Direct Economy

Summary of: Direct Economy

Author(s) / Editor(s)

Most issues related to the social, political and economic changes we are witnessing today due to the emergence and use of technologies of cooperation can be analyzed by using a matrix tracking levels of knowledge on one axis, and levels of interactivity of the other axis.

Publication Reference

Published in/by
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Date
9/1/2006

Findings

The changes brought about by the emergence and use of technologies of cooperation can be analyzed through a matrix tracking levels of knowledge on one axis, and levels of interactivity of the other axis.

Levels of Interactivity:

  • Passive consumption: The consumer is getting products or services with no real interaction and no real choice. He has to take whatever is available.
  • Self Service: The consumer is given the ability to choose between various products or services.
  • DIY: Do It Yourself: The consumer starts getting involved in the value chain.
  • Co-design: The consumer starts adding value by customizing the product and therefore defining his needs himself (as opposed to buying a product defined by the product management team).
  • Co-creation: The consumer is involved in the design of the product or service itself.

Levels of knowledge

  • Raw Data: Data, typically from measurements, or attributes (small, big, expensive, etc...)
  • Information: Data that I can make sense of. Data within a referential or data that can be tied to a process, so that I establish a first level of knowledge. If I can measure, and if I can compare, I will be able to develop a better sense of understanding
  • Classification, categorization: When I can better define the context, place the information into categories
  • Process/Time: When you start introducing the concept of time, and evolution over time.
  • Logic: When you understand enough of a thing that you can capture this understanding into a logical model. From this comes automation.

Background:

The story starts at a banker's conference where Xavier was doing a presentation on e-Banking. The room suddenly woke up at the last slide when he offered a model to explain how banks could move forward. The impact was stunning, all of a sudden everybody wanted to jump into the discussion.

The model was the result of observations from Swissquote Inc, where intermediaries had become agents of change within the company and had help transform it into a hyperproductive company.

The model has since then been refined, with the definition of the "transformActors" and "ConsumActors", and the classification of knowledge (inspired from Mathematics) and interactivity along the 2 axis of a matrix.

The model has also been validated against 3 real cases with 3 Swiss companies: Swissquote, Largeur.com and Cla-Val.

The Model

  1. The problem:

    low cost offshoring, baby boomers reaching retirement age, etc… create tension in the economy. And the answer is not in lowering costs, but rather in achieving high productivity.
  2. The solution:

    changing Consumers into ConsumActors. We have heard of crowdsourcing, but the real underlying change is that the customers are getting more involved into the value chain.
  3. Technologies of Cooperation

    While technology helps improve processes, the real value behind these technologies is the shift in the interactivity between the producers and the consumers: consumers are getting used to getting more and more involved into the process (self service, product configuration and customization, etc...)
  4. Levels of interactivity

    The level of interactivity that is possible with ConsumActors can be classified as follows:

    • 4.1 Passive consumption:

      The consumer is getting products or services with no real interaction and no real choice. He has to take whatever is available.
    • 4.2 Self Service

      The consumer is now given the ability to choose between various products or services. This first step is already a huge step forward, as the consumer can go around the vendor to pick and choose what he wants.
    • 4.3 DIY: Do It Yourself

      At this level, the consumer starts getting involved in the value chain. This is what IKEA offers, where you are not just buying a product, you are actually also delivering it to your home and building it yourself. This case is an example of the first disruption from the standard retail value chain.
    • 4.4 Co-design

      At this level, the consumer starts adding value by customizing the product and therefore defining his needs himself (as opposed to buying a product defined by the product management team). This is what Dell is asking from customers when they have to pick and choose options to build a computer.
    • 4.5 Co-creation

      This is the ultimate level of involvement, where the consumer is actually involved in the design of the product or service itself. This is what Open Source does for developers, and what Wikipedia does for knowledge consumers. Similarly Procter and Gamble has a "Connect and Develop" program that lets innovators define products.
  5. Levels of knowledge

    Being able to interact at the various level listed above requires various levels of access to knowledge. For example co-designing a computer on the Dell website implies that the consumer has a good understanding of the various components and their importance within the system. A slow processor with lots of memory, or a fast processor with very little RAM are not going to be good options.

    And then knowledge includes a notion of context that should also be taken into account: knowing that something is small is only useful relative to a context: is Jean small because he is only 4 years old, or is he small because most people his age are typically 5" tall?

    Following these concepts, knowledge can be classified as follows:

    • 5.1 Basic Knowledge
      • 5.1.1 Raw Data

        Data, typically from measurements, or attributes (small, big, expensive, etc...)
      • 5.1.2 Information

        Information is data that I can make sense of. Data within a referential or data that can be tied to a process, so that I can establish a first level of knowledge. If I can measure, and if I can compare, I will be able to develop a sense of understanding: Jean is 4 feet, and I can measure his classmates to decide whether Jean is small or not. From information I can develop basic knowledge.
    • 5.2 Formal knowledge
      • 5.2.1 Classification, categorization

        This second level of knowledge is when I can better define the context. In the example of Jean, I can place the information into categories to reach another level of understanding: boy/girl, small/tall. By defining categories and sub-categories, I can refine the level of knowledge I have.
      • 5.2.2 Process/Time

        The third level of knowledge is when you start introducing the concept of time, and evolution over time. This introduces another level of complexity and another level of understanding beyond what can be known now.
      • 5.2.3 Logic

        The final level of knowledge is when you understand enough of a thing that you can capture this understanding into a logical model. From this comes automation. This is how we started building calculators, encapsulating logic into a machine, and now expanding to building transistors into microchips to build computers for example. It all seems as if mathematic algorithms were slowly but irreversibly being materialized into automated processes. And we are only at the very beginning of an exponential curve in this area.
    • 5.3. Informal Knowledge

      Another type of knowledge that will not be considered in this document, but should be mentioned, is informal knowledge.

      • 5.3.1 Informal Experience

        This is knowledge learned from accumulated experience. This is how people learn how to drive for example
      • 5.3.2 Informal Thinking

        This is the knowledge from "soft" fields, for example philosophical, cultural, religious, moral or ethical knowledge. They should not be ignored since they are at the forefront of the political, social and cultural scene. An expression of this type of knowledge is on display in blogs or reality TV shows for example.
      • The management of Knowledge is what has led to major changes in the way we work today:

        • It all started with the concept of “Community of practice” presented by Etienne Wenger on 9/18/88
        • It evolved towards becoming a core engine of the enterprise, with Knowledge Management, to manage both static (as in encyclopedias) and dynamic knowledge (as in knowledge facilitated by groupware, starting with email).
        • It has also now been opened and shared to allow for collective intelligence, benefiting both from internal and external input.
  6. The matrix

    Using the 2 axis that were defined, it is possible to create a matrix that can be used to resolve the issue of transferring production from the producer to the consumer.

    On the vertical axis:

    Data - info - classification/categories - time process - model

    On the horizontal axis:

    Receive - Self Service - Do It Yourself - Co-design - Co-creation

    To use the matrix you need to start from the bottom left (data/Receive), to then evolve towards the right to include the consumer into the value chain and define the level of knowledge that needs to be transferred to the consumer to enable his involvement.

  7. The matrix can be used for several analytical purposes:
    • 7.1 Historical analysis - the matrix can be used to compare the result of 2 strategies used at different times, to analyze why one worked better than the other:

      Nestle had tried to sell Nespresso through the regular channels without much success. Then they decided to change strategy (break with history) and created the Club Nespresso, where customers are educated and provided with a tool to order directly online, which completely change the buying and consuming experience
    • 7.2. Market analysis - the matrix can be used to compare the strategy of two different companies on the same market:

      Napster introduced technology that allowed users to download songs for free. The technology also allowed mixing and matching of songs so that users could create their own CDs. The same concept was then used by Apple to create iTune and the iPod, while Sony decided to simply extend its existing model to make room for this new technology, but trying to keep as-is the control of the IP.

      The matrix shows that the game was about adding a level of freedom in the consumption of songs, rather than just extending technology.
    • 7.3 Strategic analysis - the matrix can be used to define where to direct future developments:

      Telcos are being threatened by VOIP, which allows near free communication anywhere around the world. Several options are available for them to react: bundle services, or offer new services for mobile, where VOIP is not a player today. Docomo is now offering payments through mobile phones, thus starting to compete with banks. The matrix can help figure out which players they should work with to make this strategy successful
    • 7.4 Positioning analysis - the matrix can help position a product on a market. A computer is a complex thing and I can decide to buy through an expert who will help me design the computer I need, or I can go to Dell to build online my own. The 2 market segments can co-exist today, but the matrix can help understand which market will survive in the long term
  8. Case studies
    • 8.1 Swissquote (a Swiss equivalent of eTrade)

      From the CEO prospective, the success of Swissquote is due to:

      • Empowerment: providing the right information and tools to customers to allow them to trade online
      • Monitoring: performing statistical analysis to evaluate risk, as a tool for both the bank and the users
      • E-wealth management: tools to help users optimize their investments

      One challenge was and still is the education of customers. 2 types of classes are offered: first step (free), and paying classes on specific topics. This is a very costly undertaking, a risk taken to help the transformation

      The other challenge is to provide the right tools, allowing to perform complex operations while remaining user friendly. This challenge still needs to be addressed today.

      Looking at the banking industry, there are 2 major trends that can be identified:

      • Communities of practice are taking over the education of consumers and improved interactions
      • Models need to be improved to help provide more sophisticated tools

      The matrix can help clarify these trends and challenges

    • 8.2 Largeur.com - citizen journalism

      After several experiments, Largeur.com has settled for a model where they produce high quality journalism but getting the content from freelancers and offering aggressive prices. Once the customer base was established, they looked into opening the platform to students and other members of the civil society (teachers, thought leaders but also unemployed people), which are representative of the audience they are addressing already.

      The media industry is organized around 3 major poles:

      • Convergence (synergy between traditional media and the Internet) - Financial Times, Wall Street Journal
      • Divergence (break from the traditional model to go towards a crowdsourcing approach) - OhMyNews
      • Complementarities (compromise between the other two) - TSR.ch

      The matrix can help rationalize the various content production and content delivery tools (blogs, RSS, Web, SMS/MMS, and Newspapers) to better understand the media industry

    • 8.3 Cla-Val - pumps to regulate pressure

      They have evolved around 4 major poles:

      • Commoditization: they have accumulated over the years more than 100 standard products
      • Customization: their customers cannot get an end to end solution from just the standard products
      • Geographical expansion: the experience gained in the implementation of custom solutions opens new geographical markets and allows rapid expansion
      • Customer innovation: customization has also introduced flexibility into the system, and combined with remote management capabilities has enabled co-innovation

    The matrix clearly shows how this evolution was possible.

  9. Conclusion

    Direct economy is the result of 5 major factors:

    • Introduction of the consumer into the value chain
    • Death of the old intermediaries, to leave room for new types of interactions
    • Empowerment of ordinary people to include them in the innovation process, which creates the issue of Intellectual Property and how to handle it
    • Emergence of new business models that threaten the existing monopolies
    • Emergence of new pricing models: donations (OhMyNews) or Bidding (EBay).

    IKEA, Easyjet, Dell, Nokia, L'Oreal, Procter&Gamble, Swissquote are examples of the transformations that can be implemented. Companies have to move towards hypergrowth to survive.

    What is interesting is that new sub-categories of products are being created in the process (song vs. album), that banks and credit cards were not setup to handle originally. Hel looks and The Satorialist are examples of what is happening in the fashion industry. Istockphoto, Innocentive or Marketocracy are example of consumer involvement in the value chain.

    In conclusion, isn't it that the changes we are witnessing in the economy are similar to what happened with Direct Democracy in Switzerland?

    The consumers have been empowered, and are we not slowly evolving towards a Direct Economy, completely changing the underlying principles of the Global Economy as we know it today?

  10. Epilogue

    While Switzerland introduced Direct Democracy, they are now lagging in their e-government implementation effort. The matrix can help understand what is happening and what needs to be done. It can help compare what is available today against what others in Europe are doing. The key is to enable the transformation towards the ultimate e-government, which is not a strategic option but rather an implementation issue to be resolved.