Sources of Knowledge

Underlying a new product may be an event such as the realization of an innovation or invention. While the invention is important, the development of a product and a market takes time and additional creativity. We may see the announcement of the new product as an event, but that is a milestone in a process. The success of the product will then depend on the readiness or development of the market—the development of demand and sales.

Significant circumstances seldom occur in a single event. Development of new technology and growth of a market may take years to develop. Below are a number sources of knowledge that can provide insight on things to come. Various employees should have access to these sources depending on their areas of expertise and roles in the business.

Scope of Change

Fig. 9.1 depicts a business change framework. This aligns the scope of a change with organizational levels for evaluation and further development. The planning horizon indicates the general magnitude of the undertaking and the duration of the effort. The organizational scope describes the level and number of organizations involved and thus the level of collaboration and coordination required. We will briefly describe the planning horizons and then describe the levels of organization and their involvement in the implementations.

Levels of Response

Based on these planning horizons, we now consider how these relate to the levels of transformation management, the vertical scale of Fig. 9.1. Essentially, we start with the assumption that management of a change is the responsibility of the manager of the organizational unit affected. This may change as the nature of the change and the scope of its impact evolve.

VDM and the capability-based architecture (CBA) enable decentralized innovation by enabling employees and unit managers to see the big picture and understand how their ideas may impact the rest of the business. Employees at any level may become aware of opportunities or relevant changes in the business ecosystem. These may be topics of discussion in interest groups. The management chain of leading participants should ensure that proposals are brought to the attention of appropriate transformation leaders. Management controls, business processes that initiate change, and capability unit manager incentives must be appropriately applied to achieve a balance between local initiative and enterprise optimization.

A VDM model for the current business provides a context for consideration of the effects of a potential change. This helps determine the organizations and levels of management that may need to be involved in consideration of a change, it provides insight on the impact of the change on value contributions and their effects on value streams, and it provides the basis for determining the enterprise-level optimum effect that may involve trade-offs.

In addition to the organizational scope of a change, there may be funding thresholds that require that a change be proposed to a higher level of management for approval of funding.

As the total transformation becomes clear, requirements on lines of business and the individual capability units will become clear, and responsibility for implementation of specific components may be delegated back to the LOB and capability unit organizations consistent with the VDM model and a phased implementation.

Capability Unit Management

The lowest level of transformation management is the capability unit. Some changes have an effect specifically on the operating activities of a particular capability unit. Resolution of these circumstances can be implemented immediately by the capability unit manager unless they require substantial investment or will adversely affect service cost, quality, or timeliness. In a CBA, the approach to implementation of service operations is internal to the capability unit, as long as it does not adversely affect service users or services used.

If a capability unit manager implements changes that improve the cost, quality, or timeliness of its operations, it must remain compliant with its interface specifications and level of service agreements of the capability unit. Some changes to interfaces and performance may be acceptable if the related capability units concur, particularly if there is off-setting value, otherwise pursuit of the changes may need to be escalated to a level appropriate to the scope of impact of the change. Shared services will have multiple recipients of their services to reconcile. Collaboration is required with related capability units to ensure continued compatibility and compliance with service level agreements. Services that are unique to a value stream—typically those that define the high-level activities—will only be concerned with the needs of the particular value stream.

For example, plans for transformation of a capability implementation may start at the capability unit level, but if the change has a functional effect on consumers of the service or services it engages, then there are broader implications to consider. This may still be resolved at the capability unit level by collaboration with the affected recipients and providers. However, if there are many other organizations, or if the change suggests a change to the corporate VDM model, then there may be cause to raise transformation to a higher level of management. The same applies to expanding scope of changes at the LOB level and the enterprise-level. Furthermore, if the planning horizon is longer, management at a higher level may be appropriate since other initiatives and considerations may come into play.

Incremental Change

Generally, changes managed by a capability unit will be incremental. This may include improvements of cost or quality or one of the following.

Regulatory compliance. Compliance with regulations may only require changes to the capability unit. They may have some effect on users of a service, but that will not remove the need to comply. Collaboration may reveal ways to comply without undesirable side effects.

Information technology. Information technology could be applied for automation, improved access to information, technology modernization, or better communication and coordination.

Production technology. Production might be improved with new or better tools or machines and potentially by changes in materials or production scheduling; however, consideration must be given to adverse effects on value contributions.

Business process. Process improvements might save labor, material or reduce scrap or defects.

Product. Product changes might improve manufacturability or maintainability or improve product appeal with new features or appearance. However, for a shared service, potential effects on other products must be considered.

Propagation of Change

If changes to internal operations adversely affect the cost, quality, or timeliness of the service for some users, the capability unit manager will need to negotiate with service users to justify the change or demonstrate to enterprise leaders that there is a net gain to the enterprise. Changes that do not affect the interfaces and do not increase cost or degrade the level of service should not be a concern to service users or providers.

In some cases, there may be a need to change the capability unit interface, and this will require other units to make complementary changes. Fig. 9.2 depicts relationships between service users and service providers. Capability unit X is both a user of capability unit Y and a provider to capability units A, B, and C. A change to the service interface of capability unit X may require changes to all the users of capability unit X, here represented by capability units A, B, and C. If a change impacts the value contributions of capability unit X, it affects the competitive position of the value streams served by capability units A, B, and C, because A, B, and C must bear the cost and depend on the results of capability unit X in the delivery of their services.

Consequently, the solution should be the result of collaboration between the capability unit manager of capability unit X and the managers of the user capability units A, B, and C unless the changes also impact the users of capability units A, B, and C.

Note that enterprise governance should require that changes to capability unit interfaces be approved at an enterprise-level to ensure that the solution is optimal for the enterprise, particularly for future needs that might not be represented by current service users.

A capability unit may require changes to a service it uses. In the diagram, capability unit X may need changes to capability unit Y. If so, the capability unit X manager should work with the manager of capability unit Y to develop the changes. However, capability unit Y may have other users, such as capability units M and N that are not apparent to capability unit X. Thus capability unit X may need to engage both capability unit Y and all the users of capability unit Y to accomplish the change. The change should occur easily if all users see a net benefit; otherwise, they either agree that it has value to the enterprise or the decision must be made at a higher level in the organization. This includes consideration of the cost of change as well as any increase in operating cost as compared to the business value of the change.

If a change to a service provider increases the cost or degrades the performance of a user, that user is in turn accountable to its users. In the diagram, suppose capability unit Y makes a change to improve the quality of its product, but this causes a cost increase. This cost increase is incurred by capability unit X along with the other services that use capability unit Y. This affects the obligation of capability unit X to its users, A, B, and C. This effect propagates up the chain of users until it becomes evident in one or more value streams or otherwise affects enterprise performance. At that level, the impact on the enterprise and the ultimate customer can be evaluated.

Changes that have a propagation of effect to one or more value streams must be evaluated in the context of relevant VDM scenarios. This will highlight the impact on value propositions and provide a basis for objective consideration of enterprise-level trade-offs.

One-Time Costs

Even if a capability unit manager makes a change that reduces cost over time, there may be an investment, and thus an increase in costs, incurred in the short term. It would not be desirable for all improvements to be impeded by opposition to cost increases by users. This should be addressed with an appropriate funding mechanism. The cost of change might be recovered over time, so improvements that would be recovered within a certain number of years would be authorized and amortized for cost recovery. The capability unit management chain has primary responsibility for making such changes. Changes that would increase the unit cost of services to users should be approved by the service user managers and/or the affected LOB managers. The enterprise must establish appropriate procedures to ensure an appropriate level of budgeting, approval, and concurrence by affected managers.

For example, a machine repair capability unit may determine that an investment in a diagnostic tool would reduce the cost of repairs. If the return on investment is acceptable, the cost of the tool can be prorated, reflecting the return on investment so that there is no net cost increase to service users. This would not affect the capability unit interface. On the other hand, shifting from a failure-response mode of machine repair to a preventive maintenance mode requires a different relationship with service users and thus a change to the service interface—which may put an additional burden on service users while reducing the impact of failures on the operations of the service users. This also requires a change in the cost model. This can be resolved through collaboration with service users but should still require enterprise-level approval of the interface change.

Changes Out of Scope

For a particular business change, there may be no solution that can be implemented within a single capability unit or through a collaboration among the service manager and service users. This may be because the change has long-term consequences or significantly impacts the enterprise product or service. The resolution of these exception events must be escalated to the LOB manager or managers. In some cases, the need for change may come to the attention of a capability unit manager but not have a direct bearing on his or her operation. Notices of these events should be posted for distribution to more appropriate recipients. If appropriate recipients have not been predefined, the event notice must be escalated up the management chain.

LOB Management

The LOB manager has a broader perspective on needs for change. The LOB manager is concerned about competitive position of value streams for the products or services that he or she manages and thus can assess the implications of changes in a market context. All LOB managers should be able to view the delivery of customer value in the context of a product life-cycle for their LOB (see the product life-cycle discussion later in this chapter).

A LOB manager will also have capability units that are unique to specific value streams or to the LOB. Some changes to these will be internal to the capability unit, but optimization of the particular LOB will always be the primary objective.

As with the capability unit manager discussed previously, the LOB manager may be able to work with one or more shared capability units to resolve changes of limited impact. These are essentially operational adjustments.

Observations that indicate a change in market demand or an opportunity for competitive advantage should be primarily directed to LOB managers and market analysts. They must translate a change in market demand to a change in sales forecasts, and then, using the value stream, they must determine the implications to the services used to deliver products or services. This may have a significant impact on the workload of service providers, but it might not require any change in functionality.

Some enhancements call for significant changes to the product or service or need to be coordinated across a number of services that are only indirectly related. For example, a new product technology may require changes in product engineering activities, production activities, field service activities, and supply chain relationships. The design and implementation of these changes requires cross-organizational coordination and control. VDM support for substantial transformation management is discussed later in this chapter.

These changes are more likely to involve improvements of value streams and value propositions of other lines of business. Planning and implementation must involve VDM modeling analysis along with collaboration among representatives of all the affected lines of business, the business architecture organization, and other shared services and business support services. These changes will likely involve changes to shared capabilities, and these must be reconciled with other lines of business that share those capabilities.

The Cost of Change

The cost of such changes must nevertheless be determined and considered in the decision to change. Change implementation may be owned by the LOB manager but managed and performed by transformation capability units. The affected provider capability unit managers have the primary responsibility for change implementation. If the change adversely affects their other users, the impact on those users is part of the cost of change and could be an increased burden on other LOBs. Unless the affected product lines agree, the issue should be escalated to the executive staff level in the organization.

Value stream relationships in a service-oriented architecture supported by VDM modeling make it possible to determine the full cost of change as well as the full cost of a product, including the indirect impact on related products and services. Each product is the result of contributions of value and cost from the services used to develop and deliver the product. Each service must report its true cost, including the cost incurred in using other services and the recovery of costs for improvements.

In some cases, a needed change has effects that reach beyond the responsibility of the LOB manager. This includes an opportunity for a new LOB, a need for substantial realignment of business operations, consideration of a merger or acquisition, or a technology change that exceeds a threshold for investment in new capabilities. These exceptional circumstances should be escalated to the executive staff.

Later in this chapter, discussion of a product life-cycle process reflects the requirements for collaboration with other organizations in the development and implementation of a new product or substantial LOB changes.

Enterprise Management

Transformation that has broad impact and requires coordination across major organizations must be managed from an enterprise perspective. These changes arise from new business opportunities and threats that are not specific to a LOB. This includes (1) consolidations of capabilities or significant changes to shared capabilities; (2) creation of a new LOB; (3) a merger, acquisition, divestiture, or outsourcing; (4) changes to customer or supplier relationships; and (5) introduction or upgrade of pervasive technology (typically information technology).

The executive staff should be aware of any circumstances, internal or external, that can cause significant and sustained change in market demand, operating costs, personnel, investment, and supply chain relationships for consideration of countermeasures or changes of strategy. Enterprise management must bring an overall perspective through strategic planning. Strategic planning and implications to the agile enterprise are discussed in the next major section. A transformation management process is discussed later in this chapter.

Virtual Enterprise Management

A virtual enterprise is an enterprise composed of multiple companies that work together for a shared purpose—a collaboration of companies. The companies involved in a virtual enterprise each expect to realize benefit from the collaboration, otherwise the virtual enterprise will not survive. This is represented in a VDM model as a business network exchange of value propositions.

The decision to participate in a virtual enterprise will be the result of enterprise management strategic planning. Strategic planning will continue to focus on the virtual enterprise relationships and the role of the parent enterprise in this business arrangement and the marketplace. See the discussion of strategic planning in the next section.

Industry Change

Generally, the purpose of the virtual enterprise is to create a stronger business than the participants can achieve on their own. Formation of a virtual enterprise suggests a change to a business model that is not consistent with current industry relationships. It will have a significant industry impact and will involve a greater investment, duration, and risk than a transformation that is contained and managed within the single enterprise.

While the industry change may involve multiple companies, one company will be the focus of the transformation as the company that will realize the major competitive advantage among its competitors, and likewise the one that will take the greatest risks, making the industry transformation a primary focus of that company's efforts for several years.

The participants will work together for seamless integration of their products and services and potentially participate in joint sales or integrated customer solutions. This will involve adoption or development of shared standards for seamless integration of complementary products and services as an aspect of the expected competitive advantage.

An industry change usually brings a new business model or at least a substantial change in the nature of a product or service. A radical change has the potential to take advantage of the cultural inertia of competitors because they are heavily invested and comfortable with business as usual.

Convergence of Factors

Generally, the change becomes viable because of the convergence of multiple factors—potentially multiple industries. Consider the introduction of iTunes by Apple. It was not just a new music download service, and it changed the recording industry—a new business model. There was already a transition to digital music, and cheap memory enabled collections of music to be stored on a small, portable device. Recording studios and artists were already losing to the distribution of pirated music. Apple gained the advantage of being first to provide the service to serve the market and develop relationships with members of the recording industry. A mass market was driven by low prices and easy access to a very large library of recordings that was more convenient (and legal) than access to pirated recordings.

The market factors did not suddenly change, they converged over time: digital music, very small player devices with lots of memory to hold many recordings, internet access to a library, recording companies and artists losing money to pirates, and an existing market of people enjoying their personal collections on portable devices. The strategy could have been developed much earlier. If it was introduced too soon, it might have failed. A key was to make the commitment and develop the details and relationships at the right time.

For Apple, the disruptive event occurred when there was a commitment to the strategy. For the industry, it occurred when iTunes was announced.

Of course, there was a lot more to the success of iTunes than commitment to a strategy. There was implementation of the service, synergy with mobile devices, the development of a profit formula, development of marketing strategy, the acquisition of content, and the delivery of value to the affected artists and enterprises.

So what could a competitor do? Could they have beaten Apple to market with an alternative service? Probably not. But they might have anticipated such a move and built a complementary strategy. Apple changed, not only the portable recording device industry, but the music industry as well.

So to create an industry change requires (1) an understanding of the marketplace, including the behavior of the end customers, (2) understanding of the potential of the core technology, (3) relationships with key participants, and (4) having the capability and courage to deliver.

Conventional Strategic Planning

Fig. 9.3 depicts a high-level view of the BMM (business motivation model) strategic planning framework, an OMG specification. This structure has received widespread acceptance as a useful framework, and it is a good foundation for strategic planning for an agile enterprise. The concepts are typical of common strategic planning practices.

Strategic planning is primarily the responsibility of the CEO with the participation of his or her direct reports. At the same time, there is a need for a support staff to gather information, support the analysis, develop the work products of the strategic planning effort, and coordinate with related activities. The leader of the strategic planning capability unit typically reports to the CEO. The following points briefly describe each of the elements in Fig. 9.3:

Ends. Ends describe the ideal future state of the enterprise; they include vision, goals, and objectives.

• Vision. A vision is a future, possibly unattainable state of the enterprise. It may be a characterization of the way the enterprise should be viewed by others, for example, as leader in a particular industry, preferred employer, innovator, etc.

• Goals. Goals are more specific aspirations for the enterprise, but they tend to be on-going rather than having a point of completion. Goals support the vision.

• Objectives. Objectives are achievable, measurable results that support goals with a defined time of completion.

Means. Means are the mechanisms by which ends are pursued. The components of means are mission, strategy, tactics, and directives.

• Mission. The mission is a general statement of the on-going purpose of the enterprise—a generalization of the value to be produced.

• Strategy. Strategy is a plan or approach to supporting the mission and achieving ends, particularly with a focus on goals.

• Tactics. Tactics are specific, near-term actions in support of a strategy. Tactics typically focus on achieving objectives.

• Directives. Directives define restrictions or requirements on how business is conducted. They include policies and rules. Policies are high-level statements of intent. Rules are specific constraints on business operations.

Influencers. Influencers are sources of effects that must be considered in assessment and planning. Influencers can affect the conduct of business, positive or negative, but do not have direct action or control. There are internal and external influencers.

• Internal influencers. Internal influencers are things within the enterprise, such as culture, attitudes, thought leaders, infrastructure, beliefs, and capabilities, that influence how business is approached or conducted and how new ideas are developed.

• External influencers. External influencers come in a wide variety, such as competitors, customers, the economy, governments, and technology. Changes in these influencers may have a significant impact on business opportunities or the viability of the enterprise or its undertakings. These are sources of change outside the enterprise. See the section on drivers of change, earlier in this chapter.

Assessment. Assessment deals with the evaluation of the impact of specific current and changing factors that should be considered in planning future pursuits or direction. Strengths, Weaknesses, Opportunities, and Threats (often referred to as SWOT) are not a normative part of the BMM specification but are widely used. Strengths and Weaknesses are internal; Opportunities and Threats typically come from the environment. Influencers, along with strategies, tactics, and transformation plans, are inputs to assessments. An assessment effort will determine potential impact.

• Strengths. Strengths are those factors that make the enterprise competitive or give it competitive advantage. Strengths are important in considering new undertakings.

• Weaknesses. Weaknesses are those factors that could put the enterprise at a disadvantage with respect to competitors or the capability to undertake a new pursuit.

• Opportunities. Opportunities represent potential growth or improvement of value and include such things as new endeavors, new markets, and advanced technology that may create a new market or provide competitive advantage.

• Threats. Threats are circumstances that could put the enterprise at risk. These may include actions by competitors, economic, political or social events, natural disasters, supplier failure, shortage of resources, or lawsuits. They may include missed opportunities that could impact market share.

• Potential impact. Potential impact captures the results of assessments—potential gain or loss. Typically, the affects of these impacts are relative to current or future business endeavors.

Adaptations for the Agile Enterprise

Fig. 9.4 depicts the BMM framework modified to support strategic planning for an agile enterprise. The modifications are highlighted with double boundaries.

We have made five changes: (1) expanded on the content of vision, (2) added business architecture, (3) changed influencers to enterprise intelligence, (4) replaced potential impact with risks within assessment, and (5) added transformation and standards and technology to means.

These five changes not only connect strategic planning to the operation of the enterprise; they provide the means for insight and participation in governance by the Governing Board. Along with Strategic Planning, these changes align with the executive staff capability units described in the organization structure in Chapter 10. We discuss their roles in strategic planning activities in the following list, and their broader capability unit capabilities and responsibilities in the organization structure discussion.

Vision. The content of Vision is expanded here based on Collins and Porras (1996). These added elements provide a stronger corporate identity.

• Core ideology. The core ideology consists of two elements that could persist for as long as the enterprise exists:

○ Core values. A few guiding principles for the operation of the enterprise.

○ Core purpose. The most fundamental reason for the existence of the enterprise.

• Envisioned future. A significant ambition for the future.

○ Audacious goals. These are inspirational goals that may not be possible.

○ Vivid description. An inspirational vision of what the enterprise should be in the future.

Business architecture. Adding this component makes the design of the business a key part of strategic planning. It provides insight on both the current enterprise design and implications of potential designs of the future. Within the Strategic Planning activities, Business Architecture is a component supported by the Business Architecture capability unit, discussed later. There are three key components that support the strategic planning process: Capability Units, Organization, and the Value Streams.

• Capability units. The capability units component is a model of the formal, integrated capabilities of the enterprise, which support the Means and are the basis of the Assessment. Capability units and resources for the capability units are managed and leveraged by the organization. Capability units are an addition to the standard model because they are the building blocks for implementation of Strategies and Tactics, and they are the focal point for assessing Strengths and Weaknesses as well as Risks. Specification, configuration, and implementation of capability units become means to realization of the strategic plan.

Capability units are also the targets of strategies and tactics. Strategies and tactics are developed for capability units when we address threats and opportunities, possibly requiring some adaptation of existing capability units and occasionally requiring the development of a new capability unit. The investment required to implement strategies is lower and more predictable with capability unit building blocks. For the most part, shared capability units remain stable as the products or services of the enterprise change. This means that they continue to operate effectively and potentially continue to improve.

• Organization. The organization structure defines responsibility for management of operations, resources, and facilities to fulfill capability unit requirements. The business architecture must align organizational goals and incentives as well as other factors that achieve synergy, to promote optimal performance of capability units. The organization structure is not the capability unit integration network but instead represents the relationships between people that manage and participate in capability units, perform the work, and adapt the enterprise to changing business needs. Organization design is discussed in Chapter 10. The organization structure also determines the responsibilities of managers for compliance with rules and regulations and mitigation of risks.

• Value streams. The value stream concept is fundamental to VDM model. A value stream defines the network of capability units that contribute to the deliverables and values delivered to a customer. The enterprise consists of a number of value streams. The primary value streams produce end customer value and generate revenue for profit-making enterprises. Other value streams produce value for internal customers and stakeholders.

In many cases, the focus for strategic planning is on value streams and the participating capability units to deliver value, manage cost, and ensure compliance with rules and regulations. Analysis of a production value stream reveals the contributions of cost, quality, and timeliness of individual capability units in the delivery of results to customers. This provides perspective on where to invest in improvements.

In evaluating new products and assessing a LOB, the full life-cycle of products and service offerings should be considered as discussed later in this chapter. VDM analysis of a potential value stream can reveal both the ability or inability to deliver value and the direct impact on other operations and lines of business of the enterprise, including the utilization of strengths and the need to resolve weaknesses.

In the past, there has not been a direct linkage between the strategic objectives and the design of business operations to achieve those objectives. Generally, strategic planning has relied on the mental models of executive leadership to identify required changes and define initiatives for change. Initiatives can suffer from the lack of a detailed and balanced understanding of the effort required and the consequences to the rest of the enterprise.

In the agile enterprise, value streams make it all real. They are the connection between change at a strategic, enterprise-level and the operation of the business, both in terms of current operations and future plans.

Enterprise intelligence. As a component of strategic planning, enterprise intelligence provides visibility of the current state of the enterprise and provides insights on forces for change—those influences, both from inside and outside the enterprise, that affect the operation and future of the enterprise. Enterprise intelligence includes knowledge management, analytics and data warehouse, and it is the primary manager of information regarding observations on changes to the enterprise ecosystem. Note the section on drivers of change earlier in this chapter. Enterprise intelligence also provides input to the formulation of ends and the assessment of means. It gives an enterprise perspective on both the data collected and the presentation of information for planning and decision making.

Assessments. Risks are added to assessments.

• Risks. Risks are the potential effects of opportunities and threats on the success of the enterprise. Risks include latent risks in the design and management of the enterprise as well as risks associated with the pursuit of enterprise initiatives and noncompliance with regulations. This is the assessment aspect of risk management. An audit and risk assessment capability unit, discussed later, provides the capabilities needed to assess compliance and risks along with mitigation.

Means. Transformation and standards and technology are added to means.

• Transformation. Strategic initiatives require more than statements of strategy, tactics, and directives. They require planning, coordination, and accountability. The transformation component addresses the broader scope of concerns associated with changing the enterprise to achieve strategic objectives. A transformation management unit provides the capability to address this strategic planning component and provide visibility into transformation plans and progress. The transformation management process is discussed in more detail later in this chapter.

• Standards and technology. This makes specification of standards and the selection of technology a key component of strategic initiatives. Standards and technology are important to both products of the enterprise and the internal operation of the enterprise. For organizational agility, standards are essential to interoperability of capability units; the ability to combine and compare data from multiple sources; and the efficiency, reliability, and flexibility of information systems. A standards and technology capability unit, discussed later, provides the capabilities needed to address this strategic planning component.

Model Alternative Implementations

VDML provides the ability to represent an implementation with enough detail to identify the capabilities affected and new capabilities required, if any. This provides a reasonable basis for estimating the cost and duration of transformation. The value stream analysis will provide an assessment of the value contributions and potential customer value proposition(s). The details of these estimates should be supported by the organizations that are or will be responsible for the contributing capabilities.

Select From Alternatives

Management consideration of cost, duration, and customer satisfaction provides the basis for validation of the proposed business change as well the basis for selection of the best alternative. It is likely that it will be necessary to consider trade-offs between cost, timeliness, and customer satisfaction.

The result of this step is a clear, consensus definition of the final, to-be business configuration. This provides the basis for continued alignment as operational details are developed by participating organizations.

Note that over the course of the transformation, new factors and potentially new strategies will arise, and it will be necessary to revise the to-be business configuration to provide new, refined guidance to the transformation participants and the details of the transformation plan.

Define Implementation Phases

Phases of implementation should be based on the expected, overall duration of the transformation, the significance of the changes, and the necessity for coordination of changes among different organizations and their capabilities. Each phase should be an incremental step in the right direction, ending with a business configuration that is acceptable and stable until completion of the next phase.

This may require a fairly detailed analysis of the dependencies between capabilities and their effects on customer satisfaction for the target value stream as well as other value streams that might be affected.

Model Next Phase To-Be

While the overall plan should define the expected phases, the next phase, for each iteration, will require the most detail and must reflect the actual results of the preceding phase. Progress on each phase will not be perfect, some assumptions will be revised and some phase objectives will not be met, so the next phase will require some adjustments. Each new phase is based on this step.

Define Phase Objectives

Each plan for the next phase should identify critical success factors (objectives) for that phase so that progress can be monitored by management and timely adjustments can be considered for the plan and availability of resources. The achievement of these objectives, or not, provides a basis for detailed planning of the next phase.

Implement the Phase

This is where most of the work gets done. The capability methods and resource requirements of the VDM model are transformed to development of changes in service interfaces and service level agreements, business processes and applications, acquisition of facilities, and staff training and recruiting.

Evaluate Objectives

The completion of each phase must be evaluated against objectives. Success should be further evaluated by consideration of the value measurements once the completed phase has become operationally stable. Some capabilities may require further refinements to realize expected value contributions. Unless this is completion of the final, to-be phase, the transformation proceeds with the model next to-be phase step, mentioned earlier.

The final phase should achieve the design and expectations of the originally anticipated, final, to-be business design. However, by that time, there will likely be new, strategic objectives and a new, final, to-be business design. Strategic planning and transformation should become a continuous process.

Marketing Stage

The marketing stage is enabled by a strategic plan defining a product vision, a management commitment to initiate the marketing stage, and creation of a product management team in an appropriate LOB.

The marketing stage solidifies plans for development of the product to support an enterprise commitment to the next stage. Marketing has participated in strategic planning in support of the product vision and the decision to proceed with the marketing stage for this product.

Product Development Stage

The product development stage will begin with a decision by top management that the product will be viable and profitable, and that the costs and risks are acceptable.

Production Engineering Stage

The production engineering stage begins when the product design is determined to be sufficiently complete. Additional product design refinements will be required as further testing and development of production capabilities identify design problems, or marketing identifies changes in customer interests or competition.

Production Stage

The production stage starts when the product design and production engineering are completed and facilities, equipment, materials, capabilities, staff, and business partner relationships are in place to sell, produce, and support the product.

Effectively, the distribution and sales stage and the field support stage are enabled at the same time as the production stage, but from a customer and product flow perspective, sales and distribution come after production (except for a build-to-order product), and field support comes after sales and distribution.

Sales and Distribution Stage

The sales and distribution stage is enabled at the same time as the production stage, but from a customer and product flow perspective, sales comes after production (except for a build-to-order product).

Field Services Stage

The field services stage is enabled at the same time as the production stage, but from a customer and product flow perspective, field services comes after production and sales and distribution.

Strategic Planning Unit

A strategic planning framework has been discussed in the previous section. Strategic planning is the responsibility of top management, but it must be supported by a team that facilitates the discussion and pulls together the detail of an enterprise strategic plan. The strategic plan is no longer a document prepared every 3 years with a consensus of abstract ideas, but rather a constantly changing framework for guidance of efforts to evolve and adapt the enterprise to address threats and opportunities in a changing world.

The strategic planning team must consider how various initiatives, from capability unit incremental improvements to radical, industry initiatives fit into the strategic plan framework (or don’t). The executives must also use VDM to validate initiatives and defined transformation phases, and they must consider the risks of strategic plans and initiatives. This may affect approval and funding for some initiatives, consolidation of some initiatives, alignment of timetables for related initiatives, or guidance regarding enterprise priorities. This requires close communication between the strategic planning, enterprise architecture, and response oversight.

Transformation Management Unit

The transformation management team is responsible for coordination, collaboration, and tracking of threats and opportunities and resulting transformation initiatives at two levels: the sense and respond directory and program and project management.

Business Architecture Unit

Business Architecture is responsible, among other things, for analysis, development, and maintenance of VDM models of business design. The current enterprise VDM model is the basis for understanding the context in which changes are considered and proposed. Some models represent proposed future states for validation and evaluation of changes. To-be models represent intended future states.

Business architecture is also responsible for obtaining measurements for activity cost and value contributions, and for review of capability unit interfaces for consistency and for approval of interface changes.

The current VDM model should have different scenarios for value measurements to provide the context and estimates for analysis of changes. New value streams can be configured primarily from shared capabilities so that there is good basis for estimation of measurements for a proposed value stream. These measurements are also available for analysis of improvement opportunities and for determination of an enterprise optimum for changes affecting multiple value streams.

Operational changes represent incremental modifications to the current business model. These are considered for compatibility and for the impact on other capability units and on value streams.

Tactical changes are more significant, so there is a focus on the desired design of one or more value streams and the capabilities that may be modified or developed to support the future value stream(s).

Strategic changes and transformations involve substantial changes that require more extensive modeling and analysis of future value streams and supporting capabilities. Generally, these will involve some reconfiguration of existing capability units and possibly addition or modification for some new capability requirements.

Industry changes go beyond strategic changes to consider the business models and value exchanges with business partners along with development of new value streams, again leveraging existing, shared capability units.

In all of these analyses, the goal is to avoid creating redundant capability units and to optimize the values delivered by multiple value streams where there may be some trade-offs of values between different value streams.

Regulations and Policies Unit

The business transformation may be affected by existing regulations and policies and it may make the enterprise subject to additional regulations. The relevant regulations must be identified and interpreted in the context of the business in order to be implemented as policies. The VDM model provides the context for implementation of policies. In this context, most policies should already be implemented, so there is a pattern for implementation in new activities. New policies will require analysis to determine appropriate implementations.

Risk Management Unit

Risks are a very important aspect of change. A change may increase or decrease operational risk or other risks such as failure rates or liability. A change has a cost that is expected to be recovered as a result of the change, but there is risk that it will cost more and the return will be less, or the effort will fail. It may be useful to consider the cost of insurance as a representation of the cost risk.

Risks must be considered in the context of the current and future VDM models both from the perspective of the propagation of effects and the costs involved due to potential loss of business and the cost of recovery. The risk perspective will also help identify those aspects of the transformation that require close attention, and the limitation of the scope of transformation phases to mitigate the consequences of delays or rework on implementation dependencies.

As the planning horizon gets longer, the risks become more substantial.

The risks of incremental changes to capability units are relatively small, so the losses from overruns, delays and even failures may be painful, but they seldom threaten the viability of the enterprise. Initiatives at the LOB level can be more serious leading to losses both in investment and in revenue. Again, these are serious, but probably do not threaten the viability of an enterprise with multiple LOBs.

Risks of undertakings at the enterprise-level, however, could be very serious due to the magnitude and duration of the effort and the amount of business that is at stake. Consequently, we must assume that top management will be cautious about taking on such initiatives and will monitor progress closely.

Industry change is high risk with the expectation of high reward. However, there is also risk if the opportunity is not pursued. There is risk that a competitor will pursue the change and will take over the market. If top management decides not to pursue an industry change, then they should consider ways they can mitigate the risks if their competition does pursue it.

There is also a risk of undertaking an industry change before the opportunity is mature. If the product is good, the relationships are solid and the marketing effort is good, but the customers are not ready or economic conditions are poor, the business may fail.

Consequently, in considering industry changes, top management has a number of choices:

• Abandon the idea as too risky or too expensive but consider possible mitigation if a competitor pursues it.

• Postpone the pursuit and wait for circumstances to become more favorable. Again there is a risk that a competitor will pursue it.

• Wait for a competitor to take the risk and create the market, but be prepared to catch up by developing key capabilities, value streams, and business partner relationships in advance.

• Wait for a competitor (potentially a start-up) to pursue it and after success is shown, acquire the competitor. This is a common strategy among large corporations, although they do not necessarily recognize the opportunity and decide to wait.

• Commit to the change. This of course has the risk of failure, but there is also a risk that it will cost more or take longer than anticipated. In the meantime, the effort may cause other opportunities to be missed.

The important point here is that doing nothing may have a greater risk than the risk of failure.

Risk management should make a risk assessment of alternative courses of action. The assessments must involve collaboration with other parts of the organization with expertise in different aspects of the undertaking.

Marketing

Marketing has a key role in refining the product design, determining the market size, and estimating pricing potential and promotional costs in the initial assessment, and in sales promotion when the product goes to market. For an industry change, this may involve collaborating and supporting the marketing organizations of the business partners. VDM modeling will help estimate production costs and product features as a basis for pricing and estimates of market demand.

Other Supports

Contributions will also be needed from other organizations such as

• Staffing costs from Human Resource Management, possibly involving requirements for special skills based on new and expanded capability capacity.

• Supplier selection from procurement considering new product requirements and business relationships considering supplier value propositions.

• Financial planning for funding and return on investment from finance for governance and risk assessment.

• Potential requirements from regulatory and policy compliance must be considered related to product design, customer usage, and regulated production operations as well as regulations such as energy conservation, safety, and environmental impact.

• Potential legal liabilities from corporate counsel related to injuries to employees, customers, or others as well as violations of government regulations and intellectual property.

Sense and Respond Directory

Response oversight is supported by a shared sense and respond directory service to define key persons to receive notices of events or relevant circumstances as well as to track activities and progress related to collaboration, analysis, and transformation.

The focus here is on observations that may require ad hoc action or business change initiatives. This information should support coordination and reconciliation of overlapping efforts and status reporting to management. Observations should directly send messages to individuals or initiate business processes or case management efforts.

The current VDM model should help identify the capability units and value streams that may be affected by changes in technology, products, markets, business models, and other factors so that these threats and opportunities are brought to the attention of appropriate persons.

Analytics

Analytics is a discipline for analysis of “big data” to analyze events and trends and discover insights in various domains. Recently developed technology supports processing massive amounts of data with distributed computing to accomplish analysis in a reasonable amount of time at a fraction of the cost of traditional methods. For most companies, this means processing using a cloud computing service.

The decision to use analytics should be based on careful consideration of the available data and the value of the potential insights. This should be accomplished with the support of an analytics expert who can provide insight on what can reasonably be expected and the cost.

Internally, there are sources of critical data such as actual sales, or sensors on equipment or transport vehicles. Capture and analysis of these data is important to understand circumstances related to the particular enterprise.

For external events, it may be very difficult to get event notices directly from the source. For example, competitors are not going to provide event notices that enable the enterprise to monitor their activities, or if they did, the events might not be a true representation of what is happening. So, we need to look for consequential or precursor events—events that precede or occur as a result of the root cause event. For competitor events, we might look at product announcements or patent applications, which are much less likely to be misrepresented and more likely to be accessible. Analytics may help discover some of these events or trends that are not immediately obvious from looking at the data.

Some observations will be duplicated, coming from different observers. Some represent different events resulting from the same root cause. Some event notices are simply ignored if the frequency becomes overwhelming. Consequently, we need to analyze what events are really needed and which event notices should be shared for different purposes. For example, an increase in the price of crude oil results in increases in costs of materials and transportation and may result in a reduction in demand for certain consumer products or services. These consequences may be relevant to a number of different enterprise activities. Some of these relationships may be addressed by CEP, discussed below.

Depending on the industry, there may be existing sources of important events and circumstances. For example, Neilsen (http://www.nielsen.com/us/en/about-us.html) captures massive amounts of data on current retail sales and television viewing (among other things) from countries around the world and can also provide various analyses of these data. Such sources of external data and analyses should be considered in lieu of development of analytics for a particular enterprise.

Complex Event Processing

CEP is a technology resolving some of the uncertainty of event notices and for inferring events from other events and the surrounding circumstances. A CEP service is both a subscriber and publisher of events. For example, the National Association of Securities Dealers (NASD) monitors news feeds to analyze the relationship of company news events to stock trades, to identify potential insider trading and fraud.

Recipients of notices should deal with various ambiguities, redundancies, and credibility of the event notices they receive, particularly from external sources. Generally speaking, the recipient of an event notice should perform some form of correlation and filtering of events to avoid unjustified or duplicated resolution activities.

It may be appropriate, given a certain magnitude of consequences and business risk, to initiate a response immediately, even with an event notice of questionable credibility. However, such a process should be designed to take into consideration later event notices or the absence of supporting event notices at certain points in the subsequent activities. These considerations cannot be programmed into a CEP system but must be part of the business logic of the resolution process.

Inference of an event relies on timely and accurate information on related events and circumstances. If the conclusion is to be based on the occurrence of two independent sources of event notices, there must be allowance for different delays in the delivery of the event notices. If the inference depends on related circumstances, there must be accurate and up-to-date information about those circumstances. The inferencing mechanism and event specifications must take these timeliness and accuracy factors into consideration. It is likely that the result of the inference can only be a probability that a particular event has occurred. It may be appropriate to publish an event notice only when the probability exceeds a particular threshold.

An approach is to capture and retain a sequence of events for a period of time or a number of events for each event source or stream. Thus the sequences of events can be viewed as relational tables. An SQL-like query can join entries from multiple tables to find combinations of events that would suggest the occurrence of an underlying event of interest. This allows corresponding event notices to be considered together, even though they may have been received at different times. These queries can potentially include information about related circumstances. With special tools, queries can be implemented such that they are applied continuously as event notices are received.

At this point, it would appear that CEP is primarily applicable to specific areas of concern such as fraud detection or security threats where there is a fairly focused domain of expertise and relevant events and the value derived from the inferred events is high. It essentially performs as a real-time expert system. At the same time, some of the analysis capabilities anticipated for CEP may be accomplished faster and at lower cost by analytics.

Internal sources of events are more controlled, and it may be effective to infer underlying events more directly, possibly adjusting for differences in timing. For example, warranty claims might be correlated with production events if the event notices are aligned based on the production date of the product. In this case, the receipt of warranty claims might trigger efforts to prevent or mitigate the consequences of similar production events. This, of course, requires a long history of production events.

Events may be captured and stored in a data warehouse; many enterprises already have such data warehouses for certain categories of events. Data mining is applied to data warehouse records to discover patterns and relationships that occur over time.