Thought Leadership on the Near Future

Create "Choosing" (Not "Shopping") Experiences

On a recent, gorgeous day in New York City I walked from Bergdorf Goodman at 59th Street & 5th Avenue past Cartier on 52nd street and continued down 5th Avenue for over a mile. Because I was preparing for a speech I was scheduled to deliver to the Global Retail Marketing Association, I was paying particular attention to the stores and the shopping experiences they created — from the posh ambiance of Bergdorf's with its $4,000 blue blazers to Diesel's inexplicable ad line: "Smart has the brains, but stupid has the balls." My conclusion: The shopping experience at every store along this route was pretty much the same. The only difference was how much each merchant was willing to cut its prices: by 20%, 40%, or even 75%. None of them had created a choosing process — in which customers' actions are guided by known principles of behavioral economics that help them make a purchase, not just look around. Instead, the retailers had simply stuffed the shelves, windows, and hallways with option after option after option, driving more shopping and less choosing. There are many ways a merchant can create a choosing — not just a shopping — experience. For example we know from extensive research in the online realm (and from common sense) that ratings and popularity drive increases in sales. Yet nowhere in the stores could customers find reviews or any information about which items were most popular. Products tend to move more quickly when people talk about them. Oddly, information exchange seems to presage choice, and stores can facilitate this in simple ways (imagine a souvenir store that told customers what most out-of-town" tourists buy) or in a more sophisticated fashion (e.g., displaying customers' online reviews near products in stores — something Best Buy reportedly is considering.) In addition, retailers could employ any number of other behavioral economics techniques that make it easier for people to choose. One of my favorites, which I've written about before, is the decoy effect in which you make it easy for a customer to get a deal. In my previous post, I noted that when the Economist magazine had three offers ($59 for online only, $125 for print only, and $125 for both), 84% of purchasers chose the print-and-online option because they got the online for "free." Nobody bought the $125 print-only option, and 16% went for the online-only offer. This meant that the "average basket" of the population of Economist shoppers was just over $114 (84% of $125 + 16% of $59). When the print-only choice was removed, 68% of purchasers chose the $59 option, only 32% went for the print-and-online bundle, and the average basket was approximately $80 (32% of $125 + 68% of $59). So when the decoy was added, the average sale increased from $80 to $114 dollars. Likewise, any merchant who might be considering a 20% off sale on a $500 suit could instead offer $500 for the suit, $100 for a shirt, and $500 for the shirt and the suit. More people would be likely to buy the combo for $500, and it's also likely that most of those people would have gone only for the shirt if the bundled deal wasn't offered. This technique could help merchants in their eternal quest to increase the average sale per customer. The growing popularity of mobile devices like iPhones, Android phones, and iPads makes helping consumers choose, not just shop, even more important for retailers. That's because these gizmos allow consumers shopping in a store to consider many other options outside the store. Since we know that increased choice tends to freeze decision making, the result will be consumers who shop more and more and choose less and less. With all this in mind, ask yourself: Is your sales process increasing choosing behavior or simply fomenting increased shopping? If your answer is the latter, you need to start designing a customer-choosing process. 05/05/2010

Do Your Knowledge Workers Have a "Bitsmith"?

Along with my colleagues Jeff Hesse and Terry Holliday, I have been trying to understand what makes some teams of knowledge workers more productive than others. In particular, we have focused on people who work in firms that create lots of value as measured by earnings before interest, taxes and depreciation (EBITDA) per employee. In our work so far, we've discovered the primary difference in how they do work is that they have the power to shape their work environment — which means that they can customize, upgrade, and even create new information technology to propel their productivity. If one looks throughout history, workers' productivity has always been proportional to the quality of the tools they use. In physical work, a man with a backhoe is much more productive than one with a shovel. Yet many firms — in their desire to save money by creating "standard" information environments — actually hamper the potential productivity of their knowledge workers. It's the knowledge work equivalent of outlawing backhoes. Our research at investment banking, asset-management, insurance, and computer-software firms found that they empowered their high-EBITDA employees to buy the non-standard tools they think they need to improve their performance. An easy test of whether your firm is doing the same is to analyze how hard it for someone to to get an additional computer screen, a known productivity-booster. Given how cheap screens are these days, if it's hard, your restrictions are probably too tough. But it's not just the window on the digital world that may need a renovation; it may be the quality of the entire infrastructure. For example, one investment bank we researched has an infrastructure team that created a massive internal computing cloud that allows any authorized trading group to configure hundreds or even thousands of computers within a week. This technology capability exceeds anything that this firm could buy from Google or IBM. Who does all this fancy design and integration? Many of the high performance teams that we studied had a member we christened the "bitsmith." Bitsmiths are people who have deep knowledge of both the work content and the tools used to support the work. In other words, they are almost as expert in derivatives or computer design as they are in computer-programming languages. Because they understand both the domain and the tools, bitsmiths can take an idea from concept to implementation quickly . For centuries, each village had its own blacksmith who fashioned new tools from iron. These tools — from the farmer's plow to the wagoneer's horseshoes — made the entire village more productive. Likewise, the modern-day IT smithy can help make high-value-added knowledge workers much more productive. Is your firm being penny wise and pound foolish by making highly paid knowledge workers suffer with slow, inadequate capabilities? Do your firm's teams of high-performance knowledge workers have bitsmiths? If not why not? 04/21/2010

How the iPad is Like the Tesla Roadster

Courtesy of my dear friend Peer Munck (Founder of MunckMix, a music distributor), I just had my first ride in a Tesla Roadster, the $129,000 electric sports car. It blew me away, because I was reminded what can happen when innovators lovingly create something that has design integrity — by which I mean the solution (e.g., the Roadster's total reliance on battery power) does not compromise on critical dimensions (e.g., speed, handling and range). If you want to know what it is like to ride in a Tesla, imagine a bumper car that can go 0-60 in 3.9 seconds, has a top speed of about 130 mph, a body designed by Lotus, and go-cart handling. Not only that, but it is gorgeous, and the engine sounds like a turbine from the year 2050. (The Batman movie The Dark Knight sampled the Tesla motor to use as the sound of Batman's Batcycle.) The most profound thing for me was not the great fun of spending an evening shooting around the highways and streets of Chicago being gawked at by passers-by. Rather, this one night's experience completely redefined what I imagined transportation could be. I always thought of electric cars as a pipe dream of the best car minds in the world — that the best they could do was to come up with something with the range and performance of a souped-up golf cart, only uglier. The Tesla showed me I had been thinking about the problem entirely wrong. For me, products or services with design integrity make you rethink the whole category. The Tesla Roadster not only fun, it's highly efficient: It has a range of over 200 miles per charge, which costs about $5, according to Tesla Motors. (My buddy Peer claims it costs him only $4.) As soon as I began experience the car, I began to rethink how the world could change as a result of such innovations. Could the U.S. use less oil, and thereby change its foreign policy? What would transportation look like as Tesla and its competitors ride the cost curve down? Could the price of such cars plunge from $129,000 today to $40,000 or even $10,000 or less? In thinking about the Tesla, my mind went to the release of the Apple iPad. Like the Tesla Roadster, the iPad has design integrity. I agree with Steve Jobs's assertion that the iPad is a new category and early adopters will show the rest of the market a new way to think about "information." Just as the iPhone redefined what a cell phone could be, I believe that the iPad and Apple's community of more than 100,000 developers will make it possible to combine media such as video, text, and games and integrate social networks in ways that will provide a new platform for telling stories. This is vitally important, because, as I've blogged about before, the 8-to-18 generation is in and around media 10 hours and 45 minutes a day (aka Generation 10:45). There will be competitors and copycats for sure. Also, one can argue that Apple should have included support for the ubiquitous Flash software. But overall, like Tesla Motors, Apple is creating a new category — one that will change the way we think about information, media, and work itself. My questions to you are: Does your company's offering have so much design integrity that you redefine the category? Is your firm ready for the revolution in transportation? Is your firm prepared for the revolution in information? 04/05/2010

Real-time Brand Management — Lessons from Virgin America's Hellish Flight

On March 13, a Virgin America flight from Los Angeles to New York was diverted from John F. Kennedy International Airport to Stewart airport in Newburgh, N.Y., due to severe weather, and the passengers and crew waited in the plane on the tarmac for over four hours. The crew was anxious, babies were crying, mothers were anxious, and the passengers were unruly — to the point that one woman was taken off the plane by police. The entire ordeal was documented by David Martin, the CEO of Kontain.com, on his company's iPhone social-media application. Martin was called by someone in Virgin America's marketing department, who offered him a $100 voucher for his troubles. He said the passengers deserved more. He subsequently received a call from Virgin America CEO C. David Cush. During that conversation, according to Martin, he negotiated a full refund and a $100-per-person voucher for all passengers. If this account is accurate, it is fascinating that a customer, by posting an account of his ordeal as it was happening via his iPhone, became powerful enough to negotiate such a deal. It demonstrates the need for every company to start thinking about real-time brand management. Firms may "own" their brands, but brands really live in the heads of their consumers. Companies must constantly nurture and actively manage their brands at the speed customers form opinions about them. And today that's mighty fast. Notifications or conversations about an experience may begin on Twitter, but they can be immediately posted to all social media around the world. (If Facebook were a country, its population would make it the third-largest nation in the world — behind India and ahead of the United States.) Greg Brandeau, chief technology officer of Walt Disney Studios, recently told me that the window for premiering a new movie used to be the first weekend of its release. It would take two and a half days to figure out if a movie was doing well or poorly. Today, with people Tweeting and posting to Facebook while they are watching the movie, that window has shrunk to hours. Most firms do not have the marketing reflexes to respond in real time. There are a number of implications for executives: Every company must have "a brand radar system" to constantly monitor social media. The good news is that if a company commits to this notion of having a brand radar system, there are many tools to help build this surveillance capability. Firms must get used to being "naked" to the marketplace. There is no question that all the things that happen with your customers and even within your firm may become a matter of global, public record in minutes. Companies need a "trust bank" with their customers. I believe that Virgin America did not suffer too much from the horrific L.A. to New York flight because its customers deeply trusted it. In contrast, United Airlines suffered terribly when it broke the guitar of a passenger, who then created a YouTube video viewed over 8 million times in which he bashed United's service and attitude. Unlike Virgin America, United did not have a reservoir of good will to help protect its brand when a problem arose. I'd love to hear: How fast are your firm's reflexes? Do you have brand radar system? How deep is your firm's trust bank? 03/18/2010

Are You Catering to your Customers' Anxieties?

This post was co-authored with Anand Rao and Jamie Yoder One of the most important things that executives forget when they craft their service model is the need to address customers' anxieties. In today's grim environment, this is more important than ever for all companies but especially for financial services firms. Since the financial crisis of September 2008, many people have been scared to invest. Between the end of September 2007 and early December 2008 retirement accounts alone lost nearly $2.8 trillion, or 32%, of their value. Although the recent rally has been accompanied by an improvement in investor sentiment, it has not reached the levels of 2007. Little wonder: Famous institutions disappeared overnight, had to merge abruptly with their competitors, or barely skirted bankruptcy. Money is a feeling-laden, complex, and deeply social product related to people's sense of power, risk, and self-worth, and emotional intensity about money is at an all-time high for understandable reasons. Consequently, when financial services firms think about their service offerings, they have to be especially careful to explicitly design the emotional message of their approach. Whether the service offering in question is virtual or embodied in bricks and mortar, the key to creating emotionally satisfying experiences is to understand the core worry of your client and to craft a direct, simple, emotional message. As a wonderful essay in The Boston Globe recently pointed out, simple, easy messages are more likely to be believed. One of the most famous historical examples of a business leader who understood this is Elisha Graves Otis. Back in mid-1800s, when Otis was introducing his new elevator, he was having a heck of a time convincing a skeptical public that his invention was any different from the dangerous grain hoists or home-made lifts they had seen before. He could have attempted to explain his clever new design, which included a patented safety. Instead, he had himself hoisted up an open shaft in front of a large audience at the Crystal Palace in New York. When he was far above the exposition floor, his assistant cut the rope supporting the elevator. The crowd gasped. But the car stopped after falling a few inches. Otis Elevator Company was on its way to becoming a phenomenal success. Otis dealt directly and simply with his audience's deepest emotion — their fear of plummeting to their deaths. A good example of a current marketing program that directly addresses the emotional soft spot of clients is Liberty Mutual's Responsibility Project. The theme of the website is individuals must take responsibility for their actions. It employs a combination of professional actors and user-generated content to create stories about individuals who act responsibly for the good of their families and communities. It creates a context that is broader than the individual investor. And by focusing on the selflessness, it creates a brand perception that the company is responsible in all its actions, including how it deals with policyholder money. Another example is New York Life's "Guarantees Matter" web site, which recently won the Best in Class Interactive Media Award. (Full disclosure: New York Life is a client, and we helped it with this initiative.) The purpose of this site is simple: to explain that because New York Life is owned by its policyholders it is more likely to keep its promises to them. The site delivers a simple message: through any financial disaster, New York Life is there. What is interesting is that the company chose not to provide a performance-based comparison (e.g., how the returns on assets in life insurance compare to the market's returns). Instead, it crafted a simple, emotional message: Our guarantee is solid. Our questions for you are: Do you know the core emotional trigger of your customers? If so, are you addressing it simply and directly? Anand Rao is an expert in decision theory and a partner in Diamond's insurance practice. Jamie Yoder leads that practice. 03/12/2010

How Behavioral Economics Can Help Cure the Health Care Crisis

This post was co-authored with Bret Schroeder and Tom Weakland Noncompliance with medical advice is one reason the U.S. health care is so costly. Yet it has received only cursory attention in the national health care debate — undoubtedly because politicians don't want to risk offending their constituents. How bad is this problem? According to a study by the National Community Pharmacists Association, three of every four Americans don't take their drugs as directed. Forty-nine percent forget to take them; 31% don't fill their prescriptions and 29% stop taking their pills before the drugs run out! According to the New England Healthcare Institute, this costs the U.S. $290 billion per year (over 11% of our $2.5 trillion health care bill). More waste comes from missed appointments. According to a cross-study analysis, no-show rates for doctor's visits run as high as 20% to 30%. Although there is no system-wide estimate of the effect, one study pegs the overall cost of each missed appointment to be over $700 to the health care system. Given the fact that in 2006 there were about 900 million appointments, the annual cost to the system is over $150 billion. We think there is a tremendous opportunity to use behavioral economics (which recognizes that people aren't always rational) and relatively simple technology to create new tools that aid health organizations in managing consumers' behavior and that help patients improve their own actions. Even very small changes in patient population behaviors would have a dramatic impact on costs. For example, our firm worked on a project to help the state of Gauteng, South Africa, create an information infrastructure to help manage diabetes care. Our approach used a combination of education, clinics, web services, and cell-phone reminders to get patients to heed their doctors' advice. Gauteng was able to reduce missed appointments from about 70% to 30% almost immediately. We are now in the midst of designing a new system that employs a number of behavioral economics concepts (reminders, pre-commitment, social pressure, default options, etc.) to reduce waste even further. Sure, it would be nice if we all rationally acted in our own best interest and followed the doctor's orders — but we don't. By recognizing that and using insights from behavioral economics to design innovative approaches, we can improve health and drive down costs. For example, after a stroke doctors usually prescribe a blood thinner to help reduce the chance of recurrence from 24% to 4%. Despite the fact that taking this drug significantly reduces the chance of additional brain damage, many patients don't take their medicine. Researchers Kevin Volpp, George Loewenstein et al, conducted a small-scale experiment to see if they could combine three incentive ideas drawn from behavioral economics to change this sad state of affairs. They used (1) small, frequent rewards, (2) a small chance at a big reward, and (3) the regret of missing a payoff. In one test group, 20 patients were entered into two daily lotteries. All participants had a one in five chance of winning a $10 prize, and a one in 100 chance of winning a $100 prize. (For those of you who remember your probability class, this means they had an expected value each day of $3.) Patients had an electronic pillbox in their homes that recorded whether or not they took their medicine. If they had not taken their pills correctly, they were disqualified from the lotteries. Winners who had not taken their medication were informed that because they had not complied with the drug regimen, they would receive nothing. Noncompliance dropped from 22% to under 2% for the entire three months of the study. A well-designed $3 payoff was a more powerful motivation than a 20% decrease in the likelihood of an additional stroke! Clearly, investments in such creative solutions that reflect how people really think could rapidly generate a huge, measurable human and financial return. It is time to make such investments a priority. Our questions for our readers are: How well do you manage your own health? Why or why not? If you work for a participant in the healthcare system, how focused is your firm on helping change behaviors — not just manage bad outcomes? Tom Weakland leads the health care and public sector practices of Diamond Management & Technology Consultants. Bret Schroeder is a principal in Diamond's health care practice. 03/05/2010

Knowledge and the Need for Speed

In 1903, the Stanley Steamer set the world wide speed record for the mile at the Daytona Beach Road Course. I have a particular fondness for the Stanley Steamer because my house, and the house next door, were built in 1896 by the twin Stanley brothers who invented the Stanley Steamer car and the founded the eponymous company. Today, what the interstate highway system was to physical productivity, fast internet is to knowledge work — it an essential infrastructure that creates value for everyone. Think of the Internet as the highway of the mind. Speed matters: Are you chugging along at 30 mph down a dirt road, or are you flying down the autobahn? Dr. Larry Smarr, the director of the CalIT2 lab for advanced visualization and connectivity, and Diamond Fellow, just announced the Cyberinfrastructure for Comparative Cancer Research. When looking at cancer, researchers often have huge amounts of data with complex visualization and models — and faster digital connections can open up a whole new world of understanding and exploration. Google recently announced that it will demonstrate ultra-high bandwidth wireless in some communities. It is old news that our country has slower and more expensive broadband than many countries — including France. I don't for a minute think that Google is doing this out of the goodness of their heart, because faster broadband will play to their strengths in many ways. Faster, more capable devices and connections allow them to promote not only search, but YouTube as well. When broadband is everywhere, the company who "owns" your search behavior and your preferences as Google does will have even more influence. As executives, we should also be helping to increase the availability and speed of our digital connections. We are going to a world in which people and things — including cars much more advanced than the Stanley Steamer — will always be connected to the network. Just think about how different innovations could be enabled when every car has a GPS in it as standard issue, and it can send and receive information on its location and movement. This will enable tremendous efficiencies in traffic flow to be designed. It will create an infrastructure which could allow peak-flow tolls which have worked so effectively in countries like Singapore to decrease traffic congestion. It will enable the creation of new products and services like on-demand car insurance, tailored to your actual driving behavior. Any company that has coordination needs, moving talent, people, goods, or serving customers, will be able to track and coordinate at a much more focused level. Speedier connectivity will create a platform for innovation where people can deliver new media, customer experiences, and interfaces. There is some amazing work by Pranav Mistry at MIT called Sixth Sense which is creating an integration of the physical world and the virtual world. In the lab, a person has a small camera and projector which allows them to project an image on any surface, and sense that environment. This means that any surface can become a keyboard, or an interface. Just imagine what technology like this looks like when we have very fast, ubiquitous wireless. My question is what applications can you imagine? I'd love to hear. How is your business preparing itself for it? 02/17/2010

Continuous Brand Management for Generation 10:45

The Kaiser Foundation recently released a study documenting the astounding fact that 8-18 year olds in the United States have increased their media use from 8 hours and 33 minutes' worth of usage per day in 2004 to 10 hours and 45 minutes' worth in 2009. Regardless of whether you think this is bad news signaling the demise of our society, or good news intimating that our progeny are on their way to becoming more literate in a media-rich world, as business leaders we must all accept the new reality and understand what it means for managing our brands. I will not recount here the popular cant of how the combination of the cell phone, the personal computer, wireless communication and overall miniaturization has lead to an anywhere, anytime, anything world. Instead, it's more illustrative to ask: when did companies have to begin dealing with this always-on consumer — and thereby continuous brand management? I think the modern need for continuous brand management started with 1-800 numbers, which was the first time that customers could effortlessly call a company at will. 1-800's were invented by AT&T as "automatic collect calling", and while the concept took some time to catch on by 1992, 40% of AT&T's calls were 1-800 number calls. What did this do to management? Well, the first thing companies needed to learn was how to have a dialogue — not just a monologue — with their customers. They needed to field large call centers to answer the phones, and they needed to train thousands and thousands of people to follow the service script. Over time, firms learned the power of cross selling, and outbound calling for selling. In essence, most consumer-oriented companies needed to upgrade their ability to field and answer customer requests. These early contact centers were followed by the world wide web and now the mobile web, extending a customer's ability to reach any company, anytime, anyway. What will the "10:45 generation" expect? First, they will expect a continuous brand experience. For example, Facebook is very similar across the iPhone, the web, the BlackBerry — even the PlayStation 3. Despite the fact that some look at the 10:45ers as the poster children for attention deficit hyperactivity disorder, if you look a little closer, their extensive use of these various devices actually creates a new continuity. Google is everywhere; their friends are too; so is access to communication. From their point of view, their experience is more continuous than the "old days" of separate television, radio, telephones and paper mail. In this increasingly seamless media landscape, you need to ask yourself, how "continuous" is your brand and the service that supports it? Do people "see" the same company across the web, phone, call center, and in person? In my work with companies, I have found great disconnects among the customer contact channels. Second, Generation 10:45 will desire transparent service. Anyone can "see" where they are any time of the day or night. Why can't you and your organization show that same level of transparency? They expect to be able to get status updates on any order, any service, or any request — immediately! (See my earlier post on the reinvention of customer service for more on this transparency idea.) Finally, they will believe word of mouth long before they believe what you have to say. We already know that people trust other customers much more than they trust the company selling things to them. They know that legions of people who use your product or service will be online — because they themselves always are. Consumer ratings and reviews will be as continuous to them as the stock-ticker was to John Pierpont Morgan — but in this case, the markets never close. 02/02/2010

Is This Innovation Too Disruptive for My Firm?

One of the trickiest decisions in business is to assess: is this innovation too innovative for my firm? You need to decide whether the core business will embrace the new product or service or reject it. Xerox, which invented the laser printer, ethernet, and the personal computer, actually rejected the new computer and network — but adopted the laser printer. Why? History is littered with attempts at diversification which "went too far." My friends Chunka Mui and Paul Carroll's book Billion Dollar Lessons waded into the largely unfathomed waters of large scale business failures and found a number of firms that tried to diversify into growing markets only to lose money and valuable management time. (In the interests of full disclosure, my firm Diamond Management & Technology Consultants worked with Paul & Chunka on the research in the book.) One of their more memorable stories concerned the attempt by American Standard, famous for their toilets and a manufacturer of plumbing supplies, air-conditioning and automotive systems, to enter the small medical device testing business powered by their core competency in laser technology. As Paul & Chunka point out, even though American Standard was solidly profitable at the time they wanted to grow faster. Success in the medical device domain would give them patent protection for their inventions. So in 1997, American Standard bought a series of companies and applied their expertise into the medical device market. But by 1999, after $30 million in losses, they took a $126 million write off and sold the division. In hindsight, it is easy to say they were wrong. But as executives we have to make forward-looking, not backward-looking, decisions. If the executives at American Standard were following the logic of "The Core Competence of the Corporation," the classic 1990 article by Prahalad and Hamel, one could argue that American Standard was making the right bet. So where did they go wrong? How could they have known that their investment was not "close enough" but in fact "too far out?" I think we can define "close" in a very straight forward way. First, if an innovation threatens the core business model, it is a non-starter. There is no way that the New York Times could have invented Craigslist — it would have been commercial suicide. Once we get past that first and vital observation, I believe that we can look for "closeness" by using the some insight from the brilliant business historian Al Chandler. In his 1977 book The Visible Hand, Chandler pointed out that there are five ways to diversify a business: by customer, by distribution channel, by product/service, by geography and by competency. I believe that if the innovation your firm is considering is "close" to current practice on all five of these, it is less risky to implement. If it is different on these five dimensions, it becomes much riskier. See the illustration below. Thinking back to American Standard, the move into medical devices did not threaten the core business model, and it did match closely on competencies, and maybe on geography. However, it was far apart on customer, distribution channel & product/service. Therefore, my little model would say that the diversification was very risky. Looking forward, this model helps explain why I think Microsoft will lose to Google in the war for the mobile phone. First, I believe that third-party software for the phone will be advertising-supported, not supported by people paying for software applications. According to my friend Andy Lippman, co-founder of the MIT Media lab, "No one is making money on iPhone applications. They are making money on what other business the iPhone applications are driving for them." I believe Andy knows this is a bit of an exaggeration, but in the main he is right — the iPhone application revenue stream is not big. Companies should think of iPhone apps just as they think of couponing — as a way to drive demand. Second, it is impossible for Microsoft to switch over to an advertising-driven business model (yes, I know MSN has advertising, but its profits are dwarfed by the software business). They cannot start to give away the razors — it's just too painful. Google, on the other hand, not only has business model compatibility because they are already advertising-driven, but they also have competency, customer, geography and product compatibility. They have been developing the distribution capability both within the phone companies and on their own directly. I know there have been complaints about their execution on the service end, and I'm sure the technology will have issues, but I believe that because of the fundamental "closeness" of this innovation, Google will make it work. So, when considering a new innovation and trying to figure out if it will "work" within your firm, ask yourself the following questions: Does it conflict with our fundamental business model? If yes, STOP. If the answer to question 1 is no, then ask yourself how it fits along the five dimensions in my model. If it misses on a couple, it is risky. If it misses on most, your best bet may be to set up a separate division or company to pursue it. Is your career tied up in a move like the one at American Standard? 01/25/2010

Five Keys to Creating an Information Advantage

The value of having superior information has been true throughout human history. I believe that in addition to the analytics movement, which my friend Tom Davenport has so beautifully documented, an information advantage actually derives from a more comprehensive set of principles — great analytics being one of them. Let's take a look at the case of a scion of the legendary Rothschild family. Mayer Amschel Rothschild (1744-1812) developed a small fortune lending money and handling the shipment of bullion during the Napoleonic Wars (1799-1815). As his wealth grew, he dispatched his five sons to different cities throughout Europe (London, Paris, Frankfurt, Naples and Vienna) and set up a pan-European network of messengers and carrier pigeons so they could quickly gather information that might affect their investments. Rothschild ran a decentralized empire, but with tight controls. Each son was allowed to make the optimal decisions regarding investments in his country, but information was kept tightly within the company by the family bonds and arranged marriages with close relatives. Just as investors watch Warren Buffet to see what they can learn, the Rothschilds developed a reputation for being in the know and were carefully tracked by speculators looking for where to place their bets. During the Battle of Waterloo, the stakes were particularly high. Speculators knew that if the Seventh Coalition (consisting of Britian, Russia, Prussia, Sweden, Austria, The Netherlands and a number of German states) won, the era of uncertainty caused by Napoleon's expansion would be over. Britain would become the dominant force in European politics, and the ensuing political stability would drive up financial markets and the value of investments throughout Europe. The Rothschilds knew this, too. Shortly after the battle ended, and long before anyone else knew the outcome, Rothschild began selling stocks. Speculators and traders assumed this meant Napoleon had won the battle at Waterloo, which started a mass sell-off. When prices crashed, Rothschild used his agents to buy up everything they could and he turned his small fortune into a colossal one. Although the SEC might not have approved of his innovative tactics, Rothschild demonstrated the power of asymmetric information — having knowledge that no one else has yet. Rothschild used five tactics to get his information advantage: He created a network of data gathering that allowed him to possess data others lacked; He used the best technology (pigeons) in a new way to help in the data gathering; He analyzed the implications of the data with insight and precision; Once analyzed, he considered how to best use these insights to his advantage — in this case, he knew the market would be watching for his movement — and therefore used his information first to drive down prices, first, before buying. If he had simply bought in, his advantage would not have been maximized. He had great timing and execution. Today, Wal-Mart has a superior data network that allows them to sense and respond to the marketplace in a way that is impossible for others to replicate. The investment banks who perform high frequency trading use their access and analysis to create massive profits. UPS moves about 6% of the US GDP and if they were willing to use their data for investing purposes — which they are not — they could make a fortune. The reason that an information advantage is becoming more important in today's world is that information about your customers, your market and your suppliers is one of the few proprietary assets that are available to you. Talent, capital, intellectual property, resources, can all be purchased. Distinctive competencies, patents, and customer knowledge are among the few defensible advantages over the long term. Yet many organizations don't spend the time and effort to turn their data into dollars. They don't look at their network of relationships as a way to gather new and interesting information about the market and their customers. Those few who do, enjoy higher margins, more agility, and less volatility — because they can react faster and better. Where will this go in the future? I believe that with the three clouds of computing (which I have written about before) there will be more opportunity to create an information advantage. For instance, AT&T developed an iPhone app that allows customers to tell them where the network is weak or strong. Soon, every product and service will have constant feedback from customers — online, and on their mobile devices. Those firms that can make sense of these emerging patterns, consider the best way to use the information, and execute flawlessly will win in the marketplace. My question for senior executives is: Have you learned the lessons of Rothschild? Do you: Have a proprietary way to collect vital data? Use the best technology to gather and amplify it? Analyze it in a timely manner? Consider how to best use it for advantage? And do you execute with timing and flawless precision? 01/19/2010

Better Customer Service Through Transparency, Tribes, and Talent

I confess that I have a warm spot in my heart for customer service operations. It is probably because I met my wife of 29.5 years when she and I were on the customer service phones at the Polaroid Corporation. As an old phone jockey, it is apparent to me that the world of customer service is transforming. If we look back at history, we can see that the central tendency of consumer businesses is to move more and more function to the end consumer and to provide them more visibility to the availability of the product or service. As the phone grew in this country as a consumer device, clever pundits predicted that in order to meet the emerging demand for phone calls, the entire country would have to become telephone operators, and that is exactly what we are: We dial our own service. Likewise, when Michael J Cullen opened his first King Kullen store in Jamaica, Queens with 6,000 square feet, on August 4, 1930 with the wonderful catch phrase, "Pile it High, Sell it Low," he ushered in the world of supermarket self-service at low prices. When they can, firms let customers roll their own. Today, technology is enabling new capabilities and I see three trends which are recreating customer service in a new, more responsive, and economically efficient manner: transparency, tribes, and talent. Transparency is best exemplified by Federal Express's efforts over the years. They were among the first companies to "expose" their internal systems so that not only could the customer schedule pick-ups, print labels, and manage his account, but he could also see the same level of detail the firm had about the location of his shipment. Many firms could benefit by letting customers see where their product or service truly is. BMW allows people who have configured and ordered a Mini Cooper to check the status of the order, and see it location on the high seas as it is shipped across the Atlantic. So what? Well, just think about how the dynamic with your cable company would change if you could actually see if the service truck was on its way to your house. It certainly would change the attitude between the customer and the company. Heck, even the government enables you to track tagged polar bears! Seth Godin's book on Tribes talks about groups of people who are passionate about a topic — and those firms that are great at harnessing tribes change the nature of customer service. Dell famously converted an angry tribe into a happier one. There are tribes ready to be released about any product or service. There is a tribe who cares about airline travel; there's one that feels passionately about the Porsche; another that obsesses over flat screen TVs. Those companies who have bad customer service are attacked by the tribe. Those who are good at involve the tribe in creating solutions for other customers. As Seth points out, tribes need to be led. Turning to the third point, I believe unlocking talent is critical to the customer experience. (Godin talks about some of these issues under the term "tribe" but I wanted to separate talent out from tribe.) Let's face it, most of the content that companies put out about how to use their product or service is often terminally boring, or disconnected to the real audience. Lauren Luke doesn't have that problem. Who is Lauren Luke you ask? She has over 300,000 subscribers for her YouTube video tutorials on makeup. She has a personality and approach which sings on the small screen, and the YouTube format. The formal star-making machinery of any cosmetics company would never have found this woman; she's not a famous actress or a model, nor does she fit some other spokesperson stereotype. Yet now she is one of the most well-known make up artists in the world. Talented users can create content that is engaging and useful — sometimes, as in Luke's case, more engaging and more useful than the company's own content. There is no reason that my local cable company could not have a contest for the best user-generated content on how to set up a new cable box and program the remote. Some would be fun, others clinical, and with the right contest-like structure, the end users will create something so much more engaging than any internal communications group could generate. The general message is very clear — open up; involve your audience in crafting solutions as well as the information about your firm's offers to other customers. The economics of this type of customer care are superior to anything that can be done with internal resources alone. When I did an analysis of a customer service organization at IBM many years ago, the codification of solutions into a knowledge base shifted first call resolution from less than 60% to over 90%. Customers were happier. The technical staff could spend their time on new products instead of chasing down customer problems. What's not to like? The future will be more connected, with more ability for people to share their impressions, stories and advice. In an ever-more crowded information market, the natural tendency will be for those people who lead the tribes to become important influencers. Those who generate great new content will be the market movers. Isn't it time to get involved in this emerging customer service structure now — while there is still time to build a reputation based on "earned media"? So my questions for you are: Are you transparent? Do you lead your tribe? Have you unlocked the talent latent in your customer base? What do you have to lose but the illusion that you are in control of your customers? 12/22/2009

Swimming in Data? Three Benefits of Visualization

"A good sketch is better than a long speech..." -- a quote often attributed to Napoleon Bonaparte The ability to visualize the implications of data is as old as humanity itself. Yet due to the vast quantities, sources, and sinks of data being pumped around our global economy at an ever increasing rate, the need for superior visualization is great and growing. To give dimension to the size of the challenge, the EMC reports that the "digital universe" added 487 exabytes — or 487 billion gigabytes — in 2008. They project that in 2012, we will add five times as much digital information as we did last year. I believe that we will naturally migrate toward superior visualizations to cope with this information ocean. Since the days of the cave paintings, graphic depiction has always been an integral part of how people think, communicate, and make sense of the world. In the modern world, new information systems are at the heart of all management processes and organizational activities. About ten years ago, I vividly remember visiting the Cabinet War Rooms in the basement of Whitehall, where Churchill had his war room during WW II. The desks were full of phones, and the walls covered with maps and information about troop levels and movements. These used color coded pieces of string to help Churchill's team easily understand what was happening: On the one hand, I was struck by how primitive their information environment was only sixty years ago. But on the other, I found it reassuring to see how similar their approach was to war fighting today. The mode, quality and speed of data capture has changed greatly from the 1940s, but the paradigm for visualization of the terrain, forces, and strategy are almost identical to those of WWII. So, the good news is that even in a world of information surplus, we can draw upon deep human habits on how to visualize information to make sense of a dynamic reality. What has changed since Churchill was chomping on his favorite cigars? The quality, timeliness, granularity, and volume of data has increased greatly. Also, with the ever improving assistance of Moore's Law, we have the power to recombine and analyze the vast stream of information at a price point that makes even very advanced visualization techniques within the reach of any business. In my work with clients, I've seen three primary benefits of superior graphic representation: Great visualizations are efficient — they let people look at vast quantities of data quickly. Visualizations can help an analyst or a group achieve more insight into the nature of a problem and discover new understanding. A great visualization can help create a shared view of a situation and align folks on needed actions. Below is an example of a data visualization used by one of our property casualty insurance clients that takes information from Google Earth and overlays flood plain data onto an arial photo of their client's commercial building: One can clearly see that a big portion of the building complex framed in the top of the picture lies within the flood plain. This picture makes it much easier for the insurance sales person to show the company why they may be paying a higher premium. It also allows for clearer internal dialog between the salesperson and the underwriter, speeding communication and collaboration. In addition to arranging the information to create shared understanding, visualization gives us the ability to combine data in order to create new insight — quickly and clearly. Wired has a wonderful graphic showing the seven deadly sins by state across the USA. As I've written about before, my firm is working on a system we call the Demand Estimator, which makes it easy for management teams to overlay information — both internal and external data — onto a map. This enables analysis of key dimensions of performance. When I was a professor at Harvard Business School, my degree was in management information systems and we often looked at how managerial control systems focused the effort of the organization, and helped leaders keep the many folks inside an organization focused on the right things, day in and day out. One of the great challenges in any field salesforce is to make sure that they are always turning their attention to the customers and markets that have the most potential. Another issue is the evaluation of salespeople. A key question you want to answer is: is my salesperson strong, or are they simply in a very good market? For property casualty insurance companies this is often a difficult question to answer. The graphic below shows a big section of Iowa and a little of the surrounding states, depicting potential demand in the market by darker colors. We gathered this information from external sources and matched it down to localities by state. This "layer" depicts the market potential. The next layer adds the performance of the agencies — shown with different-colored markers: With this graphic, we can see that there are "good agencies" in "bad markets" and vice versa. This is vital information for sales management to know when they are allocating resources to train and build up agencies. Where is all this going in the future? I believe that we will continue to get more and larger high resolution screens and projectors to display data. The average American household has increased its "screen-estate" significantly in the past few years with bigger, HD televisions and computer monitors. The same is becoming true of companies — and this will help to set the stage for more visualization. The quality of cheap mapping tools and the availability of vast quantities of free or inexpensive data is growing. The planet is becoming "smart" in the sense that we can track, monitor and see much more of both the built and the natural environment. The challenge is that if management teams do not consciously build in great visualizations, their organizations will waste an inordinate amount of time sifting through the river of bits, and not get the effective insights they need. Perhaps most perniciously, people will each be looking at their own part of the puzzle, never getting to the shared understanding that allows teams to take the right action in a tight time-frame. Ask yourself the following questions: Is there a simple map or maps of information that could make my life easier? Do we have the ability to take the myriad data and synthesize it into these new forms? How much time does the organization waste arguing about the facts instead of deepening understanding or crafting solutions? 02/22/2010

Getting Buy-In For Abstract Ideas

Shortly after the Americans and Brits landed in Normandy in World War II, they found themselves caught up in a region known as the Bocage. In the Bocage, there are many hedgerows set close together — stone and dirt ramparts topped with trees and hedges. Going over the hedgerows made the Allied tanks vulnerable, as their lightly protected underbellies were laid bare. Yet if they dynamited the hedgerows, the Germans, who were well dug-in, would know through which part of the wall the allies were about to enter, and concentrate their fire accordingly. And to go just one mile, the Allies might have to cross as many as three dozen hedgerows. Things were becoming desperate because the troops needed to break out of this part of France or risk being pushed back into the sea. An innovator named Sergeant Curtis G. Culin came up with the idea to attach a set of iron teeth to the front of the Sherman Tanks. These teeth, fabricated from the steel crosses that the Germans had set up on the beach to stop the landing craft, allowed the tanks to blast through the hedge rows — and surprise the enemy. But, according to a speech by Dwight Eisenhower, many years after the war, Culin's idea, had to make is way up the hierarchy. In a January 10, 1961 speech to the American Society of Mechanical Engineers, Eisenhower told the story: "There was a little sergeant. His name was Culin, and he had an idea. And his idea was that we could fasten knives, great big steel knives in front of these tanks, and as they came along they would cut off these banks right at ground level — they would go through on the level keel — would carry with themselves a little bit of camouflage for a while. And this idea was brought to the captain, to the major, to the colonel, and it got high enough that somebody did something about it — and that was General Bradley — and he did it very quickly..." And the rest, as they say is history. After I told this story to a friend of mine, she asked: "Where do we see the same thing in corporations today?" I began to think about it and I had a hard time coming up with a firm who had taken an entirely new idea, and used it to radically change their approach as Culin's idea had done in Normandy. I then remembered the work of a 22-year old Stanford graduate named Salar Kamangar, at Google, and another early Googler, Eric Veach, who crafted the modified Vickrey auction method which drives Google's AdWord pricing. These two young mathematicians designed a better method to structure online auctions and ad pricing than anyone in the industry had done before. A wonderful Wired article on Googlenomics notes that at the time they implemented this approach, the company had 200 employees — and no cash! There are many components to their innovative method; one of the key dimensions is the idea that any person bidding for an AdWord pays the second highest bidder's bid, plus one penny. So, if I'm willing to pay $7.00, and the next highest bidder is $5.00, I win and pay $5.01 when someone clicks on my ad word. (They also incorporated a measure of quality and supply in their algorithm, the details of which I will leave to another time.) This story has been reported in many quarters, and is the stuff of innovation legend. What I find interesting is that Google's management was willing to look for and implement this "better idea." By backing this approach, the two young men were standing against industry practice, and even apart from the other part of Google that was busy selling ads at the top of the page, with a human salesforce, to big advertisers who would pay traditional prices for impressions. Of course, AdWords Select, as this innovation was known, soon swamped that traditional mode of selling ads, and today the vast majority of GOOG's $25 billion in revenue is from this system. This ability to take the very best idea and to implement it within an organization seems easy, but is often difficult. In fact, I'd like to introduce Sviokla's Law of Marketspace Innovation: The more idea-based (or abstract) an innovation is, the harder it is to implement. For example, I'd argue that Culin's innovation was easier to implement because people could see the results. Kamangar and Veach's innovation took more managerial moxie because their approach took a new way of thinking and believing that was contrary to conventional wisdom. I predict that as the world gets more and more virtual — with people buying, selling, and communicating more and more over digital devices including but not limited to computers, cell phones, and netbooks — that the relative value of better ideas will be greater. We see in our own consulting practice that the discipline of behavioral economics can have profound effects on people's buying behavior. In one experiment we recently did for a large travel company, a change in interface design drawing upon behavioral economics principles created an immediate 2% lift in revenue — with no incremental cost. That's 2% of pure profit to this multi-billion dollar company. But, in order to implement this idea, senior management at this firm needed to go against their training in economics, and be willing to believe in a new approach. This is not easy. Those firms that are able to embrace new ways of thinking will be able to garner new opportunities and new value. Given the increasing competition in every category, those companies that can't learn to bring in truly new notions will fall behind. So, my questions are: Where is your firm? Can it bring in new ideas? Can it truly weigh the value, or are you constrained by traditional thinking? I'd love to hear your ideas on this and how to fix it. 11/16/2009

How Will "Augmented Reality" Affect Your Business?

This post was co-authored with Anand Rao. My colleague Anand and I think that augmented reality is going to be a big deal for businesses. What is it? It is the idea that locations, devices, even the human body will be "augmented" by linking and overlaying additional information on top of "regular" reality. For example, this month's Esquire will have visual codes embedded in the text — even on the cover — which you can hold up to your computer's camera. The computer will read the codes, and take you to a video or other information linked to that magazine "location." Is this just a gimmick? After all, the physical magazine is a great way to create a link to more comprehensive content. The magazine cannot afford to put too much information between its covers, but it can put as many pointers as it wants to more content. This basic notion is very, very powerful. (See the great post on this topic by Gary Hayes which inspired our thinking.) Anand and I think augmented reality will change at least the following five things: 1. The nature of advertising. We know that if you're an advertiser, you want to allow people to transact while their attention has been caught by your product or service. The beauty of augmented reality is that it allows any advertiser to bring the possibility to purchase much closer to the advertising stimulus. So, if I'm reading an interesting article in a magazine and there is an add with a visual code on it, I can then scan it with my BlackBerry or my iPhone and order it immediately. 2. The nature of location. The GPS revolution in cars has already created a low fidelity version of augmented reality by enabling maps in any car that wants them. You are already starting to see applications available on advanced phones that allow an individual to hold their phone up to a location so that the information about the location is overlayed on the screen: Right now these are focused on tourism, but it does not take a lot of imagination to see that any sales or service force would love to be able to walk up to a building and understand the nature of the potential customers inside, or installed products to be serviced. 3. The nature of healthcare. One of the great problems with healthcare is the lack of information at the point of service. It is only a matter of time before you will have the option to link your medical information to you. There is cheap, available bio recognition technology which will allow someone to swipe their finger, or speak into their phone to identify themselves, and then to allow the doctor to have information available to them — just like Esquire allowed for the ads to be tagged to a page. 4. The nature of relationships. The next natural extension of Salesforce.com would be to have a person be able to either scan in a face (face recognition software is standard issue now with many photo products, including Apple's iPhoto) and then provide the salesperson with the best available background search on the individual whose information may be out on Facebook, LinkedIn, or other social networks. Also, if you are like my friend and Diamond Fellow Gordon Bell, who has taken his whole life digital (documented in his book Total Recall, which just came out), you can link any face to all you know about that person. 5. The nature of knowledge. Much of the knowledge we need to do our jobs is not available because we have a hard time getting access to it at the right time. BMW did a concept piece on augmented reality where a mechanic is replacing a fan while wearing special glasses which project the instructions onto the car as he looks at the engine compartment. Our understanding is that this is not operational, but something like it will come. Why are we so bullish? The military has been augmenting the battlefield for some time, and now with advanced GPS devices, better telecommunications and hand-held devices that have enough display and computing power to make things interesting, we think we are at the beginning of a boom market in augmented reality. So the question becomes, is your firm thinking about how advertising, selling, products and service will change when you can overlay the right information, at the right time and in the right form — everywhere? What do you think? Are we at the beginning of a revolution — or is augmented reality an idea that will always be in the near future, but never here? 10/30/2009

Getting Started with Disruptive Business Design

Oliver Yeh, a first-year Mechanical Engineering student at MIT, just successfully designed, launched and retrieved a camera 17.5 miles into the atmosphere and took 4,000 photos — at a cost of just $150.00! That's probably less money than he will spend on his celebratory dinner. Not only is this story inspirational to someone like me, who after millions and millions of miles in the air (no exaggeration) still sits glued to the window when I fly over Manhattan or the Grand Canyon, but it points out how the minimum efficient scale of doing fantastic things is getting orders of magnitude lower in some industries. This lower cost of entry can be magnified and accelerated when you have someone come to the design problem with an entirely new set of expectations. Craig Newmark's Craig's List is estimated to have about $100,000,000 in revenue — with 30 employees. That's $3.3 million per employee, and even if it costs $70,000,000 to run it (which it can't), that's a profit-per-employee of $1,000,000. (Compare that with Amazon's profit-per-employee of approximately $30,000.) His model is so disruptive because he gives away all the ads except those for jobs, thereby turning what was once newspaper profits into what economists know as consumer surplus. Now, there's been a lot of interest in "disruption" ever since Clay Christensen did his pathbreaking work on The Innovator's Dilemma, which chronicled how incumbent companies were upended by competitors or substitutes who arose from "lower" markets to create a new cost and demand base. Southwest Airlines did it in air travel, and Wal-Mart in retail. You know the story. So what is the toolkit to create a disruptive design? Here are some ideas: 1. Simultaneously simplify a number of advantages together to create a new cost base. When Southwest Airlines launched they flew only one aircraft — the Boeing 737. Today, they still have one aircraft. They have one class of service. They have simple fare strucutures. They sell direct to end customers. They go to the less frequented, second-tier airports. They have broad job descriptions and cross-train so that one person can do many jobs — including pilots handling luggage. The created radical simplicity by simplifying many dimensions. They are not the only business where complexity has stopped adding value. New, radically simple business models can be created in everything from financial services to healthcare. 2. Give away the other guy's razor! Craig Newmark garnered dominant market share by giving away almost all the blades. Put more formally, every "two-sided market" has a vulnerability — and if you can enter by aiming at that vulnerability, you can win. In China, Google is now giving away MP3's and sharing the ad revenue with the artists. Paid music is now all marketing promotion. In addition, at Wired magazine's Disruptive by Design conference, a featured book was Chris Anderson's Free. 3. Look for new, radically cheaper ways to do the job. Yeh used run-of-the-mill technology — cell phones, video cameras, and even a styrofoam cooler — to create a much cheaper design. Consumer technologies and on-demand services like Amazon's Mechanical Turk enable new business designs that could have a fraction of the cost to deliver the same services. Imagine a security company that was truly designed around the inexpensive, internet connected, monitoring equipment available today. 4. Think about leveraging a very few individuals with extraordinary talent. It is possible today for a small group of people to make a spectacular movie (think Pixar) or to manage billions in capital (think hedge-funds). Is there a way to create incredible value for your organization by leveraging the power of a small group across millions of consumers or billions of dollars? One good way to get at these disruptive designs is to do what we at my firm call a "Fiercest Competitor Workshop," which starts with the premise that you have been fired from your old organization but you have access to ample capital and talent. Your task is to design the fiercest competitor that could take the market from your old firm. In my experience when running these workshops, it takes people about an hour to get out of their old mindset — but when they do, they often design the most wonderfully dangerous potential competitors. No one knows their company's vulnerability to a disruptive design better than their own employees. It is the leader's job to unlock this disruptive design potential so that it can be harnessed to help the incumbent make more money for its current shareholders, employees, and provide better surplus value to customers. 10/19/2009

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