The transformation of business is continuing to accelerate as we begin a new century. We were barely understanding the Industrial Age when the widespread usage of computers in business moved us into the Information Age. The rapid doubling of processor power, storage capacity and network bandwidth coupled with innovations like the Internet and the World Wide Web not only resulted in a Global Interconnected Economy but also the ability of small firms to participate on an equal footing with the very large firms. Economy of Scale is operating simultaneously with Economy of Small. Rapid change is leading us to the Knowledge Age where the fundamental challenge is not to create and access information, but rather to make sense of the enormous amount of information available AND act on that sense making before other competitors do.
Yet, the actions that need to occur must provide economic value and integrate with the values of the human beings that are at the same time employees, customers, suppliers and consumers of the value. As Amazon.com has shown, the consumers are generating new “products” in the act of consuming.
To develop new products, services and businesses, two new sources of innovation are emerging:
- Developing knowledge about the activities of daily living
- Generating stories to understand and act on our understanding of human activities.
To be effective in building on these new sources of innovation, new tools are needed to capture, analyze, and use knowledge. Since knowledge is a human activity, these tools must be a natural part of the environments that humans exist in.
Purpose of Business
As businesses grow and become more complex it is easy to forget why the business was created and what it exists for. The following generic business goals are culled from a wide range of business literature:
- Get and keep a profitable customer – Peter Drucker
- Create a growth partner – Mack Hanan
- Make money – Eli Goldratt
- Create Intellectual Capital – Tom Stewart
- Create economic value while supporting user values – John Heskett
- Evolve technology – Brian Arthur
- Get and keep a profitable growth partner while optimizing risk and reward – Skip Walter
Drucker’s definition gets at the heart of what the talent in each corporation needs to focus on. The first priority is to get a profitable customer. The second priority is keeping a profitable customer. It is very easy for employees in most corporations to spend most of their time dealing with internal urgent issues, and forget the important issues of getting and keeping profitable customers. A large part of the challenge is bringing the customer into each internal meeting. How does an organization keep its customers’ context real to every employee? The sales organization is most often chartered with being the keeper of the customer, but the customer relationships must be just as real to product development and manufacturing as they are to the sales force. A fundamental role for knowledge tools are helping an organization stay as focused on its customers as it is on the spread sheets which keep track of project plans, budgets and actuals.
Digital Business Design
Slywotzky in his book How Digital is Your Business defines digital business as “one in which strategic options have been transformed – and significantly broadened – by the use of digital technologies. . . A digital business uses digital technologies to devise entirely new value propositions for customers and for the company’s own talent; to invent new methods of creating and capturing profits; and, ultimately, to pursue the true goal of strategic differentiation: uniqueness.”
Digital Business Design leads to 10X productivity improvements. Slywotzky states:
“A 10X productivity improvement is more than an incremental growth in efficiency. It is a fundamental change in the way companies do business. It liberates resources to serve customers, leverage talent, grow the business, and help toward achieving strategic leadership.
“Productivity is measured as a ratio of value created to resources used.
“Why are 10X productivity improvements possible when Digital Business Design is employed? There are several reasons:
- Most of the time, in most of the economy, atoms are used when bits would bring better results. Bits are cheaper. When bits are used instead of atoms, a lot of big costs go away.
- Digital options make it possible to collect very valuable types of bits (such as information on what customers really want) before committing atoms. The result is that atoms (e.g., inventory or unused factory capacity) are not wasted. Huge costs vanish quickly when bits precede atoms.
- Digital innovators have developed an entire array of bit engines (listed in Appendix A) to collect, process, and distribute bits with extraordinary efficiency. The goal is not just to focus on bits, but to have the tools to manipulate and distribute those bits in smart ways. When a collection of powerful bit engines is exquisitely tuned to the needs of customer, value can be generated at an extraordinary rate.
“That’s why it is extraordinarily important to be constantly asking: What bit engines have we put to work in our company? How can they be improved? What new bit engines will we need to address tomorrow’s business issues?”
The Japanese did an excellent job in the 70s and 80s achieving high productivity gains in the manufacturing environment as epitomized by the Toyota Production Method. A key part of this method involved making everything on the shop floor very visible, whether it was the flow of materials, or the key statistics about production. The next step in Digital Business Design is our ability to visualize the flow of information and knowledge within complex distributed global businesses such that we can detect patterns, analyze those patterns, and act on the patterns.
Reverse Product Design
In Digital Business Design, Adrian Slowotzky indicates that the Choiceboard technology – the ability for the customer to configure a product before purchasing online in real time – holds the promise of reversing the traditional value chain. An example of the Choiceboard technology can be found at websites like Dell Computer where you can configure your own PC. In the typical non-digital business the value flows from:
Assets > Inputs > Offering > Channels > Customer
The author points out that all along the value chain information and value leak out and the product/service producers are left to guess at what customers want. In a digital business the value chain is reversed:
Customer > Channels > Offering > Inputs > Assets
The process begins with the key source of information – the customer. The digital business sells first, then produces. Companies like Dell and General Electric are particularly good at this model of digital business design.
With a human centered focus, it is now possible to reverse the steps of traditional product design to complement what is possible with a digital business design. In traditional product design, researchers and engineers start with a technology insight and innovate forward. They pass their finished product over to marketing where a story is created about how the new product will be “better, faster, and cheaper” than the old way for some hopefully large customer demographic segment. Finally, the sales people look for a set of customers who might be engaged in activities that will lend themselves to the new product. This process flows like:
Innovation > Story > Activity
In the information systems business the result of this sequence is that most products are not successful until the third version when the fit of technology to activity is finally realized.
With Reverse Product Design, development starts with the rapid observation and assessment of customer activities and needs. The reverse flow looks like:
Activity > Story > Innovation
From the direct observation of human activities, filtered through the lenses of physical, cognitive, social and cultural human factors, insights are gained as to the real customer needs. These needs are processed through the human centered case story method of:
Observation > Contention > Value > Solution
These vignettes are then gathered into a powerful story or scenario of use that guides the product developers to a powerful system of innovations.
Perhaps, the most accessible example of this process in action is the constant stream of innovations released through the Amazon.com Books web site. From the detailed observations of users trying to buy books in a physical bookstore to the stream of innovations related to trusted recommendations from a myriad of user participation, the site continually reinvents itself by first paying attention to user activities. The combination of Reverse Product Design with a powerful Digital Business Design leads Amazon.com in providing value to its loyal customers.
At every step of this new product design process, innovations are grounded in the observed activities of real users so that there is little guesswork needed as to what to create for whom.
In practice, there are two types of stories that emerge in the product design and development process – stories for understanding and stories for persuasion. Once the activities are analyzed, a short story that captures the essence of the observations helps with the understanding of the problem and potential solutions on the part of the development team. The understanding story is a precursor to the innovation. Once the innovation is designed, it is then necessary to persuade someone to either fund the development of the project, product or service or to persuade a customer to buy the product. A story of persuasion must go beyond understanding and create a context for the “customer” to make a decision and move forward. Descriptions of both kinds of stories can be found in Steve Denning’s The Springboard: How Storytelling Ignites Action in Knowledge-Era Organizations or on his website. Thus, the Reverse Product Design Process looks like:
Activity > Story for Understanding > Innovation > Story for Persuasion
By combining Digital Business Design and Reverse Product Design, a product development team can:
- Move from getting information in lag time to getting it in real time;
- Move from guessing what customers want to knowing their needs;
- Move from burdening talent with low-value work to gaining high talent leverage.
An important part of Reverse Product Design is adding in the component of reflection at all levels of the model. Donald Schon spent most of his academic careers understanding the effects of what they called Model 1 and Model 2 behavior as described in The Reflective Practitioner. The following diagram illustrates the differences between the two:
Abstracting from all the best research they could find on behavior, the authors described what they called Model 1 behavior. People or organizations are driven by Values, Beliefs and Theories which lead to actions in the context of those Values. The actions then have consequences which feed back into further actions. Most people and organizations stop there and operate on this simple feedback loop. This kind of model is useful for routine interactions but is very poor at learning or adapting to new opportunities which arise.
Model 2 behavior is characterized by adding another feedback loop of the consequences cycling to the Values, Beliefs and Theories level. People and organizations that utilize this model are quite adaptive to their environments. Now that we have unprecedented levels of technology and connectedness in the global economy, it is important that we start wiring in Model 2 behavior into our products and services.