The Process Edge:
Extract (3)
- Process Value Builders: Basic Change
Extract's Table of Contents:
Our final category of value builders includes those that result in basic changes in processes and, often, in the way the organization views itself and is seen by customers and investors. These revolutionary value builders are likely to bring with them considerable risk, but they promise the greatest payoff and most sustained competitive advantage when successful. Business process investment of this kind takes the organization beyond the improvement and enhancement of existing processes into new territory.
Not all revolutionary value builders involve high risk. Firms that take a creative approach to looking for a process edge may discover or invent processes that open new avenues of opportunity without massive capital investment or abandoning currently successful ways of doing business. Many of these low-risk opportunities (and some of the high-risk ones) have been created by deregulation and developments in information technology. We have touched on the fact that deregulation has removed traditional boundaries between industries. At the same time, telecommunications and computer technology have erased many of the barriers of time and distance that once prevented companies from entering certain markets or providing certain services. As a result of these developments, firms that think in terms of potential new applications of existing processes have opportunities to develop entirely new sources of corporate value. In some cases, they may turn current processes into new products, or "productize" a process. In others, they may use their processes to capture someone else's customers-what we can "preempting." These tactics, along with franchising, radicalizing, and inventing, are the five strategies that we group together as revolutionary process value builders.
Productize: Turn a Process into a Product
When MCI introduced its Friends and Family program, it turned a set of background liability processes into a product. Its accounting and billing processes became the basis for a customized discount service that generated $2 billion a year for the company. MCI's success at productizing a process resulted from two factors. One was the company's creativity-its ability to see that processes which are usually considered necessary but unexceptional could be turned into an exciting new product. The other was the fact that MCI handled these processes differently from AT&T, its main competitor, in a way that made it technically difficult for that company to duplicate the program. A process difference-a superiority in terms of its ability to track calls-was turned into a product advantage.
Productizing can be seen as the obverse of importing a process. Rather than adopting another company's superior process for accomplishing a necessary existing task, a firm finds a new use for a process that it already handles especially well. A company whose primary business is handling telephone orders for flowers turned its background credit card authorization and payment processes into a product it sells to small companies who need that capability but cannot afford the infrastructure and staff required. A typical customer might be a small bookstore which gains the ability to take credit card orders over the phone without having to become a Visa or Mastercard merchant, with the paperwork and deferred payments that entails.
Turning a process into a product can create significant EVA if it is done without massive new capital investment. When it uses an existing process in a new way, a firm generates revenue from investment it has already made. It can sell the process-based service for less than it would cost a buyer to replicate it. American Express and several other leading travel agent chains sell travel management services to large companies that would otherwise need to commit substantial capital to building internal travel agencies, including the cost in time and money of developing the expertise that Amex and other established travel agencies have built up over a period of years.
In all of these examples, firms successfully turned processes into products because they handled those processes with unusual skill and efficiency or because it was not practical for other firms to match their significant capital investment in comparable internal processes. Often both reasons apply. When Federal Express created its Business Logistics subsidiary, it counted on the fact that most other firms could not duplicate FedEx's skill at delivering and tracking small package inventory and on the knowledge of what it would cost another company to develop its own infrastructure to provide the service that Business Logistics offered.
Because turning a process into a product involves creative insight into new ways of connecting processes with customer needs, there are no specific rules for productizing. We can suggest these general approaches, however, that may be helpful in seeking opportunities to productize:
Look at processes now hidden from customers that can benefit them if directly offered as a product or service; look at other industries to identify processes that you have and they lack or carry out significantly less well than you
do.
Franchise: License Processes, Infrastructure, and Expertise
McDonald's, HR Block, Mrs. Field's Cookies, and many other firms franchise their process expertise. Franchisees generally pay for a combination of procedures, software services, and training. In addition, and equally important, they buy the use of the franchiser's name, which customers value as a guarantee of an expected product quality or level of service.
Franchisees get the benefit of McDonald's reputation for quality and consistency, a reputation that persists because that company has defined and standardized its key processes rigorously and transfers them successfully to the entrepreneurs who own individual restaurants. Those entrepreneurs buy a complete set of process capabilities, not an off-the-shelf product. McDonald's provides the oversight and training, as well as the food distribution infrastructure, to make sure that its standards are upheld.
Franchising a process is very different from franchising a facility. Several hotel chains that allowed individual hotel owners to use their names in return for a franchising fee debased the value of those names by not ensuring the quality of check-in and other services, cleaning, decor, and food. In 1992, one of the major hotel franchisers was forced to eliminate more than 20% of its hotels because they did not meet minimally acceptable standards. The damage done to a well-known name can be a lasting problem. What stays in the mind of a dissatisfied customer is not that they stayed at one poor hotel but that XYZ hotels are poor in general. The franchise name becomes as much of a liability as McDonald's name is an asset.
The process investment principle for franchising is:
Identify asset processes which can create a new business for someone else when transferred along with corresponding infrastructures and
expertise.
Such opportunities are relatively rare. Realizing them requires outstanding definition and packaging of processes and superb management of the transfer process, but the rewards of success can be
substantial. In return for the use of their names and process capabilities, McDonald's and HR Block receive substantial license fees; franchisees bear the cost of real estate.
Radicalize: Raise the Organizational Stakes
Radicalizing a process means deliberately raising its salience. Radicalizing does not in and of itself alter the process, but establishes new corporate priorities and makes it clear that the radicalized process and the processes that support it have management attention and backing. When Ford made quality "job 1," its aim was to turn quality into an identity asset. It radicalized the processes that quality depends on and made their improvement a top priority. Radicalizing does not specify how processes should be changed: The people who analyze a process to determine what value builder should be applied to it may make the same choice whether or not the process has been radicalized. But the management leadership implicit in radicalizing is itself a value builder.
A key point made by the intellectual leaders of the reengineering movement is that the firm support of senior management is a requirement for successful change. Their commitment to change matters more than the details of the plan for change. In part that commitment means being willing to make the investments of time and capital that change requires, but it also means guiding the firm through the complexities and uncertainties of change. Change is difficult. There are process movement proponents who ascribe the failure of some reengineering projects to "resistance to reengineering," and seem at a loss to understand why people would resist clear improvements in work processes. Shoshana Zuboff suggests that reengineering appeals to computer professionals because they think it does not involve dealing with people. But change is about people, not engineering diagrams. In Managing on the Edge, Richard Pascale analyzes what happened at Ford when management radicalized quality processes. He shows that the company's transformation was not accomplished through a tidy, rational process of programmed changes, but was a drama of personalities, conflicts, and uncertainties held together by the vision, values, commitment, and sometimes the luck of senior management.
The process investment principle that governs radicalizing is:
Radicalize processes when the actions and commitment of people are more important drivers of positive change than specific process activity
reforms.
Radicalizing is most appropriately applied to complex, important sets of processes rather than, say, a single background or priority process. It is a means by which senior management offers a broad vision that gives direction to those who manage the details of process change.
Preempt: Use Your Process to Captures Someone Else's Customer
Discussing the problem of traditional thinking in Chapter Three, we described firms that successfully used preempting to capture customers who "belong" to another industry. British Airways was able to enter the hotel reservations business profitably because:
- It already had a computerized reservation system that cost nearly $500 million to build, an amount that created a barrier to entry for other firms
- British Airways had access to customers at a key moment of value, since for most of them reserving a hotel room is the natural next step after making an airline reservation. (Had BA's agents tried to sell VCRs to airline customers, they would have had little success since there is no meaningful connection between the two transactions.)
- BA had predatory instincts. It had both the will to move aggressively into a business area occupied by another industry and the insight to see an opportunity outside its core activities-that is, it was free of the blinders imposed by traditional thinking.
Similarly, McKesson, a supplier of medical goods, used it existing relationship with pharmacies and its electronic data handling infrastructure to become the fourth largest insurance claims processor in the United States. By providing convenient and reliable handling of what would have been a cumbersome administrative process, it preempted the health insurance industry and, in 1992, was selected to handle the entire industry's electronic claims processing services. McKesson's move into claims process is an example of both preempting and productizing-turning its own data management processes into a service it could sell to pharmacists and insurance firms.
Appropriate infrastructure and timely access to customers are necessary conditions of successful preempting; reputation can also be important if that identity asset contributes to the customer's willingness to purchase a new product or service. Tesco, the British supermarket chain, provides an example. The firm is among the world's top supermarkets in terms of business excellence. Its original identity processes related to pricing. Its founder, as influential in British retailing as Sam Walton has been in the U.S., built his firm into one of the largest supermarket chains in Britain on the
"pile 'em high and sell 'em low" principle. Tesco has matured into a company known both for aggressive pricing and consistent quality, with strong house brands. When it set up forecourt service stations to supply gas to motorists under the Tesco brand name (though obviously the product comes from oil companies such as Texaco), it captured 20% of the UK's gas market in just two years. The venture succeeded because it offered a product at a potential moment of value-customers were already driving to a Tesco store to buy groceries-and because the company's reputation for quality and price convinced motorists that Tesco gas would be a good deal.
Marks and Spenser, another British retailer, used its expertise in managing fast-moving consumer goods and its reputation for quality to enter the business of selling perishable foods. In 1995, its Paris store was the place to go for take-away lunches. According to the Economist, Marks and Spenser was the most profitable retailer in the world in that year.
The basic process investment principle for preemption is:
See where you can capture new business at your customers' moments of value through your existing process infrastructures.
A corollary is:
Customers do not care about industry boundaries; they want service and
convenience.
Customers make hotel reservations through British Airways because that is a convenient and reliable way to secure a hotel room; they are not influenced by the thought that it might be more "appropriate" to use the hotel's reservation service instead. The success of Tesco as a retailer of gasoline shows too that the distribution channel can be a more important "brand" than the brand name of the manufacturer of a product. Consumers respond to Tesco's reputation and the convenience of buying gas at its stores; they don't care whether the gas came from Texaco's refineries or Shell's.
As the boundaries between industries continue to dissolve, preemption will become an increasingly important process investment strategy. Over the next few years, we can expect to see Fidelity Investments preempting financial service providers, Wal-Mart preempting supermarkets and other retailers, and Citibank preempting travel services. In developing its process investment strategy, a firm both needs to look at its future preempting opportunities and be prepared for the likelihood that other companies will try to preempt some of its current business.
Invent: Build a New Process, Don't Rebuild an Old One
The firm that invents a new process can sometimes enjoy a significant and long-lasting competitive advantage. Studies of innovative airline reservations systems, developments in retailing logistics, just-in-time manufacturing, and new ways of marketing financial services show that a process invention can keep competitors at bay for seven to ten years. A successful new major business process usually relies on investments in training, collaboration, and technology and cannot therefore be easily or quickly duplicated. In some cases, the cost of duplicating another firm's innovation does not outweigh the disadvantage of entering a business area years behind the leader.
Process inventions can and usually do build on existing processes. Ned Johnson of Fidelity used familiar direct marketing and telemarketing processes to create a new kind of investment service in an environment that had depended on branch offices and customer account managers. Michael Dell's innovation was to apply existing mail order and package delivery services to computer retailing. He did not have to invent package delivery, he used UPS.
Sometimes the concepts underlying process invention are relatively simple. Some straightforward but valuable new processes have been developed to address existing business problems. USA Truck invented a new process to deal with a problem endemic to the trucking industry.
Trucking typically has an extremely high turnover rate. Because the work is brutally hard and drivers often spend two to four weeks continuously on the road, a 100-200% a year attrition rate is not uncommon. It costs at least $3,000 to recruit and train a new driver. Figure in lost business and lower productivity, and the real cost of replacing a driver is closer to $12,000.
USA Truck found a way to cut its turnover rate from 105% to 85%. In one year, it saved $500,000 in recruiting and training alone, a substantial addition to its earnings of $5.6 million. Its expense ratio is 87%, compared to an industry average of 95%. Its stock price rose 50% between 1992 and 1994. These gains resulted from USA Truck's invention of a process that can be called "driver care." According to Forbes, "USA Truck has come up with a unique way to handle the shortage of long-haul truck drivers. Be nice to the drivers." The company has developed communications links to help stranded drivers get back on the road quickly. It installed private showers instead of communal bathrooms at its main terminal drivers' dormitory. It has new drivers ride with experienced ones on their first trips and gives them reduced mileage quotes, as well as not requiring them to drive to difficult destinations, like Boston, until they have gained experience. Its driver care processes benefit the drivers and the company. In return for the support it gives drivers, the company demands on-time deliveries from them: A driver who is late twice a year is fired. Unlike firms that guarantee delivery to the day, USA Truck guarantees it to the hour, and charges customers who need that level of precision a 3% premium.
Financial service firms developed new processes to solve a problem when they realized that their focus on attracting new customers was a drain on corporate value. The experience of Chemical Bank is representative. In 1993, they launched a marketing campaign to attract students, offering special rates. The campaign was a success in that 20,000 new customers signed up, but it usually takes three to five for an account to become profitable so the firm's success really meant an economic loss. Chemical Bank and other financial institutions (along with magazines, whose new subscriber incentives encouraged existing subscribers to let their subscriptions lapse and then re-subscribe) invented new processes to retain customers. Some are as simple as keeping names and addresses up to date and following up with customers whose accounts have become inactive. Others are new processes for cross-selling and improving customer relations. These new processes have the potential to generate substantial value. In financial services, increasing customer retention by 5% a year increases total operating margins by 95%.
Some of the more radical proponents of reengineering have argued that a fresh start is a necessity. They see American business in such terrible shape that the only option is to throw away the old structures and invent new ones. We see process invention as one option among many-a powerful choice where appropriate, but by no means the only one.
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