Structural Change, the Decisive Factor for Successful Transformation – LogiSYM February/March 2020

Professor Michael Wade explains that 95 percent of digital transformation efforts fail due to inflexible company structure and culture. Melvin Conway coined in his paper How Do Committees Invent what is commonly known as Conway’s Law: “Any organization that designs a system (defined more broadly here than just information systems) will inevitably produce a design whose structure is a copy of the organization’s communication structure”. Both scientists hint that companies need to change their structures to successfully drive innovation and digital transformation.

In the logistics industry disruption hasn’t arrived quickly and massively. Therefore, incumbents need to digitize their current businesses while innovating new digital models. Transform existing structures in the core business which includes creating or leveraging centers of innovation and experimentation. This represents a major undertaking, considering that structures are embedded in culture. The superglue of any organization.

A new context, a new paradigm

Research shows that digital ecosystems could account for more than $60 trillion in revenues by 2025, or more than 30 percent of global corporate revenues. Capturing value across ecosystems is the central philosophy of digitization. Ecosystem players are digital players like the digital forwarders Flexport and Freighthub, digital freight matching platforms like Convoy and Ezyhaul, haulage service providers like Haulio and NextTrucking, and on-demand warehouse space providers like Flexe and Stockspots. The enabler are analytics players like Elementum, Project44 and FourKites. Corporates as well wish to tap into the treasure. Agility launched Shipafreight, Kuehne and Nagel its portal, and Maersk TradeLense in collaboration with IBM.

So far, traditional players concentrate their efforts on defending the status quo to promote efficiency, security, maintenance or improvement of control, and to lower dependency on external factors. Ecosystem players work on the opposite basis: they share data and information resources, distribute control equally, and improve transparency and trust between partners. As this mode of operating is in opposition with every business model maintained by current corporations, it is so difficult for current incumbents to grasp the disruptive nature of the ecosystem. Those incumbents that understand the opportunity can integrate new technologies to efficiently respond to shifts in the marketplace and move before disrupters displace their value propositions.

Transformation engines

There are several ways to drive digital transformation. Some companies acquire the digital capabilities and technologies they need. Like Faurecia, the France-based automotive supplier that acquired Parrot Automotive to accelerate the development of what it calls the Cockpit of the Future, one with advanced safety, comfort, sound, and temperature functions. Prerequisite for success is that the companies that plan to acquire can envision the future state of the business and map out the required capabilities and lacking technologies.

Faurecia taps also into a network of scholars in academic research institutions and startups in innovation clusters such as Silicon Valley, Tel Aviv and Shanghai to accelerate the prototyping and industrialization of emerging technologies.

Helpful are also small experimental labs independent of a company’s main research and development (R&D) team. Schneider Electric created its own digital services factory (DSF). Working across the company’s businesses, DSF engineers generate and incubate new ideas for digital offerings such as predictive maintenance services or asset-monitoring suites.

Patrice Caine, chairman and CEO, Thales, says that “you may have the capacity to invest massively in research and development (R&D) to hire the best engineers in your field. … But it is not enough, for one simple, statistical reason: there will always be more groundbreakers outside of your company than within.” He sees two solutions. The first is incubating internal start-ups, providing them with a degree of liberty towards the hierarchical structure. The second is partnering with startups, i.e. identifying the most promising ones in the field and finding ways to work with them.

What it takes to be a digital transformer

Paramount is the alignment on definitions. Some view digitization as the next generation information technology (IT). Other leaders think about digital marketing or sales. Few have a holistic view of what digital really means. Digitization is the instant and flawless ability to connect people, devices, assets and objects across the entire ecosystem to drive value from business models based on the connectivity, data and analytics. Only based on a common definition, organizations can execute on the digital vision and plan in a coordinated fashion.

Not even ten years ago, many predicted the demise of Best Buy. Few believed that the electronics store was able to fend off Amazon. Today, Best Buy can look back at the successful completion of its digital transformation journey: the outcome of the much cited “Renew Blue” campaign. What were the key drivers of this digitization program? Digital leadership: a new CEO and a fresh digital perspective. Data-based market intelligence: using data to create customer profiles for customized recommendations and assistance. Digital services: Best Buy introduced monitoring devices in homes to detect if an emergency happens. Price matching: The company matches any veritable price found on Amazon. Digital marketing: 90 percent of Best Buy’s media is digital. Structure: The Geek Squad and in-home consultations, which offers support for products from appliances to TVs, even if not from Best Buy – available for $200/year.

Target as well leverages the power of digitization. Strategy: holistic approach for customization. Digital marketing: allowing customers to discover and buy products through social media. Digital sales: stores blurring the lines between e-commerce and retail through online ordering and in-store pickup as well as selling exclusive items at pop-ups. Customer experience: a combination of augmented reality, artificial intelligence and virtual reality. The future of Target: becoming an unmatched suite of digital fulfillment options supported by an innovative supply chain design eliminating back office labor. Both cases show the importance of a holistic approach to digitization that cuts across all function of an organization.

Digitizers in logistics

Amazon delivered 3.5 billion packages in 2019. Announcing a new record during the holiday shopping season. In the US the e-commerce company delivers about half of the 4.7 billion packages UPS has, according to Morgan Stanley. It is hard to deny that Amazon is a logistics player. Amazon is a digital enterprise and disrupter with a leadership that believes in digital, a digital offer and a business model driven by analytics. Amazon was a digital player from the outset and has created an ecosystem of its own.

Not a surprise that the e-commerce company scored first place in FreightWaves’ 2020 FreightTech 100 Companies List. Also, two traditional logistics players ranked in the top 10: J.B. Hunt and C.H. Robinson. They joined Tesla and Flexport as well as several other tech innovators in the freight technology space.

J.B. Hunt introduced a digital freight matching platform, which encompasses over 600,000 trucks that its carriers have registered on the platform, with transactions that were on a $1 billion run rate last year. Beyond matching, the services offered are predictive truckload pricing, track-and-trace and real-time capacity availability. The company believes in the value of data too. Little is known about the structural changes. No partnerships with digital enablers have been announced.

Bob Biesterfeld, CEO of C.H. Robinson Worldwide Inc. says technology is transforming freight business. He believes in the own algorithms and that customers are looking primarily for visibility, cost management and velocity of inventory. “Robinson’s Navisphere technology platform is part of the company’s commitment to providing solutions to its customers and carrier partners,” writes FreightWaves. According to C.H. Robinson the proprietary transport management system (TMS) encompasses over 100,000 supply chain companies and over 70,000 active carriers. The company has created C.H. Robinson Labs, an innovation incubator where ideas are created, tested and scaled, and which works with a technology team of more than 1,000 data scientists, engineers and developers.

The innovators of tomorrow

Next generation innovators are expected to follow a lean operational model that allows just-in-time supply of customized products and services. Product design and the delivery of services are undertaken cooperatively among partner companies of the ecosystem, depending on which is the “best of breed” or the “best fit” at that point in time. They convert data to information and establish close to real-time transparency in their operations. They increasingly rely on data-centric decision-making for service delivery and new products, processes and managing workers. They use their platform partners to scout for new business, hedge against uncertain futures and source external innovations. They use the knowledge based on the transparency they establish and the gig economy of vendors and workers for short periods of time to address specific challenges, through experts and software developers that are highly specialized.

So far, the traditional leaders in the logistics and transportation industry dwarf the disruptors. But well-funded challenger startups are growing fast. Even though it might be a long shot till they succeed, pressure on incumbents is mounting. If logistics players fail to get structures ready to transform their organizations into digital enterprises, into platforms able to connect to the Ecosystem-as-an-Industry, they risk to gradually lose those parts of the market where shippers are demanding digital compliance from their vendors. Along the way the market of digital companies will converge and consolidate. Some disruptors may be bought by existing players, one perhaps preparing for the logistics industry to see its first trillion-dollar company.