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Managing capital and 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 Web sites. Now these systems are becoming interconnected through common standards for exchanging data and representing business processes in bits and bytes. What's more, this information can be combined in new ways to automate an increasing array of broader activities, from inventory management to customer service.

During the late 1990s FedEx and UPS linked data flowing through their internal tracking systems to the Internet-no trivial task at the time-to let customers track packages from their Web sites, with no human intervention required on the part of either company. By leveraging and linking systems to automate processes for answering inquiries from customers, both dramatically reduced the cost of serving them while increasing their satisfaction and loyalty. More recently, Carrefour, Metro, Wal-Mart Stores, and other large retailers have adopted (and asked suppliers to adopt) digital-tagging technologies, such as radio frequency identification (RFID), and integrated them with other supply chain systems in order to automate the supply chain and inventory management further. The rate of adoption to date disappoints the advocates of these technologies, but as the price of digital tags falls they could very well reduce the costs of managing distribution and increase revenues by helping companies to manage supply more effectively.

Companies still have substantial headroom to automate many repetitive tasks that aren't yet mediated by computers-particularly in sectors and regions where IT marches at a slower pace-and to interlink "islands of automation" and so give managers and customers the ability to do new things. Automation is a good investment if it not only lowers costs but also helps users to get what they want more quickly and easily, though it may not be a good idea if it gives them unpleasant experiences. The trick is to strike the right balance between raising margins and making customers happy.

Further reading:

John Hagel III, Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow through Web Services, Boston: Harvard Business School Press, 2002.

Claus Heinrich, RFID and Beyond: Growing Your Business with Real World Awareness, Indianapolis, IN: Wiley Publishing, 2005. Jeanne W. Ross, Peter Weill, and David C. Robertson, Enterprise Architecture as Strategy: Creating a Foundation for Business Execution, Boston: Harvard Business School Press, 2006.

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 cost effectively. Information and communications technologies handle the tracking and metering critical to the new models and make it possible to have effective allocation and capacity-planning systems.

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 percent of all companies responding to a recent survey on Web trends say they are investing in Web services and related technologies. Although the applications vary, many are using these technologies to offer other companies-suppliers, customers, and other ecosystem participants-access to parts of their IT architectures through standard protocols.¹

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-factories, warehouses, truck fleets, office buildings, data centers, networks, and so on-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. For companies and entrepreneurs seeking capacity (or variable additional capacity), unbundling makes it possible to gain access to assets quickly, to scale up businesses yet keep their balance sheets asset light, and to use attractive consumption and contracting models that are easier on their income statements.

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.

Further reading:

"Jeff Bezos' risky bet," BusinessWeek, November 13, 2006.