Differentiation vs Integration

12 May

Read an interesting post today by Richard Veryard looking at the current state of business architecture.  In particular Richard was musing on the traditional dichotomy between standardisation and integration vs differentiation and autonomy from a business perspective.  Essentially Richard was using the Clive Finkelstein  adapted version of the two-by-two matrix from Ross, Weill and Richardson’s “Enterprise Architecture as Strategy”, below.

 

 

Firstly Richard points out that the general tendency is for everyone to think that ‘unification’ (so highly standardised, highly integrated capabilities) is the best place to be.  I’d first like to say that this is rubbish.  The reality is that an organisation – whether they know it or not – consists of many different business capabilities and the best position depends entirely on the capability in question. 

To start to break this down against the two axes, lets broadly examine integration and then standardisation:

  • If we consider a typical enterprise to increasingly be a collection of business capabilities that reside inside and outside the boundaries of a single firm then we can see that integration is indeed becoming far more important.  Integration in this context, however, does not require the traditional tight integration of an end to end business process but rather the loose integration of autonomous service providers that collaborate to deliver value.  In this sense whilst ‘value stream’ integration may be high, ‘business process’ integration needs to be kept deliberately low;
  • On the other hand differentiation of business capabilities is also claimed to be becoming more important as a result of increasing commoditisation and everyone is trying to understand how to be more agile in their offerings, more responsive to their customers and more relevant to their local markets.  Agility often leads to lower levels of integration and standardisation, however, as smaller groups seek the autonomy necessary to optimise “their” part of the business as it operates in the context of their location and stakeholders.

As a result the simple answer would seem from a business side demand perspective that ‘diversification’ (as requiring low business process integration and being potentially the greatest enabler of agility) is the new top right whereas most IT people are still aiming for ‘unification’. How do we resolve this seeming paradox?

Business Process (dis)Integration

The first issue to tackle is the seeming requirement of ‘business process integration’ as an indicator of increasing maturity in the graph.  Such language was potentially appropriate when business processes were seen to be the highest level of abstraction available to a business architect and when internal departments were the only major source of supply.  In this context it was common to try and eliminate waste by “hardcoding” all of the end-to-end process steps required to realise some value for the customer.  In this practice you  would usually have one or more architects who worked out the whole detail of how a process worked end-to-end in terms of who did what, how they did it and when they did it by – Taylorism was rife.  Such practices – whilst still widespread – are now essentially bankrupt at the macro level as a result of new methods and the rise of the web.

Business Capabilities and Extended Value Streams

I’ve talked many times about the use of business capabilities to document the stable structure of an organisation and provide a framework for concentrating on ‘what’ the organisation does rather than getting lost in the mess of ‘how’ it actually does it.  Business capabilities allow us to concentrate on the outcomes we require and map value streams both within and across organisations to coordinate these outcomes but ignore how the value is delivered.  This allows us to federate out the issues of implementation to the owners of each capability and give them the maximum scope for optimising their capability.  This is particularly important when you realise that codification of outcomes gives you options for supply – given that transaction costs have now made use of external capabilities highly desirable – but also requires you to let go of tight control of implementation and trust your chosen partner.  I wrote a long post on this whole subject here for those who are interested.

As a result whilst it might seem pedantic to separate ‘business process’ integration from ‘value stream’ integration I strongly believe that this extra level is needed to differentiate between tight integration of how you do things versus coordination (and hence loose integration) of autonomous outcomes.  This point is highly important in the context of our discussion as it allows us to understand that it is a) possible to identify and decouple the different business capabilities that we require and b) optimise these capabilities in different ways based on their characteristics.   This latter point is crucial as we look at the issue of whether the above matrix is sufficient to categorise emerging models.

No Capability is Created Equal

The first thing we have to realise is that the different business capabilities that implicitly make up an organisation today will respond to different kinds of strategies and thus require different cultural and economic thinking.  Once we have taken the first step and used business architecture to identify these discrete business capabilities we can begin to use this insight to better understand the optimum business architecture of each.

Different ‘business’ types within an Enterprise

Broadly there are four different kinds of businesses emerging as a result of the rise of the web and plummeting transaction costs.

  • Infrastructure businesses: These businesses are essentially business capabilities that respond to economies of scale.  In this sense they need to be highly standardised and have tight integration within their internals – to drive low cost and reliability – but won’t be very innovative or have time for the deep relationships required to meet the needs of individual customers.  Examples of these businesses could be literal platforms – such as a telephony network – or ‘standardised’ services such as HR.  From an economic perspective such business capabilities will be driven to providing services at the lowest possible price (and thus the highest possible scale) but they will also provide relatively stable returns given the broad consumer groups that would leverage them and the difficulties that new entrants would have due to the capital requirements.  It is worth saying that whilst this may look like commoditisation – and thus something to be feared – in this business type the embracing of commoditisation whilst maintaining an ability to operate profitably is actually your differentiation.  From a cultural perspective the business model would require an organisation that is highly standardised, focused and repetitive;
  • Relationship businesses:  These businesses are essentially business capabilities that leverage deep relationships.  Basically relationship-based capabilities rely on deep knowledge of their customers and the market they operate in to bring relevant products and services to their attention at the right time.  These capabilities are less able to be standardised – as they rely on personal customer context – and are also not likely to be strongly innovative as they will generally be responding to the stated needs of their customers – who only know what they know.  Examples of such businesses could be general practitioners or financial advisors.  From an economic perspective these businesses can take advantage of economies of scope – as they focus more on their target customers than on specific product or service niches – and can be very profitable due to the value they are perceived to add.  Culturally the business model would need to be highly flexible to build strong networks and to deliver combinations of products and services that were specifically suited to their target groups;
  • Innovation and commercialisation businesses: These businesses are essentially small, innovation focused capabilities who specialise in IP generation and product and service commercialisation. They will often be one step removed from the demands of current customer need in order to have the time away from delivery pressures and thereby work on breakthrough products and services. Examples of these kinds of companies might be software startups or pharmaceutical research companies.  Their economics is based on intangibles and a long term growth in capital worth from the leverage of their successfully commercialised IP.  Their culture will be very loose, collegiate and focused on research and exploration and many of their endeavours will not result in any tangible success – as a result whilst the rewards for the small number of successful projects are high there is also the fact that most exploration will result in no valuable IP; and
  • Portfolio businesses:  These businesses represent the residual strategy and investment capabilities of large companies and will be run as a separate business type. They will continue to own and manage brands but will replace direct control of delivery capabilities and assets with investment in a portfolio of specialised organisations. Examples of this kind of business might be Virgin or a large IT company such as Fujitsu or IBM.  Their economics will be primarily risk-based, investing money in a range of different organisations across categories in order to leverage their brand, balance their portfolio and maximise their return on capital. As a result they will invest in relationship businesses, infrastructure businesses and innovation businesses in order to get the right mix of stable, low growth returns and high risk, high growth returns.
Differentiation is…. different

Each of these categories of capability needs to maximise its assets in different ways, leading to completely different economics and cultures. I believe that these pressures – coupled with the decreasing transaction costs of working with others – will drive the fragmentation of organisations along these fault lines, since trying to manage them within a single organisational context will necessarily emphasise one whilst sub-optimising the others. Even without this, however it is plain that the different capabilities required to realise an end-to-end value stream need to be managed and optimised in different ways – with management styles, measures and dashboards altered accordingly for each – if we are not to sub-optimise the whole.  As an example, given that infrastructural capabilities are the largest (and often easiest to manage due to their concrete nature), many organisations tend towards management styles and metrics that reflect a concentration on these capabilities; concentrating on efficiency (in order to optimise your infrastructural capabilities), however, will destroy your ability to build deep relationships or to have the detachment necessary to innovate or invest successfully. As a result those organisations which manage to separate these different concerns and specialise – and in so doing create the right culture and economic metrics to underpin appropriate behaviours – will see much greater success than those who continue to operate their organisation with muddled thinking.

There is no Paradox, only Greater Subtlety… and Opportunities

The major implication of these insights is that there is no single ‘strategy’ box that an individual enterprise can be allocated to.  As Richard states in his post (my emphasis):

“….a two-by-two matrix would be misleading. The point isn’t to choose whether you have differentiation and integration or not; the point is to determine how much and what kinds of differentiation  and integration you need.”

I would also add to this understanding where you need that differentiation or integration (i.e. within which capabilities).

If each business is viewed as the portfolio of internal and external capabilities required to realise a given set of value streams then we can envisage a scenario in which each business strategy will be:

  1. An overall statement of intent as captured by the target structure of the enterprise (i.e. its intended portfolio of capabilities, the outcomes they will need to deliver and the sourcing strategy for each); plus
  2. The many federated strategies required by the individual capabilities to meet their outcome obligations. 

In this context tools like the matrix above may be helpful for enterprise strategists and capability owners to select appropriate strategies but only after they have evaluated the ‘type’ of capabilities they have and made prior strategic decisions about core competence (relationships, infrastructure, innovation or portfolio) and divested the implementation of the rest to specialised partners.  Those that remain can then be optimised as suggested based on their nature.  As immediate – but not very well thought through, lol – suggestions: infrastructural capabilities will tend towards ‘replication’ and ideally ‘unification’ strategies, relationship capabilities will tend towards ‘coordination’ strategies, whereas innovation and portfolio capabilities would likely tend towards ‘diversification’ strategies. 

As a result there is no paradox at all, only greater subtlety uncovered by increasing sophistication in the available body of thinking about business models and architecture.  The irony is that not is it only possible for a business to pursue both differentiation and standardisation strategies at the same time but rather that they increasingly must do so if they are to optimise their value streams and be competitive.  To do this, however, they must understand themselves as a portfolio of capabilities that need to be selected, retained or outsourced and then optimised based on their cultural and economic imperatives; unfortunately, however, not many organisations have even begun the process of working this out yet and thus business architects and business architecture are still more like honorary titles for valuable but difficult-to-place individuals than a widespread discipline.

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10 Responses to “Differentiation vs Integration”

  1. Danamoto May 24, 2010 at 11:25 am #

    Great to see I can get a fix of conceptual IT without resorting to such old fashioned notions as human interaction.

    My only comment is that, though clearly correct, your analogue view of the world lacks a punchy chart or headline. You need to work on how you present your ideas for organic, pragmatic EA approaches. Give your over-arching strategy a name for a start. How about ‘Value
    Architecture’?

    DJ

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