January 16, 2007

News & Opinion: Business Books For January: Wikinomics

By: 800-CEO-READ @ 6:33 PM – Filed under: Management & Workplace Culture

Don Tapscott has been writing about the intersection of business and technology for years. Wikinomics is his latest effort to explain how the networked Web is changing the relationships between companies and their customers. If you spend any time in this ideaspace, you are going to be familiar with many of the examples in Wikinomics. Second Life, Legos, and InnoCentive all make appearances.

In the chapter on The Prosumers, Tapscott and co-author Anthony Williams ask some good questions:

So here's the prosumption dilemma: A company that gives its customers free reign to hack risks cannibalizing its business model and losing control of its platform. A company that fights users soils its reputation and shuts out a potentially valuable source of innovation. Apple and Sony may feel the latter option is an acceptable risk so long as hacking remains as the fringes. After all, product hackers are still a small minority of their customers, and there is little evidence yet that product hacks and home-brew applications are leaking out into the mainstream. Any company that believes that the status quo will hold for long, however, is mistaken. Product hacking is just getting started.

Customer with the skills and inclination to hack their products may be in the minority today, but what about in five or ten years, as increasingly technology savvy kids will become the norm? Will companies choose to fight all of their customers then? How will they cope with the proliferation of tools and Web sites that enable prosumer communities to flourish? Will they unleash the lawyers and risk driving their customers to alternative platforms? Indeed, how will they compete with the inevitable rise of hacker-friendly platforms that let customers do whatever they want and in return tap unlimited pools of free innovation? The answer is they can't and won't fight their customers for long. Customer hacking will live on.

Like any good business book, the authors offer some good answers:

Prosumption is becoming one of the most powerful engines of change and innovation that the business world has ever seen. Cocreating with customers is like tapping the most uniquely qualified pool of intellectual capital ever assembled. A reservior of talent that is as keenly and uniquely enthusiatic about creating a great product or service as you are. But it comes with new rules of engagment and tough challenges to existing business models. Anyone who tells you different has not fully grasped the implications of the impending prosumer revolution.

More than customization
Just as prosumption is more than marketing disguised as customer advocacy, it goes way beyond product customization. Customization occurs when a customer gets an off-the-shelf product adjusted to his or her specification. There is nothing wrong with mass customization: Customers get to tailor products to specific uses while companies get to maintain the economies of large-scale production.

The problem is that mass customization generally entails mixing and matching prespecified components, which significantly limits flexibility and innovation for users. When you order a Dell computer, for instance, you can slot in any DVD drive you want, but it's still a DVD drive. True prosumption entails deeper and earlier engagement in design processes (ie Lego's next-generation Mindstorms) and products that facilitate customer hacking and remixing (iPod, PSP, and mashups)

Losing control
Customers will increasingly treat your product as a platform for their own innovation, whether you grant them permission to or not. As both the iPod and PSP cases illustrate, they invent new ways to create extra value by collaborating and sharing information. Over time, value migrates from your product or service to what customers do with the information. If you do not stay current with customers, they invent around you, creating opportunities for competitors. Inevitably, it is preferable to sacrifice some control than it is to cede the game completely to a more adept, prosumer-friendly competitor.

Customer tool kits and context
Forget about static, immovable products. If your customers are going to treat products as platforms anyway, then you may as well be ahead of the game. Make your products modular, reconfigurable, and editable. Set the context for customer innovation and collaboration. Provide venues. Build user-friendly customer tool kits. Supply the raw materials that customers need to add value to your product. Make it easy to remix and share. We call this designing for prosumption.

Becoming a Peer
After gaining some experience with this new world of prosumption you'll realize that your real business is not creating finishing products but innovation ecosystems. Companies will participate in these ecosystems in the same way that IBM participates in open source--it harvests value from Linux, but it does not own or control the Linux ecosystem. Similarly, Second Life creates an environment in which customers do 99 percent of the value creation. As prosumption matures, expect to treat customers like peers, not patrons.

Sharing the fruits
Customers will expect to share in the ownership and fruits of their creations. If you make it profitable for customers to get involved, you will always be able to count on a dynamic and fertile ecosystem for growth and innovation.

Don't think communism. Think of the eBay microeconomy instead. Hundreds of thousands of eBay's customers make their living there, while eBay takes a cut of their transactions. Indeed, with Second Life's customers creating so much of the game's content, it only seems right that they should own all of the IP rights to their creations and make real money by selling in-game assets. IP rights spur prolific rates of customer cocreation and make Second Life's thriving virtual economy a source of real-world income for customers. Why couldn't your products and services support similar kinds of value-added activities?