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September 23, 2013
Playing the middle against both ends
By: Mark McDonald

Digital success requires playing the organizational middle against opposing ends of achieving growth and cost reduction. Organizations can change significantly as they move between these two ends. It is clear what to do in an either/or world like the recent global recession – you concentrate on one while changing the other minimally. It is another matter when markets are in constant transition.

In a more multi-variant and fast changing environment, where some markets are up while others are down, the world is no longer binary. Traditional binary strategies can lead to companies doing what’s right at the wrong time.

Consider examples of digital transition, such as the changing fortunes of digital pure plays like Zynga, or the impact of digital on the UK automobile insurance marketplace. Executives see transition in their own businesses with their digital offerings growing at double-digit rates while still accounting for a minority of total revenue. So there’s a tension between current majority business areas, that need constant cost cutting, and minority digital business activities that need growth investments.

Growing a digital business – or any business – requires a strategy that does more than swing between growth and cost modes by playing the middle against both ends. Executives need to do more than decompose and distribute resources at the business unit or geography level, creating ‘haves and have not’s that tear at the fabric of corporate culture and cohesion.

A good approach to digital business avoids pitting the digital world against the rest of the world. We learnt our lessons more than a decade ago, when we convinced ourselves that ecommerce would require disrupting ourselves before someone else disrupted us. That strategy did not work, particularly among established businesses, as traditional business models and cultures proved far more resilient and survived the ‘dot.bomb’ bust.

Today’s challenge is somewhat different. Most organizations feel digital – in terms of online channels and IT investments – but in reality are not. Particularly when new technology is used to merely replace old systems for reasons of efficiency without revolutionizing products, services or processes. This substitution approach limits the business case for digital technology and can result in underfunding the digital opportunities these businesses cannot readily appreciate. What you can also end up with is a company investing in digital as soon as digital grows to be a big part of the business without embedding it into broader and deeper corporate plans.

Playing the middle against the opposing ends of growth and cost cutting does not have to be a zero sum game. Winning in digital does not demand destroying the existing core business. But it requires changes in strategy formulation, technology planning and budgeting to create a dynamic middle that’s successful at both cutting costs and growing digital and core businesses.

Strategy and planning disciplines like economic value add (EVA), activity based costing (ABC) and the ‘beyond budgeting’ movement seek to create a dynamic and results oriented planning process that changes the structure of core capabilities. While finance is the function that keeps score of what happens on the field, organizations seeking growth and cost control need to change the nature of the field itself. Here are a few thoughts on the changes required in the middle to consistently achieve both ends.

Plan from the outside in. Customers and markets drive the decisions that form the basis for company cost structures and commitments. Look hard at the changing nature of the customer base, where they are going, what differences are emerging between current and future purchasing patterns. Look at the average age of customers and where the most desirable customers are spending their time and money. Use this insight to realign structures with the market and where it will be in the future, or seek to redefine the market by setting new aspirations for customers – see Michael Schrage’s eBook Who do you want your customers to become for more details.

Isolate capabilities. Too often, planning processes concentrate on adding capabilities without paying enough attention to subtracting or eliminating them. The result is an accretive approach to operations, complexity and organization, resulting, for example, in duplicative and disparate channels. Rather than engaging in simple consolidation, which is often more of a financial than functional exercise, separate capabilities.

Reuse capabilities early and often. Reuse refers to the application of existing resources to achieve new purposes. Reuse was used to be an IT issue. In the digital world it becomes a business issue. A study conducted by MIT shows that business reuse reduced cost but, more importantly, it can accelerate time to market. Both are critical to success in a digital world.

Create platforms in place of infrastructures. A platform is the collection and integration of common resources that support multiple business operations. It is the physical manifestation of reuse and the basis for supporting the diversity and scale of digital commerce. Platforms blend capabilities to support multiple channels and outcomes. Platforms consist of business and technical services managed over time and represent a re-imagining of IT infrastructures and business operations.

The demands of a digital world require organizations to be both growth oriented and cost conscious at the same time. Jumping between the two, growth now followed by a period consolidation later, is no longer viable as the pace of market change ensures you will be out of sync. Likewise spreading investments across the organization, growth here, cutting there, is less effective as it pulls the organization apart at a time when it needs to be more unified than ever. And merely substituting digital technology – tablets for PCs etc. – gives the organization a face lift without changing its fundamental operating and cost structure.

Successful digital businesses acting in a complex and fast changing environment can achieve growth while reducing costs. But this requires rethinking strategy and re-engineering the organization’s underpinnings of growth and cost structures. Above all it requires creating a more flexible core that can respond to market changes more readily.

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