Digital capital and leadership

Citation

Lloyd, B. and Ticoll, D. (2001), "Digital capital and leadership", Leadership & Organization Development Journal, Vol. 22 No. 2. https://doi.org/10.1108/lodj.2001.02222bab.001

Digital capital and leadership

Digital capital and leadership

Bruce LloydProfessor of Strategic Management, at South Bank University in discussion with

David TicollCo-author (with Don Tapscott and Alex Lowy) of Digital Capital: Harnessing the Power of Business Webs, Nicholas Brealey, 2000)

Keywords: Capital, Leadership, Knowledge management, Communications technology, Competitive advantage

BL

First I must say I consider this to be a most impressive book. I have read several more popular studies around this subject but yours really gets to the guts of it in ways that others do not. But it is still useful for me to start by asking you to summarise your core message.

DT

Well to start with we have been staggered by the interest in the book. It is already apparently number four on the UK business best seller list and we haven't launched it here yet! The book recognises that new technologies now exist which have, very rapidly, become the new accepted infrastructure for a whole range of communications and this is changing the way businesses operate as well as generating a whole new range of products and services. This new revolution covers information technology, in general, but it is particularly relevant to the Internet. For the first time in human history we really have a completely available, universal, pervasive, function rich, fast, global communication system that is potentially open to anyone and everyone. In a couple of years there will be at least one billion people actively interacting with the Internet and this will radically change the way we all do business, as well as significantly influencing many parts of our personal lives. That is the starting point.

We have been researching this topic for over five years and have undertaken hundreds of interviews and case studies with relevant top executives. This has involved between four and five million dollars of sponsored research, funded by our clients. We went back to a famous economist of the 1930s, Ronald Coase who won a Nobel prize at that time, and who explored the fundamental question: "Why does the firm exist?" According to classical economic theory, which is still widely accepted, the market is the best place to set prices and achieve value; it is the most efficient mechanism for creating and transacting value. But the 1930s saw the growth of massive organisations, such as Ford, with hundreds of thousands of employees, who did almost everything that was necessary in order to produce a motor car, from manufacturing glass to owning rubber plantations and their own steamships for logistic support. They were into everything. But why did they supply all these activities themselves rather than buying them in from other organisations through the open market, which according to market theory ought to be cheaper and more effective. Essentially what they were doing was creating captive internal monopolies. Coase argued that the reason for this was transaction costs – the cost of search, contracting and coordination of the procurement of goods. When the cost of these transactions exceeds the cost of the product itself you then have a catalyst for the growth of these major corporations, but this was always a risky and potentially expensive solution.

Limitations of the re-engineering approach

BL

But although the solution might appear to be risky and expensive from the outside, that is not the way it is perceived by management on the inside of the corporation. They believe they have more control and less risk. The analysis needs to incorporate the people agenda, it is not a matter of purely mechanistic decision making. Your book does have a significant section (part III) on "The human and relationship elements of digital capital", but I would argue that you really need to make that point right at the start. If organisations do not get the people agenda right it does not matter what you do with the technology, the organisation will not hold together for long.

DT

That is certainly true. Look at what happened in the 1980s when we tried to re-engineer those vast organisations, many of those people were made redundant.

BL

But one reason why many of those re-engineering programmes were not anything like as successful as originally expected was precisely because they did not take the people issues seriously enough. Top management thought re-engineering was a technical issue, where as it was fundamentally a people problem.

DT

But the re-engineering had to happen because those organisations had layers of fat that were not adding enough value to justify their continued existence; they were not competitive with alternative ways of supplying the product or service.

BL

Hence the move to return to the "core business". But many of these programmes failed because the people issues were not being properly addressed enough in the first place.

"Business Webs"

DT

That is true, but it does not distract from the underlying economic pressure that something radical needed to happen within these giant monster corporations. The new phenomenon we describe in the book is the concept of "Business Webs". For some time people had been recognising that the old model of giant vertically-integrated corporations had serious limitations and increasingly they were finding that they could no longer compete effectively. Certainly the people concerned did not care enough about the people but another fact was that management did not have a clear understanding of what was going on, and this encouraged the workforce to resist change and be unnecessarily conservative. The basic business strategy had not been sorted out but, in addition, the enabling technology was not yet available. All these technologies have come together in the past few years. You did not have universal access to information then. And you ran into two problems – the technology did not work properly and you continually ran into people problems, partly because of their frustration with the technology. Organisations were hitting a wall. Chrysler was a classic example, they tried everything and did everything, using what they called "extended networks"; but none of it really seemed to work. By 1994 all they had been able to achieve was to link some of the key elements; they did not manage to connect everyone. All they did was transfer the inefficiencies further down the supply chain. Today things are different. Over the past five years the Web infrastructure has changed everything. For the first time with the Internet you have a universal system for communication, collaboration and transaction, which is reducing transaction costs to zero. Hence it becomes both possible and rational to see the break up of most of these large supposedly vertically-integrated firms. Companies are being forced to refocus themselves onto what they are really good at; but this does not mean you will not get big companies, only that these will be more focused on their specialist competence, instead of being, in effect, heterogeneous conglomerates. The "Business Web" is where the lead company in the value creation system uses the Internet as a universal mechanism to connect with, and relate to, its suppliers. The real value these companies are providing is that they are creating the intellectual capital and the process facilitation, as well as leadership and the customer interaction, which includes the marketing and branding – at the same time. They do not need to do the real content work of all those areas. Each supplier can now specialise much more in what they do best; then every supplier can be world class – and everyone is much better off.

BL

But you can argue that the previous process of vertical integration came about partly because communications allowed it, if not actually encouraged it. There were more opportunities for interdependence and, particularly new rapidly growing companies, became vulnerable to the failure of any one element in the process. Vertical integration was an attempt to reduce their exposure to risks in this area. Why isn't that going to happen again in this new era?

DT

That will happen. Organisations will use the the Internet as a universal mechanism for coordination, communication and transactions in business process management and that will quickly become the accepted standard in the twenty-first century. But there will be no accepted best way of doing it; there will be all kinds of "Business Webs". Some will be really smart and others not so smart. Some people will use the new media one way, others will decide on alternatives approaches – there will be a whole range of strategies.

BL

What will be the critical factor that will determine success or failure?

DT

To start with you have to look at the specifics of the business context?

BL

Will this process make it more difficult for organisations to know what business they are really in?

DT

In some ways yes, in others no. Some organisations will need to refocus their resources on new core competencies; other will find it relatively easy to outsource more activities that they would prefer not to be in anyway. Within a Business Web the activities of any one company will become increasingly specialised. For example, CISCO. We tend to think of them as a manufacturer of things, but they hardly do any manufacturing themselves. There are 38 manufacturing plants that produce CISCO products but they only own three of these; the other companies specialise in the assembly of electronic goods and many of these rely on components supplied by other companies – and so it goes on, often with several elements in the supply chain.

BL

Marks & Spencer had a somewhat similar approach; it also applied to the Japanese car manufacturers. One problem is the risk of a supplier becoming overdependent on one supplier; another is that it can make innovation more problematic and a third is the problem of retaining control over strategically critical knowledge. How do you prevent these suppliers providing the same product to other companies?

DT

Sometimes they do. Where you draw the line is essentially a governance issue. CISCO operates in a highly competitive market. Some goods supplied to CISCO are highly classified, while others are essentially basic commodities. It is important that CISCO understands the difference, because the relationship processes would need to be managed differently. CISCO has to understand where its competitive advantage is coming from and how to control the intellectual capital that is associated with those critical elements. That issues also applies to its suppliers.

Changing the nature of competition

BL

One of the particularly interesting themes in your book is the extent to which the Internet is, and increasingly will be, changing the nature of competition and industry structure. What are the critical success factors for companies in this area, particularly bearing in mind how much money some people have lost on many of these high technology developments over the years.

DT

It is a whole new world. It is a whole collection of things and what we try to do in the book is to start by focusing on two factors: first, the new forms of organisational structure. Second, the new techniques of business model innovation. Organisations need to understand Business Webs. They also have to be really clear about the nature of innovation in your business model. That is not just a matter of coming up with new products and services – although this is obviously necessary – but it is about understanding the engine behind that which will allow you to come up with these new products and services. Top management have to understand these new forms and where they fit into the alternatives. We have identified five distinct primary forms: agoras (dynamic auctions, i.e. eBay); value chains (i.e. CISCO); aggregations (i.e. Walmart); Alliances (i.e. Microsoft); and distributive networks (i.e. Enron Communications).

In each of these five primary types, business model innovations are taking place. So how do you capitalise on this? What CISCO is doing well is very different to eBay or Ford.

BL

That reflects one of the particular challenges for many companies; some have grown up with the new models as an integral part of their core business, while the more established companies now have to try to superimpose these new models onto their existing ways of doing things. BA, Unilever and General Motors all have to change radically the way they do business, which is a much more challenging task than just having to grow rapidly within the new model.

DT

That has always been the case. Fisher was once a leading carriage manufacturer for horse-drawn vehicles, and when the car came along they managed to adapt effectively to be a car body manufacturer. It is demanding, but it can be done.

BL

Did Fisher survive because they were particularly close to their customers?

DT

Of course that can be useful but it is no guarantee of success. Often the best customers are the worst people to listen to because they are often not at the leading edge of innovation.

Knowledge transfer and innovation

BL

And the cycles of innovation are getting shorter because the transfer of knowledge is speeding up all the time.

DT

eBay is a good example of the way things have developed and it shows how the new model is developing. eBay has developed worldwide auctions for very specialised products.

BL

But is this not essentially just a revolution in facilitation, rather than a vehicle for developing and producing new products?

DT

That depends on what you call a new product or a new service. In many ways this process is also developing new markets for a whole range of new products. The Internet is facilitating the growth of the entertainment industry, and that is leading to the production of a whole range of new films. Overall, the internet is already allowing a whole range of products and services to become much more focused on individual needs.

BL

Another example of how this works is in sport, as well as in opera. The greater coverage of both the activities has increased participation levels, as well as the number of books and other publications on the subjects. These examples reinforce the case that the Internet will both generate considerable new demand for existing products and well as encourage the development of new ones.

DT

You are transforming value by making products more accessible and more universal.

BL

But the more radical the changes that are taking place, the more important it is that those who are leading the process understand the key role people play and the more important it is that they can effectively manage the people who are driving the technology.

DT

Business people today believe that business is becoming much more complex, according to the survey results we have obtained. These developments are a discontinuity which makes it all much more demanding. But the models we describe in the book are not complicated in themselves. You have to understand what needs to be done and have the ability to do it well, and quickly. It is not difficult, in theory but it is not easy in practice. You have to be able to to innovative. If you continue to believe it is hard and difficult it will be. You have to rewire the way you think about your business.

BL

A key message of the book is that the more complex things become the more important it is to get the simple things right. This is particularly relevant in the context people issues. It is essential to get people working well together within the new business models. Overall both the old large companies, and the new rapidly growing ones have to develop new ways of thinking and managing. I am sure that they would all benefit immensely from a close study of the ideas in your book. In fact, I would go so far as to say that those who are either ignorant of, or choose to ignore, the contents of the book could quickly find themselves at a serious competitive disadvantage. This is a book that all the directors of every major corporation, and all those aspiring to such positions either corporately or individually, should read urgently. Thank you for sharing some of these ideas here and I hope it will encourage more people to read the book.