Disruptive technologies are helping companies automate work.  Robotic Process Automation and Artificial Intelligence are taking up jobs which were in the past earmarked only for smart humans. Driver-less cars, automated check-in kiosks at airports, and autopilots steering the aircrafts are just few instances of how automation is transforming our world.

However, automation presents unique challenges that organizations need to identify and mitigate appropriately. These include costs associated with job losses; confidentiality of data; quality and safety risks stemming from automated processes; and regulatory implications.

Other critical factors to consider before investing in automation are adoption, pace of development of automation, and readiness of organizational leadership in redefining processes and roles to support automation.

The key question is how automation will impact our work in future. Should we anticipate benefits — e.g., efficiency gains and quality of life improvements — or dread further disruption of established business and job cuts?

Research by McKinsey suggests that Robotic Process Automation will impact 4 workplace areas the most:

1. Workplace Activities
2. (Re)definition of Work
3. High-wage Jobs
4. Creativity and Meaning

 

Now, let’s discuss the first two key areas in further detail.

Workplace Activities

Research findings (based on the US labor market data) reveal that the future does not likely hold complete automation of individual jobs, but rather automation of certain activities within specific occupations. The assumption that only routine, codifiable activities can be easily automated — and those that necessitate implicit knowledge will be unaffected — is misleading. Automation has already reached (or surpassed) the median level of human performance in some cases.

Capital or hardware-intensive industries — under stringent regulatory control — are slow and expensive to automate and need more time to reap return on investments. Whereas, the sectors where automation is mostly software based (e.g., financial services) may create value at a far lower cost and within rather shorter span of time.

(Re)definition of Work

The current level of automation can potentially transform a number of occupations to a certain level, but it requires redefinition of job roles and activities. Research reveals that only about 5% of occupations can be completely automated with the current level of technology.

In spite of this, automation can boost human productivity even in the highest paid occupations by taking care of repetitive daily tasks — e.g., analyzing paperwork, reports, data and evaluating applications based on criteria — and freeing up time for people to focus more on high value work that involves human emotions and creativity.

For instance, Automation and Machine Learning can automate diagnosis of common ailments, thereby enabling the doctors to concentrate more on acute or complicated problems. Likewise, lawyers can employ data mining tools to sift through piles of documentation to isolate the most relevant cases for their review.

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The constant advancement in technology has raised the expectations of customers in terms of their interaction with companies. This digital disruption is also forcing businesses to develop new capabilities and explore innovative ways and means to deliver improved Customer Experiences.

Organizations can overhaul their Customer Journeys by embracing latest digital insights and practices. To develop a truly exceptional, breakthrough Customer Experience, organizations should work towards adopting 7 key imperatives:

1. Develop Customer Empathy
2. Design the Complete Customer Experience
3. Reinvent the Customer Experience
4. Lead the Way with Industry Rules
5. Become an Agile Organization
6. Continuously Improve and Iterate
7. Foster a Culture of Collaboration

An organization does not need to execute all 7 of these imperatives—it varies from case to case depending on the circumstances, market, and customer requirements.

Let's, now, discuss the first 4 imperatives in further detail.

Develop Customer Empathy

Many firms use surveys and face-to-face interviews to gather firsthand customer insights to enhance their Customer Experiences.

However, when designing Customer Journeys, in addition to customer data, companies need to understand their customers’ behaviors deeply and put themselves in their customers’ shoes. This entails knowing the complexities the customers face during various journeys and developing new ways to understand Customer Journeys—for instance, by making researchers accompany customers while shopping, by asking customers to report their activities and provide feedback as they interact with various offerings, and involving customers to provide their input on early versions of proposed offerings.

Design the Complete Customer Experience

Most people consider that design pertains only to good artwork, outlook, and appearance of products. However, it involves not just the look and feel of a product but also the way it operates. To render breakthrough Customer Experience, companies need to fundamentally shift the way design is perceived—not just the user interface design rather designing the overall Customer Experience.

Great Customer Experience design encompasses crafting every interface the customers have with the provider from the minute they consider a purchase. It warrants enrolling all people that can make a difference to the customer (especially from the operations and IT units), mapping out customer touchpoints, and transforming fundamental systems and processes.

Reinvent the Customer Experience

Improving current Customer Journeys enables achieving incremental cost reductions and quality enhancements. However, to improve Customer Journeys there is a need to shift the way Customer Journeys are perceived—from merely addressing the issues in a Customer Journey and streamlining a process to completely transforming the entire Customer Experience.

This should be done by carefully deliberating on and thoroughly analyzing all journeys from a customer’s perspective, drawing inspirations and studying benchmarks from other industries, and addressing customers’ needs.

Lead the Way with Industry Rules

Financial institutions are, to this day, quite cautious of utilizing technology to verify customers’ identification documents for deposit account opening. Compliance teams at these institutions often resist the efforts to transform customer account opening journeys, as they exercise extreme care to ensure regulatory compliance. Some banks make the customers fill their applications online but ask them to visit a branch with the completed paperwork, resulting in a cumbersome Customer Experience that is no longer acceptable as we enter the Fourth Industrial Revolution.

Leading organizations strictly adhere to laws but demonstrate to the regulatory authorities how technology has helped them break the status quo surrounding regulatory compliance and develop innovative solutions to manage risks and compliance better.

Interested in learning more about the other imperatives key to developing a breakthrough Customer Experience? You can download an editable PowerPoint on Breakthrough Customer Experience (CX) here on the Flevy documents marketplace.

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Digital-savvy startups are disrupting markets and threatening conventional businesses.  They are doing this by utilizing technology to offer new products and services and providing tailored yet uncomplicated experiences for their customers.

Likewise, large traditionally-run firms will have to keep evolving their Customer Experience approaches to secure additional avenues of revenue and to stay competitive.  To accomplish this, they will need to develop capabilities to effectively utilize insights on customer preferences and design offerings as per the customers’ preferences.

Many organizations, today, are undertaking Digital Transformation programs to improve their Customer Experiences.  However, a majority of these Digital Transformation initiatives fall short of securing their maximum value potential due to focusing only on improving specific touchpoints instead of confronting the entire customer journeys—spanning across several departments and channels.

To make their Customer Experience sustainable and to become Customer-centric Organizations need to clearly transform their ways of doing business, operations, and employee behaviors.  It is critical to improve these fundamental support processes before embarking on initiating any Customer Experience optimization initiatives.

Customer Experience optimization facilitates in gaining more satisfied/paying customers, additional value, and better retention rates.  Research reveals that the companies that have higher Customer Satisfaction levels can achieve four times growth in value compare to those that rank lower in Customer Satisfaction.

Customer Experience (CX) Approach to Value Creation

The following pragmatic 5-phase approach to Customer Experience Management and Value Creation is of great benefit to organizations aspiring to enrich their Customer Experience, achieve clear-cut differentiation, and capture the most potential value:

1. Understand What Customers Value
2. Simplify and Streamline Offerings
3. Link Customer Value to Operational Drivers
4. Focus on Most Important Customer Journeys
5. Adopt Continuous Improvement (CI) Thinking

Let’s now delve deeper into the first 3 phases of the approach.

Understand What Customers Value

Ascertaining the key drivers of Customer Satisfaction is the foremost step in improving Customer Experience.  A flawed approach—that many companies still employ—at the onset of a Customer Experience optimization initiative is to reduce costs associated with internal processes and exploring customer pain points.  This doesn’t assist in maximizing Value Creation.

Customer-centric organizations, on the other hand, devote their time in developing a clear understanding of what really matters to their customers.  This helps in deciding where to focus, rationalizing their processes, and creating new experiences for the customers to generate additional value.

Great Customer Experience necessitates much more than just satisfactory interactions.  Customer Satisfaction should be mapped along the entire customer journey—spanning multiple functions and channels—as customers use various channels to communicate with companies before making a transaction.

Simplify and Streamline Offerings

Alongside rationalizing the processes, it is equally important to carry out a detailed analysis of the brands, offerings, and price structures is essential to tap value from Customer Experience.  After all, even the most pleasing Customer Experience cannot offset an unpredictable or exorbitantly expensive product.

Once these fundamentals are in order, organizations should investigate which interactions and Customer Journeys carry the most significance in a Customer Experience; evaluate how the organization is rated in each journey; identify and focus on the operations that need to be overhauled to improve the overall Customer Experience.

Link Customer Value to Operational Drivers

Technology and customer input provides the stimulus to streamline offerings and Customer Experience.  However, the real value comes from linking the Customer Experience to core operational processes.  Seeing journeys from the customer perspective aids in focusing on what they need and linking internal processes, structures, and KPIs to customer facilitation.

This necessitates deeper insights on elements that are of most value to the customer across a journey, pinpointing drivers of business costs and revenues, and—most importantly—inculcating the right mindsets across the organization.  This detailed evaluation of customer journeys facilitates in determining operational improvements that bear the most positive effect on Customer Experience.

Interested in learning more about the other phases of the approach to managing Customer Experience?  You can download an editable PowerPoint on the Customer Experience (CX) Approach to Create Value here on the Flevy documents marketplace.

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Stiff market competition, expansion into new territories, product portfolio extension, and gaining new capabilities are the prime reasons why more and more organizations are seriously looking into the prospects of—and carrying out—Mergers and Acquisitions. However, only a few M&As achieve their desired revenue objectives.

Revenue Synergies are a decisive factor in closing such deals. However, identifying precisely where these Revenue Synergies lie and then capturing them isn’t as easy as it sounds.

A McKinsey study comprising of 200 M&A executives from 10 different sectors revealed that all the respective organizations of the respondents remained short of achieving their Revenue Synergy targets (~23% short of the target on average). Securing Revenue Synergies is a long-term game. The companies that succeed in securing Revenue Synergies achieve the target in or around 5 years.

Leaders aspiring to achieve Revenue Synergies should first clarify the objectives from and the schedule of the revenue synergies, lay out the organizational priorities and go-to-market strategies, remove obstacles from realizing value, and gain across the board readiness and commitment for the initiative. Organizations that are most successful in securing revenue synergies pay close attention to these 7 guiding principles during the Post-merger Integration process:

1. Source of Synergies
2. Leadership Ownership
3. Customer Insight-driven Opportunities
4. Salesperson Driven Strategy
5. Ambitious Targets and Incentives
6. Sufficient Support
7. Performance Management

These 7 guiding principles to capturing Revenue Synergies are critical for effective integration of two firms after a merger and unlocking potential benefits from the deal. Let’s discuss the first 3 principles in detail now.

1. Source of Synergies

The inability of the leadership of the acquiring company to spot major sources of revenue that integration brings in results in losing significant pools of opportunity and failure of M&As. Realizing Revenue Synergies demands a thorough methodology to ascertain and qualify revenue prospects along markets and channels, Go-to-Market Strategies, and developing commercial capabilities. This entails:

• Evaluating customers and markets, selling offerings of the combined firms utilizing existing and additional channels, and adequately training and rewarding the sales teams.
• Coming up with innovative new products and bundles utilizing combined R&D capabilities.
• Sharing best practices and commercial capabilities that mergers offer.

2. Leadership Ownership

Organizations that accomplish their Revenue Synergy objectives guarantee that their top management and employees commit themselves fully to the initiative from the onset. They identify potential value pockets from the integration, examine the assumptions about securing value, and get them endorsed by the senior management and front-line staff. The potential Revenue Strategies are regularly evaluated by inter-departmental experts.

3. Customer Insight-driven Opportunities

Accurate estimation of Revenue Synergies demands top-level estimates—assumptions on market share gain, revenue enhancement, or improved penetration—alongside comprehensive bottom-up customer insights, and evaluation of customer relationships. Other important elements to consider include analyzing the offerings being offered to customers, discerning other potential products and services required by the customers, and assessing the ability of the sales team and brands in terms of the potential they offer to the clients.

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Mergers and Acquisition are unique and complex endeavors.  These initiatives demand tailored solutions keeping in view the varying environments, ways of doing business, culture of the two combining organizations, and internal and external forces influencing the deal.

These transactions necessitate making 8 important decisions based on thorough deliberation and analysis of all relevant factors well before the integration process.  These fundamental decisions and relevant factors form the 8 decision levers of Post-merger Integration (PMI).   These 8 decision levers of PMI are essential for devising an optimal integration approach and, subsequently, the success of an M&A initiative:

1. Form of Synergy to Be Created: Cost-cutting versus growth
2. Required Pace of Integration: Quick versus steady
3. Degree of Integration: Extensive versus partial
4. Nature of Integration: Buyout versus a merger
5. Commencement of Integration: Urgent or delayed
6. Integration Project Team Organization: Clean or shared
7. Decision Making Style: Implicit and prompt versus lengthy and analysis based
8. Transaction Change Management: Tacit versus one that requires comprehensive actions

These decision considerations facilitate Post-merger Integration across all industries and organizations of various sizes.  Let’s discuss the first 3 decision levers in detail now.

Lever 1 – Form of synergy to be created

The foremost element of a PMI is deciding on the type of synergy to be achieved through integration.  The question is to either focus on achieving cost reduction or growth synergies.

If cost cutting is the objective of an M&A then the leadership of the combined organization needs to outline potential costing saving opportunities across the board.  This should be followed by robust communication strategy to convey the implications of the M&A program.  However, if the management’s objective is to unlock growth synergies from the acquisition, then the integration is to be treated as a strategic endeavor—e.g., understanding the customer needs, evaluating market potential, generating innovative business ideas, and developing execution plans.

Lever 2 – Required pace of integration

The 2^nd lever demands from the senior leadership to determine the pace most appropriate for the integration of their newly combined enterprise—i.e., to choose between a fast track and a steadier integration approach.

A majority of executives believe that PMI should be executed as quickly as possible, so that upon completion of the initiative they could divert their center of attention back to business operations.  This approach, however, involves decisions that aren’t backed by detailed analysis of facts and data, and is likely to face increased risks and uncertainties.

On the other hand, a slower pace of integration is beneficial in case of a friendly takeover or expansion in a new domain.  A steadier pace of integration works well to reduce any apprehensions, cynicism, bottlenecks, and risks due to oversight.

Lever 3 – Degree of Integration

PMI necessitates gauging the appropriate degree of integration beneficial for the organization—i.e., choosing between extensive across the board versus partial integration.

An absolute focus on cost synergies warrants an extensive degree of integration across all departments and geographies.  This puts extra pressure on teams in terms of work and risks dwindling enterprise focus on the customer.  Committing more resources and setting the priorities right aids in offsetting the risks associated with an extensive degree of integration.

A partial integration, on the other hand, is simpler, less controversial, and predominantly warrants consolidation of sales or alignment of mission-critical processes.  This typically works well in takeovers requiring new products acquisition or addition of new customer segments.

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Takeovers can turnaround companies in a short period of time, but there is a significant degree of risk to be anticipated and mitigated prior to undertaking such transactions.  Lack of careful deliberation of the potential risks, insufficient planning, weak execution, and lack of focus on Post-merger Integration are the major reasons why many Merger & Acquisition deals fail to achieve their desired goals.

The course of an M&A transaction has to be set at an early stage, way before the actual deal closure.  The period prior to the deal approval by the regulatory authorities and while due diligence is being done is most critical, and should be utilized by the leadership to clearly define the goals of integration, the potential risks, and a layout for the execution of the actual integration process.  It is the right time to perform a structured evaluation of 3 core pre-merger considerations associated with such deals, i.e.:

1. Strategic Objectives
2. Organization & Culture
3. Takeover Approach

Understanding these PMI Pre-merger considerations helps the stakeholders ascertain the unique challenges and constraints related to M&A transactions and make informed decisions.  These considerations assist in developing a systematic approach to undertaking a Post-merger Integration (PMI)—which is devoid of any “gut decisions,” and ensures realization of synergies and value.  These considerations set the direction and pace of the post-merger integration process.

Now, let’s discuss the 3 core considerations in detail.

Strategic Objectives

Organizations undertake Mergers and Acquisitions as a way to accelerate their growth rather than growing organically.  The foremost core consideration associated with an M&A transaction is the strategic objectives that the organizational leadership wants to achieve out of it.

M&A deals take place to fulfill one or more of these 5 strategic objectives:

• Reinforcement of a segment
• Extension in new geographies
• Expansion of product range
• Acquisition of new capabilities
• Venturing into a new domain

The PMI approach needs to be tailored in accordance with the desired strategic objectives of the deal.

Organization & Culture

The senior management should be mindful of the significance of organizational and cultural differences in the two organizations that often become barriers to M&A deals.  Small companies, typically, have an entrepreneurial outlook and culture where there aren’t any formal structure and the owner controls (and relays) all the information and decision making.  Whereas, large corporations typically have formal structures and well-defined procedures.

A takeover of a small firm by a large entity is bound to stir criticism and disagreement.  M&A process often faces long delays between the offer, deal signing, and closing—due to antitrust reviews or management’s indecisiveness— triggering suspicion among people.  This should be mitigated during the PMI process by orienting the people of the small firm with the new culture and giving them time to transition effectively.

For M&A deals to be effective, leadership needs to carefully evaluate the behavioral elements of the organizational culture and contemplate the overriding principles guiding a company.

Takeover Approach

Integrating the operations of two companies proves to be a much more difficult task in practice than it seems theoretically.  Organizations have the option of selecting the takeover approach most suitable for them from the following 4 methodologies--based on their organizational structures, people, management, processes, and culture:

1. Direct Hit
2. Hiatus
3. Deferred Decisions
4. Quick and Unsympathetic Disposal

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Corporate Social Responsibility (CSR) is an organization’s commitment to produce an overall positive impact on society.  CSR encompasses sustainability, social and economic impact, and business ethics.  It makes a company socially accountable of its operations, stakeholders, and the public.  Businesses undertake CSR programs to benefit society while boosting their own brands.

CSR affects every aspect of business operations and functions.  Encouraging equal opportunities; partnering with organizations practicing ethical business methods; putting part of earnings back into environment, health, and safety initiatives; and taking care of communities and charity are all examples of CSR initiatives.

Communities, customers, employees, and media consider CSR vital and gauge companies based on these initiatives.  Executives of leading companies consider CSR as an opportunity to deal with critical issues innovatively, reinforce their organizations, and serve the society simultaneously.

The Need for CSR Implementation

Organizations need to come up with a robust approach to unlock potential benefits and value from CSR for them and for the society.  The organizations practicing Corporate Social Responsibility do that with one of the following 4 objectives in mind:

• Philanthropy:  These initiatives (e.g. corporate donations) make the companies and society feel good, but produce low value for the business—questionable repute building benefits to companies, but offer much to society.

• Propaganda:  These CSR initiatives are predominantly geared towards promoting a company’s standing, but offer little real value for the society.  This form of CSR is more of advertisement and becomes risky if there are any gaps between the firm’s commitments and actions.

• Pet Projects:  Some companies engage in CSR initiatives that support the personal interests of senior executives.  These initiatives are much touted about, but are actually of little value to the business or community.

• Smart Partnering:  These initiatives concentrate on common themes between the business and the community.  Organizations, in this case, create innovative solutions by drawing synergies from partnerships to tackle major issues concerning all stakeholders.

Among these objectives, Smart Partnering offers maximum opportunities for shared value creation and finding solutions to crucial business and social challenges.  Whereas for the society, smart partnering helps create more employment opportunities, improve livelihoods, and enhance the quality of life.

Guiding Principles for CSR Initiative Selection 

An effective way for the companies to maximize benefits of their CSR efforts is to map the current initiatives; identify the objectives, benefits, and resources responsible for realizing value from those initiatives; and define the projects valuable for addressing key strategic challenges.

Pet projects, philanthropy, or propaganda are easy to plan and execute.  However, the real issue is to implement CSR opportunities that bring value for the business as well as society (smart partnering).  This goal can be achieved by applying these 3 guiding principles:

1. Focus on the right segments

Real opportunities lie in the segments where the business collaborates with and influences the society the most.  These segments help the business interpret mutual dependencies and uncover maximum mutual benefit.

2. Recognize challenges and benefits

After finalizing the opportunity segments, it is imperative to appreciate the potential for mutual benefit.  The key is to find the right balance between the business and community and recognize the challenges that both sides face.

3. Find the right partners

Collaboration with right partners—who benefit from business endeavors and capabilities of each other—creates a win–win situation for both sides and motivates them to achieve mutual value.  Sustainable collaboration demands long-term alliances and deeper insights on the strengths of each other.

These principles are helpful in selecting appropriate CSR opportunities, identifying societal and business needs to be addressed, and the required resources and capabilities.

The Case for CSR Benefits 

The goal of unlocking mutual benefits—associated with CSR (specifically Smart Partnering)—is critical for long-term success of the program.  As required by any other strategic initiative, the mutual value creation objective needs to be carefully assessed based on the true value-creation potential, prioritized, designed, staffed, and audited.

The next step is to outline the list of potential benefits for the business and community.  A well-defined business case and a compelling story immensely helps involve and gain commitment from the senior leadership, investors, and employees.

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Value-Based Management (VBM) has been regarded traditionally as a tool to help investors evaluate firms, optimize performance management, and maximize shareholder value.

However, there are mixed opinions on whether to utilize VBM as a mandatory investment or management tool.  Many investors, analysts, and executives, to this day, are skeptical of the influence and role of VBM in confronting the dot-com bubble or other financial downturns.  They are even cynical of the efficacy of VBM as a robust management approach for the future or its effectiveness in creating competitive advantage for them.

The following are some shortcomings associated with the traditional VBM approaches that leaders should negotiate:

• An inadequate link between VBM practices and capital markets realities—absence or lack of analysis of the capital markets to expose gaps between a company’s intrinsic value and actual stock price.

• Aligning VBM with the organizational systems and its culture for value creation.

• A broken process for managing the controls that govern value creation—traditional VBM offers rich insights on managing economic principles, but lacks a process on how to further align strategic, cultural, and behavioral levers.

Value Creation Framework

The lack of trust in the effectiveness of VBM necessitates formulating a more thorough, fact-based approach to executing VBM.  In developing a value creation agenda, it is quite uncomplicated to conceptually convince managers and employees that it is their main shared focus, but the core challenge is to devise a practical and integrated implementation approach.

The Value Creation Framework depends on 4 value creation levers that senior management can pull in order to effectively achieve their value creation goal.  These levers are not autonomous and needs to be activated in tandem:

• Operational Effectiveness
• Competitive Strategy
• Portfolio Management
• Investor Strategy

The framework first stresses the management team to agree on the shared aspirations, prioritized levers, and how the headquarters activities are to be aligned with the business units.  This entails revisiting the assumptions, priorities, decisions, tools, and culture at all levels across an organization to harness VBM to achieve improved value creation.  The framework warrants the VBM approach to be embraced as a culture to maximize value creation--which is measured in Relative Total Shareholder Return.

Relative Total Shareholder Return (RTSR)

Focusing and aligning the organizations around a shared mission is important for the leadership.  Clearly laid out, compelling vision and aspirations—that are reinforced daily—have a profound positive impact on an organization’s value creation potential.

Value creation best practices necessitate establishing a single, long-term goal—the Relative Total Shareholder Return (RTSR) performance.  The Relative Total Shareholder Return reflects a firm’s capital gains plus dividend yield relative to a peer group or market index.

The RTSR concept is not new, but practically most companies find it hard to implement RTSR as a goal-setting tool.  The RTSR should be clearly quantified and communicated across the board as a long-term goal.  The RTSR aspirations motivate and empower line management to work as entrepreneurs to achieve it, set objective targets, and connect business unit management to capital markets discipline.  If done right, RTSR is a useful method to specify and communicate a firm’s objectives and the supporting execution plans.

Measuring RTSR Objective

Measuring the RTSR goal achievement at the corporate level can be done by ranking a firm’s TSR against its peers  TSR.  A RTSR target can be set to analyze the effect of corporate and business unit plans.  This can be done by quantifying a subjective goal—e.g., top half or top quartile TSR—into a specific number.  The calculations warrant developing a forward-looking RTSR target on the following 3 footings:

• Anticipated 5-year company cost of equity—to gather an investor’s view of the risk-adjusted average expected return that a firm or market index is priced to deliver.

• Anticipated spread to achieve relative TSR goal—calculating stretched, above-average TSR goal needs personal discretion. It can be done through superior performance improvements instead of maintaining superior absolute levels of performance.

• Forward looking 5-year RTSR target—calculation of this goal requires 2 key considerations: RTSR probability of reaching above-median TSR and benchmarks to meet a cumulative top quartile TSR target over different time periods.

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Changing the behaviors of people is the foremost issue with every transformation initiative.

Nudge theory is a novel Change Management model that underscores the importance of understanding the way people think, act, and decide. The model assists in encouraging human imagination and decision making, and transforming negative behaviors and influences on people. The approach helps understand and change human behavior, by analyzing, improving, designing, and offering free choices for people, so that their decisions are more likely to produce helpful outcomes for the others and society in general.

Nudge theory helps reform existing (often extremely unhealthy) choices and influences on people. The theory is quite effective in curtailing resistance and conflict resulting from using autocratic ways to change human behavior. The model promotes indirect encouragement and enablement—by designing choices which encourage positive helpful decisions—and avoids direct enforcement. For instance, playing a 'room-tidying' game with a child rather than instructing her/him to tidy the room; improving the availability and visibility of litter bins rather than erecting signs with a warning of fines.

Organizations are increasingly using behavioral economics to optimize their employee and client behavior and well-being. Nudge units or behavioral science teams are being set up in the public and corporate sectors to influence people to address pressing issues. For instance, to increase customer retention by changing the language of support center staff to motivate customers to consider long-term benefits of a product; or to make employees to follow safety procedures by placing posters of watching eyes to remind them of the criticality of the measure.

An effective Nudge initiative necessitates much more than deploying a few experts in heuristics and statistics. The senior leadership should lay out a conducive environment for successful behavioral transformation. This entails assisting the Nudge unit to focus, place it appropriately, create awareness, train and de-bias people, implement effective rewards, and follow high ethical standards.

The leadership needs to think about and prepare to tackle 6 key challenges Nudge units face when implementing effective behavioral transformation initiatives:

1. What should be the focus of the Nudge unit?
2. Should the Nudge unit be placed at the headquarters or at the business unit level?
3. Which resources be made part of the Nudge unit?
4. What are the critical success factors to consider for the unit?
5. How to communicate the results and early wins?
6. What should be done to tackle skepticism and resistance to change?

Leaders who are able to confront these challenges improve the chances that the unit’s nudges will cause real change in the organization and in its productivity.

Let’s, now, dive deeper into the first 3 key challenges.

What should be the focus of the Nudge unit?

The foremost action in creating a Nudge team is to clearly spell out the value proposition for the unit. The leadership needs to define the purpose of creating a Nudge unit. They need to clearly outline whether the Nudge team will focus on employees, on customers, or on both. For instance, the purpose of its creation could be to deal with workforce motivation, to make better decisions in boardrooms, to increase the internal capabilities, or to improve the behavior of employees. The focus on customer issues, for example, entails encouraging better pension provision, inculcating behavioral science into the marketing mix, or to analyze the experiences of customers and employees—e.g., in-store service initiatives, digital operations, and HR processes.

Should the Nudge unit be placed at the headquarters or at the business unit level?

The second challenge is to decide where to deploy the Nudge unit. The placement of the Nudge unit depends on the strategic purpose of creating the unit. At some companies, it is housed centrally within the corporate headquarters as a global Nudge operations center; a few have accommodated the unit within the R&D or marketing department; some have benefited by moving the unit away from the corporate center so as to be closer to products and services; whereas other practitioners believe that the customer-focused behavioral science team should sit within the product management domain.

Regardless of where the Nudge unit resides, its flexibility and assimilation with other methods of behavioral change—e.g., cognitive neuroscience, social psychology, and personality-trait science—are critical.

Which resources be made part of the Nudge unit?

Another critical element for the success of the Nudge unit is hiring and deployment of right resources. At the commencement of the program when key capabilities are typically not available in-house, most organizations hire people from the outside for their Nudge units. A few companies have recruited solely from the in-house due to the criticality of institutional knowledge and the long learning curve required to acquire it, whereas some have recruited across different geographies. On average, the unit comprises of 3 to 8 members, however, larger organizations can have more people scattered globally.

The ideal composition of the Nudge team is to include behavioral scientists and specialists in psychology, marketing, and advanced data analytics. The team should include people with the right attitude and abilities—e.g., curiosity, can-do attitude, problem solving, entrepreneurial mindset, ownership, and communication skills.

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Transforming a product-driven firm to a customer-driven enterprise is inevitable in order to stay ahead in today’s extremely competitive markets. The days of mass marketing, mass media communications, and little-to-none direct interface with customers are long gone. The emphasis, now, should be on maximizing customer relationships and becoming customer-driven organizations rather than merely selling products. The technological advancements of this age offer potent tools for organizations to utilize in order to engage with the customers directly; gather and mine information; and tailor their products and services appropriately.

Leading organizations are making huge investments in data analytics and transforming their strategies to focus on the customers’ evolving needs. They are striving hard to improve their customer retention and deepen their relationships utilizing rich customer insights, tailoring products according to the personalized needs of the customers, and presenting the offerings in a variety of store formats.

The Customer Department

To become customer-centric organizations, companies need to transform their traditional marketing function into a new unit called the “Customer Department.” The Customer Department should be created to deliver maximum profits to the customers and nurturing customer relationships instead of pushing products.

This necessitates transforming the organizational structure, culture, strategy, and reward programs in line with the shift in focus from managing transactions to cultivating customer relationships. Specifically, there is a need to add the position of Chief Customer Officer (CCO)—under the CEO—and various Customer Managers underneath the CCO. The roles and responsibilities of these positions should be:

Chief Customer Officer (CCO)

The most prominent shift in a customer-centric organization is replacing the traditional Chief Marketing Officer (CMO) role with the Chief Customer Officer (CCO) role. Reporting to the CEO, the CCO is primarily responsible for devising and executing the customer relationship strategy, directing all the client-facing roles, and fostering a customer-driven culture in the organization. The main tasks of the CCO position include ensuring smooth flow of customer information, increasing productivity utilizing various metrics, and regularly interacting with the customers to understand their concerns.

Customer Managers

In a customer-centric organization, the Customer Managers (CMs) are in charge of various customer segments. They are accountable for enhancing the value of a customer relationship by ascertaining customers’ product needs. To make this role effective, there is a need to realign resources—people, budgets, authority—from product managers to the CMs.

The main tasks of the CM position include defining customer needs, extracting and interpreting customer insights utilizing various sources—e.g., mining customer forums, blogs, and online purchasing data—, and striving to improve the lives of the customers.

Additional Responsibilities of the Customer Department

Customer-centric organizations make the Customer Department accountable for some of the critical customer-facing functions which were once considered an integral part of the Marketing Department. These functions include:

1. Customer Relationship Management (CRM)
2. Market Research
3. Research & Development (R&D)
4. Customer Service

Customer Relationship Management (CRM)

Traditionally, the CRM function belongs to the Information Technology Department owing to the technicalities involved in managing the CRM systems. The function demands evaluating the customer requirements and behaviors—which is a core function of the Customer Department alongside gathering and analyzing data necessary to execute a customer-development strategy.

Market Research

In customer-centric organizations, the Market Research function goes all the way from the marketing unit to other units that deal with customers—e.g., Finance for payments, Distribution for delivery. These organizations take a more granular view of customers’ behaviors, and gather and incorporate clients’ feedback to further improve customer lifetime value and equity.

Research & Development (R&D)

The R&D function should also report to the Customer Department, as, nowadays, the traditional R&D-driven new product development models are conceding to creative collaboration between the client (users) and producers. It’s not a good idea anymore to pack tons of features into a product and cause feature fatigue to customers. What’s more appropriate is to seek and incorporate customers’ input into product features by involving them into the product design process.

Customer Service (CS)

CS is another function that should be handled by the Customer Department to guarantee quality of service and to nurture long-term relationships. This important function isn’t worth outsourcing overseas as this often causes negative impact to the clients and organizations alike, due to poor customer service.

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Most Transformation initiatives fail to achieve their anticipated objectives.

Change Management is all about engaging and rallying people — at all levels in the organization — to make the transition and sustain that change. It is critical to ensure that the entire workforce is eager and ready to embrace the required new behaviors. More often than not, the technical side of a change initiative is well planned, but it’s the implementation part that fails — particularly, changing the mindsets and behaviors of the entire workforce to enable change to stick.

Managing change is not an occasional affair; it is an iterative process that works on motivating human behavior to accept and adjust to a desired state of mind. The process is naturally evolving as it adapts in accordance with the feedback from the people.

Change Management demands a thorough yet organized approach to enable the “people side” of change to work — essential for accommodating and sustaining Business Transformations. This entails assisting people incorporate new mindsets, processes, policies, practices, and behaviors.

A methodical approach to make the entire workforce accept and support change constitutes 8 critical levers:

1. Defining the Change
2. Creating a Shared Need
3. Developing a Shared Vision
4. Leading the Change
5. Engaging and Mobilizing Stakeholders
6. Creating Accountability
7. Aligning Systems and Structures
8. Sustaining the Change

Now, let’s discuss the first 4 levers in detail.

1. Defining the Change

The first step entails outlining the rationale, scope, and results of the change initiative for the enterprise, key departments, and roles. There is a need to define critical elements, including the requirements from the initiative, the execution planning, and the adjustments needed to encourage people to work better.

The project sponsors need to clearly outline the essence of the proposed Transformation initiative, to realistically embed Change Management into the design of the program, and develop effective Change Management plans. An initial baseline of the expected effect of the program on people should be performed. The baseline also helps analyze the impact of the change program — in terms of skills inventory, head-count indications, adjustments in accountabilities and relationships, shifts in incentives and pay structures, and future learning needs.

2. Creating a Shared Need

Once the change and its impact has been delineated, the next thing to do is to create a shared understanding of the rationale for Transformation across the organization. To create a shared need for the Transformation endeavor, the change sponsor needs to build awareness of the necessity for change amongst the senior team, key stakeholders, and the entire organization; demonstrate to the people the benefits of change; and set up a feedback mechanism across the organization. The alignment afforded by developing a shared need for change helps build a strong footing for Transformation.

3. Developing a Shared Vision

An essential element of implementing transformation entails delineating a clear vision that outlines critical actions and the anticipated outcomes. It helps in encouraging and involving the workforce in the Transformation initiative, giving them a sense of purpose by becoming a part of something bigger. The vision of the organization after Transformation should be coherent with the company values and mission.

4. Leading the Change

This lever entails developing change leadership and implementation skills needed to drive and enable sustainable change. Engagement and commitment of senior leaders is essential for leading change. They are responsible for planning their and the entire workforce’s actions, demonstrating or role modeling the new mindsets and actions, designating program sponsors — e.g., business unit leaders who are enthusiastic about the Transformation initiative and also act as change agents — motivating others to support transformation, and setting up a road map for the change leaders to steer the organization to achieve the anticipated performance milestones.

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In this era of rapid change only organizations that are evolving and continuously learning can flourish. Successful organizations discover how to tap their people’s commitment and capacity to learn at all levels.

A Learning Organization is a place where people continually expand their capacity to create the results they truly desire, where new ideas and thinking are nurtured, and where people are continually learning to see the whole together. A Learning Organization is established on the principles of innovation, free flow of ideas, and a consistent focus on transforming the ways of doing business.

Learning Organizations adopt 5 distinct practices to succeed, which form the “building blocks” of such organizations:

• Systematic Problem Solving
• Experimentation
• Learning from Experience
• Learning from Others
• Knowledge Transfer

Five key characteristics distinguish a Learning Organization from the rest. These attributes serve as the guiding principles and practices that these organizations study and integrate into their DNA. A blend of these core characteristics helps organizations adopt a more interconnected way of thinking:

1. Systems Thinking
2. Personal Mastery
3. Mental Models
4. Shared Vision
5. Team Learning

By adopting and mastering these core characteristics organizations become communities that employees can commit to. Let's, now, discuss the first 3 characteristics in detail.

Systems Thinking

Systems thinking allows people to study businesses as bounded objects. Learning Organizations possess information systems to assess the performance of the organization and its components as a whole. Systems thinking states that all the characteristics must be present together in an organization for it to be a Learning Organization. However, some experts consider that the characteristics of a Learning Organization are gradually acquired, rather than developed simultaneously.

Personal Mastery

Personal mastery is an individual’s commitment to learning. It is about becoming more productive by applying skills to work in the most constructive manner. It involves clarification of focus, vision, and to interpret reality objectively. Training, development, and continuous self-improvement are the sources of individual learning.

Mental Models

Mental models include assumptions and generalizations retained by individuals and organizations, which go undetected, as mental models limit peoples’ observations. Learning Organizations need to identify and challenge these models. For a learning environment it is important to replace confrontational attitudes with an open culture that promotes inquiry and trust, introduce mechanisms for uncovering and assessing organizational theories of action, and discard any unwanted values.

Role of Leadership

Productivity and competitiveness relies on knowledge generation and processing. Therefore, organizations not only have to invest in new machinery and systems to improve production, but also focus on knowledge generation and learning of their people. Learning Organizations require a new view of leadership. Leaders in Learning Organizations create workplaces that help people keep building their capabilities to understand complexity, clarify vision, and improve shared mental models.

Peter Senge describes the 3 key qualities of leaders to be critical in leading the Learning Organization:

1. Designer
2. Steward
3. Teacher

Designer

The key roles of a leader as a designer in Learning Organizations is designing the policies, strategies, and systems. The designer also outlines the governing ideas—the purpose, vision, and core values—for the people. They plan and develop the learning processes whereby people throughout the organization can deal productively with the critical issues they face, and cultivate personal mastery of the team members in the desired learning disciplines.

Steward

According to Peter Senge, the notion of management in this modern age should be replaced by “stewardship”—whereby control and consistency should be swapped with partnership and choice. The leader as a steward tells ‘purpose stories’ about their organization and relate those stories. They explain the reasons of the tasks that are required to be performed, the need for the organization to evolve, and the purpose of evolution. They learn to listen to other people, involve them, and develop vision—both individual and shared.

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A large majority of organizations rarely focus on gathering and utilizing customer-centric knowledge. So much so that they even introduce a product without having vital insights on the customer and their unmet needs, and they are often clueless about them. Consequently, many product development initiatives fall flat as managers struggle to filter and evaluate ideas.

Most organizations, today, are developing initiatives around Customer Experience Strategy and Customer Journey Mapping. Customer-centric Organizations are deeply focused towards value creation for their customers. They understand the unique customer insights needed to make customer-centric decisions, are able to gather those customer insights, and are aware of the way to utilize the insights in creating value for their customers. By using customer insights, Customer-centric Organizations drive their product innovation success rate significantly higher than the industry average.

In order to develop this capability, organizations need to first utilize a customer-centric research process to gather the customer insights required to drive value creation. This is accomplished when:

• They know the desired unique customer insights needed to make customer-centric decision.
• They are able to gather the required customer insights.
• They realize the proper time and way to utilize the insights in making value creation focused business decisions.

Building a Customer-centric Culture of Innovation warrants a methodical approach. A potent approach to building such a culture of innovation encompasses 3 key phases:

1. Qualitative Insights: Apply Customer-Centric Fundamentals - The first phase commences by organizing an intensive day-long workshop for each cross-functional product team. The teams engage in a unique customer journey where they employ a “jobs-to-be-done” lens to analyze their market, and identify valuable, qualitative customer insights needed to drive customer-centric decision making.
2. Quantitative Insights: Quantify Opportunities that Exist - This phase entails conducting quantitative research to rank the most critical customer insights needed to develop customer-centric data model. The insights available through this data set help the company in making customer-centric business decisions for years to come.
3. Implementation: Leverage New Customer Insights for Growth - In this phase, managers and employees across the organization are trained on utilizing the insights to devise market and product strategies, and to encourage customer-centric growth.

Let’s take a deeper dive into the first phase of this process.

Qualitative Insights: Apply Customer-Centric Fundamentals

The first phase commences by organizing an intensive workshop for each cross-functional product team. It is typically a day-long session where the teams engage in a unique customer journey. They employ a “jobs-to-be-done” lens to analyze their market and identify valuable, qualitative customer insights needed to drive customer-centric decision making. The qualitative customer insights developed during the first phase serve as an indispensable, long-term guide in the journey to a customer-centric mindset.

During phase I, each product team is trained on customer-centric philosophy in a workshop settings. The workshop participants participate in qualitative research discussions designed to obtain critical customer information and fresh insights. Upon completion of the initial phase, the product team is able to develop a shared innovation vocabulary and gather customer insights to make customer-centric marketing and product development decisions.

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Organizations need to persistently improve the way they do business to stay ahead of the curve. New ideas trigger organizational improvement and build the foundation of a Learning Organization.

Scholars have defined a Learning Organization in many different ways. Some suggest it as an organization skilled at creating, acquiring, and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights. Marlene Fiol and Marjorie A. Lyles describe organizational learning as “the process of improving actions through better knowledge and understanding.” Barbara Levitt and James G. March define organizations as "Learning Organizations when they encode inferences from history into routines that guide behavior. Chris Argyris categorizes organizational learning as “a process of detecting and correcting error.” According to Peter Senge, “a Learning Organization is a group of people working together collectively to enhance their capacities to create results they care about.”

Being a Learning Organization offers several advantages. A perpetual influx of insights and new experience keeps the organization dynamic and ready for transformation; assists in better management of investments, improves efficiency; and helps in developing cost leadership and differentiation strategies. Learning Organizations tend to be more innovative by encouraging people to learn, develop, and by generating a more innovative environment. Shared learning builds the corporate image of the organization and increases the pace of change within the organization. Learning Organizations provide their people the ability to think insightfully about complex problems, take coordinated action, improve decision making, and instill a sense of community in them.

Despite efforts to improve continuously and creating new knowledge, organizations cannot simply become Learning Organizations. They employ various approaches but what they actually need is to become proficient in translating new knowledge into new ways of doing things, and actively managing the learning process so that it gets ingrained into the organizational culture.

Becoming a Learning Organization necessitates mastering 5 key activities. These 5 activities form the building blocks of a Learning Organization and should be integrated into the organizational core to transform your company into a Learning Organization.

1. Systematic Problem Solving
2. Experimentation
3. Learning from Experience
4. Learning from Others
5. Knowledge Transfer

Applying these practices to some degree or in isolated cases isn’t enough. To ensure continued success, these practices should be complemented by distinct mindsets, support systems, and processes.

Let’s now discuss the first 3 building blocks in detail.

1. Systematic Problem Solving

Systematic problem solving is based on scientific methods for diagnosing problems, e.g., the Plan, Do, Check, Act (PDCA) cycle or “hypothesis-generating, hypothesis-testing.” The technique employs fact-based management, relying on concrete data instead of assumptions for making decisions and utilizes statistical tools—such as Pareto charts, histograms, correlation, and cause and effect diagrams—to consolidate data and draw conclusions.

For a real Learning Organization, people need to become more disciplined, pay more attention to detail, assess underlying causes, and analyze data before reaching decisions.

2. Experimentation

Experimentation involves systematic exploration and testing of new knowledge. Experimentation has 2 fundamental configurations; both forms transfer knowledge and yield new insights, capabilities, tools, techniques, and processes:

1. Ongoing programs
2. Demonstration Projects

Ongoing Programs

Ongoing programs entails a chain of small experiments aimed at yielding incremental gains in knowledge. These programs maintain a steady flow of new ideas by sending workforce on sabbaticals at different places to learn new work practices and tools from industry and academia, and applying that knowledge to their daily routines. Such programs foster risk taking and a feeling of “benefits of experimentation far outweigh the costs.”

Demonstration Projects

Demonstration projects are one of a kind, large-scale initiatives that include holistic system-wide transformation targeted at a single site. These projects are executed with a goal of developing new organizational capabilities using a “clean slate” approach.

Self-managing, multi-departmental teams; high level of employee autonomy; considerable “learning by doing;” course corrections; implicit policy guidelines, precedents, and decision rules are the key characteristics of demonstration projects.

3. Learning from Experience

Learning Organizations gain valuable knowledge from their past experiences, by doing an exhaustive and systematic appraisal of past successes and failures. However, not too many managers pay attention to past experiences or reflect on those, eventually losing valuable insights. To inculcate a culture of learning, lessons learned should be recorded and made readily accessible to all employees.

A handful of companies have laid out processes for their managers to contemplate on their past actions and incorporate those in their learning. At the core of this approach lies the belief that distinguishes productive failure from unproductive success. Productive failure delivers knowledge and understanding whereas unproductive success goes unnoticed where nobody knows what went well and why. Learning from experience approach isn’t that expensive—case studies and project reviews can be compiled with little cost.

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The typical approach to improving productivity focuses on assessing variance in quality, time, rate, service, or cost, around which management systems develop incrementally or revolutionary.

Organizational Health Index, on the contrary, focuses on improving performance through improved alignment of organizational systems. For example, by improving competence of key components such as mindset, work design, technical expertise, or relationships; or through improving the interface between work processes, or the interaction between work practices.

Simply put, the capability of an organization to achieve its strategic goals and their alignment defines an organization’s health. The Organizational Health Index (OHI) leverages logical consistency to manage the organizational health. OHI entails quantifiable evaluations, diagnostics and recipes for success that allow the leaders to calculate and accomplish the organizational health goals, required to sustain long-term performance.

Organizational health refers to the need to address soft (leadership, direction or culture) and hard factors (accountability, reporting lines, or controls) affecting performance. The organizational health index is an ongoing continuous improvement system applicable across an organization. The OHI measures not only the current health level, but also determines the next steps for an organization. There are numerous advantages to the organizations implementing it, including:

• Benchmarking organizational health against the rivals.
• Aligning the organizational systems, units, and people by communicating shared goals and priorities; and highlighting and plugging the disconnects.
• Improving organizational performance by pinpointing variances and opportunities to improve health and drive business success.

The OHI Diagnostic Framework provides a road map for leaders and managers to improve organizational health. It measures the organization against the 9 most critical health outcomes; these outcomes comprise both hard and soft organizational elements. Careful measurement of these 9 elements has a proven link with improved financial performance and earning above-average EBITDA margins:

1. Direction
2. Accountability
3. Coordination and control
4. External orientation
5. Leadership
6. Innovation and Learning
7. Capabilities
8. Motivation
9. Work Environment

There are 37 management practices under these 9 health outcomes, developed to help companies identify the behaviors most critical to their health journey:

Direction

• Shared Vision
• Strategic Clarity
• Employee Involvement

Accountability

• Role clarity
• Performance contracts
• Consequence Management
• Personal Ownership

Coordination and Control

• People Performance Review
• Operational Management
• Financial Management
• Professional Standards
• Risk Management

External Orientation

• Customer Focus
• Competitor Insights
• Business Partnerships
• Government and Community Relations

Leadership

• Authoritative Leadership
• Consultative Leadership
• Supportive Leadership
• Challenging Leadership

Innovation and Learning

• Top-down Innovation
• Bottom-up Innovation
• Knowledge Sharing
• Capturing External Ideas

Capabilities

• Talent Acquisition
• Talent Development
• Process based Capabilities
• Outsourced Expertise

Motivation

• Meaningful Values
• Inspirational Leaders
• Career Opportunities
• Financial Incentives
• Rewards and Recognition

Work Environment

• Open and Trusting
• Internally Competitive
• Operationally Disciplined
• Creative and Entrepreneurial

Years of research have shown the healthiest companies to align with 1 of the 4 recipes for organizational health. These recipes constitute concrete management practices and activities for the organization to implement.  Leaders need to acknowledge and align to the recipe that is appropriate for them. They can use these success recipes to plan and implement a change program that results in sustainable outcomes. The 4 recipes for organizational health are:

1. Leadership
2. Market Maker
3. Continuous Improvement
4. Talent

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Customers, these days, demand ever-higher levels of personalized products and services to suit their needs. Their demand is grounded on technological disruption and access to up-to-date information. They believe that in an economy characterized by disruption and operational innovation—that makes customization possible—they have an excellent chance of getting customized offerings from the suppliers.

Thus, Product Strategy needs to evolve and become more robust, accordingly, to keep up with changing customer needs and demands.

However, Leadership at most supplier organizations believe that a strong focus of attention is the key to keeping rivals at bay and realizing amazing revenues. But the approach has its own shortcomings, as a focused market, geography, value proposition, or segment becomes replete after a while.

To serve customers’ fragmented needs, companies often outstretch the optimum level of complexity in their systems and portfolios while striving for customization. Organizations need to aim for and harmonize multiple points of focus to keep up with the fragmented demand of their customers.

Leading firms are offering bespoke solutions to customers to drive growth through Smart Customization—i.e., by tailoring business streams and aligning strategies with customer value.

With rising demands for customized offerings by the customers, organizations need to gauge the value that customization offers to their customers against the complexity costs they can charge them, in order to achieve higher growth and profit margins than their competition.

Studies have revealed remarkable dissimilarities between enterprises in terms of their approach towards customized client requirements. Those organizations that offer transient solutions to customer demands can be referred to as “simple customizers.” Whereas, firms that transform and bring their customer strategies and implementation plans in line with the specific customers’ requirements are the “smart customizers.”

Smart Customization

Improved focus on the specific needs of customer segments helps boost the market share. Research on various large organizations reveals that smart customizers have a consistent focus on 3 best practices:

• A clear appreciation of the value that customization allows to their customers;
• Constant transformation towards the point at which customization adds value to both the clients and the organization;
• And modification of business models based on customers’ demands to provide value at lower costs.

Typically, there is often a two-to-one performance difference between “Smart Customizers” and “Simple Customizers.”

Implementing Smart Customization isn’t as easy as it sounds. A Booz Allen Hamilton study of product and service companies—conducted in North America and Europe for over 6 months—revealed that customization programs at around two-third of the companies failed to improve their revenues or profits, and most customization initiatives added to organizational complexity. These initiatives typically draw the emphasis of sales and marketing units off of the real value-added propositions and the most profitable customers, and direct disproportionate investments that fail to boost revenue.

The 3 main challenges that organizations have to face while implementing Smart Customization are:

1. Cost of Complexity
2. Valueless Variety
3. Value Creation and Delivery Alignment

Now, let’s discuss the first challenge of Smart Customization in further detail.

Cost of Complexity

Organizational structure, operations or value propositions start out simpler but get complex over time. There are two reasons attributed to organizations’ decision to add complexity to their product or service portfolio: to create value for a customer segment, or in response to rivals’ moves.

The challenges of increasing complexity stay obscured from majority of the organizations. These challenges may include:

• Balancing customers’ requirements for variety in offerings with the escalating costs of complying with their needs
• Neglecting to update the decisions about the markets served and how to serve them
• Falling short of targeting customer demands accurately
• Inability to provide sustained value to existing customers
• Failure to develop a thorough understanding of the cost drivers
• Inability to differentiate between easy and difficult customization programs.

A customization program that does not acknowledge these challenges results in diverting resources away from top priority initiatives and further squeezing top-line and bottom-line figures.

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Large accounts make up a significant portion of business for most B2B companies. Therefore, losing an important customer can have detrimental effects on the organization. The significance of key accounts is urging top B2B companies to revisit their key account management approaches. Additionally, the increasing level of sophistication of the purchase process being adopted—such as, centralized procurement, competitive bidding and auctions, and laborious negotiations—by large buyers is a crucial element for B2B companies to consider to win large accounts.

Studies have shown that large buyers suggest price, product features, and reliability as the most important factors in their purchasing decisions, even more so than sales and service experience. However, detailed analysis of data into the actual purchasing decisions by buyers reveal that suppliers’ service and support capabilities mean a lot to large purchasers--in fact, almost as equal in importance as price. Large buyers often involve senior team members in procurement, which necessitates the need for inclusion of people possessing high-quality management and sales skills while serving key accounts.

With more intensifying sophistication of the procurement process at large businesses in future, the buyers will keep trying to cut costs and gain significant advantage while negotiating with procurement. The suppliers, in turn, can create a win-win situation by providing first-rate key account support and service.

Leading suppliers utilize the 4 drivers of growth to develop best-in-class key account management practices and increase their large contract win ratios. These drivers are actually the 4 imperatives that forerunners undertake to fuel their growth:

1. Quantified Value Proposition (QVP)
2. Value-based Selling
3. Coordinated Account Management
4. Negotiation Preparation

Let’s, now, talk about the first 2 drivers of growth in detail.

Quantified Value Proposition (QVP)

Although, a clearly outlined, quantified value proposition(QVP) for the products and services offered is a definite metrics of success, most sellers don’t quantify the value of their service. This helps the sales teams to focus on engaging business leaders concerned with the overall profit and loss rather than price, and positively impacts winning and sustaining customers. QVP aids in enhancing strategic account margins and creating advantage even in low-margin industries. A few sellers have taken the QVP to the next level where they link a portion or all of their fees to value delivery.

Value-based Selling

Value-based sales are focused on a shared understanding of the value of the product or service offering. Most organizations desire to be the primary suppliers of large accounts provided they can sell on value; but, not many sales people are proficient in value selling.  To train the existing sales people to become value sellers, leaders need to equip their sales teams with ready-to-use quantified value propositions, updating those, and investing in frequent trainings and in-field coaching of their cross-functional sales teams—comprising of people from R&D, sales, marketing, and senior executives—to recognize the full value potential of a strategic account. Assigning the best reps to the biggest opportunities is another important factor that yields substantial dividends.

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The Retail industry is under constant pressure by low margins and ever-increasing rivalry. Weak consumer spending; saturated markets; increased consumers demands for service and lower prices; and intense competition has put significant strain on retail bottom lines and growth avenues. Thus,Retail Strategy must evolve to accommodate these market changes.

Such low margins force the retailers to save costs across the operations, including IT, which is vital for the success of every strategic endeavor—be it enhancing customer experience, customer loyalty, or cross-channel integration. Resultantly, IT budgets are also shrinking. Thus sustaining a cost-effective, efficient, and customer-centric IT function is a priority for every retail leader.

The Retail industry faces quite a few IT challenges—e.g., hundreds of discrete locations, numerous applications, and diverse technology infrastructure and systems. The IT function needs to integrate various disjointed applications, including store-based point-of-sale, supply chain, and human resource management with their core systems. Rational utilization of technology is important to achieve customer loyalty with clusters of customers across the store, online, and catalog channels. It is equally important for the retailers to become more cost-centric in their operations, particularly IT.

Most retailers count on cumbersome bespoke ERP systems to deal with merchandising systems and price management, which further add to costs and complexity. The apprehensions for customer privacy and data security, and dependence on traditional ERP systems limit the retail sector to take full advantage of offshore IT infrastructure and solutions delivery services.

Regardless of the ever-increasing rivalry and the challenges associated with technology, retail CIOs should prioritize IT Cost Management and improved IT capabilities. They can utilize the 4 efficiency and effectiveness levers to improve IT capabilities, drive IT efficiency, achieve cost reduction, and secure differential advantage. The levers are:

1. Strategic Sourcing
2. Application & Infrastructure Simplification
3. Demand Management
4. Lean IT Organization

Let’s discuss the first 2 levers in detail.

Strategic Sourcing

Strategic Sourcing of IT services is an effective cost cutting method. The selection of services to be outsourced depends on how strategic or transactional the service is. Many retail organizations outsource their infrastructure, software systems, and business processes to partners, since they offer focused, tailored solutions (at appropriate, need-based service levels) to assist in core retail operations, financial reporting, merchandizing, and much more. An ideal sourcing strategy should entail carefully considering what to outsource, meticulously selecting the appropriate partner(s), outsourcing specific application development phases to unlock savings, blending in-house talent with service provider’s competencies, and nurturing relationships to drive profits. Service providers offer significant cost benefits to the retailers.

Application & Infrastructure Simplification

Retailers typically have excessively complex operations and rely on custom-built applications. In the past, commercial off-the-shelf programs, specifically for the retail sector, were quite limited, which pushed the retailers to develop large custom-built legacy systems. Some even created Microsoft Access / Excel–based programs, to fulfill their mission-critical functions. With growing business, the functionality of these systems was simply extended to manage additional product lines. All of this resulted in makeshift, fragmented IT ecosystem, lack of standardization, increased application support costs, redundancies, and limited scaling opportunities.

Even today, IT ecosystem at most retailers consists of fragmented applications—running on varied platforms—and unorganized data. Latest retail applications are costly but valuable for portfolio consolidation and simplification. A variety of advanced retail ERP products are available today that offer portfolio simplification and are able to consolidate the fragmented legacy systems on a common platform. These systems provide integrated retail functionalities including merchandising, warehouse management, POS systems, workforce and financial management.

Interested in learning more about the 4 efficiency and effectiveness levers to improve IT capabilities in detail? You can download an editable PowerPoint on Retail Strategy: IT Cost Management here on the Flevy documents marketplace.

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Disruption is constantly changing the retail business environment.  In fact, it is adding complexities to it with every passing day.  Sweeping changes in consumers’ behaviors and the challenges to retail economic models are pushing the current retail models to undergo considerable transformation.  A number of organizations that possess a sizable property portfolio find it challenging to manage their assets.

Although, physical stores still remain the preferred mode of shopping in retail—owing to benefits, such as, experiencing the products on the spot, ensuring a good fit, and the satisfaction of immediate ownership—consumers today have the convenience of exploring and buying products online.  There is a progressive trend of e-commerce with many consumers relying on online medium instead of physical store, as they prefer a shopping experience that reduces ambiguity and inflexibility and boosts simplicity and fun.  In future, mobile commerce is predicted to make up an even larger portion of e-commerce.

In future, new pricing regimes and transforming consumer behaviors will put further pressure on retail margins.  Moreover, intense rivalry and a gamut of online shopping solutions will likely push the retailers to reassess their store requirements, evolving from larger stores to smaller store formats, since optimization of real estate operating costs will be a decisive factor in keeping the stores profitable.  Market challenges will drive the retailers to have low space per store, demand greater flexibility, briefer lease periods, discontinuity clauses, and store area modification options.

For the organizations to deal with imminent consumer trends and competition, it is important to undertake frequent evaluations and adjustments in their retail business strategy.  But often they face issues, such as the retail business strategy not translated into property domain; disassociation between business and Real Estate Strategies; or existing Real Estate Strategy lagging behind in meeting business needs resulting in high operating costs and unused premises.

Integrated Real Estate Strategy

These changing times warrant integration of organizational and Real Estate Strategies.  Leadership needs to understand the effect of local and global trends on an organization’s industry.  They should then interpret and incorporate the impact of these trends into an integrated, pragmatic, and executable Real Estate Strategy; and envisage its potential alignment with their real estate requirements.

An integrated Real Estate Strategy assists the premises occupants in implementing strategic decisions consistent with evolving markets and technological disruption, without having any negative effects on business operations and in line with their current portfolio.  A pragmatic Real Estate Strategy meets enterprise and customer requirements and streamlines operating costs.

An integrated approach to manage enterprise real estate in the retail industry helps reveal potential opportunities and threats for the investors.  The benefits of adopting an integrated Real Estate Strategy include enhanced market access and operational efficiency by responding promptly to consumer demands, flexibility in retail and office environment, improved consumer experience, and robust premises cost management.

An integrated and executable approach to Real Estate Strategy encompasses 4 key elements:

1. Detailed understanding of the Corporate Strategy
2. Current portfolio analysis
3. Workforce management
4. Occupancy management

Let’s now get into the details of the first 2 key elements of the integrated Real Estate Strategy.

Detailed Understanding of the Corporate Strategy

Leaders need to have a detailed assessment of business requirements to create a premises strategy.  Based on a thorough understanding of business requirements, a premises strategy should be developed.  The occupants should outline a detailed location portfolio mix to achieve enterprise goals related to cost optimization, growth, locations, and risks.

The key to developing an integrated Real Estate Strategy is to understand and challenge the organization’s Corporate Strategy and Target Operating Model; outline the business or service model and product mix; and ascertain current and future strategic and financial goals.  A robust strategy entails clear definition of premises requirements, initiatives to enable sustained optimization of portfolio, and alignment with financial goals.

Current Portfolio Analysis

Another important element aimed at the integration of organizational and Real Estate Strategies is to evaluate the existing premises portfolio, by undertaking a thorough analysis of the current and future use of the properties.  This should include taking a careful look at the existing tenure agreement and terms and conditions, current rents, market conditions, and commercial options.  This also warrants carrying out a premises opportunity analysis to include development and disposal options, current and future operational and capital expenditures, portfolio-wide exit terms from current owned/leased premises, tax, and performance metrics.

Interested in learning more about the other 2 elements (Workforce Training & Management and Occupancy Management) to managing real estate portfolio?  You can download an editable PowerPoint on Integrated Real Estate Strategy here on the Flevy documents marketplace.

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