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25 May 2007
The Internet, E-Business and Web 2.0 in Context
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 Web 2.0 and social networks readily appear as hype, but I will argue that they are actors in a much larger drama, the emergence of the Knowledge Economy, which is currently in its third phase, Web 2.0 and social networks. By understanding the transformation of relationships among your customers and between your customers and your company, you will be in a much better position to guide your company through this area of tremendous change.
The Ascendance of the Knowledge Economy
The Knowledge Economy is a post-industrial economy in which value is primarily created through information, and differentiation is achieved by explicitly focusing on customer experience itself rather than on products or services. The life cycles of products and services will increasingly shorten. Leaders of companies with products and services who do not understand this face rampant commoditization from which there is no escape except through unprecedented innovation. We are in the third phase of the growth of the Knowledge Economy in which it is transforming relationships. Each phase is ongoing, but the emphasis shifts over time.
Phase I: Technology, 1969-1993*
Pervasive networks of computers are the infrastructure of the Knowledge Economy, and its Technology Phase was largely invisible to business, government and society. Computers used to be designed and run as self-contained systems that were not connected to other computers. Software ran on dedicated machines. However, distributed computing is a different approach that emphasizes networks and “distribution” of software and hardware. The Internet itself is an excellent example of distributed computing. Engineering was the focus of this phase.
Phase II: Business Process, 1994-2001
The Internet and Java burst into the public consciousness in 1994 with the release of Mosaic, the first popular graphical browser that became Netscape. It was free and enabled anyone to view text and graphics. It led to the World Wide Web, a vast collection of html documents. During Phase II, the browser also became the de facto interface for enterprise systems. Before this, customers had to have custom software to have any access to computerized information.
In Phase II, companies were focused on using this new communication medium to change their business processes. E-Commerce enabled many companies to “go direct” to external customers, and “e-business” was its B2B and internal cousin. Online product reviews were a novelty, and the concept became entrenched in many cultures. However, the communication largely went from company to customer. Very few customers exchanged information with each other.
Phase III: Relationships, 2002-2015?
The focus of Phase III is peer-to-peer (P2P) communication. According to Sam Palmisano, the CEO of IBM, one billion people access the Internet today, but this will double by 2011. The Internet is increasingly inculcated into cultures around the world. A generation of people does not know life without it. The Web interface is increasingly easy to use, and broadband adoption is accelerating.
The scene is set for the transformation of relationships. What do friendship and connection mean? People now have “friends” and acquaintances around the world based on highly specific interests. They create digital text, audio, graphical and video knowledge, while intermediaries like LinkedIn, MySpace, YouTube and Technorati help people to find content and people with the same interests. They connect, communicate and act collectively very quickly and easily.
Your customers increasingly have access to customer-created content, and, even more disconcerting, they often believe other customers’ opinions rather than your employees’ or “experts.” New sites review professional services as well as products: doctors, high school teachers, lawyers and hospitals are rated 1 to 5, anonymously or not. Increasingly, anyone can find and connect with anyone else irrespective of distance, culture or age: the currency is common interest and willingness to collaborate.
The rise of the customer voice will dramatically change companies’ relationships with their customers because P2P communication can rapidly change customer expectations. Customers’ perceptions of value morph faster than ever before—and it will surprise many companies. This new market volatility is an opportunity for the companies that are plugged into their customers’ experiences.
Your Customers Are Increasingly Your Message
Not so long ago, customers were fairly isolated from each other. In the B2B arena, they interacted at trade shows and professional associations, once or twice a year. They viewed your ads, read your thought leadership in journals and had lunch with your salespeople. Your marketers strongly influenced the information customers used to make purchasing decisions. The B2B world is very specific: a supply chain analyst for newsprint had a very limited ability to get geeky with her peers. Today, however, newsprint geeks have blogs where they interact with each other constantly and share ideas about any aspect of the market, which can serve to destroy margins.
The B2C story is the same: customers blog and video your product doing things you would never believe, and they share their frustrations with its shortcomings as well as its glories. They discover, share and expose the intricacies of its differentiation. This information is available to your competitors as well. This increased knowledge exchange is shortening product and service life cycles. Customer communication about companies’ products is increasingly affecting purchasing decisions.
Reinventing Customer Relationships
- As I wrote in “Web 2.0 Means Marketing 2.0,” astute leaders will get in front of these trends. The Knowledge Economy will reward those who evolve their attitudes and communications with customers:
- Customer-generated content can be a tremendous asset, but your marketers and their proxies must get comfortable with losing control. This is not trivial.
- Increasingly, your influence over your message will depend on your ability to be honest with customers and consider their needs before the needs of the organization (also see The Transformation Imperative). Customers will reward companies that do this.
- The Knowledge Economy is defined by collaboration—voluntary sharing and cooperation among people. Pyramids and top-down power relationships will endure in some cases, but collaboration will increasingly be the rule. It demands companies to encourage fairness, respect and curiosity above all else.
- Companies that collaborate with their customers will outperform competitors that do not.
- By respecting and being curious about customers’ points of view, you can engage them on a different level. When your company responds to customers without excuses, customers often become delighted, and they can become your advocates. They will go out of their way to promote your company to their friends and total strangers via their blogs.
- By helping customers to discuss your company and offerings without trying to control the communication, you will increase your credibility and magnify the impact of your offerings. To arrive at this point, you must acknowledge customers’ influence.
- Everyone fears unhappy customers and public criticism. However, in most cases, it is a golden opportunity. Andy Sernovitz, the founder of the Word of Mouth Marketing Association, cites these results: on average, for every one person whom a happy customer talks to, an unhappy customer talks to five people and a formerly unhappy customer who is subsequently made happy talks to ten people (for more, see WOM Marketing review). The economics are magnified greatly online, where problems and resolutions to problems are visible by millions.
- This transition must be approached with care, but it offers companies a rare opportunity to significantly improve their market position. For more on the transition, see “Consumer Empowerment—A Rare Innovation Opportunity.
Acknowledgements
Several months ago, I was having a conversation with Dave Smith at the Illinois IT Association, and Dave outlined these three phases so eloquently that it really clicked with the Knowledge Economy direction I was doing. Thanks, Dave!
12 March 2007 Web 2.0 Is Transforming Relationships Between Customers and Companies*
 I’ll risk using a hype-laden term like “Web 2.0″ in the title: I think most of us have been around long enough to understand that hype doesn’t mean that nothing is there, although it can distract us from seeing things that we should be watching.
I have been in the thick of the “adoption curves” of Java, e-business transformation and SOA/Web services (detail). They have been instrumental in creating a new information infrastructure and business process capabilities. “Web 2.0″ will prove to be the most transformational so far because it is changing relationships. It changes individuals’ relationships with each other, and it will change how companies and the customers relate to each other. It will demand “Marketing 2.0.”
Tectonic Shift
As I argued in The 3.x Economies, we are transitioning away from the Industrial Economy and entering the Knowledge Economy. In the Industrial Economy, companies created value by manufacturing products efficiently based on their core competencies, and they marketed products to customers. They also created and marketed services on a large scale. “Marketing” grew as a profession during the 20th century when supply began to outstrip supply. Its job was to “create demand” (for production capacity).
In the Knowledge Economy, agricultural and industrial products are still consumed, but most of the perceived value and differentiation is achieved by using information to create knowledge. Starbucks sells coffee (the product) but the differentiation is the experience of drinking coffee in a café (the knowledge is creating the experience of drinking coffee in a café, en masse and everywhere). Likewise, Apple sells computers and iPods, but its differentiation is creating and sharing digital entertainment experience. Even work (“we do that, too”) is a fun experience.
In the Industrial Economy, companies produced, and consumers consumed. Companies had more information about customer needs (in general, not about individuals), competitive solutions and substitutes. Superior information gave companies an advantage in the market over consumers. They are still accustomed to this.
Web 2.0 resources** enable individuals to create, find and share text, graphic, audio and video content, virtually for free, globally. Individuals are no longer isolated, and they can assemble, educate each other and become more proactive when, where and how they want, with few restrictions. Time Magazine recognized “You,” the Web 2.0-enabled individual, as its 2006 person of the year, reflecting this trend.
Individuals are getting advice from each other about how to create satisfying experience, and they often trust other individuals in online forums to give them the skinny on a company, product or service more than an expert or a company representative. Other individuals have cred because they are customer focused by default, and they are not tainted by having to make a buck. Moreover, their advice is vetted by other people in the community, who chime in with their experiences (using the product to accomplish something) and contradict advice that does not jibe.
Isolated individuals had access to very little specific knowledge, but today people assemble in smart tribes and can develop extremely valuable specific knowledge extremely quickly. In 2007, when I discuss this with corporate executives, they doubt its relevance because individuals have been isolated and ignorant. However, smart companies will aggressively experiment with tapping knowledge created by customer-to-customer interaction in Web 2.0 spaces. They will push to integrate this information into their discovery, marketing and innovation processes. Patty Seybold gets this: “The company with the smartest customers will win.” Help your customers become smarter, and they will educate you. Your innovation will outperform your competitors. Industrial Economy efficiency is increasingly table stakes, and innovation will increasingly drive value—and survival.
Marketing 2.0
Marketing 2.0 will be much more profitable than Marketing 1.0, which could not access the voice of the customer very easily. In Marketing 1.0, companies simulated understanding of customer needs, using limited data points from focus groups, point of sale data, surveys, etc. They used these to create demand models. They created new offerings and “innovated.” Results have been consistent: product failures have been rife in every industry, and innovation efforts have over a 90% failure rate. Prior to Web 2.0, reaching customers and integrating their knowledge into processes was not economically feasible. However, Web 2.0 communications are digital and asynchronous, which significantly reduces the cost of finding and exchanging information.
Customers interact digitally and generate user-specific information for fun: people like collaborating online, and solving problems makes them feel good about themselves. Marketing 2.0 will mix customers and providers in a new collaborative milieu. Of course, online collaboration has been around a long time in the form of bulletin boards, support forums and communities, but it has mostly been limited to techies. However, Web 2.0 will increasingly be mainstream—and everywhere. Combine Web 2.0 resources like social networks, blogs, YouTube and Flickr with mobility, and customers will communicate 24×7, everywhere, about every product category. Imagine point of sale reviews for all retail and wholesale.
Marketing 2.0 will continue to use Marketing 1.0 processes, but it will integrate the real-time, increasingly rich “voice of the customer” to dramatically increase the success of new offerings and innovation. Astute companies will develop action plans for 2007—and act on them. For more on action steps, see “Market Advisory on Consumer Empowerment.”
*A slightly longer version of the article that appeared in the Illinois IT Assocation’s Industry Weekly, March 12, 2007
**Web 2.0 is a bit of an amorphous term. It refers to technologies that promote P2P (peer to peer) interaction. However, these technologies are bundled into fantastically user-friendly websites like LinkedIn, MySpace, Flickr and YouTube. Intermediaries like Technorati and Del.icio.us help people find content based on their interests. Also see Wikipedia’s excellent entry.
10 October 2006
If you have started to get the feeling that something new and big is afoot in the consumer Web world, no, you’re not having flashbacks to 1997.
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 Web 2.0 is a new phenomenon that is beginning to realign the balance of power between producers/providers of products/services and customers because it enables customers to self-organize and wield unprecedented influence in the market. “Web 2.0″ refers to a group of (usually) free user-friendly Web applications like blogs, wikis, integrated video/phone services and social networking sites (more below) that enable individuals to connect, collaborate and concatenate with unprecedented ease. E-Commerce (doesn’t it sound quaint now?) first enabled consumers to gain a new level of information about products and services and, as adoption proceeded, to buy over the Web. That was “Web 1.0″ and it was still largely one-way communication because information flowed from the Web to customers. “Web 2.0″ is focused on letting individuals self-organize, interact, collaborate and be equal players in what aficionados call “the conversation” of the Web.
Before you B2B-focused readers yawn and turn the page, consider that this will turn mainstream customers into hackers, although not in a technology sense. As hackers collaborate and expose (or exploit) the weaknesses in (technology) products, customers will share information and expose all the shortcomings in all products and services. Until now, consumers have been a sleeping giant, but Web 2.0 will enable them to organize and take the initiative as never before. Smart companies will begin planning for this now; they will change their attitudes and processes to invite customers to help them provide superior customer experience. Companies’ prowess at engaging customers’ participation in discussing the nuances of their products and services will drive a major portion of competitive advantage in the next 5-10 years. It’s arguable that the customer participation is becoming the product/service in some categories.
The New Age of Hacking Everything
Global Human Capital will be sharing examples of customers’ “hacking” all kinds of services and products, and we invite you to bring them to our attention. For now, these initial examples show that global organizations are losing their control over how information is created and shared. Customers are gaining mastery over the tools and processes of media production and distribution. Customers increasingly scoop mainstream media through their imaginative use of digital cameras, video cameras, podcasts and print.
- Kryptonite Bike Locks—Kryptonite pioneered the now-ubiquitous “U-shape” bicycle locks in 1972, and they have an install base of millions worldwide because they are the Oracle (“It’s unbreakable”) of the bike lock world. This is their core business. However, in 2004 blogs started reporting (and showing with pictures) how the locks could be opened by inserting a simple Bic pen into their circular “keyholes.” This confronted the company with a huge threat to their core business: people around the world, including thieves and owners, not only knew that the locks were vulnerable but also how to pick them.
- “Bus Uncle”—In Hong Kong, Elvis Ho, a young businessman, was commuting home and made the mistake of tapping on the shoulder of the older man sitting in front of him, who was yelling into a cell phone, and asking him to quiet down, as reported by The Wall Street Journal. The older man turned on Elvis and berated and insulted him for several minutes. Another passenger recorded the incident with the videophone functionality on his mobile phone and posted it on YouTube to share with friends. It became an international sensation; people in cities worldwide are repeating the lines of the conversation like it was a hit movie, and they’ve been made into several ringtones.
- The 2006 Montana senate race—The Democratic Party is currently using a “Candid Camera” approach to attempt to unseat incumbent Conrad Burns, according to The Wall Street Journal. A 23-year-old staff member follows the senator with a video camera and tries to catch him in compromised situations, which are filmed and posted on YouTube. Some of these have been featured on local and national media.
- Abu Gharib Prison—In 2003, this Iraqi prison became notorious when photos taken with mobile phones disclosed maltreatment of prisoners by U.S. Army personnel. Inexpensive mobile phones increasingly include video cameras, which also capture sound and conversations, and this can lead to unexpected results.
The Tools of the Trade
 Tools of production are in the hands of all of us, but what is coalescing as Web 2.0 is the business process of packaging and distributing the content. Adoption will increase as more people increase their experience with the tools and familiarity with Websites, wikis and blogs through which they can distribute content. They will knit these together into seamless processes for sharing their content on the Web.
- Weblogs (“blogs”)—Blogs have always exhibited a wide range of content, but many began as on-line journals of impressions, opinions or experience (“logs”). Often a central feature is linking to other sources of content on the Web about which the author comments. Today, there is boundless variety, and I think one of the best ways to define blogs is by the software they use (usually websites like Blogger, Typepad). Blog software is critical because it streamlines the process of creating and sharing content: it has templates that the author customizes by point and click; creating content is as simple as using a word processor, and the author publishes/edits entries via one button. Also, most software also simplifies “tagging” and notifies blog intermediaries (i.e. Technorati) of new entries. Tagging is a way for the author to categorize his/her entries according to topic, which Technorati will relate to other blogs with the same tags. This enables readers to rapidly find content on similar topics from diverse authors. One other key social element of blogs is that they often represent personal points of view, and the concept of a “corporate blog” is an oxymoron for many.
- Social networking—There is an increasing number of these sites, but several are bona fide phenoms: MySpace, Facebook, LinkedIn, Friendster. In a sense, the sites offer many of the advantages of blogs in that they encapsulate very user-friendly features that enable people to share content and connect with each other. Members use the sites’ functionality to post photos, videos, music and written content, but a key element is defining “friends” (other users) and commenting on other members’ sites. Increasingly, music groups and filmmakers directly reach customers through their MySpace sites. Facebook is similar to MySpace except that it specializes in the college and university student community (now high school students as well). LinkedIn is a business networking site that enables members to locate and connect with other members. Members post their resumes and show their connections to other people. A key feature is that it automates the “referral”: people in your personal network can connect directly with each other through you, but someone not in your network must ask you for a referral to gain access to someone in your network.
- Wikis—although they are far less along in adoption by the general public, wikis are revolutionary. They refer to a type of (often free) software that enables collaborative, group authoring of content. One of the best examples is Wikipedia, the on-line encyclopedia, where anyone with a passion can register and create, edit or add to content. As with many collaborative sites, Wikipedia depends on users policing content, and by most measures they do an outstanding job. However, wikis are gaining traction in the corporate and government organizations who use them to enable people to collaborate. Don’t miss Wikipedia’s entry on Web 2.0.
- Free VoIP phone/conference service—Skype is a leader in this space, especially since it was bought by eBay in October 2005 for €1.9 billion. Skype users call other users via their computers anywhere in the world for free, and they can call people on “normal” phones for a nominal fee (“SkypeOut”); additionally, Skype users can order “normal” phone numbers in many countries in the world for a nominal fee (“SkypeIn”) so that any phone can reach them via that number. There are several other free VoIP (Voice over Internet Protocol) services as well (i.e. Freetalk, yakForFree, Googletalk, Apple), and most increasingly bundle video and conferencing functionality. This means that users around the world can increasingly collaborate in real time for free. This used to be an expensive proposition only available to employees of global enterprises.
- Commercial sites—eBay and Craigslist enable people to connect and exchange goods and services. Again, they provide tools and processes that enable people to buy and sell from each other worldwide, in many cases. Unlike other Web 2.0 tools, they are far more structured in how members can use their tools, but they arguably are changing the ownership life cycle and value of many consumer goods because they develop a vibrant secondary market: if there’s a market of 10 people in the Chicago area for your custom-designed chartreuse davenport, chances are you can reach several of them through eBay or Craigslist, which may serve to increase the variety of products in the primary market. Amazon.com is partially in this category due to its leading edge development of reviews, which increasingly cover any consumer product. Through the use of the “real name” designation and user feedback on reviews, they are continually a leader in aggregating customer advice and delivering it where it’s most relevant, at/near the sale.
- “Digital life”—Apple Computer has redefined itself as a digital life company that also happens to make computers and those über-hot small digital music devices, iPods. The company is applying its legendary prowess at elegant, user-friendly design to the entire process of creating, capturing, sharing and experiencing digital music and video for consumers. There are myriad companies that are a part of this wave, but Apple is a leader that is driving adoption of producing, sharing and distributing music and video. Its iPods are changing the entire model for how people experience music (as VCRs did for television) because users control packaging and timing. In addition, anyone can publish their favorite playlist on iTunes, the music store website through which Apple sells music. Anyone can make a podcast, which is an audio program designed to be listened to on an iPod or other mp3 player. Consumers no longer depend on record companies to create albums or radio stations to discover music; they bundle their own, for each other and comment on the results for all to see. Time will tell whether this model will soon apply to the television episodes and movies that Apple is now selling through iTunes. YouTube is another phenomenon that enables anyone to upload video to share with millions worldwide. Its distribution far surpasses television or major studios in brute numbers, although content quality and variety is all over the map.
Conclusions
- Note that these tools integrate the elements of network, software and business process that enable users with little/no technology sophistication to connect and collaborate, mostly for free. Such functionality until recently was only in the hands of large, well-heeled organizations, who strongly influenced the information to which customers had access. Customers have been relatively isolated from each other, and their voices have been singular. All that is changing.
- Although the idea of customers commenting openly about products and services may be unsettling at first blush, it will be a tremendous boon for those companies that embrace it because customers will do an increasing amount of marketing for them. Overall, large groups self-police and marginalize dishonest or outrageous people. I never cease to be surprised at the quality and validity of reviews.
- Customer “hacking” will become mainstream because most people have an innate sense of fairness. When they care about products/services, things bother or delight them, and they feel moved to comment and suggest, especially when they understand that they are being heard and responded to. Enthusiasts will delight in exposing mediocrity and, as long as companies have the flexibility to respond, this will be to their advantage. Smart companies will have the opportunity to use customer input to innovate in many dimensions.
- Read amazon.com’s book reviews and imagine that virtually all products and services will have customer-created reviews as adoption proceeds. This will include their experiences of doctor visits and hospital stays, their interactions with their stockbrokers, and what that condo building is really like, as well as any product you can imagine. You may ask, “Why would anyone take the time to review eyeliner, toilet paper, vacuum cleaners, wiper blades or electric companies?” Some people do, and remember that it doesn’t take many people to contribute their opinions and make an impact, especially since an increasing number of websites help users to find each other.
- The customer-driven Web 2.0 wave will be building over the next 5-10 years, and wise companies will begin preparing now. This is a golden opportunity to make a major competitive move, but it will take a sustained effort. First, they need to develop agile processes that can accommodate and respond to customer feedback. Second, they need to create processes that invite customer opinion that they integrate with expert specialists internally and partners to respond. Giving customers unprecedented responsiveness and individual experiences will win their loyalty. I postulate that your company’s ability to do this will drive retention and profitability in the era of increasing commoditization for services and products.
- Think of current governance and compliance initiatives as opportunities to master processes so that your company can become more agile and responsive and innovative.
26 September 2006
At the turn of the 21st Century, converging social, technological and political changes demand profound changes in how organizations relate to their customers. These changes question many of the assumptions on which 20th Century businesses are built. To turn this situation to their advantage, executives need to approach how they create value for their customers, quickly and proactively. They must build a collaborative network of partners to discover, design and deliver differentiated experience to customers.
The new meaning of customer experience
- Pervasive e-business and global sourcing are creating new centers of excellence for knowledge, services and manufacturing around the world—these clusters of people and companies are technology-enabled, well educated and highly motivated. They will impact incumbents in several ways: 1) they represent new collaborative resources that can add significantly to the enterprise expertise network; 2) they are developing into high-growth consumer markets; 3) they will create new offerings that may change the rules of your business since their companies do not have legacy organizations and cost structures.
- Web 2.0 is mobilizing customers in high-value mature markets—”Web 2.0″ technologies are user-friendly, collaborative tools and work processes that enable customers to connect with each other and collaborate spontaneously. Examples are weblogs, meetups, mashups, and free global phone applications with integrated chat/video. Yesterday, Amazonites reviewed books and music; today, they discuss in detail the performance and relevance of everything sold by Wal-mart, exchanging information about their experiences and advising each other on what to buy. Yesterday, the simple workaround to pick the vaunted kryptonite lock was first shown on a weblog; increasingly, product shortcomings are demonstrated in full-motion video.
- Customer mobilization pressures the barely-adequate new product/service development processes—customers discover irrelevant new offerings and vapid product extensions overnight and pervasively. Most companies already have lackluster new product development track records, and they will perform far worse in this environment. There’s nowhere to hide.
- Emerging market customers are technology-enabled by default—for example, in Chinese consumers’ practice of tuangou (“team purchase”), people meet on-line, collaborate on learning about a product’s strengths and weaknesses, pricing performance and availability. Then they approach the vendor as a large group and strike deals. Think of them as ad-hoc buying cooperatives. Practices like this will change the rules for entry into these ultra high-growth markets.
- Consumer offerings will be forcibly unbundled through 2015, wreaking havoc with business models—As ultra-wired consumers grow in buying power, they recommend an ever-increasing array of products to each other. They will demand product and service componentization, so they can create their own products and services collaboratively. Yesterday’s music package was the “album.” Today, consumers buy songs, publish playlists and shuffle their songs at will. How much longer before book chapters go this way? Cameras? Amplifiers? Autos? Cosmetics? Consumers will specify components and force mass customization.
- B2B markets follow B2C innovation—all B2B executives are consumers, and their expectations are set by their individual experiences. B2C innovation is extremely relevant in your ability to create rewarding experience for your B2B customers.
- Emerging leaders will dominate by providing incomparable customer experience—Apple, Starbucks and Nordstrom create breakaway value by tuning into the experience a customer has; in fact, their “products” and “services” serve props in creating experience. Further, customers increasingly create collective experience; they describe their experiences and define how products and services are relevant to their experience. This will shorten product life cycles even more and pressure business models.
- Increased collective consumption will drive further commoditization—As the portion of on-line consumers continues to increase, the commoditization of mediocre products and services (those that do not provide differentiated experience) will accelerate.
- By 2015, 25-40%of enterprise business will be executed by global partner networks—The stand-alone computers of the 1980s are all but gone, and the enterprise will follow a similar path. It will be inseparable from its partner network, which will have redundant providers so that the enterprise will not be dependent on any node. And much innovation will come from the network. Outsourcing is a transitionary practice that enables companies to build collaborative practices while moving non value-add processes outside.
- India and China will emerge as innovation and intellectual property leaders by 2020—Making the world’s products, services and living standards available in radically different means and social contexts will demand unprecedented innovation, and these countries’ talent, motivation and need will create the perfect storm for an explosion of creativity and IP.
The new importance of innovation and collaboration
- Innovation is a repeatable process that creates discontinuous new value—it breaks the mold by: 1) catalyzing new thinking about customer experience; 2) structuring new thinking into actionable ideas and solutions; 3) testing the solutions’ ability to create the desired experience; 4) scaling and delivering the experience. Information sharing makes or breaks the process, and new collaborative Web applications and work processes can speed them up and increase accuracy.
- Collaboration is a style of interaction in which diverse parties work together to innovate—enterprises can collaborate by assembling cross-boundary networks of value chain partners and customers to operate short-cycle innovation projects that address all aspects of customer experience: design, service, disposal, collateral products/services vital to the experience, etc.
- Innovation is widely seen as the means to drive the top line, the traditional model fails consistently—innovation has rarely been practiced as a core competency due to the Industrial Economy’s long product life cycles. 96% of corporate innovation fails* because companies have practiced it as a secret process conducted by specialized experts, in internal “labs.” These experts too often did not understand customer experience.
- Customers demand true insight into their experience—marketing’s focus groups and database analysis take too long and are too error-prone because they don’t deliver a holistic view of experience. They are product-focused, not experience-focused. There are too many layers of management involved in “product development,” which, like technology commercialization, consistently fails because the process is too ponderous and do not invoke real customer insight.
- Leaders will engage customers to design their own products and services—and this process will attract customers to participate in innovation networks, which will pair diverse customers with various experts. The knowledge of each participant is vital, but the secret sauce will be orchestrating the knowledge to produce short-cycle, actionable results consistently.
The bottom line is that mobilized customers accelerate success and failure, and leaders will thrive by creating collaborative innovation processes.
27 February 2006 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.
6 February 2006 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.
31 January 2006 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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