BUSINESSWEEK ONLINE : AUGUST 28, 2000 ISSUE
THE 21ST CENTURY CORPORATION -- THE GREAT TRANSFORMATION

Management by Web
To thrive in this new century, companies are going to need a whole new set of rules

What advice would Alfred P. Sloan Jr., the legendary architect of the 20th century corporation, offer to today's leaders? If he proved to be as farsighted about the coming century as he was about the last, the former chairman of General Motors Corp. (GM) and author of My Years with General Motors would advise them to leave his tome on the shelf, understanding that it's as outdated as a '26 La Salle.

Sparked by new technologies, particularly the Internet, the corporation is undergoing a radical transformation that is nothing less than a new Industrial Revolution. This time around, the revolution is reaching every corner of the globe and in the process, rewriting the rules laid down by Sloan, Henry Ford, and other Industrial Age giants. The 21st century corporation that emerges will in many ways be the polar opposite of the organizations they helped shape.

Indeed, if you've worked as a manager for at least a decade, you can forget much of what you've learned so far. Prepare to toss out your business-school case studies and set aside many of the time-honored principles that have guided generations of managers. The vast changes reshaping the world's business terrain are that far-reaching, that fundamental, and that profound. ''We're not witnessing just a little change in our economy,'' says David Ticoll, chief executive of Digital 4Sight Systems & Consulting Ltd., a business think tank and consulting firm. ''This is an epochal change in the history of production.''

EPHEMERAL. To survive and thrive in this century, managers will need to hard-wire a new set of rules and guideposts into their brains. Not so long ago, for example, leaders believed that building assets over the long haul guaranteed competitive advantage. In this new century, success will go to the companies that partner their way to a new future, not those that put heavy assets onto their balance sheets. Leaders once thought that creating intense rivalries among competitors motivated their employees and assured success. But in the days to come, a company's fiercest competitor might also be its most important collaborator. Since the dawn of trade, every business leader has wanted to build an enduring enterprise. In the new century, though, many companies will be intentionally ephemeral, formed to create new technologies or products only to be absorbed by sponsor companies when their missions are accomplished.

Many factors, from the need to expand beyond national borders to the inexorable shift toward intellectual capital, are driving change, but none is more important than the rise of Internet technologies. Like the steam engine or the assembly line, the Net has already become an advance with revolutionary consequences, most of which we have only begun to feel.

The Net gives everyone in the organization, from the lowliest clerk to the chairman of the board, the ability to access a mind-boggling array of information--instantaneously, from anywhere. Instead of seeping out over months or years, ideas can be zapped around the globe in the blink of an eye. That means that the 21st century corporation must adapt itself to management via the Web. It must be predicated on constant change, not stability, organized around networks, not rigid hierarchies, built on shifting partnerships and alliances, not self-sufficiency, and constructed on technological advantages, not bricks and mortar. Already, old business models that emphasized fixed assets, working capital, and economies of scale have become increasingly vulnerable to nimbler organizations that employ new technologies to reduce costs.

Leading-edge technology will enable workers on the bottom rungs of the organization to seize opportunity as it arises. Employees will increasingly feel the pressure to get breakthrough ideas to market first. Thus, the corporation will need to nurture an array of formal and informal networks to ensure that these ideas can speed into development. In the near future, companies will call on outside contractors to assemble teams of designers, prototype producers, manufacturers, and distributors to get the job done. Emerging technologies will allow employees and freelancers anywhere in the world to converse in numerous languages online without the need for a translator. ''The gap between what we can imagine and what we can achieve has never been smaller,'' says Gary Hamel, a consultant and author of Leading the Revolution.

That rapid flow of information will permeate the organization. Orders will be fulfilled electronically without a single phone call or piece of paper. The ''virtual financial close'' will put real-time sales and profit figures at every manager's fingertips via the click of a wireless phone or a spoken command to a computer. ''We don't have science-fiction writers who have seen and written this future,'' says Lowell Bryan, a consultant who leads McKinsey & Co.'s Global New Economy practice. ''Everything we see leads to greater diversity, greater choice, a far more integrative economy, yet more individualism.''

How, exactly, will these forces reshape the 21st century corporation? The organizations that flourish will have several defining features.

-- It's management by Web. That means not just Web as in Internet but the web-like shape of successful organizations in the future. If there are a pair of images that symbolize the vast changes at work, they are the pyramid and the web. The organizational chart of large-scale enterprise had long been defined as a pyramid of ever-shrinking layers leading to an omnipotent CEO at its apex. The 21st century corporation, in contrast, is far more likely to look like a web: a flat, intricately woven form that links partners, employees, external contractors, suppliers, and customers in various collaborations. The players will grow more and more interdependent. Fewer companies will try to master all the disciplines necessary to produce and market their goods but will instead outsource skills--from research and development to manufacturing--to outsiders who can perform those functions with greater efficiency.

Managing this intricate network of partners, spin-off enterprises, contractors, and freelancers will be as important as managing internal operations. Indeed, it will be hard to tell the difference. All of these constituents will be directly linked in ways that will make it nearly impossible for outsiders to know where an individual firm begins and where it ends. ''Companies will be much more molecular and fluid,'' predicts Don Tapscott, co-author of Digital Capital. ''They will be autonomous business units connected not necessarily by a big building but across geographies all based on networks. The boundaries of the firm will be not only fluid or blurred but in some cases hard to define.''

-- It's more about bits, less about atoms. The most profitable enterprises will manage bits, or information, instead of focusing solely on managing atoms (the corporation's physical assets). Sheer size will no longer be the hallmark of success; instead, the market will prize the ability to efficiently deploy assets. Good bit management can allow an upstart to beat an established player; it can also give an incumbent vast advantages. By using information to manage themselves and better serve their customers, companies will be able to do things cheaper, faster, and with far less waste.

-- It's mass customization. The previous 100 years were marked by mass production and mass consumption. Companies sought economies of scale to build large factories that produced cookie-cutter products, which they then sold to the largest numbers of people in as many markets as possible. The company of the future will tailor its products to each individual by turning customers into partners and giving them the technology to design and demand exactly what they want. Mass customization will result in waves of individualized products and services, as well as huge savings for companies, which will no longer have to guess what and how much customers want.

-- It's dependent on intellectual capital. The advantage of bringing breakthrough products to market first will be shorter-lived than ever, because technology will let competitors match or exceed them almost instantly. To keep ahead of the steep new-product curve, it will be crucial for businesses to attract and retain the best thinkers. Companies will need to build a deep reservoir of talent--including both employees and free agents--to succeed in this new era. But attracting and retaining an elite workforce will require more than huge paychecks. Corporations will need to create the kind of cultures and reward systems that keep the best minds engaged. The old command-and-control hierarchies, with their civil-service-like wages, are fast crumbling in favor of organizations that empower vast numbers of people and reward the best of them as if they were owners of the enterprise.

-- It's global. In the beginning, the global company was defined as one that simply sold its goods in overseas markets. Later, global companies assumed a manufacturing presence in numerous countries. The company of the future will call on talent and resources--especially intellectual capital--wherever they can be found around the globe, just as it will sell its goods and services around the globe. Indeed, the very notion of a headquarters country may no longer apply, as companies migrate to places of greatest advantage. The new global corporation might be based in the U.S. but do its software programming in Sri Lanka, its engineering in Germany, and its manufacturing in China. Every outpost will be seamlessly connected by the Net so that far-flung employees and freelancers can work together in real time.

-- It's about speed. All this work will be done in an instant. ''The Internet is a tool, and the biggest impact of that tool is speed,'' says Andrew S. Grove, chairman of Intel Corp. (INTC) ''The speed of actions, the speed of deliberations, and the speed of information has increased, and it will continue to increase.'' That means the old, process-oriented corporation must radically revamp. With everything from product cycles to employee turnover on fast-forward, there is simply not enough time for deliberation or bureaucracy.

The 21st century corporation will not have one ideal form. Some will be completely virtual, wholly dependent on a network of suppliers, manufacturers, and distributors for their survival. Others, less so. Some of the most successful companies will be very small and very specialized; others will be gargantuan in size, scope, and complexity.

Some enterprises will last no longer than the time it takes for a new product or technology to reach the market. Once it does, these temporary organizations will pass their innovations on to host companies that can leverage them more quickly and at less expense. The reason: Every company has capabilities, but also disabilities, as Harvard Business School's Clayton M. Christensen puts it. The disabilities--things like deeply held beliefs, rituals, and traditions--often smother radical thinking. Some biotech upstarts, for example, have already served as external labs for large, powerful pharmaceutical companies. Some technology ventures have drawn seed capital from Cisco Systems Inc. (CSCO), only to be acquired by the network giant once the technology has been proven.

DIGITIZATION. Just as the smaller companies will use technology to gain economies of scale, larger companies will harness technology to reduce the costs of complexity. McKinsey's Bryan points out that technology allows Bank of America to manage a continent-wide bank of $700 billion in assets as effectively as it once managed a single-state bank with $7 billion.

At the very core of the 21st century corporation is technology, or what most people today call digitization. Put simply, digitization means removing human minds and hands from an organization's most routine tasks and replacing them with computers and networks. Digitizing everything from employee benefits to accounts receivables to product design cuts time, cost, and people from operations, resulting in huge savings and vast improvements in speed. Everything a company does involves what Bryan calls ''interaction costs,'' the expenses incurred to get different people and companies to work together to create and sell products. In the U.S. alone, Bryan surmises, such interaction fees account for over half of all labor costs. Digitization lowers these expenses dramatically. ''You are going to see unbelievable speed and efficiencies,'' says John T. Chambers, Cisco's CEO. ''Truly efficient companies, particularly in the first couple of waves of change, will be able to drive [overall] productivity at 20% to 40% a year.''

Think of it this way: A typical bank transaction costs $1.25 when handled by a teller, 54 cents when done by phone, or 24 cents at an ATM. But the same transaction processed over the Internet, without the hefty capital and real estate costs of ATMs, costs a mere 2 cents. The productivity improvement isn't incremental. It's revolutionary--on the order of more than 60 times. Similar examples already abound. Not long ago, for instance, Corning Inc. (GLW) spent an average of $140 to procure the parts and supplies needed to make a single product. Simply switching to a Net-based catalog system reduced procurement costs to one-twentieth of that amount. Humana Inc. (HUM), the health-care provider, reduced the average cost of handling a job application and resume from $128 to 6 cents by digitizing the process, largely by eliminating labor costs. ''The truly great businesses of today and especially tomorrow have powerful bit engines, digital systems for capturing, managing, and leveraging information both inside and outside the company,'' says Mercer Management Consulting Inc. partner Adrian J. Slywotzky.

CULTURAL CHANGE. The potential for productivity gains is everywhere, in every process, in every industry. The bigger the company and the larger its costs, the greater the opportunity to see tremendous efficiencies. In the years to come, large incumbent corporations that get it will be the greatest beneficiaries of the Net, not the dot-com insurgents that once garnered all the publicity and market valuations.

Despite a handful of leading-edge companies, the true 21st century corporation, at least as it will eventually emerge, does not yet exist. John F. Welch Jr. of General Electric Co. may have created the archetypal ''learning organization,'' a highly diverse company that shares ideas across its many boundaries. Chambers of Cisco Systems may boast the most networked organization in the world, a company in which nearly all its administrative functions are conducted over the Internet. Michael S. Dell may have built the most efficient supply-chain network ever, a model that requires virtually no inventory. But there is no one company today that embodies all the possibilities and promise of the superefficient 21st century corporation.

For companies that have begun to grasp the possibilities, the payoff can be enormous. Enron Corp. (ENE), a onetime natural-gas pipeline company, is a good example. The Houston business employed the Net to make itself into a highly profitable energy and telecommunications service. Enron's Web-based trading platform, EnronOnline, now trades some 900 contracts per day for commodities including oil, natural gas, electricity, and even broadband telecommunications capacity. Earnings--up 30% in the second quarter--are skyrocketing, along with the company's stock price. Enron has created for itself an entirely new core competence: Web-based trading that could bring the company into financial products, chemicals, and data storage.

Many view Enron's transformation through the narrow lens of technology. The lesson for 21st century leaders, however, isn't just about clever application of the latest software. It's about culture and mind-set. By refusing to limit itself to the traditional notions of what an energy company should do, Enron has pioneered completely new businesses. And it's not just the bosses who are thinking up all the good ideas. Enron is a company of risk-taking entrepreneurs who share a broad definition of the businesses' boundaries.

The truly great 21st century companies will recognize that the real power of technology is not just the ability to make a business more efficient but also its potential to spark transformative change. Much of that change will involve the company's relationship with its customers. In an era of unprecedented choice, in which prices and product specs for almost anything are only a click away, companies will have to offer a lot more than bargain prices.

By shifting corporate think from delivering a product to serving the customer, even long established companies can find ways to drive new business. Exxon Mobil Corp.'s (XON) Speedpass, a cylinder-shaped credit card that users can swipe against the gas tank before they fill up, is a good example. The simple device, which fits on a keychain, lets customers gas up and leave without trudging inside to pay or waiting for an attendant. ''Mobil scientists spent an inordinate amount of time studying the molecules in gasoline in an effort to make better fuel,'' says Michael J. Clearly, president of WingspanBank.com, the online offshoot of Bank One Corp., who studies how companies achieve great service. ''But it's not about whether Mobil's 89-octane is better than Exxon's. It's all about speed and customer relationships.'' By figuring out a way to offer a new level of convenience, Mobil significantly boosted revenues and customer loyalty.

Clearly is applying the same strategy to his online bank. ''It's not about having a better CD rate,'' he says. ''It's about customer service.'' From the start, Wingspan has been focused first and foremost on the customer, even adding an iBoard of Directors made up of customers who offer advice on products and strategy. The emphasis on service is pervasive. Applicants for home equity loans get answers in 60 seconds. The customer call center runs 24 hours a day, seven days a week. Every employee is required to listen to customer calls for at least 1 1/2 hours a month, and the top executive team reads at least 20 customer e-mails a day. There are even ''customer experience'' departments and ''customer advocacy teams'' to quickly address complaints and suggestions.

FEEDBACK. High-tech bells and whistles aside, how does this differ from previous efforts to ''delight'' customers? Wingspan invites customers to refine the bank's offerings. ''Our customers have a great desire to improve the bank, and we act on their ideas,'' says Clearly. Customer feedback led to software changes that allowed users to access all their accounts at once, with a single sign-on. In response to customer suggestions, the bank is working on a way to allow deposits at ATMs and to improve downloads of financial data from Wingspan servers to customers' Quicken software.

The best-of-breed companies will go even further. They'll invite customers in as collaborators, binding them ever tighter to the corporation. Procter & Gamble Co. (PG) spin-off reflect.com LLC, an online cosmetics merchant, is a harbinger of what's possible. By answering a series of queries ranging from color preferences to skin type, consumers can custom-design up to 50,000 different formulations of cosmetics and perfumes. When they're done, they can even design the packaging

for the products. Procter & Gamble charges a premium price for the custom-blended blushers and lipsticks, and why not? Customers mixing their own shades aren't likely to try comparison shopping.

Reflect.com is one of many efforts to create enduring relationships with customers in an age of commoditization. ''The next level up is where the consumer is really designing from scratch,'' says Ticoll of Digital 4Sight. ''Organizations will learn from these new opportunities.''

Applied correctly, this kind of mass customization can yield remarkable efficiencies. Already, Dell Computer Inc. (DELL) generates more working capital than it consumes because its customers specify and pay for product before Dell has to pay suppliers. In contrast, Honeywell International Inc. has $3.5 billion of working capital tied up at any given time. The key to Dell's remarkable feat lies in the company's made-to-order business model, which greatly limits inventory. Already, the company turns over its tiny inventory 60 times a year, a tenfold improvement from 1994. The result is obvious: Dell's

customers finance the company's growth so it does not have to take on debt. Mass customization also allows Dell to make only the products it will sell. So there are no write-downs or discounts to move unwanted or outdated merchandise.

DELIVERING THE GOODS. In the hands of a creative leader, even the most prosaic Industrial Age enterprises can reap quantum efficiencies by applying the new management principles of the 21st century corporation. No company proves that better than Cemex (CX), which operates in one of the most mundane, commodity-driven businesses in the world: cement. Based in Monterrey, Mexico, Cemex was a modestly profitable business in 1985 when Lorenzo H. Zambrano, a Stanford University MBA whose grandfather founded the company, became chief executive. Cemex' biggest problem in an asset-intensive, low-efficiency business was unpredictable demand. Roughly half of its orders were changed by customers, often just hours before delivery. Dispatchers took orders for 8,000 grades of mixed concrete and forwarded them to six plants. The phones were often jammed with calls from customers, truckers, and dispatchers, resulting in lost orders and frustrated customers.

Then Cemex went digital, vastly reducing delivery and production problems. More important, the makeover helped management refocus efforts from managing assets to managing information. ''Technology allows you to do business in a much different fashion than before,'' says Zambrano. ''We used it not only to deliver a product but to sell a service.''

For starters, Zambrano linked the company's delivery trucks to a global positioning satellite system so dispatchers could monitor the location, direction, and speed of every vehicle. That means Cemex can quickly send the right truck to pick up and deliver a specific grade of cement, or reroute trucks around congested traffic, or redirect deliveries as last-minute changes occur. It reduced average delivery times from three hours to 20 minutes. Zambrano reaped huge savings in fuel, maintenance, and payroll, since Cemex now uses 35% fewer trucks to deliver the same amount of cement. And because it can guarantee delivery of a perishable commodity product within minutes of an order, it can charge a premium for it.

By digitizing, Zambrano also eliminated a lot of the friction that slowed down the company and added costs at every step. The company's customers, distributors, and suppliers can use the Internet to place orders, find out when shipments will arrive, and check payment records--without having to speak to a customer-service rep. That allows employees to shift from low-value repetitive work to improving services that build stronger customer relationships. Zambrano and his executives, moreover, now have access to every conceivable detail about the company's operations within 24 hours, compared with the more typical month-old data generated by competitors; they can now better respond to customers and rivals. ''They were able to substitute the management of information for the deployment of costly assets such as trucks, ships, and employees,'' says Slywotzky, who puts Cemex in a league with Dell and Cisco as one of the world's leading digital re-inventors.

CONNECTIONS. True 21st century corporations will also learn to manage an elaborate network of external relationships. That far-reaching ecosystem of suppliers, partners, and contractors will allow them to focus on what they do best and farm everything else out. And it will let them quickly take advantage of fleeting opportunities without having to tie up vast amounts of capital. Outsourcing and partnering, of course, are hardly new. But in the coming century, such alliances will become more crucial.

Cisco Systems has taken the concept to an extreme. It owns only two of the 34 plants that produce its products. Roughly 90% of the orders come into the company without ever being touched by human hands, and 52% of them are fulfilled without a Cisco employee being involved. ''To my customers, it looks like one big virtual plant where my suppliers and inventory systems are directly tied into an ecosystem,'' says Chambers. ''That will be the norm in the future. Everything will be completely connected, both within a company and between companies. The people who get that will have a huge competitive advantage.''

For some companies, the ecosystem represents not merely the outsourcing of a function or two to save a few bucks. It goes, instead, to the very heart of a company's ability to exist and compete. If not for its dozens of alliances and partnerships, Juno Online Services Inc. (JWEB) in New York, the Internet service provider, could not survive--at least not without hundreds of millions of dollars in additional capital and thousands of extra employees. ''If we had to do it all ourselves, it would be prohibitively expensive,'' says CEO Charles Ardai, who spends 25% of his time on alliances. ''For our customers, it's an invisible experience because of the technology. The coordination among the partners allows for real-time communication and makes it feel more like a single company.''

Juno, though still unprofitable, is an example of an opportunistic insurgent in a new industry. It was formed in 1994 when investment banker David E. Shaw asked two of his managers to come up with ideas about how to exploit the Net. Jeff Bezos dreamed up the idea of an online bookseller and left D.E. Shaw & Co. to found Amazon.com Inc. (AMZN) Ardai, backed by Shaw, created Juno, the first provider of free Internet access, and challenged America Online Inc. Today, Juno is the third-largest ISP.

From the start, Ardai's focus was speed to market. ''You start out with the premise that you don't have much time, so you build the core competency and partner for the rest,'' he says. Juno designed an easy-to-use e-mail service and user interface and then contracted out for just about everything else. It leased phone lines from a dozen companies. It hired out customer service, immediately gaining hundreds of call-center representatives. It partnered with an upstart advertising agency for ad sales. It aligned with dozens of content partners for news, weather, sports, movie reviews, health information, and travel advice. It even outsourced some programming and customer support in Hyderabad, India. ''The partnerships allowed us to get started without huge capital expenditures,'' explains Ardai.

TALENT HUNT. They also gave a small upstart immediate scale and reach. Juno, for instance, boasts fewer than 300 direct employees yet has nearly 700 technicians in customer service alone because of its alliances. ''If we did all of this stuff ourselves, we would have to have at least 1,000 people to work on content alone,'' estimates Ardai.

Vast changes in technical and organizational structure, however, will only get leaders so far on their journey toward 21st century leadership. Nearly everyone agrees it still comes down to that most precious commodity: talented people. Attracting, cultivating, and retaining them will be the indispensable ingredient that will drive the ideas, products, and growth of all companies like never before. As management guru Gary Hamel puts it: ''We have moved from an economy of hands to an economy of heads. Therefore, the price of imagination, the premium for it, will go up.'' Increasingly, companies will need to scour the world for the best intellectual capital, then create the kinds of challenging environments that will allow stars to flourish.

Few organizations have worked harder at this or with greater creativity than Trilogy Software Inc., the Austin (Tex.) producer of economic-commerce software. A private company with more than $200 million in revenues, Trilogy devotes an extraordinary amount of attention to recruiting the best engineers directly from campus. The Trilogy proposition: Rather than work in a huge organization like Microsoft Corp. (MSFT) as product managers, they could have a major impact at Trilogy in driving the company to the next level of competition.

Once hired, candidates attend a three-month-long intensive training program that co-founder and President Joe Liemandt calls Trilogy University. All the top executives show up to teach. ''The same way people look at customers, we look at our jobs,'' says Liemandt. ''We ask how you make the job compelling for employees. If you don't get the steel into the factory, there is no product. If you don't get the best people into the company, there is no product.''

INCUBATOR. As a private company, Trilogy can't offer stock options. Instead, it offers the chance to create and run new businesses. Liemandt throws out a daunting challenge to every incoming class: Within two years, the students will be responsible for the creation of at least 20% of new revenues. ''They treat the university as an R&D incubator,'' says Noel M. Tichy, a University of Michigan management professor. Trilogy, for example, has spun out six companies, including one that's selling hundreds of millions of dollars' worth of cars online annually.

To make sure he doesn't lose touch with his employees, Liemandt uses the Net to establish one-on-one conversations with them. Trilogy's 1,500 employees go online to read--and respond to--the mission statements of top managers. Periodically, they're asked to assess managers online. ''Energy and excitement is why people do startups,'' says Liemandt. ''But as the company gets larger, people don't feel as engaged. They feel as if they are spoken to instead of being engaged in a collaboration. The net provides a ten-to-twenty-fold increase in the level of interaction you can have.''

The 21st century corporation will require an array of new skills, all of which must be mastered for leaders to gain the upper competitive hand. Globalization has opened new markets. Deregulation has broken down industry boundaries. Venture capital has funded thousands of new tech-savvy insurgents who now threaten incumbents. And the ever-ubiquitous Web has brought the potential for remarkable gains in productivity--but also for frightening deflationary pressures. All these forces are fast propelling the creation of new business models in the 21st century, models that will look nothing like the once-healthy and seemingly invincible enterprises of an earlier age.

By JOHN A. BYRNE

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