Wednesday, November 25, 2009

Who will be the CMO’s most trusted advisor?

The business of marketing is moving quickly away from a one-way, linear process, where communications start with the Chief Marketing Officer (CMO) and end up with the customer or consumer.  With the rise of digital and social media, we have moved to an environment where marketing is more complicated and shared across a number of disciplines within the client organization, requiring an increasing number of internal and external channels, different stakeholders and advocates, as well as multi-level conversations.  
The CMO must also respond to increasing consumer demands from brands. Consumers want great products, services and experiences. But they also want brands to do good deeds for people and the planet, and provide education, entertainment, information and the ability to connect with other like-minded people.
While this is an incredibly exciting time, many marketing people are struggling to keep up the market changes.  An increasing number of influencers and advisors are moving in to help fill the gap and become the CMO's top advisor.  Some of these players are existing partners including Brand Consultancies, Creative Agencies, Digital Agencies, Media Agencies, Public Relations companies and Research Houses.  Others are new players, including Business Process Consultants and Internet Companies such as Google and Microsoft.
Given a backdrop of increasing complexity and expectations, who will become the most trusted advisor(s) to the CMO?  The winner will almost certainly be the one who is able to serve the CMO's needs – as outlined below – in a manner better, faster, cheaper and more comprehensively,  than others. Who is best positioned to do this?
1. Brilliant Ideas and Thought leadership
Trusted marketing advisers need to be inspirational, presenting big, inspiring ideas to build businesses in these changing times. To do this the need to involve both the best people in their organizations and to bring in outside experts in relevant fields e.g., youth experts, authors, editors, film makers…. who have both a vision of the future and the means to help marketers achieve their objectives and goals.  The leaders of these advisory companies must share their time and skills with both their key clients and the people who work in their organizations.
Apparent leaders: Creative agencies and Brand Planners tend to be strong in this area of "Big ideas" so they have an advantage here. PR agencies also excel at bringing outside advocates in to support brands and marketers.  Business Process Consultants have great ideas on how to run business more efficiently but are not necessary attuned to consumers. In short, no one has a corner on thought leadership, and many will compete in this arena.  
2. Unique insights
Trusted marketing advisors must provide unique insights into how to build brand affinity and drive sales and repeat purchases. These insights will come through:
  • Analytics of existing data. (Most brands have a wealth of data. The real challenge is how to draw insights from this data.)
  • Proprietary Research related to the specific target groups and brand industry
  • Round-table Discussions where the marketing partner brings in a number of clients and experts to tackle specific topics that have shared interests. 
Apparent leaders:  Research agencies obviously have a wealth of information from dealing with many clients and have advantages here. Media agencies also have strong target group data and have done research into Social Media which gives them an advantage here. In addition, the top PR agencies have released studies on Advocacy, CSR and Trust, which give them strength here. Digital agencies and Internet companies also bring a wealth of data to uncover insights and future trends.   Finally creative agencies are often able to combine data with qualitative thinking to provide insights. So a number of players are competing for dominance in this area and the CMO and Brand should be able to benefit from this competition.  
3. "Whole brain" thinking
Trusted marketing advisors need to bring both creative and analytical thinking to support their recommendations. While in the recent past it was possible to be strong with "right brained" creative thinking or excel at "left brained" rational support, today's market requires both sides of the brain to work together. So the brilliant idea is not just inspirational to some but has been analytically proven to have broad appeal. Marketing investments needs to both "smart" and "safe", meaning they will deliver a proven ROI.
Apparent leaders:  This area does not seem to have a strong leader as agencies tend to be either creative or analytical.  An "integrative" solution is not widely available suggesting opportunities for a new type of agency.
4. Financial acumen
Trusted marketing advisors need to better understand the financial elements of their clients business and present ideas from the position of driving bottom line results.  They need to demonstrate to both the CMO and its Finance and Procurement divisions, the direct relationship between spending and results.  Financial acumen can be improved by involving financial people in the account management function.
Apparent leaders: The media agencies have strength here because they work with thin margins and tend to have stronger finance functions.  However all agencies can and should think more about the broader context of client financials.
5. Internal communications
Trusted marketing advisors should help their clients align the "cultures" of their organizations (i.e., the people who work on the brands) to the Vision and Image of the brand.  A key reason for this is that brands are judged more on what they do versus what they say. So it's increasingly important to involve more players in the marketing decisions across organization – for brands are only as strong as their weakest links.  Increasingly organizations will have to live up to their brand promises or be held accountable through the transparency provided by the Internet.  
Apparent leaders: Business Process Consultants and Branding Consultancies have  strength in this area, as they help advise clients on structuring organizations to more effectively and efficiently delivery products, services and experiences, and in expressing a unique "Behavior identity".  
6. "Added value"
Trusted marketing advisors will have to generate ways to help the CMO provide added value to consumers beyond great products, services and experiences. They will have to develop ways for brands to do good deeds for people and the planet in addition to being profitable. They will also need to help brands and CMO's share their know-how in their particular expertise to educate, entertain, inform and help consumers connect with other like-minded people.
Apparent leaders: The PR agencies have strength in this area because much of this involves brand advocates. Further, there are a number of CSR and Sustainability consultancies that can help companies with the "Triple bottom line" of profit, people and planet. However, there is no one group that has an edge in this area for added value is tied closely with consumer insights.
7. Content generation and continuous communications
Trusted marketing advisors need to help develop on-going content to keep up with the continuous conversations that revolve around brands. Consumers interact with brands on a 24×7x365 basis. They are increasingly demanding fresh content and two-way communications, with the result that the model of campaigns is now obsolete.
Apparent leaders: Digital agencies, retail marketers and PR companies have strengths in continuous communications. That said, digital agencies are probably best at generating on-going content as it has been easiest and cheapest to produce, when compared with traditional communications.
8. Integration
Trusted marketing advisors need to help their clients integrate the specialists from the various disciplines including BTL, brand identity, creative, digital, media, research etc.  Given the huge developments in digital (and particularly search and social media) clients are finding it difficult to manage the complete communications of their brands.
Apparent leaders: While the large holding companies are in the best position to help integrate the various communications disciplines they have not been overly successful in doing this as the individual silos are often fighting for the same portion of the marketing budget. Holding companies still have an edge but need to find better ways to provided integrated services to the CMO.
To conclude, consumer behavior has dramatically changed and placed higher expectations of brands. Companies are also demanding more accountability from the marketing function. As a result, the CMO's job is becoming increasingly complicated.
While this is an exciting time for the CMO, it is difficult to get on top of all the changes in the market place. And the marketing advisors see this time as a chance to increase their position and the trust they earn from the CMO.  But it is not clear which ones are gaining ground in this area.
Until this resolves, the role of the CMO will be to get the best from the varied advisors and to let time, ideas and results decide who will be the most trusted advisor.  

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Wednesday, November 4, 2009

Creativity expert Sir Ken Robinson challenges the way we're educating our children

About this talk
Sir Ken Robinson makes an entertaining and profoundly moving case for creating an education system that nurtures (rather than undermines) creativity. Peppered with humor he makes a case for discovering and nurturing creativity in our children through the educational system.

Good morning. How are you? It's been great, hasn't it? I've been blown away by the whole thing.In fact, I'm leaving. (Laughter) There have been three themes, haven't there, running through the conference, which are relevant to what I want to talk about. One is the extraordinary evidence of human creativity in all of the presentations that we've had and in all of the people here. Just the variety of it and the range of it. The second is thatit's put us in a place where we have no idea what's going to happen, in terms of the future. No ideahow this may play out.

I have an interest in education -- actually, what I find is everybody has an interest in education.Don't you? I find this very interesting. If you're at a dinner party, and you say you work in education --actually, you're not often at dinner parties, frankly, if you work in education. (Laughter) You're not asked. And you're never asked back, curiously. That's strange to me. But if you are, and you say to somebody, you know, they say, "What do you do?"and you say you work in education, you can see the blood run from their face. They're like, "Oh my God," you know, "Why me? My one night out all week." (Laughter) But if you ask about their education, they pin you to the wall. Because it's one of those things that goes deep with people, am I right? Like religion, and money and other things. I have a big interest in education, and I think we all do. We have a huge vested interest in it, partly because it's education that's meant to take us into this future that we can't grasp. If you think of it, children starting school this year will be retiring in 2065. Nobody has a clue -- despite all the expertise that's been on parade for the past four days -- what the world will look like in five years' time. And yet we're meant to be educating them for it. So the unpredictability, I think, is extraordinary.

And the third part of this is that we've all agreed, nonetheless, on the really extraordinary capacities that children have -- their capacities for innovation. I mean, Sirena last night was a marvel, wasn't she? Just seeing what she could do. And she's exceptional, but I think she's not, so to speak,exceptional in the whole of childhood. What you have there is a person of extraordinary dedicationwho found a talent. And my contention is, all kids have tremendous talents. And we squander them, pretty ruthlessly. So I want to talk about education and I want to talk about creativity. My contention is that creativity now is as important in education as literacy, and we should treat it with the same status. (Applause) Thank you. That was it, by the way. Thank you very much. (Laughter) So, 15 minutes left. Well, I was born -- no. (Laughter)

I heard a great story recently -- I love telling it -- of a little girl who was in a drawing lesson. She was sixand she was at the back, drawing, and the teacher said this little girl hardly ever paid attention, and in this drawing lesson she did. The teacher was fascinated and she went over to her and she said, "What are you drawing?" And the girl said, "I'm drawing a picture of God." And the teacher said, "But nobody knows what God looks like." And the girl said, "They will in a minute." (Laughter)

When my son was four in England -- actually he was four everywhere, to be honest. (Laughter) If we're being strict about it, wherever he went, he was four that year. He was in the Nativity play. Do you remember the story? No, it was big. It was a big story. Mel Gibson did the sequel. You may have seen it: "Nativity II." But James got the part of Joseph, which we were thrilled about. We considered this to be one of the lead parts. We had the place crammed full of agents in T-shirts:"James Robinson IS Joseph!" (Laughter) He didn't have to speak, but you know the bit where the three kings come in. They come in bearing gifts, and they bring gold, frankincense and myrhh. This really happened. We were sitting there and I think they just went out of sequence, because we talked to the little boy afterward and we said, "You OK with that?" And he said, "Yeah, why, was that wrong?"They just switched, that was it. Anyway, the three boys came in, four-year-olds with tea towels on their heads, and they put these boxes down, and the first boy said, "I bring you gold." And the second boy said, "I bring you myrhh." And the third boy said, "Frank sent this." (Laughter)

What these things have in common is that kids will take a chance. If they don't know, they'll have a go.Am I right? They're not frightened of being wrong.Now, I don't mean to say that being wrong is the same thing as being creative. What we do know is,if you're not prepared to be wrong, you'll never come up with anything original. If you're not prepared to be wrong. And by the time they get to be adults, most kids have lost that capacity. They have become frightened of being wrong. And we run our companies like this, by the way. We stigmatize mistakes. And we're now runningnational education systems where mistakes are the worst thing you can make. And the result is that we are educating people out of their creative capacities. Picasso once said this: he said that all children are born artists. The problem is to remain an artist as we grow up. I believe this passionately:that we don't grow into creativity, we grow out of it. Or rather, we get educated out if it. So why is this?

I lived in Stratford-on-Avon until about five years ago. In fact, we moved from Stratford to Los Angeles. So you can imagine what a seamless transition that was. (Laughter) Actually, we lived in a place called Snitterfield, just outside Stratford, which is where Shakespeare's father was born. Are you struck by a new thought? I was. You don't think of Shakespeare having a father, do you? Do you? Because you don't think of Shakespeare being a child, do you? Shakespeare being seven? I never thought of it. I mean, he was seven at some point. He was in somebody's English class, wasn't he? How annoying would that be? (Laughter) "Must try harder." Being sent to bed by his dad, you know, to Shakespeare, "Go to bed, now," to William Shakespeare, "and put the pencil down.And stop speaking like that. It's confusing everybody." (Laughter)

Anyway, we moved from Stratford to Los Angeles,and I just want to say a word about the transition, actually. My son didn't want to come. I've got two kids. He's 21 now; my daughter's 16. He didn't want to come to Los Angeles. He loved it, but he had a girlfriend in England. This was the love of his life, Sarah. He'd known her for a month. Mind you, they'd had their fourth anniversary, because it's a long time when you're 16. Anyway, he was really upset on the plane, and he said, "I'll never find another girl like Sarah." And we were rather pleased about that, frankly, because she was the main reason we were leaving the country.(Laughter)

But something strikes you when you move to America and when you travel around the world:every education system on earth has the same hierarchy of subjects. Every one. Doesn't matter where you go. You'd think it would be otherwise, but it isn't. At the top are mathematics and languages, then the humanities, and the bottom are the arts. Everywhere on Earth. And in pretty much every system too, there's a hierarchy within the arts. Art and music are normally given a higher status in schools than drama and dance. There isn't an education system on the planet that teaches dance every day to children the way we teach them mathematics. Why? Why not? I think this is rather important. I think math is very important, but so is dance. Children dance all the time if they're allowed to, we all do. We all have bodies, don't we? Did I miss a meeting?(Laughter) Truthfully, what happens is, as children grow up, we start to educate them progressively from the waist up. And then we focus on their heads. And slightly to one side.

If you were to visit education, as an alien, and say "What's it for, public education?" I think you'd have to conclude -- if you look at the output, who really succeeds by this, who does everything that they should, who gets all the brownie points, who are the winners -- I think you'd have to conclude the whole purpose of public education throughout the world is to produce university professors. Isn't it?They're the people who come out the top. And I used to be one, so there. (Laughter) And I like university professors, but you know, we shouldn't hold them up as the high-water mark of all human achievement. They're just a form of life, another form of life. But they're rather curious, and I say this out of affection for them. There's something curious about professors in my experience -- not all of them, but typically -- they live in their heads.They live up there, and slightly to one side. They're disembodied, you know, in a kind of literal way.They look upon their body as a form of transport for their heads, don't they? (Laughter) It's a way of getting their head to meetings. If you want real evidence of out-of-body experiences, by the way, get yourself along to a residential conference of senior academics, and pop into the discotheque on the final night. (Laughter) And there you will see it, grown men and women writhing uncontrollably, off the beat, waiting until it ends so they can go home and write a paper about it.

Now our education system is predicated on the idea of academic ability. And there's a reason. The whole system was invented -- around the world, there were no public systems of education, really, before the 19th century. They all came into being to meet the needs of industrialism. So the hierarchy is rooted on two ideas. Number one, that the most useful subjects for work are at the top. So you were probably steered benignly away from things at school when you were a kid, things you liked, on the grounds that you would never get a job doing that. Is that right? Don't do music, you're not going to be a musician; don't do art, you won't be an artist. Benign advice -- now, profoundly mistaken. The whole world is engulfed in a revolution. And the second is academic ability, which has really come to dominate our view of intelligence,because the universities designed the system in their image. If you think of it, the whole system of public education around the world is a protracted process of university entrance. And the consequence is that many highly talented, brilliant, creative people think they're not, because the thing they were good at at school wasn't valued, or was actually stigmatized. And I think we can't afford to go on that way.

In the next 30 years, according to UNESCO, more people worldwide will be graduating through education than since the beginning of history. More people, and it's the combination of all the things we've talked about -- technology and its transformation effect on work, and demographyand the huge explosion in population. Suddenly, degrees aren't worth anything. Isn't that true?When I was a student, if you had a degree, you had a job. If you didn't have a job it's because you didn't want one. And I didn't want one, frankly. (Laughter)But now kids with degrees are often heading home to carry on playing video games, because you need an MA where the previous job required a BA, and now you need a PhD for the other. It's a process of academic inflation. And it indicates the whole structure of education is shifting beneath our feet. We need to radically rethink our view of intelligence.

We know three things about intelligence. One, it's diverse. We think about the world in all the waysthat we experience it. We think visually, we think in sound, we think kinesthetically. We think in abstract terms, we think in movement. Secondly, intelligence is dynamic. If you look at the interactions of a human brain, as we heardyesterday from a number of presentations,intelligence is wonderfully interactive. The brain isn't divided into compartments. In fact, creativity -- which I define as the process of having original ideas that have value -- more often than not comes about through the interaction of different disciplinary ways of seeing things.

The brain is intentionally -- by the way, there's a shaft of nerves that joins the two halves of the brain brain called the corpus callosum. It's thicker in women. Following off from Helen yesterday, I think this is probably why women are better at multi-tasking. Because you are, aren't you?There's a raft of research, but I know it from my personal life. If my wife is cooking a meal at home -- which is not often, thankfully. (Laughter) But you know, she's doing -- no, she's good at some things -- but if she's cooking, you know, she's dealing with people on the phone, she's talking to the kids, she's painting the ceiling, she's doing open-heart surgery over here. If I'm cooking, the door is shut, the kids are out, the phone's on the hook, if she comes in I get annoyed. I say, "Terry, please, I'm trying to fry an egg in here. Give me a break." (Laughter) Actually, you know that old philosophical thing, if a tree falls in the forest and nobody hears it, did it happen? Remember that old chestnut? I saw a great t-shirt really recently which said, "If a man speaks his mind in a forest, and no woman hears him, is he still wrong?" (Laughter)

And the third thing about intelligence is, it's distinct. I'm doing a new book at the moment called "Epiphany," which is based on a series ofinterviews with people about how they discoveredtheir talent. I'm fascinated by how people got to be there. It's really prompted by a conversation I hadwith a wonderful woman who maybe most peoplehave never heard of, she's called Gillian Lynne,have you heard of her? Some have. She's a choreographer and everybody knows her work.She did "Cats," and "Phantom of the Opera." She's wonderful. I used to be on the board of the Royal Ballet, in England, as you can see. Anyway, Gillian and I had lunch one day and I said, "Gillian, how'd you get to be a dancer?" And she said it was interesting, when she was at school, she was really hopeless. And the school, in the '30s, wrote to her parents and said, "We think Gillian has a learning disorder." She couldn't concentrate, she was fidgeting. I think now they'd say she had ADHD. Wouldn't you? But this was the 1930s, and ADHD hadn't been invented at this point. It wasn't an available condition. (Laughter) People weren't aware they could have that.

Anyway, she went to see this specialist. So, this oak-paneled room And she was there with her mother, and she was led and sat on a chair at the end, and she sat on her hands for 20 minutes while this man talked to her mother about all the problems Gillian was having at school. And at the end of it -- because she was disturbing people,her homework was always late, and so on, little kid of eight -- in the end, the doctor went and sat next to Gillian and said, "Gillian, I've listened to all these things that your mother's told me, and I need to speak to her privately." He said, "Wait here, we'll be back, we won't be very long." and they went and left her. But as they went out the room, he turned on the radio that was sitting on his desk. And when they got out the room, he said to her mother, "Just stand and watch her." And the minute they left the room, she said, she was on her feet, moving to the music. And they watched for a few minutes and he turned to her mother and said, "Mrs. Lynne, Gillian isn't sick, she's a dancer. Take her to a dance school."

I said, "What happened?" She said, "She did. I can't tell you how wonderful it was. We walked in this room and it was full of people like me. People who couldn't sit still. People who had to move to think." Who had to move to think. They did ballet, they did tap, they did jazz, they did modern, they did contemporary. She was eventually auditioned for the Royal Ballet School, she became a soloist, she had a wonderful career at the Royal Ballet. She eventually graduated from the Royal Ballet School and founded her own company, the Gillian Lynne Dance Company, met Andrew Lloyd Weber. She's been responsible for some of the most successful musical theater productions in history, she's given pleasure to millions, and she's a multi-millionaire. Somebody else might have put her on medication and told her to calm down.

Now, I think -- (Applause) What I think it comes to is this: Al Gore spoke the other night about ecology, and the revolution that was triggered by Rachel Carson. I believe our only hope for the future is to adopt a new conception of human ecology, one in which we start to reconstitute our conception of the richness of human capacity. Our education system has mined our minds in the waythat we strip-mine the earth: for a particular commodity. And for the future, it won't serve us. We have to rethink the fundamental principles on which we're educating our children. There was a wonderful quote by Jonas Salk, who said, "If all the insects were to disappear from the earth, within 50 years all life on Earth would end. If all human beings disappeared from the earth, within 50 years all forms of life would flourish." And he's right.

What TED celebrates is the gift of the human imagination. We have to be careful now that we use this gift wisely, and that we avert some of the scenarios scenarios that we've talked about. And the only way we'll do it is by seeing our creative capacities for the richness they are, and seeingour children for the hope that they are. And our taskis to educate their whole being, so they can face this future. By the way -- we may not see this future,but they will. And our job is to help them make something of it. Thank you very much.

Tuesday, November 3, 2009

Why advertising needs behavioural economics


Campaign, 23 October 2009, 00:00am

Rory Sutherland delves deep into the consumer's psyche to find the subconscious economic drivers of action and choice.

Why is marketing - and, more importantly, the vital study of human behaviour - so little celebrated in the wider world of business? And why have marketers and agencies not fought back against a left-brained business culture, which seems to place human understanding so low on its list of priorities?

In recent years, marketing's models of human behaviour have been mostly naive or self-interested. Every discipline (advertising, DM, online, sales promotion, PR, design) has simply created a model of human persuasion designed to suit whatever proxy measure their own discipline moves most. Just as troublesome, these models date from a pre-digital media age, where commercial communication was largely one way and occurred at the behest of the advertiser, not the consumer.

As a result, agencies and marketers have formed no common philosophy - making it all the harder to put up a united front. Without a coherent world view, it is now assumed that the only way to grow an agency is at the expense of another agency; the only way to grow a discipline is at the expense of another discipline; the only way one medium can grow is at the expense of another. Our Balkanised sector hence spends most of its time in snarky infighting, rather than promoting the value of marketing ideas in general and trying to grow the whole sector.

If not now, when?

Behavioural economics - a decades-old, yet newly fashionable, field of study might help us answer this. It has a vocabulary (unlike that of marketing and brands) that can play in the boardroom or the ministry. It is an area of study that might earn us consideration in the FT and The Economist - and in government policy-making - in a way that simple pleas for creativity won't. Most importantly, it provides us with an intellectual framework, which allows us to better justify (and charge for) the ideas we already generate as well as generate new and better ones.

My interest in this field follows several rest-stops on the road to Damascus.

The first came while reading Nudge, by the University of Chicago economists Dick Thaler and Cass Sunstein. In this groundbreaking book, Thaler describes his idea for the "save more tomorrow pension" - a new pension format designed to appeal to young people, a group who are famously averse to saving. Using the concept of "loss aversion" (qv), Thaler created a pension plan where investors signed up for a pension that costs nothing until they receive a pay rise - at which point a percentage of their pay rise would automatically be directed into their pension fund. By making sure the saver never saw a reduction in his disposable income, the plan was both ingenious and effective: pension contributions among this group were 200 per cent higher than normal.

Why didn't a marketer or an agency come up with this idea?

Possibly because we didn't know about loss aversion. Or, more likely, because we knew of it instinctively - but didn't know what to call it.

But this is only one small example. Below are a few more - large and small. As you will see, behavioural economics is not, in itself, a grand theory. It is, in fact, marvellously scalable - allowing you to ask questions on, for instance, the optimal rate of inflation - or equally to ask why people are prepared to pay such exorbitant prices for cinema popcorn. By understanding and categorising the disparities between actual human behaviour and the theoretical behaviour predicted under the classical economic theory, it can help us improve marketing effectiveness and prevent millions being wasted on activities, which, while ostensibly logical, run contrary to human nature.

The nine examples below are merely an indication of some of the concepts so far revealed in experiments. Significantly, many of these non-rational behaviours affect us unconsciously, and hence will not be revealed by conventional market research.

Loss aversion

People will work harder to avoid losing something than they will to gain it.

Indeed, behavioural economics tells us that it can be twice as painful to lose a fiver as it was enjoyable to acquire it in the first place. This has simple consequences.

- People hate to see a fall in their net earnings. An argument to increase VAT may be an easier sell than raising income tax.

- People who never normally use a debit card will suddenly remove it from their wallet to avoid a credit card surcharge when booking online for flights.

If you want to persuade people to use a debit card, you are better off referring to a "surcharge" for using a credit card than to a "discount" for using a debit card - we are more eager to avoid a loss than to bank a gain. Likewise, don't tell people they can "save £200 a year with loft installation" - tell them they are "wasting £200 a year by not having it".

I'll have what she's having

People frequently simplify decisions by mimicking the actions of people around them and by adhering to social norms.

In Australia, water consumption was cut dramatically by simply printing the average consumption figure for his street on an individual's water bills.

The power of now - and of instant feedback

We tend to respond to stimulus and feedback in proportion to its immediacy, not its strength.

- Vehicle-activated signs that instantly flash your speed at you do more to reduce accidents than cameras that trigger a fine that will arrive days later. An immediate "nudge" is more motivating than delayed punishment (this finding has helped change Conservative Party policy on speed cameras).

The power of channel preference and interface

People's propensity to respond to marketing is hugely dependent on their individual channel preference - and the introduction of new channels attracts new customers.

Interestingly, while young people typically don't give much money to charity, if you allow them to give via text messaging they can become quite generous.

Scarcity value

When we perceive something to be scarce, it has a greater value in our eyes. Conversely, when we perceive it to be plentiful, its perceived value falls.

- The turnaround in popularity of the potato was due mainly to them being declared as fit only for royalty. Frederick the Great declared the potato a royal food. As a result, the people pilfered the King's potato fields and the plant quickly ended up in gardens all over Prussia.

- In the 60s, live music was plentiful and cheap while recorded music (and the equipment to play it on) was relatively scarce and expensive. This produced the golden era of the LP - beautiful, treasured and coveted items. Now recorded music is so plentiful as to be virtually free. Live music, however, is increasingly in demand.

Goal dilution

When items promise multiple benefits, they are less convincing than items that appear to do only one thing.

- Ever wondered why Google is so successful? At a time when everything else was a portal, a page trying to do many things, Google was a single-minded search engine. We hence believed it must be very good at the one thing it did. Generally, if you give someone a combined TV and DVD player, they assume it's effectively a crap TV yoked to a crap DVD player.

- Now take the example of the success of apps and widgets versus browsers on mobile devices. Browsers are designed to access all of the internet. Apps and widgets only do one thing - so their focus and specialism makes them feel far more effective. On 28 September 2009, Apple announced it had sold two billion iPhone apps ...


Parts are easier than "wholes". The way a task is presented affects people's willingness to take it on and complete it. Something presented as one long task to be conducted in a single act will be less likely to attract people than something "chunked up" into bite-sized stages.

- There is a huge risk incurred when people fail to complete courses of antibiotics. If people were given 20 white pills and eight blue ones and were told to take the white pills first followed by the blue ones, would people be more likely to take them?

Price perception

In theory, price should be a consequence of the value people attach to something. We should be willing to pay what we think something is worth. In practice, this causality runs backwards. The price that is demanded for something makes us value it more.

Blind taste tests have long alerted us to the fact that consumers do indeed "taste the brand" with many food and drink products.

However, behavioural economics has gone further.

- Studies have shown that the efficacy of a soft drink that claimed to help mental acuity was affected by price. People who paid more for the drink performed better on mental acuity tests, benefiting not just from a trivial taste effect, but apparently gaining extra mental powers.

- Similarly, people who paid more for the same over-the-counter pain- relief products reported more effective pain relief despite price being the only variable.

- The effect is also observed with cultural products. In a notorious example, a violinist who could sell out concert halls above ground struggled to gain a few dollars underground busking in the subway. The context determined the value.

Price-cutting can, and does, reduce perceptions not just of product quality, but of experienced efficacy.

Choice architecture

Choosing is relative to what you can have, not absolutely about what you want. In broad terms, "choice architecture" concerns itself with how people gather information when they choose and how absolute values are crowded out by other influences. The area of behavioural economics dedicated to choice architecture is one of the richest seams for our industry, and the one we believe we should make into a special subject for priority investigation of its potential applications.

- We are all familiar with choosing the second-cheapest wine on the wine list. We are also familiar with never choosing the most expensive item on the menu. However, having one very expensive item on the menu can increase the average value of dishes ordered, even if the most expensive choice is rarely chosen.

- In an ingenious exploitation of framing effects, one salesman sold Rolls-Royces at a yacht show. Seen alongside a $10 million yacht, a $500,000 car seems like a bargain.

Our vision of the future

Where might a fuller understanding of behavioural economics take IPA member agencies?- Imagine a future where product and service innovations can be offered by agencies to provide a greater value-added service to clients and their customers. And where we can comment intelligently on every single brand- interaction, not just messaging.

- Imagine a future where agencies are invited into board-level talks with clients in both the private and public sectors to explain how better choice architecture can structure their organisations to make it easier for people to choose from their offerings.

- Imagine a future where the first step in answering a communications brief is to engage the client in a workshop with all roster agencies to investigate the order effect of different communication channels and the role of each in the consumer decision-chain.

What this discipline offers us is some badly needed common ground from which IPA agency members can make common cause. It is too early to say how quickly we can turn this study to our advantage, but one thing above all makes me optimistic.

At every event the IPA has hosted on the subject, it has attracted sell-out audiences from a spectacular mix of backgrounds: planners, creatives, account people ... from media agencies, ad agencies, digital agencies, direct agencies, promotional agencies.

If there is another field with the same power to unite and enthuse the IPA's membership, I don't know what it is.

- Rory Sutherland is the IPA president and vice-chairman of Ogilvy Group UK.

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Wednesday, October 7, 2009

10 Branding and Marketing Trends for 2010

Niels Bohr once noted that "prediction is very difficult, especially about the future," but then he didn't have access to predictive loyalty metrics. Happily, we do. And, as they measure the direction and velocity of consumer values 12 to 18 months in advance of the marketplace and consumer articulations of category needs and expectations, they identify future trends with uncanny accuracy.

Having examined these measures, we offer 10 trends for marketers for 2010 that will have direct consequences to the success - or failure – of next year's branding and marketing efforts.

1) Value is the new black

Consumer spending, even on sale items, will continue to be replaced by a reason-to-buy at all. This spells trouble for brands with no authentic meaning, whether high-end or low.

2) Brands increasingly a surrogate for "value"

What makes goods and services valuable will increasingly be what's wrapped up in the brand and what it stands for. Why J Crew instead of The Gap? J Crew stands for a new era in careful chic --being smart and stylish. The first family's support of the brand doesn't hurt either.

3) Brand differentiation is Brand Value

The unique meaning of a brand will increase in importance as generic features continue to plague the brand landscape. Awareness as a meaningful market force has long been obsolete, and differentiation will be critical for success --meaning sales and profitability.

4) "Because I Said So" is so over

Brand values can be established as a brand identity, but they must believably exist in the mind of the consumer. A brand can't just say it stands for something and make it so. The consumer will decide, making it more important than ever for a brand to have measures of authenticity that will aid in brand differentiation and consumer engagement.

5) Consumer expectations are growing

Brands are barely keeping up with consumer expectations now. Every day consumers adopt and devour the latest technologies and innovations, and hunger for more. Smarter marketers will identify and capitalize on unmet expectations. Those brands that understand where the strongest expectations exist will be the brands that survive - and prosper.

6) Old tricks don't work/won't work anymore

In case your brand didn't get the memo here it is -consumers are on to brands trying to play their emotions for profit. In the wake of the financial debacle of this past year, people are more aware then ever of the hollowness of bank ads that claim "we're all in this together" when those same banks have rescinded their credit and turned their retirement plan into case studies. The same is true for insincere celebrity pairings: think Seinfeld & Microsoft or Tiger Woods & Buick. Celebrity values and brand values need to be in concert, like Tiger Woods & Accenture. That's authenticity.

7) They won't need to know you to love you

As the buying space becomes even more online-driven and international (and uncontrolled by brands and corporations), front-end awareness will become less important. A brand with the right street cred can go viral in days, with awareness following, not leading, the conversation. After all, everybody knows GM, but nobody's buying their cars.

8) It's not just buzz

Conversation and community is all; ebay thrives based on consumer feedback. If consumers trust the community, they will extend trust to the brand. Not just word of mouth, but the right word of mouth within the community. This means the coming of a new era of customer care.

9) They're talking to each other before talking to the brand

Social Networking and exchange of information outside of the brand space will increase. Look for more websites using Facebook Connect to share information with the friends from those sites. More companies will become members of Linkedin. Twitter users will spend more money on the Internet than those who don't tweet.

10) Engagement is not a fad; It's the way today's consumers do business

Marketers will come to accept that there are four engagement methods including Platform (TV; online), Context (Program; webpage), Message (Ad or Communication), and Experience (Store/Event). But there is only one objective for the future: Brand Engagement. Marketers will continue to realize that attaining real brand engagement is impossible using out-dated attitudinal models.

Accommodating these trends will require a paradigm change on the parts of some companies. But whether a brand does something about it or not, the future is where it's going to spend the rest of its life. How long that life lasts is up to the brand, determined by how it responds to today's reality.

Contributed by: Robert Passikoff, President, Brand Keys

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Thursday, September 24, 2009

Why Big Data & Real-Time Web Are Made For Each Other

There's been a lot of discussion lately about the real-time web and theproblems it poses for incumbent search companies and technologies. Fast-moving trends and the availability of up-to-the minute updates mean that purely historical answers are missing crucial information. Dealing with constantly growing information streams causes performance and scalability problems for existing systems and calls into question the mechanisms for compiling, vetting and presenting results to users. While these challenges may sound new, game-changing performance and scalability problems are also being faced in the more traditional realm of data analytics and large-scale data management. Driven by network-centric businesses that track user behavior to a fine degree, there has been an explosion in the speed and amount of information that companies need to make sense of, and an increasing pressure on them to do so faster than ever before. What needs to be recognized is that the inadequacies of existing systems in these two seemingly different environments stem from the same source — infrastructure built to handle static data simply doesn't scale to data that is continuously on the move. The information stream driving the data analytics challenge is orders of magnitude larger than the streams of tweets, blog posts, etc. that are driving interest in searching the real-time web. Most tweets, for example, are created manually by people at keyboards or touchscreens, 140 characters at a time. Multiply that by the millions of active users and the result is indeed an impressive amount of information. The data driving the data analytics tsunami, on the other hand, is automatically generated. Every page view, ad impression, ad click, video view, etc. done by every user on the web generates thousands of bytes of log information. Add in the data automatically generated by the underlying infrastructure (CDNs, servers, gateways, etc.) and you can quickly find yourself dealing with petabytes of data. Batch processing The commonality between real-time web search and big data analytics problems is rooted in the need to continuously and efficiently process huge streams of data. It turns out that traditional data analytics systems (such as database systems and data warehouses) and search engines are a poor match for this type of processing. These systems are built using batch processing, which involves information being collected, processed and indexed, then made available for querying and analysis, often with a cycle time of a day or more. This is not unlike the way programming used to be done in the days of punch cards -– create a card deck, wait for your turn, and come back the next day to see if it worked. Batch processing, however, leads to two problems: First, and most obvious, is the time lag ("latency") inherent in such processing. Batch processing systems typically have high startup costs and overheads, so efficiency improves as you increase the batch size. Larger batch sizes also make it easier to exploit the resources of ever-larger clusters of servers. In a batch world, throughput is improved by delaying the processing of information — exactly the opposite of what's needed for real-time anything. The second problem with the batch approach is that it wastes resources. For example, data warehouses typically ingest data through an ETL (Extract, Transform, Load) process that writes data into disk-based tables. Subsequent queries then hunt for that recently stored data and pull it back into memory to process it. All of this data movement is hugely expensive in terms of I/O, memory and networking bandwidth. The batch approach stems from viewing information as something that is stored rather than something that flows. The real-time web is a perfect example of where this way of thinking fails; the much larger information stream generated by all web activities is a less visible but even more extreme case. A mindset shift The big data problem has fed a surge of activity in data analytics systems. The flurry of new data warehousing and database vendors and the increasing adoption of the Google-inspired Hadoop stack are driven by these new data management challenges. While there have been some innovations in terms of efficiency in these systems (such as highly compressed columnar storage and smart caching schemes), the basic approach has been to rely on increasing amounts of hardware to solve ever-bigger problems. Such systems have not addressed the fundamental mismatch between batch-oriented processing and the streaming nature of network data. The excitement around real-time web provides a great opportunity to reassess the way we think about information and how to make sense of it. While there will always be a need to store information and to search through historical data, many of the analysis and search tasks that users need to perform can be done in-stream. This type of processing has both efficiency and timeliness benefits. For example, real-time search and trend analysis of the tweetstream can be done continuously as tweets are being created. This doesn't mean that the need for managing stored data is going away. In fact, most useful applications will need to combine streaming data with stored historical data, and in-stream processing is an extremely efficient way to compute metrics to be stored for later use. The point is that all processing that can be done in-stream should be. And such processing should not be limited just to the emerging "real-time" web. Applications that can map activity on the real-time web with information about past and present user activity on the traditional web will be perhaps the most useful of all. For example, a spike in tweets about a particular band could be used as a predictor of demand at an online music store. Conversely, the real-time web could be monitored for explanations for an observed spike in user activity patterns, video popularity or music downloads. The key to enabling such applications is to move from the "data as history" mindset to one of "data as streams." Fortunately, the real-time web is providing a great opportunity for all of us to rethink our approach to making sense of the ever-increasing amount of information available, no matter where it comes from. Michael Franklin is the founder and CTO of Truviso, and a Professor of Computer Science at UC Berkeley.

How millionaires become and stay millionaires and do meaningful things

Power of Money, By Adam Khoo ( Singapore 's youngest millionaire at 26 yrs.)

Some of you may already know that I travel around the region pretty frequently, having to visit and conduct seminars at my offices in Malaysia , Indonesia , Thailand and Suzhou ( China ). I am in the airport almost every other week so I get to bump into many people who have attended my seminars or have read my books.

Recently, someone came up to me on a plane to KL and looked rather shocked. He asked, 'How come a millionaire like you is traveling economy?' My reply was, 'That's why I am a millionaire. ' He still looked pretty confused.

This again confirms that greatest lie ever told about wealth (which I wrote about in my latest book 'Secrets of Self-Made Millionaires'). Many people have been brainwashed to think that millionaires have to wear Gucci, Hugo Boss, Rolex, and sit on first class in air travel. This is why so many people never become rich because the moment that earn more money, they think that it is only natural that they spend more, putting them back to square one.

The truth is that most self-made millionaires are frugal and only spend on what is necessary and of value. That is why they are able to accumulate and multiply their wealth so much faster.

Over the last 7 years, I have saved about 80% of my income while today I save only about 60% (because I have my wife, mother in law, 2 maids, 2 kids, etc. to support). Still, it is way above most people who save 10% of their income (if they are lucky).

I refuse to buy a first class ticket or to buy a $300 shirt because I think that it is a complete waste of money. However, I happily pay $1,300 to send my 2-year old daughter to Julia Gabriel for Speech and Drama c lasses without thinking twice.

When I joined the YEO (Young Entrepreneur's Orgn)a few years back (YEO is an exclusive club open to those who are under 40 and make over $1m a year in their own business), I discovered that those who were self-made thought like me. Many of them with net worth well over $5m,travelled economy class and some even drove Toyotas and Nissans - not Audis, Mercs, BMWs.

I noticed that it was only those who never had to work hard to build their own wealth (there were also a few ministers' and tycoons' sons in the club) who spent like there was no tomorrow. Somehow, when you did not have to build everything from scratch, you do not really value money. This is precisely the reason why a family's wealth (no matter how much) rarely lasts past the third generation.

Thank God my rich dad foresaw this terrible possibility and refused to give me a cent to start my business.

Then some people ask me, 'What is the point in making so much money if you don't enjoy it?' The thing is that I don't really find happiness in buying branded clothes, jewellery or sitting in first class. Even if buying something makes me happy it is only for a while; it does not last.

Material happiness never lasts, it just gives you a quick fix. After a while you feel lousy again and have to buy the next thing which you think will make you happy. I always think that if you need material things to make you happy, then you live a pretty sad and unfulfilled life.

Instead, what makes me happy is when I see my children laughing and playing and learning so fast. What makes me happy is when I see my companies and trainers reaching more and more people every year in so many more countries.

What makes me really happy is when I read all the emails about how my books and seminars have touched and inspired someone's life. What makes me really happy is reading all your wonderful posts about how this blog is inspiring you. This happiness makes me feel really good for a long time, much much more than what a Rolex would do for me.

I think the point I want to put across is that happiness must come from doing your life's work (be it teaching, building homes, designing,trading, winning tournaments etc.) and the money that comes is only a by-product. If you hate what you are doing and rely on the money you earn to make you happy by buying stuff, then I think that you are living a life of meaningless.

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Tuesday, September 22, 2009

The Great Internet Buildout Continues

By Om Malik | Monday, September 21, 2009 | 6:30 AM PT | GigaOM
Earlier this month, Facebook announced that it has 300 million subscribers. The fantastic growth of the company is mirrored by the rapid advancement of Twitter and many other web services that have spawned ecosystems of their own. While these services get most of the media attention, a much bigger story is what lies beneath — the Internet's infrastructure and the grid that powers it. "We have entered this new era where essentially everything is on all the time," Alan Meier, a senior scientist at Lawrence Berkeley National Laboratory, recently told The New York Times. And increasingly, everything is connected to the Internet. The biggest impact is being felt by the electricity grid. The power consumed by servers alone doubled between 2000 and 2005 to about 123 billion kilowatt-hours. Data center power use is likely to increase another 76 percent by 2010, according to Jonathan Koomey, a researcher at Lawrence Berkeley and Stanford University. I can't imagine the energy implications of what's coming next. There are 444.3 million broadband subscribers in the world, according to the Broadband Forum, and that number is only going to increase over the next few years as emerging telecom economies such as India, Brazil and Russia ramp up their Internet efforts. A whopping 250 million people are going to connect to the Internet wirelessly by the end of 2009. Just imagine the bandwidth and computing horsepower needed if all of them started streaming movies from Netflix, listening to music by visiting Spotify, and sharing videos and photos via Facebook. We are starting to see a spike in demand for everything from data centers to backhaul connections to content delivery networks. In the month of September alone, four new major data centers were announced that would cost upwards of $1.3 billion to add over 750,000 square feet of new data center space.
  • On Sept. 10, details emerged about Apple's plans to build a 500,000 square-foot data center in Maiden, N.C., that is going to cost over $1 billion spread over 10 years.
  • Equinix, a data center service provider, said it will build two data centers — a 152,000 square-foot facility in Washington, D.C., and a 170,000 square-foot facility in Silicon Valley — that will collectively cost about $245 million.
  • New York Internet plans to open a 40,000 square-foot facility in Bridgewater, N.J.
  • Codera is building a 22,000 square-foot data center in downtown Phoenix.
  • NTT America recently announced plans to add a 10,000-15,000 square-foot data center in San Jose, Calif., to support Twitter's hyper-growth. NTT also added a new 15,000 square-foot data center in Santa Clara, Calif.
Just as demand for data center space is rising, we are seeing an increase in the desire for bandwidth. For instance, Cogent Communications, a large Internet service provider, reported that the traffic on its network grew 10 percent from the first to second quarter of 2009 (PDF). Qwest Communications recently announced plans to upgrade its long-haul network to 100Gbps. The company recently said that Internet traffic is doubling approximately every 19 months, and that each year, individual Internet users consume approximately 43 percent more bandwidth than the previous year. Mike Hatfield, CEO of Cyan Optics, recently told me that his company's clients are seeing demand for bandwidth double every 12-18 months. Add all these random tidbits, and you start to see a larger picture emerge. Network operators added 9.4 terabits per second of new capacity during the 12 months ending July 2009, bringing the global capacity to about 25Tbps, a recent report by Telegeography shows. That compares with 8.7Tbps of new capacity in the 12 months ending July 2008. Online video is going to help accelerate the infrastructure buildout. At present, we are watching only 3-4 hours of web video a month (vs. over 150 hours of old-fashioned TV), and this number is going to increase as more and more TV Everywhere-styled services go online. Some are predicting 3D-centric video content that would be made possible by gigabit speeds. What does this all mean? The demand for everything from routers and switches to servers is going to swing up, as will the urgent need for power and the problems that would come with that need. Whichever way you look at it, there is a technology revival taking shape. Get ready for it.

Thursday, September 17, 2009

Do friends influence purchase decisions on social networks

Executive Summary:

Purchase decisions are influenced differently in social networks than in the brick-and-mortar world, says Harvard Business School professor Sunil Gupta. The key: Marketers should tap into the networking aspect of sites such as Facebook. Key concepts include:

  • Some social network users are influenced by the purchases of their friends.
  • Of these users, 40 percent show a strong "keeping up with the Joneses" behavior, increasing sales by 5 percent.
  • "High-status" users are more likely to not purchase something that others have bought.
  • On social networks, viral campaigns may work better than advertising.
When marketers want to reach users of social networks such as Facebook, MySpace, or Cyworld, they have two choices: buy advertising or start a viral campaign.

New research by Harvard Business School professor Sunil Gupta suggests that viral may be the way to go in these connected worlds. But first it's important to understand both who influences purchase decisions in online communities and which groups of users can be influenced.

"Viral campaigns truly leverage the network aspect of these social networking sites."

"By understanding the social network of users, firms can better understand and influence consumers' behavior," says Gupta, who coauthored the working paper "Do Friends Influence Purchases in a Social Network?" [PDF] with Raghuram Iyengar, of the Wharton School, University of Pennsylvania, and Sangman Han, of Sung Kyun Kwan University in South Korea.

Gupta recently discussed the research with HBS Working Knowledge.

Sarah Jane Gilbert: Your research attempted to answer this question: Do friends within a social network influence online buying behaviors of others in the group? What did you discover?

Sunil Gupta: To answer this question we used data from Cyworld, an online social networking site in South Korea with almost 21 million members. Cyworld users buy virtual items to decorate their home pages. Our research shows that some users are influenced by the purchases of their friends while others are not.

Q: One of your findings was that certain types of group members are more influenced by social pressure than others. Can you discuss the distinctions among user groups and how they influence buying?

A: We found three distinct groups. Low-status members (48 percent of the users in our sample), who are not well connected to others, are generally unaffected by the purchases of other members. Middle-status members (40 percent of the users) are moderately connected and show a strong and positive effect due to friends' purchases. In other words, this group shows strong "keeping up with the Joneses" behavior.

Members of the high-status group (12 percent of the users) are well connected and are very active on the site. However, these users show a negative effect due to friends' purchases because they want to remain distinct. Instead of buying items like the other members, this group tends to pursue non-purchase-related activities (e.g., uploading their own content).

Q: Were you able to quantify social influence in terms of how it increased or decreased the percentage in sales revenue?

A: The impact of the low-status group on revenue is negligible. Social influence increases revenue from the middle-status group by 5 percent. In contrast, social influence leads to almost a 14 percent drop in revenue from the high-status group.

Q: Despite the ability to gather millions of users, the business viability of social networking sites seems uncertain. Is there any good news in your findings for the Facebooks and Twitters of the world?

A: Following the success of Google, social networking sites such as Facebook have been trying an advertising-based business model. However, studies show that the click-through rate of ads on social networking sites is extremely low—simply because people don't go to these sites to seek information about specific products. Therefore, the advertising-based business model has had only limited success on social networking sites.

If the purpose of advertising is to influence consumers' purchases, our research shows that there is another way to influence their behavior. Imagine that Sony wants to promote its new digital camera. Sony can either advertise on Facebook and accept a very low click-through rate, or give away free cameras to several Facebook members (potentially at a lower cost than advertising) and generate a viral campaign. Our research shows that this viral campaign is possible. We further show what type of users are more likely to be influenced by such a campaign.

Interestingly, Sheryl Sandberg [HBS MBA '95], the new COO of Facebook, recently talked about such a campaign. On Valentine's Day, Honda offered 750,000 Facebook members a heart-shaped virtual gift complete with the Honda logo that could then be passed on to other members. It is exactly this type of viral campaign that has the potential to be an enormous source of revenue. Unlike banner ads, these viral campaigns truly leverage the network aspect of these social networking sites.

Q: What are some key takeaways from your work for retail and other online sites in general hoping to influence online purchasing decisions?

A: The fact that people are influenced by their friends is not new. We all know it at some level or the other. However, by understanding the social network of users, firms can better understand and influence consumers' behavior.

Consider a cosmetic company such as Mary Kay. Its Web site currently allows consumers to upload their picture and try different cosmetics virtually to see how they may look before making a purchase. However, if users (especially young consumers) really value the opinion of their friends, Mary Kay may benefit from linking its online site to a social networking site such as Facebook where users may even get instant feedback from their friends before making a purchase.

Q: What are you working on now?

A: I am continuing my research to better understand how information and influence spreads in social networks. I am also working on understanding the relative role of offline and online advertising to determine how firms should optimally allocate their resources across different media

How Software Platforms Revolutionize Business

Executive Summary:

Cell phones, the Game Boy, and PCs are examples of products based upon software platforms—ecosystems where independent companies can provide products and services tied to the core technology. Playing in a software platform world can make you rich—ask ringtone creators—but it also demands special management skills that emphasize cooperation over competition. Professor Andrei Hagiu discusses his new book, Invisible Engines. Key concepts include:

  • Software platforms have improved productivity and innovation in many industries, disrupted or destroyed others, and created entirely new businesses.
  • Software platforms are powerful engines of change because of the malleability of code and of the fundamental functions they perform, which make it easy for them to march across industry boundaries; and because their multi-sided nature allows them to spawn vibrant ecosystems of complementors.
  • Managing software platforms is about much more than creating technology. It takes skills in navigating cooperation and competition, building creative business models, and anticipating competition across industries.

You can't see them, but we've all used "software platforms" over the last few decades, whether they are embedded in the Windows operating system, a cell phone, or game machine. In a new book, the authors term software platforms "invisible engines that have created, touched, or transformed nearly every major industry for the past quarter century."

Think of software platforms as ring leaders of ecosystems in which a few or many companies can participate to reach users. These core products, like Windows, for example, offer software services that can be used as the basis for independent developers to build new features. The cell phone has become a lucrative platform for more than handset makers—also in on the party are makers of digital cameras, music services, and organizer software.

Not only are existing industries being transformed and sometimes toppled by software platforms, but new industries are also springing up around them; witness the multibillion-dollar ringtone business.

To record the impact of software platforms on the economy and look to their future impact, David S. Evans, Andrei Hagiu, and Richard Schmalensee collaborated on Invisible Engines: How Software Platforms Drive Innovation and Transform Industries, available October 4 from MIT Press. Evans is Managing Director of the Global Competitive Policy Practice at LEGC LLC. Hagiu is a professor in the Strategy unit at Harvard Business School. Schmalensee is John C. Head III Dean and Professor of Management at MIT Sloan School of Management.

We asked Hagiu to discuss the book. To learn more about Hagiu's early-stage research into the concept of multi-sided markets, of which many software platforms are a manifestation, see this earlier HBS Working Knowledge interview.

Sean Silverthorne: At a 50,000-foot level, what impact have software platforms had on traditional industries over the last thirty years?

Andrei Hagiu: At its most fundamental level, they have fueled innovation and improved productivity. Software platforms have accelerated technological innovation by providing springboards that allow specialized producers to leverage their infrastructure and create new innovations and by bringing digital technology to a wide variety of sectors and users, again by providing flexible infrastructures that make it possible for armies of specialized providers to build myriad software solutions for myriad tasks that previously were performed in traditional, non-tech ways. In this way, they have improved the productivity of many traditional industries (just look at all the industries that use PCs today) and created brand new ones (just look at the Internet and mobile data services including streaming content).

Even the best product design will end up subordinated to the best multi-sided platform.

Software platforms have also been the source of much creative destruction. The reduction in transaction costs and increases in efficiency brought about by digital technologies powered by software platforms have been so great that the so-called "old guard" was displaced (or may be on its way to extinction): Typewriters have been all but displaced by PCs, board games have been displaced (but not eliminated entirely) by the videogame industry (PC- and console-based), and traditional newspapers are fighting an uphill battle for readership against Internet content portals.

Q: From a management skills perspective, what do managers and strategists who make their living from software platforms need? Seems like cooperation rather than competition would be a core competency?

A: Yes, cooperation is critical: The quintessential key to success of software platforms has always been their ability to build large, well-functioning ecosystems of third-party producers who build on top of the software platform. Without them, no one would have any need for the platforms. The relevant management skills are:

  • Knowing the community and being able to identify and attract the third-party producers who can build the most valuable innovations.
  • Knowing how to manage the ecosystem: Deciding the right balance between quantity and quality; knowing when to compete and when to collaborate with partners; being able to manage the conflicts of interest inherent to such compete-collaborate relationships; knowing how to monetize the value created by the ecosystem (which member of the ecosystem is needed most—developers or end users—and how the pricing scheme must be designed to get both sides on board).
  • Knowing how to architect the physical design and scope of the platforms: what to do in-house vs. what to rely on others to do; which features to offer and which to forego.
  • Knowing how to spot competitive threats early, both within the industry, but most important and difficult, in adjacent industries, where other platforms might be poised to strike (e.g., smart phones moving into the PDA industry); and conversely, spotting expansion opportunities in adjacent industries (e.g., NTT DoCoMo expanding into payment systems).
Q: The book makes mention that software platforms have the promise to significantly change how we buy and pay for goods and service in the future. Could you elaborate on this? What impact do software platforms have for the consumer on the street?

A: Software platforms are universal in nature because they can potentially underlie any digital technology: As digital technologies become more ubiquitous, so will software platforms. They can potentially reduce search and transaction costs for any imaginable economic transaction.

Today we can already search for, choose, and pay for many goods on the Internet using a few clicks by way of the software platforms running under eBay or Google or Rakuten. In some countries like Japan and Korea, one can do exactly the same thing on the Internet and over the mobile phone. And in Japan, mobile phones now function as payment devices (one can waive the phone in front of a reader to pay). The next generation videogame consoles are no longer just gaming platforms, they are gateways to a variety of digital content, including DVD movies and Internet video for the gamer and advertising and other promotional opportunities for the advertiser. Broadly speaking, software platforms have the potential to streamline access to many diverse transactions through a single device, be it a mobile phone, a videogame system, an iPod, a car navigation system, etc.

Q: Software platforms naturally lead to multi-sided business but Apple seems to be the outlier in all this ferment. What are the lessons of Apple's contrarian approach? Will this come back to bite them?

A: Let me first make a clarification. Apple's computer business is definitely multi-sided, just like Microsoft's, except Microsoft Windows has three sides (end-users, application developers, and hardware makers) whereas Mac OS has only two sides (end-users and application developers—Apple does the hardware). Apple's decision to stay two-sided rather than three-sided is in large part the reason for which Windows-based PCs have today a 95 percent-plus market share, whereas Macs are at less than 4 percent. So in this business I think everyone—including Apple—has learned the obvious lessons there were to learn: Whereas control over quality in the initial stages may have been a good reason to stay away from that third side, the latter is necessary in order to achieve sufficient scale in the market, particularly in the face of competition.

Losers will include anyone providing a brick-and-mortar product or service that can be digitized and put on a software platform.

If we turn to Apple's iPod/iTunes business, it superficially looks multi-sided, in the sense that Apple has "gotten on board" music publishers and consumers. But in fact, Apple has done so in a one-side-at-a-time way, by first licensing the music (essentially taking "possession" of the music licenses) before turning to consumers and selling it to them (at a price and under a format entirely controlled by Apple) along with iPods. This took the chicken-and-egg aspect (characteristic of multi-sided businesses) out of the equation, which again might have been the right thing to do to get started.

My personal view is that in the face of an explosion in the number of digital music services (download and/or subscription) rivaling iTunes and that of digital music players (rivaling iPod), Apple should turn to a truly "multi-sided" model, by opening up iTunes and devolving more control to music publishers in order to achieve more variety of the music offering—thus trying to become the eBay of digital music.

The broad lesson here is that ingenious product design can take you very far; however I am willing to take a bet that in any multi-sided market, sooner or later, even the best product design will end up subordinated to the best multi-sided platform in town.

Q: What is your best guess as to how software platforms will evolve over the next ten years? Who will be the winners and losers?

A: They will undoubtedly continue to cross industry boundaries and penetrate in a variety of markets previously untouched by digital technologies: For instance, software platforms are playing an increasingly prominent role in the car industry today. Does that mean that Toyota will become a Microsoft OEM anytime soon? Probably not, but they will certainly be an awful lot closer to each other!

The winners will be of course the providers of the most versatile and flexible software platforms, i.e., those that can span the widest range of functionalities and markets, and also those that will perform the most fundamental functions, which in my view are search and payments. Another category of winners will be of course the owners of valuable content—be it games, music or movies—software platforms will allow them to monetize and distribute their content in ways which were previously not possible. Needless to say, consumers will also gain a lot.

Losers: anyone providing a brick-and-mortar product or service that can be digitized and put on a software platform—unless the producer does it him- or herself. Example: newspapers.

From Invisible Engines: How Software Platforms Drive Innovation and Transform Industries by David S. Evans, Andrei Hagiu, and Richard Schmalensee.

Many modern products run on software platforms. Car engines and navigation systems have one, as do jumbo jets and the handheld devices we use for e-mailing and organizing ourselves. Video game consoles from Atari to Xbox are based on them. French debit cards have included them for years; these "smart cards" may eventually replace the magnetic stripe cards that are standard in the United States. Sophisticated mobile telephone services such as i-mode Japan are based on software platforms. Personal music devices are as well. And, of course, all sorts of business and home computers also have them.

Software platforms are based on computer code. The code tells the microprocessors and other hardware components what to do. It is what makes your computer do calculations, or your personal music device play songs. And it provides services to applications, such as accessing the hardware or providing features that many applications would otherwise have to include themselves. It is what makes handwriting recognition possible on personal digital devices and enables employers' human resources software to work on the company's computer system.

Yet these remarkable software engines are invisible to most of us. Their creators write them in a language that looks almost human. They then use other code to translate what they have written into machine language—combinations of 0s and 1s that microprocessors understand. Those digital data are then transferred to the physical memory or storage in the device itself.

Some software platforms are famous. Linux, the Mac OS, and Windows are household names. You cannot really see or touch these products, but at least you can buy a CD and a hefty manual. Others are known to many business users: z/OS, Solaris, and Unix, for instance. Many are known only to a few, such as Symbian for mobile phones or GeoWorks for handheld devices. Others, including the software platforms that are the real brains behind devices such as the Sony PlayStation or Tivo's digital video recorder, are truly anonymous.

Software platforms have generated great wealth. Windows has provided about 40 percent of Microsoft's revenues in the last decade.2 It has helped make Bill Gates the richest man in the world. Linus Torvalds has become a modern icon as a result of writing the first version of the famous open-source platform, Linux. And software platforms have been partners in some of the most successful technological marriages of the last quarter century: the Macintosh, iPod, PalmPilot, Sony PlayStation, and Xbox are among the better known hardware-software platform couples.

The computer revolution has been changing our lives now for fifty years, at an accelerating rate, and much has been written about it. Many of the companies, products, and entrepreneurs behind this revolution have become household names. Stories of Steve Jobs and Steve Wozniak building the first Apple computer in their garage and Bill Gates getting the best of IBM are almost folklore at this point. Economists have written a fair amount about the computer industry, and business writers have scoured its history in search of the drivers of great success.

Yet little has been written about software platforms. This is not necessarily remarkable. They are not well-defined products like toothpaste. The software platform used in i-mode does not compete directly with the software platform used in Web servers. And they are not components, like the engines sold to automobile companies or even the chips sold to computer device manufacturers. There is no software platform industry defined in government statistics. Rather, software platforms are a technology—though one based on a written language—that can be deployed in a vast range of industries for a great multitude of purposes.

Many economic threads, however, tie diverse software platforms together. The most critical of these ties is their potential for supporting a multisided business—one in which value is created by bringing together on the same platform multiple distinct groups of customers who need each other in some way. Businesses that cater to the singles scene are one example of this sort of business. Heterosexual nightclubs must get men and women together in the same place. Shopping malls are also multi-sided: Their developers create platforms that attract both merchants and consumers. Similarly, many software platforms provide services to application developers and platform users. Like shopping malls, they also provide a common meeting ground where one side can sell to the other side.

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