Creating New Value

By Gary Hamel

Expert Voice: Gary Hamel on Thinking about the Customer



In 1994, when Gary Hamel wrote Competing for the Future (Harvard Business School Press) with his long-time colleague and former professor, C.K. Prahalad, it changed much of the debate about how companies set strategy. Instead of advocating a top-down approach, Hamel, who is also a visiting professor of strategic and international management at the London Business School, and Prahalad, a professor at the University of Michigan, proposed that business strategy should involve employees at all levels of a company. Moreover, they argued that when companies set their strategic course, they ought to include younger employees and even dissidents in the process—a theme that Hamel expounded upon later in his 2000 best seller, Leading the Revolution.

Since his first book appeared, Hamel, 47, has continued his writing and speaking activities, and also founded a consulting firm in Menlo Park, Calif., called Strategos. The Economist calls Hamel "the world's reigning strategy guru," and MIT Professor Peter Senge describes him as "the most influential thinker on strategy in the Western world." As the author of concepts such as "core competence" and "industry revolution," Hamel has helped to change the focus of strategy in many of the world's most successful companies, including The Royal Dutch/Shell Group, Nokia Corporation and Ford Motor Co.

But staying ahead by being a revolutionary is easier said than done. In Hamel's view, even highly competitive companies can develop blind spots. When that happens, they can lose out to newer challengers. The reason for that blindness, Hamel says: "An unwillingness or inability to look outside of current experiences." Helping companies "see" better has been the focus of his latest work.

Hamel recently spoke with CIO Insight Executive Editor Marcia Stepanek about how CIOs contribute to that blindness—and how they can correct their vision. What follows is an edited transcript of Hamel's remarks.

Over the last decade, CIOs have been rewarded for using information technology to drive efficiency, reduce transaction costs and reduce procurement costs. If you divided most IT investments or projects into two buckets—enhancing some particular activity versus transforming it—I think most would be in the first bucket.

I have no problem with that, but one of the things we know is that to create wealth, an organization needs to increase its productivity—and productivity has two dimensions to it. It has an "E" dimension, and I mean "E" in terms of efficiency. It also has a "V" dimension—value. Productivity growth is always some blend of the two, using people and capital more efficiently while at the same time increasing the value that customers place on what you produce.

The reality, though, is that when you look at companies that have created a lot of new wealth, they've done it, by and large, not by getting better at using fewer people via CRM systems, automated order systems and the like—basically using technology to take time, capital and labor out of the business process. Instead, they've created new wealth by delivering new value to customers. Think of Starbucks or any other company bringing new products and services to the marketplace.

There's still no question that if you look at most of the technology projects out there, most of the e-commerce stuff is still really not much more than an online catalog with maybe some immediate access to customer service. So, yes, it's wonderful that Office Depot is steadily increasing the amount of its revenues that come from e-commerce. But all they've really done is find an effective online catalog that is probably more useful than talking to somebody on the telephone. To me, that is incredibly boring.

Then, on the e-business side, you have companies such as General Electric and Oracle, which claim to reap hundreds of millions of dollars of efficiencies from their b2b efforts. I have no doubt that will happen. But this is simply re-engineering on steroids. This is what companies have been doing for the last decade, first with EDI and now with the Internet, but it's essentially just automating the supply chain. So to me, all of these things are really a yawn.

Now, don't get me wrong. I know, from the perspective of a technologist trying to work through all of the complexities of doing this, that these efficiency projects are important. I have enormous respect for anybody who has the courage to face the back-breaking, mind-boggling complexity of setting up an industrywide exchange. But I want to distinguish that from initiatives that could actually create new wealth for a company.

My question to the IT community is: What is the contribution you are going to make to produce incredible new value for customers?

Creating New Value

Creating New Value

Years ago, I was working with some of the top managers at Ford Motor Co. I think they've now caught up, but at that time, Ford was way behind the Japanese in producing 16-valve, four-cylinder engines—the high-revving, fun-to-drive engines that you could find in a Honda Accord. Why? These Ford executives told me that creating a 16-valve engine would cost $65 over what an 8-valve engine would. And, of course, my response was that any 18-year-old kid out there would gladly pay you another $250 to have an engine that revs up like that. The punch line was that these executives knew everything about cost and nothing about customer value.

I think that's true for most CIOs. They know everything about the cost of a particular transaction, but they don't know very much about what it costs when you frustrate the customer, when you waste his time and get him angry.

I go to a store like Home Depot, and the first thing that strikes me when I walk in is that I am utterly confused by the layout of the store. It's as big as several football fields, it has shelving that runs from floor to ceiling and it keeps tens of thousands of items in stock—of which I only want three. What occurs to me is that they know where all those items are because they put them there, but I don't know where they are when I come in. Where's the kiosk that would let me type in what I want, and then immediately show me a store map and give me the aisle number and the shelf number—and then tell me how to get there? And better yet, wouldn't it be helpful for this kiosk to find out whether I'll need help—so that a store clerk could meet me in the designated aisle when I get there?

Take it a step further. If I wanted to build a deck behind my house, why can't I go online, look at several different plans, tell Home Depot what my budget is, what the style of my house is and the amount of space I have to work with? And why couldn't they then generate a set of potential plans online that I could look at? For example, if I choose the plan I like, the site could then generate a materials list. I could then check off the things I already have, like a hammer and a saw. But the rest of the things I need but don't have could be delivered to me the next day, on a pallet, ready to go. Why can't they do that? I think there are many examples of where we have not yet understood how to use technology to enhance the customer experience. Most IT people don't really spend much time deeply understanding the customer experience, nor think very creatively about how to change it.

So what's the problem? By and large, IT has been seen as an inward-facing function where IT people take on the objectives defined by other people in the organization—by someone in marketing or in procurement or senior management. But these objectives seldom involve putting IT people into deep conversation with customers.

Over the next decade or two, every industry is going to be reinvented from the customer backwards. It sounds incredibly trite to say that in a world where people talk about being customer-focused and customer-led, but I believe that there's hardly a business in the world today that has really been thought through in a customer-backwards way.

Here's how to get started thinking more creatively about the customer. Imagine a list of all the good ways a customer can feel about a product or a service experience. They can feel informed, trusted, amused or involved. Then imagine all of the not-so-good ways a customer can feel—mistrusted, confused, alone, misinformed and so on.

When I'm trying to get organizations to think more creatively about using technology to change the customer interface, I take a diagonal slice of an organization and identify people from top to bottom. I ask those people to pick what they would regard as the five or 10 best service experiences in the world. That might be staying a night at the Four Seasons Hotel, or it may be a day at Walt Disney World. Then, I ask those people to live in those experiences—for a day or two. I ask them to note along a time line any point at which they had one of these very good or not-so-very-good kinds of feelings and experiences. And when it happens, I ask them to take a picture with a digital camera or write a note and tell me what happened. For example, let's say I'm at Walt Disney World and my little one falls down and bruises his knee and starts crying. Mickey Mouse comes over and tells my kid that they're going to put him in front of the parade this afternoon, whatever it takes to make him feel better.

Be the Customer

Be the Customer

When the executives finish with this exercise, I then ask them to come back and live through the experience of being customers of their own companies. We did this recently with one of the biggest hospitals in the U.S., and we literally had people walking around in these gowns that flap open in the back. We had them lying half-naked on a gurney out in front of radiology waiting a couple of hours to get an X-ray and so on. And most of the things they recorded were not such good feelings.

Then we asked them to think about what they can learn by analogy from these other industries that would help them transform this customer experience.

One of the most dangerous things any company can do is to rely on sales and marketing to give it insight into the unarticulated needs and frustrations of the customer. That's because the sales and marketing people are prisoners of their own thinking and of their traditional market research methods, and so you cannot rely on them to be the conduit for these kinds of insights. Moreover, since they typically don't understand what is possible with technology, it's difficult for them, even if they see the customer frustration, to think about the solution. And so I think this is a challenge for the CIO. After all, if the CIO is spending 50 percent to 60 percent of a company's capital budget, for heaven's sake, he or she should be responsible for making sure that the expenditure is bringing a value to customers that will thrill them and elevate their customer experience to a completely new level.

It shouldn't be too difficult to get started. Nothing prevents a CIO from putting some of his or her staff out in the field in different settings. Go ahead, block off two or three days, and really get yourself and your people thinking deeply and creatively about how technology could change the customer experience.

Analogies provide powerful examples. I can go to any cash machine in the world and get $250. Nobody asks for my signature or my address, it just gets done. Yet, when I go to a hotel, they want me to sign something, they want my address, they kind of semi-interview me when I get to the desk. I'd rather just come up to the door, swipe my credit card and have them know that way that I have a reservation and I'm in room 327. I can then go to the room, swipe the card again, and the door opens. This is not rocket science. Bankers have already figured this out.

In most companies, though, there is no well-organized effort to produce fundamentally new strategies to allow a company to differentiate itself and create new wealth. Therefore, there is nothing really challenging the IT community to use technology in fundamentally new ways.

If technology has the power to dramatically transform the economics of a business and the customer experience, then it's a question of who should drive the transformation. I think the IT community has to recognize that this isn't going to come from marketing. People in marketing are worried about incremental market share. And we're not going to get it from top management, either—they're worried about making the quarterly numbers. CIOs and IT people are going to have to be the ones who go out and generate this insight.

Unspoken Needs

Unspoken Needs

People who create new wealth are almost never responding to needs that have already been articulated—or, 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 general—and the Web in particular—is 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 running—many of which will fail, but enough of them hopefully will succeed—that 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 value—and, therefore, to justify and shore up prices—as 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 deal—in a matter of minutes.

Zero Friction

Zero Friction

Not tomorrow and not next year, but over the next few years, the Internet is going to smooth out almost all of these sources of friction. We will live in a world where there are no ignorant customers, where there are no local monopolies, where the search costs have gone to zero and where transaction costs have gone to zero. In that world, a lot of companies are going to find their profits under enormous pressure.

The reality is that all of the same tools that every company is using to drive efficiency are also going to be put in the hands of their customers. It's going to take a while, but the Internet will represent the final evolution of bargaining power from producers to consumers. And they are going to use that bargaining power to hammer down prices.

The good news in all of this is that if I have a product or a service that is truly cool, unique and differentiated, I can escape that pressure. A while back, I was looking for a new SUV for my wife. She had thought that she might like a BMW X5. So I did what all auto buyers do today. I went online, I found the dealer cost, and figured that since it's a BMW, then maybe they have to make $500 instead of $200 on the deal. I then went to my local dealer ready to do battle. I told the salesman this: Here's what you paid for this thing—and here's what I'll pay over that. He looked at me as if I was crazy. He told me that he'd sell it to me for $10,000 over list price. Why? This vehicle is very cool, people love it, it's a source of pleasure to customers, and that's the price BMW dealers can get.

And I had a little epiphany at that point. I understood very clearly that if you're making a Ford Explorer or a Chevy Blazer or some other product that does not particularly differentiate, all of this power ending up in customers' hands is going to be quite murderous for you. On the other hand, if you're making something that's differentiated and truly appealing, the Internet is your friend. You're going to get word of mouth and a buzz going and a user community and whatever else. For the makers of truly differentiated services and products, the Internet is going to create a world in which there's no place for mediocrity to hide and in which the only kinds of competitive advantages left are advantages that deliver amazing value to customers. That's why I think the Internet is one of these unstoppable tides of history. The genie is out of the bottle, and consumers are not looking for the cork. I don't believe for a moment that all margins go to zero. What it does mean is margins go to zero for companies that don't have cool products and services.

It won't be hard to differentiate. Here's why: Despite the enormous growth in IT spending, the average operating margin for the S&P 500 has hardly changed over the last five or six years. What is happening? We're spending billions, and it's not going to the bottom line. Well, the first reason is that this money is going into customers' pockets. The second reason is that most companies' IT strategies are highly convergent in the sense that they're all working on the same kind of initiatives. In fact, the major trends in IT over the last few years tend to drive strategy convergence rather than divergence. Most companies today are running industry- standard platforms, whether DB2 from IBM or R/3 from SAP.

We are also all outsourcing to the same handful of companies, talking to the same few IT consultants. We are all joining industry hubs and exchanges, where we're purposefully trying to homogenize IT policies across companies. We are increasingly relying on external ASPs. So if you think about it, all of those things are diminishing the probability that you're going to use information technology to create something unique and distinctive for your own company. Most IT executives are out for the biggest bang for their buck in terms of efficiency, and the way they're doing that is outsourcing and borrowing best practices from somebody else.

Do Something Unique

Do Something Unique

Again, the question that I would ask an IT executive is this: Show me something in your strategy that will create something unique and give your company an industry advantage. Right now, CIOs all go to the same conferences, they all read the same magazines, they're all trading war stories, and that's fine, but it's bad for innovation. Shut up sometimes and don't share everything. Keep to yourself that completely unique thing that you're going to do. And know this: In an industry where strategies are largely undifferentiated, price becomes the only mechanism for competition. Any efficiency gain that a rival ekes out, then, will be devoted to lowering prices as a mechanism for keeping customers.

Which brings me full circle: CIOs need to help justify rising prices. They need to create customer value. We need to get the customer back in the middle of our discussions about e-commerce, and not in the sense of whether or not we're going to allow them to go online to check the status of their order. You get no points for doing that, everybody's going to do that. That's turning on the lights every morning. The big challenge is this: Do you have any insights that are deep enough in the customer experience that will enable your company to use IT in a completely unique way?

Do you agree or disagree? Please send comments to us at editors@cioinsight.com.

This article was originally published on 08-01-2001