Digital Enterprise: What is it and how to become one?

If the media is to be believed, organisations will soon all be digital enterprises. The examples appeal to the imagination. Google, Amazon and Booking.com have all built their empires on innovative IT, and all three are doing well.

But what exactly is a Digital Enterprise? And how could it apply to every company? To maximise the chances of success, we must first understand what a Digital Enterprise is and prepare as best we can for the journey towards one.

Both issues are discussed in this blog.

Unbundling the Corporation

To understand what a Digital Enterprise is, we have to go back almost 25 years. In 1999, two gentlemen from McKinsey, John Hagel and Marc Singer, wrote an article entitled “Unbundling the Corporation“. In that article, they described the primary process as it applies to most organizations, with a division into three phases or main processes:

Phase 1. Innovation

The first phase is that of innovation: we come up with a new service or a new product or, if necessary, we make an invention with which we want to take the market by storm. For this phase, we need talent, preferably the smartest in the room, because in the innovation or product management department, the rules of ‘Economies of Skills’ apply over those of efficiency.

Phase 2. Production

As soon as the product or service is ready, the second phase follows in which we have to start producing. Preferably in large numbers and as standardised and automated as possible. Or in the words of Henry Ford: “Any colour is good, as long as it’s black.” After all, ‘Economies of Scale’ makes the production process profitable.

Phase 3. Marketing & Sales

Finally, we must start selling the product or service. Always a challenge, but with the right focus on the market we will certainly succeed. With the right dose of ‘Economies of Scope’, every Marketing & Sales organisation can eventually be made successful.

Focus on what you’re good at

If you compare the three phases mentioned, you will see that they differ so much in dynamics, management model and type of employees, that they do not actually fit within one and the same organisation.

The argument of the men at McKinsey was: do what you are good at and outsource the rest of your primary process to other companies that are much better at it. Then you will see that you become more flexible and can innovate much faster.

“Do what you are good at and outsource the rest to other companies that are much better at it, then you will see that you become more flexible and can innovate faster”

Example: iPad 2

Here’s an example. We all know Apple as the strongest brand in the world. Exhibit A: Customers are willing to lie in front of the store’s door all night for the latest version of the iPhone or iPad. So Apple’s marketing and sales are pretty much in order. Opinions are divided about the degree of innovation at Apple, because in fact they rarely or never make an invention but use existing technology. And what about the production of all that beautifully packaged stuff? They have completely outsourced this to, among others, a Taiwanese producer, which has large factories running in China for this purpose. For the iPad 2, this factory had to scale up from 140,000 people to 300,000 people in a month’s time. No sooner said than done: a month later, 300,000 people were working very hard to make sure that Apple’s customers didn’t spend a night outdoors for nothing. If Apple had ever thought of producing these things in America, the advance of the iPad would have come to a screeching halt.

This is a typical example of a production process where scalability is a critical success factor, but where the company itself falls short. By outsourcing that part of the primary process to a company that is very good at it, Apple can effortlessly bring the next model to market every time. And they are doing so at a rapid pace! This was also the idea behind the theory of ‘Unbundling the Corporation’: if you do what you are good at and outsource the rest to other parties, you become more flexible and can radically accelerate your pace of innovation.

Splitting doesn’t always go well

We are now years later and we see many companies around us that have followed the theory of Unbundling the Corporation and have become successful with it. But we also see examples where splitting off has been less successful. Some of these cases have been enforced by the government. Just think of the split between ProRail and the NS or the split between the energy producers and their network companies.

Without going into any more politically driven splits, it’s clear that Unbundling the Corporation isn’t a recipe that works out well anytime, anywhere. But if we can’t split things up, what’s the alternative to radically accelerating your innovation? You can already guess the answer to this question: you automate those parts that you would have liked to split off so that you have more time for innovation. You need to become a Digital Enterprise!

What is a Digital Enterprise?

A Digital Enterprise is a company that manages to automate two of the three most important phases in the primary process, production and marketing & sales, in such a way that it can radically accelerate the first phase of that primary process, namely innovation. Note that this definition is based on the condition that as a company you want to be very good at innovation and that you therefore want to spend less time on production and marketing & sales. But instead of outsourcing production or marketing and sales, as the theory of ‘Unbundling the Corporation’ dictates, Digital Enterprises choose to automate those things. As a result, they have less to worry about the parts they are less good at, but more importantly: they create a feedback loop from production and marketing & sales to the beginning of the primary process, so that they accelerate innovation.

“Instead of splitting off, a Digital Enterprise automates production and marketing and sales in such a way that it can radically accelerate its innovation”

Example: GE

We know GE as a conglomerate of companies, and we know that one of those companies makes aircraft engines. Well, the big news is that GE no longer sells aircraft engines. Instead, they sell flight hours.

Their engines are equipped with sensors, which GE has been using for years to collect and analyse data, on the basis of which they now know exactly when a screw is loose somewhere or where a drop of oil needs to be added. Based on this data, they apply predictive analytics and take full control of the maintenance of their engines.

In fact, GE has been able to use all that knowledge and information to no longer offer their engines as a product, but as a service (read: flight hours instead of aircraft engines). That’s innovation! And it fits perfectly at a time when customers increasingly want to pay as they use instead of own, which is of course an application of the theory of Unbundling the Corporation. After all, an airline does not necessarily have to be good at maintaining aircraft engines, but wants to excel in the marketing and sales of airline tickets and outsource the rest to third parties. For example, we see that the transformation to a Digital Enterprise at one company enables the application of the theory of Unbundling the Corporation in another.

How do you become a Digital Enterprise?

As mentioned, a Digital Enterprise automates production and marketing and sales in such a way that it radically accelerates its pace of innovation. But where do you start? And how do you go about it? Of course, that depends on the type of business, the type of production process, and the go-to-market strategy. To give as many examples as there are circumstances simply does not fit in this article. Next time I could write a book about it, but for now I’ll just give you three general guidelines or rules of thumb:

Develop a Digital Strategy that not only supports the primary process as an IT department, but creates value for the company and helps accelerate innovation. The process of drawing up and maintaining a Digital Strategy offers the opportunity to think about where, how and what can be automated, together with colleagues from the factory and from marketing & sales: processes, customer contact, after-sales, etc. And because drawing up a Digital Strategy is not a one-time action but a process that requires periodic maintenance, this process supports the communication that needs to be initiated between IT, the business and the factory.
Start automating, where the added value is greatest. That’s where the difference is usually made. For companies in the B2C market, it is often the marketing & sales department where the difference is made. Branding and customer loyalty are important assets here, while the products are comparable to those of the competition. E-commerce is an obvious way to further automate marketing and sales in that market, but also consider loyalty programs or in-store marketing. For companies in the manufacturing and process industries, the factory is usually the most logical place to start with automation, because it can improve the quality and continuity of the production process.
Make sure that all your automations immediately deliver data that can be put back in a feedback loop at the beginning: where the innovation needs to take place. After all, data will be the source of inspiration for optimising the production process, improving customer contact or increasing customer satisfaction. These can all be direct consequences of data analysis, but keep in mind that the biggest opportunities of Big Data are not in the immediate consequences or the predictable improvements, but in things we don’t yet know we want to know.

Finally

We started with the question of what a Digital Enterprise is and how you can become one. By placing it in a historical context of technological and business developments, I hope that you will not only understand the concept better, but also be able to apply it yourself.

For example, you will have to get started with a concrete innovation plan, set new goals and start thinking about ways to develop, test and scale up applications quickly. This can only be done with a cloud strategy.