Harvard Business School's F Warren McFarlan on enterprise business value CIO: Why is enterprise value such a hard concept for businesses to grasp? McFarlan: Because it often comes in subtle ways. If inventory turns or labour costs are down, you can prove cost reduction.
But additional market share, new revenue generation or increased margins-that's soft stuff. It's not easy to tell if your investment was really a plus or just held things equal. And it's sometimes not easy to differentiate a strategic coup from a harebrained scheme. It can be very thin and very close.
CIO: What can companies do to start thinking about enterprise value smartly? McFarlan: It starts by having a clear and crisp understanding of what your value proposition is to your customers: Why do they buy what they buy? Often what you think drives buying decisions really doesn't because of a whole series of things behind it. And that turns out to be quite complicated.
CIO: How can companies know if technology will add value to their businesses? McFarlan: Technology allows businesses to deliver different kinds of value, but how to tease out that value is the biggest headache. Value is not measured in some abstract sense; it's measured against what other competitive offerings are out in the field. The company may be doing better, but then it's doing better in a different competitive universe. It's hard to know if your investment was really a plus, or if it was just holding things equal.
CIO: Can developments such as e-commerce play a role in adding business value? McFarlan: Yes, but it's a question of knowing how to do it. And that's where it gets complicated. We put this new channel and this new set of services out there, but then we need to understand the human animal as to how and why we are motivated by these new ways of operating.
For example, the shopping experience is what keeps the shopping malls going, and what's important is the ability to understand where and how [in an e-commerce initiative] there's real added value and where it's a mirage. There can be an awful lot of ambiguity as to the actual amount of bottom-line value that is delivered.
CIO: Where is the thinking about enterprise business value headed? McFarlan: First, I think that there will be a redefinition of the role of the company. We're also dealing with a fundamental shift in the products themselves. Businesses are basically making suppliers own the inventory in their stores and manage it on behalf of the businesses.
I also believe that we will see a complete transformation in service expectations. Consumers expect-and they will continue to expect-those things that aren't, in fact, deliverable in today's environment.
With electronic commerce, we'll continue to see a shift in where and how we're selling. And finally, there will be a transformation in the way organisations are structured in terms of the nature of the work, the nature of control and where decisions are made. Each of those areas have been evolving for 15 years at different rates, and I see no reason to think they won't continue to evolve.
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