By Christopher Rollyson Jim Champy, author of many management bestsellers, including Reengineering the Corporation, led a fascinating discussion 18 April 2006 at Chicago’s Standard Club, sponsored by Perot Systems. Beginning with the presentation, “Doing Business in a Flat World: An Exploration of the Next Era in Globalization,” Jim gave attendees an invaluable perspective on how executives needed to reengineer reengineering for the knowledge economy. He highlighted past transformational efforts in the industrial economy (the original reengineering) and focused on how to achieve change in the knowledge economy. As usual, I will summarize key points of the discussion first and follow up with my insights.
Reengineering: 20th Century
In the 80s and 90s, reengineering helped businesses improve their business processes. For example, an insurance company regularly required 24 days to issue a policy because 13 departments were involved, each of which had optimized processes for itself, not the enterprise (or the customer). In fact, to issue the policy took ten minutes of actual work; the rest was administrative time. Today, business models of the industrial era are becoming obsolete, but most companies haven’t yet changed how they manage their businesses. A default method of drastic organization change, often employed by IBM and many others, is to implement large-scale layoffs and let the remaining people figure out how to streamline processes.
Reengineering: 21st Century
Today, innovation is vital to managing a business because continuous change (process refinement) isn’t enough. Innovation usually entails breaking the mold in some way. Consumers are far more demanding today because they have increasing information at their disposal. For example, Jim shared his personal experience with buying an unnamed “German sports car” by looking up the list price online, sharing it with the dealer and executing the sale in a few minutes. He illustrated the problem of the out of synch company by referring to GM and Ford, which are notorious for many levels of management. Japanese carmakers have flattened their structures and consequently innovate far more quickly. Competition is relentless. Consumers are getting accustomed to the “More-with-Less Economy” in which they get higher quality products and services for less money. Former Federal Reserve Chairman Alan Greenspan has stated repeatedly that economists don’t yet understand the impact of the productivity increases we are experiencing.
The More-with-Less Economy
The More-with-Less Economy poses challenges for 20th Century producers. For example, having low costs is table stakes, and restored pricing power will be the exception to the rule. Innovation (he cited Doblin extensively—for more, see Innovation and Interaction) will be required to thrive because it is a way to achieve widespread change. Returning to the insurance policy above, many corporations labor under business processes that are bloated with administrative cost (health care, anyone?): ten minutes of work that requires 24 days (say, that’s 34,550 minutes for administration and 10 minutes for the actual work!). Therefore, new entrants have a lot of room to deliver for much less. It’s an understatement that executives need to manage differently now: we are at an inflection point. They must focus on cross-boundary reengineering, across departments and outside the enterprise.
Another group of drivers for imminent discontinuous change will spring from the 3 billion people that comprise the emerging consumer markets in Asia. Already, Asia has burgeoning pockets of consumerism, and these will accelerate over time. Work crosses boundaries with less friction all the time, and new capabilities are emerging every day. These capabilities will give astute companies the opportunity to reorganize themselves.
Innovation at the Business Model Level
Will executives have the appetite for radical operating change? Jim gave us an example of SwissAir, which couldn’t see its unique assets and opportunity to innovate at the business model level by focusing on passenger and crew experiences. They went bankrupt and ended up re-launching as Swiss, which is now largely owned by Lufthansa. Business model innovation must focus on strong value propositions for customers who leverage information transparency in the “More-with-Less Economy.” Although ideas are important in a value proposition, Jim strongly feels that execution is what gives a business sustainability. He presented a “differentiation value curve” (from least to most differentiation): price > speed > quality > service > customization > variety > innovation.
Here are some examples of innovative business models:
- Lean—The Minute Clinic‘s operating principle is leanness. Employing mostly R.N.s at locations within (mostly) pharmacies, they diagnose common illnesses right away, and prescriptions are filled immediately. Their tag line gets to the point: “You’re sick. We’re quick.”
- Value beyond the product—Bass Pro Shops pampers their customers to an amazing degree.. and customers reward them by paying top dollar.
- Leverage processes and technology—Zip Car‘s value proposition is offering automobiles as a service. They enable, in effect, shared car ownership in a seamless fashion. Members reserve cars via the Internet, and everything is in the package at a reasonable price. It’s another example of “appealing to a higher value” (below) as Zipcar talks about “liberating” city dwellers from the costly car ownership model. Check out their comparison calculator.
- Appealing to higher value—some propositions appeal to a sense of mission beyond profits. For example, Tata Motors is making a “car for everyone” (which reminds me of the $100 laptop) that will cost a $2,200 and is projected to go into production around 2008 (see Sidebar).
Some guiding principles for innovation are:
- Beware of long adoption curves. Although many of these ideas seem obvious, experience tells all people who listen that the adoption of new ideas is always longer than one expects. To whit, many of the Internet companies that were born in the Internet Boom had solid value propositions, but they discounted the length of time required for adoption.
- Don’t confuse individual behavior with corporate behavior. In general, it is far easier for individuals to change their behavior than for corporations.
- Be sure the idea is scalable. When you’re dealing with a global market that is far more diverse than previous markets, you need scalability and adaptiveness.
- Drive some level of standardization. You can manage complexity and achieve adaptiveness by standardizing where possible. Dell’s mass customization is an excellent example of this.
- Digitize as much of your process as you can. Paper is static and invisible from a global standpoint; however, digital documents are searchable (and able to be found) anywhere in the world (even out of the world).
X-Engineering
X-Engineering is defined as “..the art and science of using technology-enabled processes to connect businesses with other businesses and companies with their customers to achieve dramatic improvements in efficiency and create new value for everyone involved.” Some of its key principles are transparency, standardization and harmonization. Trust underlies everything (because it’s crucial in collaboration). Choosing partners with whom to collaborate is difficult, but recognize that most partnerships don’t work. To succeed, you need compatible beliefs, complementary products/services, the ability to create new propositions and the power to eliminate redundancy. Jim shared with us some business model concepts, “flat world opportunities”:
- The delivery of discreet, repeatable business processes on an on-demand, transactional basis most likely enabled by or delivered over the Internet.
- An IT and business process outsourcing company, with a real global delivery model: the ability to deliver with scale on-site, on-shore, offshore, and nearshore services.
- A business software provider that supports simple, elegant operations processes, at low costs.
- A real offshore, IT infrastructure utility (scale).
- Almost anything that has to do with healthcare administrative and clinical services and that changes how services are managed and delivered (e.g., build a global healthcare information utility using search engine capabilities).
- A manufacturing company that begins with quality products but that also runs with a superb set of processes, deeply linked to the processes of its customers and suppliers, running on the principles of transparency and collaboration.
- Any of the above business models, but selling back into the countries where the playing field has been “leveled” and that represents new markets and new wealth of 3 billion people.
Analysis and Conclusions
- The knowledge economy (“flattened world”) challenges all the assumptions of the industrial economy, which does not mean that everything changes. Rather, smart leaders will reexamine long-held assumptions and principles to see whether they still apply in the same way they did before. Some things just no longer apply, while others are relevant in a different way. Of course, this includes management tools and approaches, and Jim’s talk reflected this. Reengineering itself must be adapted to the knowledge economy. For example, the old reengineering focused mostly on process improvement, while the new focuses on innovation.
- In the 80s and 90s, reengineering helped to change the corporation within the context of itself, which made sense because the industrial enterprise was the locus of attention. The industrial enterprise developed and thrived in an era of scarcity (products, food, health), and therefore producers had the most influence in the market. Today, people in the world increasingly live in an era of plenty, and therefore the influence in the market has shifted to the consumer. Imagine how many business decisions embed the assumption that the producer has the upper hand. I’ll wager most of them.
- My favorite of Jim’s Principles was: “go for businesses that take work out of companies rather than businesses that try to change how companies do their work.” Reading between the lines here, discontinuous change is required because the amount of change is too great for continuous change. Therefore, don’t try to do the reengineering of the 80s and 90s, even though that may be more comfortable, because it won’t be enough. In addition, expand your vision outside the enterprise because innovation thrives on the dynamism that results from diverse points of view and practices coming together. Of course, that means extensive collaboration with partners (some would even say “pervasive outsourcing” ;-).
- Tata Motors’ “peoples car” represents a price point that is orders of magnitude less than other carmakers’ current offerings. In addition, it will be “the first car” for many people in emerging markets, giving Tata the opportunity to imprint customer experiences with millions of emerging market customers. This is a textbook example of why multinationals cannot stay out of emerging markets: they represent a precious R&D opportunity to learn how to engage tomorrow’s customers.
- The productivity increases behind the “More-with-Less Economy” are driven by the shift to the knowledge economy. In the industrial economy, companies differentiated by changing product features, which often meant changing the alloy, design or manufacturing process. These things are difficult changes because they involve “bits,” real physical materials that impose constraints on what can be done and how. In the knowledge economy, companies create differentiation with information, which knowledge workers organize and apply as knowledge. In most cases, it is far easier to change information about a product (“bytes”) than it is to deal with the “bits.” Information is far more scalable and change is more rapid. From a macroeconomic perspective, knowledge workers create more change more quickly, hence more differentiation and value.
- X-Engineering is sorely needed due to its focus on cross-enterprise boundaries. In my opinion, decreasing e-collaboration costs will increasingly pressure enterprises to forgo their tightly coupled business processes in favor of loosely coupled processes. Outsourcing is a paradigm in which to transition to loosely coupled processes. This is a very difficult proposition that will require much innovation and—you guessed it—unparalleled collaboration, to the point that the very definition of the “enterprise” will morph from a centralized command/control structure to a decentralized networked, collaborative one.
| Sidebar: McKinsey Interview with Tata Group’s Ratan Tata |
| McKinsey: On the development of a people’s car that would sell for 100,000 rupees. What’s the thinking behind it?
Ratan Tata: It is propelled by the opportunity, but there is also a social or dreamy side to it. Today in India, you often see four people on a scooter: a man driving, his little kid in front, and his wife on the back holding a baby between them. It’s a dangerous form of transformation… If we can make something available on four wheels—all weather and safe—then I think we will have done something for that mass of young Indians. |
| Excerpted from “What’s next for Tata Group: An interview with its chairman,” The McKinsey Quarterly |
By Christopher Rollyson The emerging knowledge economy will reconfigure the role of discovery in innovation in some surprising ways. First, a couple corollaries:
- For most of the history of mankind, information has been scarce, and an important way that people innovated was through discovery. In agrarian and industrial economies, it was extremely important to discover new ways to transform raw materials in order to create new products. Since people lived in relative isolation compared to today, there was significant duplication of discovery efforts in pockets around the world.
- The pervasive TCP/IP network (i.e. Internet), combined with accelerating adoption of modern architectural approaches (i.e. service-oriented architecture) and messaging (Web services and XML) is unlocking the world’s data/information as a dizzying pace. It’s a cliché that we have too much information, and this trend shows no sign of abating. Moreover, software tools for automating the management of information are improving all the time. Of course, this development gives people an unprecedented ability to collaborate—on everything.
In the knowledge economy, discovery gets leveraged, pervasively and instantaneously. Discovery will remain extremely important to creating value, but I’m going to argue that it will play a cameo role in the hyper-innovation knowledge economy: crucial but supporting.
Anyone attending innovation conferences and seminars will tell you about a persistent refrain emanating from enterprises with world renowned laboratories: they roll out patents at a torrid pace, but commercialization of the discoveries remains a consistent frustration. Very few of their patents create business value. This is true irrespective of industry or country.
The commercialization process will be the innovation mother lode, from electronic gadgets, to pharmaceuticals to space lichens. Commercialization means making a new discovery relevant to customers and creating a process to fabricate (if product), service and introduce it to customers, in an efficient way. These are all areas in which groups of inter-connected knowledge workers, collaborating at an unprecedented level, can achieve a quantum leap in value creation.
But there’s a catch. Companies must reorganize themselves, in structure, attitude and habit. Large industrial enterprises have traditionally managed risk by controlling variables. Because they have large tightly coupled structures, they must constrain change within the limits that their structures can accept. Structural realities and limitations have imprinted employees with formal processes and methodologies.
Does this sound like fast-moving, dynamic spontaneous energy that can be focused on fulfilling customers’ whims? Exactly.
Transforming how the employees of a global enterprise interact to create value is a daunting task, but it’s eminently doable. Some of the secrets are encapsulation, delegation, collaboration and abstraction. In brief, encapsulation enables activity to be differentiated and organized within “pods,” which operate without external micro-management. Pods have specialized competencies and are responsible for producing something, but the approach they take is up to them, which gives them the freedom (and responsibility) to create and innovate. Of course, pods collaborate with other pods to get something done. This structure is very flexible. Pods can exist anywhere in the world, inside or outside the company.
Delegation is a concept that everyone’s familiar with, but it bears mention that, when one pod asks for a service to be performed, it specifies what it needs and when it needs it, and relevant pods respond and organize themselves to get it done. Delegation does not focus on specifying how the job is to be performed because the how is encapsulated within the pod that said that it could provide the service.
Management needs to become a brain.
Now, abstraction. In command/control environments, management typically gives literal (that is, not abstract) direction for what gets done—and often how things get done. This approach can theoretically be workable in relatively static environments in which change is slow. In the hyper-dynamic knowledge economy (and I postulate that we’re still in the initial stages of acceleration), management can’t know the optimal process to get something done because capabilities and conditions are changing too fast. In the self-organizing world, requests are made in standardized formats, and pods respond in standardized formats, so that communication is pervasive and consistent. Pods know what their specialties are and what services they perform. They only respond to appropriate requests.
It bears mention that this is roughly how the human body is organized: the brain doesn’t instruct lymph nodes on how to fight a disease or muscle cells how to deal with lactic acid. It just receives and sends messages, and only cells that are relevant to that particular message respond. This is a way that enables the body to excel in a tremendous range of activities and circumstances. The brain would be overwhelmed if it had to micro-manage all the body’s systems and how they did their work.
Having been closely involved with enterprise transformations for years, I realize that this proposition will be difficult for enterprises, but the rewards will be many (they include survival ,^). Moreover, the journey can be iterative—it need not be a big bang—the new can coexist with the old as it replaces it.
By Christopher Rollyson China Analysis and Outlook 2006 reveals an emerging opportunity to rebalance economic and political influence.
 Part II of the 2006 Economic Forecast featuring David Hale (presented Part I) and Lyric Hughes-Hale. Here, I present my notes of Lyric’s talk, followed by my observations.
- Background: China’s development and situation are far more complex than U.S. news sources report. It has seen significant economic liberalization during the past 25 years, and it shows every sign of continuing on that trajectory. However, the country is politically conservative. There is no freedom of the press. That said, the authoritarian government may produce reform much more quickly than if China had been democratic because the democratic process often slows reform. China is far more open and engaged on the world stage than it has been in many years.
- Continue reading China Analysis and Outlook 2006
By Christopher Rollyson 
SMA 21st Annual Economic Forecast 2006 is my coverage of the SMA/Harvard Club annual confab featuring David Hale and Lyric Hughes-Hale
The Strategic Management Association and The Harvard Club jointly sponsored the Economic Forecast 2006 featuring David Hale and Lyric Hughes-Hale. David presented his encyclopedic knowledge and perspective on global economic trends, while Lyric shared her insights on China in Part II of the evening (she was the founder of China Online and has focused on China for several years.).
As usual, I present my notes, followed by my insights. Here are my notes from David’s presentation (Part I of the meeting). Continue reading SMA 21st Annual Economic Forecast 2006
By Christopher Rollyson Adam Hartung of Spark Partners led a compelling and thought-provoking discussion at this month’s MITEF meeting on 14 March in Chicago. Adam is a veteran of a bevy of management consultancies and large corporations who has spent the last four years researching a hypothesis about innovation, writing a book (The Phoenix Principle) and consulting. His observations are straightforward, profound and potentially healing for industrial economy companies.
Summary of the Meeting and Discussion
- “Lock-in” is a corporate phenomenon that is fatal for organizations because it prevents new thinking.
New thinking is increasingly important because the market is more volatile than ever. Lock-in happens in a cycle: in its formative stage, the corporation experiences success, and success “hardens” into a success formula; it leaves an imprint on executives, workers and customers, who all identify with the success. Of course, the problem arises when the market moves and nullifies some key assumptions that are embedded in the success formula. There are three types of lock-in:
- Behavioral lock-in: group-think, not invented here; slow decision making; rigid ideas about customers and products; sacred cows. Profits from financial manipulation.
- Structural lock-in: many, but one stood out–“biased toward easily quantified, traditional actions and against more speculative ventures.” Tightly integrated processes; relentless focus on process excellence; creative financial accounting.
- Cost lock-in: costs always increase in real terms and are difficult to escape beyond a certain point without cutting innovation.
- Lock-in is very hard to change, and it is the cause of death of many (most?) corporations. Adam cited many well-known statistics about corporations’ short tenures as members of the Fortune 500. Today, bankruptcies are at an all-time high in number and size. The most arresting statistic related to a symptom of lock-in—stalled growth—which he defined as zero/negative growth, either in two subsequent adjacent quarters or in subsequent quarters year over year. Only 7% of stalled companies ever produce 2% or greater growth again, and 70% lose 50% or more of their market value.
- The concept of lock-in is deceptively simple, but it’s a widely applicable. Individuals are locked into their success formulas, as are universities, government and any type of organization. For example, a sacred cow of management education is the “S curve,” which holds that an innovative product experiences nearly vertical success before the slope of the curve diminishes. The rationale of product extensions is to create successive S curves, all feeding off of each other, and this is a myth.
- There are 3 kinds of leaders: stabilizers, explorers and adapters. Each is valuable for various stages of the company’s life cycle.
- Another key concept is “Defend and Extend,” which is invoked when growth starts to falter. The success formula is harshly inflicted on the organization in fierce determination to maintain success. The company tries to defend its market leading position by replicating and extending the formula, not by innovation. Investment in game-changing innovation is pared back because they can’t meet the investment criteria that were established in the company’s heyday.
- Product life cycles are not nearly as durable as they are held to be (this one is close to my heart): Lock-in justifies itself by exaggerating product lifecycles and extensions. Some stats: 86% of new products are extensions, and they produce 40% of profits. 60% of profits come from the 14% of the products that are truly new.
- “The Phoenix Principle” is an approach for rectifying this situation:
- Don’t defend and extend: distinguish between “the challenge” and “the problem.” The former is more externally focused, as it embodies the market’s new demands and a new context in which the company’s product/service is consumed. The latter represents the company success formula’s lack of alignment with the new demands. By focusing on the external, the company aligns itself with customers; the latter is a ticket to demise.
- Attack competitors’ lock-in. Everyone with corporate experience knows that the proverbial “three leaders” in a market often move in lock-step; they often have collective lock-in. But any competitor with the insight, discipline and skill can innovate. He proposes using that to advantage, citing Domino’s, Encarta and Casio as examples.
- Explicitly use disruption as a way to eviscerate lock-in. Groups imbued with lock-in are comprised of individuals that reinforce each other, and it’s critical to interrupt this by exposing the lock-in.
- Finally, use “white space,” which is permission and resources to innovate. To succeed consistently, innovation requires commitment, but it has to be managed by using actionable milestones. Notably, measurement has to be of a different standard, but it has to be real. White space projects must involve new people from the outside. Obviously, you want a strong element of explorers involved.
Additional Insights
“The Phoenix Principle” is valuable because it explains the problem of what I call “industrial economy” thinking in a powerful way and in some detail. Abstracting up a level, it becomes a way to manage the inherent tension between efficiency and innovation. As decision makers, we all face the challenge of when to accept that a “success formula” has outlived its usefulness. Of course, formulas are useful tools, and they’re hard to give up. At a simplistic level, life cycle management of a company, a product or a country revolves around optimizing efficiency and innovation. Too much innovation would not make a company competitive, either, and striving for efficiency using yesterday’s context rapidly becomes a disadvantage. This tension is also directly applicable to natural selection and survival in a literal sense; all competitors in a system are faced with the pressure to adapt.
A related issue is that industrial economy companies have traditionally meant large, complex organizations. In practice, their size has mandated long life cycles because it takes a long time to get all parts of the organization to understand and support the company’s competitive advantage in a coordinated way. In being tightly coupled, their processes do not inherently support discontinuous change very easily.
If information exchange has as much of an impact on life cycles as I hypothesize, the continued increase in information flow may prove that the large organization itself is an outmoded success formula. This is something that will be discovered in the years ahead, as we seek to apply rapidly changing technology capabilities to business process to drive competitiveness. Technology has the potential to change the rules of efficiency.
This is why outsourcing can be such a powerful strategic tool for transformation. It is an idea and approach for collaborating with a partner that excels at a task or process while saving money or creating productivity gains. However, organizations typically don’t approach it as a way to collaborate; their goal is usually efficiency or operational excellence. But those organizations that develop widespread competency in collaboration will have the means to optimize efficiency and innovation as market conditions change. They will be able to tap into competencies outside themselves in a seamless way.
To return to the talk, this discussion gives us a construct with which to ask ourselves, “What is my company’s success formula, and how are we locked in?” I don’t believe that being locked in is a binary proposition: there are always shades of gray. Following the natural selection example, adaptation always involves figuring out what about our experience we can harvest and continue to apply in the present, what we must reject, what we must adapt, and what we must invent. In the context of organizational change, however, Adam’s point is well taken: it’s very difficult to support transformative innovation within the context of lock-in due to the disagreement about when and how we should abandon the success formula. Defend/Extend will always rob resources from innovation because more people (within the company) agree on traditional values. Lock-in has to be identified and faced.
This is a simple concept but it will undoubtedly surprise you if you focus it on organizations you might not think of at first, like sports teams, countries and other institutions—or even yourself!
By Christopher Rollyson Surprises in the Emerging Chinese Consumer Market highlights the Internet-powered practice of consumer collaboration and group buying for discounts.
“Chinese Consumers Overwhelm Retailers with Team Tactics,” The Wall Street Journal, February 28, 2006 is a perfect example of how mature market assumptions can lead to surprises in emerging markets. Chinese consumers increasingly meet on the Internet chat rooms to plan and coordinate a group buying strategy for a type of good or even brand. Then they go to the retailer as a group to extract significant group discounts. This practice is known as tuangou, or team purchase, and can play havoc with companies’ pricing strategies and margins, to say the least.
Continue reading Surprises in the Emerging Chinese Consumer Market
By Christopher Rollyson The American Marketing Association Chicago Chapter held its Power Lunch round tables, 23 February 2006 in Chicago. I hosted Technology and Strategy tables, where marketing leaders from Fortune 1000 companies, startups and service providers exchanged impressions about emerging marketing trends and techniques. Here are my notes from the discussion.
By Christopher Rollyson Insight about Human Resources in China featured speakers with decades of experience on the ground in China and offered surprising experiences. The GSB (Booth) International Round Table hosted two Asia and cross-cultural experts 16 February 2006 at Gleacher Center, “Human Resource Challenges for Multinational Corporations in China.” As is my custom, I will summarize the salient facts of the session first, which will be followed by my analysis.
This discussion was led by Deborah Lauer, former VP Global Talent Supply at Motorola who spent six years in China, and Jeffrey Reed, a 20 year veteran of Asia who headed up Unilever-Best Foods joint ventures in Pakistan and China. The talk focused on MNCs’ (multinational corporations) human resource challenges in China, both from expatriate and local talent perspectives. Many of the ideas presented corresponded to the ITA Round Table led by Dr. Wolfgang Fürniß (see China: The New Economy).
Continue reading Insight about Human Resources in China
By Christopher Rollyson In the post-Internet-boom period, it’s easy to forget about some old friends, so here I thought I’d drop in and revisit e-commerce…
 The old joke about commitment being like a ham and eggs breakfast certainly applies to producers (of goods) and consumers in the industrial economy. The punch line is that the chicken (consumer) is involved, but the pig (producer) is committed.
A large part of producers’ inflexibility today is due to the fact that they are committed to bits (as opposed to bytes) at all stages of production and distribution: inputs, inventory, safety stocks, unsold goods, returns “… the whole catastrophe,” as Zorba says. These commitments are, in many cases, more important to producers than putting the customer first, and they represent a critical barrier to industrial economy companies’ intimacy with consumers because companies must sacrifice customer needs to maintain their operating realities. (For more on this, see Transformation: from Self-contained Company to Networked Global Organization.)
E-Commerce is steadily liberating producers from this dilemma in many categories. Let’s take a banal example. Probably most readers have shopped at “Earth’s Biggest Bookstore.” For many people, it defined the e-commerce experience. From the comfort of one’s own desktop came almost limitless variety; in the consulting business myself in the late 90s, it was integrated into my workflow. On engagements, books were mentioned, and they were ordered instantly, delivered next day. There was virtually no possibility that the book was not available. Since those early days, it has only gotten better because used books are integrated into the offering. Virtually no book, CD or DVD is out of print anymore. “Foreign” products are also increasing, although outmoded licensing/distribution agreements put a damper on a truly global market.
Changed Expectations
The point is, once consumers experience predictable sales and self-service on-line, their expectations are fundamentally changed. Suddenly it is intolerable to call the phone company and be transferred to innumerable departments after being on hold for who knows how long to change one’s address or to rectify a billing issue. One thinks, “If they can help me to do these things almost instantly whenever I want, why can’t the others?” This is not intimacy yet, but it empowers the consumer to service him/herself, a very powerful change in the provider/consumer relationship. For one, it is more collaborative. It gets the consumer more involved in the business process; there is no longer a human intermediary in many cases; the consumer interacts directly with the producer’s systems.
Changed Economics
From a product perspective, Chris Anderson’s The Long Tail makes an excellent case for a revolution in product life cycles. He shows the economics of “hits” and campy exceptions. One of his key ideas is that, due to the burden of the distribution of bits products, enterprises could not afford to support or market products that had no chance (based on focus groups and marketing analysis of similar products) of becoming mainstream, huge hits. Anyone in the business will tell you that distribution, returns, shrinkage, breakage and capital costs of bits products are huge. Distributing La Mina to record stores across the U.S. is not worth it because there are not enough Europeans to recognize and buy it. More poignantly, India has very vibrant film and music industries, and there are many Indians in the U.S. However, distribution costs prevent retailers from carrying any of the titles because a store only pulls from a small radius around its location, and the density of Indians is insufficient, save for a few pockets in Silicon Valley. On the Web, however, millions are sold nationwide, profitably, by aggregating demand because shelf space and distribution costs are minimized. The distribution center can be in a rural area where land and labor are cheap. In this scenario, shelf space is infinite; the producer/publisher has infinitely long to make its nut of 100,000. I highly recommend The Long Tail blog while you await the book, which will come out this year. It’s out; see our review.
For many bits products, this fact aligns producers and consumers because it frees producers from the tyranny of retail and distribution costs. Distribution cost is largely variable cost incurred at the time of order, and often paid by the consumer. Of course, the e-commerce model does not work for all products and services; it excels especially with highly standardized products and services. But that includes many products that consumers buy. I expect its portion of total consumer products to increase steadily.
Another instructive example is Dell Computer, which makes products to order and gets paid by customers before it pays its suppliers. Of course, it is not feasible to make everything to order, but many products could be that are not today. Some potential examples: consumer electronics, furniture, cars, and even certain apparel items.
E-Commerce is such a fact of life now that it’s easy to take for granted. However, it’s unleashed profound changes for consumer experience that are rippling through the economy. For one, “retail” is held to a higher standard because technology-enabled service is so much better for many things. The “Long Tail” phenom is a solid indication that ownership cycles and values will be completely changed because, as each generation does more on-line, the secondary market will flourish.
By Christopher Rollyson A blog is not like a plant of the desert variety; it needs watering more often, so here’s an excerpt from my imminent Market Advisory on the marketing tectonic shift:
The Mirror: Customer Experience and Intimacy
We will see more changes in marketing practices from 2006-2015 than in the rest of the profession’s history because marketing will be the vanguard for the shift from an industrial economy to a knowledge economy, which will demand competence in all encompassing customer experience in order to achieve differentiation. Similarly, the globalization of markets is accelerating: emerging markets will represent extraordinary potential, but addressing them will demand unprecedented innovation. In a bright spot, ongoing CRM and BI initiatives, combined with continuing standardization of architecture (SOA) and messaging (Web services, XML), will begin to deliver the proverbial 360° view of the customer.
The Customer Experience Imperative
The customer experience will be mandated from producer and consumer quarters. Consumers have product fatigue. In many categories, there are too many choices with little differentiation save price. Producers will have unprecedented information, which they will explicitly use to create experiences. In fact, no consumer wants a product or service anyway; rather, consumers buy products and services in order to have emotional experiences through products or services. By making “customer experience” a strategy, leading edge marketers will try to differentiate themselves by explicitly helping customers have experiences. The quintessential example is Starbucks, which does not sell coffee; it offers a European coffeehouse experience with fast food economics and predictability. The explicit customer experience focus is a megatrend that will transform business itself and usher in the knowledge economy because the differentiating value will be the information and presentation of the product/service, not the product/service itself as in the industrial economy.
In many western countries, the height of the industrial economy was in the 1950s and 1960s. In the U.S., wartime industries were retooled for making consumer products (although far less so than after prior wars due to the Cold War). Boomers, whose parents had gone without during the war, unleashed their pent up demand. Television offered a then-cutting edge means to reach customers, and marketing as a profession developed quickly. The focus of marketing was on selling (manufactured) products to customers and, later, to “demographics.” Marketing has generally remained product-focused rather than customer-focused. Marketers have focused on gathering and synthesizing better consumer information in order to produce more targeted profiles to which companies can market.
Marketing is due for discontinuous change. In being the closest discipline to the customer, marketing will be the conduit through which business itself will morph from product-focused to customer-focused. This will unfold within the decade as the result of two key forces: customers are empowering themselves by getting product information and connecting with other customers via the Internet. IT is delivering increasingly sophisticated systems that will enable companies to optimize efficiency with being customer-focused.
Critical IT Enablers: CRM and BI
Marketers’ focus on customer experience is emerging now because CRM (customer relationship management) and BI (business intelligence) investments are starting to make it possible. Helping customers to have experiences is a fairly intimate proposition. It requires knowing the customer, but that has not been a scalable goal from a corporate perspective. Enter information technology. CRM attempts to gather information about customers that companies can use to determine what their experiences are, what affects those experiences and how companies can organize processes to increase pleasurable experiences (avoiding undesirable experiences isn’t bad, either ;-).
The concept is that a customer’s interactions with the company are inputs to the CRM system: calls, purchases, returns, responses to promotions and advertising: any measurable unique data. These are gathered and synthesized so that the company can track patterns that can be combined with other customers’ experiences from which the company draws conclusions about consumer experience in general or for a certain demographic. BI focuses on interfacing with any kind of data repository, synthesizing data and presenting information in an actionable way so that decision makers are more effective. Together, these systems attempt to create a mechanized facsimile of intimacy. It’s the only kind that’s remotely scalable.
The 360° view of the customer is still years away from most enterprises despite significant CRM and BI investments, but it is drawing steadily closer as capabilities increase and bridges are built among islands of automation (isolated systems). SOA and Web services make it easier to exchange data among various disparate systems, consolidating myriad instances of customer information that still exist (billing, service, sales systems all have separate records on you, and they don’t match).
However, having the 360° view is not even half of the battle. The truth is, knowing customer likes doesn’t do any good by itself; the company must be able to act on the knowledge. Keeping in mind the company’s trade-off between efficiency and customer delight, it must then engineer business processes to empower employees (or agents) to respond to the customer information. Information without action effects no change. This is a much more difficult proposition.
The Inherent Conflict between Efficiency and Customer-focus
One reason that companies will have a problem with the transition to customer-focus is the intrinsic dilemma between efficiency and innovation. According to Ronald Coase , the godfather of transaction costs, the economic rationale for the enterprise is its ability to deliver products and services in a superior way by controlling business processes within the enterprise, which is the legal owner of the process. For most of the history of the enterprise, “superior way” meant good quality at a lower cost. Efficiency was the hallmark of the enterprise during the industrial economy.
Being customer focused conflicts with efficiency. “I want to be treated like a person, not a number,” thinks the consumer, but a machine can’t treat the customer as a person. Only a person can do that because only a person can care and have an emotional relationship with another person. Shopping at your favorite boutique or bookstore used to give the customer that feeling. Overall, however, customers continue to vote for efficiency with their pocketbooks: independent stores continue to fail in increasing numbers.
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