How Digital Is Your Business?

by Adrian J. Slywotzky, David Morrison, Karl Weber

Overview

The biggest, most important issue in business today--becoming digital--touches not only traditional enterprises but the most avant-garde of Internet companies as well.

Old-economy companies must take steps to avoid becoming victims of capitalism's creative destruction, the unofficial system that flushes out the old to make way for the new. For dot-com companies the question is whether or not they are flash-in-the-pan businesses with no long-term prospects of profitability and customer loyalty.

Most of the early efforts to answer the question "How digital is your business?" have been shrouded in techno-speak: a veritable Tower of Babel unconnected with the real needs of business. Slywotzky and Morrison show, first of all, that becoming digital is not about any of the following: having a great Web site, setting up a separate e-business, having next-generation software, or wiring your workforce.

What they so creatively demonstrate is that a digital business is one whose strategic options have been transformed--and significantly broadened--by the use of digital technologies. A digital business has strategic differentiation, a business model that creates and captures profits in new ways and develops powerful new value propositions for customers and talent. Above all, a digital business is one that is unique.

How Digital Is Your Business? is a groundbreaking book with universal appeal for everyone in the business world. It offers:

* Profiles of the future: the in-depth story of the digital pioneers--Dell Computer, Charles Schwab, Cisco Systems, Cemex.

* Insight into how to change a traditional enterprise into a digital business: the stories of GE and IBM.

* An analysis of the profitable dot-coms: AOL, Yahoo!, and eBay.

While How Digital Is Your Business? has great stories and case studies, its most invaluable central idea is that of digital business design and the array of powerful digital tools it offers for use in creating a digital future for your own company.

Product Details

ISBN-13:	9780609504055
Publisher:	Crown Publishing Group
Publication date:	01/18/2001
Sold by:	Random House
Format:	eBook
Pages:	336
File size:	817 KB

About the Author

ADRIAN J. SLYWOTZKY is the author of Value Migration and the coauthor of The Profit Zone and Profit Patterns. Mr. Slywotzky is a graduate of Harvard College and has an M.B.A. from the Harvard Business School and a J.D. from Harvard Law School. He is vice president of Mercer Management Consulting and was recently selected by Industry Week as one of the six most influential people in management.

DAVID J. MORRISON is the coauthor of The Profit Zone and Profit Patterns. A graduate of the U.S. Naval Academy, he also holds an engineering degree from Princeton and an M.B.A. from Harvard Business School. Mr. Morrison is vice chairman of Mercer Management Consulting and head of MercerDigital, the firm's e-commerce practice.

KARL WEBER is a writer and editor specializing in business and current affairs.

Read an Excerpt

Introduction

Why this book? And why now? After all (you may be thinking), this isn't the first book on e-commerce and the Internet. It may not even be among the first hundred books on these topics, as a casual glance at any bookstore's shelves makes clear. What can this book say that's new and different?

That casual impression is correct in one sense, wrong in another. Correct because the digital revolution has been under way for years and has spawned hundreds of books, including several excellent ones. Wrong because How Digital Is Your Business? is not a book on e-commerce or the Internet. It's a book on digital business. And that means it could not have been written even eighteen months ago.

We define a digital business as one in which strategic options have been transformed--and significantly broadened--by the use of digital technologies. Under this definition, it's not enough to have a great Web site or a wired workforce or neat software that helps to run a factory. A digital business uses digital technologies to devise entirely new value propositions for customers and for the company's own talent; to invent new methods of creating and capturing profits; and, ultimately, to pursue the true goal of strategic differentiation: uniqueness.

Digital business, so defined, is a phenomenon that has emerged only since 1996. It gathered momentum in the last two years of the twentieth century.

* Not until 1998 did Dell Computer's on-line configurator--one of the first Choiceboards, a powerful new tool for digital business--appear in anything like its current form.

* Not until May of the same year did it become apparent that what we call 10X Productivity--order-of-magnitude improvement in cost, capital requirements, and cycle time--could be and in fact was being realized through the use of digital technologies.

* Not until early in 1999 did it become clear that AOL, Yahoo!, and eBay had all developed viable business models for doing business on the Internet.

* And not until the early months of 2000 did it become clear that GE, one of the business world's great incumbent companies, was moving forcefully to bring about the first successful large-scale transition from a nondigital to a digital business model.

Add to these facts the reality that the creation of a fully developed digital business design takes four to five years to complete, and it's apparent that what we now know about digital business was impossible to know, except in vague outline form, prior to 2000. Thus, we'd argue, this is the first book about digital business. It won't be the last.

Having been exposed to the hype and furor that digital technologies have aroused, we have no desire to contribute to them. But we believe that digital business represents a fundamental change from past business models. By comparison, other business movements, like the quality movement of the 1980s or the reengineering movement of the 1990s, will prove to be significantly narrower and more technical, and will have less impact.

The breadth and depth of the digital revolution are so important that no one in business can afford not to make digital business a leading priority during the next half-decade. The situation of today's business leaders--those responsible for decisions that affect customers and determine how talent, money, and other resources are deployed--is comparable to that of any professional whose field is being altered forever by the emergence of a new and better way of working.

Think of an architect during the early years of the twentieth century, when steel-girder construction and the invention of the elevator were making skyscrapers possible; or imagine a physician in the middle of the nineteenth century, when the discoveries of anesthesia (in the 1840s) and of sterile technique (in the 1860s) were transforming surgery from a torturous horror into a life-saving miracle. No responsible professional would want to ignore such developments. It's now clear--far clearer than it was even two years ago--that the changes made possible by new digital ways of doing business will be equally radical, beneficial, and liberating.

The history of digital business is just emerging from the discovery stage. But early developments have already revealed some important lessons for those who would lead--or join--the second wave of business digitization. This book makes available to anyone in business the economic and organizational implications of the success stories (as well as the struggles and setbacks) of companies that are showing the way toward the Digital Business Designs of the future.

These companies are the digital pioneers, and several chapters in this book tell their stories: Dell Computer (Chapter 4), Cemex (Chapter 5), Charles Schwab (Chapter 7), and Cisco Systems (Chapter 9). Taken together, these chapters illustrate the extraordinary outcomes that Digital Business Design makes possible, and they suggest the qualitative changes in business culture and values that accompany digitization. The stories of these four companies offer profiles of the digital businesses of the future.

Chapters 12 and 13 present a different kind of case study: the current experiences of two large and powerful incumbents, GE and IBM, as they transform themselves into digital businesses. These chapters sketch out what it takes to change a traditional enterprise into a digital business, and some of the problems and obstacles that must be overcome.

Chapter 14 tells yet another type of business story: the success of the few large-scale Internet-based businesses that have developed viable (and profitable) digital business designs. AOL, Yahoo!, and eBay are examples of what it takes to start in a digital space and build an effective business model. Legions of struggling dot-com companies have begun to learn some of the hard but necessary lessons.

Other chapters focus on specific aspects of digital business design: the Choiceboard, a powerful but little-known digital tool; 10X Productivity, one of the remarkable benefits that digitization offers; and the organizational effects of going digital. Each element of the digital business picture provides ideas and methods that can help every company that is crafting a transition from a conventional to a Digital Business Design. The chapter sequence allows the ideas, information, and stories to be mutually reinforcing and cumulative in their effect.

We hope that, after reading this book, the importance and urgency of digitization for all businesses today will be clear. The current business climate of relative prosperity (and the record-setting bull market) can dampen the sense of urgency about fundamental business reinvention. "We're doing fine," is the feeling, "so why rush into something we don't really understand?" That reaction is human, understandable, and very dangerous.

Consider the people for whom you're responsible: your customers, your employees, your partners. Within the next three years, it simply won't be possible to do a world-class job of serving them, and the other stakeholders who rely on you, without becoming digital. But if you begin today the process of transforming your company through Digital Business Design, you'll be able to offer them benefits no other company can match--the unique value propositions that are the ultimate reward of digitization.

The time is now, and the starting gate is right here.

Table of Contents

Introduction
Chapter 1: How Digital Is Your Business?
Chapter 2: Getting Started in Digital Business Design
Chapter 3: The Age of the Choiceboard
Chapter 4: Digital Innovator: Dell Computer
Chapter 5: Digital Innovator: Cemex
Chapter 6: 10X Productivity
Chapter 7: Digital Innovator: Charles Schwab
Chapter 8: Hybrid Power: The Incumbent's Advantage
Chapter 9: Digital Innovator: Cisco Systems
Chapter 10: The Active Customer
Chapter 11: Obstacles to Going Digital: Beating the Odds
Chapter 12: Incumbent on the Move: GE
Chapter 13: Incumbent on the Move: IBM
Chapter 14: Dot-Coms on the Move
Chapter 15: The Digital Organization
Epilogue: Be Unique
Appendix A: The Bit Engines Table and Tour
Appendix B: How Digital Business Design Expands Your Options
Appendix C: The Choiceboards Tour
Appendix D: The Cisco Tour
Appendix E: The GE Tour
Acknowledgments
Index

What People are Saying About This

Michael Dell

Let's be clear about one thing: If you take a business that's a bad business and put it online, it's still a bad business. It's just become an online bad business.

Interviews

Exclusive Author Essay
What Becoming a Digital Business Really Means
by Adrian Slywotzky and David Morrison

When we use the phrase "digital business," many people assume that we're talking about companies that operate mainly on the Internet -- companies like eBay, for example. Or else they figure we're referring to companies that use a lot of gee-whiz technology: computer-aided design, video email, or handheld personal organizers.

Both ideas are beside the point. It's true that the Internet is an amazing new space for business, and it's also true that other new technologies are revolutionizing one business process after another. But none of this describes what we mean by digital business, nor does it capture the profound impact that the advent of digital business will have on your industry, whatever it may be, over the next three to five years.

Digital business isn't just about communicating a little faster, selling products through electronic channels, or storing information in a new and handy form. It's about expanding your company's strategic options through the use of digital technologies.

To show what we mean, let's consider two apparently similar businesses: Compaq and Dell. Both sell PCs and other technology products; they're comparable in terms of quality, reliability, and pricing. But Dell is a digital business, while Compaq is not. What's the difference?

Like most other PC companies, Compaq relies mainly on retail outlets to sell its computers. These outlets have to be stocked with products for customers to look at and choose. Therefore, the marketing process begins with Compaq guessing about what kinds of computers customers are likely to want over the next few months. Compaq manufactures those machines, fills warehouses with them, and then tries to sell them to customers through distributors. Some sell, some don't. What happens to the ones that don't? They end up as fodder for low-margin discount sales or even get junked -- pure loss both for Compaq and for the distributors and store owners who make up Compaq's retailing chain. Dell Computer operates differently. Most of Dell's sales occur on their web site, where customers use an online tool we call a Choiceboard. It lets the customers browse electronically among various PC models, offering basic information about the specifications and capabilities of each. Once the customer picks a basic model she likes, she then answers a series of questions that enable Dell to configure a computer that fits her preferences exactly. Do you want a little more memory, a larger monitor, a DVD drive instead of a CD-ROM, a different software package, a better set of speakers? No problem! The configurator captures your choices with a few mouse clicks. Only then does an order go to Dell's manufacturing plant. The computer is built according to your specs and shipped to you within a few days.

It's difficult to exaggerate the significance of this new way of doing business. Among other effects, the Dell business model:

• Eliminates the need to guess what consumers will want, instead capturing precise knowledge of customer demand before any product is manufactured;
• Lets customers buy exactly the product they want rather than having to settle for one that's almost-but-not-quite-what-I-had-in-mind;
• Sharply reduces the financial risks borne by the manufacturer, distributor, and retailer, by setting the wheels of production in motion only after an order is received; and
• Makes clearance sales, unsold inventory, and lost revenues due to sudden, unpredictable shifts in demand a thing of the past.

And these effects -- which benefit both the customer and the company -- all flow from a single powerful innovation of digital business: the Choiceboard. It's a new way of doing business that is quickly spreading to other industries, with similarly profound effects.

Dell was one of the first companies to create a Choiceboard, and Dell's Choiceboard remains one of the best in any industry. Furthermore, Dell has introduced a host of other strategic innovations using digital technology in other areas of its business, from manufacturing to finance to human resources to customer service. No wonder Dell has been a remarkably successful business in an industry where profits have been increasingly hard to come by. Over the past three years, Dell's average profit margin has been about 11% (versus one percent for most competing PC companies), while its revenues have grown by an average of 48 percent per year (versus 14 percent for the competition).

Dell is one of a handful of companies we call the digital pioneers. These are companies that were among the first to recognize the transformational power of digital technologies. Some are well-known as high-tech powerhouses: for example, Cisco Systems, the leading manufacturer of routers, switches, and other electronic gear for computer networks. Others will come as a surprise to all but a very few.

For example, consider Cemex, the leading supplier of cement and concrete in Mexico. It's a (literally) gritty, commidity-based industry plagued by unpredictable demand and sudden changes in business conditions, whipsawed by everything from interest rate hikes and labor unrest to weather and traffic conditions in Guadalajara. Probably not the kind of company that comes to mind when we speak of digital business.

Yet Cemex has revolutionized the cement industry -- and achieved nearly incredible rates of growth and profitability -- by using digital technologies to tame their worst problems. After studying how the FedEx shipping company, Houston 911's emergency response system, and Exxon's worldwide oil shipping network had tackled similar challenges, Cemex created a communications system called CEMEXNET. Every Cemex plant and delivery truck is now linked via satellite to a computer system that continually tracks customer demand and Cemex supplies of various grades of cement and concrete. Dispatchers at Cemex's Monterrey plant always know the location, direction, and speed of every delivery vehicle and can reroute shipments instantly as needed.

As a result, Cemex has reduced the industry-standard three-hour delivery window to twenty minutes. Is that a big deal? You bet it is. When you're the manager of a construction crew with three hundred workers standing around a big hole in the ground, waiting for the cement you need to start pouring a new foundation, every hour lost costs thousands of dollars. You'd be foolish not to do business with the digital pioneer in the cement industry.

So both Dell and Cemex are examples of digital businesses. What do they have in common? Both companies are certainly technologically savvy. Their brilliant business innovations wouldn't have been possible without electronic tools like Dell's Choiceboard and CEMEXNET.

But it would be wrong to focus on the technology alone, as if an infusion of computer gear is the cure for what ails any lagging business. The success enjoyed by Dell and Cemex comes, first, from their deep knowledge of customer needs; then, from their readiness to apply the new capabilities made possible by digital technologies to meeting those needs better, faster, more accurately, and more economically.

We've studied Dell, Cemex, and the other digital pioneers, as well as a number of companies that are moving rapidly to join the ranks of digital businesses. (Jack Welch's GE is one example.) We've found that going digital enables companies to:

• Reach new sets of customers;
• Offer new arrays of customer benefits;
• Leverage employee talent in powerful new ways;
• Tap entirely new sources of profit; and
• Find new ways of strengthening their strategic position in the marketplace.

It's very exciting, and a little scary -- especially when you consider that, if you aren't ready to explore these options, your competitors probably are.

Today, being a digital business offers a distinct competitive advantage -- often one that will allow a company to dominate its industry for the next several years. Tomorrow, it will be the price of admission to the game. The sooner you learn what it's all about, the better.

Introduction

Why this book? And why now? After all (you may be thinking), this isn't the first book on e-commerce and the Internet. It may not even be among the first hundred books on these topics, as a casual glance at any bookstore's shelves makes clear. What can this book say that's new and different?

That casual impression is correct in one sense, wrong in another. Correct because the digital revolution has been under way for years and has spawned hundreds of books, including several excellent ones. Wrong because How Digital Is Your Business? is not a book on e-commerce or the Internet. It's a book on digital business. And that means it could not have been written even eighteen months ago.

We define a digital business as one in which strategic options have been transformed--and significantly broadened--by the use of digital technologies. Under this definition, it's not enough to have a great Web site or a wired workforce or neat software that helps to run a factory. A digital business uses digital technologies to devise entirely new value propositions for customers and for the company's own talent; to invent new methods of creating and capturing profits; and, ultimately, to pursue the true goal of strategic differentiation: uniqueness.

Digital business, so defined, is a phenomenon that has emerged only since 1996. It gathered momentum in the last two years of the twentieth century.

* Not until 1998 did Dell Computer's on-line configurator--one of the first Choiceboards, a powerful new tool for digital business--appear in anything like its current form.

* Not until May of the same year did it become apparent that what we call 10X Productivity--order-of-magnitude improvement in cost, capital requirements, and cycle time--could be and in fact was being realized through the use of digital technologies.

* Not until early in 1999 did it become clear that AOL, Yahoo!, and eBay had all developed viable business models for doing business on the Internet.

* And not until the early months of 2000 did it become clear that GE, one of the business world's great incumbent companies, was moving forcefully to bring about the first successful large-scale transition from a nondigital to a digital business model.

Add to these facts the reality that the creation of a fully developed digital business design takes four to five years to complete, and it's apparent that what we now know about digital business was impossible to know, except in vague outline form, prior to 2000. Thus, we'd argue, this is the first book about digital business. It won't be the last.

Having been exposed to the hype and furor that digital technologies have aroused, we have no desire to contribute to them. But we believe that digital business represents a fundamental change from past business models. By comparison, other business movements, like the quality movement of the 1980s or the reengineering movement of the 1990s, will prove to be significantly narrower and more technical, and will have less impact.

The breadth and depth of the digital revolution are so important that no one in business can afford not to make digital business a leading priority during the next half-decade. The situation of today's business leaders--those responsible for decisions that affect customers and determine how talent, money, and other resources are deployed--is comparable to that of any professional whose field is being altered forever by the emergence of a new and better way of working.

Think of an architect during the early years of the twentieth century, when steel-girder construction and the invention of the elevator were making skyscrapers possible; or imagine a physician in the middle of the nineteenth century, when the discoveries of anesthesia (in the 1840s) and of sterile technique (in the 1860s) were transforming surgery from a torturous horror into a life-saving miracle. No responsible professional would want to ignore such developments. It's now clear--far clearer than it was even two years ago--that the changes made possible by new digital ways of doing business will be equally radical, beneficial, and liberating.

The history of digital business is just emerging from the discovery stage. But early developments have already revealed some important lessons for those who would lead--or join--the second wave of business digitization. This book makes available to anyone in business the economic and organizational implications of the success stories (as well as the struggles and setbacks) of companies that are showing the way toward the

Digital Business Designs of the future.

These companies are the digital pioneers, and several chapters in this book tell their stories: Dell Computer (Chapter 4), Cemex (Chapter 5), Charles Schwab (Chapter 7), and Cisco Systems (Chapter 9). Taken together, these chapters illustrate the extraordinary outcomes that Digital Business Design makes possible, and they suggest the qualitative changes in business culture and values that accompany digitization. The stories of these four companies offer profiles of the digital businesses of the future.

Chapters 12 and 13 present a different kind of case study: the current experiences of two large and powerful incumbents, GE and IBM, as they transform themselves into digital businesses. These chapters sketch out what it takes to change a traditional enterprise into a digital business, and some of the problems and obstacles that must be overcome.

Chapter 14 tells yet another type of business story: the success of the few large-scale Internet-based businesses that have developed viable (and profitable) digital business designs. AOL, Yahoo!, and eBay are examples of what it takes to start in a digital space and build an effective business model. Legions of struggling dot-com companies have begun to learn some of the hard but necessary lessons.

Other chapters focus on specific aspects of digital business design: the Choiceboard, a powerful but little-known digital tool; 10X Productivity, one of the remarkable benefits that digitization offers; and the organizational effects of going digital. Each element of the digital business picture provides ideas and methods that can help every company that is crafting a transition from a conventional to a Digital Business Design. The chapter sequence allows the ideas, information, and stories to be mutually reinforcing and cumulative in their effect.

We hope that, after reading this book, the importance and urgency of digitization for all businesses today will be clear. The current business climate of relative prosperity (and the record-setting bull market) can dampen the sense of urgency about fundamental business reinvention. "We're doing fine," is the feeling, "so why rush into something we don't really understand?" That reaction is human, understandable, and very dangerous.

Consider the people for whom you're responsible: your customers, your employees, your partners. Within the next three years, it simply won't be possible to do a world-class job of serving them, and the other stakeholders who rely on you, without becoming digital. But if you begin today the process of transforming your company through Digital Business Design, you'll be able to offer them benefits no other company can match--the unique value propositions that are the ultimate reward of digitization.

The time is now, and the starting gate is right here.

Editorial Reviews

When Industry Week magazine compiled a list of the six individuals whose principles and practices most inspire business leaders around the world, they included Adrian J. Slywotzky, coauthor of How Digital Is Your Business?. Slywotzky was honored for his impact on such global players as Microsoft and Honeywell as well as for his expansive vision of a future in which technology, deregulation, and the accelerated exchange of information reshape classic business models. In How Digital Is Your Business? Slywotzky and coauthor David J. Morrison expand upon the conventional definition of a "digital business" and argue that, in the future, digitalization will be "the price of admission to the game."

bn.com

Slywotzky [is] one of the leading lights of a new generation of strategic thinkers.

Boston Globe

Six individuals . . . now are the people whose ideas, principles, and practices most challenge, drive, and inspire chief executives in companies across the U.S. and around the world . . . Peter F. Drucker, Bill Gates, Andrew S. Grove, Michael E. Porter, Adrian J. Slywotzky, and John F. Welch, Jr.

Industry Week

In every industry, managers struggle to understand the changing rules of competition. Slywotzky's charting of the tectonic shifts in business has made him one of today's hottest corporate strategists.

CFO Magazine

Slywotzky and Morrison, management consultants and authors of The Profit Zone, return with guidance for companies that will increase their competitiveness and profitability by integrating the most appropriate technology into their strategic business design. Their concept, dubbed "Digital Business Design," is "not about technology for its own sake; it's about serving customers, creating unique value propositions, leveraging talent, radically improving productivity and increasing profits. It's about using digital options to craft a business model that is not only superior, but unique." The companies that demonstrate the best DBD, they argue, are those that focus on business issues first--and then determine how technology can maximize their business. The authors guide readers through a series of fundamental questions, with numerous examples of companies (Charles Schwab, GE, Cisco) that have successfully employed the DBD concept. Key to DBD is a "choiceboard," an "interactive on-line system that allows individual customers to design their own products and services." The best example of a company using choiceboards to increase a customer base, claim Slywotzky and Morrison, is Dell, whose customers can go online and select from an array of options to "custom make" their own computer system. For an increasingly global and digital market, Slywotzky and Morrison lay out a clear and cogent recipe for increased competitiveness and profitability. (Nov.) Copyright 2000 Cahners Business Information.

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