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Ensure Continuity
for the Customer, Not Yourself
Hoping to stall the painful
move from the world of atoms to the world of bits, many
companies begin by hiding behind their customers. The
mass market isn't ready for this, they say. People are
afraid of computers. The Internet is scary. Scary for
whom? There's little doubt that digital technology and
the killer apps they enable are making life difficult
for most everyone in business. Old ways of doing business
disintegrate overnight, reducing the time to respond
from years to days. For customers many of the changes
are beneficial. More to the point, they are entirely
consistent with developments in commercial life consumers
have been enjoying for years. The Law of Disruption
is what you have to worry about. Managing continuity
for customers and other business partners means doing
what you can to protect them from the fallout.
Andy Lippman, director of the MIT Media Lab's Digital
Life program, which studies the social dimension of
computing, made this point eloquently during a recent
consulting project. The client, a group of related trading
and transportation companies, was concerned that its
customers and suppliers would be uncomfortable switching
to electronic interfaces. But why worry about that?
Lippman asked. They deal with electronic interfaces
all day—the telephone, the television, ATMs, grocery
scanners, car dashboards, even automated bus transfers.
Customers don't know, or don't care, that technology
has replaced familiar ways of doing things when the
interface is designed to continue the old metaphors.
Digital gauges on dashboards still "look"
like gauges. Electronic bingo cards, in another example,
are designed to simulate blotting out called numbers.
Electronic commerce, in essence, combines the unhurried
convenience of catalog shopping with the superior interface
of TV shopping, innovative developments that customers
adapted to almost from inception. (Revenue from TV shopping
will reach $60 billion in the United States by the year
2000 at its present rate of growth).
For customers electronic commerce is like an interactive
catalog, supplemented with audio, video, and (eventually)
real-time interaction with other shoppers. The merchant,
on the other hand, must deal with the fact that electronic
commerce erases much of the value of physical stores,
which must be transformed into showrooms, demo centers,
or staging areas for direct home delivery. As customers
grow to expect customized goods not just for information
products but for manufactured goods—blue jeans, cars,
and home computers, for example—manufacturers will need
to find ways of using technology to improve production
and delivery systems by several orders of magnitude,
adding memory, perhaps, that stores the customer's specifications.
Final assembly will have to be outsourced to the delivery
system itself, turning trucks into miniature manufacturing
plants.
Several electronic commerce start-up companies are building
businesses that do nothing but minimize disruption for
customers and merchants. Cybercash, for example, was
launched to solve the difficult problem of handling
electronic payments cheaply, safely, and without having
to utilize relatively high-cost credit card systems
that do not respond well to large volumes of low-price
transactions.
Cybercash initially offered a simple third-party verification
service to belay exaggerated fears of credit card fraud
by customers who were being told by credit card companies
that the Web was not a safe place to reveal their account
numbers. (It is, in fact, as safe as doing so over the
telephone or in stores with electronic card readers.)
Cybercash, and rivals DigiCash and Mondex, have since
launched experiments in providing technology that acts
like cash ("E-cash"). E-cash is stored on
intelligent credit cards that can be plugged into computers
or given to participating merchants. Mondex has already
coordinated merchant and customer immersion pilots in
England and Canada and on New York City's Upper West
Side.
Customers will grow comfortable with E-cash initially
because it will simulate the familiar experience of
using paper bills and coins. Eventually they will learn
that electronic money has advantages over cash, which
will lead to new uses. E-cash can be programmed (so
that, for instance, parents can limit what their children
buy with it), it can be switched from one currency to
another without incurring high transaction fees, and
it can generate mountains of useful data as it is used
to help fine-tune buying decisions and products. The
key will be to bring the customers along as quickly
and as smoothly as possible, not as slowly as is convenient
or most profitable for the developers. As one Mondex
user put it, "Convenience is addictive.".
WebTV's CEO, Steve Perlman, ran an end-run around computer
manufacturers that were scampering to build cheap Internet
access devices by playing to the customer's preference
for the familiar. Perlman recognized that many consumers
don't want a computer at all, only access to the Internet
for features like the Web and E-mail. Since every home
in the United States already has television, which owners
are entirely comfortable operating, Perlman's killer
app is to use technology to extend the TV rather than
to introduce a new, unfamiliar device. Instead of forcing
consumers to accept the computer makers' mind-set, Perlman
adopted the consumer's perspective, and transformed
televisions into simple Web access devices by connecting
them to a phone line, remote control, and optional keyboard,
coupled with a subscription-based access service oriented
toward nontechnical (and happily so) users.
June 26, 2001
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The New
Economics
I don't know who discovered water,
but it probably wasn't a fish—Marshall McLuhan
What is it about the digital killer apps that
makes them so deadly? If Moore's and Metcalfe's Laws
are improving the power and speed with which technology
enters the marketplace, shouldn't that be cause for
celebration and not anxiety? Why does the Law of Disruption
apply to commerce at all, when conventional wisdom
holds that technological innovations improve productivity
and create new wealth?
Moore and Metcalfe explain how digital technology
spawns so many killer apps, but we need to look elsewhere
to understand why business executives now see technology
as their main competitor instead of their chief weapon.
The answer comes from the remarkable work of economist
Ronald Coase. Coase's breakthrough work on transaction
costs, as well as the peculiar economics of information
provide a powerful framework for thinking about the
new economics of cyberspace.
As transaction costs fall, many organizations have
already farmed out functions like purchasing, travel,
data processing, and accounting to outsource partners
that can operate, thanks in large part to new digital
technology, on scale. Despite admonitions to focus
on the organization's "core competence"
(those activities the firm does particularly better
inside than outside), firms today don't usually decide
on their own to outsource a function that's no longer
efficiently performed inside; rather, the outsourcer
comes to them with the economics already worked out.
To return to our paper clip example, many firms have
already adopted an intermediate solution of turning
supplies, copying, and other purely administrative
activities over to outsource partners, who often actually
reemploy the firm's employees who formerly performed
the function but now operate it as a profitable business.
Even when the former employees aren't retained, the
rush to outsource explains why, despite continual
and massive downsizing in nearly every industry, the
unemployment rate in the United States is near record
lows (it is high in much of Europe, but this seems
more a function of overregulation and the upheavals
being caused by the collapse of Communism in Eastern
Europe and the shift to European Union than to downsizing).
It's not that people are losing their jobs, it's that
they are increasingly shifting from large firms to
smaller ones. Just as the Law of Diminishing Firms
suggests, the U.S. Department of Labor is already
predicting that by the year 2005 the largest employer
in the country will be "self."
New entrants and early adopters of new technologies
do not have fixed assets, and in the new economy,
what was an advantage will quickly become a disadvantage.
Digital publishers don't have or need printing presses,
a distribution network, and retailer contracts. Digital
insurance firms and banks don't have or need agents
and branches. And digital shopping malls don't need
any of the three key assets of traditional retailers:
location, location, and location. New digital competitors
can still reach an exploding, global, unregulated
market overnight, and at very little start-up cost.
The barriers to competition are falling fast, falling
at the speed of a bit. Software giant Microsoft is
already offering services as varied as event ticket
sales, travel reservations, home and car shopping,
and investment advice.
Many organizations have already recognized the power
of information assets. Some are even willing to put
a value on them. Jewel grocery stores give their customers
a "Preferred Card" that allows the stores
to capture and market perfect sales data, connecting
customers with the complete details of what and when
they buy. Jewel compensates the customers for cooperating
in the collection of this information by providing
discounts on various products only to customers who
use their Preferred Card.
In the new economy, the balance of activity between
firms and the market, between middlemen and the buyers
and suppliers they sit between, changes dramatically.
Early exploiters of new technology disrupt value chains,
cartels, industry structures, and the delicate balances
between sellers and customers, between regulators
and the regulated, and partners and competitors. New
rules and new structures will rise and fall with increasing
velocity, new operating models and new competitors
will come and go, and activities will morph into others
or disappear altogether.
This is a brave new world—one that requires a new
strategy. In the age of digital killer apps, it requires
a digital strategy.
May 17, 2001
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