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Transforming businesses: Using information in innovative ways

Transforming businesses: Using information in innovative ways
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First Published: Wed, Dec 12 2007. 10 53 PM IST
Updated: Wed, Dec 12 2007. 10 53 PM IST
Research by McKinsey & Co. has identified eight technology-enabled trends that will shape businesses and the economy in the coming years. The trends fall within three broad areas of business activity: managing relationships, managing capital and assets and leveraging information in new ways. Part 1 of this article that appeared on Wednesday looked at managing relationships. Part 2 looks at managing capital and assets and leveraging information.
Managing capital, assets
5. Expanding the frontiers of automation
Companies, governments, and other organizations have put in place systems to automate tasks and processes: forecasting and supply chain technologies; systems for enterprise resource planning, customer relationship management, and HR; product and customer databases; and websites. Now these systems are becoming interconnected through common standards for exchanging data and representing business processes in bits and bytes.
During the late 1990s, FedEx and UPS linked data flowing through their internal tracking systems to the Internet to let customers track packages, with no human intervention required on the part of either company. More recently, Carrefour, Metro, Wal-Mart Stores and other large retailers have adopted digital-tagging technologies such as radio frequency identification and integrated them with other supply chain systems to automate the supply chain and inventory management further.
Companies still have substantial headroom to automate many repetitive tasks that aren’t yet mediated by computers and to interlink “islands of automation” and so give managers and customers the ability to do new things.
6. Unbundling production from delivery
Technology helps companies to utilize fixed assets more efficiently by disaggregating monolithic systems into reusable components, measuring and metering the use of each, and billing for that use in ever-smaller increments.
Amazon.com, for example, has expanded its business model to let other retailers use its logistics and distribution services. It also gives independent software developers opportunities to buy processing power on its IT infrastructure so that they don’t have to buy their own. Mobile virtual network operators, another example of this trend, provide wireless services without investing in a network infrastructure. At the most basic level of unbundled production, 80% of all companies responding to a recent survey on Web trends say they are investing in Web services and related technologies.
Unbundling works in the physical world too. Today, you can buy fractional time on a jet, in a high-end sports car, or even for designer handbags. Unbundling is attractive from the supply side because it lets asset-intensive businesses raise their utilization rates and therefore, their returns on invested capital. On the demand side, unbundling offers access to resources and assets that might otherwise require a large fixed investment or significant scale to achieve competitive marginal costs.
Companies that make their assets available for internal and external use will need to manage conflicts if demand exceeds supply. A competitive advantage through scale may be hard to maintain when many players, large and small, have equal access to resources at low marginal costs.
Leveraging information
7. Putting more science into management
Just as the Internet and productivity tools extend the reach of and provide leverage to desk-based workers, technology is helping managers exploit ever greater amounts of data to make smarter decisions and develop insights that create competitive advantages and new business models. From “ideagoras” (eBay-like marketplaces for ideas) to predictive markets to performance-management approaches, standards-based technologies promote aggregation, processing and decision making based on the use of growing pools of rich data.
Leading players are exploiting this information explosion with a diverse set of management techniques. Google Inc. fosters innovation through an internal market: employees submit ideas, and other employees decide if an idea is worth pursuing or if they would be willing to work on it full time. Intel integrates a “prediction market” with regular short-term forecasting processes to build more accurate and less volatile estimates of demand. Cement manufacturer Cemex optimizes loads and routes by combining complex analytics with a wireless tracking and communications network for its trucks.
The amount of information and a manager’s ability to use it have increased explosively not only for internal processes but also for the engagement of customers. The more a company knows about them, the better able it is to create offerings they want, to target them with messages that get a response, and to extract the value that an offering gives them. The holy grail of deep customer insight—more granular segmentation, low-cost experimentation, and mass customization—becomes increasingly accessible through technological innovations in data collection and processing and in manufacturing.
Examples are emerging across a wide range of industries. Amazon.com stands at the forefront of advanced customer segmentation. Its recommendation engine correlates the purchase histories of each individual customer with those of others who made similar purchases to come up with suggestions for things that he or she might buy. Although the jury is still out on the true value of recommendation engines, the techniques seem to be paying off: CleverSet, a pure-play recommendation-engine provider, claims that the 75 online retailers using the engine are averaging a 22% increase in revenue per visitor. Meanwhile, toll road operators are beginning to segment drivers and charge them differential prices based on static conditions (such as time of day) and dynamic ones (traffic). Technology is also dramatically bringing down the costs of experimentation and giving creative leaders opportunities to think like scientists by constructing and analysing alternatives. The financial-services concern, Capital One, conducts hundreds of experiments daily to determine the appropriate mix of products it should direct to specific customer profiles. Similarly, Harrah’s Casinos mine customer data to target promotions and drive exemplary customer service.
Given the vast resources going into storing and processing information today, it’s hard to believe that we are only at an early stage in this trend. Yet, we are. The quality and quantity of information available to any business will continue to grow explosively as the costs of monitoring and managing processes fall.
Leaders should get ahead of this trend to ensure that information makes organizations more rather than less effective. Information is often power; broadening access and increasing transparency will inevitably influence organizational politics and power structures. Environments that celebrate making choices on a factual basis must beware of analysis paralysis.
8. Making businesses from information
Accumulated pools of data captured in a number of systems within large organizations or pulled together from many points of origin on the Web are the raw material for new information-based business opportunities.
Frequent contributors to what economists call market imperfections include information asymmetries and the frequent inability of decision makers to get all the relevant data about new market opportunities, potential acquisitions, pricing differences among suppliers and other business situations. These imperfections often allow middlemen and players with more and better information to extract higher rents by aggregating and creating businesses around it. The Internet has brought greater transparency to many markets, from airline tickets to stocks, but many other sectors need similar illumination. Real estate is one of them. In a sector where agencies have thrived by keeping buyers and sellers partly in the dark, new sites have popped up to shine “a light up into the dark reaches of the supply curve,” as Rich Barton, the founder of Zillow (a portal for real estate information), puts it. Barton, the former leader of the e-travel site, Expedia, has been down this road before.
Moreover, the aggregation of data through the digitization of processes and activities may create byproducts, or “exhaust data,” that companies can exploit for profit. A retailer with digital cameras to prevent shoplifting, for example, could also analyse the shopping patterns and traffic flows of customers through its stores and use these insights to improve its layout or the placement of promotional displays.
Another kind of information business plays a pure aggregation and visualization role, scouring the Web to assemble data on particular topics. Many business-to-consumer shopping sites and business-to-business product directories operate in this fashion. But that sword can cut both ways; today’s aggregators, for instance, may themselves be aggregated tomorrow. Companies relying on information-based market imperfections need to assess the impact of the new transparency levels that are continually opening up in today’s information economy.
Conclusion
These trends are best seen as emerging patterns that can be applied in a wide variety of businesses. Executives should reflect on which patterns may start to reshape their markets—and on whether they have opportunities to catalyse change and shape the outcome rather than merely react to it.
James M. Manyika is a director and Kara L. Sprague is consultant in McKinsey’s San Francisco office; Roger P. Roberts is a principal in the Silicon Valley office.
McKinsey’s Jacques Bughin, Michael Chui, Tony Huie, Brad Johnson, Markus Löffler and Suman Prasad contributed to this article.
Reprinted with permission, ©2007/McKinsey & Co. The article was originally published in The McKinsey Quarterly and can be found on its website,www.mckinseyquarterly.com
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First Published: Wed, Dec 12 2007. 10 53 PM IST
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