Wired magazine recently announced on its cover that the Web is Dead.  I confess I really like the magazine  despite some of the hyperbolic rants that Chris Anderson, Wired’s editor creates like his book “Free” — which is completely indefensible from an intellectual or factual standpoint.  In this case, I think the magazine is “right” — more and more digital traffic is going non-web mechanism but rather  in peer to peer activities like Twitter, or Netflix’s movie streaming, or listening to Pandora radio.  We are less and less  interacting with the “traditional” web.  Anderson and co-author Michael Wolff note that Marc Andreessen famously said that applications would be open, free and out of control — and here we are.

But how radical is this?  I believe it is just another turn of what I call the modularity cycle.  Modularity cycles tend to come from two sources.  Either, you have an innovator who comes up with a complete design — the way Edison and Westinghouse did for their electrical infrastructures.  This type of systemic innovation creates an entire value chain and business model.  Alexander Graham Bell did the same thing with the telephone.  Over time, these “systems” become more open and each module of value from the phone to the phone line, become fiercely competitive.  Big, successful systemic innovations create entire industry clusters — as Swift did for meat, Sears for retailing, and DuPont in chemicals.

I don’t see many entirely new business systems occurring in the digital world right now.  (You could argue that Google and Apple are close.)  I believe this lack of systemic innovation is due to the fact that too many parts of the infrastructure — especially access to bandwidth — are so heavily regulated, making it difficult for new business models to completely arise.  For example, if there were free access to a chunk of spectrum on a national basis, it would be possible for Ford or GM to launch an entirely peer to peer telecommunications infrastructure — with their cars becoming transceiving stations.  Car use goes in the same density as telecommunications demand, so it would give rise to bandwidth in a pattern shaped like the demand for the bits.  Given that many households spend around as much on entertainment and communications as they do on a car payment, one could imagine these companies finding entirely new profit pools.  But, given the regulatory infrastructure such a radical, systemic, innovation is unlikely in the new world.

The other way for the modularity cycle to begin is for a very simple application or product to become popular and more and more functionality can be layered on top.  For example, Twitter is starting to build its own applications to compete with more open platforms.  Today, they released their own application for the iPad and iPhone which will compete with the likes of Tweetdeck and Twitteriffic.  I believe Twitter will try to continue to incorporate more and more functionality in it’s “base” product.

So, the observation of the folks at Wired is simply noting that the sun is going down, before it is to rise again.  Modularity versus systemic innovation is an old and well documented story.  (It is also true that publications are often in the business to hype variance, not seek truth — so, all cycles are turned into impending trends to grab attention.)

For businesses, one important thing is to make sure that you can sample functionality and integrate new things on top of your “systems”.

You need to be able to enable your internal applications with existing, external applications as they arise from the modularity cycle.  Here are three thoughts:

1. Can you easily grab your employees information from their public pages on Linked-In?  Why not, it will save you time and money and connect them more easily to customers and recruits.
2. Can you map your customers onto a Google map, along with their revenue and growth?  Why not?  Wouldn’t you like to be able to “see” your demand?
3. Can you get access to all and any information about your brand and your customer’s brand’s easily — a brand radar if you will?  If not, why not?

Wired’s Anderson is right about one thing, you do need to be able to access this new ecosystem of modules and I’d add, you should understand the emerging systemic innovations too!

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I’m coming to believe every good is a convenience good.  A recent New York Times article reported that Nordstrom has integrated their in-store inventory with their online supply, meaning that anyone can get access to the entire inventory from any “location” — a physical store or online.  They also report that Nordstrom’s management believes that this “innovation” has helped change their same store sales from a “negative growth” (don’t you love that term!) of 11.9% to a positive growth of 9%.

The brilliance of this strategy is that it maximizes the most precious thing in any business — the yield on a customer that wants to buy something, now!  The famous maxim by Peter Drucker was, “The purpose of business is to create and serve a customer.”  So many businesses have become so operationally complex — especially in retail, that there are many barriers for a customer who wants to spend money.  Nordstrom, fortunately, was willing to spend the two years necessary to integrate all their inventory into one information pool — and thereby allows not only better customer service, but fewer mark downs and sale items.

Rightfully, the article points out how few companies have pulled this off.  But I will say I saw a similar result years ago.  Back in 1998-1999 I was working with W.W. Grainger the $7B industrial parts distributor, and then CEO Dick Keyser.  (By the way, Grainger’s stock price has tripled over the past decade while paying a regular dividend.)  Dick wanted to completely integrate the physical and the informational.  He was early in the market with Grainger.com, and was willing to make the significant investment to integrate all his inventory across retail stores, over 15 distribution plants, across a magnificently complex product line.  Grainger carries over 250,000 different products!  But Dick wanted any of their thousands of customer service or sales people to be able to check the entire inventory of the company and to be able to commit the actual unit — maybe it was the last water cooler available to replace a broken one in the local high school gym.  Not only does their system allow for complete visibility and commitment of the inventory of the entire company, but it even allows the customer to say if they want it shipped, if they will pick it up, or if they want it transferred to a closer store to allow for pick up.  Now that’s inventory control.

Dick was very clear on why he wanted to do this: Grainger’s core value proposition is convenience, and if they did not have availability the complexity of their business would dampen their economics.  But, if they could break the back of that complexity — by having one inventory then they could deliver better service and capture differentiated demand that was willing to pay a premium for service.

I think this lesson is generalizable.  All retail companies, and to an increasing extent business to business companies must have complete availability of all their products and services wherever, however, and whenever the customer comes to them.  Demand is a terrible thing to waste.

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If you are the type of person who likes to think about where things might be going I’d suggest you start watching the evolving competitive battle between Facebook and Google.  Both firms want to know who you are and whom you connect to, e.g. your “social graph”.   To date, Google knows a ton about what you search for, but only Facebook, LinkedIn or another social network knows your social graph.

As most people know, the value of Google is that their software crawls the web and uses its page rank algorithm to generate a giant “influence graph”, and thereby they serve up the most influential sites that match your search query, along with ads.  The social graph starts from a very different place.  It begins with you as a real human being – not just an individual searching for stuff – and because Facebook knows not only who you are, but whom you know, how often you “talk” with them, and what you chat about, Facebook has the potential to start mining this data for many commercially useful things.

In 1984 as a doctoral student my colleagues and I performed an extensive analysis of social graphs within three large organizations and from that experience I know that any firm which has a clear articulation of the social graph of a group can make an informed guess at who is the leader, who has power, who is listened to, and who is isolated.  Back then we performed these social graph analyses on itty-bitty personal computers with simple academic software.  Facebook and Google are building some of the world’s most powerful computer systems for their own use and I’d bet they will be able to easily show:

• What groups form around which subjects and why (something any media company, or politician would want to know);
• Which individuals are the most influential on any product or service decision in social group (something any marketer would desire);
• Whose star is rising and who’s falling (something a placement firm would like to understand).

To date, Google’s efforts in social media have been marginal at best.  Its Buzz service is not even close to Facebook’s popularity, and Orkut the social network they bought is popular in Brazil, but not strong elsewhere.  Yet, Google is undaunted and they recently invested an undisclosed sum (reported to be between $100-200,000,000) in the very popular social game company Zynga.  The Zynga game network, which includes Farmville and Mafia Wars, is visited by over 200,000,000 people a day within Facebook.  By investing in Zynga, Google might have a chance to get at the social graph – because the games show the connections among people.  Zynga is ready to create games outside of Facebook and Google may use Zynga’s games as an end run to get to the social graph.

Even if you are not interested in the competitive battle for the world’s attention, you should be asking yourself is your firm using the social data that is available to you?  For example, if Harvard Business Review wanted to, you could add the LinkedIn widget I have on this site which shows you all the people you already know in LinkedIn who are working at our firm Diamond.  Imagine how you could use that at your firm.  Any time a person “comes” to your web site, and if you encourage your employees to add their names to LinkedIn, the visiting person not only sees your content, but they find out if they already connected to people within your organization.  This social functionality can be very helpful for making useful connections.  This is just one simple application, there are many more possible.

We all know that relationships are vitally important and my question is, how well is your firm to take advantage of this new, social world?

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The other day I was on the phone with my insurance company because they had rejected, for a second time, a procedure for my son which was performed by a physician who they claimed was “out of network” — let’s call him Dr. Brown.  But, as I logged into the firm’s web-site (again), I was able to easily find Dr. Brown who was “in network”.  As I had done a few weeks before, I mentioned this to the customer service representative, and she was not able to look at the web site from her computer, so I had to read her the name, address, and phone number so that she could contact him and make sure that he was “in network”.  I’m hopeful that I won’t have to provide the screen reading service a third time and if I had not spent time as a customer service representative myself, I might have been a bit more testy.

Certainly this is a scene into which Joseph Heller might have put Captain John Joseph Yossarian, the protagonist of Catch-22.  To me the interesting question is: how do we get here?  For this, I offer 5 things that cause ridiculous customer experiences:

1. Mergers.  Often, when firms combine the poor customer service representative has to jump back and forth between two or more systems to answer  customers’ needs.  Many years ago when I was researching the speciality chemical division of duPont, the customer service representative routinely had to interact with over a dozen screens to service a typical customer;
2. Siloed organizations.  I’m sure in my insurance experience above, the people who handle the physician network are in a different organization than those who handle claims – exacerbating the chance of a missed hand-off;
3. Permanently delayed integration.  In many organizations there is a significant amount of “waxy buildup” of business processes and systems.  I was performing research at a leading insurance company which was, at one time many decades ago, the market leader in integrated customer information.  However, they failed to reinvest and after the slow accretion of years of new products and services their customer experience was largely disintegrated.  It got so bad that long standing customers would get duplicative sales calls from different parts of the organization, and one group did not know what the other was doing!
4. Poor incentives.  Often those who touch the customer are motivated in very different ways.  Sales is driven by volume, and to some extent margin.  Service by efficiency.  Claims by how little you can pay out.  Only the customer sees these multiple personalities — hurting service.
5. Lack of leadership.  It is hard to make long term, transformational investments that improve the customer’s experience.  In my absurd experience chronicled above, I’m sure someone in that organization has raised the issue time and time again, but there has not been the coherent, driven, leadership needed to fix the problem.

So, have you lived through the experience your organization creates for your customers?  If not, you should give it a try as you may be surprised by what you find!

Other potential useful articles include:

• Staple Yourself to an Order (My HBR Article with Ben Shapiro and Kashturi Rangan)
• Better Customer Service Through Transparency, Tribes and Talent (My HBR blog post).

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Today’s New York Times article joins new stories about Zynga (formally Zynga Game Network), the maker of FarmVille, MafiaWars and other popular games on Facebook.  Mark Pincus, the 44 year old founder is estimated to be Silicon Valley’s newest paper billionaire.  Not only is his company profitable but it also sees over 200 million people a day on their Farmville game alone.

How do they make money to the tune of $835 million expected this year? Their revenue stream, as reported by the Times, is comprised largely of people buying digital currency for seed, animals, equipment, etc.  Like Second Life before it, marketspace communities are willing to spend real money to create activities, status, and function within their virtual world.

It only makes sense that as people spend more and more of their work and leisure time “within” a digital environment that there is a concomitant rise in the nature of social interaction.  Perhaps Facebook, Twitter, Zynga are all “yin” to balance out the “yang” of work.  Put another way, if we spend so much time interacting in functional ways with email, spreadsheets, and PowerPoint decks (which are often more mind-numbing than being forced to listen to C-Span), as humans we find a way to inject something fun, social, and diverse in our days of structured work.

It is interesting to me that the biggest consumer killer apps of the past five years have not been about productivity, they have been facilitating the more “humanizing” aspects of the web: fun, chatter, and games.  I wonder how much more the pendulum will swing toward these social applications before productivity comes to the fore again.  (By this, I’m not saying that Twitter and Facebook are completely unproductive, but I am saying they are less instrumental toward traditional cognitive work than a spreadsheet.)

It begs the question, how social is your personal marketspace — or digitally, are you all work and no fun?

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Esurance.com’s current advertising campaign emphasizes the fact that their customers can interact with technology when they don’t want to talk with people and they can talk with people when they don’t want to interact with technology.  In a world which is becoming increasingly populated by people who have grown up with the internet always being a part of their lives, their expectations are shaped by being able to get their products or services in any mode they desire.

In addition, at Diamond, we have performed analyses that show a significant amount of online customers abandon their purchases before they finish.  I’d bet that Esurance is ready to use either method because it helps to create a better close rate.  Rather than have their customer leave without buying — they can pick up the phone and ask for help.  Esurance is smart to turn the need to provide online and on the phone into a benefit.

In addition to the “have it your way” service model, they also provide transparency for the customers when they have an accident.  Esurance provides daily pictures so that the customers can see the progress on their repair.  Given the very low level of trust between customers and their repair shops, this is a valuable added benefit for many customers.  More broadly, this need to deal with customers anyway, anytime, and anywhere they want to is a requirement for today’s service expectations.  Also, providing transparency helps to make the virtual experience more real.  In addition, their visit to the web site ovviates the need for a call to the Esurance call center.

All companies should think carefully about how well they deal online and in the real world. Furthermore, they need to look at how much transparency you provide customers througout the customer experience.

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One way to effectively market while being friendly to the environment is to facilitate the market in used goods.  When I was a kid my father used to make me bang nails out of junked wood and straighten them on an oak workbench to store them in empty coffee cans for future use.  Strangely, this made my father one of the “greenest” people I know, despite the fact that he does not believe even the U.S. Navy’s data on melting of the polar ice cap and he thinks climate science is a liberal plot.  Nevertheless, his frugality made him an accidental environmentalist!  In fact, promoting the used market may be one of the best things we can do to be green, while simultaneously keeping an ongoing relationship with customers.

As Matt Power pointed out in a his May 19, 2008 article Don’t Buy That New Prius! Test-Drive a Used Car Instead it takes 113 million BTUs of power to create a new Prius.   Personally, I’m bothered by my propensity to buy new gadgets and join the billions of us who are creating a Niagra Falls sized waterfall of toxic waste as we dispose of these devices.  The Boston Globe reported on a number of new companies which are facilitating the used market for technology — especially iPhones more aggressively.  There are also the folks from Flipswap whose Greenphone site gives you some trade-in value for your device (my BlackBerry 8100 brought just under $16), and they will plant a tree.

More broadly, eBay is starting to promote the environmental benefits to buying used and the big guys like Costco and Wal-Mart are starting to have trade in centers.  Of course the big kahuna in this domain is Amazon.  When they decided to facilitate the used book business, they made a huge strategic coup — because they were willing to manage any demand — not just new demand.  They must have figured not only how to make money on the used book business, but more importantly, they wanted to funnel new and used book information.  By facilitating the used market, they had access to the entire market — not only the customers interested in new things.  This creates a deep understanding of the entire demand curve and all its price points.

Consequently, whereeever possible, I think it is in the interest of companies to facilitate the used market in their products and services.  It not only helps customers, it gives the producer an ongoing relationship with the individual buyers and users of the product or service, and illuminates the price/value curve across the entire market.  What do you think?

Useful links:

• Wal-Mart’s New Information Advantage (My HBR Blog Post on WalMart and used.)
• The impact of electronic marketplaces on product prices: an empirical study of AUCNET (An academic paper on an early Japanese electronic auto auction.)

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eBay recently guided Wall Street to lower numbers.  I’m always amazed that eBay can’t grow faster because they have lots of information on millions and millions of people’s desires.  Moreover, they know not only what is being sold and bought, but also what people are searching for and what they will pay.  More broadly, it seems to me that lots of companies don’t do a very good job of engaging existing, former or new customers in helping to create new types of solutions for their desires.  It seems they don’t hear their customers well enough!

For example, it would be possible for eBay to either buy, or compete with Indie-Go-Go, which is a company that helps people raise money for any type of project or creative act.  If you are building a movie, or want to write a book, or create a new company, you can go and raise the money through Indie-Go-Go.  Why can’t eBay host this pre-production financing.  They are locked into a mindset in which they only “sell” “things”.  If they could shift their thinking to being a market in desire, both for things that already exist and for things that might exist if enough people are ready to pre-buy it.  Also, Indie takes 9% off the top which is a bigger fee than eBay takes on things. This is a very different type of listening to the market.

The famous example, Threadless, the  company that creates custom t-shirts, and only builds to order could have been part of eBay as well if they had a “pre-thing” mindset.  It lets people provide content, and they have a business model that listens to demand by letting people pre-buy the shirts, and thereby lower the risk by having no inventory, and no marketing costs because people have already committed to buying the shirts.

This way of thinking is vital to the new world of search and social media.  Both Google and Facebook, like eBay, know  what people want before they have consummated the sale.  This is very valuable information, and innovative companies like Threadless create innovations in the way that their suppliers and customers interact with them so that they can let the market unlock this nascent demand.

For your firm, or for your career, how well do you listen to your customer’s or possible customer’s interests?  Can you craft a way for them to interact with you as you listen?

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A few days ago the iPad just passed 2,000,000 units in sales in under 60 days.  Why is that?  I think its because the device allows people to take their information sources and uses (e.g. their personal marketspace) and “bring” it into their everyday life.  When you create a device which can be spliced into life, it can crop up everywhere.

Radical innovations redefine how we think about a category, and history is replete with examples.  Take Radio for example.  Radio has a rich and interesting history, from its scientific roots in the mid 1800s to the creation of the first broadcast station by Charles Herrold in 1909, and the subsequent scaling of the powerful idea of advertising driven broadcasting was lead by David Sarnoff at RCA.

Early on in commercial radio, the most optimistic projection for adoption was to have one radio in every household because at the time radios were expensive, furniture encrusted devices.  But, with the advent of the transistor, the radio became portable and could fit in the car, on the nightstand, and even in the pocket.  I still remember my father’s golf-club-head radio and listening to the WEEI in Boston early in the morning as he made breakfast.  The estimates of use completely missed what the new patterns of behavior would be when the device became small.

Likewise, the iPad solves a number of size, interface and connectivity problems, simultaneously.  Its versatility was driven home to me when I watched this video by Jason Kottke:  Velcro + iPad = Love.  This short piece of creative genius shows that you can “put” an iPad anywhere and use it for everything from a map, to a weather station, to a book, to a personal communcator on the top of your motorocycle gas tank.

So, my question is, how are you using iPad to reinvent your customer’s experience?

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Earlier this week, in a hot New York City, I was having some tea and lemonade with a dear friend who is a  senior publishing executive.  When our conversation turned to exploring the future of publishing she said, “our folks say our core value is to curate content”.  I suggested that the real challenge for any publisher today is not just to curate content, but to manage audiences for the authors.  She said, “in other words we need to curate audiences”.

As I thought about her brilliant turn of phrase, it occurred to me that all great authors and companies curate their audience.  For example, Seth Godin, whose work I greatly admire, curates his audience.  His very functional web site has daily blogs.  He has published the most popular business eBook ever; he created a Vook, which is a video book you can download to your iPhone.  In short, he keeps in touch, and he provides ongoing intellectual sustenance to his followers (in his terms his tribe).  In my opinion he does a superb job of curation.

Zappos curates their audience.  In each interaction, they treat you like someone precious to them.  They have crafted their interfaces and databases and call centers to create a seamless, painless, anytime, anywhere, anyway experience.  This is curation.

More broadly, all firms need to curate their audience.  This is more than networking and direct mail spamming or putting in a CRM system.  Curation is a process of overseeing the perservation and use of something precious.  Audience is the most precious thing in the world to any company.  Audience is a large concept than current customers.  Audience is anyone who knows about your firm, your brand, has bought something from you in the past or may do so in the future.  It is all the people who have an opinion about your organization.

When I taught marketing I used to say, your brand is nothing more than the sum total of the memory traces which everyone who has touched your company have in their heads — good and bad.  So a curator thinks about how precious those memory traces are and how important it is to be prepared to create new positive memories.  Tactically this means that a firm must at least do the following:

1. Have full information about all the interactions your customer has had with your firm. for example, recently i have been fighting with my insurance company to pay a health claim.  Each time I call I have to educate them on the status of everything.  If they were museum curators they would have lost all the paintings already.

2. Be ready to do business in anyway, anytime, and anyway. If your customers want to link to you over a mobile device, then you should do it that way.  We are in the middle of some work for a large insurance company and many of their customers don’t want to go to the web to check claim status so a simple mobile alert will improve service and lower costs in the call centers because people won’t have to call.

3. Have an attitude that your audience is precious. Think of how carefully curators treat each and every artifact in a collection.  The heart of the curator is imbued with care.

So, do you think your organization is curating your audience, or only warehousing them?  I’d love to hear your stories.

Other Relevant Posts and Links:

• Better Customer Service Through Transparency, Tribes & Talent: An HBR Blog Post
• Keeping Customers (A book I edited with Ben Shapiro on the topic)
• Staple Yourself to an Order (An HBR article on managing the customer relationship across the entire order cycle)

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