Client<br />
Player 3<br />
Player 4<br />
Player 5<br />
Player 6<br />
Player 7<br />
Awareness Market share (FY09)<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
Product<br />
usage 1<br />
Product<br />
usage 2<br />
Multipurpose<br />
Product<br />
category 1<br />
Product<br />
category 2<br />
Product<br />
category 3<br />
Total<br />
Multi<br />
purpose<br />
Product<br />
usage 1<br />
Product<br />
usage 2<br />
Total<br />
64% 21% 11% 97<br />
71% 9% 18% 285<br />
65% 13% 17% 23<br />
69% 12% 17% 405<br />
Client Player 1 Player 2<br />
Positioning mis-match<br />
63
<strong>The</strong> distribution equity effect<br />
<strong>The</strong> assessment of the client’s distribution<br />
equity, however, revealed key areas which<br />
seemed to explain the reasons behind the<br />
underperformance.<br />
1. Network strategy<br />
Mapping the quality of the distribution<br />
chain with market share revealed a<br />
mismatch in the nature and type of dealers<br />
deployed in specific markets. For example,<br />
“ While only partway<br />
through<br />
implementation,<br />
the client<br />
witnessed a 50%<br />
increase in its<br />
market share.”<br />
some high-performing dealers had been<br />
allocated less attractive markets (see<br />
Figure 5a and 5b).<br />
In order to improve strategic deployment, a<br />
detailed review was required of the client’s<br />
existing network, with implementation<br />
plans for each category of dealer (see<br />
Figure 6).<br />
Figure 5a. Mapping districts in MP based on market<br />
potential vale and “cost to serve”<br />
Figure 5b. Mapping of districts in MP based on quality of network<br />
presence<br />
22<br />
21<br />
25<br />
23<br />
24<br />
Chambal<br />
26 27<br />
38<br />
Malwa 1<br />
20<br />
32<br />
28<br />
2<br />
2<br />
9 13 17 19<br />
9<br />
29 37<br />
33 33<br />
4<br />
CMP 18<br />
14<br />
30<br />
40<br />
5<br />
7 10<br />
6<br />
34<br />
36<br />
15<br />
31<br />
16<br />
35<br />
8<br />
11<br />
12<br />
39<br />
EMP<br />
Excellent Good Decent Poor Dealer present and<br />
above threshold sales<br />
Dealer present and<br />
below threshold sales<br />
Dealer with less than<br />
4 billing in 6 months<br />
Vacant territory
Competing for market share in<br />
rural India<br />
Figure 6. Recommended actions based on the dealer type<br />
Action steps<br />
BB<br />
DD<br />
Territories with good market share<br />
2<br />
4<br />
1<br />
Infuse funds<br />
AA<br />
Territories with high visibilty<br />
CC<br />
Territories with low visibility<br />
1<br />
2<br />
4<br />
2 Improve coverage<br />
Total no. of territories<br />
FF<br />
5<br />
3 Increase awareness<br />
CC<br />
Territories with low visibilty<br />
Territories with good market share<br />
GG<br />
Territories with low market<br />
share/vacant<br />
1<br />
3<br />
5<br />
4 Improve conversion<br />
5 Enhance dealer network<br />
2. Channel management<br />
<strong>The</strong> second step in the assessment was<br />
an evaluation of how the channel was<br />
performing. Key to this approach was<br />
tracking and monitoring how the channel<br />
was being funded.<br />
Figure 7. Channel management approach<br />
• Should the network be self-funded, funded by<br />
distributor/stockist or provided channel funding/CC?<br />
• What should be liability borne by company in each case?<br />
What rate of interest should channel partner be charged?<br />
Again, specific action steps emerged<br />
for each one of the elements shown in<br />
Figure 7. For example, precise guidelines<br />
for various funding approaches were<br />
developed to enable mapping of optimal<br />
funding options (see Figure 8) with the type<br />
of dealer, the sales levels and the quality of<br />
the market they were playing in.<br />
• What indicators of the<br />
channel partner’s funding<br />
system should the<br />
organization team be<br />
actively tracking?<br />
• How should dealer’s<br />
fund in market/stock<br />
be tracked?<br />
Mode of funding<br />
Network<br />
funding<br />
• How should dealer’s funds<br />
be distributed among<br />
sales/service/spares?<br />
Monitoring<br />
of funds<br />
Distribution<br />
of funds<br />
65
“ A focus on distribution equity will yield greater<br />
returns to organizations planning to succeed<br />
in rural markets in India.”<br />
Figure 8. Mode of funding<br />
Physical stock value<br />
as on date<br />
Market outstanding<br />
as on date<br />
Physical stock norm<br />
(days of sale)<br />
Monthly sales target<br />
Adjusted RCT<br />
Physical stock value<br />
(average value “monthly<br />
sales target” stocking<br />
norm/30)<br />
Market o/s value (average value “monthly<br />
sales target” adjusted RCT/30)<br />
Current funding at dealership (physical stock<br />
+ market o/s value)<br />
Required funding at dealership<br />
(physical stock + market o/s value)<br />
Funding gap<br />
(required - current)<br />
Bank RCT<br />
35%<br />
No<br />
Industry<br />
size>500?<br />
No<br />
1 2 3<br />
Candidate for channel<br />
funding<br />
Candidate for<br />
territory bifurcation<br />
Probable candidate for<br />
distribution funding
Competing for market share in<br />
rural India<br />
Deployment of appropriate funding<br />
methods and effective monitoring of<br />
the funds deployed led to a significant<br />
improvement in the dealers’ profitability<br />
and enhanced their ability to service the<br />
market more effectively.<br />
3. Sales force effectiveness<br />
Another critical aspect was the<br />
effectiveness of the sales force (including<br />
both the client’s and the dealers’ sales<br />
forces in the local markets). Based on<br />
the analysis, we found contact by a sales<br />
person during the sales cycle was one of<br />
the most critical components impacting<br />
successful sales performance (see<br />
Figure 9).<br />
Analysis of customer buying behavior<br />
revealed that customer conversion<br />
dramatically drops when the salesman<br />
has not met the customer during the sales<br />
process. For example, conversion ratio<br />
was 36% when a company salesman met<br />
the customer, irrespective of whether the<br />
customer visited the dealership or not.<br />
Conversion ratios went up to 48% when the<br />
customer visited the dealership and was<br />
visited by the salesman. However, when<br />
the salesman did not contact the customer<br />
during the sales process, the conversion<br />
was only 5%, irrespective of the customer<br />
having visited the dealership.<br />
As a consequence, running initiatives to<br />
increase the number of sales personnel<br />
(of both company and dealer) in the<br />
market and also increasing the frequency<br />
of visits made to a customer during<br />
the sales process dramatically improved<br />
sales performance.<br />
Overall impact<br />
By focusing on the key elements of the<br />
client’s distribution equity and introducing<br />
some very specific changes, the effect<br />
was a significant overall improvement<br />
within a very short period of time (see<br />
Figure 10). While only part-way through<br />
implementation, the client witnessed a 50%<br />
increase in its market share and is currently<br />
looking at rolling out a similar program<br />
across its entire network within India.<br />
Figure 10. Sales and market share<br />
performance<br />
8%<br />
180<br />
90<br />
11.21%<br />
226<br />
83 100<br />
12.35%<br />
253<br />
Figure 9. Analysis of customer buying behavior<br />
December January February<br />
Customer conversion driver<br />
Customer conversion ratios<br />
Implementation launch — mid December 2010<br />
FY 09<br />
FY 10<br />
Salesman contact<br />
Dealership visit<br />
36%<br />
Summary<br />
Salesman contact<br />
Salesman contact<br />
Dealership visit<br />
Dealership visit<br />
48%<br />
5%<br />
While organizations spend significant<br />
amounts of time and effort in developing<br />
their brand equity, in rural India, given<br />
the nature of the market, it is critical<br />
for organizations to focus equally, if not<br />
more so, on their distribution equity. We<br />
believe this will yield greater returns to<br />
organizations planning to succeed in rural<br />
markets in India.<br />
67
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69
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<strong>Ernst</strong> & <strong>Young</strong><br />
Assurance | Tax | Transactions | Advisory<br />
About <strong>Ernst</strong> & <strong>Young</strong><br />
<strong>Ernst</strong> & <strong>Young</strong> is a global leader in assurance, tax, transaction and<br />
advisory services. Worldwide, our 141,000 people are united by<br />
our shared values and an unwavering commitment to quality. We<br />
make a difference by helping our people, our clients and our<br />
wider communities achieve their potential.<br />
<strong>Ernst</strong> & <strong>Young</strong> refers to the global organization of member<br />
firms of <strong>Ernst</strong> & <strong>Young</strong> Global Limited, each of which is a separate<br />
legal entity. <strong>Ernst</strong> & <strong>Young</strong> Global Limited, a UK company limited<br />
by guarantee, does not provide services to clients. For more<br />
information about our organization, please visit www.ey.com.<br />
© 2011 EYGM Limited.<br />
All Rights Reserved.<br />
EYG No. AU0851<br />
ISSN No. 1866-3923<br />
About <strong>Ernst</strong> & <strong>Young</strong> Advisory services<br />
<strong>The</strong> relationship between risk and performance improvement<br />
is an increasingly complex and central business challenge, with<br />
business performance directly connected to the recognition<br />
and effective management of risk. Whether your focus is on<br />
business transformation or sustaining achievement, having<br />
the right advisors on your side can make all the difference. Our<br />
20,000 advisory professionals form one of the broadest global<br />
advisory networks of any professional organization, delivering<br />
seasoned multidisciplinary teams that work with our clients to<br />
deliver a powerful and superior client experience. We use proven,<br />
integrated methodologies to help you achieve your strategic<br />
priorities and make improvements that are sustainable for the<br />
longer term. We understand that to achieve your potential as an<br />
organization you require services that respond to your specific<br />
issues, so we bring our broad sector experience and deep<br />
subject matter knowledge to bear in a proactive and objective<br />
way. Above all, we are committed to measuring the gains and<br />
identifying where the strategy is delivering the value your<br />
business needs. It’s how <strong>Ernst</strong> & <strong>Young</strong> makes a difference.<br />
This publication contains information in summary form and is therefore intended for<br />
general guidance only. It is not intended to be a substitute for detailed research or the<br />
exercise of professional judgment. Neither EYGM Limited nor any other member of the<br />
global <strong>Ernst</strong> & <strong>Young</strong> organization can accept any responsibility for loss occasioned to<br />
any person acting or refraining from action as a result of any material in this publication.<br />
On any specific matter, reference should be made to the appropriate advisor.<br />
<strong>The</strong> views of third parties set out in this publication are not necessarily the views of the<br />
global <strong>Ernst</strong> & <strong>Young</strong> organization or its member firms. Moreover, the views should be<br />
seen in the context of the time they were expressed.<br />
267 <strong>Performance</strong>_Volume 3_Issue 4_April.indd (India) 11/01.