Month: January 2021

Last week, I gave a presentation to a company that’s in the midst of a strategy revamp. I always admire leadership teams that take on the incredibly difficult challenge of taking a step back and reviewing how the organization is operating right now and what change in direction is required to achieve future success. As the saying goes, what got us here in many cases won’t get us there.

One of the key discussions was concerned with the R&D resources allocated to providing customizations to some of the most important customers. Large customers often know how important they are to the company and, as a consequence, typically negotiate very hard for special treatment in terms of customization, free services and similar. As these companies provide a significant part of the revenue, the short-term and immediate response often is to go along with their requests.

When a company becomes increasingly dependent on a small set of powerful customers and these customers exploit their power, the consequence may easily be that all R&D resources are consumed by providing customizations and customer requests. The result will be that the company’s offering becomes increasingly commoditized as the R&D resources aren’t used for building differentiating functionality.

Of course, there’s nothing wrong with listening to your customers and understanding their needs and wishes. However, there’s a major difference between “customer-first” and “customer-unique” features. Customer-first features are requested by customers that are in many ways leading and happen to identify the need for new functionality before others. Such a feature will be relevant for more customers besides the one initially requesting it and hence valuable. A customer-unique feature is functionality that’s only relevant for the requesting customer. These features are often a drain on the company as their return is quite low.

At the company where I gave the presentation, the discussion led to an interesting question: are these important but demanding customers really the right customers for us? In this context, I brought up the difference between “making customers happy” and “making happy customers.” The company had worked incredibly hard at making customers happy, but were they really the customers they wanted to serve? Although the discussion didn’t lead to a clear conclusion, it was clear that it was far from obvious that this was the case.

As part of the strategy work that every company needs to engage in, it’s of critical importance to identify the profile of the customer you want to serve – for at least three reasons. The first is that a company trying to be everything to everyone is bound to fail. As you can’t stand out and differentiate yourself without focus, the only strategic path left is to be the lowest-cost player, which is a hard game.

Second, strategic investments made by any organization should be prioritized such that the skills and capabilities the company has used to differentiate itself from the competition are developed further and those that the company needs going forward receive sufficient attention. Failing to be strategic in these investments typically leads to a politicized process and a scattered set of results.

Third, as any company needs customers and it’s the sales function that’s delivering these, it’s important to ensure that those active in sales are aware of the profile of the customer that the company seeks to serve. Failing to provide sales with a clear customer profile easily leads to the aforementioned problem where sales has promised customers specific customizations and extensions as part of the process of “closing the deal.”

So, as part of your strategy process, make sure to create a clear profile of the type of customer you’re looking to serve. And that profile may require you to “fire” customers that no longer fit that profile, or at least put them in maintenance mode and not invest in any further customization work for them. In the end, the goal isn’t to make all customers happy but to make the customers that you want to serve happy.

 

 

 

During the Christmas break, I read several books including “Sense & respond” by Jeff Gothelf and Josh Seiden. The authors frame the difference between traditional and digital companies in terms of the absence or presence, respectively, of a continuous dialog with the market and the customers. Of course, traditional companies interact with the market and talk to customers, but once a product specification has been defined, the product developed and the product is ready for sales, the discussion is mostly concerned with getting customers to actually buy the darn thing.

If the sales are disappointing or if there are many requests for changes, there often is an upgrade or next version of the product. However, the frequency of updates tends to be low and is often measured in years. In automotive, a car model usually lives for 5-7 years and has a mid-life upgrade after 3 years. Even traditional software products experience a yearly release cycle at most.

Digital companies, on the other hand, are in a constant dialog or conversation with the market. Through a variety of different metrics and mechanisms, they continuously learn from the feedback from customers, make changes and measure their effectiveness. These mechanisms include instrumenting the product to understand how the product is used, the ability to provide different feature versions and ways to assign users to different groups. And, of course, digital companies assume continuous deployment (DevOps) to be in place as the feedback cycle should be as short as possible and preferably be measured in days and weeks.

Another main difference between traditional and digital companies is that the former tend to focus on what customers say while the latter focus on what customers actually do. This is a very important distinction as, although we all view ourselves as rational people, it turns out that in almost all cases, there’s a significant gap between what people say and what they do. Deciding based on what people say can therefore really throw you off the optimal path as the things you build or add to your product may not deliver any actual value.

Going from focusing on what people say to what people do can be a difficult transition, especially in B2B contexts. Customers may walk as they feel you’re not listening to them. Also, it’s really hard to tell them that they may believe something about their behavior that’s actually incorrect. However, the alternative is to build functionality that won’t add any business value in the long term.

Especially for embedded-systems companies, there often is a belief that these principles only apply to software, but not to electronics and mechanics. The interesting development is that more and more companies are now starting to explore mechanisms to deploy new electronics and, perhaps, even mechanical components to products in the field. Of course, the release frequency is lower for anything that includes atoms, but it’s entirely possible to also have a dialog with the market for these types of components. It’s mostly a matter of finding the right business model to support it.

Many in R&D don’t realize the economics of R&D budgets. For a company that allocates 5 percent of its revenue to research and development, it means that every euro invested has to generate 20 euros of business value. It’s not enough that the R&D costs are covered. The best way to ensure that R&D activities deliver the 20x return is to take small steps, measure continuously whether you deliver on the expectations and change immediately if the response from the market is different than expected.

Digital companies are in a continuous dialog with the market, have short feedback cycles and focus on customer behavior (rather than on what customers say). As digitalization continues to be the theme for 2021 as well, evaluate your business and technology strategy to ensure that you’re incorporating these principles and transitioning towards these. The only constant is change and not changing has a very predictable outcome: extinction. And who wants that?

 

 

Many years ago, together with a few colleagues, I wrote a paper on the BAPO model. The BAPO model says that business and business strategy should drive architecture and technology choices (A). These should, in turn, drive process, ways of working and tooling choices (P). Finally, these should be used to define an organization that makes sense to realize the business and technology strategy (O). Although this model is intuitively very appealing and in many ways makes a lot of sense, the challenge is that it misses an important point: technology is becoming increasingly central in business and the way that companies traditionally work with business strategy is becoming increasingly obsolete.

No matter what business you’re in, you’re a digital technology company. The success of the clothing store Zara is often attributed to its ability to detect trends in fashion and respond to these trends in weeks. The only way it can do this is by using digital technologies. Similarly, banks are huge IT houses and the budget for IT often is on par with, if not larger than, the other functions in a bank. The implication is that developing a business strategy without incorporating technology is impossible and makes no sense. Instead, the technology and business strategy are so tightly interwoven that these need to become one and the same.

One reason for this is that the nature of business is changing from a one-directional, transactional model where the company stresses the features of the product and tries to convince customers to buy it, to a bi-directional, continuous model where there’s a continuous dialog between the company and its customers. This dialog can take more of a qualitative approach, such as surveys and questionnaires. With the increasing digitalization of the industry, however, it often tends to be more quantitative and driven by mechanisms to measure customer behavior, such as A/B testing.

A second reason is that digital technologies allow for the automation of processes to an extent that was infeasible even a few years ago. Ranging from robotic process automation (RPA) to full AI solutions, processes requiring significant human effort can these days be fully automated, reducing cost and error rates and significantly speeding things up. And with the increasing prevalence of no-code and low-code solutions, processes can be automated by teams mostly consisting of domain experts with minimal support from engineers. All this is of course not constrained to the boundaries of the organization but can, and in fact should extend to your ecosystem of partners, suppliers and customers.

Third, the pace of technology development is now so high that the traditional infrequent, time-consuming strategy process needs to become continuous as well. We don’t do strategy once per year, but continuously. New technologies enable new business models, new ways of serving customers, and so on, and if you don’t exploit those immediately, others will do it for you. Similarly, new business models require new technologies, which in turn often require new partners to interact with.

Business strategy and technology strategy are becoming one and the same. This requires us to suspend the traditional division of the business side and the R&D side of the house, and build a continuous conversation with the market, continuously engage in the strategy process and constantly experiment and test to inform the strategy. Remember, no matter what business you’re in, you’re a digital technology company. So, you better start behaving like one.

An engineer asks:

I am a test expert and I regularly have to try very hard to convince project leaders to have a certain test performed. I find convincing them difficult, especially if the project leader has a dismissive attitude. How can I sell my service better?

The communication trainer answers: 

Even if there is no sales function on your business card, you must regularly “sell” your services to internal customers. For example, because your customer can get your service from outside or simply because he doesn’t need to buy your service or product at all. Selling is a dirty word for many technicians. And yes, selling nonsense or deceiving someone is something you shouldn’t do if you want to sleep peacefully. But if you really have something to add and help the customer solve the problem, you have to bite the bullet.

How do you do that? In the sales process, you go through the steps of the Aipa process: attention, inventory, presentation and approval. The first step involves making it clear who you are and exactly what you or your department is offering. Here, it is important that you know how to get the attention of the customer. In your introduction you will therefore have to name something that you know or estimate that your customer will benefit from. For example, “We are developing a new test that can detect errors in your process early”.

Once interest is piqued, you ‘earn’ the right to start asking questions. The big mistake you can make here is simply telling people how great your service or product is. After all, you don’t know if the customer really needs it at this point yet.

You must look for the problem and the desire of the customer. You do this by asking open questions: “What is the problem?”, “What are you up against?”, “What exactly is going wrong?”, and also “What negative effects does this have?”. In this way, the client’s pain comes to the table and this provides motivation to want to do something about it. You also ask about the goals to be achieved. This creates a creative tension between the here and now (‘ouch’) and where the customer wants to go (smiling faces and full glasses). Your added value lies in helping them to take that step.

Once the problem is on the table, you move to the third step: offering your solution. Here, it is important that you also dare to promise something. After all, you stand for your product. If you can’t guarantee a result yet, state the degree of uncertainty, but do choose a position. Say, for example, “I still see a ten percent risk that we will not achieve the desired result, but I want to go for it and minimize the risk”. Waiting until you are 100 percent sure is science; taking a position in uncertain circumstances is leadership and this is often necessary.

When you explain your solution, don’t immediately count on applause. It is natural that critical questions will come. It is important to find out what is bothering you. That means you have to go back to the inventory phase and ask open questions, until you have the customer’s concern clear. So you have to go from sending (phase 3) back to asking questions (phase 2).

If your proposal meets the customer’s needs, trust and the desire to make joint agreements emerge – the final stage in the Aida process. You have helped the customer.

In many industries, there’s an implied, often underspecified, architecture of how the different stakeholders in the ecosystem interface with each other. By defining their mutual interfaces, it allows for better alignment. For the typical interactions within the ecosystem, this is very helpful as the different parties have predefined expectations about one another, and transactions and integrations can be conducted, built and deployed more easily.

The existing business ecosystem gets encoded in the way a company organizes itself, including the work processes, workflows, automation, tooling and even job titles. For instance, a company that buys embedded subsystems for its products from suppliers will have processes for defining the requirements, purchasing professionals who negotiate the best deal with suppliers and tooling for testing deliveries from suppliers as well as for tracking the realization of requirements to sign off on contracts and allow suppliers to get paid.

However, there’s a downside to this implied ecosystem architecture: it tends to hinder innovation and experimentation by companies. Experimenting with different business models, introducing DevOps for the product throughout its lifetime, exploring new customer segments with the product – it all tends to upset the existing relationships in the ecosystem. This may easily cause a situation where the cost of innovation and experimentation is so high that it doesn’t get done. This is especially so when innovations require changes by multiple ecosystem partners – generally, the more partners are involved, the less likely it is that the innovation is even experimented with.

Let’s say, for example, that the aforementioned company decides to stop using a supplier and bring the development of the subsystem back in-house – something that happened in the automotive industry during the past years with in-vehicle software. This isn’t simply a technology decision. Rather, it requires changes to the tooling, reassigning of people in purchasing, significant changes to ways of working and internal processes as well as a potentially challenging legal situation with the former supplier.

Where the architecture is especially rigid, for instance driven by regulation or a strong government customer, the ecosystem runs the risk of becoming stale. Due to the difficulty of incorporating change, the ecosystem’s ability to adopt productivity-improving innovations is so limited that, rather than individual players, the ecosystem as a whole may be disrupted. Industries such as construction, healthcare and university education are illustrative examples of where the pace of innovation in the ecosystem is particularly slow and where some are predicting a fundamental disruption may happen in the foreseeable future.

When it comes to the digital transformation of your company, this very often requires the organization to strategically reposition itself in its business ecosystem. Digitalization often causes a transition from a transactional to a continuous value delivery to end-customers. This means that companies that happily used wholesalers, resellers, installers and other partners to get their product out in the market are now looking for ways to build direct customer relationships. Removing the intermediaries requires careful management of the relationship with these partners as the old, transactional, and the new, continuous, business often have to coexist for several years, if not longer.

A second typical pattern is that work that was outsourced needs to be brought back in-house as the suppliers are unable to change their operating model to faster feedback cycles, there’s no good business model or the company considers the technology to be so critical that they want to own the competence internally.

Of course, the opposite happens as well: a technology and associated subsystems that were done in-house because of their strategic nature lose that status due to digitalization and need to be outsourced to new partners that might even have been competitors earlier.

A fourth pattern is that the company needs to involve new partners to manage new digital technologies, such as data and AI, or because the new position in the ecosystem requires new relationships with others serving the same customers. This often calls for a careful strategy as to where the company wants to own the market and where it’s open to partnering and letting others coexist.

Finally, there’s the challenge of startups and established, repositioning companies entering your existing or intended market. The organization needs to decide whether to partner or compete with these new entrants.

The digital transformation almost always requires strategic repositioning in your business ecosystem. You need to have a direct relationship with your end-customer, adopt new technologies and associated new partners, reinvent your business model, jump over existing partners without ruining the relationship for your legacy business and so on. This is complex and calls for careful strategizing and execution. But the alternative is that you get disrupted together with the existing business ecosystem. So, next to executing your New Year’s resolutions, also spend some time thinking about how you’ll initiate the work on repositioning your company in your business ecosystem. I wish you a prosperous 2021.