In a recent post (Center-Edge Organization: An Alternative to Traditional Hierarchy), I described how a Center-Edge organization facilitates working wider. This post offers 7 reason for shifting resources and power from the center to the edge
1. Customer vs. Shareholder focus: Shifting the center of gravity to the edge changes who you serve. Center-weighted firms are biased towards serving shareholders whereas edge-weighted firms are biased to serving customers. The shareholder focus accelerated strongly in 1977 when Jensen and Meckling criticized professional managers for enhancing their own well being at the expense of shareholders. Recent findings by Martin suggest that shareholder returns have declined or at best achieved parity with previous approaches.
Peter Drucker defined the primary purpose of the firm as acquiring and serving customers. He also famously characterized profit as cost, which is important since many believe that over the long term profits (think earnings per share, EPS) drive shareholder value.
From my perspective, the story is even simpler. Customers generate revenue; not shareholders. Period. There are two routes to increasing revenue: add more customers or sell more to existing customers. Where do customers live? They live at the edge and beyond. (And for those who are caught up with legitimate or perverse examples of “internal” customers, they both live beyond your edge).
2. Understanding Customer Experience “Customer experience is the internal and subjective response customers have to any direct or indirect contact with a company.” Experience is internal and personal. Communicating it tends to be sticky and is not easily captured in a single moment or method. Experience and particularly the judgments that come out of it are contextually driven. For example, irrigation equipment that augments healthy rainfall in the Midwest won’t provide a good experience for farmers in California’s inherently dry central valley.
For services in particular, one has to get mentally and physically close to customers to iterate and test your understanding of their personal experience. That’s why video game designers constantly test their progress with actual users. It’s impossible to predetermine a great game or user interface.
Customer responses also reflect their cultural setting. This could be a region of the world, technical heritage, current corporate culture and so forth. Interpreting responses out of context is a quick way to get into trouble. What’s considered precise to a marketer rarely satisfies an engineer.
3. Speed: Customer experience is time sensitive. Experiences aggregate constantly, eventually resulting in a judgment based on comparing experiences to expectations. If the judgment is negative, buying will halt and drive down revenues. When a customer uses today’s technologies to broadcast their displeasure (see “United Breaks Guitars”), the impact can be enormous. The Internet has turbo-charged word-of-mouth such that its speed and power is greatly increased. Word-of-mouth now matches the pace of life. Remember, the time it takes to discover a problem is usually far longer than the time it takes to respond.
Just because you act on a customer problem doesn’t mean it’s solved. You can’t tell if you’ve closed the loop until it’s confirmed. By living on the edge, you’ll get quicker confirmation feedback.
4. Access to knowledge and talent: Bill Joy, co-founder of Sun Microsystems, commented that today “there are more smart people outside your firm than it.” Living on the edge puts you in a better position to better identify and go after such talent. Procter & Gamble’s well-reported goal of sourcing over 50% of new product ideas from outside P&G Labs underscores how seriously one company believes innovation depends on working wider. To achieve this goal, P&G had to re-train technologists and shift how they used their time.
5. Location, location, location: Peter Horan, former CEO of About.com, argues that a center-weighted organization expects customers to come to them versus edge firms that go out to customers. In Peter’s terms, Netflix takes its business to the edge whereas Blockbuster requires you to come to their “centers”. Going to the edge also enables you to shift from mass marketing (one-to-many) to a personalized approach (one-to-one). Increasingly ubiquitous GPS technologies can tell us where customers and employees are in the spaces beyond the edge.
Location drives raises personalization beyond individual preferences. Companies can address problems or offer solutions that are uniquely tied to a customers’ current position. For example, soon AAA towing or cab companies won’t have to ask where you’re calling from.
6. Controlling Beyond the Edge: Columbus went off the grid the moment he sailed over the horizon. Sponsoring patrons had no visibility or input until his return. One of the reasons companies have strong centers is that only by aggregating and controlling assets could they manage the economies of scale that drove the industrial revolution. As we’ve shifted from a materials-based to a knowledge-based economy, this is no longer necessary. In fact it’s counter-productive. Partnering and outsourcing can provide any firm with world class talent and the tools to manage it. Beyond the edge no longer means out of control.
7. Innovation: Innovation occurs when people create brand new knowledge or more frequently, when they combine existing knowledge in a new way. MIT’s Eric Von Hippel calls customers whose needs drive them to innovate before suppliers “lead users”. Running shoes and sports bra’s were created by elite athletes whose needs were not being filled by existing companies. Being at the edge enables a firm to join customers to create as well as find innovations.
Going beyond the edge of experience forces us to step outside our patterns of thought and life in general. That’s what makes the edge both exciting and scary. The fact of the matter is that significant innovation rarely emerges from within familiar structures. If your boss asked you to do some creative thinking, would you go to your office or ideally, somewhere else?