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StefanL, 13.09.09 19:43
On last Friday a competent third party drew our attention to two things. Quoting Peter Drucker with "The purpose of a business is to create a customer." was a reminder.
The pointer to Dealing With Darwin was new. DWD is a relatively new and rather interesting business economics pattern book published in 2005 by Geoffery Moore .
Let us just mention that we agree with Mr. Drucker in the assertion quoted with respect to business as an organizational form.*
Before you determine to buy the book (Dealing With Darwin) go on its website. You'll get some pretty valuable promotion material there.
Mr. Moore in his book suggests there are two different basic business model architectures for successfully handling innovation and the task of creating and keeping customers, calling them the Complex Systems Model and the Volume Operations Model. Mr. Moore also recommends not to mix these architectures:
The two cannot and should not mix, or share best practices. Businesses with one architecture should not covet the benefits of the other.
A First Line Explanation
Volume operations customers, like individuals buying coffee, sports ware, mobile music players or enterprise units buying furniture, multipurpose office software or cars, require an easy-touch, a few-sizes-fit-all approach, where customization, if available at all, is in DIY or small business personal services form.
Volume operations start with a base technology. This creates a portfolio of offerings which spread through a continuum of channel operations to a potentially huge base of customers. If the potential is reached then the buyers generate the cashflow as trickles of small transactions that unite to a mighty river at the supply side. Sony, Volkswagen, Apple Records, Apple Computer, Microsoft and many regional food, say for example local cheese, companies are good examples for this business model. These companies deal in standards. Edison, Bell and Ford are famous implementors.
Complex systems customers on the other hand, like, for example, an enterprise buying a new overall IT architecture and implementation of their business processes (say Allianz) or a multinational buying cross-country, cross-media, cross-targetgroup promotion (say Coca Cola) or individuals buying a new home for their family, require an intense-touch, high-customization approach.
As we can see in Mr. Moore's diagram, the complex systems model necessitates a solutions model which involves an integration platform over legacy infrastructure elements, all bunched and connected by a technical architecture layer, a mixture of own and third party modules, a second architecture layer that maps the bottom of the system to the customer’s needs and tastes. The complexity of this alone is often too much for the customer and this in turn opens the opportunity to offer consulting and integration services as an icing on the cake.
NASA, CapGemini, Siemens, WPP and many local business technology integrators are good examples for this business model and its architecture. The model does not scale infinitely but does so pretty well.
What the Models Have in Common
Everybody knows, companies have to be profitable to stay in business. We now need to return to Drucker as an unsuspicious source for the assertion that profit is not the goal of business, which is to “create and keep a customer”. Profitability is a constraint. It is needed to manage risk, crisis and survival.
How the Models Differ
Concerning the cost and pay constraints: In complex systems revenue and margin are dominated by a complex and rather nontransparent cost structure, large gross margins and slow turnover. In volume operations on the other hand profit is achieved by lean and transparent cost structures, narrow margins and fast turnover, costs are standardized and modular.
Concerning innovation handling: In volume operations technological innovation generates revolutionary changes in the business model. In complex systems disruptive technology is most often a direct driver, but legacy must be handled. Philips mixed that one up badly when they thought a digital consumer music device (Digital Compact Cassette) needed to handle legacy. Volume products do not need legacy handling, it only holds them back. Look at mobile music players in the 90ies and 00ies.
Concerning marketing : Volume customers and complex system customers have very different sympathies and prejudices and therefor generate very different necessities in marketing. Sales cycles and revenue balance between first buy and post-sale are near completely different in the two models. Complex systems architecture must orchestrate coalitions of associates to make solutions work. Subtle reputation and collective positioning is a key to this. In volume operations branding and stand-alone segment positioning is a key to working the image and brand value and clearly opposed to collective positioning.
A Preliminary Conclusion
We now start to see why Mr. Moore so adamantly discourages the mixing of both business architectures. We could give lots of examples, positive and negative. Lets be content with 3 or 4. After 25 years in the business and great successes IBM got rid of its PC product line. Siemens never succeeded in electronic volume operations products. Oracle although trying hard and repeatedly was never once able to successfully develop, ship or sell mass consumer products. All of these are very well managed companies and generally successful over many years. The other way round was rarely undertaken. Apple would be a modest example. While maybe they have - after many crises - mastered the volume model better than anybody else, whatever they did in the server, network, management and IT services area was ridiculous and doomed to fail. Amazon, coming strictly from the distribution and commerce side, seems to handle it quite well now.
Mass Media, a Practical and Fundamental Violation of This Principle
Now traditionally, mass media, as the name suggests and considering their main product, found themselves quite naturally in the volume architecture. All customers of a newspaper read the same newspaper that morning, evening and the next day. All viewers of a movie or television entertainment program used to watch the same story unfold on the silver, phosporized or LCD-lit screen. In newspapers, pay TV, pay Radio (including public service broadcast) and paywall websites and apps the media item does still move a large part of their revenues but in free to air Radio and TV ad slots are the sole real revenue moving uniform mass product. And so for most of these media companies nowadays it is their most important and media item sales a minor one. Until digital came along no one even dreamt of customer based ad slot customization. As a customer you'd book that slot or space, send in your hopefully sexy spot or display ad and that was that. National and regional selling was a lot cheaper and easier than what Coke and Apple had to do when conceiving and booking global campaigns.
There is a large difference to Coca Cola and iPhones though. The daily products and even building blocks (clips and articles) may have uniform rules but are still handcrafted by teams of better or worse artists thus leading to the above mentioned nontransparent cost structures typical for complex systems businesses. Radio with its playlist dominance and product elements that can be used for many weeks and even years and Online-media with its larger shares of newswire content have mastered that problem better than TV and newspapers.
On the market side, once physical production machinery and transport were efficient enough, low implementation and distribution cost expanded the reach to practically the limits of language comprehension. In entertainment, without the need of speed in news content it was even better. Translation and overdubbing enlarged markets to culture comprehension sizes.
But! In addition to custom production from the start of the mass media business model in about the 1830ies to this very day there have been complications in the creation and satisfaction of the customer. These complications have been set by the two classes of mass media customers who pay a lot, are not mere consumers and, accordingly, do not request the easy-touch, a few-sizes-fit-all approach of volume operations but require the intense-touch, high-customization approach of the complex system architecture.
The first class of customer is a complex mix of product promoting companies and their advisers and consultants, a sector which the media companies call the advertisement industry. The product these customers want to buy is increasingly complex. Though it is constructed of rather uniform and simple mass available byproduct elements of mass media (ad time and space slots), the form and set into which these elements are combined tends to be ever more complex. Those customers and the associated offers and sales stuff belong to the complex systems architecture.
The second class of buying customers of course are political elite groups. Quite a lot of investigation has been directed at the contradictions created by the often differing interests and tastes of these two complex customers groups.
The troubles generated by the two different business architectures on the other side can be thoroughly felt every day but have been largely overlooked by science and model abstraction as far as we can see. The troubles also have been smeared over a bit by the fact that large intermediate groups act in the field with a strong pretension to be able to reconcile those needs and tastes. This pretension is the ground and water they swim in. No figure, nothing to be seen. Just feelings of the participants
The Provisional Diagnosis
Let us pause here and assert that mass media companies, by their double basic business model architecture fundamentally violate one important rule (Do Not Mix!) explained in Moore's "Dealing with Darwin".
*Some necessary philosophical clarifications:
The last assertion has to be called a fictional agreement, because a practical acknowledgement that business is a field and form of action that needs to be handled under the given circumstances does not provide for long term inner appreciation and full recognition.
We also believe that there are many things people can do and did actually do that are stupider and more outdated than doing business. The comparison with those things still makes business look like a good thing to pursue. It also makes suggestions of past and present leaders to carry on with it and do ever more of it look like a sound suggestion (compared to, say, creating peace and well being for everybody by inventing and executing a "culture revolution" as has been empirically and sadly tested in the people's republic of China and afterwards corrected to "doing business" by Mr. Deng).
Correctly understood, this very comparison only ascertains that business is a better thing to do than many other things. It does not sufficiently ensure that business is a real good form and field to realize the human potential for action and interaction. "Better" simply does not of itself guarantee "Good".
Quote Collection Websites normally carry other Peter Drucker sayings like "Management is doing things right; leadership is doing the right things. " and "Most of what we call management consists of making it difficult for people to get their work done."
We agree with these two statements. With this agreement frameworks for deciding what the right things to do are and what the wrong things to do are, come into play. All large frameworks are really hard to tackle. Nevertheless, business is a field of action that, for the time being, as we said, still has to be handled. Seriously. And here at tinytalk plc. we frankly have nearly no idea for how long still it will and into what it shall transform in the future.
last updated: 13.07.19 11:04
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