Once Upon A Time There Were Producers and Consumers

What started as social media is disrupting traditional producer/consumer roles
By Tim Gilchrist, Microengagement Co-founder

Analog TV, Records, Cassettes, drive-in movies, and trans fat are all artifacts of our recent past. For one reason or another, things that were once mainstays were replaced or eliminated because they did not fit anymore, people moved on to do things differently, changed their rituals, or without ceremony, simply forgot. Soon 35 mm film, VHS, small newspapers, CDs, network television and the big three automakers may go the same way. This is not a revolution, it is a natural a process and we just happen to be at a time when a combination of factors working together makes things change more rapidly than before.

The next step in this evolution is actually a positive step backwards, to a time when there were no “producers” or “consumers”, rather only peers engaged in mutually beneficial commerce. Purchases started with conversations. Imagine how fast products developed in the ancient marketplace/agora. Feedback was instantaneous; there was no room for vendors who were “too big to fail.” If a customer did not like a product, they had a conversation with the vendor or went to the other side of the street and purchased a superior product. The hamburger and ice cream cone are both products of just these types of conversations where someone with money in their hand wanted something different and a quick-thinking vendor met their needs. Over the years, the natural process of connecting with and fulfilling consumer needs has been “corporatized” and sanitized into a disconnected, dislocated process called product development where consumers are examined like bacteria in a Petri dish. Focus groups and customer probes do nothing to directly strengthen brand loyalty, but this is all changing. What customer wants to be “probed” anyway?

Mass production led us into an age of the producer/vendor as a “cathedral”. The ability to produce outweighed conversations with customers in the marketplace. We drove in our cars to giant stores and if you did not like what they were selling, just try and tell the clerk with a cell phone to her ear you are not satisfied.

The Perfect Storm

The recent economic meltdown accelerated change in consumer behavior that was well underway with the widespread adoption of the Internet. Consumers may not be as addicted to consumerism as we thought. They have found a new marketplace in the form of the Internet, and that has allowed consumers to revive the old conversations, make smarter decisions and do something totally new. Create important products and services without going to the traditional producer-cathedral or the agora! It’s called open innovation or crowdsourcing, and three market realities make it a growing economic force:

1. The Internet allows people to freely associate, form groups and publish on a scale never seen before. Individuals and groups have the power to get their ideas across at a level once enjoyed only by large organizations, corporations and government’s.
2. Most corporations categorize people into divisions of labor the same way they did during the industrial revolution. This is contrary to human psychology and is the only known antidote to innovation. People can and will find ways to express themselves outside corporate walls and these expressions rapidly turn into competing products e.g., Linux.
3. The price of knowledge is falling to zero. Anything from powerful server software to how to become a six-sigma black belt can be found on the Internet. A child in India can monitor classes at MIT for free. The quality of this information is getting better all the time.

These three factors contribute to a new parallel economy that few companies have been smart enough to harness. Welcome to the post-consumer, post-producer? era:

• 50% of all web sites are brought to you by open source software, built and maintained by volunteers.
• Google, the world’s most popular search engine and an economy unto itself, relies primarily on the recommendations of web page authors to drive its search engine .
• A 2006 Forrester Research study shows 27% of consumer’s research products online before making an offline purchase, up from 19% in 2004. Conversely, the influence of advertising is falling at a similar rate.
• IBM now makes twice as much money servicing its Linux open source software customers than it does selling intellectual property and patents ($2 billion in 2003) .

Enter Social Networking

In 1994 Seinfeld and ER were the most dominant shows on TV since I Love Lucy. Advertising and supply chains were effectively targeting and delivering massive amounts of products to waiting consumers who had no effective way to voice their opinions on brands, save the Better Business Bureau or an editorial in the local paper. Consequently, the voice of the consumer was at an all-time low. Along came the web browser and now the web has matured into a medium where average people can broadcast. We call it social media / social networking. Through social networking consumers have a new and powerful voice in their collective conversations:

• Conversations are breaking out everywhere. Find a dead mouse in your "luxury" hotel, have the picture, and your experience ready for millions to see in minutes on tripadvisor.com.
• Open a Kryptonite lock with a pen, put it on YouTube and millions may pay attention.
• If Motrin makes a condescending commercial towards new mothers, moms will strike back in ways the advertising media elite never dreamed of.

Everywhere you look businesses, services and governments are becoming more transparent. This is not to say they did so willingly. Many are dragged kicking and screaming into this new world and some have refused to move at all. We are seeing the rebirth of the bazaar, right in front of our eyes. Only this time, there is a twist. The Internet serves two roles, it is the platform for conversation between customers and producers and it takes the place of the physical marketplace itself. What’s old is new again and people can have conversations sell things and leave a permanent record of these activities all in one place. And now the twist, there is nothing stopping consumers from developing products and services themselves. The line between producer and consumer is eroding and so with it have fallen many tenets of traditional business rules.


The Next Iteration of Social Networking: Open Innovation

How will companies develop products for consumers who increasingly are: able to instantly connect with their friends to complement, complain about or redesign your product; discover your most closely held trade secrets; or influence thousands of people with one click more effectively than a corporation can with a million dollar TV commercial?


The Social Media Landscape


The above chart depicts how social media is evolving and where it intersects with organizations ability to innovate. Starting with news and delivery of entertainment in the mid 90’s, the Internet has matured to deliver increasingly more value in the form of community and commerce and now is moving towards an open innovation delivery model. Online communities reached a tipping point when enough members were willing to write code, make comments, and organize data to the point where they became market forces. Wikipedia, Linux, YouTube, Facebook, and MySpace are all examples of communities using social media to become market forces. Now these communities are creating products, often with the cooperation of formerly proprietary companies such as Sun Microsystems, Google and IBM. Therein lies the intersection between traditional, vertical, publicly traded companies like IBM and the open source, open innovators such as Linux and Mozillia. They can coexist!

A rough time line of this progression is as follows:

• The early web delivered news entertainment and commerce in a one way, broadcast.
• The addition of community allowed people to start conversations with each other and the merchants they patronized.
• The community then organized, developing high value products (Wikipedia & Google).
• Using the tools and accumulated knowledge from the community accelerated creative endeavors (Linux, Swiffer).
• All components of the system working together make prediction possible (Intrade, Consensus Point). The result: a parallel economy with unlimited potential.

Case Study: The TechCrunch Web Tablet

We all know that computer companies make money by pushing speed, memory and operating systems as points of differentiation. Macs are widely regarded as more intuitive than PCs, Dells often are easier to order than Gateways. Most of these points don’t matter as much as they used to. A growing majority only uses computers to surf the web, with online competitors to Microsoft Office available for document creation (e.g., Google Docs). These market realities are lost on the major computer manufacturers whose paradigms and organizational structures compel them to make computers that run faster, consume more energy, and store more data.

Now a technology blog is spearheading the first open consumer product. TechCrunch proposed to its readership in July of 2008 that they should get together and build a web surfing tablet for $200. It's an interesting idea. How many people use more expensive laptops to do nothing but surf anyway? This tablet could fill an interesting niche as computer manufacturers shy away from inexpensive products that don't need the latest processors. Many people want a device to surf the web while they watch TV.


How Can a Blog Make a Computer? Thought Only Computer Companies Could Do That?

Four points mentioned above in the “Perfect Storm” allow a blog to make a computer:

• Software: The operating system for the tablet is Linux, an open source (or free) system with rock-solid dependability, created and supported by millions of volunteers all over the world. BMW automobiles also run on Linux.
• Hardware: Advancements in manufacturing and supply chain management created a new class of manufacturing-on-demand companies who will make computing products to your specification at rock-bottom prices.
• Distribution: TechCrunch has 1.25 million daily subscribers with many more visiting their site every day. Not surprisingly, TechCrunch achieved this sizable reach using the open source blog software Wordpress to power its web site.
• Service: In the open source community, users help each other out via online bulletin boards. Compaq is now running a pilot using this same open service model. This peer-to-peer service model scales perfectly, and keep millions of open source customers happy all over the world. Peer-to-peer customer service is open 24/7/365, and there are no phone queues or automated voice attendants.

Transforming Existing Business Models to Accommodate Open Innovation

For many organizations, the falling price of quality information will be enough to act as a catalyst for change. How successful organizations faced with this challenge are at making necessary changes depends on their willingness to respect the ideas and opinions of all of their constituents, including their: employees, customers, consumers, end users and vendors.

The open innovation model can exist within traditional business. As with any other change agent, it requires the support and understanding of top management. The majority of organizations embrace open innovation gradually through pilot programs, or are forced into the practice because they have exhausted all other alternatives. The chart below, taken from Microengagement, data, shows the continuum of organizational types from those that are inwardly focused to those embracing open innovation, and characterizes the traits of each type by major corporate functions.



After management commitment, self-selection plays the greatest role in transforming a business from inwardly focused to open innovation. Employees already familiar with the organization’s customers, vendors, employees and trade customers (the company’s constituent base) will be best suited to optimize these networks. There is a very good chance that someone in your organization is willing to take on the job of organizing and nurturing customer ideas. Self-selection is a key ingredient to the success of the open source software movement because it is a superior way to match people and tasks. Have you ever heard of someone volunteering for a task for which they were incompetent?


Open Vs. Closed Management Styles

TechCrunch risks much in the traditional view by announcing their web tablet idea and specification before having a viable product. However, the massive advantage of thousands working on the project who will no doubt become customers, and their combined range of expertise and experience, will prevent many gaps left open by the smaller development teams of their competitors. This open strategy flies in the face of most traditional product development models that depend on secrecy. Companies like Google, Intel, and P&G understand the value of their constituents and will continue to thrive because the critical mass of constituents built up behind them will not allow them to fail. Most companies suffer not as victims of corporate espionage but under the weight of their own secrecy. If a business never takes a chance and engages its: experts, customers, shareholders, or any other constituency, mediocrity is almost certain. In short, "You can't win if you don't play."

It is a natural human trait to be proud of our achievements. All too often the achievements are part of an organization’s value chain: software code, business processes, products in development, i.e., all things an organization is afraid to share with the competition. It is this unwillingness to share and be open that prevents many organizations from achieving their goals. Value chain analysis is critical in a hyper-connected "flat" world:

• The secrets most businesses think are safe, probably are not.
• A competitor, dumb enough to steal and replicate a business process, will likely commit errors in the execution and end up helping the originator (e.g., Microsoft Zune).
• The effort expended in developing a value chain such as: a call center, subscription knowledge bank, or, digital rights management system, may end up handicapping the value chain owner as less expensive, disruptive technologies emerge or the manager’s pride of ownership distorts their judgment.

Many public companies such as P&G, Merck, Kimberly-Clark, and The New York Times realized the threat secrecy represented in the form of protected value chains and disposed of them. P&G takes a chance every time it allows an outsider to develop a product, but it realizes not developing the next killer product is an even greater risk. In all of these examples, company employees saw the value of open processes and worked with consultants such as Microengagement to execute pilots and later integrate open innovation to their core business.



Where to Begin

We see three essential steps to get started:

1. Education – with the latest research and new learnings about open innovation, we help educate senior executives on this growing phenomenon and its implications and opportunities. The Crowd Forum is a critical gathering point of our ongoing research.
2. Assessment – we help organizations assess the potential for their business to increase their total innovation value via open innovation.
3. Project Identification – we work with functions within a company as well as external partners to identify (a) specific projects that implement open innovation capabilities, and (b) prioritized programs to use open innovation to develop and launch new products and services.

The cost of undertaking these learnings and assessment is not high. The potential return is huge.

From there, companies can decide what are the critical priorities to pursue, the investment required, and who can best help to develop new business strategies, organizational processes and identify specific opportunities to action. Contact us at info@microengagement.com or the Crowd Forum (www.crowdforum.org) and we will be excited to discuss this further!

Endnotes

1. Louis Lassen 1900, New Haven, Connecticut. Louis' Lunch. This small establishment, which advertises itself as the oldest hamburger restaurant in the U.S., is credited by some with having invented the classic American hamburger when Louis' sandwiched a hamburger between two pieces of white toast for a busy office worker in 1900.
2. The ice cream cone was invented in St. Louis, Missouri in 1904 at the Louisiana Purchase Exposition-- not in New Jersey. According to one legend, a Syrian pastry maker, Ernst Hamwi, who was selling zalabia, a crisp pastry cooked in a hot waffle-patterned press came to the aid of a neighboring ice cream vendor (perhaps Arnold Fornachou) who had run out of dishes; Hamwi rolled a warm zalabia into a cone that could hold ice cream.
3. Netcraft December 2008 Web Survey http://news.netcraft.com/archives/web_server_survey.html
4. Google’s page rank technology explained http://www.google.com/technology/
5. Yochai Benkler, The Wealth of Networks, P. 47 http://cyber.law.harvard.edu/wealth_of_networks/Main_Page
6. YouTube video on kryptonite locks http://www.youtube.com/watch?v=t8XxcOj3Seo
7. Controversial Motrin Moms Commercial http://www.youtube.com/watch?v=BmykFKjNpdY