Business Architecture - The Rise and Fall of Smart Retail
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Slides from Unicom webinar May 2012
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Business Architecture - The Rise and Fall of Smart Retail
- 1. RICHARD VERYARD UNICOM Webinar, May 2012 The Rise and Fall of Smart Retail
- 2. Themes Developing Knowledge Expanding “what the business knows” Developing Agility Expanding ability to manage complexity Developing Wisdom “Fox knows many Hedgehog one Solid trick”
- 3. Business Architecture - 1980s Paradigm Business Data Model represents stable and unchanging view of “what the business knows” Business Function Model represents stable and unchanging view of “what the business does”. Every company in an industry should have the same basic models. The basic models remain stable over time. Business Modelling Industry Model
- 4. Repertory Grid technique Grid Component Definition Example Topic Subject or situation Special Offer Element Three contrasting instances Bread, Baked Beans, Chocolate Construct Something that differentiates two instance from the third Shelf-Life - easy for customer to store Necessity – Luxury Rating A way of characterizing the elements in terms of the construct Bread is a necessity with a fairly stable demand and a relatively short shelf-life. Customers are not likely to increase their consumption of bread, and are therefore not likely to be attracted by BOGOF offers In the 1980s, this technique was used to build a conceptual model showing entities and their attributes. We expected this model to be pretty stable. Veryard 1984
- 5. Retail Industry Event-Response Model Before Loyalty Cards Undifferentiated mass of customers NOTE Customer Buys Stuff Stock Check Stock Low Stock High Sell Customer Stuff Restock Store BOGOF to all Customers CBDI Journal Feb 2006
- 6. Retail Industry Event-Response Model With Loyalty Cards Ability to identify customers Can differentiate business by customer NOTE Customer Buys Stuff BOGOF to specific customers Stock Low Sell Customer Stuff Analyze Customer Behavior Restock Store CBDI Journal Feb 2006
- 7. Extending the scope of the analysis Include customer’s process as well. Change scope of model On what basis does customer differentiate? Use repertory grid NOTE Sell Customer Stuff Analyze Customer Behavior Create BOGOF Restock Kitchen Buy Stuff Evaluate BOGOF Customer Store CBDI Journal Feb 2006
- 8. Retail Industry Information Model Before Loyalty Cards Product Transaction Outbound Transaction (Till) Stock Check Inbound Transaction (Supply) Supplier * * CBDI Journal Feb 2006
- 9. Retail Industry Information Model With Point-of-Sale (POS) and Loyalty Cards Customer now appears as a key entity. Stock check ceases to be a primary transaction. NOTE Product Transaction Outbound Transaction (POS) Inbound Transaction (Supply) Supplier * * Customer * CBDI Journal Feb 2006
- 10. Abstract Metamodel of Business (extract) What the business knows information intelligence (what is going on) What the business does capability response event CBDI Journal Feb 2006 Note how business intelligence and analytics can now trigger additional business operations. What the business knows follows from what it does and what the environment does. With loyalty card and other technologies, the business now knows more than before.
- 11. Issues for Business Systems and Processes Differentiation • Cost-effective differentiation, based on a rigorous analysis of differentiation requirements. Process integration • Retention of rich information from one process step to the next. Real-time enterprise • Convergence between information and intelligence
- 12. Modelling Operational Capabilities Customer Management Product Management Store Management Staffing & Resources Customer Purchase Segment Brand Supplier Stock Item Location Facilities Layout Employee Role Shift Promotion Capability Areas Domains Context Career Path Here is a typical breakdown of retail operations into discrete areas of capability. (We used to call these “business functions”).
- 13. Alternative Model of Operational Capabilities Customer Management Product Management Store Management Staffing & Resources Customer Purchase Segment Brand Supplier Local Community Location Facilities Layout Employee Role Shift Promotion Capability Areas Domains Context Career Path Supply Chain Management Stock Item Location Warehouse Transport How do we choose between alternative ways of decomposing a retail operation into discrete chunks? One way is to consider how independent is each chunk, and how much coordination is required. Any given decomposition raises cross-cutting concerns.
- 14. In a joined-up business, these capabilities need just enough coordination. Customer Management Product Management Store Management Staffing & Resources Consumer Supplier Customer Employee Coordination This line denotes the dependency between capabilities. There may be different degrees of dependency.
- 15. Intelligence from Differentiation (Requisite Variety) We may differentiate customers (and their behaviour and intentions) according to a number of factors, with greater or lesser granularity. And we may also wish to differentiate suppliers, locations, and any other significant business concept. Each degree of differentiation increases the complexity of the process. Under the right conditions, increased differentiation may produce better outcomes for the organization and its customers. Under the wrong conditions, differentiation merely adds complication, increases cost and risk, and may produce worse outcomes. Differentiation Consequences
- 16. Operational Differentiation Zero variation. No differentiation between customers. One size fits all. Fixed segmentation. The retailer identifies a number of (fixed ) market segments, and assigns each customer to the appropriate segment. Dynamic deconstruction . Differentiation based on the detailed actions and inferred intentions and context of customers. Degrees of Differentiation Retail Example Customer Management Customer Purchase Segment Context
- 17. Fixed segmentation: many industries have a simple way of classifying customers Strategic Information Classification – Banking Example CUSTOMER COMPANY INDIVIDUAL LARGE CORPORATE SME SOLE TRADER HIGH NET WORTH ORDINARY LOW NET WORTH
- 18. Customer service with fixed segmentation A different set of services is provided to each category of customer. Correct categorization of customer allows efficient and low-risk differentiation of services. BUT customer category may become functional silo. NOTE CATEGORY SERVICE CUSTOMER
- 19. The retail industry is leading the way to smarter differentiation Anonymous Customer Customer Identified at Checkout (Loyalty Card) Customer Behaviour Tracked Inside Store (RFID) ? Retail Example Your Industry
- 20. First let’s look at differentiation within one capability area Focus on the most relevant differentiators. Sufficient range of responses to differentiators. Coordination between variety of perceived differentiation and variety of response. Feedback loops to improve relevance and accuracy of differentiation. Feedback loops to refine responses. Progressive elimination of unnecessary or irrelevant complication, along with exploration of new opportunities Success Factors of Effective Differentiation Customer Management customer operation customer intelligence attenuation amplification
- 21. But each capability may have some intelligence customer operation customer intelligence attenuation amplification product operation product intelligence attenuation amplification store operation store intelligence attenuation amplification staffing operation staffing intelligence attenuation amplification intelligence coordination operation coordination So how do we join all this up?
- 22. SupplierSegmentCustomerSegmentCustomerSegment Buying? Promotions? Store Layout? Integration Pathways A jar of organic baby-food can be involved in many different differentiating behaviours. So how do we integrate (align) these differentiating behaviours?
- 23. Using Repertory Grids to Identify Integration Pathways Topic Subject or situation Buying Element Three contrasting instances Food, Wine, Coffee Construct Something that differentiates two instance from the third Responsibility Rating A way of characterizing the elements in terms of the construct With coffee, the supplier/importer may be handling some of this complexity rather than the retailer, and hiding it inside product packaging that says "product of more than one country". Topic Subject or situation Buying Element Three contrasting instances Food, Wine, Clothing Construct Something that differentiates two instance from the third Seasonal Patterns Rating A way of characterizing the elements in terms of the construct Wine has a buying process similar to clothing in that you buy a seasonal batch, often a long way in advance, to a specific "design" but you can't go back for more of exactly the same product.
- 24. Modelling Challenges Which business events are we going to respond to? Which process/capability is response-able? What variety of response are we going to support? Aligning variety of response with variety of demand (“requisite variety”). Coordinating responses. Aligning complexity of processes / capabilities with the capacities of the organization. Monitoring outcomes to ensure effectiveness. Developing capacity for progressive improvements over time.
- 25. Practical Questions How do formal management information systems support differentiation and integration? • Within a single capability area • Across multiple capability areas How do informal communication mechanisms (including social networking and interpersonal trust) support differentiation and integration? • Within a single capability area • Across multiple capability areas How does the structure of the organizational and systems environment affect the “intelligence” of the enterprise? How can CIOs, enterprise architects and others help the enterprise to leverage its intelligence? How can we communicate differentiation and integration to the enterprise Where these differentiations and integrations are, or need to be. How to measure the differentiation and integrations How can we demonstrate and monitor the change? Do we have an opportunity to derive measurement of quite free flowing collaboration through BPM and social networking capabilities?
- 26. Changing Market Structure (Retail) Traditional Platform Consumer Retailer Farmer Manufacturer Caterer Consumer Retailer Farmer Manufacturer Caterer Asymmetric Design Economics of Scale, Scope Economics of Alignment, Governance Indirect relationships
- 27. Four Types of Customer Behaviour Comparison • Choosing between different solutions to the same demand Destination • There is only one place for the customer to go. Cost Convenience • Choosing between similar standardized offerings Custom • Supplier adapting the offering to the customer’s requirement SupplyInfrastructure Capability Requirement MicrosoftArchitectureJournal AsymmetricDesign
- 28. Narrow Focus or Broad Focus? Big Data Smart Retail Store Design? Customer Service? Customer Attitudes?
- 29. eBooks In preparation … leanpub/businessarchitecture Now available … leanpub/orgintelligence
Notas del editor
- Hi. My name is Richard Veryard and I’m going to be talking to you this afternoon about Business Architecture. In particular I’m going to explore some of the changes that have taken place in the retail sector over the past 25 years or so and look at the implications for other industries.We’ve got quite a few people on the webinar this afternoon, so we’re going to mute everyone while I’m talking. If you want to ask a question, you have a button to raise your hand and a panel to type your question. We’ll probably take most of the questions at the end, but I’ve got a guy from Unicom here who will nudge me sharply in the ribs if he thinks I need to stop and answer something straightaway.
- In this webinar, I’m going to talk about a fictional retail company and its development over the past twenty years. Any resemblance to any real retail company in the UK is entirely in your own imagination. There are some huge simplifications in this story, especially if we think of the enormous range of challenges facing any real retail company, howeverlarge or small, but I hope it will give us a rough idea of some areas where it may be helpful for business architects and others to develop new ways of thinking structurallyabout business.There are a few things I want to explore here in particular.Firstly, I want to look at how the retail business has changed. Much of this change has gone along with a growing sophistication in the use of Information Technology, but IT alone doesn’t explain some of the particular things that have happened in the retail sector.Secondly, I want to look at how these changes have introduced greater complexity into the retail business. Some architects seem to think that complexity is a bad thing, and that the agenda of architects is to eliminate all signs of complexity. But I think that ignores the benefits of complexity - giving the organization more power to operate effectively in a complex demand environment. So the agenda here is not to eliminate complexity but to respect it.There are some important structural issues here, that I don’t think are particularly well represented by the traditional methods used by business architects. So we shall need to look at business structure from a range of different viewpoints.And thirdly, I want to look at what this implies for the intelligence of the retail organization – both operational intelligence and strategic intelligence. It is all very well to have an extremely refined intelligence in one area of business operations, but that’s not so good if it means other areas are being neglected.Notes:http://www.guardian.co.uk/money/blog/2009/aug/17/tesco-clubcard-reward-schemes
- There is a view of business modelling that was heavily promoted by the centralizing methodologies of the 1980s (such as Information Engineering) and isstill accepted uncritically by many business architects. According to this view, there is a general function model that represents what the business does, and a general data model that represents what the business knows. These models are unaffected by the kinds of change experienced by the business, including technology change and organization change.Conventional approaches to information analysis need to alter to support the characteristic features of SOA, including support for event-driven and context-sensitive services.Systematic approach to discovering context and opportunity areas for differentiation will allow the business to make informed choices on the level of support they need today and in the future. Informed choices drive practical levels of generalization. Remember SOA is a framework for flexibility, it is not necessarily delivering unlimited flexibility. So better information analysis can facilitate business change. In the third part of this series we will examine how we use the knowledge of context and differentiation based on a better understanding of information in order to support inherently flexible processes.
- Let’s start by dividing a retail operation into a number of discrete capability areas, each focusing on a discrete domain of interest.We wish to define capability areas that each contribute to the viability of the whole enterprise by having some value exchange with the environment.Each capability area can then be managed semi-autonomously.
- We may compare alternative ways of decomposing the retail operation according to this criterion: how independent is each chunk, and how much coordination is required. Any given decomposition leaves some cross-cutting concerns. For example, does Supply Chain Management count as an autonomous capability area, or is it a critical cross-cutting concern?Many architects skip this step, and base their models uncritically on the most obvious decomposition, without exploring alternatives.
- What counts as “environment” depends how we draw the boundaries of the system. Thus for the purposes of this model, we may regard staff as an external stakeholder class – the retail organization creates value by establishing job opportunities and career development. The long-term viability of this capability area depends on things like being able to develop store managers and buyers without poaching from competitors.Each capability area may focus on a different class of primary stakeholders. Thus each capability area can be regarded as operating a single-sided market; the retail operation as a whole is modelled as a multi-sided market.In order to make this model work, we may need to introduce a conceptual separation between consumer (e.g. the child who eats the breakfast cereal) and the customer (e.g. the parent who buys the packet).Remember: This is just a modelThe Map is not the Territory
- A simplistic model of operational capabilities regards the stakeholder as part of the environment.A more sophisticated model recognizes that the stakeholder may be an active participant in the requisite capability. This is particularly obvious in the case of supply chain management, although it applies to all capabilities to some extent.As we shall see, the management of the supply chain raises some interesting questions about shared intelligence - how are supply chain requirements and problems resolved, how do the supply chain partners collaborate around planning, problem-solving and innovation, and what are the knowledge flows and communication mechanisms that support these collaborations.Does the fact that Supply Chain Management is a distributed capability / responsibility weigh against our modelling it as an autonomous capability area?
- All other capability areas are dependent on coordination capability. We need to understand these coordination requirements.Within each capability area, we have a potential trade-off between the economics of scale and the economics of scope.For example, simple economics of scale within product management suggest stocking large quantities of a very small number of products from a small number of suppliers to obtain maximum discounts and minimum transport costs. However, this conflicts with the need within product management to offer a broad range of products (economics of scope). There are also trade-offs between capability areas. For example, a simplistic approach to the economics of scale within product management will conflict with a simplistic approach to the economics of scale within store management.In practice, it is impossible to optimize all these economic factors simultaneously. So we need a coordination mechanism that allows for a reasonable accommodation between these semi-autonomous areas, as well as a sense of the economic and organizational cost of this coordination.
- We may differentiate customers (and their behaviour and intentions) according to a number of factors, with greater or lesser granularity. Each degree of differentiation increases the complexity of the process. Under the right conditions, increased differentiation may produce better outcomes for the organization and its customers. Under the wrong conditions, differentiation merely adds complication, increases cost and risk, and may produce worse outcomes.There are arbitrarily many degrees of differentiation – these are just typical points on the curve.
- Let’s look at differentiation within a single capability area – Customer Management. We may differentiate customers (and their behaviour and intentions) according to a number of factors, with greater or lesser granularity. Each degree of differentiation increases the complexity of the process. Under the right conditions, increased differentiation may produce better outcomes for the organization and its customers. Under the wrong conditions, differentiation merely adds complication, increases cost and risk, and may produce worse outcomes.There are arbitrarily many degrees of differentiation – these are just typical points on the curve.
- With business intelligence, we have the opportunity to select the most relevant forms of differentiation, based on statistical analysis of characteristic features. In many situations, what the business really wants is to use the past to predict the future. We only want to differentiate customers based on their past buying patterns if this provides a good predictor of their future buying patterns.When I lived in Central London, I sometimes used to visit a hairdresser on the King’s Road, The King’s Road is full of hairdressers, and the staff often stand in the street handing out leaflets to likely customers. When I was walking towards my hairdresser, I would walk past several of these touts, but I wouldn’t be recognized as a potential customer because I didn’t have a smart haircut. After my hair was cut, I would be given loads of leaflets because I then fitted their preconception of what a customer looked like – but of course I didn’t then need a second haircut. This is the kind of stupidity trap that many backward looking sales operations fall into – trying to sell lawnmowers to people that already have lawnmowers.Business intelligence helps us find alternative differentiators. What are the characteristic features of someone who needs a haircut, or might buy a lawnmower? We can then differentiate the services based not on a fixed set of differentiators, but on a current (and periodically updated) set of differentiators, and we constantly review the predictive power of these differentiators. This means that the underlying business type model now needs to be constructed at the meta level, with DIFFERENTIATOR and CHARACTERISTIC FEATURE as business types.
- The introduction of the loyalty card represented a radical strategic shift for the large retail chains. Stores now had a formal basis for recognizing a customer as the same again. They can identify customers, and collect and analyze data about the behavior of specific customers. And they can use this analysis to differentiate the response to different customers. For example, different customers may receive different special offers. Amazon is of course well-known for its pioneering work in providing targeted information and deals based on a customer’s browsing and buying history, and creating new forms of associative information which may be reflected back to the customer.Obviously if the retailer can identify the customer as she enters the store, then this differentiation can be done as the customer browses, rather than only when the customer comes to pay. This is relatively easy to implement with online shopping (for example through the use of cookies); and there are various mechanisms that might achieve the same result in a physical store – perhaps face-recognition software in the store camera, or loyalty cards with RFID chips – if the obvious privacy concerns can be allayed.And if there are RFID chips on the goods and RFID scanners on the shelves, then the customer can be presented with information based on the stuff that is already in the shopping basket. Again this capability is very easy to implement for online shopping, and this stimulates retailers to build an equivalent capability for physical shopping. (This is an instance of an increasingly common generalization pattern: take a simple innovation from one channel and look for ways of implementing it in other channels. We then need to define a general structure for the data from different but equivalent sources, and render the data through a common service interface, to enable aggregation and comparison of data across channels.)
- Effective differentiation is a function of the intelligence embedded within the customer management capability. The greater the “quantity” of intelligence, the greater the capacity to differentiate effectively.For the sake of analysis , we may regard “Intelligence” and “Operation” as separate sub-capabilities of Customer Management.We can then identify the signals that pass between “Intelligence” and “Operation” , and the attenuation and amplification mechanisms that govern these signals.
- What are the events and information flows that help to join up the retail operation as a whole?Where is the strategic knowledge of the enterprise located, and how is it continuously development and effectively used? What are the mechanisms to support innovation and organizational learning?
- There are many different pathways for joining-up the business.How does a jar of organic baby food get managed alongside other jars (pasta sauce)?alongside other baby goods?alongside other organic produce?Wrong answer #1 – pick one of the above. Adopt hierarchical managementWrong answer #2 – pick two of the above. Adopt matrix management. Wrong answer #3 – swing erratically between different alternatives (oscillation)Correct answer – manage and coordinate all the relevant pathways. Adopt complexity management.Note – each of these pathways may be associated with a different capability area, and mobilizes a different kind of intelligence.
- Alignment ChallengeHow is the differentiation aligned across different capability areas? For example customer differentiation x product differentiation?HypothesisThe first task is to develop intelligence in each autonomous unit.Only then can we start to worry about the intelligence of the whole enterprise.Thus intelligence is an emergent collaborative bottom-up development rather than a directed top-down development.Lawrence, P., and Lorsch, J., "Differentiation and Integration in Complex Organizations" Administrative Science Quarterly 12, (1967), 1-30.In this paper Lawrence and Lorsch develop an open systems theory of how organizations and organizational sub-units adapt to best meet the demands of their immediate environment. Organizations must balance differentiation and integration to be successful. Those companies who manage to achieve high sub-unit differentiation and yet still maintain high integration between sub-units seem to be best equipped to adapt to environmental changes.Groups that are organized to perform simpler, more certain tasks (e.g., production groups) usually have more formal structure than groups focusing on more uncertain tasks (e.g., research and development).The time orientation of sub-groups is primarily dependent on the immediacy of feedback from their actions. Thus sales and production groups have shorter time orientations than R&D.The goal orientation of sub-units is based relative to the part of the environment that affects them the most.http://faculty.babson.edu/krollag/org_site/org_theory/Scott_articles/lawren_lorsch_cont.html
- What is the status of these models? Are they supposed to be a simplified description of the current state of the enterprise (AS-IS)? Or an idealized blueprint of some future state of the enterprise (TO-BE)?Enterprise architects typically produce both AS-IS and TO-BE models, and then produce transition plans to get from AS-IS to TO-BE. This is therefore an exercise in requirements engineering at the enterprise levelThese models can therefore be regarded as a TO-BE architecture to some extent, but that is not their only purpose. There is a collectivemanagement need to make sense of those existing conversations and collaborations that need to become more systematic and focused, and so the model is a sense-making tool as well as an engineering tool.Obviously we can install more sophisticated mechanisms if that's justified, but often it's about making better use of the existing mechanisms. I see this as part of the job of enterprise architect – not just fixing the mechanisms but understanding and advising on their effective use.Thus my purpose here goes beyond conventional EA practice. I want to improve the manageability and intelligence of the whole organization as a complex sociotechnical system of systems. I am therefore interested in the management system - the information flows and coordination mechanisms and feedback loops - rather than the operational system.The operational model is therefore a map to support this kind of investigation, as well as a sense-making map to be used within the management system itself, rather than just a blueprint for reengineering the enterprise.
- Determining which business events each process/capability is going to respond to, and at what level of granularity.Deciding what variety of responses each process can support. (This is not just a question of the logical design of the process but also the capacity of the organization to carry out the process.)Aligning the variety of response with the variety of the target events. It is clearly a waste to collect information that you can never make effective use of, and it is also a waste to build variety into a process unless you are capable of detecting the events that require this variety.Coordinating the responses of different processes across the enterprise to the same event (or connected events).Implementing these processes into the organization , so that the collective cognitive capacities of the people (for example the quantity of detailed information that they can utilize effectively) are fully exercised (stretched, developed) but not overloaded.Continuously monitoring business outcomes to verify that the variety build into the process is justified by business results.Evolving a portfolio of responsive processes over time, allowing for progressive improvements in differentiation and integration. (The target events themselves may be fairly stable, but the technology for detecting these events may get better and cheaper.)Allowing a loosely coupled organization of autonomous sociotechnical units to emerge, with open and democratic (?) governance.
- The traditional retailer acts as a hub in the food supply chain, aggregating food supply from fields and factories, and distributing food to workshops and private kitchens. This is essentially a positional strategy: the retailer seeks to establish and maintain a strategic position within a value chain, as the bottleneck/hinge point between upstream and downstream. Within the positional strategy, the business drivers are understood in terms of the economics of scale and the economics of scope.But if we shift from a value-chain perspective to a service-oriented perspective (effects-ladder), we can see that the retailer is providing a service (=delivering value) downwards as well as upwards – it is a food distribution platform for farmers and manufacturers as well as a food supply platform for consumers and catering companies.So instead of drawing the merchant in the middle, we can draw the merchant as a new kind of platform providing various kinds of market interaction.This takes us from a positional strategy to a relational strategy. No longer just focused on the economies of scale and scope, the relational strategy emphasizes how economies of governance are generated in relation to two kinds of demand context. The big question for a company such as Wal-Mart is how to balance the exploitation of each of these forms of asymmetric advantage.
- The names for two of these four ways came from research on shopping behaviour by Gary Davies in which he distinguished ‘cost’ convenience (choosing between similar standardised offerings) and ‘comparison’ behaviours (choosing between different solutions to the same demand). The other two separated out circumstances where there was a demand particular to the customer, distinguishing offerings in which there was only one place for the customer to go ( ‘destination’), or in which the supplier would adapt the offering to the customer’s requirement ( ‘custom’) within their context-of-use. The point being made, however, was that the ‘destination’ form of offering required asymmetric governance because of the need to hold power at the edge of the organisation. What distinguishes this position in the cycle?If we think of the original development of pc-based spreadsheet programs in-house (destination), they soon became a limited number of alternative branded solutions (comparison) that in turn became dominated by the one offering all the others’ features in one package (cost). From here we have seen an increasing ability to customise the ways it can be used (custom) to the point where we are now looking at a new cycle of web-based solutions that we can build one-by-one (destination).http://www.asymmetricdesign.com/2006/04/managing-over-the-whole-governance-cycle/
- http://www.asymmetricdesign.com/2006/04/managing-over-the-whole-governance-cycle/
- http://rvsoapbox.blogspot.co.uk/2012/12/showrooming-and-multi-sided-markets.html
- Here’s the problem