Doing Business in Virtual Worlds

By Kamales Lardi-Nadarajan  |  Posted 03-03-2008

Doing Business in Virtual Worlds

Synthetic worlds are big news these days, with visitors to these so-called virtual environments coming from a wide range of backgrounds--including presidential candidates and movie stars. In addition, numerous large and midsize companies have explored synthetic worlds, though many eventually abandoned them.

Synthetic worlds are computer-based simulated environments that allow multiple users to inhabit and interact with each other through two- or three-dimensional graphical representations of humanoids and other forms, known as avatars. These virtual environments resemble the real world, with rules such as gravity, topography, locomotion, real-time actions and communication.

Though more than 50 individual synthetic worlds exist, according to VirtualWorldNews.com, a social virtual environment called Second Life has gained a lot of attention during the past year. Many people believe synthetic worlds are elaborate games, but there is real business going on in Second Life. Its service provider, New Business Horizons, counts scores of businesses and retailers, such as Coca-Cola and Sears, that have set up virtual stores to market products and test prototypes. And INSEAD, an international business school with real-world classes in France and Singapore, has built a virtual campus and classrooms in Second Life to supplement in-person learning.

A growing number of companies use synthetic worlds to connect with customers or interact with employees, thereby significantly reducing business travel time and expenses. At Deloitte Consulting, for example, we used this environment to host our 2007 Global Excellence Awards ceremony, allowing employees from around the world to "attend" the event.

More recently, Second Life covered the 2008 World Economic Forum in Davos, Switzerland. It provided virtual interviews and discussion forums with key attendees.

Understanding the Virtual Market

Skeptics may find it hard to understand all the fuss about virtual environments, especially when they find large deserted areas in synthetic worlds such as Second Life. For the most part, these areas were set up by corporations that used them for a one-time media blitz and then abandoned them. This short-term view has resulted in what media critic Mark Glaser characterizes as a hype-and-backlash cycle, which has cast doubt over the potential business value of synthetic worlds.

The phenomenon is reminiscent of the dot-com era of the late 1990s, when a large number of Internet-based companies were formed after the explosive popularity of the Internet. These enterprises dismissed standard business models and focused on the common goal of "getting big fast."

Unfortunately, thousands of these startups failed, burning through their venture capital--often without ever making a net profit. However, some companies did make it through the dot-bomb, including Amazon, which differentiated itself through a business model that was tailored to suit the new market environment.

Learning from the dot-com experience, some enterprises have identified a key factor that's necessary to successfully establish a virtual presence, whether for marketing purposes or commercial gain: Develop a strategy specifically suited to consumers of this new environment. In order to do that, companies must first understand the virtual market and its users.

Though surrounded by controversy, virtual environments such as Second Life can have a huge impact by quickly redefining personal and business interactions. In fact, the emerging social computing networks--online communities of people who share interests and activities--are predicted to redefine customer relationship management and business relationships within the next five years. This trend is gradually moving toward immersive 3-D environments, where there has been a tremendous increase in the number of synthetic world users. Virtual world consultancy K Zero estimates that synthetic worlds have registered close to 174 million users.

Some companies have developed innovative ways to integrate synthetic world technologies into their business model, effectively generating value for their business. In December, for example, Luxembourg hosted its first virtual job fair, bringing together professionals from 45 countries worldwide.

The Working Worlds fair, hosted in Second Life, welcomed 2,000 visitors who conducted more than 300 job interviews, with more than 50 of the candidates invited to Luxembourg for face-to-face meetings, according to GAX Technologies, the IT services firm that organized the event. Luxembourg, which faces significant recruitment difficulties due to an insufficient number of job candidates, has used this method to open the recruitment market internationally--with no travel expenses and low operating costs.

Communicating With Customers

 

Communicating With Customers

In the last year, executives in many companies have had to decide whether to venture into virtual environments, either for business or marketing reasons. It's not an easy decision, as media reports of enterprises that have abandoned their virtual businesses have cast doubt on the value and potential of synthetic worlds, even though there have been consistent increases in the number of registered users.

Despite getting some negative press, synthetic worlds are starting to change the way companies communicate with their customer groups. Over time, online synthetic worlds will play an increasingly vital role in business-to-consumer relationships, building customer loyalty through time and commitment.

Within the next five years, synthetic worlds will dominate and drive brand building in major companies.

That will give a competitive edge to enterprises already established in these interactive environments. When deciding whether to enter the virtual environment, companies should take an experimental approach, focusing on long-term added value.

Unfortunately, many companies view new or emerging technologies as a way to cut costs, forgetting the added value of innovation and new market development. "New ideas don't drop from the sky, but are developed through an analytical experimental process," wrote Harvard Business School professor Stefan Thomke, an authority on the management of technology and product innovation, in a February 2001 Harvard Business Review article. "The process should not only identify several new ideas, but also help narrow the number of ideas and pursue the most viable option for experimentation."

Realizing the challenge executives face when assessing the potential benefits and risks of having a virtual presence, my colleagues and I developed an approach that takes a long-term strategic view of synthetic worlds as a new route to the emerging online consumer market. This three-phase approach encourages experimentation in the virtual environment.

Phase 1: Understanding the Current Environment The first phase is the most critical, as it ensures that a thorough assessment of the virtual environment is conducted. To initiate this process, a company must first determine the strategic objective of entering a virtual environment and decide whether this move is in alignment with the firm's overall strategic direction. For instance, if the enterprise has a specific focus on sustainable growth and innovation, entering the virtual environment to develop new products and marketing concepts might be a good move.

At this stage, companies need to develop a clear understanding of this technology's potential by keeping up to date on trends and predictions concerning synthetic worlds. In addition, they should assess their competitors' perspectives and reactions to synthetic worlds, while also identifying the customer group to be targeted in order to gauge its openness to and expectations of synthetic business environments.

The strategic objectives must be accompanied by measurable business outcomes--key indicators that would allow the company to measure and track the impact or outcome of the approach. These indicators would likely include the number of weekly customer visits to the virtual site, the number of media mentions and even the impact rating compared to other customer channels.

The subsequent step involves identifying all relevant possibilities for entering the virtual environment and potential operating models. Focus on describing the options from the perspective of the target audience, the user's experience and the functions provided, as well as alignment with the initial strategic objectives.

Then identify the related costs, resources, timeline and technology infrastructure required. This is an iterative process, which should be conducted continuously until a satisfactory assessment has been developed.

Throughout the duration of phase 1, the options and subsequent assessments need to be shared with key internal stakeholders. That's essential, as most executives shy away from venturing into unknown territory, particularly when it involves experimenting with new technology.

Once the initial assessments have been conducted, the most viable option should be selected for further design. The selected synthetic world entry option should be developed into a scenario, describing the customer experiences, as well as the functions, services and products to be offered.

A strategic approach such as this will establish a strong foundation for conversations with executives, because the risks and investments involved will have been thoroughly assessed. Then a collective decision on whether to continue with a pilot implementation can be made. As with the implementation of any new technology or media, it is critical to have the full support of key stakeholders to ensure success.

Phase 2 and 3

 

Phase 2: Launching a Test Environment The experimentation process may be carried out as part of a pilot implementation of the selected option. In a virtual environment, the costs of technology and experimentation--as well as the risks--during the pilot implementation phase are far lower than they would be in a real-world environment. Of course, the cost of establishing a functioning pilot business environment can range from inexpensive to exorbitant, depending on how elaborate the service scope is.

During the pilot phase, companies should track key indicators to determine the success rate of the virtual presences. These indicators include the number of existing customers visiting the virtual site, as well as the number of new customers gained through the virtual presence.

 

Phase 3: Full Implementation and Continuing Operations Following a three- to six-month pilot launch, a decision should be made on whether or not to conduct a full implementation based on the key indicator data collected. If the customer response to the virtual presence has been positive, there may be a good case to conduct a full launch of the site. Other factors that need to be considered include the continuing operational model of the virtual presence, as well as resources and cost requirements.

Virtual environments face risks that are similar to those marketing and branding must deal with online. Since a synthetic world is a consumer-controlled environment, organizations have little power over the impact of their message on the consumer. Therefore, enterprises should thoroughly assess the risks posed by virtual environments--including the collateral effects that could impact their brand and image--before making a decision to proceed. Once the virtual presence has been launched, it's vitally important to measure and track the business outcomes on a continuous basis.

Synthetic worlds have created a new way for people to socialize, entertain, innovate and transact business. This can be a daunting reality for many companies, since traditional inward-focused business models will not have long-term sustainability.

In this new virtual environment, as the authors of Wikinomics note, self-organized consumer communities offer lucrative opportunities and present grave new threats to business. Taking a long-term strategic approach to assessing the pros and cons of virtual environments ensures that enterprises decide to venture into this environment based on a thorough assessment of its possibilities and risks.

As the consumer environment changes, virtual environments offer a new route to market--one that traditional business models are unable to cope with. The inevitable changes brought about by virtual environments will redefine the way businesses interact with their customers. Companies that explore and understand these environments today will win consumer buy-in and loyalty tomorrow. n

Kamales Lardi-Nadarajan is a manager with the Technology Integration division of Deloitte Consulting GmbH in Zürich, Switzerland.