People who create new wealth are almost never responding to needs that have already been articulatedor, at least, not ones that have been widely articulated and broadly understood. But when a business starts serving such a need, people go, "Ah, thank goodness somebody figured this thing out."
Consider Starbucks. We were drinking bad coffee, and none of us said, "Why doesn't somebody do the McDonald's of coffee?" I defy you to find anybody who was talking about that. But when it happened, people said, "Hey, that's kind of cool, I like that," and pretty soon they just started taking it for granted. Now, people can't imagine a world in which specialty coffee shops didn't exist. Starbucks is one of the most frequently visited retail establishment in America today.
Here's a more trivial example. It took about 5,000 years of so-called civilization for us to figure out that you could put wheels on luggage. Why were our parents humping all their luggage around without wheels on it? I don't think this is a Nobel Prize kind of a problem. It has to start with the unarticulated needs, the things people are not saying.
When you have that kind of insight, the challenge is always to find a way of testing it at low cost and low risk. It's not about doing some huge rollout and spending $10 million or $15 million. Instead, build a prototype. Build something out of paper and wood and glue, and put the idea in front of a customer. Or videotape people pretending to have this kind of service, and then show it to people and see how they respond.
One of the great things about information technology in generaland the Web in particularis that it's pretty easy to do small-scale, low-risk experiments, to put up a new site or a new service, and then to see whether it is going to make any difference. It's about having enough small experiments runningmany of which will fail, but enough of them hopefully will succeedthat over time you are starting to transform the customer experience faster than those around you.
And here's another thing to keep in mind: Don't worry so much about price to customers. You have to believe that customers care about something more than price. Starbucks, again, is an excellent example of this. If anybody had said a few years ago that people would pay $3 or $4 for a cup of latte, we would have thought they were crazy.
Also, take a look at the airline industry. Many people drive BMWs and stay at The Ritz-Carlton, people who are pretty well-off and who can afford the better things in life. Yet when one of those individuals goes to an airline, the service they are given is noticeably inferior to the service they'd get in any other kind of experience.
The problem the airline industry has is this relentless downward pressure on price, which they've brought on themselves because they said: "People seem to be very price-sensitive, so let's start picking away at the service." Yet as they take away the service, people become even more price-sensitive, because there's no reason to care and nothing that differentiates the service.
The question a CIO should ask himself or herself, then, is this: What have I done to offset the steady downward pressure on prices that comes when competitors have a largely undifferentiated product or service offering? And the answer a CIO is likely to give is: "I've helped to decrease costs." But I'm asking: "What have you done to prevent prices from going down? What have you done to give customers a reason to care?" The CIO has to be working as hard to use information technology to build valueand, therefore, to justify and shore up pricesas he or she is using it to reduce costs.
One of the great myths right now is that efficiency derived from information technology will show up on the company's bottom line. I believe that very few e-projects will ever boost the bottom line. I don't doubt for a moment that there will be enormous efficiency gains from the e-enablement work currently going on in organizations; I just don't think the shareholders are going to get very many of them.
There are two reasons. First, for most companies, the efficiency-enhancing benefits of e-business will be overwhelmed by the price-deflating impacts of e-business. And here's the explanation: Most companies owe a substantial proportion of their profits to friction that props up prices. Let me cite a few examples. Most people cannot tell if they're getting the best rate on their mortgage or their credit card debt, and that ignorance is a profit center for banks. There's hardly a customer in America who can tell you the commission their insurance agent earned on the insurance they just bought. That is customer ignorance, it is a source of friction, and it props up prices. When it disappears, prices come down.
A second source of friction is local monopolies. If I historically had only so many banks or jewelers locally, that props up prices, because I can't play 10 or 20 or 50 vendors off one another. And in any local market, it's easy for them to maintain price discipline. The third source of friction is search costs. Circuit City can safely promise to refund the difference if you find the product you just bought for a lower price in the next 30 days. They can make that promise, confident that you are not going to spend the next 30 days perusing the newspapers to find that difference. But over time, search costs are going to drop to zero. It will be very easy to go online and find out who has the best dealin a matter of minutes.
This article was originally published on 08-01-2001
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