Getting to grips with new age mechanics

You are a mechanic and a customer rolls up with a problem. You open the bonnet and stand there aghast. Inside, it looks more like a scene from the X-Files than a hum-drum engine. The parts are moving as if they were alive: changing size and shape, displaying new characteristics: isn’t that rubber tube conducting electricity? Once tight connections are coming loose. New methods present themselves: fix the steering wheel to the fan belt? Perplexed; terrified; excited, you think: “How the hell am I going to fix this?”

That, in a nutshell, is the sort of situation marketers are likely to face as we hurtle beyond a familiar industrial age towards a new information age which works according to a different set of rules.

Recently, a mini tidal wave of new books has appeared examining the implications of this shift. They range from the breathless New Rules for the New Economy by Kevin Kelly (Fourth Estate), and the textbook-style When Economics Means Business by Sultan Kermally (Financial Times Pitman) through to the hard-nosed Information Rules by Carl Shapiro and Hal Varian (Harvard Business Press), and the visionary Net Worth by John Hagel III and Marc Singer (Harvard Business Press).

Increasing returns is one of the themes dominating their analyses. Traditional economics takes diminishing returns for granted. At some point, each extra unit of resource (say, another TV spot) creates less of a return than the previous one. But in many markets the opposite seems to happen. Take fax machines: one fax machine in the world is useless, two have a little value, and a million have lots of value. The more there are, the more use they are.

We see something similar in those marketing situations where word of mouth takes over. Negative word of mouth kills a new product in no time. Positive word of mouth can spread like a flu epidemic. And compared with traditional marketing communications, both are uncontrollable. As Kelly writes in New Rules: “The Net shifts from mass media to mess media.”

The fax network has another strange characteristic. As Kelly notes, its success is “external to any particular company’s success” and, as a result, “we are heading into an era when both workers and consumers will feel more loyalty to a network than to any ordinary company”. The strategic concerns of network leaders, or sponsors such as Microsoft and Apple, also change, argue Shapiro and Varian in Information Rules.

Number one priority is not to maximise market share but to build their particular network. In such circumstances the brand tends to rise above the corporation to represent the network, and marketing focuses increasingly on alliances with complementary companies and “co-opetition”: co-operating to increase the size of cake while competing for a share of the spoils.

Marketing tactics may also be transformed. “If consumers expect your product to become popular, a bandwagon will form, the virtuous cycle will begin and consumers’ expectations will prove correct. But if consumers expect your product to flop, your product will lack momentum,” write Shapiro and Varian.

“The beautiful if frightening implication: success and failure are driven as much by consumer expectations and luck as by the underlying value of the product.”

This is the world of standards wars, of new product launch pre-announcements (instead of paranoid secrecy), of high switching costs and lock-in to particular technologies and infrastructures, and attempts at artificial lock-in – the loyalty scheme.

There are yet more twists to “network” marketing, according to Kelly. While the central economic imperative of the industrial age was to increase productivity, now the amplification of relationships is taking over. That’s because through these relationships between companies and companies, companies and customers, and between customers and customers opportunities arise. And wealth begins in opportunities. Efficiencies are for robots. Opportunities, on the other hand, are for humans.

Kelly draws three conclusions for marketers. First, make customers as smart as you are. “It’s a tough job being a consumer nowadays. Any help will be rewarded by loyalty.” And “whoever has the smartest customers wins”.

Second, connect customers to customers. Nothing is as scary to most corporations, he writes. But “there is no more powerful force in the network economy than a league of connected customers. They will teach you faster than you could learn any other way”.

Third, imagine your customers as employees. They want “to be involved at some level in the creation of the things they use”. The ultimate destination, he suggests, is “the company that is only staffed by customers”.

What makes this all the more complicated is that these new information age economic drivers are still mixed up with old, industrial age imperatives. Every one displays a mixture of both industrial and information age logics. One part of the business may face diminishing returns, for example, while other parts experience increasing returns.

If Hagel and Singer are right, many businesses won’t survive the tensions this creates. Most companies are really made up of at least three different businesses, argue the two McKinsey consultants.

There are customer relationship businesses which focus on interactions with customers; product innovation and commercialisation businesses which create new products and bring them to market; and infrastructure management businesses which make sure core processes happen at minimum cost.

Each of these businesses naturally follows a different economic logic, and every attempt to “bundle them together into a single corporation forces management to suboptimise the performance of each business”. As the information age unfolds, the inevitable consequence, they suggest, is the “unravelling of the company” into separate specialist businesses each focusing on these different skills.

The information age is now a ubiquitous phrase. What it really means for business and marketing, however, remains hazy. Inventing a new marketing engine may be easier for our mechanic than trying to fix the old one. But either way, his skills will be put to the test.v