The CIO agenda of tomorrow, part I

One of the effects of the recent economic meltdown is American and Western European consumers looking for cheaper products. Many are shaken and struggle to pay off existing loans, let alone feel comfortable to engage new ones. At the same time are billions of consumers in Asia, South America and in a lesser extent Africa, entering the middle class. But a middle class which can only afford cheap products. Companies react to these developments by producing cheaper products and services, like the one Lac (2,000 dollar) car from Tata.

In the Harvard Business Review article ‘Innovation’s Holy Grail’, C.K. Prahalad and R.A. Mashelkar argue that this change in demand requires companies to think differently about innovation. Where traditional innovation is built on the assumption of abundance in capital, knowledge and other resources, will future innovation be driven by the need to build more products with fewer resources. According to the authors, companies should focus on ‘affordability and sustainability, not premium pricing and abundance’. The subsequent global search for lower cost, affordable talent pools will lead to even more dispersed value chains, requiring sophisticated IT solutions to manage the accompanying complexity.

Other business models are based on free, as free is better than cheap. This business model is based on providing free services to most consumers in combination with adjacent revenue sources that cover the cost. The concept of free services was made popular by author and Wired editor Chris Anderson in his book Free: The Future of a Radical Price . In reality is the product or service is indeed free for most consumers, with advertisers or ‘premium users’ generating the necessary revenue. Will this the future? Not very likely as the available revenue pool generated by advertisement or user-upgrades is limited. Even Facebook with 500 million users still requires cash donations from its owners.

While being price conscious are consumers at the same time looking for products which reflect their desire for individualism. Companies like Netflix and Amazon.com have already mastered the skill of selling a large number of unique items in relatively small quantities, while still making a profit. Chris Anderson described this concept in this book The Long Tail: Why the Future of Business Is Selling Less of More and this retail concept is gaining in popularity with the consumers’ desire to reflect their personality in the products and services they buy. The ‘Long Tail’ in the book title refers to the statistical property that a larger share of consumers rests within the tail of a probability distribution than observed under a 'normal' or Gaussian distribution. More simply stated, consumers used to be happy with a black Ford, but not anymore. They expect all available colors of the rainbow, paying only a minimum premium for that added value. This requires companies to combine two, on first sight conflicting, requirements in their production process: efficiency and differentiation.

Offering a wide variety of customizations without adversely impacting cost is a skill which Western European car manufacturers learned to master. There the customization process starts with feeding information left behind by visitors of their websites regarding preferred models, colors and options into the production process. A production process which is based on the capability of putting a wide variety of modules together as a jigsaw puzzle. The flexibility these modules bring into in the design process and supply chain is the cornerstone of the car industries’ ability to combine product flexibility and efficiency. It drives the adding and removing of functionalities, integration with suppliers, and allocation of R&D efforts among all companies involved.

This post is from the 2nd chapter in the book I’m writing on orchestrating the Business IT value chain.