The Two Sides of Connectivity

Speak to senior executives today, and they often convey a sense of exasperation. On the one hand, they feel mounting pressure to cut costs while increasing revenues, improving responsiveness to customers, and enhancing—or at least not compromising—quality. On the other hand, after several rounds of productivity programs introduced in the wake of the Great Recession, they feel they have reached the limits of what is humanly possible: if they cut any more, they will cut to the bone.

So, are they correct? Has the “lean revolution” run its course? Or is there still room for improvement, to do things better and differently?

In our view, the plain answer is that there is still a lot of room for improvement. Every day, we encounter evidence of poor performance. Every day, we discover places where companies could be more productive—or rather, less unproductive. Here are some examples:

• A company’s customers are not aware of a new product; their orders are lost or delayed, and no one seems to know where they are; or their orders are wrong, incomplete, or damaged.
• Different departments within the company are working with different product or service specifications, different timelines, and different KPIs. As a result, they are not aligned, they create problems for each other and for their customers, and they all get different pictures of the company’s performance.
• Orders are not going out to suppliers in time, or the orders are incomplete or wrong. Suppliers are not providing the right parts and services in a timely fashion, resulting in costly mistakes and delays.

The list could go on and on. But there is some good news: the tools for extracting costs while increasing revenues are more widely available than ever before. They come in both digital and physical form—what we call the two sides of connectivity.

The Digital and the Physical World: Two Sides of the Same Coin

It’s no secret that the world has never been more connected than it is today—thanks to the digital revolution. By 2016, half the world will be connected to the Internet. With the PC, and increasingly with the smartphone, we can get more information faster, we can make better decisions, and we can create better-quality products and services faster and at lower prices.

But the flow of digital information would be worthless without the flow of physical goods. Amazon may be a digital miracle, with its promise of next-day delivery. But without global supply chains, optimized storage facilities, and local delivery companies in many parts of the world, the click of a button would just be a hollow sound.

Digital and physical connectivity go together, even as the former comes to substitute for some of the latter. They reinforce each other. In fact, you can’t hope to be truly successful if you don’t place equal emphasis on these two channels of communication. They are key enablers not just of productivity improvements, but also of quality, flexibility, and growth.

This is why it is so astonishing that many companies are laggards when it comes either to digital connectivity or to supply chain, logistical, and other types of physical connectivity.

How to Be Hyperconnected: Some Corporate Pioneers

To grow these days, you need to take care of both your digital and your physical connectivity. In other words, you need to be hyperconnected.

In the course of our work with clients, we have come across several hyperconnected companies. Amazon’s story, of course, is famous. And it is still unfolding. Not content with its best-in-class delivery record, the company is developing “delivery drones”: small, unmanned flying vehicles designed to deliver packages within 30 minutes of a customer’s online order. Here are some other examples:

• BMW Group. The German automotive company invests heavily in technology. Like many other OEMs, BMW has invested in localized manufacturing so that “production follows the market.” Around the world, the company has 30 production and assembly plants, allowing it to source components and manufacture cars close to the ultimate customer. The purpose is to cut production and transportation costs without compromising quality. But BMW constantly pushes its boundaries. For instance, it has devised prototype augmented-reality glasses to be paired with its Mini cars. Among other uses, the glasses can diagnose a faulty engine. When a mechanic wearing them looks at the engine, a colorful 3D display is superimposed on the image of the actual part. The glasses then provide step-by-step repair instructions on the top left-hand corner of the screen.
• Zara. The Spanish fashion retailer has pioneered a lightning-fast supply chain, sourcing clothing materials near its customers. It has also developed a rapid store-to-manufacturing feedback loop supported by digital technology, with a significant amount of production retained in-house. As a result, it takes Zara less than a month to design and manufacture a new line of clothes—and deliver them to stores. By comparison, it takes the company’s rivals nine months. No wonder Zara has enjoyed annual sales growth of 15 percent over the past decade.
• eBay. The U.S. online marketplace, based in California, relies on continual investments in technology—such as its data analytics platform—to attract businesses to sell through its website. But the company also understands the essential importance of logistics and enters into local partnerships to assist with global shipping. For instance, in partnership with the U.S. Postal Service, China Post, and the Hong Kong Post Office, eBay brokered a multilateral USPS ePacket agreement that allows eBay sellers in China and Hong Kong to get better rates for shipments to the U.S., with seven- to ten-day guaranteed delivery at up to a 50 percent discount.
• Monsanto, BASF, John Deere, and Claas. Farming is an old-world industry that is being transformed by new-world technology. With “precision farming,” Monsanto and BASF, among others, are helping farmers choose the right type of seeds, fertilizer, and pesticides—depending on the composition and quality of the soil—and the best time to sow the seeds and harvest the crops given the latest weather information. Similarly, tractors from John Deere and combine harvesters from Claas are being fitted with the latest GPS technology to ensure precision harvesting and reduce operating time.
• Anglo American, BHP Billiton, and Rio Tinto. These mining companies are constantly optimizing their production processes: the automated extraction of coal and ore, transport by driverless trucks and trains, loading on bulk carriers at the port. The entire operation is steered and monitored from a central command station. So, too, are the quantity and quality of the coal and ore being mined and the servicing of machinery. Thus, costs are reduced and the number of people needed for mining operations can be minimized, especially in hazardous environments.

Be Ever Ready to Exploit New Opportunities

There is much that you can do on your own to improve your company’s productivity—and prospects for growth. After years of lean reforms, it’s not so much about cutting out the fat as cutting out the frequent mistakes.

But at some point, the politicians and administrators involved in the development of the infrastructure required to facilitate digital and physical connectivity become critical factors. These people influence what might be called “institutional connectivity”—the harmonizing of standards, rules and regulations, and regional and global agreements on the flow of capital, goods, services, and people. For example, Amazon is now working with the U.S. Federal Aviation Administration to get permission to use its delivery drones.

These politicians and administrators also influence the funding of infrastructure projects. We calculate that the global demand for investment in areas such as energy, transportation, and social infrastructure (including hospitals and schools) will average $4 trillion annually between 2011 and 2030.

You need to be prepared to lobby for investment and to exploit emerging opportunities as new roads, bridges, railroads, and digital networks are developed in different parts of the world.

Some governments are leading the way. Singapore launched its Smart Nation Programme in 2014 to optimize existing resources. The government understands that there are only so many roads and hospitals that can be built. Its database, with 8,000 data sets, is helping to improve the use of government services. For example, the Health Ministry’s central database stores patient information across hospitals, allowing doctors to access patients’ full medical histories and enabling patients to avoid unnecessary doctor visits and obtain their records before visiting specialists.

Meanwhile, in Tel Aviv, the government has introduced a real-time data-collection system that enables operators to optimize traffic flow by adjusting traffic signals and directing drivers to less congested streets. Since it was introduced two years ago, the system has increased mobility, accessibility, and safety, reducing traffic delays by 60 percent and traffic accidents by 50 percent.

Then there is the remarkable transformation in China, which has spent 8 to 10 percent of GDP on infrastructure over the last 25 years. We are on the cusp of a new era of trade routes between East and West, which will reshape the pattern and pace of global trade. On the 11,000-kilometer “Silk Railway,” passing through Kazakhstan, Russia, Belarus, and Poland, travel between China and Germany takes just two weeks. Likewise, the fabled Northwest Passage between Europe and China is now a real possibility—via the Canadian Arctic. These routes shave as much as 15 days off the traditional route to Europe via the Suez Canal and the Mediterranean.

The Connectivity Checklist: Are You Ready?

There are many opportunities for your company to benefit from increased digital and physical connectivity—and many more will emerge over time. You need to ask yourself and your team many questions, within three overlapping loops:

• First of all, look at your company’s connectivity with customers. Do you use the constant flow of information from your customers (do you understand their needs, do you have a full view of their behavior, and do you understand their pain points)? Do you proactively reach out to your customers online and offline (do you tailor your products and services to their needs, do you change your offering based on their reactions, and do you respond quickly)? Do you use the best means of communication with and transport of goods to your customers (are you constantly monitoring new opportunities under development and are you experimenting with new modes of communication and transportation)?
• Second, examine your company’s connectivity with suppliers and intermediaries. What activities do you have to undertake yourself (what truly distinguishes you and gives you an advantage, and what activities can you outsource)? Do you know all the relevant external providers (do you fully understand their offering in terms of cost, quality, and risks, and do you understand all the potential bottlenecks)? Have you optimized the information and transportation flows (are your systems fully linked to those of your suppliers, and are you helping them improve their offering)?
• Finally, assess your company’s internal flow of information, goods, and services. Do you use one common set of information systems (do you work with one or several IT systems, does everybody use and adhere to the same set of information, and does everybody follow the same set of KPIs)? How do physical goods move through the organization (can they be identified at any moment in time, and what are the key bottlenecks and leakages)? Do you actively pursue all mistakes that occur (do you get the various functions together, and are solutions implemented rapidly)?

The Ultimate Prize: Higher Productivity, Profitability, and Growth

It is more than 40 years since the first mobile phone call. It is nearly 25 years since the launch of the World Wide Web. Yet the world is only now starting to comprehend the power and capture the potential of the two sides of connectivity.

Both help with the two sides of your business: they protect your bottom line and promote your top line. Chances are that you are making only fractional use of the enormous potential of digital and physical connectivity. If you ask the right questions and act on the answers that you get, you should be able to raise the productivity of your company—and reap the rewards of much higher profitability and much higher growth.