Chapter 7: Digital Strategy in Practice

You can no more reason from highway precedents to railway problems than you can reason from the ox to the electric battery—Brooks Adams

You do not need to understand electricity to use it—Julia Cameron

Tim Gallwey, best-selling author of the "Inner Game" series of sports instruction books, has spent the last fifteen years applying his techniques to business settings. When he talks about the learning process, he uses words like "awareness," "commitment," and "trust," words more common in Zen than in business. Through a series of clinics and workshops, Gallwey teaches executives how to discover the obstacles that get in the way of performance, and to rescue themselves from the inner voices of self-doubt that inhibit their learning.

To succeed at digital strategy, your organization must be a learning organization, more focused on ideas and experiments than detailed plans and forecasts. The change is not as dramatic—or weird—as it first sounds. Organizations are at their core learning entities, reinvented over and over again throughout their history. Without a learning capability, the organization would never have come into being, and if the need to change is ignored for too long, the organization will perish as surely as if it was denied capital, employees, and markets. That, as Ronald Coase might say after taking one of Gallwey's clinics, is the nature of the firm.

Organizations that practice digital strategy must learn to communicate with their organization's change center. The language it speaks is the language of ideas, scenarios, options, and what-ifs. In this chapter we tell you the story of how two of our client organizations learned to understand and speak this language.

7.2: Two Giants, Two Missions, One Approach

The clients are fast-food industry leader McDonald's Corporation and German industrial powerhouse VEBA AG.

McDonald's, one of the most recognized brand names in the world, has expanded at an impressive pace throughout its history, spreading not only its products but its commitment to value, convenience, and a dependable customer experience. McDonald's customers know that they will be served good-tasting food quickly and courteously and at the lowest price possible, whether the restaurant is in Kansas City or Kuala Lumpur.

VEBA, less well known in the United States, is Germany's largest conglomerate, with total revenues of more than $42 billion a year. Founded more than a hundred years ago as a government-owned corporation involved in coal mining and processing in Germany's Ruhr Valley, the company is now a diversified conglomerate, including divisions that are leaders in electricity, chemicals, oil, transportation, real estate, trading, and wholesaling. VEBA owns Germany's second-largest electrical utility, PreussenElektra, and a few years ago began preparations for the deregulation of the German telephone market by creating a new subsidiary, OTELO, in cooperation with RWE, its chief competitor in the electricity business. VEBA's objective for OTELO is to challenge the current monopoly or near-monopoly of Deutsche Telekom in everything from residential and business phone service to cable television and corporate data networks.

As these brief introductions suggest, the future holds different challenges for these two companies.

McDonald's goal is to continue its expansion on a global basis and, if possible, to accelerate the process. In 1995, the company opened new outlets (including mini-locations inside convenience stores, gas stations, or temporary storefronts) at the rate of more than 2,000 per year worldwide, nearly double the number opened in 1993. At the same time McDonald's is increasing its scale, the company is pursuing several operational strategies:

• Improving the company's ability to provide customers with value, based on competitive price, food quantity, overall experience, and the like.
• Improving information flow between stores and the marketing organization so as to move quickly in markets where price and tastes (responses to promotional items, for instance) change rapidly.
• Finding ways of operating the stores at the lowest cost but with the highest commitment to a consistent, high-quality experience for customers.

Each of these strategic initiatives is supported by full-time I/S resources, and McDonald's CIO Carl Dill decided to revisit each of them through the lens of digital strategy. Though each strategy supports several systems initiatives, Dill was concerned that the I/S teams were too reactive and might be missing opportunities and overlooking risks that didn't appear on their radar screens. He was also aware that separate technical architectures for networking, data exchange, and processing, although optimal for the individual strategy, would fail in the end to give McDonald's a flexible, open base on which to build in the future.

For VEBA, the overall challenge identified by CEO Ulrich Hartmann is the transformation of the holding and its subsidiaries from industrial companies to an integrated information-age enterprise. Hartmann and his corporate planning department are well aware of the new forces and how each of them is already affecting VEBA's traditional operating model and asset base. In utilities, as we mentioned, European integration will eventually bring competition for PreussenElektra, and the trade and transportation units feel increased competitive pressure from the rapid globalization of their activities (globalization largely enabled by technology). VEBA itself has already taken the lead to compete through digitization by launching and investing millions of dollars in its telecommunications start-up.

In launching the digital strategy project, Hartmann tied the overall goal of his organization to the successful integration of technology. As a former mining company, VEBA understood the metaphor of "mining its bits," and it has plenty to mine. Each subsidiary has expertise and customer data that could be of considerable value to the others, but for organizational and technical hurdles that blocked the flow of information. Data sources are disparate, and the subsidiaries had developed a culture of independence (based in part on incentives to do so that came from VEBA's reporting and financial evaluation criteria) that made cooperation difficult.

So Hartmann formed a digital strategy project team, led by his corporate planning department and supplemented with outside assistance from the MIT Media Lab, consultants from CSC Index, and ourselves. The goal of the project was to identify threats and opportunities from digital technology that would be difficult to see from the perspective of VEBA's corporate culture. The project's findings were a major theme of a spectacular meeting of all VEBA managers in 1996, a two-day event in re-unified Berlin, which Hartmann called a "meeting of the minds."

7.3: Tapping the Vein of Gold

The key objective of the digital strategy projects at both McDonald's and VEBA was to invent the future. To do so, we started by playing with it. In meetings, workshops, and short projects, we used the twelve design principles to imagine scenarios of how the companies could change their industry and their own positions within it. These were not necessarily destinations anyone would actually reach; in fact, some were abandoned early on. But having some destinations in mind is more helpful than having none.

In this work, the focus is not on technology and what it might be capable of doing for us or to us. Rather, the goal is to paint a picture of what the organization wants to be doing with its time and resources in the future. This could be based on a strategic plan and what the plan established as the stretch goals for the organization, or it might be inspired by a review of what partners and competitors are doing (or not doing). The goal might also be the product of brand-new ideas, pulled out of thin air, based entirely on the collective imagination of those involved.

Every organization we have worked with has found its own way of conducting these brainstorming sessions. One organization had teams of executives play the role of well-funded outsiders, both new entrants and existing competitors, and asked them to devise business plans that attacked the organization's prime markets and stole away its most profitable customer segments. Knowing the blinders of the organization, and the exposed flanks of its offerings, these teams easily put together alliances and business propositions that realistically challenged the status quo.

In some organizations, the process captures the imagination of a much larger group. In the early 1980s, Apple Computer produced a high-quality videotape inspired by a remarkable device that had been dreamed up by Alan Kay, which he called the Dynabook. The video showed life in a near-future where computing on small, personal devices that kept track of appointments, placed video conference calls, and looked up data from computers all around the world had become ubiquitous. We still show this tape to companies having trouble looking past their own four walls, even though much of what Apple imagined has now arrived.

American Express's customer service department, similarly, produced a video demonstrating a brilliant reconception of the entire service function and how technology could change it for the better. These included learning interfaces that would give customer service representatives relevant history and make recommendations for additional goods and services to offer the customer while he or she was on the line. The tape generated tremendous excitement within American Express, and while the company itself largely failed to follow through on the most promising ideas, many of them are now standard features of the sophisticated customer service functions of catalog sales and home shopping companies.

A videotape is just one way to document a vision, and nothing that elaborate is required. Details are not important. Practical reality and the laws of physics are also unimportant. What is important is coming up with one or more powerful ideas about what the organization should look like in the next five years, including ideas that contradict each other. Later, you'll figure out how and whether you can actually get there.

7.4: Rethinking Strategy at McDonald’s

Large or complex organizations usually need to break the planning process down into manageable units. McDonald's developed its future scenarios around three strategies—customer convenience, customer value, and optimal operations. For each of these strategies, there was already a full-time team that included both operations and systems development personnel from Carl Dill's organization. The digital strategy project team worked through these teams to generate the bold new ideas that Dill instinctively knew were there to be discovered.

First, the digital strategy team reviewed the current plans of each of the three teams and developed an initial list of new and emerging digital technologies that might play a key role, for better or worse, in realizing the teams' strategies. In assessing the strategy aimed at improved store operations, the digital strategy team noted a possible mismatch between the identified projects and the overall direction of the company. The operations team had characterized the stores as miniature manufacturing facilities. Consequently, it was working to improve the suite of manufacturing systems—inventory control, production planning, financial control, and point-of-sale order entry—that supported the store.

But Cindy Elzinga, the digital strategy team leader, wondered if the more appropriate model for McDonald's future might not be that of a service company. After all, the stores already offer considerably more than hamburgers and french fries. They serve as a family retreat, where parents can relax while children play with promotional toys or in increasingly elaborate indoor playgrounds, and as a community center for senior citizens, who in many locations are invited to the stores to play bingo. A large part of the reason people go to McDonald's is the community that it fosters.

Assuming this trend would continue, Elzinga believed that the operations team should expand its initiatives to include more service-oriented technologies. Could McDonald's offer computer games instead of and more cheaply than plastic toys? Could the experience in the stores actually be enhanced by replacing human order takers with learning interfaces? Could more food production processes be automated, freeing up in-store personnel to interact in more interesting ways with customers? If so, what technologies should the team be considering now that it was not? How carefully had the stores team reviewed developments in multimedia interfaces, interactive television (order in advance from home or the car?), robotics, and modeling and simulation tools?

Similar analyses were done for each strategy, after which the digital strategy team held a half-day workshop with all three teams. Where possible, key technology partners and vendors of the newly identified technologies were invited to participate. The strategy teams each gave a brief presentation of their major initiatives, after which the digital strategy team began pushing the new ideas and technologies.

We asked each of the three strategy teams to imagine and describe what the business would look like were the team to achieve its wildest goals. With the customer convenience team, one of the key initiatives was to improve the speed with which new stores and new kinds of stores could be opened, and the result of the workshop was the development of a "day in the life" scenario for site developers that described the optimal toolset and collaborative environment they would have with them as they scouted locations.

Rather than choosing individual tools from separate vendors today, we asked the convenience team to think about the tools on the horizon—geographical information systems, global positioning satellites, new media such as video and teleconferencing, and the expanding information flow of public networks such as the Internet. Didn't the differing pace and divergent platforms of such technologies suggest that the longer-lasting toolkit would be one built for easy swap in and swap out of tools? It would be a mistake to lock in to a platform that could support only a subset of today's options and, perhaps, none of tomorrow's.

For the customer value team, the focus was on real-time information flow that would allow for instantaneous corrections of the menu and prices to respond to customer preferences, the competitive environment, and even the global commodities market for ingredients. How far was McDonald's today from having that kind of information? How close could it be if it invested in available technologies? What would it take to get the company all the way there, and who would they need to work with to get there faster, and first?

After these meetings, the digital strategy team sifted through more than a hundred pages of detailed notes highlighting the ideas that had provoked the most response—positive or negative. In addition, the team identified what Carl Dill had referred to as a superset of "agility" imperatives that each strategy team needed to include in setting its individual agenda. These imperatives were the themes that had raised the most promising new technologies that might otherwise have been missed.

All the teams, for example, needed to begin thinking about the implications complete information would have in the near future. How would their goals change in a world where each transaction—including purchasing, pricing, menus, and site development—could be customized in real time? A second of these stretch goals was to design every system in the context of Moore's Law and to recognize that the need to scale up (a local system becomes global) and scale down (a global system becomes local) was a necessary component of every systems initiative.

7.5: Hosting a Meeting of Minds at VEBA

At VEBA, the natural organization for the project was along major lines of business. The digital strategy project team performed a brief competitive assessment of the business line's use of digital technology as compared to industry leaders in other countries, then held a workshop with the senior management of the affected subsidiaries. The goal was to develop a general model of the competitive pressures that were soon to enter the picture as a result of new technologies, deregulation, and the opening of markets to other European Community countries. The workshops included not only the team's analysis of the industry pressures but live demonstrations of the way organizations from around the world were already using digital technologies in creative ways that addressed (or aggravated) the problems.

These workshops were carefully prepared by the corporate planning department and representatives from the executive team of each subsidiary. The executives' major concern was the company's possible complacency. Given the excellent overall performance of VEBA on a sustained basis, the executives intuitively believed that they were not sufficiently worried about the future. They asked the digital strategy team to try its best to challenge this mindset. In short, they wanted to be shocked and surprised. The team decided that the best way to do this would be to take the executives on a trip to the future, which, in other industries or markets, had already arrived.

For the retail group, this included live demonstrations of electronic commerce over the World Wide Web, and for the real estate holding it meant demonstrations of multimedia CD-ROMs that showed how easy it was to design lifelike virtual tours of everything from gardening techniques to the Louvre. With the trading subsidiary, the team demonstrated developments in virtual reality software that could make simulated product selection and configuration so lifelike that it might eliminate the advantage of local agents and consequently wipe out a major investment of the company.

From these exercises it became clear that each business line was threatened by the rapid arrival of the future, including pressures animated by the technologies themselves. In each workshop, the presentation and the ensuing discussion focused on a likely set of new industry models and a series of interim roles and solutions the organization could participate in to ensure a positive outcome. The "output" of the visioning process itself was simply the minutes of the discussion held during the workshops. At least that was the tangible result. More importantly, however, the process triggered the beginning of a series of major ideological changes within the organization—not only in terms of attitudes and approaches to digital technology but to the very ideas of planning, competitive analysis, and strategy.

The focus of the project team shifted to learning how the business line could preemptively respond and thereby shape the future environment to the company's own best use. For each business, a series of projects was defined that included short-, middle-, and long-term options. In many cases, the subsidiaries agreed that the way was clearer than the will. Executive teams began to rethink and realign their relationships with I/S resources, and several subsidiary CEOs made public their intention to take responsibility for new technology introduction or to begin to experiment with technologies that were already on line in other industries or markets, particularly in the United States. One subsidiary CEO decided to create a digital readiness group, whose chief would report directly to the CEO.

The attitude of each subsidiary to the holding company and to the other subsidiaries began to change as well. Initially, each subsidiary requested its own private workshops, but at each the digital strategy team raised questions about how partnerships across VEBA could help the different parties achieve common goals more quickly and effectively. Organizational barriers, some extremely long-standing, began to relax, and multicompany workshops began in earnest. Corporate planning staff from the holding company were invited to participate more freely in subsidiary activities, and the holding's role of coordinator and community builder took on new meaning. These developments, as Hartmann had planned, culminated in the Berlin "meeting of minds" in June 1996, where many of the CEOs included future technology plans in their presentations and information booths.

7.6: Gold on the Floor

The development of a digital strategy is not a linear activity. It is not about going through a long, deliberate process of business analysis. It is not about whittling the list of possibilities down to the one big initiative that everyone must then salute. Once the flow of ideas gets started, they often come in a flood. Some ideas come out in extremely embryonic form, but others, perhaps interim solutions, emerge fully formed. When they do, there's no reason to be bound by the methodological mindset that says they must go into a queue and wait their turn. That's why there is an innovation portfolio.

At McDonald's, advances in public networks and the availability of information had been underestimated, so the company slowed its deployment of a private satellite network to reconsider the value of this proprietary system. At VEBA, it was clear that electronic commerce was a key threat and opportunity that spanned all subsidiaries, and some experiments had begun even before the initial digital strategy project was complete. These early results are like gold lying on the floor of a mine.

Another client, describing his own experience evaluating emerging technologies, referred to these as the "painfully obvious" solutions. Once the organization sees them, it's hard to understand how they stayed hidden as long as they did. The pain came from his recognition of the fact that he could have been developing new customer interfaces, offering new digital goods and services, or forming powerful electronic links with business partners much sooner. The technology was there, the opportunity was there. But the planning processes and atmosphere for innovation generally filtered them out before he had a chance to see them.

For VEBA, it was clear that what was most needed was a mechanism for communicating information between the companies. Consequently, a corporate intranet was quickly planned, implemented first at the chemicals subsidiary. VEBA is now expanding it to cover the entire organization. At McDonald's, the weakness of the company's technology radar became painfully obvious, and the I/S organization corrected the problem with a dispatch appropriate to the company's customer service model. The team developed a list of "painfully obvious emerging technologies" and for each reviewed what evaluation and experimentation initiatives were under way in the company. In some cases, more resources were added; in many others, this was the first time the company had any first-hand experience with the technology.

Whenever we work with clients in developing digital strategy, as at McDonald's, a small subset of emerging technologies are quickly identified as being crucial to the future of every strategy or business unit or both. The sad part is that in nearly every case, when we then look through the organization to see what's currently being done about these tools, the answer is often nothing. Senior executives don't take the emerging technologies seriously and the information systems professionals don't have any information on them. Nobody is paying any attention to them.

The short-term solution is obvious: Do your homework. If you're very uncertain about a technology you know is very relevant to your business, you better start learning about it. If global communications is key to your future strategies, you need to get smart about global communications networks and the Internet. If electronic commerce is the way you're going to salvage current markets in the next years, or take yourself global, don't close your eyes because electronic commerce hasn't matured yet. Start figuring out what's missing that you need. Is it digital payment? Widescale access? High bandwidth communications? Adequate security? Trials for every one of these future applications are going on right now, and you should consider being a part of them. If not, you should at least follow the progress of those who are.

A list of "painfully obvious" partnerships will also emerge. As with the critical technologies, we recommend you stop and take a look at your relationships with all the business partners who appeared over and over again during the digital strategy workshops. If it's the top 1 percent of your customers, what kind of relationship do you have with them today? Do you even know who they are? Do you give them any reason to believe they play a key role in your future? If you have determined that the only way to avoid disintermediation is to forge highly robust links with your upstream suppliers, what are you doing about that today? Do you give them access to your E-mail, voice mail, and other critical systems? (If you don't, do you think there's some reason they'll give you access to theirs?) Is the relationship with key technology vendors in the hands today of the I/S department or, worse, the purchasing department?

7.7: Lessons Learned From Practice

There are a few additional lessons to be learned from the stories of McDonald's and VEBA as both companies continue to refine and implement their digital strategies. At McDonald's, the project suffered from its origins as an I/S initiative. Carl Dill's courage and commitment are considerable, and the project had some visibility with senior executives. Visibility, however, is not the same as ownership, and the categorization of the project as a technology initiative rather than a strategic one made it difficult for the team to communicate the new ideas or develop them fully with their operations counterparts. Absent the kind of practical benefits senior managers were used to seeing for technology projects, the effort stalled.

At VEBA, Ulrich Hartmann knew before the project began that organizational and even cultural obstacles would be found, but perhaps not in precisely the manner and places where the team encountered them. The project team discovered, for example, that VEBA's telecommunications start-up was having trouble forming partnerships with the other subsidiaries, a problem now corrected by a clear mandate from CEO Hartmann that raised visibility at senior levels.

The solution overall at VEBA has been to focus the efforts of the corporate planning function. Corporate planning took a leadership role in the development of the digital strategy for VEBA, and it has continued to carry the torch with full-time commitment. It is championing the breakdown of information barriers inside the company and encouraging as broad a channel for communication as technology permits. The holding has begun development of an ongoing, continuous, and virtual "meeting of the minds."

Unleashing killer apps requires not only a process for transforming ideas into experiments with testable hypotheses. As the lessons learned by McDonald's and VEBA suggest, it also requires the ability to execute, to implement, and to make permanent the new openness to ideas and information exchange that are experienced during the project. What is required is to move digital strategy from a project to an operating model, the operating model of the future. The next two chapters describe how organizations are making the transformation.