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How Enterprises Exploit Five Digital Capabilities to Globalise

September 8, 2013 • Emerging Ideas, Global Business, INNOVATION, STRATEGY & MANAGEMENT, TECHNOLOGY

Some of the most successful enterprises have embraced global diversity and operate nimbly in multiple countries by digitising key aspects of their businesses. Below, Siew Kien Sia, Peter Weill and Christina Soh describe insights from a study of enterprises that have successfully managed global complexity using five digital capabilities, and show how top performers actively explore new digital possibilities to create business value.

Despite – and perhaps because of – recent economic uncertainties, businesses are continuing to globalise. The World Investment Report 20121 highlights the internationalisation of businesses, with sales, employment, and assets of foreign affiliates all increasing. For example, from 1998 to 2011, the UN’s top 100 trans-national companies grew their percent of sales from outside their home countries from 58% to 71%: a 22.4% increase.

Increasing globalisation means more business complexity that results, in part, from political, regulatory, and socio-economic risks. Add the demands of sophisticated global customers and the differences in cultures, tastes, and business practices, and the challenge grows. Yet, we found some of the most successful enterprises have embraced global diversity and operate nimbly in multiple countries by digitising key aspects of their businesses, e.g., channels, products, collaboration and processes. For example, Ravi Kant, the Vice Chairman of Tata Motors, a fast globalising Indian-based enterprise says ‘there are three things we do well: challenge people, deploy world-class business processes, and heavy use of IT – we are 70% digitised’. As part of their globalisation strategy, Tata Motors acquired Jaguar LandRover, and the turnaround has been impressive. In 2009, Jaguar LandRover lost $632M; three years later, in 2012, this figure grew to a net income of $2,328M.

Digitisation facilitates globalisation by enabling a number of critical capabilities:

• enterprise-wide process standardisation and automation where desired
• better capture of data from distributed sources and exploitation of a ‘single source of truth’
• reuse of intellectual property or best practices from the home country that helped make the firm successful – and then reuse of best practices globally
• more intimate customer and employee engagement.Without effective digitisation, thriving globally would be much more difficult and expensive, if not impossible.

In this paper, we describe insights from a study of enterprises that have successfully managed global complexity using five digital capabilities. We define digital capabilities as enterprise-wide reusable organisational routines that combine people, processes, data, technology and partners to achieve key organisational goals. The five digital capabilities are to:

Build Scale—achieve lower cost of operations via economies of scale through the sharing of digitised business services.
Enable Responsiveness—deliver distinctive value by catering to important local differences through digitisation.
Drive Optimisatio n—improve business processes by continuously finding the best way to digitally perform a business activity.
Foster Innovation—explore and create new business value through digitisation.
Facilitate Coordination—maximise business value from digitisation across the above four capabilities to meet strategic goals.Together (see Figure 1), these digital capabilities help to enable higher performance. We found that enterprises above average on these five capabilities have return on assets 20% or more above their industry average.2

 

 

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Developing the Five Distinctive Digital Capabilities

1. Scale
We found top performers continually seek greater scale efficiency across their global operations often with goals of reducing unit costs for any shared business service by 5% a year – every year. The digital capability for scale relies on organisational routines to:

• Standardise and rationalise infrastructure, applications and business processes
• Consolidate operations through shared services or outsourcing
• Make unit-costs transparent and re-use digital assets wherever possibleScale is achieved through the sharing of common business services delivered from enterprise platforms with pre-established service agreements. These services are typically supplied through shared services from one or more regional hubs and/or through partnerships with external vendors.

Procter & Gamble is a 170-year old consumer goods company operating in 180 countries, and marketing over 300 brands to nearly 4 billion consumers globally. P&G’s Global Business Services (GBS) brings together HR, Finance, Facilities, and IT, and leverages scale to provide best-in-class business support services. GBS provides more than 170 shared service solutions to more than 300 P&G brands with the help of around 15 strategic partners globally. GBS specifies a service level for each business service and a unit cost, and then works with partners to reduce cost and improve service every year. The brands ‘own’ the choice of services to meet their business needs, while GBS ‘owns’ the design and implementation of solutions and processes to deliver business goals. GBS helped P&G achieve a net profit margin of 15.5% vs. industry average 10.4% on 2012 sales of $83.7B.

 

2. Responsiveness
Simultaneously, top performers cater to important local differences that create value. The digital capability for responsiveness relies on a strong business-IT partnership, comprising organisational routines that:

• Converge IT with business, ensuring that local business units have a strong voice
• Standardise digital processes and data as the norm, but localise where needed with an exception process
• Deliver IT as a ‘service’ with service level agreements

Without effective digitisation, thriving globally would be much more difficult and expensive, if not impossible.

Microsoft has 94,000 employees in five major lines of business, with 2012 revenues of $73.7B and growth of 5.4% (industry average of 1.9%). Digital capability for responsiveness depends on a field IT structure across 106 countries. Field IT is overseen by an International IT Vice President reporting to the Global CIO. Reporting to the International IT Vice President are the IT managers for three regions: North America, Europe/Middle East/Latin America, and Asia. The Asia region, for example, further cascades down to 13 regional clusters. These IT managers play an active brokering role, i.e., representing Central IT to influence and negotiate with the regional business owners, as well as advocating for these business units and ensuring they derive strong value from IT. For example, when the Asian country head found that the enterprise HR application couldn’t handle its high volume of recruitment, the IT manager as the ‘voice of the field’ brokered a solution that balanced local needs with global scale by negotiating for a short-term local HR application module. The ‘local’ solution would both meet local needs and help specify the requirements for the rollout of the next version of the global HR solution.

 

3. Optimisation
Finding the best way to perform selected business activities and implement them digitally and globally was the goal of the top performers we studied. They have organisational routines that:

• Instill end-to-end process thinking and process measurement
• Use the data from optimised process to create a single source of truth
• Integrate service channels to deliver great customer experienceEnterprise-wide optimisation efforts (e.g., cross-functional, cross-product, cross-geography) to improve efficiency, reduce risks and errors, compress cycle time, and fulfill customer needs, rely heavily on digitisation.

Tetra Pak is the world’s leading food processing and packaging solutions company with over 23,425 employees. It meets the food needs of millions of people in 170 counties producing over 77 billion liters of food generating 2012 revenues of €11.1B. With three major lines of business: packing equipment, packaging material and a packaging solutions service, each member of Tetra Pak’s executive committee oversees one of seven digitised core business processes (e.g., order fulfillment). These process sponsors provide oversight for process performance while dedicated managers in the global process organisation continuously review and use process metrics for benchmarking.

 

4. Innovation
Digital innovation is hot right now and top performers actively explore new digital possibilities to create business value. The set of organisational routines that help are:

• Link disruptive technologies to enterprise business strategies for breakthrough thinking focused on the enterprise’s core challenges
• Create an innovation ecosystem for new idea generation and co-creation
• Provide flexible resourcing for rapid experimentation, prototyping and deploymentInnovation efforts often tap cutting-edge technologies (e.g., mobile, sensors, robotics, social media, big data) through strategic transformation projects, centers of excellence, or innovation offices staffed with creative champions and a willingness to challenge fundamental assumptions. Successful innovation typically uses an ecosystem to generate ideas from across the enterprise (e.g., idea storms), from customers, research institutions, and industry partners. Rapid idea development and implementation are enabled by flexible resourcing for rapid test and learn, and robust digital infrastructure for enterprise-wide diffusion.

Tesco PLC is the third largest retailer in the world, with 492,000 staff operating in thirteen countries. In 2012, Tesco had revenues of £72.0 billion with three year revenue growth of 6.2% compared to an industry average of 0.8%. Innovation in Tesco is driven both centrally and locally. Centrally, Tesco in the U.K invests significantly in innovations to improve the customer experience. A powerful source of innovation is its ability to tap business analytic technology to gain customer insights, enabled by Tesco’s ownership of Dunhumby, a business analytics provider. Dunhumby co-developed Tescos loyalty card, Clubcard, but also analyses data from over 85% of transactions (by value) made by the loyalty card and other credit cards.

New innovations in close alignment with enterprise business strategies are incorporated into the Tesco operating model and implemented globally. For example, Tesco drives an integrated multichannel approach, with free Wi-Fi provided in each store enabling shoppers to compare prices or order online with their mobile devices. Over half of its products purchased online are picked up in a store. Innovation is also local. For example, in Korea, a mobile shopping application allows shoppers to purchase supermarket items pictured in the subway for home delivery by scanning product Quick Response (QR) codes.

 

5. Coordination
While each of these four capabilities delivers distinctive business value, the synergies and conflicts across these capabilities need to be managed. These top performing enterprises have developed capability to set direction and govern across capabilities to maximise business value. They use organisational routines that:

• Enhance decision and accountability transparency for critical decisions
• Simplify and streamline decision processes for greater agility
• Reinforce the ONE-firm enterprise identity amidst diversityBy focusing on a set of lean but effective governance processes, these enterprises balance the delicate tensions across the four digital capabilities. Our survey shows that top performers had particularly effective architectural compliance, business value tracking, project management, SLAs, and change management processes.

While each digital capability is distinctive, thriving in the complexity of global business requires all five working together. And the incentive is clear—enterprises above average on these five capabilities have return on assets 20% above their industry average.

Operating in 192 countries with half a million employees, Siemens is one of the largest global electronics and engineering companies. With 3 sectors (Industry, Energy, and Healthcare), 16 diverse technology divisions, and more than 70 sales and service regional companies generating a 2012 revenue of $100B and a return on equity of 14.1% (versus an industry average of 12.3%), coordinating the digital capabilities in such a massive, complex, global organisation is a daunting challenge. Despite the number of IT units across Siemens, a simple 4-member CIO Board makes all the critical enterprise-wide IT decisions relatively quickly. Yet, the CIO board solicits inputs from key stakeholders. A 30-member CIO Advisory Council, comprising senior executives from Corporate IT, Sectors, Regional Clusters, Cross-Sector Businesses, and Corporate Functions, provides input. In addition, special-purpose task forces are mobilised to harness expertise globally when necessary. These ad hoc task forces function no longer than 10 weeks. The clear and streamlined governance in Siemens accelerates strategic decision-making, which would otherwise be burdened by lengthy bureaucracy in an enterprise this size.

 

Think Global, Think Digital – Imperatives for Actions

While each digital capability is distinctive, thriving in the complexity of global business requires all five working together. And the incentive is clear—enterprises above average on these five capabilities have return on assets 20% above their industry average. While most organisations already have some pockets of excellence for these five digital capabilities, they are often islands of capabilities, and not coordinated enterprise-wide. Here are our recommendations:

• Start with scale and focus on the provision of business services reducing unit costs every year.
• Senior management then focuses on a set of lean but effective enterprise-wide coordination mechanisms. A coordination capability is needed early to manage the inherent tensions that will arise in developing the other digital capabilities and decide if and how to grant exceptions.
• Then, tackle responsiveness. Responsiveness to local needs is important — to a point—but where exactly is that point? To find it, require the local region adopt the global solution unless given an exception — revisited each year— by a committee of all the regions (or a similar mechanism).
• Business process optimisation must be an enterprise-wide capability requiring active involvement of the line of business leaders (e.g., formal process owners, coordinated process teams, process performance metrics, assigned accountabilities) with effective metrics.
For innovation, think ecosystems, fast experimentation, and rapid deployment.But who should take the lead to develop such digital capabilities for effective globalisation? Such transformation is typically driven by an executive committee as it is an enterprise capability and will inevitably require the kind of strategic clarity, management of politics (there will be perceived winners and losers), and resource prioritisation only this level of senior management can achieve. Senior management needs to think both globally and digitally. It is the coordination of scale, responsiveness, optimisation, and innovation capabilities using the power of digitisation that enables global growth at competitive costs resulting in industry leading return on assets.

The research in this article was made possible by the support of the Nanyang Business School’s Information Management Research Center (IMARC) and MIT Center for Information Systems Research (CISR) sponsors and patrons. The authors would like to thank Dr Stephanie Woerner of MIT CISR for her data analysis, Dr Peter Reynolds of MIT CISR for his collaboration on the Tesco and Computershare case studies and Dr Ritu Agarwal of the University of Maryland for her collaboration on the case studies of the Indian based firms.

 

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About the Authors
Dr. Peter Weill
(Chairman, MIT Sloan CISR and Senior Research Scientist, MIT Sloan School of Management) researches the role, value, and governance of digitization. He is a popular presenter to executive audiences and has published widely including award winning books, case studies and journal articles. His work has appeared in Harvard Business Review, Sloan Management Review and The Wall Street Journal. Peter has co-authored five books published by the Harvard Business School Press including his latest book IT Savvy: What top executives must know to go from pain to gain. In 2008, Ziff-Davis and eWEEK.com recognized Peter as #24 of the “Top 100 Most Influential People in IT” and the highest ranking academic.

Sia Siew Kien is an Associate Professor and the Director of the Information Management Research Centre at Nanyang Business School, Nanyang Technological University. His research and consulting experience focus on process redesign, enterprise systems, enterprise integration, complex IT organization design, and digital capabilities in global enterprises.

Christina Soh is Professor at the Nanyang Business School, Nanyang Technological University. Her areas of research include the management of IT resources in global enterprises, business strategy and IT, the management of complex, enterprise-wide IT projects, strategic technology innovation management and electronic marketplaces.

References
1. Published by UNCTAD – United Nations Conference on Trade and Development

2. MIT CISR survey of 131 firms in 2009 with financial performance from Compustat for 2009 and 2010. We measured two key constructs: effectiveness of the 5 digital capabilities for globalisation and industry adjusted financial performance. Firms who were above the median on the five capabilities had 42% higher ROA than the sample industry average ROA (overall average ROA = 5.9%) in 2010 and 20% higher in 2009. We measured effectiveness of the 5 digital capabilities for globalisation using the average of :

• Scale: Percent of the IT budget allocated to shared services
• Responsiveness: Effectiveness of the line of business and IT relationship management
• Optimisation: Effectiveness of the business responsibility in business process optimisation
• Innovation: Effectiveness of digital innovation centers of excellence
• Coordination: Effectiveness of six critical coordination capabilities.Firm performance was measured using industry-adjusted firm performance ROA (i.e., Firm ROA minus the ROA of the firm’s industry).

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