Tuesday, July 01, 2014

Why market ”penetration” closes your mind

The words we use reflect our differences in attitude and strategy.
A lot of business lingo tends to use phrases from warfare, and of course one would such phrases, if that’s how you see the game.
In a we-economy, where business involves more stakeholders, and co-creation and participation from users, the metaphors from war seem misplaced, and using them is likely to close your mind to the potential of creating value in collaboration.

Acceptance, take up

Thursday, June 19, 2014

The new normal in business: Going from product to platforms and processes

Platforms and processes, rather than products, will become the focus of new business creation as we move forward. The main characteristic of a handful of new trends in business – Collaborative consumption, Sharing, the Maker movement and the Circular economy – is that the value creation is less about adding some new feature to a product. Instead, the appeal of these models is that they can deliver more value for less by involving a number of stakeholders, including the users, in co-creating solutions. What’s innovative, and what distinguishes successful companies in this type of economy, is their ability to create well-working platforms that enable a wide set of actors to participate.

Conventional hotel chains like Hilton or Intercontinental have built their business over decades by owning and operating hotels. Now, in just a few years, Airbnb has created a service that rivals them in size, by coordinating that a great number of private persons can rent out rooms to others. Likewise, the large media companies used to be broadcasters that would send the same ready-made content to millions of viewers. Now, 7 of the top ten global websites are services based on content created by the users. Sites like Facebook, Wikipedia and Twitter do not produce content, they operate platforms that make it easy for millions of users to exchange the information they need.

Even producers of physical devices need to start focusing on platforms and processes, because increasingly, this is where they can create value for their users. Take as an example a manufacturer of Digital SLR cameras. SLR cameras have fallen drastically in price in recent years, while at the same time, the quality and features offered by companies have become very similar. Technically, the difference between Canon, Nike, Olympus or Sony is hard to tell.  In short, cameras have become commodities, mainly competing on price – which is not a very attractive game for a manufacturer to play. New features or marginal technical improvements in image quality are getting harder and more expensive to develop – even if they hardly can fetch a higher price.

The superstructure
Instead a company can try to improve the user’s experience by building services and processes, for instance by creating sites that teach users to take better pictures, galleries and competitions that allow users to show off their photos and be inspired by others, forums where users can help each other with tips and tricks, or platforms that allow users to share equipment or collaborate on projects.
One could think of these processes as a virtual ”superstructure”, which runs on top of the physical product. For companies, it is typically a less expensive way to improve the value of its solution to users, and often it creates a more engaged and loyal relationship to customers.

The same approach can be used for almost any object or device – whether it’s pharmaceuticals, sporting goods or DIY tools. It’s likely that for many devices there will be no point in trying to distinguish between the physical product and its virtual superstructure – they become an integrated solution. Already products like smart phones make no sense without all the apps and services that run on it. The same will be true for 3D printers, cars, thermostats, running shoes…
In some cases, creating a popular superstructure, can allow a company to change its status from being one among a number of other providers of equipment to becoming an integrator, operating a platform, where many others companies and their customers also go to create solutions. Once again, Apple’s app-store is an obvious example.

Designing tools for participation
From a design perspective, this means that focus moves from designing finished products, to designing tools that allow customers to participate and contribute to creating a solution, which fits exactly to the individual users’ context.
This is already evident in the many websites that enable users to customize the products they order. Cars, furniture, glasses and shoes have been modularized, so customers can pick and choose the combinations of features, colors and materials they prefer. This makes the product much more valuable to the customer, indicating that making the interfaces for participation effective and easy to use is an important part of the overall design of what the company offers.
Such mass customization is at one end of the spectrum of involving users in value creation. At the other end are much more open-ended systems for 3D printing, which allow users to download CAD drawings and remix and redraw objects completely before printing them out.
It seems likely that users will increasingly expect and demand the option of co-creating ever more details of the objects they use – at least those objects that they are most engaged in or dependent on.

User-driven innovation is another example of the power of creating platforms and services rather than just physical objects. The toymaker LEGO very deliberately works to engage its users in co-creating new products – and in the process, the platforms for involving users have become extensions of the LEGO experience. LEGO Cusoo is an example; it’s a website, where users can show off their constructions, and where they can vote for the constructions that they would like to see as official LEGO sets. If a design gets more than 10.000 supports, LEGO will start the process of developing it into an official product, and if it makes it to the market, the designer will receive a percentage of the revenues.

Traditional roles are blurring
One way of describing the shift in approach is that companies, which have been providing solutions to you and for you, will move to solutions created with you and by you. This goes for customized physical products as well as services like healthcare, education, banking or travelling.

Although it’s not as if customers are taking over completely and starting to build everything themselves, it’s clearly very different than the strict division of roles and responsibilities between providers and users, that were the norm in the traditional industrial society. Those old lines are blurring, as consumers become participants and co-creators.

This in turn has implications for styles of management. The company loses control of the process and the outcome, when solutions emerge in the interaction among a number of different stakeholders on a platform
Managers cannot hand out top-down commands, because the contributors to a project may be from different organizations – or they can be customers or volunteers. The company can influence, but not control, and leadership becomes a matter of motivating others by the strength of your vision.

The shift of roles can be challenging, because it requires a rethinking of how you see yourself contributing value – whether as a company or as a person. In the co-creation paradigm, being an expert is not about knowing all the facts or being able to come up with solutions yourself. Rather, expertise can be in enabling the solution to emerge, by bringing together the right people and resources. Thus , the teacher is not just an expert in the subject, but rather in making learning happen. The doctor is not just an expert in disease, but in supporting health.
Procter and Gamble famously changed the approach of their huge internal product-development labs from “research and develop”, to “connect and develop”.

It’s not just about money
Interestingly, the collaborative economy is not just about money. For the company that operates the platform or sells products that work with it, money may be what drives the business. But for other stakeholders, there can be other motivations for participating than money. Users and volunteers can contribute to get recognition and status, to help each other, because they find it interesting – or because they enjoy the social interaction. It’s an important point that these values can be as important as money in making the interaction work productively.

From ME to WE-thinking
The most challenging part of moving to platforms for co-creation may be the deeper change in mindset that it requires: From a ME to a WE perspective.
Generally, the past decades have been an era of ME thinking. There has been an emphasis on individual freedom and achievement. Winning the competition against everyone else was seen as the way to grow.
The Me-thinking appears increasingly problematic and un-suited for a world that is becoming intensely connected and interdependent.
Instead it has getting easier and more efficient to develop and seek solutions by working with others, and in the process accepting that one’s own success depends on the success of everyone else in the system. WE-thinking is about realizing that our fate is shared.

WE-thinking requires trust. To cooperate and share we need transparency, we need better tools for assessing risk, we need to be able to retaliate if others cheat or free-ride, we need new ways of sharing ownership and benefits. For the WE-economy to become the new normal it needs to be operational for regular, established companies. Businesses may see the potential in opening up, but they will be very reluctant to do so unless there are tools in place, that make sharing and collaborating more predictable and reliable.

Obviously, all of this is not an absolute shift. We will still be competing, we will still be thinking about our own interests, we will still want to be able to control and own. But the opportunities in thinking more in terms of WE are growing as technology connects us, and as the increasing pressure from a growing population on a finite planet makes it clear that ME-thinking will only exhaust the available resources for all of us.

Monday, June 16, 2014

Platforms for co-creation - elements of a new economy

The products and services that we use are developing in two seemingly opposite directions:

On one hand, we are demanding solutions that are much more personalized and adapted to fit the exact context that we use them in.

Technology has given us powerful tools to co-create and configure what we want. The conventional, top-down, one-size fits all solutions that we have been provided with so far seem to be losing their ability to solve our current challenges and to create the next level of value.
Mass customization and 3D printing, Quantified self in healthcare, and the millions of privately owned solar panels contributing to the energy supply are examples of the movement towards decentralization and user-involvement.

On the other hand, companies and organizations are growing to unprecedented dimensions. The same products and brands are sold worldwide, the issues we face are global, supply chains are long and crisscrossing the world, and it is clear that we are increasingly connected, interacting and interdependent. There are currently 4,5 billion mobile phone users on the planet, and the number is rising rapidly – as is the bandwidth of our connections.

These two movements: Towards the global and unified, and towards the hyper local with value creation at the periphery, are driven forwards and shaped by three strong trends:
- There are increasing resource and environmental constraints, which dictate that solutions be ever more efficient, making more with less, or completely substituting our current ways of meeting demands.
- Increasingly, every action and condition will be registered and analyzed. Big data will create transparency as to demands and preferences, and the availability of resources. The intense use of data should enable a much more precise allocation of resources, and a better understanding of costs and consequences – also in a wider and more long-term perspective.

- As always in a market economy, there is pressure to reduce cost in order to compete. That pressure will be particularly high in a world economy driven mainly by a new developing-world middleclass that’s coming up out of poverty and looking for affordable solutions, and by a stagnating western economy, with companies challenged by a new class of low cost competitors from the emerging markets.

All told, a new model for value creation is taking shape – and it seems to be happening in almost any sector. Rather than companies and organizations providing ready made solutions on a mass scale, focus is on creating broad platforms that enable a number of stakeholders: consumers and other companies, to participate in co-creating highly contextualized solutions.
Examples of such platforms are Apple’s App-store, the crowd-funding site Kickstarter, Ebay, Airbnb and Wikipedia.

These platforms can be global and they can accommodate both very large players and small, individual contributors. It’s a model that bridges the seemingly opposite trends towards the global and the local.

To the extent that the economy moves towards platforms, which function as enablers and brokers, it will create some important new patterns in business.
The solutions that are created will be highly integrated, using input from several, hitherto separate industries and combining very different types of players in the value creation: corporations, small businesses, volunteers, users, public sector institutions etc.
The interaction will be highly complex, and like any complex system, results can be unpredictable and develop in non-linear ways, even more open to fads and sudden successes and crashes than the current marketplace.
There will be very strong monopoly tendencies. Once a company has developed a well functioning platform, the marginal costs of letting in new users are low. At the same time, there are strong network effects: The more that use a platform, the more valuable it becomes for all users.
Likewise, global platforms can tend to be ”winner-take-all” systems. Consumers can pick the best available from the superstars on the platform – while everyone else will find it hard to attract users. Furthermore, on a platform that includes contributions from amateurs and volunteers, professionals and companies will find that they are competing against solutions that cost next to nothing.  Whether you are a rental car company, a photographer, a designer or a hotel, you will feel a much harder pressure on prices.

The platform model will enable a much more efficient use of resources, it will mobilize competences and capacities that are currently not utilized, and it will allow users to co-create and configure highly individualized solutions from a global supply.

It will also increase competition and challenge the way businesses are currently making money.

Wednesday, May 21, 2014

Amazing radio program by Martin Wolf on our economic future

Martin Wolf, chief economics commentator of the Financial Times, has produced a 43 min. radio program for BBC, which provides a very good and timely overview of some of the deep structural issues that are changing the economy and everybody’s future. The program is titled: "The future is not what it used to be". 
Martin Wolf covers issues such as machines taking over jobs, polarization of income and taxation and redistribution. He draws on an amazing line-up of interviews with the world’s leading economists: Thomas Pikkety, Larry Summers, Robert Stiglitz, Robert Gordon, Eric Brynjolfsson… It goes on and on. It’s hard to think of anyone else who could have produced this program.

Generally, Wolf himself sounds a bit more pessimistic than the experts he interviews.

Thursday, May 15, 2014

Following China to the next level

Just published the latest newsletter in the Suitable for Growth project at the Universe Foundation. Lots of interesting information, frankly - if you are interested in business in China, that is.
Humphrey Lau, GM of Grundfos China, tells that the coastal cities are now so different from the in-land markets that Grundfos has split their China operations in two divisions.
Ed Tse, former head of Booz and co in China talks of the innovations coming out of a new generation of Chinese companies emerging from the mid market, and they can become important players way beyond China soon.
And lots more...

Thursday, May 01, 2014

Jeremy Rifkin on an economy where energy, information and things cost next to nothing

Jeremy Rifkin’s latest book ”The zero marginal cost society” looks at how the economy could change as an increasing part of what we consume is produced in ways, where the marginal cost is near zero. We know that once a piece of information has been produced, it can be copied and distributed for nearly free.
Jeremy Rifkin argues that the same logic will apply to 3D printed physical objects and to renewable energy.
It will be expensive to establish the infrastructure and the machinery for producing and delivering, and it will take investments to design and create the first version of a product – but from there on, all the following copies are essentially free.

As Rifkin writes:
”Like the communications internet where the up-front costs of establishing the infrastructure were considerable, but the marginal cost of producing and distributing information is negligible, the up-front costs of establishing an energy internet are likewise significant, but the marginal cost of producing each unit of solar and wind power is nearly zero. Renewable energy, like information, is nearly free after accounting for the fixed costs of research, development, and deployment”.

Obviously, this completely changes the conventional logic in business:
”As more and more of the foods and services that make up the economic life of society edge towards near zero marginal cost and become almost free, the capitalist market will continue to shrink into more narrow niches where profit-making enterprises survive only at the edges of the economy”, Rifkin writes.

One consequence of this is that the need for human labor to reproduce will be very limited. To be of use, you must create variety and novelty – you can’t make money on the second item.
A lot of people will find it very hard to find employment or earn an income – yet we will live in an era of abundance:

”When the exchange value of producing additional units of a good or service is nearly zero, it means that scarcity has been replaced by abundance. Exchange value becomes useless because everyone can secure much of what they need without having pay for it. The products and service have use and share value but no longer have exchange value”.

In my opinion, Rifkin tends to gloss over the risk of creating an economy in which a very small group of people own the infrastructure, and have the capital and intellectual resources to operate the machinery that delivers at near zero cost. Business will need VERY large-scale operation to get a return on their investment, when every transaction is so small – so the monopoly tendencies are extremely strong.
Only the superstars will be able to make money by creating designs that are so novel, that everyone will want to use them for a small fee.

Rifkin acknowledges the risk, but only in a sketchy way:
”Whether the new potential inherent in the Internet of things infrastructure can be realized will be determined by who finances the platform”.

”The prospect of a new economic infrastructure and paradigm that can reduce marginal costs to near zero makes the private firm, whose very existence depends on sufficient margins to make a profit, less viable. Cooperatives are the only business model that will work in a near zero marginal cost society”.

The solution he points to is cooperatives – however, there’s not much in terms of description of what a plausible type of cooperative. He does link the zero margin cost logic to the explosion of the ”collaborative economy” with sharing, makers, open source and social entrepreneurs exchanging value in new ways.
And I completely agree, that this is perhaps the most important trend pointing the way to an economic model for the 21st. Century.

I have a bit of a love/hate relationship to Rifkin. He has a particular knack for sensing new major shifts in the way our societies operate long before most others. He’s very good at big picture thinking, and when he is at his best, he really delivers great vision and insight.
I just wish he wasn’t so pre-occupied with promoting himself and making sure we all understand his magnitude.

Luckily, if you want a quick overview, there’s an excellent podcast where Jeremy Rifkin explains hisideas in a conversation with Paul Saffo. In fact, his ideas seem a lot crisper in this hour-long talk than in the book, which in sections tends to get overly detailed, and to spread out in too many directions.

I strongly recommend starting out with the podcast.