How Digital Is Your Company?

Forget about the e-hype. Going digital -- converting from atoms to bits -- gives your company a competitive edge, but only if you focus on the basics: money, talent, customers, and time.

If there is one lesson that we can all learn from the continuing evolution of work and competition in the new economy, it's this: Change the question, and you change the game.

The last revolution in business thinking was spurred when innovative companies changed the question that they were asking themselves. The old question was, "What business are you in?" In the early 1990s, the question changed, prompted by the emergence of widespread entrepreneurial competitiveness and the blurring of boundaries between companies, industries, and countries. The new question became, "What is your business model?"

That change has defined competition for the past decade. New challengers using new business models have risen to take on almost every leading company in almost every industry. Compaq reinvented the business model for computer companies -- to the dismay of IBM. (Then Dell reinvented the model again -- to the dismay of Compaq.) Southwest Airlines reinvented the business model for air carriers -- to the dismay of American Airlines. Nucor reinvented the business model for steelmakers -- to the dismay of U.S. Steel. In almost every instance, the new business models produced cost advantages of 10% to 20% for the innovators.

But today competing on the basis of your business model is hardly cutting-edge thinking. And so the question is changing again. The question today is not, "What is your business model?" The new question -- the question that is the basis for the next great revolution in business thinking -- is, "How digital is your company?"

The question derives from Nicholas Negroponte's insight that the fundamental distinction in the new economy is between atoms and bits: What work do you do that involves atoms -- whether paper and pencil, people, or other tangible assets? And what work do you do that involves bits -- whether email, e-commerce, e-communication, or e-manufacturing? But this is not a question only about the e-hype of the moment. Neither is it about launching a Web site, nor is it about e-commerce. It is not, in short, a matter of embracing technology just for technology's sake.

Before you get caught up in the prevailing winds of e-hype, it's important to stop and consider some cautionary questions: What issues are fundamental to your business? Which of the many available digital technologies can help? And when is it the right time to make the investment to digitize your company? Intel is one company that has long had a keen appreciation of these questions. In 1986, following a $203 million loss, Intel decided to digitize its product-development process by investing roughly $300 million in computer-aided design and computer-aided manufacturing -- CAD/CAM. That investment wasn't a reflection of Intel getting caught up in the CAD/CAM hype. CAD/CAM was the digital answer to a purely competitive question: How could Intel create a two-year lead over its competitors? Becoming more digital in the design and production of chips was key to improving competitive performance. Wal-Mart made a similar investment at about the same time, digitizing its logistics system. By installing sophisticated communications and technology systems to provide real-time sales-and-ordering information, the company moved from atoms to bits. As a result, Wal-Mart outperformed its competitors by offering the right products at the right stores, by cutting costs, by integrating its operations with its suppliers, and by capturing valuable information about its customers. Fifteen years ago, Wal-Mart and Intel were already digitizing their way of doing business -- and winning.

As these examples show, there is a back-to-basics quality to the digital business revolution. Conceived correctly and done well, going digital can change the way your company communicates, sells, purchases, manufactures, develops products -- even how it holds meetings. But, most profoundly, asking "How digital is your company?" can offer revolutionary answers to the four fundamentals of any successful competitor: How do you finance the company and its growth? How do you attract and retain more than your fair share of the best talent? How do you segment and serve your customers in the best and most cost-effective way? And how do you make the most of the competitive advantages afforded by speed in all of your business operations?

In each case, asking a new question not only produces new answers -- it fundamentally reinvents the game. The result is a cost advantage that's not 10% better than your competitors -- but 10-times better. That alone makes "How digital is your company?" a question that everyone in business needs to ask.

How do you get your customers to finance your growth?

If there is one corporate function that would be voted "least likely to go digital," it would be finance. In most companies, finance is the oldest, stodgiest, most conservative department. There's a good reason why chief financial officers and their minions are known as "bean counters." But today the companies that are going digital are leading with finance. In radical fashion, these companies are essentially letting their customers finance their growth -- and multiply their stock price. In the process, they are forging whole new concepts in corporate finance: negative working capital and negative asset intensity. Each of these ideas overturns the conventional laws of corporate finance -- and neither would be possible without the digital revolution.

The old model of corporate finance took for granted three time-honored operating principles. First and foremost, companies must raise capital for physical assets. Second, companies could only operate with a reasonable stock of inventory -- components and parts, works in process, and finished but unsold goods. Third, companies need to raise large amounts of working capital to operate and grow. In fact, according to the old laws of finance, the faster companies have grown, the more they have needed working capital.

Doing business digitally absolutely junks those operating principles -- and reinvents the role of the CFO and the finance department. Digital finance lets you shrink asset intensity without any loss of control or quality. Outsourcing assets to suppliers shifts inventory from your books to theirs. The results: lower operating costs, a higher asset utilization, fewer assets required for every dollar of sales, and, ultimately, negative working capital.

Look at the leading company in almost any industry, and you'll find the same pattern of asset disassociation: Marriott sells its hotels -- and opts for management contracts. Chrysler rids itself of component plants -- and increases its sourcing from suppliers. Disney sets up EuroDisney -- and owns the management contract, not the tangible asset. In each case, the company that releases tangible assets does so without sacrificing operational control -- thanks to the digitization of information.

Chrysler, for example, has shifted the responsibility for the asset to its suppliers and now relies on electronic-data interchange to access real-time information about the quality, delivery, and even the redesign of parts and components. Marriott and Disney have given up assets but have retained contractual rights to digital information -- such as how many customers they have in a given time period, how much each customer spends, what each customer establishes as a utilization pattern.

In fact, digitization lets you accomplish two important goals with respect to assets. First, it lets you assign your company's assets to wherever they can best be managed -- which frequently is with your suppliers. Second, "going digital" lets you substitute good information for excess assets. In the old model, redundant assets of all types -- inventory, manufacturing capacity, even accounts receivable -- were simply every company's way of compensating for poor information. The first breakthrough of digital finance: It improves the management of assets and eliminates waste from the system.

The second breakthrough of digital finance is the invention of negative working capital. The preeminent example of a company that is pioneering digital finance is Dell Computer Corp. By now, most businesspeople are familiar with the rough outlines of the Dell story: the tale of how Michael Dell started the company in 1983, selling computers out of his dormitory room at the University of Texas; how the company has since ridden its business model -- direct-to-the-customer selling -- to become a $12 billion business, with profits of nearly $1 billion.

Less well known but just as important are the details of Dell's digital design. The company prefers to do business over the Web, and it currently registers $10 million in revenue a day over its Web site -- more than $3.5 billion per year. And by the end of the year 2000, Dell hopes to generate 50% of its sales online.

Dell's digital business design allows the company to rewrite the rules of asset ownership and management. Rather than having an inventory of products in stock for shipment to resellers, Dell typically assembles and ships each computer within five days of a customer's placing an order.

The company buys off-the-shelf components -- motherboards, processors, software -- on a just-in-time basis and stores them by the truckload within 50 feet of its assembly line. With only one week of parts on hand, Dell turns its inventory 52 times per year -- a big advantage over both Compaq and IBM, which turn their inventories 13.5 and 9.8 times per year, respectively.

Moreover, the revolutionary dimension of Dell's digital way of doing business shows up in its consumer accounts. Because Dell receives payment from its customers immediately -- through credit cards, either online or over the phone -- the company has cash-in-hand roughly eight days before it has to pay its suppliers. Thus in one stroke the company has been able to flip the traditional manufacturing-finance model.

In the old system, manufacturers pay suppliers for components and raw material long before their products are finished -- much less shipped to market, bought by a customer, and paid for. Because of its digitalized system, Dell can operate with negative working capital: Its liabilities are always higher than its assets -- which means Dell actually increases its liquidity as its sales grow.

Here's how negative working capital looks on Dell's balance sheet for the 1997 fiscal year: Under assets the company lists accounts receivable, inventory, and other, totaling $1.7 billion. Under liabilities the company lists accounts payable, accrued, and other, totaling $2.7 billion. The $1 billion difference represents the company's negative working capital -- Dell's digital design has, in effect, eliminated the need for the company to raise capital.

The third breakthrough of digital finance -- and the companion to Dell's invention of negative working capital -- is Microsoft's creation of negative asset intensity, a financing feat that, in part, accounts for the company's remarkable stock-market valuation. Asset intensity is a measure of the dollars of assets or capital that a company needs to support a dollar of sales. If a typical manufacturing company is growing at 20% per year, and it requires $1 of assets to achieve $1 of sales, then it will need to raise a considerable amount of money to support its growth. Most software companies need roughly 20 cents of assets to generate $1 of sales. Remarkably -- almost miraculously -- Microsoft has achieved negative asset intensity: It needs minus 5 cents to generate $1 of sales!

Here's what negative asset intensity looks like on Microsoft's balance sheet for fiscal year 1997: Under assets the company lists property, plant and equipment, accounts receivable, and other, totaling $2.9 billion. Under liabilities the company lists accounts payable, accrued compensation, income taxes payable, unearned revenue, and other, totaling $3.6 billion. The difference -- minus $700 million -- represents Microsoft's ability to grow its sales with negative asset intensity. To Wall Street and investors, this capability is a stunning competitive advantage: Microsoft, in effect, can grow at 50% per year without having to raise extra cash or add assets. With both Dell and Microsoft the lesson is simple -- and powerful: Digital finance lets you substitute information for assets. The result is a financial model in which your customers fund your growth, and Wall Street and your investors multiply your market value -- all because you've demonstrated your genius by switching from atoms to bits.

How do you get talented people to recruit themselves?

Across the new economy, there is virtual agreement: talent determines the success or the failure of any enterprise. The process of identifying, recruiting, hiring, retaining, and developing talented people is a critical test of any fast company. And the faster a company is growing, the faster it needs to land talented people.

And yet in 1997, only 1.2 million resumes were processed electronically in the United States -- a measure of the extent to which most companies remain firmly rooted in the "atoms" side of the "atoms or bits" equation. Consequently, forward-looking companies that have digitized their recruiting efforts are establishing several powerful advantages over their competition. These advantages include reducing the cost of landing great people; increasing the likelihood that the people they are landing are, in fact, great; and increasing the likelihood that the jobs for which these great people are being hired are right for them. In the process, digitized companies are transferring a great deal of the responsibility and the cost of recruiting to the candidates themselves -- reinventing the whole approach to the talent game.

Think about the old-economy recruiting process most companies use: A company publishes an advertisement in a newspaper or a trade journal. Or maybe it hires an expensive headhunter. Either way, an expensive bureaucracy is needed to handle the blizzard of resumes the ad generates. Inevitably, the majority of the resumes simply don't fit the requirements of the job. Some do, and interviews are scheduled for those candidates. Either the interviews consume the time and effort of a significant number of the company's people -- in which case the encounters are often treated as an unwelcome interruption; or the interviews are handled by an HR person who screens the candidates -- in which case the encounters seem unconnected to the work for which the candidate is being selected. Finally a candidate is hired. And to this point, the process -- just the process! -- has cost the company, on average, between $30,000 and $90,000.

Then comes the test: Does the candidate perform? If the person is truly talented, and if the fit is good all around, everyone wins. But as we all know, this ideal scenario doesn't always occur. It can take up to six months to determine that a new hire is not going to work out, and another six months for the company to dismiss that person. In the interim, the company suffers the double whammy of subpar performance and the internal disruption of a disaffected hire -- since poor performers never blame themselves. The true cost to the company is $200,000 to $300,000 per failed hire -- plus organizational costs, customer-related costs, and the opportunity costs. And then there's the need to start all over again -- using the same broken system.

Digital companies are harnessing the power of digital recruiting:

Microsoft has won a reputation as a hard-nosed interviewer, running job applicants through a gauntlet of whiteboard computations and equations. Despite its atoms-based approach, there is a method to this mental-boot-camp madness: Microsoft is looking for people with high IQs and strong problem-solving abilities. But Microsoft has also developed a strong e-recruiting and e-training process, reaching out to a network of leading universities. The company's Web site features a substantial amount of information to attract talent, a series of interactions to screen candidates, and a portfolio of e-training programs to develop candidates once they've joined the company. It's a comprehensive approach to recruiting -- and one that exchanges atoms for bits.

Most business observers rarely confuse Humana Inc. with a front-of-the-pack fast company. But when it comes to e-recruiting, the $7.8 billion health-care giant has become a digital champ. Recently the company has shifted its approach to talent, using software that searches the Web for resumes and then matches qualified candidates to appropriate openings. The company then uses a tracking system to email top candidates, updating their resumes while updating Humana's talent database. By moving to e-recruiting, Humana has cut its spending per qualified resume from $128 to $.06 -- that's right, 6 cents! That per-resume saving totals $8.3 million annually -- and does a more efficient job of forecasting the fit of candidates tracked through the system.

Who says you can't teach an old dog new tricks? Korn/Ferry International, one of the giants of the executive recruiting industry, has discovered that digitization can improve the firm's hit rate. But instead of moving to the Web, Korn/Ferry has embraced digital video. The firm's research into recruiting variables found that a poor fit with corporate culture is the greatest cause of failure of new managerial recruits. Korn/Ferry's bits-based solution: Use videophones early in the screening process so that clients can look for visual clues to determine how well a candidate will fit in.

These companies, and others like them, are replacing the old informational nightmare with a digital system that prequalifies candidates. The company at the forefront of the e-recruiting revolution is Cisco Systems. The San Jose-based, $8.5 billion technology leader has had unparalleled growth, fueling its phenomenal economic performance with an e-recruiting system designed to bring in more than its fair share of the best talent available. From 1990 to 1997, Cisco rocketed from 250 people to more than 14,500 people in 55 countries. Last quarter alone, Cisco added roughly 1,400 people; this quarter, the number of new employees it will add will range from 900 to 1,200. And the company is bringing these new people on largely in response to growth -- not to replace disaffected employees: Cisco's turnover rate is around 8%, which is far below the industry standard of 12% to 16%.

Cisco's goal is to hire the top few percent of engineering and business talent. Central to the effort is Cisco's well-designed, carefully monitored -- and regularly improved -- recruiting Web site. All of the company's other recruiting activities -- from placing ads in Silicon Valley newspapers, to setting up recruiting tables at upscale social gatherings, to using strategically placed cards in the stands at college football games -- are designed to send self-selected job seekers to the Cisco Web site. There the applicants encounter recruiting pages that are informative, user-friendly, and entertaining. And Cisco is making its recruiting information available in Cantonese, Mandarin, and Russian.

At the front end of the recruiting process, Cisco carefully targets its message to the best candidates. Its recruiters hold focus groups to learn the work practices, social interests, hobbies, and lifestyles of the most successful engineers and managers at their company. Cisco then identifies the most popular and influential Web sites on which to post recruitment ads. In addition to posting positions on standard job-search Web sites, Cisco also goes on the Net to places where its kind of people are likely to hang out: The Dilbert Zone, for example. And, since most applicants are likely to visit the Cisco site during their own work hours, Cisco has added the capability of monitoring not only the number of visits to its site but also the company where the visitor works.

The domain information then lets Cisco target its advertising messages, greeting employees working for competitors with an intelligent screen that prompts, "Welcome to Cisco. Would you like a job?" And the Web site features an emergency escape key called, "Oh No! My Boss is Coming," to help would-be Cisco employees hide their job hunt from their current employers.

Through its Web site Cisco is able to post hundreds of detailed job descriptions at a very low cost -- and with great convenience for prospective employees. Jobs are easily searchable by title, by job description, by keywords, by field of interest, and by location, throughout the United States and the world. Recruits can conveniently inform themselves of the relevant job definitions and skill requirements. Through a special "Hot Jobs @ Cisco" page, the company lists unique positions that it is especially eager to fill.

But the Web site does more than simply list job openings. It also gives potential recruits a window on life at Cisco, making it easier for would-be employees to gain accurate information about the company and its way of working. For those who want even more information, the site's "Make Friends @ Cisco" links applicants with Cisco employees, which makes it easy for them to talk about life at Cisco, about potential job opportunities, and about common interests. Cisco employees volunteer for that program, which matches them with recruits who share similar backgrounds and skills.

Cisco has embraced e-recruiting with enthusiasm -- largely because it works. Today Cisco receives between 30,000 and 36,000 resumes each quarter -- 80% electronically. Cisco has successfully automated 70% of its recruiting process. At the same time, Cisco is building a database that is predictive of the qualities and characteristics that make a star Cisco employee -- screens that guide the company's evolving Profiler system. Through the Profiler, applicants submit personal information online -- education, professional skills, employment experience, and personal interests. The more information the applicant enters, the more the system asks relevant questions. The outcome is a specialized resume that Cisco recruiters can match to job openings. It is a system that, ultimately, allows applicants to recruit themselves.

How do you get your customers to segment themselves?

It is a crucial question for every business: "what does it take to get and keep a customer?" Or, broken down to first principles, "Who is my customer? And what does he or she really want?" These are direct, down-to-earth questions, around which elaborate, expensive, and inefficient answers were developed in the old economy. Much as finance and recruiting in the atoms-based world have become bureaucracies, so too has the hard work of customer segmentation, which has evolved into a hit-or-miss proposition.

It is an all-too-familiar model, whether you experience it as a producer or as a customer. If you're the producer, you spend money and time trying to find your customers. You hire consultants to conduct focus groups; you channel your energy into market research -- all with the hope that you'll learn something about what your customers want. Based on these gleanings, you create your service or manufacture your product. Then you spend more money on marketing and advertising, hoping to lure consumers into your store or to sample your service. And finally, the big moment comes: Customers arrive and they don't want what you're selling. Or you don't have exactly what they want. Or it turns out that they're not really the customers you had hoped to attract in the first place.

It's a system guaranteed to produce mismatches. And it is precisely those mismatches that digitization prevents. In fact, the promise of e-segmentation is the promise to turn the old world upside down. Rather than getting stuck in a make-and-sell system, you shift into a sense-and-respond mode. The information that once was expensive and difficult to get -- and that often turned out to be inadequate, fragmentary, too old, or just plain wrong -- now comes to you courtesy of your customers, who deliver it to you both cheaply and effortlessly from online feeback or through their buying behavior.

The benefits of shifting from atoms to bits are enormous. You save money. You save time. You get a window into the future: By studying the behavior of your most valuable and forward-looking customers, you have the ability to build a predictive capability that tells you where the market is headed next. And, most important, you then can reduce the risk that your customers will move, and you don't -- which could leave you with an obsolete business model, products or services that no longer fit your customers' profile, and the daunting task of trying to retrofit your company and its offerings to a customer base that has moved on to new territory and more responsive relationships.

So great is the promise of e-segmentation that today e-commerce is achieving the overnight status of e-hype. But the overarching lesson of e-segmentation is that thinking digitally takes you beyond the narrow confines of the Web. Creating a Web site does not make you a digital competitor, any more than opening a store makes you a successful retailer. Moreover, thinking digitally can also help you recover lost ground -- if you've been left behind in a sudden, unexpected business-model shift. Take the case of Levi Strauss & Co., the $6.9 billion, San Francisco-based jeans maker. The jeans business is all about fashion -- and fashion is all about fickle customers. A few years ago, Levi Strauss saw its core customers declare Levi's jeans decidedly unhip. The company closed 11 U.S. plants, launched a new ad campaign -- and moved aggressively into e-segmentation, using digitization throughout its retail system to reestablish customer relevance.

In 1994, the company initiated its Personal Pair program: Women who were willing both to pay an extra $10 to $15 over the usual price of jeans and to wait an extra week or two for delivery, could go to certain Original Levi's Stores and have themselves "digitized" -- that is, have their measurements taken and a pair of jeans custom made, and then have the information stored in the company's database for future purchases. And the result? The Personal Pair program achieved a repeat-purchase rate that was significantly higher than the 10% to 12% rate of Levi's typical customers; and by 1997, the program accounted for 25% of women's jeans sales at Original Levi's Stores.

The message to Levi's was clear: With digital technology, customers could not only segment themselves, but they could also serve themselves. The company incorporated these ideas into its Original Spin program, which rolled out in the fall of 1998, making the digital experience available to men and doubling the options for all customers: Levi's now offers an impressive 1,500 different styles.

Although the program is only a few months old, Levi's can already smell success. The Original Levi's Store in New York City, for example, is so busy that customers sometimes wait up to two weeks for an appointment. Moreover, Levi's is seeing much lower return rates than anticipated, and much higher numbers of jeans purchased per store visit -- up to ten times as high as the traditional buying experience. And the program has given Levi's a new shot at the all-important, highly influential youth market -- a market that is less concerned with fit than with the "cool factor" that comes with a new styling experience. Perhaps most important, Original Spin gives Levi's a new look at the always-changing world of consumer tastes.

And, in a reversal of the normal e-hype approach to e-commerce, the company has taken its in-store digital experience to its Web site: Visitors to the Levi Strauss Web site can now check out subsites featuring the company's different product lines, such as silverTab and Hard Jeans. The e-segmentation lesson: When you're trying to answer the questions, "Who is my customer? What does he or she really want?" let the person who has the best information provide the answers -- your customer.

How digital is your company?

Digital finance. digital recruiting. digital segmention. What is this all about? Is it about technology and the revolution in information that is transforming how companies do business? Or is it about strategy, and the ways in which the boundaries of competition are giving way to new business designs and new ways of thinking about competition? The answer: Going digital is about technology, strategy, and more. Ultimately, it's about finding new solutions to old issues.

Becoming a digital company requires the people inside the organization to execute a series of challenging mind flips. They have to think differently about finance -- and turn the old model upside down. They have to think differently about recruiting talent -- and turn that model inside out. And they have to think differently about customer segmentation -- and turn that model back to front. Executing any one of those reversals is a lot to ask of most businesspeople, particularly at a time when people are so focused on the work at hand. Finding the time and the emotional energy needed to reverse the three most fundamental aspects of their company's business design seems like a monumental task.

And yet if you do rethink your company's business design, the result is a liberating experience. The simple organizing principle that cuts across the core tasks of almost any company today is, in fact, a revolutionary-conservative concept: Redistribute the work that needs to be done to the people who are best equipped to get it done.

Going digital is the ultimate act of outsourcing: It lets your customers finance your growth. It lets talented people recruit themselves to work for your company. And it lets your customers segment and serve themselves. Thinking digitally represents the delegation paradox: When you delegate, not only does the job get done better, but you also reserve more time to do the work that only you can do.

It is the final benefit of moving work from atoms to bits.

Adrian Slywotzky (Adrian_Slywotzky@MercerMC.com) is a vice president of Mercer Management Consulting. He is the author of several best-selling business books, including "The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits" (Times Business, 1997) and "Value Migration: How to Think Several Moves Ahead of the Competition" (Harvard Business School Press, 1996). His next book, "Profit Patterns," will be published in March 1999.

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