Innovation is the key to reaping profits

(CORBIS)    
 
 

Technology alone is rarely the key to unlocking economic value. Companies create real wealth when they combine technology with new ways of doing business.

In a recent report, international consultancy McKinsey & Company has identified five technology-enabled trends, which will help shape global businesses and the world economy over the coming years.

These trends fall within broad areas of business activity. These can range from managing relationships, managing capital and assets, and leveraging information in new ways.

Numbers

- 12% of all labour activity in the US economy could be transformed by more distributed and networked forms of innovation.

1 Profiles to profits

Technology will be a crucial factor in the way companies map their customers’ preferences to ensure maximum spend, the McKinsey report states. Leading players such as online retailer Amazon.com and credit card firm Capital One will increasingly look at new ways of using technology in their business to generate spend profiles of consumers around which to build their marketing strategies.

Businesses will then have the chance to extract the maximum revenue from their clients, and using the latest software, can significantly reduce research costs.

The report identified a number of emerging trends, which will dominate the future of the IT sector and its impact on new ways of

doing business.

James M Manyika, co-author of the study, said: “The amount of information and a manager’s ability to use it have increased explosively not only for internal processes but also for the engagement of customers.

“The more companies know about them, the better able they are to create offerings they want, to target them with messages that get a response, and to extract the value that an offering gives them. The holy grail of deep customer insight – more granular segmentation, low-cost experimentation, and mass customisation – becomes increasingly accessible through technological innovations in data collection and processing and in manufacturing,” he added.

Manyika argued Amazon.com stood at the forefront of advanced customer segmentation, with its recommendation engine able to correlate the purchase histories of each customer with those of others who made similar purchases to come up with suggestions for things that he or she might buy.

CleverSet, a pure-play recommendation-engine provider, claims that the 75 online retailers using the engine are averaging at around 22 per cent increase in revenue per visitor.

Meanwhile, toll road operators are beginning to segment drivers and charge them differential prices based on static conditions, such as time of day and dynamic ones such as traffic.

Manyika said: “Technology is also dramatically bringing down the costs of experimentation and giving creative leaders opportunities to think like scientists by constructing and analysing alternatives.

Capital One conducts hundreds of experiments daily to determine the appropriate mix of products it should direct to specific online customer profiles.

Similarly, Harrah’s casinos mine customer data to target promotions and drive exemplary customer service.

“Given the vast resources going into storing and processing information today, it’s hard to believe that we are only at an early stage in this trend. Yet we are.

“The quality and quantity of information available to any business will continue to grow explosively as the costs of monitoring and managing processes fall.”

2 Uploading innovation

The report also identifies the internet and other related technologies as helping businesses to reach out to talents of innovators working outside the corporate boundaries – or “co-creation”, as it is called.

“Today, in the high-technology, consumer product, and automotive sectors, among others, companies routinely involve customers, suppliers, small specialist businesses, and independent contractors in the creation of new products. Outsiders offer insights that help shape product development, but companies typically control the innovation process,” the report states.

Technology now allows companies to delegate substantial control to outsiders by outsourcing innovation to business partners that work together in networks. By distributing innovation through the value chain, firms may reduce their costs and usher new products to market faster by eliminating the bottlenecks that come with total control.

Manyika used the example of Chinese motorcycle manufacturer Loncin, which sets broad specifications for products and then lets its suppliers work with one another to design the components and reduce costs.

It is estimated that in the US economy, 12 per cent of all labour activity could be transformed by more distributed and networked forms of innovation.

3 Virals as income strands

Companies are also beginning to see the benefits of reaching out to consumers as innovators to enhance the products and services they offer.

The online encyclopaedia Wikipedia has been the most well-known exponent of this technique, as it looks to offer a service or product that in some ways is created by its distributed customers.

The report says: “Consumers increasingly want to engage online with one another and with organisations of all kinds. Companies can tap this new mood of customer engagement for their economic benefit.”

The online clothing store Threadless asks people to submit new designs for T-shirts. Each week, hundreds of participants propose ideas and people vote for their favourites. The top four to six designs are printed on shirts and sold in the store; the winners receive cash prizes and store credit. Threadless opened its first physical retail shop in 2007.

“Companies that involve customers in design, testing, viral marketing and the after-sales process get better insights into customer needs and behaviour and may be able to cut the cost of acquiring customers, engender greater loyalty, and speed up development cycles,” said Manyika.

But the report warns that such firms must not be unduly influenced by information from a vocal minority.

4 Tracking revenues

Parcel delivery companies FedEx and UPS have pioneered the use of automated tracking to provide enhanced customer satisfaction, another major trend in the innovative use of technology in business.

During the late 1990s, they linked data flowing through their internal systems to the internet to let customers track packages on their websites, with no human intervention.

The report states: “By leveraging and linking systems to automate processes for answering inquiries, both dramatically reduced the cost of serving them while increasing their satisfaction and loyalty.”

Carrefour, Metro, Wal-Mart Stores and other large retailers have adopted, and asked suppliers to adopt, digital-tagging technologies, such as radio frequency identification, and integrated them with other supply chain systems in order to automate the supply chain and inventory management. The rate of adoption disappoints the advocates of these technologies, but as the price of digital tags falls they may reduce the costs of managing distribution and increase revenues by helping firms to manage supply more effectively.

Manyika said: “Many companies still have substantial headroom to automate many repetitive tasks that aren’t yet mediated by computers.”

5 IT for outsourced return

The McKinsey report also found an increasing number of companies have been offshoring a greater proportion of their production and manufacturing activities and their clerical or simple rule-based activities.

As a result, a growing proportion of the labour force in developed economies engages primarily in work that involves negotiations and conversations, knowledge, judgment, and ad hoc collaboration – or tacit interactions, as it calls them.

It is expected that by 2015 jobs primarily involving such interactions will account for 44 per cent of the total US employment, up from 40 per cent at the beginning of 2008. Europe and Japan will experience similar changes in the composition of their workforces.

Manyika said although the application of technology has improved the quality of this workforce, there are huge inconsistencies that still remain. “Technology tools that promote tacit interactions, such as wikis, virtual team environments, and videoconferencing, may become no less ubiquitous than computers are now.”

 
 
 
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