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Change Leadership Authors: Jason Bloomberg, Sharon Drew Morgen, Michael Bushong

Related Topics: Cloud Computing, Agile Software Development, Change Leadership Journal, CIO, SOA Best Practices Digest, Microservices Journal

Agile Development: Article

Struggling for Differentiation in the Digital Age of Abundance

There is no more important emotional connection in this world than the connection between people.

There’s no question that much of this planet is enjoying an unprecedented age of abundance. We’ve optimized and scaled the production of everything from vegetables to smartphones. And while there are certainly parts of this world that suffer from scarce resources, there’s no disputing the fact that huge swaths of the developing world are enjoying abundant goods and services much as we do in the developed world.

The broad macroeconomic strokes of the age of abundance have graced the global canvas since World War Two, and the Information Age is unquestionably one of the most important colors in this masterwork of progress. Today, however, the latest flourish in this decades-long information revolution – the rise of digital – adds new drama to the art.

The Tangled Economics of Digital

The basic economics of abundance are straightforward: increasingly efficient production leads to greater abundance, which in turn drives prices down. The engine of the economy shifts to the consumer as producers must up their game to win enough business to remain competitive.

Next, add software to the mix. The fundamental economic difference between software-based products and physical goods is the fact that software has near zero marginal cost. In other words, once a software vendor delivers a product, producing additional identical copies of that product for new customers costs the vendor virtually nothing, especially as compared to the cost of developing the product in the first place.

In today’s digital world, the physical products we buy are increasingly likely to have software in them. Take, for example, our smartphones. How can something so powerful, versatile, and useful cost no more than a few hundred dollars?

True, mass production drives down the cost of the physical component of the phone, but the real story is the zero marginal cost of the millions of lines of code in each one – especially considering that the value of the computer chips themselves also lies mostly in software.

Fully digital products benefit from the near-zero marginal cost of software as well, of course – but with a difference. When we say ‘digital product,’ sometimes we really mean just software, but in many cases we mean a combination of content and software, or perhaps digitally-delivered content, where the software is part of the delivery mechanism more so than the product itself.

Once we introduce content into the mix, the economics of digital take a subtle, but disruptive turn – a shift with implications for most digital businesses and by extension, any enterprise struggling with digital transformation.

A Tale of Two Digital Products

To understand the subtleties of these digital economics, let’s explore two familiar examples of digital transformation: digital consumer banking and the digital delivery of television-like programming, for example, House of Cards on Netflix.

Back in the pre-Internet dark ages, if you wanted to withdraw some cash or deposit a check, you had to walk into a branch, wait in line, and conduct your transaction with a human teller. The rollout of automated teller machines (ATMs) in the 1970s and 1980s changed the economics of consumer banking, and the advent of web-based banking in the 1990s changed it once again.

Now in the 2010s, we are undergoing yet another transformation of consumer banking, as mobile payment technologies and remote check deposit services are eliminating the need to visit ATMs altogether.

Each of these technology-driven innovations shifts the economics of banking from physical to digital, thus reducing the marginal cost of each transaction closer to zero. As a result, every consumer bank must step up to the plate and offer essentially identical services at decreasing cost to the consumer in order to attract and retain business.

Let’s compare this straightforward banking example to the House of Cards scenario. In those same dark ages, all we could watch was broadcast television. The selection was small so audiences were large, and thus advertising revenue was plentiful and networks could easily afford to create the content they required to attract the audiences the advertisers craved.

Cable television increased the selection of content, splitting up the audience and thus driving advertising revenues down. As a result, the money each network had to invest in content creation dropped, leading to the predominance of reality TV programming, for better or worse (mostly worse).

Now let’s add digital to the mix. The ubiquity of high-speed Internet coupled with the video capabilities of 4G mobile networks opened up the TV-like programming world to all-digital producers like Amazon and Netflix. Given the economic argument above, we’d expect the result to be lowered cost and increased abundance.

However, instead of following the pattern of consumer banking, where the move to digital lowered the cost of serving customers, just the opposite happened. In this case, the rise of digital led to the production of programming like House of Cards – far more expensive to produce than your average Keeping Up with the Kardashians or The Bachelorette. What’s going on here?

The Digital Economics Missing Link

The missing link in the entire abundance argument is the fact that while consumers appreciate abundant, low-cost products and services, the providers of those products and services must offer some kind of differentiated value in order to attract increasingly fickle customers.

In the case of television-like programming, driving the delivery cost to zero is fine – but what makes a consumer choose House of Cards over the Kardashians is the value of the content to the consumer: content that real human storytellers must create.

In other words, the greater the digital-driven abundance in our lives, the more we crave the human touch, even though (or perhaps in part because) human creativity is resource-constrained.

In the case of consumer banking, however, the situation is different, as customers as a rule aren’t looking for content from their banks. They want low cost and convenience – benefits that don’t differentiate one bank from another, once they all get with the program.

Instead, the banks – and any other company looking to provide differentiated value in this digital world of low-cost sameness – must differentiate on their emotional connection with customers.

If they are in an industry that delivers content, they can create this connection with human creativity. But what about companies in industries that deliver value outside of original content? Those enterprises must focus on their brand to establish and maintain differentiated emotional connections with customers.

Coke vs. Pepsi style brand differentiation has been around for decades, of course. What’s different today is how digital is raising the stakes on brand differentiation for an increasingly broad range of products and services in virtually every industry.

From tellers to ATMs to mobile apps, the consumer banks are all becoming essentially identical to each other from the perspective of the customer. All that’s left is the brand.

The Intellyx Take

In some industries, companies might think that mass customization is just the ticket to a differentiated value proposition in the face of these digital economic pressures.

To be sure, if only one footwear company offers the ability to build a custom shoe, then customers will likely flock to its site. It’s only a matter of time, however, until all footwear manufacturers offer increasingly similar mass customization.

Thus even the ability to offer unique products to each and every customer is only a short-term solution to the pressure of digital economics. At some point they must once again differentiate solely on their brand.

Eventually, however, even traditional brand elements begin to pale. Just how many different logos, color schemes, taglines, and jingles can we tolerate before they all fade into the background noise?

Shake up the branding, perhaps? Some guerrilla marketing, or other novel branding efforts? Sorry, those will all begin to pale as well. What’s a digital marketer to do?

Fortunately, there is one element of any brand’s emotional connection to its customers that never pales – the human touch. When digital sameness drives out your margins, eliminates your differentiation, and bores your customers, you can always fall back on real, human interactions with them. After all, there is no more important emotional connection in this world than the connection between people.

This conclusion should serve as an important wakeup call for anyone who believes what can be automated should be automated. True, automation provides enormous value to customers while driving costs out of the business.

But in the end, being able to chat with a real live, human teller at our local bank branch – or watching original content by all-too-human storytellers – might become the only differentiated brand value remaining in our increasingly digital world.

Intellyx advises companies on their digital transformation initiatives and helps vendors communicate their agility stories. As of the time of writing, none of the organizations mentioned in this article are Intellyx customers. Image credit: Ernesto Pletsch.

More Stories By Jason Bloomberg

Jason Bloomberg is the leading expert on architecting agility for the enterprise. As president of Intellyx, Mr. Bloomberg brings his years of thought leadership in the areas of Cloud Computing, Enterprise Architecture, and Service-Oriented Architecture to a global clientele of business executives, architects, software vendors, and Cloud service providers looking to achieve technology-enabled business agility across their organizations and for their customers. His latest book, The Agile Architecture Revolution (John Wiley & Sons, 2013), sets the stage for Mr. Bloomberg’s groundbreaking Agile Architecture vision.

Mr. Bloomberg is perhaps best known for his twelve years at ZapThink, where he created and delivered the Licensed ZapThink Architect (LZA) SOA course and associated credential, certifying over 1,700 professionals worldwide. He is one of the original Managing Partners of ZapThink LLC, the leading SOA advisory and analysis firm, which was acquired by Dovel Technologies in 2011. He now runs the successor to the LZA program, the Bloomberg Agile Architecture Course, around the world.

Mr. Bloomberg is a frequent conference speaker and prolific writer. He has published over 500 articles, spoken at over 300 conferences, Webinars, and other events, and has been quoted in the press over 1,400 times as the leading expert on agile approaches to architecture in the enterprise.

Mr. Bloomberg’s previous book, Service Orient or Be Doomed! How Service Orientation Will Change Your Business (John Wiley & Sons, 2006, coauthored with Ron Schmelzer), is recognized as the leading business book on Service Orientation. He also co-authored the books XML and Web Services Unleashed (SAMS Publishing, 2002), and Web Page Scripting Techniques (Hayden Books, 1996).

Prior to ZapThink, Mr. Bloomberg built a diverse background in eBusiness technology management and industry analysis, including serving as a senior analyst in IDC’s eBusiness Advisory group, as well as holding eBusiness management positions at USWeb/CKS (later marchFIRST) and WaveBend Solutions (now Hitachi Consulting).